Commentaryon the Wrong IMF Austerity Advice
Commentaryon the Wrong IMF Austerity Advice
TheInternational Monetary Fund (IMF) has the responsibility of correctlyadvising countries about financial and economic processes at theglobal level. The IMF provides prompt advice to countries in additionto the provision of financial assistance but it gave the wrongadvice in the recession aftermath. According to Yukhananov (2014),the IMF was supposed to advise countries in regard to theirmacroeconomic policies that would heal their financial recovery. Themisadvising by the institution led to the pursuance of austerity bygovernments in the face of recession recovery.
Oneof the macroeconomic concepts that relate to the article and thematter at hand is public spending. According to Mankiw(2014), public spending is theamount of government budget that is spent within the borders of acountry on collective needs. If the IMF had advised countries tospend freely in the aftermath of the recession, such countries couldhave revamped their economy faster than it took. Therefore, inagreement with Yukhananov (2014), the IMF did not offer appropriateadvice by insisting that states should pursue austerity.
Tosupport the judgment, it is important to understand the concept andimplementation of austerity. Austerity is a concept that seesgovernments reducing their expenditure by cutting their budgetaryallocations and adopting austerity policies. Among the austeritypolicies also includes increases of taxation and avoiding budgetdeficits. In the context of the IMF advice during the post-recessionperiod, austerity meant a reduced expenditure by governments trimmingbudgets and loose monetary policies (Yukhananov, 2014). However, thiswas wrong because austerity slowed the process of recovery because ofits effects on the local economies.
Thiscan be supported by the understanding of the consequences ofausterity. According to Blanchard(2011), one of the results isslow economic growth that is marked by higher levels of unemployment.According to Mankiw(2014), the aftermath of therecession period was marked by high unemployment rates that resultedfrom the austerity calls by the IMF. The following were the mainunemployment levels in terms of percentage for the major economies ofselected 17 countries in the Europe Area (EA17).
Thegraph indicates an increase in the unemployment rates, contrary tothe expected rise in employment due to austerity.
Inaddition, the austerity affected the levels of debt-to-GDPratio that the IMF was trying tohelp countries manage. According to Yukhananov (2014), the IMFauditor justified the call for austerity by explaining that thecircumstances at the time favored austerity and that it was theright call to make. However, this call was inappropriate based on theoutcome of the economic results of the economies. For instance, thecountries in the Europe Area (EA17) recorded an increasing trend ofdebt-to-GDPratio for the last three years.
Theabove debt-to-GDP ratio indicates an increase in the amount of debtby countries that were supposed to be protected by the austeritycalls by the IMF. This justifies the argument by Yukhananov (2014)that the advice from the IMF to the rich countries was wrong.According to Mankiw(2014), this is because austerityleads to the inactivity of the economies, leading to poor economicgrowth that is measured by GDP. The main reason for this phenomenonis because the reduction of the government expenditure reduces themoney supply and income levels of the citizenry.
Asa result, the disposable income of citizens in these countriesreduced, leading to a reduction in consumption levels in the economy.Consequently, the demand for goods reduces, thereby reducing theproduction levels of both the public and private sector. As a result,unemployment levels, reduce greatly as industries may lie unemployeddue to poor market demand. The adoption of austerity by all countriesas advised by IMF leads to reduction of international demand, therebyreducing the power of international trade to revamp economies. Thisexplains the result of the policy among the rich countries andjustifies why the IMF was wrong.
Theadvice by the IMF for the rich countries to promote austerity was awrong advice. This is because the policy slowed the process ofrecovery from the recession period, by slowing economic growth.According to the economic results of the policy were not reflectiveof the expected outcomes of the IMF advice. The unemployment levelsincreased and the debt-to-GDP ratio increased over time. This can beattributed to the effects of the austerity policy as advised by theIMF.
Blanchard,O. (2011). MacroeconomicsUpdated (5th ed.). EnglewoodCliffs: Prentice Hall.
EuroStat, 2015. YourKeyEuropean Statistics. RetrievedFrom,<http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-30042013-BP/EN/3-30042013-BP-EN.PDF>March 19, 2015
Mankiw,N.G. (2014). Principlesof Economics.Stamford: Cengage Learning
Yukhananov,A. (2014). IMFgave richer countries wrong austerity advice after crisis: watchdog.RetrievedFrom,<http://www.reuters.com/article/2014/11/04/us-imf-crisis-idUSKBN0IO1NO20141104>March 19, 2015