Who does it hurt? The IMF on fiscal consolidation

Arjun Jayadev

Who does it hurt? The IMF on fiscal consolidation

In 2010 Alberto Alesina from Harvard University was celebrate by Business Week for his series of papers on fiscal consolidation. This was ‘his hour’ the article argued. The surprising argument that he and his coauthors made that was that the best way forward for several countries facing debt issues was to undertake “Large, credible and decisive spending cuts”. Such cuts would work to change the expectations of market participants and bring forward investment that was held back by the uncertainty surrounding policies in the recession.

The idea of ‘expansionary austerity’ has failed spectacularly by any account. Martin Wolf’s latest article in the New York Review of Books goes over this, as does Paul Krugman’s earlier piece in the same outlet. In a forthcoming paper written by Josh and I  (which I will blog about later), we argue that austerity succeeded at least in part because of the nature of consensus macroeconomics (by which we mean both New Keynesian and Real Business Cycle approaches).

One paper that I had wanted to write was to discuss the distributional implications of austerity. For many reasons, including those elucidated by Jim Crotty, Josh and Jerry Epstein, austerian policies and should really be seen as class conflict—protecting the interests of the wealthy and attacking those of the poor.

I never got to the empirical tracing out of this argument- but the IMF has. And the abstract really does say it all:

“This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments”

In other words—it does hurt, and it hurts the relatively poor more. Even more importantly, the claim that spending cuts are ‘better’ for the economy than tax raises as argued by Alesina and some coauthors forgets to ask for whom this is better. The IMF’s answer is that spending cuts are definitely not good for the working class and that advocating spending cuts rather than tax increases imposes distributional costs to those least capable of bearing it.

What a surprise!

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Measuring Hunger: A Response to the FAO

Timothy A. Wise

The U.N. Food and Agriculture Organization (FAO) created a stir last October with its revised estimates of global hunger. After revising the methodology used in its annual State of Food Insecurity (SOFI) reports, the FAO reported that the number of hungry had not surpassed one billion following the 2008 food price spikes, as previously reported. Indeed, the new estimates showed barely an upward blip during the food price spikes. Moreover, new trend lines based on revised estimates of past hunger suggested significant progress in reducing the incidence of hunger.

“New estimates show that progress in reducing hunger during the past 20 years has been better than previously believed,” the FAO concluded, “and … given renewed efforts, it may be possible to reach the MDG hunger target [of halving world hunger] at the global level by 2015.”

Now, a group of hunger researchers led by Frances Moore Lappe, and including Triple Crisis bloggers Jennifer Clapp, Robin Broad, and Timothy A. Wise, have published a detailed critique of the SOFI 2012 estimates and report. “Framing Hunger: A Response to ‘The State of Food Insecurity in the World 2012,’” offers recommendations to the FAO, as much in relation to the presentation of its hunger estimates as on the methodology itself.

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Unlocking our Climate Wealth: James Boyce at TEDxTraverseCity 2013

James K. Boyce is professor of economics at the University of Massachusetts, Amherst, and director of the environment program at the Political Economy Research Institute. His latest book is Economics, the Environment, and Our Common Wealth (Edward Elgar, 2013).

Triple Crisis Welcomes Your Comments. Please Share Your Thoughts Below.

Waving or Drowning: Developing Countries After The Financial Crisis

Yilmaz Akyuz

More than five years since the outbreak of the global financial crisis, the world economy shows little sign of stabilizing and moving towards strong and sustained growth.  Because of policy shortcomings in removing the debt overhang and providing strong fiscal stimulus to make up for private sector retrenchment, the crisis in the US and Europe has been taking too long to resolve.  While deleveraging continues to stifle private demand, economic activity is further restrained by fiscal drag in these two epicentres of the crisis as governments have turned to fiscal orthodoxy after an initial reflation.  There has been excessive reliance on monetary policy through provision of large amounts of liquidity to financial markets and institutions at close-to-zero interest rates, using unconventional means, generating financial fragility and exchange rate instability in emerging economies, as well as potential unintended and not well-understood consequences for future financial stability in AEs.

Developing countries (DCs) are not decoupled from AEs, contrary to what was widely believed during their unprecedented growth in the run-up to the global crisis.  With continued instability and downturn in AEs, the structural weaknesses in DCs are exposed.  Although conditions in global financial and commodity markets have generally remained favourable since 2009, the strong upward trends in capital flows and commodity prices that had started in 2003 have come to an end and exports to AEs have slowed considerably.  Growth in most major DCs has now decelerated significantly compared to the rates achieved before the onset of the crisis, after showing some resilience in the first couple of years of the crisis thanks to a strong countercyclical policy response made possible by their improved macroeconomic conditions during the earlier expansion.  In Asia, the most dynamic developing region, growth in 2012 was some 5 percentage points below the rate achieved before the onset of the crisis; in Latin America it was almost half of the pre-crisis rate.

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The Great Banking Divide

Jayati Ghosh

The Great Recession of 2008 has become a marker for many turns of the tide, including the relative position of nations in the global economic hierarchy. Among the many ways in which emerging economic powers (like the BRICS) are supposed to be doing better than developed countries in patterns of bank lending. So while the credit crunch continues for many businesses and households in the US and Europe, banks in the developing world are said to be providing larger and larger amounts of credit to enable investment and economic expansion.

Between December 2008 and 2011, the BRICS countries expanded bank lending to businesses in their domestic economies by 62 per cent, whereas in the G-8 countries such lending fell by 4 per cent. Much of the increase in bank credit to business in the BRICS came from China, and much of the decrease in the developed countries came from troubled European economies.

