For decades, structural adjustment policies in the developing nations (often strongly encouraged by the wealthy nations) has created poverty or made things worse.
Now, with such a severe financial crisis industrialized nations from Greece, to UK and others are contemplating such strong austerity measures and cutbacks on public services that it looks like the structural adjustment the developing world has had to endure.
For example, UK’s new government has come in mostly on a platform of blaming the previous government for causing the crisis, ignoring any ideological encouragement from the private sector or their own party insisted before the Labour Party had come into power (though Labour also encouraged the same thinking). As such, the new Conservative government has insisted that because of policies of the past government, they have no alternative but to cut back on all manner of social spending (all while various bankers get ready to be rewarded with more bonuses!).
Yet, as Professor Ha Joon Chang notes, the fall in tax revenues has made the deficit hard to sustain, not government spending per se: Companies and individuals have been unable to earn as much as before the recession so the fall in that revenue for governments leaves their previously high spending look like immense bureaucratic waste holes.
Bringing about sustainable and appropriate growth is more important than cuts to areas that didn’t cause the problem he seems to imply, while not enough is being done to prevent future crises of the same type. Excessive cuts, he warns, can even push a country further into recession if it is not addressing the core causes of the crisis in the first place.
Stories of strikes and protests are increasingly commonplace, and if the experience of developing nations are anything to go by in previous decades, similar protests are likely in the future in industrialized nations.
One such example is in Ireland that has recently seen a bailout package from the EU, IMF and others require an austerity budget, much like the harmful structural adjustment policies the developing world went through.
Other Eurozone countries such as Portugal, Italy, Greece and Spain are also facing potential problems, while Iceland has gone through many in the past.
Former nobel prize winner for economics, Paul Krugman compared Iceland and Ireland’s handling of the situation and found that Ireland’s situation is potentially worse than Iceland’s because “the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.”
Ireland’s economic growth turned to disaster when speculative frenzy, driven by banks and the real estate sector, and possibly corrupt politicians, ended with banks bursting. Ireland’s credit-worthiness in international markets was under fire so it took on austerity measures. So, in effect, actions by banks and others have left the nation in recession, with the public bailing them out, while taking on the effects to their economy; a double-whammy so to speak.
As Krugman ends, punishing the Irish population for the mistakes of the banks and others is a terrible mistake.
By contrast, Krugman also notes that Iceland’s banks had to pay for their mistakes, leading to a decline in Iceland’s external debt. (Other measures including temporary capital controls also helped. Iceland’s own currency, the Krona, instead of Euro may have helped it too as it was able to devalue its currency, making its exports more competitive and thus helping it somewhat.)
Ireland is now in a tough spot as protesters have a legitimate cause to be concerned while others are worried that if actions such as considering increasing corporate tax are entertained, major multinationals that have been part of Ireland’s recent boom, may make good on their threat to move to other places that are more favorable to them although the$100bn bailout conditions currently do not require that.
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