Ineffective, Inconsistent and Dangerous: The OECD-backed fiscal consolidation plans to deal with the looming sovereign debt crisis
Today’s post is contributed by Pierre Habbard of the Trade Union Advisory Committee to the OECD (TUAC)
In 2010 in the wake of the recession, the policy consensus at the OECD – alongside the IMF, the European Commission and many G20 Finance Ministries – shifted away from support for stimulating global demand to near-term fiscal consolidation. Their priority became reducing sovereign debt through unprecedented budget austerity programmes, the costs of which will be borne almost entirely by workers and their families: cuts in public services and in social protection, regressive tax reforms, and downward wage flexibility. At the same time, the much needed re-regulation and downsizing of the financial sector, which triggered the crisis in the first place, was either scaled back or postponed until “better days”.
This policy response is ineffective, inconsistent, and ultimately dangerous.
It is ineffective because the fiscal consolidation programmes that are advocated ignore the causes of the crisis: the combination of rising inequality, excessive leveraging and de-regulation of the financial sector. To bring government debt back to pre-crisis levels, public budgets should contract by -9.5% on average in the near future, and remain in surplus afterwards.
Considering the enormity of the social crisis spreading across OECD economies, the cuts in public services and in social protection that are foreseen, as well as, concomitantly, the regressive tax reforms which the OECD is pushing for will hit households and the lower income people front on. The OECD concedes that the massive public expenditure cuts it is advocating “may have adverse consequences for equity outcomes” – but its response to this concern appears thin, to say the least, and this, in spite of its recent work in that field.
It is suggested that social protection and unemployment benefits be “revisited in terms of their effectiveness in reaching envisaged policy goals”. The OECD lives with the hope that while the inputs will effectively be cut down, the output levels (including quality of public services) could be maintained thanks to “efficiency gains”, better “targeted” services and restructuring: “doing more with less”, we are told. Trade union experience with public sector restructuring would rather point to the opposite effect: “doing much less with less”. Any restructuring involves substantial upfront costs. Importantly, the notion that social protection could be better targeted in times of social crisis appears rather illusory with unemployment at 10% and under-employment at 20%, rising poverty and social deprivation.
It is inconsistent because, as OECD experts are well aware, the most effective way to deal with the unsustainable rise in sovereign debt is to put an end to the unhealthy relationship between private sector finance and government balance sheets. If public budgets have become more vulnerable following the crisis, it certainly is not due to any badly managed or inefficient public services or social protection, or badly designed tax systems; rather, the fault lies with the unwillingness of policymakers to take decisive action on banking and broader financial regulation, which leads to growing exposure of governments to any future financial crises.
The key threat to sovereign debt sustainability in the short term lies not in fiscal policy, but in government exposure to contingent liabilities created by multiple guarantees on banks’ liabilities as a result of the crisis and by financial institutions that are too big to fail. The on-going debate on the possibility of a ‘hair cut’ or debt restructuring for the most crisis-hit countries exemplifies that dilemma. Governments must put an end to this intertwining without delay. The OECD experts know that and have been calling, as at least implicitly, for splitting the large banks to shield commercial and retail activities – that serve the real economy – from the volatile investment banking activities.
On revenue side, the obvious “under-taxation” of the financial sector barely appears in the main recommendations by the OECD. The generalisation of Financial Stability Contribution (FSC) type insurance mechanisms together with the creation of a Financial Transaction Tax and the IMF suggested Financial Activity Tax would help redress the current under-taxation of the financial sector. Here the OECD is lagging behind. On that it is no small irony to compare the OECD’s insistence on broadening VAT with its total silence on the massive VAT exemptions which benefit the financial sector across OECD countries. Together with the current G20–Financial Stability Board “action plan” (Basel III, consolidation of the supervisory framework, regulation of the derivatives markets), these measures could help reduce governments exposure to the private banking sector. But the needed speed of reform simply is not there.
And it is dangerous because the fiscal consolidation packages currently being introduced threaten to have long-lasting consequences in terms of income and welfare distribution. Trade unions are well placed to know through their membership that social cohesion is breaking down across OECD societies; they are first-hand witnesses of rising populism within the working class. The political dimension of the crisis, the need to bring back some redistributive justice in the economy, is not factored in the OECD–IMF response. To the contrary, their response fuels the risk of weakening democratic institutions if key elements of fiscal policy are transferred away from democratically elected bodies through the constitutionalisation of fiscal rules and the empowerment of “independent” experts in the fiscal consolidation process.
