Initiative for Policy Dialogue
The South Centre
THE AGE OF AUSTERITY
Adjustment today, development
impacts, and what to do?
Isabel Ortiz
EURODAD-GLOPOLIS International Conference
Prague 3-5 June 2013
Phases of the Crisis (2008-2015)
Number of Countries Contracting Public Expenditures as a % GDP, 2008-16
131
132
122
119
106
111
68
55
37
89
91
94
90
Source: Ortiz and Cummins.2013. The Age of Austerity. IPD and the South Centre - based on IMF’s World Economic Outlook (October 2012)
Crisis Phase I (2008-09) – Fiscal Stimulus Plans
• $2.4 trillion fiscal stimulus plans in 50 countries
Social Protection in Fiscal Stimulus Plans 2008-09
Source: Ortiz and Cummins, A Recovery for All, UNICEF, 2012
Bailing out Banks, not People
Crisis Phase III (2013-15): A quarter of countries excessive
contraction (expenditures below pre-crisis levels)
.
Changes in Total Government Spending as a %GDP, 2013-15 avg. over 2005-07 avg
How are Countries Adjusting? Austerity
Measures in 174 Countries, 2010-13
120
119
30
100
98
100
22
80
High-income countries
94
86
23
39
89
78
75
Developing countries
31
60
40
80
25
63
37
47
55
20
32
25
17
12
15
Health
reform
Labour
reforms
0
Contracting
expenditures
in 2013*
Limiting
subsidies
Wage bill
Increasing
cuts/caps consumption
taxes
Pension
reform
Further
targeting
safety nets
Source: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF
country reports 2010-2013
Development Impacts
119 countries contracting public expenditures in 2012 (89 developing)
 Phasing-out subsidies (food, fuel and others) in 100 countries,
despite record-high food prices in many regions
 Wage bill cuts or caps in 98 countries, reducing the salaries of
public-sector workers who provide essential services to the
population.
 VAT increases on basic goods and services that are consumed by
the poor – and which may further contract economic activity –
in 94 countries
 Rationalizing and targeting safety nets are under consideration
in 80 countries, at a time when governments should be looking
to scale up benefits though social protection floors
 Reforming pension and health care systems in 86 and 37
countries
 Labor flexibilization reforms in 30 countries, eroding workers
rights
Source: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF
country reports 2010-2013
A Crisis of Social Support
• Vulnerable households are most impacted by austerity measures,
and are bearing the costs of a “recovery” that has largely excluded
them.
– They were left behind prior to the crisis
– They were severely affected during the crisis
– They are now suffering from adjustment measures and from
lack of employment due to reduced growth.
• The deployment of vast public resources to rescue the financial
sector forced taxpayers to absorb the losses, caused sovereign
debt to increase, and, ultimately, hindered global economic
growth. Now the cost of adjustment has been passed on to
populations, many who have been coping with fewer jobs, lower
income and reduced access to public goods and services for more
than five years.
Fiscal Space for an Equitable Recovery Exists
Even in the Poorest Countries

There are many options, supported by UN and IFIs policy
statements:
1. Re-allocating public expenditures
2. Increasing tax revenues
3. Lobbying for increased aid and transfers
4. Fighting illicit financial flows
5. Tapping into fiscal and foreign exchange reserves
6. Restructuring debt
7. Adopting a more accommodative macroeconomic
framework (e.g. tolerance to some inflation, fiscal
deficit)
Source: Ortiz and Cummins, “Finding Fiscal Space,” in A Recovery for All, UNICEF, 2012
Risks to Socio-Economic Recovery –
The Need for a Policy Shift
• United Nations: Austerity is likely to bring the global
economy into further recession. Called on governments
for concerted policy action to support development goals
• Policy shift started in a few Asian and Latin American
countries 2012-13 . Concern on low growth and demand
for their exports:
– Building internal markets (minimum wage policies,
social protection, subsidies, social services, etc)
– New round of fiscal stimulus to be invested in
infrastructure, tax incentives -- the amounts are small
for sustained recovery ($0.38 trillion in 2012, compare
to $2.4 trillion fiscal stimulus in 2008) but a sign of
policy change
Policy shift: Ecuador
 Like Europe, no national currency (it uses the US$)
 The government kept interest rates low and expanded
liquidity by requiring banks to keep at least 45% of their
reserves in Ecuador
 it took a partial default on its illegitimate external debt
(private debt that had been made public)
 Freed public resources were invested in human
development, doubling education and housing
spending, plus cash transfer Bono de Desarrollo
Humano.
 Impressive results: Poverty from 36% to 28%,
unemployment From 9.1% to 4.9%, rise school
enrollment rates.
Policy shift: Iceland
 Iceland repudiated private debt to foreign banks and did not
bail-out its financial sector, pushing losses on to bondholders
instead of taxpayers.
 Temporary capital controls to shield itself from capital
outflows
 Preserved the social welfare system despite fiscal
consolidation. May 2011, rise in nominal wages of 6%
 Unemployment rate fell to about 7% in 2012
 Progressive income tax, creating fiscal space to preserve
social benefits.
 When expenditure compression began in 2010, social
protection spending rose as a percent of GDP, the number of
households receiving income support increased.
 These policies led to a sharp reduction in inequality. Iceland’s
gini coefficient—which had risen during the boom years—fell
in 2010 to levels consistent with its Nordic peers.
Thank You
Download:
“The Age of Austerity – A Review of Public Expenditures
and Adjustment Measures in 181 Countries.” 2013. New
York and Geneva: IPD and South Centre
http://policydialogue.org/files/publications/Age_of_Au
sterity_Ortiz_and_Cummins.pdf
“A Recovery for All”. 2012. New York: UNICEF Policy and
Practice. http://arecoveryforall.blogspot.com/