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POVERTY, CORRUPTION AND THE CHANGING WORLD, 1950-2050

Robert H. Wade

On May 29 2013 James Wolfensohn, president of the World Bank from 1995 to 2005, gave the Amartya Sen lecture at the London School of Economics, on the subject, “Reflections on a changing world, 1950-2050”.

His reflections on the changing world were mainly reflections on what he achieved as World Bank president. He emphasised five.

  • Re-focusing the World Bank – and the whole development “community” – on poverty as the central issue of development.
  • Elevating “corruption” as a major development problem, instead of sweeping it under the carpet.
  • Writing-down countries’ debt (especially African) – so that World Bank loans no longer went straight out the door to western banks and instead were  used for investment in the country.
  • Putting Bank operations in a particular country in the context of a broad vision of the economy’s future development path five to ten years ahead, in the format of his “Comprehensive Development Framework” (CDF).
  • Decentralizing World Bank operations, so that more of the total staff operated from regional or country offices rather than from headquarters in Washington DC, and more meetings with shareholding states were held in borrowing countries rather than in Washington or Paris.

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The Party is Over: Children, Clean up the House! Lessons from the Turkish #OccupyGezi

Erinc Yeldan

They are referred to under different identifiers: generation-Y; millennium generation; globalization generation; Net-generation… roughly they are the cohort of post-1980 newborns, coming from distant geographies, different nations. Yet, they are claimed to share astonishingly common characteristics:  narcissistic love of the self; the me, me, me approach to life; impatience; intolerance of all forms of hierarchy; a fetishistic loyalty to technology and brands; almost non-existing interest in social events; apolitical nihilism; non-reading, etc etc…

The peculiar characteristics of the post-1980 generation has been the subject matter of quite some research, but the subject gained popular interest recently through an editorial led by the popular Time Magazine, where most of the adjectives indicated above had been liberally adopted.  The Time approach to the generation-Y consisted mostly of a superfluous description of the peculiarities of the young and the hot-blooded consumers.  There was not much mention of the surrounding dictates of the neoliberal global assault on the young citizens, nor on the conditions of the political-economy embedded within today’s bubble capitalism.

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Reading and Writing

What We’re Reading

Institute for Policy Studies, Corporate Pirates of the Caribbean
BBC News Europe, Turkey Government Freezes Gezi Park Project
Joachim Jochnow, What’s Become of the German Greens
Greg Kaufman, This Week in Poverty: Congress Turns its Back on Rural America

What We’re Writing

Jayati Ghosh and C.P. Chandrasekhar, Banking as the New Frontier
Martin Khor, Malaysia Takes Key Role in Climate Talks
Jeff Madrick, The Scarlet Debtor
Matias Vernengo, More on David Graeber’s Debt

A Great Sucking Sound: Part 3

Sasha Breger, Guest Blogger

In my last two posts (http://triplecrisis.com/a-great-sucking-sound-part-2/, http://triplecrisis.com/a-great-sucking-sound-part-1/), I addressed the roles of debt, farmland acquisition, and physical commodity hoarding in helping finance siphon wealth from global agriculture.  In this final post, I discuss the role of derivatives and insurance markets in this redistributive process. I then turn to some of the potential critiques of my argument.

Derivatives markets

Derivative and insurance markets are implicated in the redistribution of wealth from agriculture to finance in at least two ways.  First, derivatives—and some retail insurance products based on them (e.g. Brazilian CPR, micro crop and revenue insurance)—are increasingly marketed to farmers, traders and/or consumers as a means of reducing market and weather risks in agriculture (demand for such products has been catalyzed by the erosion of public arrangements to prevent and mitigate agricultural risk). To my mind, this arrangement in many cases resembles a case of unequal exchange.  An hedging product of mediocre quality is being exchanged for a stream of fees and commissions to the financial sector. Indeed, hedging with commodity futures and options is a tricky proposition without guarantee of success. Contracts are too large and relatively short-term (relative the positions of many food system participants), trading and brokerage accounts are difficult, expensive and time-consuming to establish (especially for smaller traders), and future prices are both volatile and inefficient in many cases (this complicates derivatives trading by increasing the frequency of margin calls, as well as driving basis risk).

In fact, recent speculation in agricultural derivatives (more below) has introduced such inefficiency into future prices that hedgers have been petitioning regulators to introduce new limits on speculative trading. A 2008 letter from the Missouri Farm Board to the US Commodity Futures Trading Commission (CFTC) comments on rising basis risk for hedgers: “For almost three years farmers have experienced a widening of basis levels for most commodities…The lack of convergence between an expiring futures contract and the cash market has… presented major challenges to producers trying to carry out marketing plans involving futures and options contracts.”  Even as speculators render cash prices more volatile, and effective risk management thus more essential, these same speculators are disabling one of the few price risk management options that remain for agricultural actors.  I hear that sucking sound growing louder.

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NGOs Target Financial Investment in Farmland

Jennifer Clapp

Banks, pension funds, hedge funds and other financial institutions have stepped up their investment in farmland in recent years, including financing for controversial large-scale land deals in developing countries. NGOs are now calling specifically on financial institutions to ensure that their investments are environmentally and socially sound, or consider divestment.

Last month, Friends of the Earth released a report that linked a number of European banks and investment firms to large-scale land acquisitions in Uganda. In this case, the financial institutions provided financing to Wilmar, a major agricultural trading firm with extensive interests in palm oil production and refining. FOE’s research showed that Wilmar’s subsidiary in Uganda had violated environmental and land tenure legislation in connection with recent land purchases in the country.

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