TUAC Discussion paper The International Policy Response to the Post-Crisis Rise in Sovereign Debt – A trade union critique, April 2010
At the next Annual Bank Conference on Development Economics (ABCDE), to be held at the OECD in Paris on 30 May – 1 June, leading economic thinkers and policy makers will discuss how economic opportunities can be broadened to accelerate poverty reduction, promote human development, and stimulate inclusive growth. Felix Zimmermann of the OECD Development Co-operation Directorate outlines the aims of the conference and introduces the key speakers.
These are uncertain times for decision makers concerned with development issues. The global financial crisis and its after-effects have tested their ability to facilitate job creation, improve education, equip young people with marketable skills, and design effective social protection programmes.
How might people be provided with better opportunities to access education and health services, and other forms of human capital? How might they be provided with access to affordable financial services and the ability to own land or other assets? How can better service delivery be ensured? And how can gender equality be promoted and ensured?
At ABCDE 2011, which will be co-hosted by the OECD, the Government of France and the World Bank, four distinguished policy makers and academics will deliver keynote speeches.
- Michelle Bachelet*, Under-Secretary-General and Executive Director, UN Women, will share her views on gender equality and the empowerment of women at global, regional and country levels.
- Daniel Cohen, Director, Centre for Economic Research and its Applications (CEPREMAP, France), will discuss globalization and wealth and income disparities among countries.
- Christine Lagarde*, Minister of Economic Affairs, Finance and Industry of France, will elaborate on role of the G20 as a new international forum for global economic cooperation in the 21st century.
- Francis Kramarz, Director, Centre for Economic Research and Statistics (CREST, France), will share results of his work on job and labour-market policies in developed countries.
Five plenary sessions will focus on current research and policies, addressing various dimensions of the challenge of broadening opportunities for development.
- John Roemer and Vito Peragine will reflect on the concept of inequality of opportunities and how it can be measured;
- John Haltiwanger and Francis Teal will explore the issues of job creation and the performance of labour markets, firm growth, and other issues in developed and developing countries, particularly Africa;
- Janet Currie and Rodrigo Soares will provide insights on how early intervention programmes in health, education, and other social services can benefit human capital formation in young people and their transition to the labour market;
- Stefan Dercon and Sudarno Sumarto* will review the literature on social protection programmes, with a particular focus on African countries and Indonesia;
- Finally, Pierre André Chiappori and Raquel Fernandez will look at female empowerment and labour market participation, among other outcomes, and analyze the role that household behavior and norms play in influencing these outcomes.
A High-Level Roundtable on “Democratizing Development Economics” will close ABCDE 2011. Panelists will be asked how developing countries can play a part in designing, implementing, and continually improving development solutions. How can the development community broaden its sources of knowledge, taking on board a wider set of lessons from emerging markets and developing countries? How can research in such countries be supported? And how can research and data be disseminated more widely, providing developing countries with the tools for sound development policy?
The OECD, the Government of France and the World Bank are honoured to be collaborating with one another on ABCDE 2011.
To apply to participate in the conference, click here. The deadline is 1 May.
* to be confirmed.
Following on Monday’s presentation of the World Development Report, this post is from Richard Batley emeritus professor and Claire Mcloughlin a research fellow in the International Development Department of the University of Birmingham. They have worked on questions of service delivery, including the preparation of a Handbook on Contracting Out Government Functions and Services in Post-Conflict and Fragile Situations with the OECD’s Partnership for Democratic Governance.
In its World Development Report released earlier this week, the World Bank says that international aid and development co-operation need to focus more on breaking the cycle between conflict and poverty. The report argues that an emphasis on supporting service delivery and strengthening national institutions in post-conflict states can improve people’s security and help maintain the government’s legitimacy in difficult circumstances.
However, in these post-conflict situations, populations may be displaced, infrastructure absent or impaired, the rule of law minimal, and government’s own capacity weak. Donors, international NGOs and local informal service providers are often the first to intervene to satisfy basic demands, frequently bypassing government.
This presents deep dilemmas. The OECD Partnership for Democratic Governance (PDG) has identified the building of ‘effective, legitimate and resilient states’ as the central objective of international engagement in fragile situations. As far as possible, states would therefore provide their own core functions and essential services to the population. Others argue that getting services to the population is more important than who provides them.
Is there a compromise solution where government contracts private providers and NGOs to manage functions and services on its behalf, or does this further postpone the development of state capacity? Is contracting out more than just a way out of difficult choices, and in fact a positive way of combining state and market roles?
