PROJECT SYNDICATE
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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