Because most of these countries are saddled with huge debts, the logic propelling the use of fiscal austerity is that these countries should make painful cuts in government spending, which means that they will not incur more debts to finance large governments. The irony about these austerity measures is that they affect the poorest of the poor disproportionately. Records are showing that poor people in these countries are committing suicide because they are unable to bear the hardship caused by unemployment and at the same time see social programs being cut drastically by their governments.
As is always the case, once the big economies begin to implement measures advocated by the multilateral financial institutions (MFI), these measures are imposed on the smaller economies. In most cases, the structures of the economies are not the same even if the symptoms are similar. In the 1980s we saw “structural adjustments” (SA) imposed on poor countries by the MFIs and today the evidence, conclusively, have shown that SA hurt most poor countries. No evidence exists in the extent literature on how SA helped any country advance economically. The contrary is true: those countries that ignored or resisted SA experienced economic advancement compared to those that embraced.
The fact remains that there are several different ways to manage an economy and austerity measure does have its place but the conditions must be right in order for it to have a positive impact.
In an economy like ours where there is high level of unemployment, low disposal income, severe underemployment, massive lack of infrastructure, high cost of essential commodities, severely import dependent, high exchange rate, high interest rate and high poverty level, would massive cuts in government spending help? Is fiscal austerity a prudent economic tool to use in these times?
I am not an economist, but all the indicators show that if the Liberian authorities are not careful in the use of austerity measure as advocated by the MFIs, they could have a big enough trouble on their hands. The case in Europe is different: most of them have huge social programs that they must finance with borrowed monies. In this case, the MFIs are requiring that if they must borrow money, those monies cannot be used to finance their social programs hence the need for austerity.
In the case of Liberia, there are no social programs to finance per se. The Government doesn’t have sufficient money to finance its recurring expenses. In fact, basic social services like education, health, and water are not adequately financed. In this case, what will the Government be cutting and for what?
During debates on the national budget and justification for public spending, we hear our economic managers advocate for cut in recurring expenditure so that Government can finance capital projects.
There are two particular issues with this mode of managing the economy. First, the size of the national budget is too small to adequately finance capital projects that will have any significant impact on the economy. The infrastructural challenges are too grave for anyone to believe that you can run government on a $500 million budget and at the same time make capital investment to address the challenges. What this kind of management does is that you neither adequately finance your core government operations nor make any dent in capital expenditure. This is a lose-lose proposition.
Secondly, any attempt to use all the domestic resources on the capital projects defeats the purpose of creating a circular flow in the economy. Because the infrastructure projects are capital intensive and Liberia is not a producer of capital goods, the resources are spent outside the country and ordinary Liberians do not benefit as much. And since Government is the largest spender in the economy, the resources must be spent strategically so that ordinary people can participate.
This goal can be achieved, in part, by spending mainly on consumables. At least, by this Liberians will have the opportunity to provide goods and services to the government; hire more people; and pay more taxes. This spending will have more multiplying effect than if they were spent on capital goods and projects.
As a non-economist, I have highlighted all of these just to show that not everything that the MFIs say we should adopt. Our cases are unique and we must consider them carefully before attempting to implement. These guys want to remain relevant in the global economic space and so they will proffer a number of textbook prescriptions that will not help you. And when they succeed in not helping you, then they remain relevant to you.
The case of South Korea is a vivid example: these MFIs condemned South Korea 50 years ago. But today, the story is different. South Korea dared to think outside the box and took their destiny in their own hands. The verdict is in on South Korea.
All I am doing here is warning that our Liberian economists and politicians should carefully consider what’s important to them and decide what they want to do. We don’t have to do everything the IMF and World Bank say: we have to do what’s right for our country and people.
I hope I have made no attempt to proffer irresponsible and reckless spending on the part of Government. If I came across that way, I am sorry. All I am advocating is that we make spending decisions that will help our cause and improve the living conditions of our people.
Austerity measures as proposed by the IMF and WB will hurt our poor little country. We are not saddled with debt. Our economy is not producing as much jobs as we would like. Our people are hurting. Our children are not getting quality education and healthcare as they should. We still have issues with safe drinking water. College is getting expensive by the day.
The WB and IMF want us to cut spending to these basic social services and the effective running of our government in the name of “austerity”. I think this is evil and immoral! If we don’t carefully consider our choices, we will have ourselves to blame.
Prudent fiscal management, and not “austerity” as advocated by the MFIs, is what Liberia needs in order to make progress.
In my next article, I will propose means on how we finance our infrastructure projects; but first, we must take care of our people by meeting their basic needs.
This is the responsibility of any responsible government.
Culled from The Capitol Insider Magazine