Why Austerity Persists

Jon Shefner, Cory Blad

• Publisher: Polity
• Year: 2019
• Print ISBN: 9781509509874, 9781509509867
• eBook ISBN: 9781509509904
• Edition: 1
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Several nations in the Global North have turned to austerity policies in an effort to resolve recent financial ills. What many failed to recognize is the longer history and varied pattern of such policies in the Global South over preceding decades – policies which had largely proven to fail.

Shefner and Blad trace the 45-year history of austerity and how it became the go-to policy to resolve a host of economic problems. The authors use a variety of international cases to address how austerity has been implemented, who has been hurt, and who has benefited. They argue that the policy has been used to address very different kinds of crises, making states and polities responsible for a variety of errors and misdeeds of private actors. The book answers a number of important questions: why austerity persists as a policy aimed at resolving national crises despite evidence that it often does not work; how the policy has evolved over recent decades; and which powerful people and institutions have helped impose it across the globe.

This timely book will appeal to students, researchers, and policymakers interested in globalization, development, political economy, and economic sociology.

1
Many Paths to Austerity

On February 2, 1989, during his inaugural address, Venezuela’s President Carlos Andrés Pérez emphasized the need for a debtors’ cartel and called for a new international policy aimed at reducing Third World debt. Since the Mexican government’s announcement of its inability to pay its debt in 1982, and subsequently accession to austerity measures, debt had become the central issue of the developing world. The President’s contentious inaugural rhetoric soon proved empty, however, when he agreed to International Monetary Fund (IMF) requests that austerity policies be imposed as conditions of debt relief. Venezuelans interpreted the agreement as a betrayal; during Pérez’s previous term as President (1974–9), he had served as a strong voice for social democratic foreign and domestic policies.

The IMF conditions followed a design by then familiar across the Global South. The government implemented austerity measures, including increases in gasoline prices and transportation fares, lifting price controls over goods and services, freezing public hiring, imposing a national sales tax, as well as raising domestic interest rates and devaluing the currency. These measures, combined with shortages of various food commodities, hurt many Venezuelans; they responded with peaceful marches in the capital city Caracas, with protest immediately following in other cities.

Within days, the demonstrations escalated to full-scale rioting and looting. President Pérez called out the army, suspended constitutional guarantees, and imposed a curfew as riots spread to at least 16 cities and towns. Weeks of rioting resulted in at least 300 reported dead, along with over 2,000 wounded and over 2,000 jailed. Participation in the riots was widespread, with students, workers, and slum dwellers taking part in the looting of shops and sniper attacks on government forces.

The riots forced the government to reinstitute price controls over basic foodstuffs and services and allow pay increases in private and public sector jobs. The President used the protests as temporary leverage in negotiations with the IMF, World Bank, US Treasury, and commercial banks to obtain further loans.¹ But despite the dramatic protests and his initial backpedaling, Pérez continued to follow IMF prescriptions over the course of his increasingly discredited presidency. The government allowed no further wage increases and slashed social protection programs and spending while increasing interest rates and privatizing some state-owned enterprises. New trade policies included lowering tariffs in order to open the market to competition from imported goods. Global elites benefited from the changes, as interest rate increases diminished credit access to local businesses, while new foreign investment laws removed restrictions on remittance abroad of dividends, established parity of treatment of foreign and local investors, and enlarged the list of activities designated as priority areas for foreign investors. In short, the IMF-driven policies paved the way for the neoliberalization of the Venezuelan economy.

Greece’s experiences with austerity began in the wake of the Great Recession of 2008. Europe’s great powers offered stimulus packages for their own national economies, while imposing austerity on some of the weaker members of the European Union (EU). Greece was an easy target, as its debt was thought to be a product of its overgenerous welfare state.² By 2011, the Greek government had already instituted austerity measures as a condition of Eurozone bailout, but new punishing measures were on the horizon. The parliament voted to impose more austerity as conditions for its further relief. The new plan called for cuts of “14.32bn euros ($20.50bn; £12.82bn) of public spending, while raising 14.09bn euros in taxes over five years” (BBC 2011). Specific measures targeted state workers, cutting public sector workers’ wages by between 20 and 30%, and shrinking civil service employment by drastic attrition, with replacement of retirees ranging only between 10 and 20%. Additional cuts targeted health and education spending, social security income and pensions, public investment, and subsidies to local governments (BBC 2011).

