Saturday, 2 February 2013


The International Monetary Fund (IMF) has a long history of imposing austerity programs on countries,  set of fiscal and monetary policies that contribute to the further impoverishment of the country in general, and within the country of reducing the living standards for the middle class and workers. Those who have studied the history of the IMF's dealings with Latin America, Asia and Africa know that far from creating wealth and prosperity as the IMF promises if its austerity policies are adopted, countries fall into greater poverty and become more economically dependent on the richer nations for the duration.

This was as true in the 1950s as it is today. The only difference is that in January 2013, on three separate occasions, high-level IMF officials have acknowledged that in the case of Greece austerity has not worked to yield the intended results. Two IMF economists recently wrote that:  “Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation.” The question is whether the IMF, as well as EU and the Greek government intentionally deceived the public when they introduced austerity in order to make the measures more palatable. Naturally, this is hardly a consolation to millions of people who have suffered as a result of austerity, but it should be a lesson for future politicians thinking of inviting IMF austerity as a solution to debt crises. 

Apologists of austerity argue that the reasons the IMF-EU program has indeed failed in Greece include: public sector corruption, 40% of GDP is produced by the public sector, fiscal mismanagement, lack of economic diversity, and resistance to austerity by labor unions. In the past decades, the IMF and its defenders have argued that the only reason for austerity not working is that government officials do not enforce it well and long enough.

 Let us simply accept all of those arguments without any rebuttal. Has austerity been a resounding success in the rest of Southern Europe in the last two years or in any country to create prosperity as its apologists argue? How can austerity work to create prosperity when its ultimate purpose is to absorb capital from the public sector and funnel it into the private sector, especially into large foreign banks and foreign enterprises at the expense of workers and the middle class?
Greece is now entering the sixth year of recession, and contrary to what the IMF, EU and the conservative-led coalition government promises, more than likely 2014 will be the seventh year of continued recession, with no prospects of growth the will absorb the one-third of the labor force currently our of work. The question is why the continued deception even now against the reality of a country that has proved austerity means impoverishing a substantial percentage of the population - some figures have it at around 30%. What is frightening about all of this is that the IMF and EU, as well as armies of prominent economists and mainstream media followed the lead of European and US politicians that favored austerity as the one and only option, not just for Greece, but all of Southern Europe and indeed any country with a large public debt.

The IMF now admits that its prescription has not yielded the results it promised, namely reduction in unemployment through economic growth, and private domestic and foreign investment to fill the gap that the weakened public sector was leaving behind. People from all ideological and political fields are understandably very angry that they were misled into believing austerity was the panacea when in reality it was the road to chronic impoverishment of a society.

In the last two years, the IMF, European Central Bank and European Union have imposed an austerity program on Greece as a condition for providing $325 billion in loans, of which most of it was devoted to servicing past debt and a portion to strengthening the banks. The austerity program that the EU-IMF imposed included:
1. raising taxes, especially property and indirect taxes across the board;
2. slashing government spending, especially subsidies and social programs;
3. slashing public employees jobs, public salaries and pensions;
4. slashing education and public health budgets;
5. raising the costs for public services, everything from public utilities to transportation;

Austerity Results:

1.statistical unemployment at 27%, unofficial unemployment at 32%, with youth unemployment at 57%.
2. drop of income f
3. an estimated 68,000 businesses have closed since 2010 and there are figures that place the number of closings much higher. Moreover, there will be tens of thousands small business closings in the next two years as the deep austerity-induced recession  continues. Given that small businesses are labor intensive, this means that Greece will not see unemployment reduced to pre-recession levels of 8% until at least ten years from now.
4. massive exodus of college-educated people seeking jobs in Europe, North America, Australia and other countries.
5. massive public debt that went from 120% of GDP before austerity to an estimated 190% in 2013, and it is not likely to come down to 120% until 2022 or so.
6. social fabric dismantled: sharp rise in protests and labor strikes; rise in crime and suicides;0 rise in extreme right-wing, racist activities backed by a neo-Nazi party represented in Parliament.

Will austerity go away simply because it is working to impoverish the middle class not just in Greece but across Southern and Eastern Europe? The answer is that austerity serves financial institutions and large enterprises that want to reduce labor costs and a weak state structure that focuses on catering to large business interests and spends as little as possible on social welfare benefits. If there is a common denominator across all countries that have adopted austerity in the last sixty years it is that they have weakened the middle class and workers and strengthened large domestic and foreign capital.


Anonymous said...

One reason why interventions of both the World Bank and the IMF had limited impact is their blind faith in economic approach to the neglect of other equally and sometimes even more important political and social aspects. Public Policy decisions require inputs from other disciplines also. Another mistake which they often make is to assume that what has worked in Western countries will also work in non-western context. Vasant Moharir

Anonymous said...

RE: "Let us simply accept all of those arguments without any rebuttal," Dr. Kofas asked. "Has austerity been a resounding success in the rest of Southern Europe in the last two years or in any country to create prosperity?"

In Sovereign Debt Restructuring 1950-2010, Das,Papaioannou, and Trebesch
(2012) emphasized that qualitative and quantitative frameworks are the principle rules for restructuring sovereignty.

This IMF Working Paper provides insight into a categorical break down and the general reader will find: illiquidity vs. insolvency as well as unwillinglyness vs. Inability. This shows that the IMF has scrutinized policies of state and public structures(p. 68). L.Pierce