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Choiceless Democracies: From Arab Revolution to Austerity
Manuel F Montes1
19 April 2013
1.
In the Arab region, there are two things at stake at the same time: (1) political
transition and (2) economic recovery. There have been similar situations in the past of
these two things having to happen at the same time. Will one support the other? Will the
nature of the economic recovery facilitate or hinder political transition?
2.
Whether and what kind of political transition will in turn depend on – though not
only on – the economic program. Will the economic recovery program actually result in an
economic recovery? Will the economic recovery be consistent with a change in growth
dynamics that will avoid a repeat of the economic crisis?
3.
In the whole mix are the external donors with geopolitical and commercial
interests, with the international financial institutions serving as the techno-policy channel
for these interests.
4.
On the domestic side, old order with control over economic assets, companies, and
jobs versus a wide range of political persuasions among the new forces.
The new
government has a not-so-stable
5.
We experienced such a transition with the 1986 overthrow of Ferdinand Marcos in
the midst of the 1982 debt crisis (which swept through Latin America and many African
countries) in which the Philippines was the only participant from Asia. The WB and the
IMF come in to meet the new government for the economic program.
6.
Our program which became part of the lexicon of the new government was
“selective debt repudiation” – choosing to service only legitimate debt inherited from the
1
Senior Advisor on Finance and Development, The South Centre. Speaking notes for
panel on “From the Arab Revolutions to Global Austerity Trends,” 20 April 2013, the World
Bank. I am solely responsible for all errors, opinions and analyses. Email:
montes@southcentre.org.
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previous government. Because of cross-default clauses, we expected at least best-faith
negotiating efforts on the part of creditors. More important, the proposal could certainly
have made economic recovery possible without spiralling domestic and foreign public
debt which later became a millstone on investment and growth.
7.
In the Philippines in 1986, having been intimately connected with the previous
government, IMF and WB staff made strenuous efforts to rehabilitate the reputations of
their agencies. At the same time, the US stands behind their recommendations which is
critical to unlock financing that will be needed to keep the economy going.
8.
The World Bank and the IMF justified the reform program they presented as the
solution to The corruption of the Marcos regime, including the money that its officials had
deposited abroad.
Less government interference with the economy, means less
opportunities for government corruption. Despite the fact that the new government
eagerly undertook IMF-WB reforms more than 26 years ago, corruption has stayed and
worsened, even after liberalization. The main impact was a short few years of growth with
even greater debt load than that left by the Marcos government, then a long period of
weak growth, heavily dependent on aid and external financing.
9.
The major “Arab spring countries” – Morocco, Tunisia, Egypt, and Jordan – all face
balance-of-payments crises. They have had current account deficits in the order of about
seven per cent at least in the last three years or so and have elevated debt levels.
10.
The problem with the word austerity is that it implies that everyone is having their
spending curtailed. What it actually means is that households, factories and their workers,
and the public sector are having their spending curtailed while the financial companies are
able to receive the debt service at market rates that are contractually due. Unlike in
developed countries where perhaps austerity has some element of social psychology to try
to motivate a well-developed private sector to begin risking and investing again, in the
developing countries austerity is not done for its own sake – it is done to set aside
resources for debt service.
11.
The public sector takes responsibility for servicing debt owed to foreign creditors
and must reduce spending on social sectors to make the resources available. Often, even
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when there were not explicit guarantees on foreign borrowing, the government is forced
to accept private exzternal debt as its own. This happened most recently in Spain,
Portugal, and Ireland, but this has been happening for decades now to developing country
governments.
12.
New financing from the IMF and other external donors is meant first of all to
contribute to the external debt service; this is what is meant that the IMF is helping
country. It is helping the country to meet its external debt service obligations. It also
means that it is not the country that is being rescued. The foreign creditors are being
rescued because if there is a delay in their receiving debt service they must begin setting
aside reserves against the “non-performing loans,” thus severely curtailing their profits.
13.
In the meantime, under these programs, the government must undertake policy
reforms whose long-term impact on investment and growth has proven to be highly
doubtful in previous experiences.
I have no time to discuss how ambiguous but large-
scale terms such as “enabling environment” found in these programs actually translate
into blanket investor protections and straitjackets on capital controls that unduly restrict
growth oriented domestic policies.
Such policies tend only to elicit short-term,
speculative investments from abroad. Not the kind of long-term, patient investment that
creates jobs and new economic activities. In any case, it is most important to promote
long-term investment, and the impact on policy restrictions in favour of “enabling
environments” means loss of control over domestic interest rates and lending and the
exchange rate, which amplifies risk and obstructs long-term investment.
14.
There is also a set of austerity measures. For example, arguments on removing
fuel subsidies are based mainly on the equity considerations; the subsidies benefit the rich
benefit but not the poor.
