Equitable Growth and the Perils of Austerity

One would hope that Europe regained its composure since our economic interests are also at play in what is going on in Europe. The less they dither over there, the more we could gain time enough to succeed our transition to a more diversified and dependable economic market base

Mauritius faced one of the most difficult phases of its economic history in the late 1970s and early 1980s. Nothing seemed to work out well. The balance of payments of the country went on deteriorating in the face of a quadrupling of oil prices on international markets, one of the largest items on our import bill.

The US dollar became more expensive by the day. At the same time, despite having launched ourselves into textiles some years before, we were still economically narrow-based and dependent on sugar exports to a large extent. This was insufficient to pull us out of the dire economic conditions. Unemployment was ever on the rise while compensating welfare spending was fast receding in the face of deteriorating government finances.

It was the perfect scenario for the World Bank and the IMF to invite themselves here in with “Structural Adjustment Programmes” and “Standby Arrangements”. All of this took the shape of an extended government austerity programme lasting over several years. Rates of taxation soared higher each year, the rupee was devalued twice. Domestic inflation went up by nearly 50% in one of the devaluation years (1979) and by nearly 30% in the next one (1981). Unemployment swelled the ranks of the very poor with ever diminishing social relief programmes in place. Prospects were getting bleaker. At the end of the day, people were as if fed up with ‘austerity measures’ and it is in this mood of despair that they voted out the Labour government in 1982.

Something similar has been playing out far away from our shores, notably in Greece. Europe is still our economic plat de résistance, as it has been during several decades past. The situation in Greece and hence in Europe is preoccupying for us. What are our prospects, given the current tussle between advocates of ‘austerity measures’ in Europe and populations in distress increasingly opposing such measures? Will a mutually agreed solution be reached? Or, will there be continuing policy tensions in the euro zone? Will all this end up in a divided Europe with possibly a Greek exit from the euro zone? Uncertainty clouds the horizon.

Limits to tolerance of austerity packages

On January 25th the left-leaning Greek party, Syriza, won the local elections. They went to the polls with an agenda to do away with an austerity programme that has been in place since May 2010 and has brought the Greek people almost to their knees. Despite implementing this programme, unemployment in Greece has been increasing and stands today at 28 percent overall with youth unemployment rising to as much as 60 percent within this figure.

Unable to honour its public debt obligations, Greece had resorted to a bail-out in 2010 at the heart of which was this austerity programme. The austerity programme was set down jointly by the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB), the “Troika”. It involved, amongst others, debt repayment, curtailment of public spending, economic “reforms” by way of savage cuts in public services, in the wages of government workers and in social benefits. In return, Greece saw a softening of the terms of repayment of its debt.

Officials of the Troika, who had imposed the conditions to be respected by the Greek government back in 2010, forecast that abiding by the terms of the austerity programme would only see a small contraction of the Greek economy in 2011, with the economy starting to recover by 2012. Unemployment would, according to the programme, rise substantially initially from 9.4 percent in 2009 to almost 15 percent in 2012, but would then begin coming down fairly quickly. The Troika officials believed in the tell-tale story that the direct job-destroying effects of government spending cuts would be more than made up for by a surge in private sector optimism. It never happened this way.

Despite strictly abiding by the austerity programme, unemployment has kept increasing; GDP has kept on falling and, along with it, the tax take of the government due to falling levels of production. Greek debt troubles are worse than before the programme started. The economy hit the bottom in 2014 despite a timid sign of recovery but there has been nothing compared to the pre-crisis levels in terms of standard of living. It shows how unrealistic and out-of-tune with reality the projections under the austerity programme were.

As in the case of Mauritius in the late 1970s and early 1980s, Greece has been reeling under multiple social and economic setbacks from implementing the austerity programme. The programme was, if anything, misconceived and has added to the existing problems with no clear end in view as to how Greece could get out of its predicament. This is the background against which the new left-leaning Greek government headed by Alexis Tsipras was voted to power January last. The damage wrought by the austerity programme had stretched the long suffering of the Greek people to its final limits. People were fed up. They wanted to see alternative policies and a society which, contrary to the individualistic and neo-liberal philosophy of governing, would carry a more humanizing tone towards them.

The new Prime Minister of Greece has been asking the EC for either part cancellation of the Greek government debt (estimated to around €320 billion) or to extend its maturity to give more time to the hard-pressed country to meet its debt repayment commitments with lesser stress on the people. He has also been asking for an easing of the austerity programme which has no chance of working out the way it was contemplated, given the prevailing constraints under which the Greek economy has been evolving.

The response of Germany and a couple of other northern European states, such as the Netherlands and Finland, has been an adamant ‘No’. According to them, Greece should abide strictly by the commitments taken during its past two bail-outs since the onset of the crisis. They believe that any concessions made to Greece will be echoed by other southern states of Europe, such as Portugal, Spain and Italy, which are also in economic distress. Germany in particular is even averse to the ECB’s belated decision to salvage the European economic situation by injecting additional liquidity into Europe through buying of bonds under what is called a programme of ‘Quantitative Easing’. It fears that that would stoke inflation when Europe is actually facing the threat of deflation (a condition of successive rounds of falling prices and shrinking GDP).

A situation of deadlock has thus emerged. Those who are more optimistic hope that the two sides will reach a compromise on their respective positions if only to enable a distressed country like Greece to get out of the difficult tangle in which it is finding itself. Others believe that Germany might adopt a tough line whereby Greece would be forced to exit the euro zone eventually. Make it or break it. The people of Greece themselves would like to stay in the euro zone.

Conclusion

In the case of Mauritius when faced with a situation similar to Greece today, our salvation came in the form of an expansion of our economic activities helped by the coincident liberalization of international markets and hence our increased access to export product markets. Incoming investment, boosted by a friendly tax regime, raised the economic scope dramatically. By 1987, there was “full employment” in Mauritius.

The tragedy of Greece today is that international demand for goods and services continues to be subdued and there is limited scope therefore for the Greek economy to expand out. With time and a pickup of international markets, however, it could get out of its trauma. Northern Europe, on its part, appears to prioritize a proven failed economic austerity dogma which translates itself into greater human suffering than what has been the lot of the Greeks already. It’s like: “You’ve got to pay up for your past sins (i.e., debts) and we are in no mind to help by recycling funds from the better-off to the les-well-off countries of Europe to save the situation. Such a concession could give ‘markets’ the bad signal and we’ll not risk it.”

From a place like Mauritius, one would hope that Europe regained its composure since our economic interests are also at play in what is going on in Europe. The less they dither over there, the more we could gain time enough to succeed our transition to a more diversified and dependable economic market base. Unfortunately, we see an increasing disconnect between economic science with a social vision — a tool to create opportunities for human and social development – and a market-driven economic model devoid of fellow feelings and the rich emotions of sharing a platform of equitableness with others. There is little point to drive the Greek people into an aggravating state of despair about their future. There is also little point to persist in obstinacy and thus fail to kick-start growth in Europe to avoid another lost decade with clouds of deflation already looming over the euro zone.

* Published in print edition on 13 February  2015