IMF austerity questioned as Latin American intervention looms
After weeks of often violent protests, which saw thousands of indigenous Ecuadorians descend on the capital Quito and paralyze the city, President Lenin Moreno last week restored the subsidy on fuel that he had canceled last month. Moreno has been raising taxes and cutting public spending in order to get emergency financing of $4 billion from the International Monetary Fund (IMF). A similar scene played out on the southern tip of the same continent this weekend, when thousands of protesters, mainly students, blocked the streets of Chilean capital Santiago in protest at a hike in metro prices as part of another austerity drive. In neighboring Argentina, President Mauricio Macri is almost certain to lose his bid for re-election when voting takes place next week. Macri was trounced in a primary election in August, reflecting the amount of anger against his severe austerity drive as part of a $50 billion bailout package devised by the IMF.
The various crises in Latin America may seem to be unconnected and the local factors behind them distinct and often unrelated. However, Latin American nations have benefited or suffered from the “contagion” effect. Thus, most of the region’s countries recently experienced almost a decade of rather remarkable progress and extremely strong economies, with a sustained burst of growth that saw significant expansion of the middle classes across the continent. However, for the past few years, the economies of several regional countries have slowed down, mainly due to a decline in the prices of various commodities. The fiscal situation of many nations deteriorated sharply, forcing governments to turn to overseas lenders, notably the IMF, seeking a bailout.
As has become standard practice for the IMF, it forced the countries to swallow the bitter pill of mounting an extreme austerity drive, slashing public spending and subsidies. However, many economists have turned against the IMF’s methods, saying that austerity hits the poorest sections of society the hardest, often reducing them to destitution. They point to various examples of IMF bailouts that have actually worsened the situation rather than helped the receiving country. For instance, when, during the Asian financial meltdown of the 1990s, the IMF forced South Korea to adopt austerity measures, its unemployment rate skyrocketed from 3 percent to 10 percent. More recently, a sustained and forced austerity drive in Greece saw its gross domestic product fall by 27 percent between 2008 and 2015.
In contrast, back in the 1990s, Malaysia was a rare Asian country to slam its doors on IMF assistance. As a result, the Malays not only escaped the worst of austerity, but also saw their economy revive the quickest. The IMF did belatedly admit in 2002 that the Malaysian experiment had indeed worked. However, nearly two decades later, there seems to be an urgent need to remind the IMF that, for economies in trouble, there are other, more palatable solutions than a severe austerity drive. The Greek case study should serve as a lesson that even the most serious and urgent rebalancing of a budget needs to be done with a human face. The IMF would do well to remember this as it prepares to intervene in Latin America once again.