IMF: Austerity & Security

Author Name: Hassan Mujtaba      21 Oct 2020     International Economy

The 1970s witnessed a plethora of economic challenges such as high inflation, high unemployment, rising oil prices caused by the Arab embargo, declining profitability of businesses, and productivity of workers, etc. These crises culminated in the downfall of Keynesianism with a near-simultaneous rise of neoliberalism. This ‘neoliberal’ revolution was championed by the University of Chicago Economics professor Milton Friedman and spearheaded by his political patrons Margaret Thatcher, then Prime Minister of the United Kingdom and Ronald Reagan, President of the United States of America. Interestingly enough, the rise of neoliberal ideology came to affect all facets of life with its proponents and ideologues treating it as gospel. It is in this context then that multilateral financial institutions like The World Bank, International Monetary Fund, Asian Development Bank, etc. started adopting increasingly (fiscally) conservative positions.

Many people, however, are not aware of the fact that The World Bank and IMF are actually the brainchildren of British economist John Maynard Keynes, who had originally conceived the idea of an ‘international central bank’ at the Bretton Woods Conference of 1944. Keynes envisioned the IMF and The World Bank as multilateral institutions that would facilitate macroeconomic stability, economic growth, increasing income, and living standards of all nations, especially those located in the Third World. It is because Keynes had seen and lived through the horrors of the Great Depression of the 1930s and was keenly aware of the shenanigans of free markets caused by lack of regulations and weak governing bodies. It is a pity, however, that the aforementioned multilateral institutions have drifted so far away from Keynes vision.

Today, the IMF champions the neoliberal ideas of ‘austerity’, including cuts to social welfare spending, especially in health, education, pension, and defense spending. Ironically, this cruel austerity package is reserved specifically for Least Developed Countries (LDCs) that already have low Human Development Index (HDI) and poor social service structures. Moreover, the Fund also demands an increase in tax collection and an increase in interest rates typically aimed at choking aggregate demand (i.e., purchasing power of the common people) in the guise of “structural adjustments.” This is in stark contrast to Keynes, who envisioned aggregate demand as the lever that jumpstarts a stalled economic engine and keeps an economy afloat. It is small wonder then that the LDCs that have subscribed to Structural Adjustment Programmes (SAPs) have seen rising inflation, high unemployment, rising poverty, and falling incomes.

Recently, our officials from the Ministry of Finance and Revenue held a video conference with the IMF staff to discuss the terms and conditions for the revival of the Extended Fund Facility (EFF) that the PTI government had subscribed to in July 2019, and that had been stalled earlier in 2020. Although the conclusive details of the talks have not yet been made public, analysts are pointing out some very gory economic proposals that may be in the pipeline.

First, it appears that the Fund is not budging away from its demand for collecting PKR 4.6 trillion in tax revenues, despite the COVID-19 pandemic and the already falling disposable incomes of the common people. Second, it is demanding to do away with all the subsidies, especially in the power and energy sector, while simultaneously seeking an increase in the tariff rates (in accordance with the recommendations of National Electric Power Regulatory Authority) and controlling circular debt. Third, it seems that the Fund is calling for even greater belt-tightening by either eliminating or at least freezing the salaries and pensions of employees, while curtailing the administrative costs of running the government and cuts to the Public Sector Development Program (PSDP).

All these proposals are a bad omen for the Pakistani people, who are already bearing the brunt of the Fund’s policies by facing double-digit inflation, record unemployment, falling living standards, and rising poverty. Although the PTI government has not agreed to the IMF’s demand for further fiscal consolidation — perhaps due to the mounting pressure of the citizenry and the PDM — if and when it does, it will further hurt the middle classes and the working poor. Some analysts are even of the view that the proposed increase in electricity tariffs is so egregious that, if implemented, it will fuel public unrest. This is very likely to lead to public security concerns as the common folk’s rage spills out into the streets. As such, it represents a frightening example of how economic hardship can create profound security risks.

The IMF should also review its policies — at least till the virus subsides —and promote pro-poor and inclusive economic growth and listen to its own staff economists who assert that high levels of austerity lead to greater inequality and depressed growth. It simply doesn’t make sense for the IMF to fuel such social unrest through its brutal economic austerity imposition, while also asking Pakistan to make such intense reforms at such a delicate (pandemic) time. Pakistan, in turn, must look at the economic and public security aspects as interrelated, because one will bear out on the other.

 

-Hassan Mujtaba is a Researcher in the Economic Affairs section of Centre for Aerospace and Security Studies (CASS). The article was first published in NHT newspaper. He can be reached at cass.thinkers@gmail.com.