Over the course of the next four years, the Troika (the European Commission, the European Central Bank [ECB], and the IMF) continued to demand austerity despite persistent street protest and the outcry of elected officials. Austerity, Troika members believed, would ensure that bailout monies would be repaid, while avoiding the contagion of economic failure spreading to the rest of the Eurozone. Social protection and government services were regularly slashed. In 2013, 15,000 additional layoffs were imposed on the public sector. In 2014, the government “cut another 4,000 public-sector jobs, reduced benefits for the unemployed, cut pensions, and implemented a reform of the labor code that drastically curbed the right to strike” (Panageotou & Shefner 2015: 317). Social costs were substantial, with unemployment surging, especially for youth. Those “at risk of poverty or social exclusion increased from 27.6 percent to 34.6 percent in 2012” (Panageotou & Shefner 2015: 318). Suicides, homicides, and armed robbery all increased, while access to healthcare diminished. Social movements took to the streets repeatedly in protest at the ongoing hardships caused by austerity.

The political struggles evolved as an emerging left-wing party, SYRIZA, became increasingly prominent in the opposition, leading the waves of protest against austerity. That continued until its candidate, Alexis Tsipras, became President in January 2015, having been elected with promises to roll back the austerity agreements and grow the economy without leaving the Eurozone (Elliott 2015). Tsipras soon found his promises impossible to keep. By July, the President and his party found themselves in the uncomfortable position of pushing the same kinds of austerity measures that they had critiqued. In exchange for ongoing bailout, the Greek parliament again voted in favor of another round of punishing austerity (Daley & Kanter 2015). SYRIZA paid the price and lost power in July 2019.

Venezuela’s and Greece’s experience are similar in many ways, despite the 20-year gap. Austerity was imposed on less powerful nations by coalitions that were dominated by more powerful nations supported by global/regional financial actors; specific measures were similar in their targeting of state social protection expenses; state debt was seen as the problem that austerity would fix; and the hegemony of austerity as a policy was demonstrated in part by its imposition by government leaders whose actions belied their previous critique.

These two brief scenes of austerity lay the ground for the goals of this book: to recognize the long and global history of austerity; to clarify the different economic ills to which austerity has been applied as the purported cure; and to point out similarities and differences in the way austerity has been implemented since the early 1980s. These goals require some elaboration.

From 1973 to the current day, austerity has increasingly become the go-to policy to resolve the “problem” of national debt. This has been a truly global phenomenon, emerging in the 1970s in what was then called the Third World in response to debt crises incurred by government borrowing. Over time, as we will show, austerity responded not only to public debt, but also to private debt that was guaranteed by national governments. Austerity was often rhetorically framed as “shock treatments,” with the expectation that such policy imposition would be short-lived, but history demonstrates the extended life of such measures in many nations. Over time, the use of austerity has moved well beyond resolving public debt: it has also been imposed in response to slower economic changes, as a strategy to protect creditors’ investment, and as an instrument for governments to take on private debt, all as part of a wider neoliberal shift that has diminished government efforts to address citizen needs through various social welfare measures. That is, austerity has been viewed as the medicine to cure a number of economic ills, while the components of austerity policy have remained largely similar.

We make four central contributions in this book. First, we want to point out that austerity is a truly global set of policies that have been brought to bear in response to different economic ills across the past 40 years. That global history has been ignored by recent research following the 2008 financial crisis. In the wake of austerity in the Global North, academics and journalists published a great deal of critical research, admirably demonstrating how austerity policies failed to stimulate equitable economic growth in developed nations. However, this recent scholarship suffers from spatial and historical blinders in its discussion of austerity, as it fails to recognize its extensive history in the Global South. Development scholars remember the dramatic impacts of austerity across Latin America, Africa, and Asia. The pain of those years was recognized by many who labeled the 1980s “the Lost Decade” owing to the reversal of previous state-funded social gains. Austerity continued to be the policy of choice in the Global South into the 1990s and 2000s. Indeed, its global scope increased as more Asian nations were forced to follow the same policies even while many ex-Soviet nations found austerity defining their reintroduction to capitalism. The fact that recent researchers who wrote critically of austerity in the Global North ignored its precedent in the Global South and elsewhere demands this historical correction. This book addresses austerity in both the Global South and the Global North, in powerful nations and those less so, in democratic nations and authoritarian ones, pushed by external actors and internal ones. Our goal is to demonstrate the continuities and differences in application of those policies across time and place.³

The failure to recognize the global scope of austerity by even critical scholars has implications beyond the scholarly omission: this position provides cover to the policymakers of the Global North, who willfully ignored the largely detrimental history of austerity in the developing world as they applied the policy to the Eurozone. The critique of austerity in the Global South was wide and deep (Pastor 1987; George 1988; Walton & Seddon 1994; Portes 1997; Dello Buono & Bell Lara 2007, to cite just a few). Reminding readers that this critique preceded the more recent research (Crouch 2011; Lynn 2011; Blyth 2013; Karger 2014) leads us to our next point.

