Jayati Ghosh says more…


Professor Jayati Ghosh PHOTO/Jawaharlal Nehru University

Project Syndicate: In your latest PS commentary, you criticize the International Monetary Fund’s apparent belief in “expansionary austerity.” In the case of Ecuador – where you foresee IMF-imposed austerity leading to a growth slowdown – how could the current loan agreement be improved? Is it simply a matter of extending the timeline for fiscal consolidation, or do you think the IMF should actually be making the opposite demand: fiscal stimulus?

Jayati Ghosh: For Ecuador (and Argentina), two imperatives are abundantly clear: external debt must be restructured, and debt repayment must be enabled through economic growth, rather than wage suppression and fiscal consolidation.

Restructuring requires creditors to accept a haircut. There is nothing unfair about that: reckless lenders should not be protected from the consequences of their own folly. In any case, the interest rates financial markets demand are supposed to take default risks into account. Having taken advantage of higher interest payments from riskier borrowers, they cannot turn around and call for mommy (the IMF) when the risks materialize.

Moreover, experience has shown time and again that debts are most effectively repaid in a context of economic growth. For ailing economies, that requires fiscal stimulus, not fiscal consolidation. It was based on this recognition that, in the early 1950s, German debt was written off and its loan repayments were capped at 3% of export revenues – an approach that enabled its subsequent “economic miracle.” (Ironically, Greece was one of the countries that offered Germany loan forgiveness at that time.)

No country today gets anything close to that level of support from the IMF. Instead, the Fund forces borrowers to implement counterproductive economic policies, in exchange for loans that benefit only creditors. It is bizarre and depressing that global institutions that should know better and countries that have benefited from constructive strategies in the past should now feign ignorance about what is really needed.

PS: Last month, you warned that the hoarding of profits by the rich was coming at the expense of productive investment, raising the risk of economic stagnation, market failures, and even a breakdown of democracy. Yet governments have shown little appetite for counteracting this trend through taxation or regulation. What can be done to spur action on this front? Are there politically palatable first steps that can be taken now to bring about greater change in the future?

JG: Economic policy globally has become heavily distorted in favor of the rich, with governments increasingly beholden to corporate interests, and thus highly resistant to progressive policies. As economies have become increasingly dysfunctional, however, the likelihood that social forces will rise up against the current system is growing. Ultimately, the need for political legitimacy will force change, even if that does not seem likely in the immediate future.

There is some low-hanging fruit that should be easy for progressive forces to pluck, especially with regard to illicit capital flows. A first step could be greater international cooperation on taxation, ideally moving toward a system of unitary taxation for multinational corporations and the plugging of loopholes for tax evasion and avoidance by high net-worth individuals. Governments and citizens alike would win. The only losers would be the ultra-wealthy, and they have not justified lower effective tax rates by investing in more productive activities.

Similarly, people are increasingly recognizing that more stringent environmental regulation is urgently needed. Such regulation must be combined with public investment that drives a shift toward greener forms of production and consumption, and augments job creation.

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