Is the IMF Encouraging World Financial Leaders to Walk Blindly Towards More Austerity?

By Isabel Ortiz and Richard Jolly

NEW YORK and SUSSEX, Oct 16 2020 (IPS) - This week the world’s Ministers of Finance and Central Bank Governors meet virtually at the 2020 Annual Meetings of the International Monetary Fund and the World Bank and decide on the fate of the world.

This year’s gathering is particularly important, given that the world is confronting an unprecedented crisis. Governments are struggling to finance emergency care and urgent socioeconomic support to cope with the COVID19 pandemic.

Isabel Ortiz

While these short-term expenditures are necessary, countries need more than intensive care units, respirators, tests and emergency support. Governments must continue to invest in long-term public health, universal social protection floors, employment-generating activities and other sustainable development goals.

The funding gap remains vast. However, the budgetary capacity or fiscal space is more limited than before COVID19, as pandemic emergency spending has left governments with higher levels of debt and fiscal deficits.

Many countries received support from the IMF’s Rapid Financing Instruments and other arrangements, or obtained additional loans to cope with the COVID19 emergency, leaving them more indebted.

But now the IMF and world financial leaders are talking about “necessary” fiscal consolidation or austerity cuts after the pandemic.

Austerity cutbacks reduce economic activity and worsen living conditions. The pandemic has revealed the weak state of public health systems – generally overburdened, underfunded and understaffed because of earlier austerity policies and privatizations.

Over the last decade, a majority of countries have implemented austerity policies, resulting in negative social impacts. People have suffered inadequate social security reforms that reduced hard-earned benefits; pay cuts and redundancies for teachers, health staff and other civil servants; reductions to subsidies; labor flexibilization reforms that worsened working conditions; privatization of public services; and the targeting and scaling down of social protection benefits, when the world should be scaling up social protection floors.

Sir Richard Jolly

More than 500 organizations and academics from all over the world have signed a statement requesting the IMF to end austerity.

“The IMF has already started locking countries into new long-term austerity-conditioned loan programs in the past few months” says the statement “… and a significant number of the IMF’s COVID-19 emergency financing packages contain language promoting fiscal consolidation in the recovery phase… Instead of austerity cuts, it is critical to create fiscal space and give governments the time, flexibility and support to achieve a sustainable, inclusive and just recovery.”

People are suffering unnecessarily. They were left behind prior to COVID19; they have been severely affected during the pandemic; and, if ministers of finance agree on austerity cuts, they will suffer from the sharp reductions in government expenditure. In the 1980s and 1990s, structural adjustment and austerity became conditions for Latin America and Sub-Saharan Africa. The result? Between 1980 and 2000, Latin America had suffered two decades of economic stagnation. In Sub-Saharan Africa, per capita income fell 15 percent.

Poverty and inequality have both increased during the pandemic. Countries now must avoid austerity cuts at all costs, and instead boost social spending. A return to “normal” (pre-COVID19) is not the solution, many were denied a decent living. It is necessary to increase public expenditures and create jobs.

This is feasible. There are alternatives. There are at least eight options for that governments can consider to increase public budgets, instead of austerity.

First, increase tax revenues, in particular -given the growing levels of inequality- increasing progressive income and wealth taxation, corporate taxation including taxes to the financial sector that remains largely untaxed.

Second, increase social security coverage and revenue by bringing workers from the informal economy to the formal sector, thus paying social security contributions – and above all, not cutting employers contributions to social security as sometimes is suggested as this would make social security unsustainable.

Third, fight and claw back illicit financial flows. Substantial public funds are lost to illegal activities such as money laundering and tax evasion. Abating these flows will result in a significant increase in available public funds.

Fourth, if governments need to look at re-allocating public expenditures, austerity cuts to the social sector should be avoided at all costs. Instead, focus must be upon replacing high-cost low-social-impact expenditures such as defense. For example, Thailand have successfully cut military spending to invest in public health.

Fifth, adopt more accommodative macroeconomic frameworks, with some tolerance to inflation and fiscal deficits.

These could be supported by international measures:

Sixth, the IMF should explore reductions in sovereign debt. Given the current high debt levels, it is important to promote debt forgiveness/relief, or at least debt moratoria with restructuring.

Seventh, increases in development aid and transfers, such as the Global Fund for Social Protection Floors.

Eighth, issuing Special Drawing Rights at the international financial institutions, or alternatively issuing fiat money to developing countries via a multilateral consortium under the United Nations to provide liquidity to prevent a global depression.

These policy options are too important to people’s lives to be decided behind closed doors: they must be discussed openly in national dialogue, with all relevant stakeholders, including unions, employers, governments and civil organization.

Austerity can and must be prevented, it is feasible to increase social expenditures and generate jobs. Governments must not accept damaging austerity cuts. Instead of cuts to budgets that have already been pared to the bone, countries can prevent austerity and have significantly larger budgets to fund employment generating economic activities, and bring health and prosperity to all citizens.

Isabel Ortiz, Director of the Global Social Justice Program at the Initiative for Policy Dialogue at Columbia University, USA, was Director of the International Labor Organization and UNICEF, and a senior official at the United Nations and the Asian Development Bank.

Sir Richard Jolly KCMG is a leading development economist who was named one of the fifty key thinkers globally in this field of economics, Honorary Professor and Research Associate of the Institute of Development Studies (IDS) at the University of Sussex, UK, and a former Assistant Secretary-General of the UN.