The IMF vs Andrew and Portia

Published: Sunday | December 2, 2012 Comments 0

Ian Boyne, Contributor

A new policy paper issued by the International Monetary Fund (IMF) last Wednesday has highlighted public-sector wage growth and high public-sector employment as major contributing factors to the Caribbean's debt crisis. "Public-sector wage growth outstripped real GDP growth over the last 15 years. Wage growth was particularly high in times of low GDP growth."

In the 45-page paper titled The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean, the IMF concludes its analysis and recommendations by saying solutions lie in "reducing the size of the public sector, including the high levels of public employment". The paper says, "Given the already sizeable public sector, most of the fiscal consolidation would have to be done by restraining spending, better control of the public wage bill, and tackling transfer spending."

One of the things the IMF is very frank and realistic about in this paper is that talk about growth is illusory in the present environment. The IMF is blunt: "Since growth in the current environment is virtually non-existent, significant consolidation is inevitable."

Those who speak in terms of easy solutions and quick fixes betray their ignorance of the enormity of the crisis which faces Jamaica. And many discuss Jamaica's dilemmas as though we are an island unto ourselves, ignoring the fact that we are a small, open, highly trade-dependent economy in a world with sluggish demand. It's fiscal consolidation all the way down. And that's the rub. For fiscal consolidation is bound to exacerbate our social problems and further erode the living standards of the poor and the middle class, at least in the short term.

What is being recommended by the IMF will be costly to many. The kinds of cuts being recommended are reductions not to capital expenditure, as we like to do for political expedience, but slashing public spending. Hear the IMF in this new paper issued last week:

"The quality of past fiscal consolidation in the Caribbean is questionable, as capital expenditure has been cut heavily, creating infrastructure gaps inimical to growth and hence compromise debt sustainability. Country experiences generally show that reducing public spending with a focus on non-productive and non-priority spending, particularly transfers, subsidies and general goods and services in a comprehensive reform programme, is likely to ensure the success of fiscal consolidation efforts in the Caribbean."

cut, cut, cut

A new IMF programme, therefore, seems certain to target social spending cuts. In reviewing a number of cases, globally, of successful fiscal consolidation, the IMF says approvingly, "The more successful expenditure-based consolidations focused on cuts in transfers and wages, the so-called politically sensitive budget items. Country experiences show that expenditure-based adjustments, [and] reductions in wage bill and social spending were more sustainable. Expenditure cuts were spread across multiple spending categories and institutions, with sizeable reductions in wage bill and social-security spending, including transfers, health care and unemployment benefits ... ." I see.

The IMF finds that, "Adjustments that lasted longer were driven by reductions in wages and transfers, and cuts in wages, transfers and subsidies constituted about 86 per cent, on average, to successful cases."

The People's National Party president, Portia Simpson Miller, last Sunday at her party's National Executive Council, blasted Opposition Leader Andrew Holness for his annual party conference speech the Sunday before. She was upset that he announced that his election campaign was starting now and worried that that might bother an IMF, which wants to conclude an early deal with her Government. She found a number of problems with Holness' speech, but failed to exploit some key points he made.

Holness talked about the importance of taking tough decisions, and reminded how he was courageous enough to tell the people the truth about the inevitable bitter medicine before the election. He seemed proud that he was new and different and willing to pay the ultimate political price for coming clean with the people, unlike those other-generation politicians who love to fool the people.

He would take the tough, hard decisions to put our debt-ridden economy on a right footing. But yet "had we been the Government today, one of our first actions would have been a comprehensive social-protection reform to expand, improve and increase benefits and beneficiaries of the social safety net programme. This would start the process of ending abject poverty in Jamaica and protect the poor from any further erosion in their quality of life while we undertake economic reform."

That's laudable, but under an IMF programme it shouldn't be taken for granted. The IMF does talk about the importance of a social safety net and social protection. But Holness' plan to expand the number of PATH beneficiaries from 350,000 to 500,000 might not easily be accommodated under an IMF programme. Holness' concern about unemployment and the prospects of Shanalee, whom he highlighted, does not automatically square with the IMF's immediate shock therapy.

Holness pledged, in that conference speech, to fight for entitlements such as free health care, free secondary tuition, and the Career Advancement Programme. But would that square with what the IMF is telling us in this just-released paper lecturing the Caribbean on what it needs to do, and what successful cases of fiscal consolidation look like? All of Holness' laudable goals and intentions would have to be matched with those holding the handle.

What Simpson Miller should have found some time to do is to invite Holness, in his new-found progressive configuration - before he changes - to stand with her and other progressives to ensure we get what Peter Phillips terms the best IMF deal - a deal which addresses our economic distortions while protecting social welfare. Holness talked about the many persons unemployed and a "growing mass of working poor - persons who are employed or engaged in some form of economic activity, but the returns are not sufficient to give them access to adequate social services, shelter and a decent standard of living. These people work to pay bus fare."

Would Holness be willing to join Simpson Miller in fighting to save public-sector jobs, or would he force them to take that bitter medicine, not "pandering to the politics of populism", as Damien King would put it? Lest you think the IMF is only interested in constraining public-sector wages and any further public-sector employment growth and is ruling out layoffs, think again.

even more reductions

When the IMF talks about rationalisation of the public sector, it is not limiting that to public-sector efficiency gains, reorganisation and public-sector wage restraint. Says the IMF paper: "Savings could be gained from consolidating administrative services and personnel through mergers or closing of agencies. This should be accompanied by broad-based public expenditure reform to rationalise the public-sector wage structure and employment." Both, not one.

Interestingly, while neoliberal recommendations are being given to the Caribbean in this new IMF paper, the December issue of the IMF's monthly journal, Finance and Development, there is an enlightening article on inequality titled 'Fair Share', which shows that taxes and public transfers have been used in developed countries to offset inequality. The article shows that "redistributive transfers and taxation - especially transfers that citizens receive regardless of their income, such as public pensions and universal childcare benefits" - have helped to reduce inequalities produced by marketisation.

Hear this admission: "Income taxes are another key distributive tool. In fact, in most economies, income taxes redistribute wealth better than means-tested transfers (based on recipients income) ... ." Yet, recently, my good friend Don Wehby was calling for one tax rate for everyone and everything - a simplification which has the very wealthy paying the same rate as the poor. This is neoliberal dogma. The 2012 UNCTAD Trade and Development Report has an excellent section showing how so-called tax reform has worsened inequality over the last couple of decades.

The IMF's own article, 'Fair Share', shows the same thing. The data are unequivocal: These recommendations which are being passed off to us by institutions like the IMF have empirically worsened poverty and inequality rates - and if we would only read, we would find these facts buried in books, papers and journals written by neoliberals themselves.

Audley Shaw has been enthusiastically trumpeting tax reform, saying openly last week that we should remove GCT from everything, exemptions and reduce GCT to 12.5 per cent. He lambasted the Government's White Paper on tax reform for being too timid and tentative. It should be bold, slashing all exemptions to the poor right away, and having means-tested criteria for protecting "the most vulnerable".

Now how a bankrupt Government would pay for all it needs with such drastic reduction in GCT income is anyone's guess. What Simpson Miller should have done at NEC is to seize on Holness' progressive conversion and ask him to campaign for a more people-friendly IMF deal.

Ian Boyne is a veteran journalist. Email feedback to columns@gleanerjm.com and ianboyne1@yahoo.com.



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