The PDG doesn’t take an ideological stance for or against the contracting of non-state service providers, but rather a pragmatic one: in fragile situations, at least in the short term, there is unlikely to be sufficient capacity within the public sector for delivering the bulk of essential services and functions. Governments have to decide whether, what and how they can contract out to external providers. They may prefer to provide their own services and functions but contracting out accepts the need for external providers while putting government in the driving seat – setting the policy framework and coordinating provision.
Almost everything that is done by government could be contracted out to the private sector or other non-governmental organisations. However, for good reasons, there is greatest reluctance where the function defines a state’s sovereignty (such as diplomacy, security and defence) or affects policies that are at the heart of the political process.
Even here, advice and support may be contracted – for example to train the military or to advise on budget design. Governments may also closely guard aspects of their core internal administration, such as financial management and legal services. However, temporary support for public procurement, customs, tax collection, accounting and auditing has been contracted, for example, in Afghanistan, Angola, Liberia, Mozambique and Southern Sudan.
The sphere that raises fewest doubts is the delivery of functions and services to citizens. This intrudes least into the state’s own internal administration and offers the greatest opportunity for exploiting competition between rival contractors. There are widespread examples of the contracting out of health care and other social services, infrastructure (roads, water and sanitation, telecommunications), agricultural extension, and some aspects of security services (maintenance of police stations, prisons and court houses). The cases of Liberia and Haiti are highlighted in the short documentary film produced by the PDG presented below.
There are no standard blueprints for contracting out government services in situations of fragility. Government policy-makers and field practitioners have to weigh up the pros and cons of contracting out and navigate the processes of procurement and implementation once the decision is taken.
A key prerequisite for successful contracting in fragile states is the development of governments’ capacity to assess the options and to manage them, whether the ultimate intention is to continue contracting out or eventually to provide services directly.
The Partnership for Democratic Governance was set up in 2007 to examine how core policy functions could be strengthened in fragile states or those recovering from conflict.
Annual Bank Conference on Development Economics (ABCDE), hosted at the OECD in Paris, 30 May-1 June
Following on Monday’s presentation of the World Development Report, Stephan Massing of the OECD’s International Network on Conflict and Fragility looks at the role of external support in fragile states.
Recent events in the Middle East and North Africa – where the legitimacy of the reigning power-holders has been seriously questioned by popular protest – bring home the threats to global stability posed by the world’s 30 to 40 fragile states.
While these threats have stirred deep anxiety in the international community for over a decade, the current political upheavals remind us of the need to head off instability by helping to build legitimate and responsive states.
State fragility threatens the livelihoods of one in six people on the planet. It poses particular challenges for donors, who have witnessed the hopelessness of trying to graft Western institutional responses onto fragile contexts.
Viable solutions need to take into account the particular distribution and dynamics of local power; they need to recognize the trade-offs between development objectives, the fine grain of social expectations and the evolution of regional dynamics.
To be realistic, the conception of statebuilding must be grounded on how the state – at all levels of authority – connects with the people, and how people in turn view the power that governs them. Failing to do so can make an aid programme moribund before it gets off the ground.
The fact that there is no blueprint, nonetheless, doesn’t mean that you can’t sketch a framework for making strategic decisions in fragile states. In practical terms, donors can operate at multiple levels inside and outside institutions – or across regions – to promote statebuilding, but a certain amount of humility is required. The process is a long one, and is driven first and foremost by dynamics within the country.
The process needs to start with looking at the pacts and agreements that link the country’s main political actors (the political settlement), the capacity of the state and its institutions to deliver key functions and services, and the nature of public expectations. Development policy towards each country must be anchored in a clear understanding of the dynamics of power: who is in charge, how do power holders derive their support, and what levers do they have at their disposal? Most significantly, what opportunities exist to spur improvements in governance, and can sound partnerships be formed?
On this basis, using some of the analytic tools now common in the aid community, fundamental choices must be made. The pursuit of multiple simultaneous objectives, as the international community has done in Afghanistan, threatens the fulfilment of any single goal.
Instead, donors must acknowledge the difficult choices they face, for instance the trade-offs between short-term objectives of ending violence or delivering basic services quickly, and the longer-term objective of building institutional capacity.
Statebuilding is endogenous and highly political. It involves not only developing the capacity of state institutions, but also negotiating their place in societies. While priorities will differ according to context, the new OECD Policy Guidance on Supporting Statebuilding in Situations of Conflict and Fragility draws particular attention to the following entry points for external support:
- Supporting local conflict management mechanisms – be they formal, informal or traditional – to help address the causes of conflict and mediate tension and dispute.
