The Austerity Debate and Post-Conflict Recovery
The communiqué from the May 2012 meeting of G8 leaders opens by stating: “Our imperative is to promote growth and jobs.” This assertion encapsulates what many believe is a sea-change from the German-led austerity approach to resolving Europe’s economic crisis to one based on fiscal stimuli, preferred by the United States and France. The statement by the leaders of Canada, France, Germany, Italy, Japan, Russia, the UK and the US reopens a long-standing debate relating to the revitalization of economies following recessions, protracted economic shocks, persistent underdevelopment and violent conflict.
Countries or regions impacted by violent conflict face a number of challenges including destroyed infrastructure, depleted human capital, a legacy war economy and weak governance. No two country circumstances are the same. Rebuilding such economies requires significant creativity, targeted investment and a private sector that is both engaged and empowered. The track record of economic recovery in conflict-affected countries over the past couple of decades is mixed, with most countries either floundering or becoming heavily aid-dependent. Three lessons could be gleaned from the G8 communiqué. First, the sustainable growth of the domestic economy must be prioritized. Second, structural reform programs must be supported by strategic investments in people and infrastructure. Third, growth and jobs must always go together.
The first port of call for post-conflict countries that are embarking on economic recovery programs is the donor community (primarily bilateral and multilateral institutions) and the first goal is always ‘regularization.’ Organizations like the World Bank and International Monetary Fund cannot do business with countries having outstanding debts, so a critical part of the regularization involves debt relief. In exchange for a combination of debt forgiveness and debt restructuring, countries also commit to a measure of fiscal austerity. The mantra quickly becomes “don’t spend more than you earn.” This is sage advice but for a country devastated by war, where the private sector has to be rebuilt from the ground up, an amount of fiscal flexibility is probably prudent. This is the same case being made by Greece: deep cuts are likely to contract the economy and make growth less likely.
Spending as usual is not a viable option. Citing the “Beijing Consensus” here and here, a number of developing countries call for more state-led spending/investments to kick-start their economies, particularly because of the low level of domestic savings and weakness of private sector actors and institutions. The G8 communiqué explains that stimulus spending must be supported by a range of structural reforms including improved macroeconomic management, improvements in the business climate and the removal of onerous and counterproductive trade barriers. These reforms would increase the likelihood that strategic investments in well-being, skills/technology and infrastructure could elicit equitable and sustainable economic progress.
While GDP growth rates in many post-conflict economies appear encouraging, they are hardly robust. For some countries (like Afghanistan and Rwanda in the late 1990s), growth is largely a function of foreign aid inflows. In other countries (like Liberia and Sierra Leone), the post-conflict growth spurt may be attributed to a combination of foreign aid and the resumption of official exports of a dominant natural resource. In the vast majority of the cases, GDP growth does not translate into improvements in living standards for the vast majority, while persistently high unemployment rates undermine both socio-economic and political stability. Growth and jobs must go hand in hand. Careful attention must be paid to initiatives that expand entrepreneurship expeditiously (way too many countries have public sector-focused economies), as well as to strategies that more fully integrate the domestic economy (and labor force) into the supply chains of dominant economic activity.
In many ways, the problems facing Europe in 2012 and the challenges besetting the world’s conflict-affected countries may be worlds apart, but the lessons are similar. Rebuilding troubled or shattered economies requires both growth and jobs. Also, fiscal stimuli must complement structural reform. Finally, the inter-connectedness of the global economies demands that conflict-affected states should be viewed as potential trading partners and not recipients of humanitarian/philanthropic largess.