IMF, Troika and the Austerity mess
Consensus has it, the austerity drive has been harmful for economies in the European South. Indeed, this conclusion is so widely held by so many reasonable people, that one can hardly cast doubt on it. Mistakes made -sometimes silly ones, other times infuriating ones- are being admitted and they are slowly being ticked off in the “lessons learnt” list.
But at the same time, there is a lot to be asked about the effectiveness of PIGS’ programs. The latest discussions, in Cyprus and elsewhere, draw a dreadful picture.
1) Productivity was the problem, it is said, but internal devaluations and wage cuts didn’t do anything for exports and GDP growth. Worse, unemployment is still growing.
2) States were told they couldn’t borrow, and they moved into austerity mode. This, in its turn, put pressure on GDP and on fiscal revenues, essentially backfiring.
3) Another point made, is that, as programs are being implemented, gini coefficients worsen and economies are becoming more unfair.
None of this is strictly speaking wrong. Even in Ireland, the “success story” that others hope to emulate, the “end of the crisis” has come at immense suffering among the country’s citizens.
But there something more to be said here: How certain are we that the above conclusions are about “the Program” itself?
First, wages are declining, but employment is not recovering. Of course they are- you’re in the middle of a crisis. Banks are deleveraging, businesses are facing severe dislocations, imbalances are being corrected, the bubble (usually in real estate) is bursting and the credit crunch is squeezing investment. So how of this is because of “the Program”? Declining employment, falling wages, increasing productivity (due to unemployment levels) and a drop in GDP are all natural outcomes in crises –IMF or no IMF.
Second, austerity is putting pressure on the GDP, which in turn is squeezing fiscal revenues. Of course it is- you’re in a crisis. The state isn’t borrowing because it can’t afford to. This was the very reason you went into a program to begin with. Fiscal revenues are declining because the underground economy is getting bigger and because tax evasion, always rife, is now even more widespread. All of this is natural in a crisis –IMF or no IMF.
Finally, income inequality is getting worse since going to an MoU. Of course it is- you’re in a crisis; most people are watching their net worth decline as stock exchange values are dropping, as real estate and land prices are declining and as wages are falling while unemployment is rising. All of this is normal in a crisis –IMF or no IMF.
We simply can’t know how much of this is because of the crisis as opposed to the program. This is an important first point to make. (I don’t know of any analyses or regressions out there that quantify results under IMF-style bailouts/MoUs versus other “non-assisted” crises, but any references would be welcome.)
Second, what you do is half the story- the other half is how you do it. Austerity in one country is rationalization of expenses in another.
But thirdly, Programs are supposed to end the “crisis”, lifting a country out of a state of emergency. They aren’t supposed to make us as rich as before. Crises, at least in the European South were caused by the fact that we were living beyond out means and because of an unsustainable growth “model”.
Coming out of this crisis (or going through a correction) while maintaining previous income levels or net worth, would be a fantasy. Programs aren’t there to restore wealth, but to place our countries on a sustainable path.
None of this absolves the IMF and the Troika more generally for the sometimes bemusing mistakes they are making- but perhaps the debate should steer towards a qualitative analysis of mistakes made, rather than arguments based on effects that would have been there even without a bailout. Most of all, unless we start realizing these unpleasant realities, we can’t do what the entire exercise of the correction is supposed to do- get the country on a mild growth path that, unlike the last few years, at the least, will be sustainable.