Transcript The Age of Austerity

Initiative for Policy Dialogue
The South Centre
THE AGE OF AUSTERITY
How we got into this mess,
development impacts, and what to do?
Isabel Ortiz
EURODAD-GLOPOLIS International Conference
Prague 3-5 June 2013
Phases of the Crisis (2008-2015)
Number of Countries Contracting Public Expenditures as a % GDP, 2008-16
131
132
122
119
106
111
68
55
37
89
91
94
90
Source: Ortiz and Cummins.2013. The Age of Austerity. IPD and the South Centre - based on IMF’s World Economic Outlook (October 2012)
Crisis Phase I (2008-09) – Fiscal Stimulus Plans
• $2.4 trillion fiscal stimulus plans in 50 countries
Social Protection in Fiscal Stimulus Plans 2008-09
Source: Ortiz and Cummins, A Recovery for All, UNICEF, 2012
Bailing out Banks, not People
Crisis Phase III (2013-15): A quarter of countries excessive
contraction (expenditures below pre-crisis levels)
.
Changes in Total Government Spending as a %GDP, 2013-15 avg. over 2005-07 avg
How are Countries Adjusting? Austerity
Measures in 174 Countries, 2010-13
Source: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF
country reports 2010-2013
Main Adjustment Measures by Region,
2010-13 (number of countries)
Limiting Wage bill Increasing Pension Rationalizing Health
Developing Region /
subsidies cuts/caps consumption reform targeting reform
Aggregates
taxes
safety nets
East Asia and the Pacific
12
13
8
4
9
0
Eastern Europe and Central Asia
9
15
13
16
15
9
Latin America and Caribbean
11
14
13
12
11
0
Middle East and North Africa
9
7
7
5
5
3
South Asia
6
4
4
1
4
0
Sub-Saharan Africa
31
22
18
9
11
0
Developing countries
78
75
63
47
55
12
High-income countries
22
23
31
39
25
25
All countries
100
98
94
86
80
37
Labor
Reform
2
6
1
1
2
3
15
17
32
Source: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF
country reports 2010-2013
Development Impacts
119 countries contracting public expenditures in 2012 (89 developing)
 Phasing-out subsidies (food, fuel and others) in 100 countries,
despite record-high food prices in many regions
 Wage bill cuts or caps in 98 countries, reducing the salaries of
public-sector workers who provide essential services to the
population.
 VAT increases on basic goods and services that are consumed by
the poor – and which may further contract economic activity –
in 94 countries
 Rationalizing and targeting safety nets are under consideration
in 80 countries, at a time when governments should be looking
to scale up benefits though social protection floors
 Reforming pension and health care systems in 86 and 37
countries
 Labor flexibilization reforms in 30 countries, eroding workers
rights
Source: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF
country reports 2010-2013
A Crisis of Social Support
• Vulnerable households are most impacted by austerity measures,
and are bearing the costs of a “recovery” that has largely excluded
them.
– They were left behind prior to the crisis
– They were severely affected during the crisis
– They are now suffering from adjustment measures and from
lack of employment due to reduced growth.
• The deployment of vast public resources to rescue the financial
sector forced taxpayers to absorb the losses, caused sovereign
debt to increase, and, ultimately, hindered global economic
growth. Now the cost of adjustment has been passed on to
populations, many who have been coping with fewer jobs, lower
income and reduced access to public goods and services for more
than five years.
Fiscal Space for an Equitable Recovery Exists
Even in the Poorest Countries

There is national capacity to fund social and economic
development in virtually all countries

There are many options, supported by UN and IFIs policy
statements:
1.
2.
3.
4.
5.
6.
Re-allocating public expenditures
Increasing tax revenues
Lobbying for increased aid and transfers
Fighting illicit financial flows
Tapping into fiscal and foreign exchange reserves
Adopting a more accommodative macroeconomic framework
(e.g. tolerance to some inflation, fiscal deficit)
7. Restructuring debt
Source: Ortiz and Cummins, A Recovery for All, UNICEF, 2012
Risks to Socio-Economic Recovery –
The Need for a Policy Shift
• United Nations: Austerity is likely to bring the global
economy into further recession. Called on governments
for concerted policy action to support development goals
• Policy shift started in a few Asian and Latin American
countries 2012-13 . Concern on low growth and demand
for their exports:
– Building internal markets (minimum wage policies,
social protection, subsidies, social services, etc)
– New round of fiscal stimulus to be invested in
infrastructure, tax incentives -- the amounts are small
for sustained recovery ($0.38 trillion in 2012, compare
to $2.4 trillion fiscal stimulus in 2008) but a sign of
policy change
Policy shift: Ecuador
 Ecuador, a country challenged like Europe by not having a
national currency (it uses the US$) and therefore has limited
capacity for policy maneuver, creatively managed to restore
growth and improve living conditions.
 The government kept interest rates low and expanded
liquidity by requiring banks to keep at least 45% of their
reserves in Ecuador.
 it took a partial default on its illegitimate external debt
(private debt that had been made public); the freed public
resources were invested in human development, which
included doubling education spending between 2006-09,
nearly doubling housing assistance programs to low-income
families and expanding its main social protection program,
the cash transfer Bono de Desarrollo Humano.
 Results are impressive: poverty fell from a recession peak of
36.0% to 28.6%, unemployment dropped from 9.1% to 4.9%
and school enrollment rates rose significantly
Policy shift: Iceland
 Iceland repudiated private debt to foreign banks and did not bail-out its
financial sector, pushing losses on to bondholders instead of taxpayers.
 The government also imposed temporary capital controls to shield itself
from capital outflows
 From Iceland’s IMF Article IV Consultation (2012:5-6):
 A key post crisis objective of the Icelandic authorities was to preserve the
social welfare system in the face of the fiscal consolidation needed. Wage
increases, agreed among the social partners in May 2011, led to a rise in
nominal wages of 6% and the unemployment rate fell to about 7% in
2012…/…
 In designing fiscal adjustment, the authorities introduced a more
progressive income tax and created fiscal space to preserve social
benefits.
 Consequently, when expenditure compression began in 2010, social
protection spending continued to rise as a percent of GDP, and the
number of households receiving income support from the public sector
increased.
 These policies, led to a sharp reduction in inequality. Iceland’s gini
coefficient—which had risen during the boom years—fell in 2010 to
levels consistent with its Nordic peers.
Thank You
Download:
“The Age of Austerity – A Review of Public Expenditures
and Adjustment Measures in 181 Countries.” 2013. New
York and Geneva: IPD and South Centre
http://policydialogue.org/files/publications/Age_of_Au
sterity_Ortiz_and_Cummins.pdf
“A Recovery for All”. 2012. New York: UNICEF Policy and
Practice. http://arecoveryforall.blogspot.com/