Our second contribution is to demonstrate that the actors most important to the imposition of austerity have varied over time. Examining the “architects of austerity” (Major 2014) demonstrates that austerity policies are linked to changing loci of power in the global economy. Powerful states, international and national banks, and international financial institutions have played significant roles in the imposition of austerity, as have a variety of ideologues employed by academic institutions, government, and business. Importantly, and related to austerity’s hegemonic status, the relative importance of these players changes across time and place. The IMF and the United States were central players in the developing world, but play a reduced role in austerity in the Eurozone, where the ECB, German and French bankers, and credit rating agencies became more important. Indeed, in several of the cases we examine, austerity was willingly introduced by domestic policymakers. Austerity has remained an important tool of control by global economic elites; examining who has wielded it over time helps us understand shifting powers within the neoliberal global economy.

Third, we argue that austerity has been used as a tool to make the poor and the working and middle classes pay for those changes in the global political economy that might otherwise have forced economic elites to diminish their profits. Harvey (2005: 12) makes the point that neoliberalism was a response to a global “crisis of capital accumulation” which occurred simultaneously with rising political and economic threats to elites. Neoliberalism, for Harvey (2005: 19), is best understood as a “political project to re-establish the conditions for capital accumulation and to restore the power of the economic elites.”⁴ Austerity has provided an important and consistently used tool for those elites. Examining austerity across time and place provides important documentation of how the majority of national populations are hurt as elites restructure economies in ways that benefit them. Neoliberal economic restructuring in itself has hurt many; in addition, the risks taken on by the powerful in the restructuring process have led to errors such as those that led to the Great Recession. Within the nations where it has been imposed, it is the poor and the working and middle classes who bear the costs, suffering from both risky behaviors and more planned components of the global transition. Cross-nationally, austerity adds to the policy toolbox that maintains inequality between Global North and South nations, as many of the latter continue to be dependent on the former for investment, supplying low-skilled jobs on commodity chains, and remain the locale of much natural resource extraction.

Capitalism is not everywhere and always the same. The classic work of Cardoso and Faletto (1979) masterfully unpacks dependency and development in Latin America as they examine historical variations in capitalist control. Importantly, forms of control shift over time, and are sensitive to specific places and histories. Cardoso and Faletto remind us that capitalism always varies owing to changing priorities of external and internal social forces. The former, in our argument, have been responsible for imposing austerity. The latter are more diverse in their relationships to austerity; they, too, may impose and implement it, but they also sometimes resist and occasionally overturn it.

Finally, our goal is to show that both the long history of its imposition and its global reach suggest that austerity has taken on the status of a hegemonic policy. Regardless of the economic ill diagnosed as the root of diverse problems – debt crisis in the Global South, financial crisis in the Eurozone, diminished state spending flexibility in the United States – austerity has become the medicine of choice. The different problems have found different champions, as we note above, but their common settling on austerity confirms it as a hegemonic policy. Arrighi (2010) points to the importance of financialization as a key strategy during hegemonic transitions. Although austerity policies have not played that same historical role, the consistency of their implementation suggests they have provided stability in power holding and accumulation during neoliberalism. The fact that austerity has now been applied to weak and strong states, to states with divergent political structures, and in globally common but also locally varied ways, further demonstrates its hegemonic status.

Yet hegemony, in the Gramscian sense, cannot persist without some manifestation that the hegemonic ideology, or in this case policy, indeed addresses some material needs. The postwar industrial expansion in the United States, for example, facilitated hegemony because it addressed the material needs of certain working-class populations for a time. In contrast, austerity has benefited very few. Despite repeated failures, however, austerity policies continue to be the policy of choice for economic elites. Examining the global actors who became increasingly important in establishing neoliberalism’s hegemonic status helps us understand these choices (Plehwe et al. 2007; Mirowski & Plehwe 2009; Jones 2012; Mirowski 2013; Major 2014). These range from intellectual pioneers such as those found in the Mont Pelerin Society, established in Switzerland in 1947, to foundations set up by rich business families in pursuit of their economic interests and philosophies, to economics departments across the globe, and finally to think tanks that brought theorists, politi...

Table of contents

• Cover
• Contents
• Title page
• Copyright page
• Abbreviations
• Acknowledgements
• 1 Many Paths to Austerity
• 2 From Development to the Lost Decade in Latin America
• 3 African Austerity
• 4 Austerity in Asia and Oceania
• 5 The United States and the Inevitability of Austerity
• 6 Austerity Lands in the European Union
• 7 Why Austerity Persists
• References
• Index
• End User License Agreement