The net benefits of Government’s austerity programmes in terms of helping to fix an ailing economy, such as the type vigorously pursued by the Freundel Stuart administration over the past three years, are under serious question from a surprising source –– three economists working with the International Monetary Fund (IMF).
As most Barbadians familiar with these developments would be aware, the IMF gained notoriety for recommending and sometimes insisting that economically troubled countries, especially in the developing world, go the route of austerity by adopting fiscal stabilization and structural adjustment programmes which were presented as the panacea to cure whatever was ailing the economy.
However, in a just published assessment of the conservative doctrine of neo-liberalism, which has generally informed approaches to economic growth and development around the world since the collapse of Soviet communism in the 1990s, the IMF trio of Jonathan D. Ostry, Prakash Loungani, and Davide Furceri concluded that austerity programmes could do more harm than good to a country.
Their critique, entitled Neo-Liberalism: Oversold?, appears in the June, 2016 issue of Finance & Development, a quarterly publication of the IMF. The trio’s conclusion was immediately seized on by the British Labour Shadow Chancellor of the Exchequer (Minister of Finance) John McDonnell to highlight the futility of austerity, given the passion which Conservative Chancellor of the Exchequer George Osborne has exhibited for this approach since taking office in 2010.
While the three IMF economists identified a significant growth of trade and an increase in foreign direct investment as positive outcomes of neo-liberalism, they noted other aspects had not delivered promised improvements in economic performance. Looking specifically at the removal of barriers to flows of capital and plans to strengthen public finances, the economists came up with conclusions that contradicted neo-liberal theory.
They observed: “The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries. The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.
“Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.”
The neo-liberal agenda, which was a product of the so-called 1989 Washington Consensus, had its genesis in the late 1970s, early 1980s in free market-promoting policies, such as privatization, deregulation and downsizing of the state, that were championed by two like-minded conservative world leaders –– Margaret Thatcher, the then British prime minister, and Ronald Reagan, the then president of the United States.
Their “conservative revolutions”, as some commentators described the sweeping economic changes that resulted, set the stage for the acceleration of globalization through the liberalization of markets around the world for trade and investment to permit a free flow of goods, services, capital and people to some extent. In the process, the power of Governments was increasingly weakened as a result
of being watered down by market forces.
Chancellor Osborne’s austerity has been aimed at tackling a record British government budget deficit and a rising national debt –– the same issues which also prompted the Freundel Stuart administration to introduce austerity which saw the imposition of higher taxes, 3,000 public sector job losses and spending cuts that resulted, among other things, in Barbadians having to pay tuition fees for the first time to attend the University of the West Indies.
According to the Guardian newspaper, Shadow Chancellor McDonnell is calling on Osborne to change course in light of the conclusions of the IMF economists.
“The International Monetary Fund has summarized what a growing consensus among economists across the globe now think, that Osborne-style austerity economics increases inequality and instability, and undermines growth. It’s time for the chancellor to listen to the experts, change course and put an end to his failed policy of austerity . . . ,” he said.
We wonder if Minister of Finance Chris Sinckler has read the IMF economists’ critique and what his views are. The debate in “big England” on the benefits of austerity, compared with the costs, is directly relevant to our situation in “Little England”. Based on the experience of the last three years, there is an obvious need for a similar debate in Barbados. As part of a commitment to public education, the Barbados Economics Society and UWI economists are ideally suited to take the lead on such an initiative.
It is clear that what Barbados needs, if it is to be successful in the search for effective solutions to its various economic challenges, is a well thought out strategy which is not a carbon copy of what has been applied elsewhere, but which draws its relevance from a profound understanding of our unique circumstances.