TWN Info Service on Finance and Development (Oct20/04)
We are pleased to share with you an article by Bhumika Muchhala that sets out concerns that the International Monetary Fund (IMF) loans for COVID-19 response will generate another wave of austerity measures across developing countries.
By 20 September, the IMF had approved loans to 81 countries to combat the health and economic crises induced by COVID-19. Within the fine print of loan and emergency financing documents, the institution’s recurring policy recommendation is for pandemic-related fiscal measures to be targeted, temporary and reversed upon cessation of the pandemic. The European Network on Debt and Development shows that by 2023, public budget cuts and regressive tax measures, such as value added taxes, will be implemented in 80 countries.
UNCTAD warns that many developing countries are in danger of facing “a lost decade” if countries adopt austerity measures.
Below is the full article.
TWN Finance and Development Programme
19 October 2020
The Annual Meetings of the World Bank and International Monetary Fund (IMF) that just concluded (12-18 October 2020) confirm the fear expressed by many since the onset of the COVID-19 pandemic that another wave of austerity measures will soon sweep across developing countries.
By 20 September, the IMF had approved loans to 81 countries to combat the health and economic crises induced by COVID-19. In the short term, the institution’s emergency financing packages support the intent of borrowing countries to use funds to meet urgent health and social protection needs, including relief for vulnerable households.
The Fund’s flagship World Economic Outlook report released in October 2020 calls for policies that “guide economies to paths of stronger, equitable, and resilient growth,” including investments in “health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence” and research spending in technology and innovation.
However, within the fine print of loan and emergency financing documents, the institution’s recurring policy recommendation is for pandemic-related fiscal measures to be targeted, temporary and reversed upon cessation of the pandemic. According to research conducted by Oxfam International, fiscal consolidation measures appear in 84% of loan agreements across 67 countries as early as 2021. The European Network on Debt and Development shows that by 2023, public budget cuts and regressive tax measures, such as value-added taxes, are to be implemented across 80 countries. More than half of the projected measures, equivalent to 2 per cent of GDP, will take place in 2021.
The consequences are grave. Many developing countries are in danger of facing ‘a lost decade’ as their pathways to achieving the Sustainable Development Goals (SDGs) and Paris Agreement on climate change targets are effectively derailed.
In the absence of scaled up, coordinated and multilateral solutions such as grant financing, liquidity, debt relief and a sovereign debt workout mechanism, for example, the austerity mandate is once again being enforced in order to generate financial resources to meet debt repayments and stabilise debt levels.
Double standards for South and North
While low and middle-income countries face austerity measures by early 2021, a very different directive is offered to developed countries. According to the Fiscal Affairs Department of the IMF, most “advanced economies that can borrow freely will not need to plan for austerity to restore the health of their public finances.”
Unhindered access to financial markets and near-zero interest rates available to developed countries means that they have the exclusive privilege of escaping the fate of raising taxes and cutting public financing for public goods.
In contrast, the poorest countries in the world confront the highest costs of borrowing. Interest rates for African countries range between 5% to 16% on 10-year government bonds. For sub-Saharan African economies, interest repayments constitute the highest, and fastest growing, expenditure item in their public budgets.
While the Fund justifies these two opposite sets of policy advice through the “binding financial constraints” that define developing countries limited capacity to borrow, no inquiry is made into the structural inequities that define a state’s ‘capacity’ to borrow.
High debt levels in developing countries stem from a historical legacy of power inequalities among nations, resulting in South to North resource flows through tax evasion, for example, and thwarted productive capacities and domestic revenue potential which drive the need to borrow externally.
The past has repeatedly demonstrated the cost of maintaining debt sustainability in the eyes of official and private lenders and creditors: austerity measures will be paid for by the most vulnerable across developing countries, exacerbating inequalities as well as exclusion and discrimination, on all scales of income, gender, race, caste, disability and sexuality.
In response, over 500 organizations and individuals have signed a petition calling on the International Monetary Fund to immediately stop advising austerity measures to developing countries, and instead advocate policies that advance human rights, sustainable development, climate justice, gender and income equality.
The petition emphasises that fiscal consolidation driven austerity will undermine the achievement of economic and social rights while deepening poverty in a context where the UN estimates 70 to 100 million people will be pushed into extreme poverty.
Empirical data on the impact of fiscal consolidation measures, as well as research by the IMF’s Independent Evaluation Office on the Fund’s response to the financial and economic crisis confirm that fiscal consolidation has led to reductions in health and education investments; losses of hard-earned pensions and social protections; public wage freezes and layoffs affecting public sector employees such as teachers, nurses, doctors and public civilians who comprise a large portion of the public wage bill in developing countries; increased unpaid care work; and, greater consumption taxes – all of which disproportionately affect the poor and women.
Normalisation of an ideology
Over the last four decades, fiscal austerity, or consolidation, has become normalised as well as internalised by many developing as well as developed countries. The singular compulsion to austerity is in part rooted in the neoclassical economic theory that fiscal credibility and macroeconomic stability is achieved by preserving the expenditure ceiling rule and reducing debt levels.
