Austerity – NO! Increased Production and Fiscal Prudence – YES!

Fri, Feb 17, 2012

Editor: Austerity is the preferred economic model advocated by Arnhim Eustace who demands Austerity Now! This posture has its deep seated roots in Arnhim’s training and experiences at CDB.{{more}} Eustace’s failure to think outside the box and penchant to stick to the old paradigm and IMF like thinking was typified by the advice even CDB provided in that era. His penchant to stick to the letters in the book without questioning its validity, applicability or context without a thought of rewriting the book is unfortunate and disappointing.

I am yet to hear one original ground breaking idea from Eustace, yet many prop him up as an Economic Genius. Surely, there must be more than just simply demanding Austerity Now! and waiting with bated breath and bended knees for an IMF prescription and then swallowing it hook line and sinker.

Many Vincentians are unaware of the IMF’s dubious past and its core set of prescriptions which invariably included: 1. Government impose restraints upon the supply of money and credit; 2. open doors to foreign capital; 3. privatization of state assets and; 4. cuts in public spending. Like medications, IMF ideas may not be applicable to every nation, especially small island states.

Today, SVG and St. Lucia are the only two Caribbean nations that have never been on an IMF program. Currently, Jamaica, Antigua, St. Kitts and Grenada are in Structural Adjustment Programs. (Trinidad, Barbados and Guyana in the past). Contrary to Eustace’s public claims that SVG had negative growth for a fourth year in 2011, this claim has now been totally debunked by ECCB’s publication on December 3rd, 2011, that as stated by the PM, there was positive growth of 0.8%, similar to St. Lucia (0.7%) Barbados (0.5%) and compared to Anguilla’s (minus 2.15); Antigua’s (minus 4.17% and St. Kitts-Nevis (Minus 0.09%). So why did Eustace in his Budget response stick to the incorrect IMF estimate of minus 0.4 (made in August 2011some 5 months before the end of 2011), when he had the official 2011figures long before the budget? Clearly, this questions his credibility and integrity and warrants an apology and retraction of his statements. He is also wrong on many issues, including the NIS’s financial status.

The IMF is not universally held in high regard. It is generally misunderstood, and in some countries even hated. It can advocate stimulus and in another breath, austerity as if like a split personality. It makes annual visits and recommendations to most of its 187 member countries, but with these recommendations, you can either take it or leave it. However, once a country enters into a formal IMF program, it starts losing any ability to ignore recommendations that it dislikes. IMF Standby and Structural Adjustment Programs come with conditionalities which are dubbed the Washington Consensus.

In the past, the IMF adopted a very harsh approach to Economic Stress. In 1980, the Overseas Development Institute (ODI) undertook research which pointed to four main criticisms of the IMF.

1. Developed countries and the Washington Consensus ideas were seen to have a more dominant role and control over less developed countries. 2. the Fund worked on the incorrect assumption that all payments disequilibria were caused domestically and the weight of external factors was minimized. (Eustace is guilty of the same thing, for while acknowledging the impact of the Global Financial Crisis, Hurricane TOMAS and the April storm (the last two a loss of over 160 million according to ECLAC), Eustace blames Government’s domestic management). 3. effects of IMF Fund policies were anti-developmental 4. harsh IMF policies were self-defeating.

IMF conditionalities (economic performance targets established as a precondition for further IMF loans) retard social stability and hence can inhibit the very stated goals of the IMF, while Structural Adjustment Programs often lead to an increase in poverty in recipient countries. IMF prescriptions are like Chemotherapy, they cause as much and often even more side effects than the expected benefit.

It is generally accepted that IMF policies in 1990 smashed Hungary after its emergence from Communism. The same IMF strategies were repeated often enough for us to expect poor results as in Thailand, South Korea, Indonesia, Russia and Argentina. IMF’s financial liberalization and forced restrictions led to worsened economic crisis, which was relieved only after the restrictions were lifted. Those nations which refused to take the medicine, even though they were confronting almost identical conditions (Malaysia, China, Poland) prospered while their neighbours which accepted IMF assistance and austerity collapsed.

In 21 countries that the IMF had given loans, tuberculosis deaths rose by 16.6%. Other studies Rowden et al (2009) showed IMF induced underfunded public health systems, led to dilapidated health infrastructure, inadequate numbers of health personnel, undermined public health systems, the fight against HIV/AIDS, environmental protection and food production.

Some nations have refused programmed loans due to the harsh conditionalities. So why knowing what the results may be, does the IMF keep applying the same formula for disaster? It is partly that some people like Eustace have been trained in the Washington Consensus to accept the prescription wholeheartedly without any questions but more-so the results happen to suit IMF’s sponsors.

Many world leaders have criticized the IMF including Bill Clinton. Leading economist, Joseph Stieglitz; former U.S. President Bill Clinton Economic Adviser in 2000 said: “When the IMF arrives in a country, they are interested in only one thing. How do we make sure the banks and financial institutions are paid? It is the IMF that keeps the financial speculators in business. They’re not interested in development, or what helps a country to get out of poverty.” “For how much longer should we give those who run the global economy the benefit of the doubt? The IMF has made the same mistake so many times that only one explanation appears to remain: it is an engineering disaster”.

There is absolutely nothing wrong with talking frankly and even openly criticizing International organizations, they may not like you, but you are respected for it. Leading Argentinean Politicians have called IMF policy, misdesigned fiscal federalism. Bill Clinton in 2006 finally said We need the World Bank, the IMF, the big foundations, and all the governments to admit that, for 30 years, we all blew it, including me when I was president. We were wrong to believe that food was like some other product in international trade, and we all have to go back to a more responsible and sustainable form of agriculture. Since 2006, the IMF has been undergoing reforms and responding to the criticism.

For St. Vincent and the Grenadines, the key to economic prosperity is increased productivity at a State, Private Sector and the level of the individual citizen. Each person and enterprise must be more fiscally prudent. We must utilize the new educational thrust and opportunities to enhance our competitiveness and the major efforts to boost health and link healthy living to increased productivity in agriculture, tourism and other services. However, Eustace and old IMF style Austerity can only serve to produce the same ill-effects as experienced by other nations. Austerity -No; Fiscal prudence and increased productivity -YES!

Dr. Jerrol Thompson