If there are any lessons learned from previous political
transitions, the elimination of such subsidies is properly a medium-term and long-term
effort.
Only if resources saved from the immediate elimination of such subsidies are
guaranteed to be applied to employment and job creation, and not debt servicing, can
these be reasonably part of an emergency strategy.
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15.
IMF programs are based on “backward calculation.” Backward calculation starts
with the question: What is the financing gap in the coming 12 to 24 months - in which the
most important claim on resources is how much debt service is needed - assuming there is
no restructuring of the external debt? Of this required debt service, how much can be
taken from public revenues, how much from domestic private savings? After these
questions have been answer, it can then deal with the question: How much from domestic
growth that can be afforded? In this approach, economic recovery and the absorption of
unemployed capital and labor, are the residual result of debt service.
16.
The alternative is to calculate forward: How much of the factories and workers are
idle? Then a rough calculation of what kind of macroeconomic growth rate would be
required to (1) to re-absorb unemployed resources and (2) an investment rate that will
absorb new entrants into labor force and improve the competitiveness of the economy
over the medium term.
17.
This will determine the resource requirements which can be funded by domestic
savings, public revenues, and the residual can be applied to debt servicing.
18.
Countries can also consider monetary easing, in the same way that advanced
economies are doing it. However, for developing countries, this will require imposing or
re-imposing capital controls to maintain adequate control over exchange rates and
domestic interest rates. The IMF allowed Iceland and Cyprus to do this; Iceland has its
own currency but Cyprus does not. The government can re-nationalize certain companies
if they cannot be restarted with private financing, and collect the profits for its own
revenue stream, since for the most part it was the profitable government companies that
had been privatized by the dictatorships under the aegis of the World Bank and IMF. (The
term for this is “crony capitalism.”)
19.
To be clear this is a heterodox program and it will require debt restructuring up
front given the debt load of many countries in the Arab region. But such a heterodox
program could be better than joint procrastination between Arab countries and their
donors, because the orthodox programs just kick the can down the road, while local
populations suffer within a the limited scope of choices in the political transition. A friend
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of mine, Malawian Thandika Mkandawire, who now heads the Africa program at LSE,
called this post-dictatorship situation “choiceless democracies.” After a lot of sacrifices,
the population has managed to introduce democratic processes. However, they are
presented a very limited set of choices for economic programs, which are often a
continuation and acceleration of the program of the government that had been
overthrown.
20.
Orthodox economic strategies result in governments which are more politically and
economically dependent on the donor community. Heterodox strategies at least have the
possibility of opening up political space and a reordering of relations with external
financiers.
21.
What kind of arguments for forward as opposed to backward calculations?
22.
Commercial argument: Restructuring early ensures the viability of domestic growth
and the eventual repayment of debt.
Not restructuring the debt now will mean a
restructuring again later one even though it will allows private external creditors to
continue to book profits now.
23.
Change of regime argument: Debt were incurred by the previous regime. Like the
fall of the Marcos regime which was seen all over the world on CNN, the change in Arab
governments were seen everywhere. Why should the old economic model be married to
the new democracy?
24.
Is there a cost? Yes, there is an important cost. The cost is slower growth over the
medium-term, but with increased probability of more steady, employment protecting and
creating growth. For example, Iceland is currently subject to criticism that it is growing
“too slowly,” after the sea change with external creditors because of its capital controls
and a return to reliance on domestic financing. Both Iceland and Cyprus now require a
new economic model, except that Iceland has the advantage of its own currency. One can
argue, as the movements that succeeded in overthrowing the old order agrue, that the
Arab countries require a new economic model.
25.
The old economic model tells us: One can always grow faster with greater
inequality and higher or more vulnerable unemployment by reassuring financiers their
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short-term profits and transferring the risk to labor and households. One can always
grow faster with short-term, highly volatile, external capital financing. However, we know
from experience in the past that the cost of the bust (which also lasts many more years)
exceeds the benefits from the boom. Twelve years after the financial crisis, Southeast
Asian investment rates have not recovered the levels they averaged before the crisis.
26.
What is the alternative to fast growth, as is the implied promise in IMF program?
The alternative is slower growth, with less vulnerable employment and sustainable
growth, less subject to large booms and busts and most protective of the livelihoods of the
poor and middle classes. Such growth protects domestic policy space and permits the
government to implement policies to protect employment and simulate investment in
new more productive jobs.
27.
It can provide the political space for a genuine democratic transition, where the
government must take responsibility for its actions and not blame outside forces about
not having a choice in alternative policies.
There are alternative policies, but only
afunctioning democracy will allow these alternative policies to emerge.
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