IMF austerity questioned as Latin American intervention looms
After weeks of often violent protests, which saw thousands of indigenous Ecuadorians descend on the capital Quito and paralyze the city, President Lenin Moreno last week restored the subsidy on fuel that he had canceled last month as part of an austerity drive that saw diesel prices more than double overnight. Moreno has been raising taxes and cutting public spending in order to get emergency financing of $4 billion from the International Monetary Fund (IMF).
A similar scene played out on the southern tip of the same continent this weekend, when thousands of protesters, mainly students, blocked the streets of Chilean capital Santiago in protest at a hike in metro prices as part of another austerity drive. In neighboring Argentina, President Mauricio Macri is almost certain to lose his bid for re-election when voting takes place next week. Macri was trounced in a primary election in August, reflecting the amount of anger against his severe austerity drive as part of a $50 billion bailout package devised by the IMF. Protests have since continued in Buenos Aires, forcing Macri to backtrack on several of his promises, especially as he stepped on to the campaign trail.
The situation in Peru turned almost Kafkaesque in early October, when embattled President Martin Vizcarra dissolved the opposition-controlled Congress following a prolonged conflict between the two institutions. The Congress in turn stripped Vizcarra of his post and named the vice president as the acting president, but within hours he had resigned and asked Vizcarra to hold early elections. The standoff has continued, as the matter has been referred to the country’s Supreme Court. Peru has been rocked by instability since Vizcarra’s predecessor, Pedro Pablo Kuczynski, resigned over a massive corruption scandal that has spread from Brazil to several other countries in the region.
The various crises in Latin America may seem to be unconnected and the local factors behind them distinct and often unrelated. However, Latin American nations have benefited or suffered from the “contagion” effect. Thus, most of the region’s countries recently experienced almost a decade of rather remarkable progress and extremely strong economies, with a sustained burst of growth that saw significant expansion of the middle classes across the continent. Today, the middle class accounts for almost a third of the total population and living standards have risen accordingly, along with the emergence of several strong democracies in a part of the world that had been infamous for its military dictatorships and coups d’etats, as well as civil wars between governments and Marxist rebels.
However, for the past few years, the economies of several regional countries have slowed down, mainly due to a decline in the prices of various commodities, not least the oil that is the primary export of many Latin American nations. And, as economies in the region were weakening, a series of corruption scandals broke out involving many leaders, especially the one involving Odebrecht, a Brazilian infrastructure firm with a presence in several nations. A combination of weak economies and the eruption of corruption scandals led to a wave of protests against leaderships across the continent.
The fiscal situation of many nations deteriorated sharply, forcing governments to turn to overseas lenders, notably the IMF, seeking a bailout — as was the case with Argentina’s Macri and Ecuador’s Moreno. However, as has become standard practice for the IMF, it forced the countries to swallow the bitter pill of mounting an extreme austerity drive, slashing public spending and subsidies. However, many economists have turned against the IMF’s methods, saying that austerity hits the poorest sections of society the hardest, often reducing them to destitution. They point to various examples of IMF bailouts that have actually worsened the situation rather than helped the receiving country. For instance, when, during the Asian financial meltdown of the 1990s, the IMF forced South Korea to adopt austerity measures, its unemployment rate skyrocketed from 3 percent to 10 percent and the austerity drive also saw a sharp rise in the number of suicides, leading to the term “IMF suicides.” Similarly, Indonesia saw its gross domestic product (GDP) crash by 13 percent in a year.
Many economists have turned against the IMF’s methods, saying that austerity hits the poorest sections of society the hardest.
Ranvir S. Nayar
More recently, a sustained and forced austerity drive in Greece saw its GDP fall by 27 percent between 2008 and 2015. Now, as the Athens government continues to struggle to keep public spending down in order to meet the rather atrocious target of reaching a primary budgetary surplus of 3.5 percent of GDP, the costs to the Greek people and society have been unprecedented. A study by Lancet says that the mortality rate in Greece has jumped significantly, from 944.5 deaths per 100,000 people in 2000 to 1,174.9 in 2016, with most of the rise coming in the period after the austerity measures began in 2010.
In contrast, back in the 1990s, Malaysia was a rare Asian country to slam its doors on IMF assistance. Instead of putting its people through forced austerity, it imposed capital controls and curbed speculation on its currency. As a result, the Malays not only escaped the worst of austerity, but also saw their economy revive the quickest. The IMF did belatedly admit in 2002 that the Malaysian experiment had indeed worked.
However, nearly two decades later, there seems to be an urgent need to remind the IMF that, for economies in trouble, there are other, more palatable solutions than a severe austerity drive. The more recent Greek case study should serve as a lesson that even the most serious and urgent rebalancing of a budget needs to be done with a human face and by first taking into account the human cost of any such exercise, rather than just the economic cost. The IMF would do well to remember this as it prepares to intervene in Latin America once again.
- Ranvir S. Nayar is the editor of Media India Group, a global platform based in Europe and India that encompasses publishing, communication and consultation services.