Arriving for the GB20 Summit in Toronto, Canada, President Christina Fernandez of Argentina warned against policies of austerity. AThe focus is absolutely wrong she said. The President explained that policies of cutting deficits and removing stimulus in the midst of a recession were responsible for an Aimplosion in Argentina resulting in a US$100 billion default and one in four Argentinians out of work. It is only when former President Kirschner, the husband of President Fernandez, ignored conventional wisdom and reversed the policies of austerity that the economy stabilized. The Argentine economy has been recovering ever since and is expected to grow by 5 percent this year.
The most recent experience of the failure of austerity measures is that of Ireland. Faced with economic collapse two years ago, Ireland imposed cuts in public spending and higher taxes. Its economy remains in recession and shrank by 7 percent last year. More pain is expected with no end in sight.
Similar austerity measures were imposed by the European Union and the IMF on Greece earlier this year. Britain, in particular, and Germany, to a lesser extent, implemented austerity measures. Reduced public spending and increased taxes have been imposed in Britain despite the secret public service prediction that 1.3 million jobs will be lost. The same medicine has been prescribed for Italy, Spain and Portugal. Austerity measures which destroys jobs and reduces economic growth are being imposed in the midst of unemployment and recession on shaky economic grounds, but on firm ideological principles.
The Washington Consensus of neo-liberal prescriptions consisting of almost identical measures have been foisted on developing countries for at least two decades without much success. Despite these failures, the recession which hit Europe and the United States have attracted the same old neo liberal solutions, generally championed by conservative politicians, despite little sign of inflation or lack of investor confidence, according to some experts.
The G-20 Toronto Summit Declaration issued after the recent meeting in Canada recognizes the importance of fiscal and monetary stimulus and of strengthening the recovery. While it stresses the importance of following through on stimulus plans and creating conditions for robust private demand, it agreed that those countries with serious fiscal challenges need to accelerate the pace of consolidation and undertook that advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
The anger which greeted this declaration is reflected by Naomi Klein who, writing in the Guardian, said: Faced with the effects of a crisis created by the world’s wealthiest and most privileged strata, they decided to stick the poorest and most vulnerable people in their countries with the bill. How else can we interpret the G20’s final communique which includes not even a measly tax on banks or financial transactions, yet instructs governments to slash their deficits in half by 2013. This is a huge and shocking cut, and we should be very clear who will pay the price: students who will see their public educations further deteriorate as their fees go up; pensioners who will lose hard-earned benefits; public sector workers whose jobs will be eliminated. And the list goes on.
Paul Krugman, the Nobel Prize winning US economist refers to the reliance on austerity in similar terms as described above. Writing in the New York Times, he said: For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed. This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elites imagination …
Krugman argues that the US has now moved from a recession into depression. This is how he put it: We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost C to the world economy and, above all, to the millions of lives blighted by the absence of jobs C will nonetheless be immense. And this third depression will be primarily a failure of policy. Around the world C most recently at last weekend’s deeply discouraging G-20 meeting C governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
If Krugman is correct, then developing countries including Guyana will be deeply affected by a long term depression in North America and Europe. Commodity prices will be unprofitably low, markets for our products will tighten, foreign direct investment will reduce, remittances will decline and transfers through aid and grants will be harder to access. Guyana’s policy makers would do well to take into account these developments and analyses begin in refining our agenda for economic growth to overcome the negative consequences of a possible depression. (www.conversationtree.gy).