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The Austerity Pandemic

NEW YORK – At this year’s International Monetary Fund/World Bank spring meetings in Washington, DC, the IMF urged European countries to ease their austerity policies and focus on investment, marking a shift from past rhetoric. But, in the corridors of those two multilateral institutions, there was talk of double standards.

In fact, most countries are cutting public expenditures – with the IMF’s support. So, even as some northern countries begin to question the austerity prescription, their southern counterparts (including southern European countries) are increasingly adopting fiscal-adjustment measures.

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According to IMF projections, of the 119 governments that are shrinking their 2013 budgets (relative to GDP), three-quarters are in developing countries (including 21 low-income and 68 middle-income countries). Fiscal consolidation affects an estimated 80% of developing-country citizens, and its impact is expected to intensify steadily through 2015. During this time, the magnitude of contraction will be significant, with roughly one-quarter of all developing countries expected to cut expenditures below pre-crisis levels.

A review of policy discussions from 314 IMF country reports published since 2010 – part of a comprehensive update on the global shift toward austerity – shows that many adjustment measures are most prevalent in developing countries, where citizens are especially vulnerable to austerity’s economic and social consequences.

The most common adjustment measure, which governments in 78 developing countries are considering, is subsidy reduction. Deliberations on the subject are often – indeed, in 55 developing countries – accompanied by discussion of the need for a targeted social safety net to offset higher food, energy, or transport costs for the poorest citizens.

But developing and implementing a social-protection floor takes time, and governments do not seem to be willing to wait. At a time when the need for food assistance is particularly high, some governments have withdrawn food subsidies and others have scaled back subsidies for agricultural inputs like seeds, fertilizer, and pesticides, hindering local food production.

Similarly, public-sector wage cuts and caps – currently being pursued by 75 developing countries – threaten to undermine service delivery to citizens, particularly at the local level in poor rural areas, where a single teacher or nurse can determine whether a child receives an education or health care. This danger is heightened as policymakers in 22 developing countries consider health-care reforms and those in 47 developing countries discuss pension reforms.

On the revenue side, as many as 63 developing countries are considering raising consumption taxes, such as the value-added tax. But taxing basic foods and household items can have a disproportionate impact on lower-income families, whose limited disposable incomes are already stretched thin, and thus can exacerbate existing inequalities.

Instead of slashing expenditures, developing-country leaders should focus on providing decent job opportunities and improved living standards for their citizens. They must recognize that austerity will not help them to achieve their development goals. On the contrary, spending cuts will hurt their most vulnerable citizens, widen the gap between rich and poor, and contribute to social and political instability.

Indeed, civil unrest is already on the rise across the developing world. From the Arab Spring to the violent food riots that have erupted in recent years across Asia, Africa, and the Middle East, populations are reacting to the cumulative effects of pervasive unemployment, high food prices, and deteriorating living conditions.

Ours does not have to be an age of austerity; governments, even in the poorest countries, have options to foster a socially responsive economic recovery. These include, among other measures, debt restructuring, increasing the progressivity of taxation (on personal income, property, and corporations, including the financial sector), and curbing tax evasion, the use of tax havens, and illicit financial flows.

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Ultimately, reducing wages, public services, and household income impedes human development, threatens political stability, lowers demand, and delays recovery. Rather than continuing to adhere to policies that do more harm than good, policymakers should consider a new approach – one that actually contributes to their countries’ social and economic progress.

Read more from our "Visionary Voices" series