The Return of Austerity-The View From Africa

Leonce Ndikumana

Following the intense debate on the fiscal deficit during the U.S. presidential campaign, fiscal consolidation continues to dominate discussions in policy circles and academia. The large fiscal deficit in the U.S. and sovereign debt woes in the Eurozone are used by proponents of the “small government” mantra as a means to advance the belief that fiscal consolidation is the only way to bring the economy back to sustained growth and full employment. While the arguments are not new, the current circumstances of a global recession and a slow recovery in the U.S. make it somehow easier for proponents of this school of thought to fool the public into believing that tying the hands of the government is the only road to salvation.

African countries and developing countries in general know too well about the ravages of austerity programs; they certainly would not want to revisit the era of the 1980s that left permanent scars from fiscal retrenchment. While arguments for the alleged benefits of fiscal consolidation in terms of accelerated recovery and long-run growth are built on shaky empirical grounds in the case of developed countries,[1] they are even more tenuous for African countries. First is the chimera of “expansionary fiscal contraction” whereby fiscal consolidation is arguably supposed to boost growth through expansion of private spending driven by improved business confidence. In the case of developing countries, fiscal retrenchment typically involves substantial cuts in public expenditures including infrastructure, which worsens rather than improves the business environment by raising production costs. So, “expansionary fiscal contraction” isn’t, and can’t be, a developing country phenomenon.

Read the rest of this entry »

Solving Emerging Debt Crises

Martin Khor

The issue of foreign debt has made a major comeback.  This is due to the crisis in Europe, in which many countries had to seek big bailouts to keep them from defaulting on their loan payments.

Before this, debt crises have been associated with African and Latin American countries.  In 1997-99, three East Asian countries also joined the indebted countries’ club.

This year, European countries, notably Germany, insisted that private creditors share the burden of resolving the Greek crisis.  They had to take a “haircut” of about half, meaning that they would be repaid only half the amount they were owed.

It is increasingly realised that bailouts, where new loans are given to indebted countries in order to enable them to keep up to date with paying their old loans in full, are not enough and may be counter-productive, when the countries are facing a problem of insolvency and not just temporary lack of liquidity.

The restructuring of some Greek debt that was owed to private creditors is an example of what needs to be done.

However, the ad hoc restructuring undertaken in the case of Greece is not enough.  There needs to be a more systematic framework available to countries on the verge of debt default to conduct a proper debt workout, with principles agreed to internationally.

Read the rest of this entry »

What’s Up For 2013? “We simply do not know" but:

Gerald Epstein

Prognostication is a fool’s errand…maybe that’s why we economists like to do so much of it, especially this time of year.

John Maynard Keynes was no fool, but even he couldn’t help making forecasts. Keynes famously predicted, for example, that over time there would be such abundance of capital that investments would yield close to 0%, bringing about the “euthanasia of the rentier.” Though interest rates are now quite low, the rentiers are still, unfortunately, going strong.

Keynes’ willingness to engage in such forecasts is all the more interesting because, better than most economists – then and now — Keynes understood the pitfalls of economic prediction. As emphasized by my colleague James Crotty, among others, central to Keynes’ economic thought is the notion of “fundamental uncertainty.” That is, the economy is constantly in a state of flux, especially in times of profound structural change, so about the future “we simply do not know.”

Read the rest of this entry »

What’s Up For 2013? “We simply do not know” but:

Gerald Epstein

Prognostication is a fool’s errand…maybe that’s why we economists like to do so much of it, especially this time of year.

John Maynard Keynes was no fool, but even he couldn’t help making forecasts. Keynes famously predicted, for example, that over time there would be such abundance of capital that investments would yield close to 0%, bringing about the “euthanasia of the rentier.” Though interest rates are now quite low, the rentiers are still, unfortunately, going strong.

Keynes’ willingness to engage in such forecasts is all the more interesting because, better than most economists – then and now — Keynes understood the pitfalls of economic prediction. As emphasized by my colleague James Crotty, among others, central to Keynes’ economic thought is the notion of “fundamental uncertainty.” That is, the economy is constantly in a state of flux, especially in times of profound structural change, so about the future “we simply do not know.”

Read the rest of this entry »