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World Bank austerity measures worsen matters in poor countries

World Bank Headquarters, Washington DC. [iStockphoto]

The International Monetary Fund (IMF) and World Bank insist on austerity.

Leaders, economists, intellectuals and the academia all echo the same rhetoric - that governments must cut expenditure and tighten their belts. Countries facing economic problems are supposed to take austerity measures before the Bretton Woods institution can lend them and save their currencies from collapse.

It is called fiscal contraction. It means government expenditure cuts on social welfare, education, health, public utilities, water/sewerage, electricity to subsidise cost of living for the poor and vulnerable in the society. It means trimming of the wage bill, and employment.

Austerity is IMF's ideological fiction, out of touch with reality and it has never worked anywhere. It created more crises in Kenya and countries under the IMF policies in the 1980s. The objective of austerity is to cut government expenditure during crises; bad times, to create surplus to reduce debt to GDP ratio. Austerity assumes there is independence between income and expenditure.

Whereas this is true for households and businesses whose incomes are fixed and must cut expenditure during bad times, it is not true for governments. Public expenditure plus private expenditure equals national income/GDP. One person’s expenditure is another’s income.

If public expenditure is reduced by 20 per cent, GDP will automatically reduce by 20 per cent. During bad times, private expenditure is reduced. There is less investment and employment and therefore less tax revenue for government. If government also becomes austere and cuts expenditure, it means GDP will shrink further.

Further, IMF loans on austerity mean an increase in debt while GDP shrinks further. This is the exact opposite of solving debt to GDP ratio crises. It makes matters worse. Raising tax in local currency can’t pay dollar denominated loans.

Austerity is a response to a crisis created by government's spending spree through senseless borrowing to subsidise/insure the rich multinational corporations and cut back and tax more the poor who had nothing to do with the crisis. 

In Kenya from 2017, our national debt was doubled for infrastructure development of ports, highways, fly-overs, EPZ and special economic zones. The development was not for rural roads to benefit farmers and people. It did not employ local companies and local people but multinationals and foreign expatriates. 

Now we have food, unemployment and debt crises. What is even more disturbing, we are not talking about who created these crises and who benefited from them but we are talking about austerity - cutting back and taxing innocent victims more. Why should people pay for sins they never committed? 

Solutions to this problem include liberating our minds from this ideological fiction of IMF. We should borrowing dollars to finance our priority development projects.

-Mr Bilacha is an international banking expert