In particular, the predilection to view the macro-economy through the methodology of general equilibrium entails an analytical commitment to austerity policy by presupposing macro-stability. The prioritisation of macro-stability through the primary channel of reducing debt levels is essentially a signal to markets and lenders that debt and deficits will not obstruct private sector interests to avoid risks and losses.
Economists who work within the general equilibrium framework generally do not engage with a broader plurality of economic models and theories that might contest or opt out of the austerity bias. Due to the hegemony of the neoclassical form of economic knowledge over the past several decades, the economics discipline has not evolved or diversified the accepted and acknowledged basis of economic methodology and analysis.
Empirical evidence illustrating how austerity has neither restored income growth nor reduced unemployment has mounted over the years, including by scholars who have detailed how the economic methodology in support of austerity is flawed.
Why, then, does austerity continue to “dominate the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past” as John Maynard Keynes stated in 1936? It has been 84 years since Keynes asked this question, and austerity’s compulsion has yet to fade. In consideration of the argument that facts never disconfirm a powerful ideology, austerity can be considered a virulent idea inflicting systematic harms.
The Right to Development requires bold multilateralism
The human toll of the pandemic demands that the centrality of public financing for public systems, such as healthcare, can no longer be undermined or ignored. The gaze of the international community can no longer look the other way when the State protects the creditors and investors at the expense of peoples’ human, economic, social and cultural rights. Without an urgency of multilateral action, the pandemic endangers years, if not decades, of hard-earned progress in reducing poverty and expanding economic sectors and employment across the developing world.
As the 2020 Trade and Development Report by UNCTAD illustrates, active government policies to reduce income inequality are required and for many developing countries this will require effective multilateralism. Such policies should play multiple roles of lowering carbon emissions, establishing large public investment projects to generate jobs and accelerate the transition to a low-carbon energy-efficient economy as well as enacting structural reforms to usher forth new patterns of production and consumption.
This will require a scale and depth of international solidarity that finds resonance in the 1986 Declaration on the Right to Development. The centrality of the Right to Development is precisely that it promotes an enabling international environment that ensures equality of opportunity for all in access to basic resources, education, health services, food, housing, employment and the fair distribution of income. Economic and social reforms are guided by the imperative of eradicating all social injustices.
Six ingredients to avert a lost decade
First, expanding the possibility horizon and official recognition of countercyclical fiscal stimulus policies as the most effective and equitable means to stimulate economic recovery, job creation and equity-enhancing redistribution through public transfers. An expansionary fiscal policy toolkit includes, for example, establishing universal social protection floors, extending coverage of social security, including for informal sector workers, progressive taxation, tapping into foreign exchange reserves for some middle-income developing countries and so on. Countries that use fiscal policy tools for economic recovery should not experience adverse impacts in access to capital markets, terms of borrowing, debt sustainability or credit ratings.
Second, in order to meet the need for immediate liquidity in developing countries, a new and special issuance of Special Drawing Rights needs to be followed through. Scaling up the creation of grants and other highly concessional financing are also necessary.
Third, a formal sovereign debt workout mechanism grounded in an international legal framework has been considered a serious deficit or missing link in the international financial architecture. Systematic support for states to cancel or restructure their debts in order to prioritise investments in quality public services is needed. Debt restructuring should be based on Debt Sustainability Assessments that consider fulfillment of human rights obligations, SDGs and climate financing.
Fourth, a UN Tax Convention can address tax havens, tax abuse by multinational corporations and other illicit financial flows through a universal and intergovernmental process. Progressive tax measures, such as raising tax rates of systemically important global banks, large firms and the wealthy can raise additional financial resources to address the economic fallout of the pandemic and are effective channels for human rights-based revenue mobilisation strategies.
Fifth, capital controls should be given their legitimate place in any policy regime to curtail the surge in capital outflows, to reduce illiquidity driven by sell-offs in developing country markets and to arrest declines in currency and asset prices.
Sixth, the use of ex-ante and ex-post participatory human rights impact assessments, with data disaggregated by gender and social groups, is essential to ensuring economic equity relevant to local contexts, as is transparent, participatory and gender-responsive budgeting processes.
Global interdependency and historical responsibility
The neoliberal variant of capitalism is well known for being founded from an individualistic premise. Distributive justice, equity among nations and human rights, however, require a collective premise, where solidarity is not construed merely as altruism but rather as moral responsibility and awareness of global interdependencies.
Economic recovery for any one nation is unsustainable. Uneven recovery will create difficulties in reviving global trade flows. Debt crises in regions that are already in political and civil conflict, for example, can create upheaval such as displacement and migration that can hurt other countries.
Ultimately, unilateralism and protectionism is antithetical to a genuine recovery from a pandemic-induced global recession.
The countries and regions possessing the financial and material resources to pursue fiscal stimulus for health and economic recovery owe their policy space, in large part, to the legacy of several centuries of colonialism. The great transfers of wealth, extraction of natural resources and use of cheap or free labour from the colonies to the metropoles. This is not just a historical travesty; this wealth transfer diffused capital and resources across Europe, North America and other settler colonies, creating the very conditions for industrialization and economic wealth.
Today, it is incumbent that the principles of historical responsibility and interdependency of recovery guides the actors of economic power to support the health and economic recovery for the most vulnerable regions of the Global South.
The counterfactual is a lost decade for the vast majority of the human race.