Why austerity is not the answer

Can a govt that in an economic crisis spends over half of its budget on social programmes be called “neoliberal”?

The globalised world offers challenges as well as opportunities. This is not a criticism of globalisation; it simply means that while we take advantage of the opportunities it offers we must be sure to address the challenges it presents.

One of the most difficult challenges of this period is responding to the international economic crisis while keeping alive our aspirations for development.

It is well established that a year of insufficient investment in education, sports, or scientific research means lost decades for entire generations. The errors of the present weigh heavily on the future.

The rich countries, like those in Europe, and the United States, are debating whether to increase or decrease public spending to revive their economies.

In contrast to the situation just five years ago, these countries have entered an economic recession, meaning that in the best of cases they have experienced a slowing of growth, while in the worst cases they stopped growing altogether.

We could debate until the end of time which economic theory is best suited to spur recovery. However, for a committed social democrat the decision is not hard: the economy must be on the side of those who have the least.

Wrong concept

Those who preach austerity to reduce fiscal deficits when this means a sudden and indiscriminate reduction in public services are simply wrong.

Proponents of austerity are recommending it for countries with dizzying levels of public debt, like Greece, Ireland, Spain, Portugal, Italy, and Japan (whose debt is about 240 per cent of its gross domestic product). Costa Rica, particularly during my two terms as president, never had such levels of debt.

At the beginning of my second term (2006-2010) we cut the deficit by about 15 per cent such that when the lean times struck with the international financial crisis of 2008, we could spend and borrow again, prudently and responsibly.

To address the crisis we launched the "Escudo Plan", thanks to which, in sharp contrast to what happened in the industrialised countries, not a single bank failed, companies did not go bankrupt, houses were not foreclosed upon, and unemployment did not rise.

Historical evidence demonstrates that the best way to reduce fiscal imbalance is a combination of a gradual reduction in the deficit with rapid economic growth, which generates increased government revenue.

This is precisely what the governments of Europe did in the period after World War II to combat high deficits. It is what Bill Clinton did as president of the United States. It is what the Swedes did to bring about their much applauded deficit reduction between 1994 and 1998. This is why it is simply irresponsible and unjust to ask certain European countries in recession to cut spending in the name of austerity.

This approach of slowly reducing public spending while stimulating economic growth is what Barack Obama is defending against Republican presidential candidate Mitt Romney. It is the policy that Francois Hollande defended in the face of Sarkozy and that allowed him to win the presidency of France. It is also the policy my government followed during the financial crisis four years ago.

In the US this policy is labelled "Democrat"; in France it is called "socialist", and only a handful of confused people in Costa Rica call it ‘neoliberal.’ When my government decided with the consent of my entire cabinet to dedicate 51 per cent of the 2010 budget to social investment, it was not only a well thought out decision; it was also the right one.

Can a government that in a full-blown economic crisis spends over half of its budget on social programmes be called "neoliberal"? Evidently not. We spent more than half of the budget on social programmes. Our administration dedicated more resources than any other in Costa Rican history to the well-being of the poor and vulnerable. No Costa Rican will ever forget that we created the Avancemos Programme, which quadrupled pensions from the Social Security Fund, or that we spent 7.2 per cent of our resources on public education.

Despite the high cost of getting things done in this country, from my first day in office we had a precise idea of where we were going and set a clear course for the country.
(The writer is a former president of Costa Rica, who received the Nobel Peace prize in 1987)
IPS

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