- Identifying opportunities to foster inclusive political settlements; supporting processes that strengthen state-society interaction, including fostering transparency and accountability.
- Strengthening institutions to perform state functions that are strategically important for statebuilding, such as security and justice, revenue and expenditure management, economic development (particularly job-creation), and basic service delivery.
The international community needs to work in new ways with state, non-state and regional actors and across multiple dimensions of the state-society relationship to help build strong states. Instruments and tools need to be adapted to meet statebuilding objectives. And external actors need to strengthen their own capacity and align their incentives with those of the states they are supporting.
There is no single path out of fragility, but at least we have a map of the terrain.
Annual Bank Conference on Development Economics (ABCDE), hosted at the OECD in Paris, 30 May-1 June
1961, what a year, eh? The OECD, George Clooney and Barack Obama were born. And of course, Yuri Gagarin proved Joseph de Lalande wrong, yet again.
In 1782, a year before the first manned balloon flight took off from the site that would become OECD headquarters [insert your own hot air joke here], the eminent expert from the Académie française declared that: “It is entirely impossible for man to rise into the air and float there. For this you would need wings of tremendous dimensions and they would have to be moved at a speed of three feet per second. Only a fool would expect such a thing to be realised.”
Of course, it’s easy to get it wrong, but it takes a rare form of genius to fail to predict what has actually happened. So a special mention goes to the Engineering Editor of The Times, who, three years after the Wright brothers’ first flight, informed the cream of British society that: “All attempts at artificial aviation are not only dangerous to human life, but foredoomed to failure from the engineering standpoint.”
Britain’s outstanding record in technology forecasting was maintained by Astronomer Royal Richard Van Der Riet Woolley, who in 1956 declared that “space travel is utter bilge”. The following year, his predecessor, Sir Harold Spencer Jones, showed that timing is everything when he upgraded the rating to “Space travel is bunk” two weeks before the first Sputnik.
Four years later, Gagarin orbited the Earth, and only eight years after that Neil Armstrong walked on the Moon. Astronautics was the most spectacular proof that the pace of change in science and technology had accelerated dramatically, but major breakthroughs were occurring in every domain in the 1960s.
One Brit who got it right was Harold Wilson, the future prime minister, who said that that the type of country being “forged in the white heat” of the scientific and technical revolution would need different ways of dealing with the potentials and problems of the new discoveries.
However, policymaking often lags behind the pace of change in science and technology, and we’re no exception: the OECD’s Committee for Scientific and Technological Policy wouldn’t be created until 1972, long after Committees overseeing other areas such as agriculture or tourism.
Then as now, scientific discoveries that would prove crucial often appeared unimportant to all but a few specialists. For instance, putting E. coli cells in a cold calcium chloride solution doesn’t sound exciting, but they then become permeable to nucleic acid fragments, allowing scientists to carry out numerous genetic engineering operations.
This illustrates a dilemma for science and technology policy makers. They are faced with demands to finance “useful” research, but it’s practically impossible to predict where science will lead, and which technologies will ultimately make the most money.
A funding strategy that relies on spotting winners ignores the role that unforeseen connections and insights play in science and technology.
The OECD has been a major influence in changing how governments approach science, technology and innovation, and how economics as a discipline tries to understand these phenomena. In 1963 already, Science, economic growth and government policy convinced governments of something that seems obvious now: that science policy should be linked to economic policy. In 1971, Science, growth and society anticipated many of today’s concerns by emphasising the need to involve citizens in assessing the consequences of developing and using new technologies.
For many experts though, the OECD’s major contribution was the concept of national innovation systems, presented in 1992 in a landmark publication, Technology and the Economy: The Key Relationships. Economists working at the OECD pioneered a new approach that saw innovation not as something linear, but as a kind of ecosystem involving interactions among existing knowledge, research, invention; potential markets; and the production process.
Since then, the way science is done has been changed radically by the connectivity offered by the Internet and other communication tools. This allows scientists and technologists to interact better with each other, and it also allows scientists and technologists to take advantage of other types of expertise to develop the tools and foster the innovation required to meet emerging economic, sustainability and even social challenges.
This means that what has been called the science of science policy will have to change too. The OECD will have a role to play in this. As in the past, the OECD will be expected to spot emerging issues; provide the data, analyses, and policy recommendations needed to make the most of them; and to provide a forum where problems, contradictions and differing aspirations can be debated in an objective, productive fashion.
Looking back at looking forward – great forecasting mistakes