WHICH INSTITUTIONS FOR RIGOR, WHICH INSTITUTIONS FOR GROWTH?

 

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Demonstrators march to protest against the British government’s spending cuts and austerity measures in London on June 20, 2015. (Agence France-Presse)

The role of rigor (and austerity) as a way to correct fiscal imbalances in the midst of the economic crisis, has been extensively debated over the last few years, and it is still a contentious issue to this date. The recipes imposed by the Eurozone authorities and by the IMF in the European sovereign debt crises have been widely criticized and contested. In one specific case, they have even been recognized as wrong. Well-known economists Carmen Reinhardt and  Kenneth Rogoff have been questioned in their main research finding of an existing inverse relationship between public debt levels and growth rates, beyond a certain critical threshold. On the other hand, there is a consensus that high levels of public debt are not desirable as they may pose a serious issue of sustainability and financial vulnerability. As a result, the need to keep the public budget under check is a broadly shared policy objective. A hotly debated issue, though, is whether the fiscal adjustment should be done during the crisis, at the risk of depressing growth, or whether it should be backloaded thus allowing the fiscal budget to support output and employment.

But, one fact is a logical antecedent to the debate itself: which institutions are supposed to be the best judges for choosing the optimal balance between rigor and growth?

A tentative way to start addressing this question is to assume a division of tasks between global agencies (like the IMF and G20), regional institutions (like the EU), and nation states. Each with its own set of competencies and responsibilities.

We then need to have some understanding of growth and rigor.

It’s hard to define growth. It is the result of a mixture of heterogeneous ingredients. Most of them are economic ones: the state may stimulate growth through public policies aimed at supporting investment and entrepreneurial initiatives. Similarly important are the institutional ingredients, such as the set of norms and rules aimed at encouraging certain economic behaviors or discouraging others, or the measures to make public administration more efficient or to reduce its costs. Other ingredients are social ones, such as public investment in health, education, and inclusiveness, which produce results in the long run. The whole mix of ingredients, moreover, has to communicate a sense of social justice and of shared efforts in order for it to be acceptable for the population.
Even though good practices may be of inspiration to countries engaging in pro-growth strategies, there is no such a thing as “the” right recipe for growth. Successful growth strategies differ from country to country, and across periods, and vary according to the strengths and weaknesses of each country, its culture, institutions, and level of technological development. The international context may influence domestic growth significantly.

It may be argued that growth has some kind of conceptual primacy inscribed in the mission of international institutions such as the IMF and World Bank, as well as of many regional organizations aimed at economic and financial cooperation. Of course, the way growth and other objectives are articulated in the charters of such institutions reflects, besides the different purpose and peculiarities of each, also the different times when their charters were written. Therefore, for instance, while the IMF Articles of Agreement (1944) show a conception of growth that is deliberately based on purely economic terms, the EU Treaty (1957 and revised many times) aims at a different, holistic, idea of growth, complemented by social elements, reflecting the cultures and politics of the region, as it has evolved over time.

Let’s explore now the meaning of rigor: it is understood to be a conduct (or even a set of rules) aimed at limiting excessive public debt and state deficit, and at restoring good governance and sound public finances. In practice, in the case of excessive deficits and/or debts due to cyclical or structural difficulties, rigor often translates into austerity policies, with cuts to public expenditures and high social costs.

Moving to the responsibilities and tools of international organizations, we do find many examples of interventions aimed at strengthening rigor rather than supporting growth. On the occasion of the recent European sovereign debt crisis, both IMF and EU engaged in supporting and restoring public finances in several countries. The Eurozone itself, in the process of strengthening its governance, added new instruments and regulations for disciplining public finances more effectively.

In the Treaty on the Functioning of European Union (TFEU) we find several rules of hard law that are intended for achieving more rigor, like, for instance, the articles 123-126 on fiscal discipline.

The best-known one is art. 126:

 “1. Member States shall avoid excessive government deficits. (…)”

There are, moreover, various legal acts specifying rules for rigor and the sanctions for violating them.

Frameworks for growth have also been contemplated at the global and European level, of which many G20 communiques and the Europe 2020 strategy are good examples. Yet they are all nothing more than good intentions, or soft laws at best. All the relevant policy instruments – and especially the budgets – are in the hands of national governments and parliaments.

We can draw the first conclusion: while international multilateral organizations have economic growth in their statutory mission, they are in fact best equipped for delivering rigor.

Why is this so? A simple but nonetheless convincing line of reasoning is that rigor is unpopular. And since the ultimate goal of politicians is generally to be elected
(or re-elected), policies for rigor tend to be avoided as much as possible by democratic governments (and, even more, by populist governments), unless they can be blamed on somebody else. On the other hand, nation states are best positioned and equipped to deal with growth policies, since it is at this level of government that one finds (i) democratic representation of citizens in order to have legitimate choices; and (ii) resources necessary for growth initiatives.

Thus, it is really not surprising that states have transferred the political price of unpopular (but necessary) measures for rigor to different levels of government, levels where there are no political elections. One of the consequences is that states are risking to kill international levels of government with unpopularity.

This dichotomy suggests a number of questions: (i) is nationally driven growth the best solution? Is it the best solution, if international organizations are responsible for imposing rigor?

The choice to place the tools for growth at the national level may appear in contradiction with the goals attributed to the IMF and the EU (as already mentioned), but also with the plans and guidelines for growth formulated periodically by the European Council and the Groups of States (G8, G20), which point to the need for making growth a commonly shared objective by the global community, one which requires international cooperative governance frameworks. At the same time, nation-states run against formidable obstacles to growth, as the international orientation to rigor inhibits their efforts to that end.

Back to growth: which are the main obstacles met by international organizations when they want to deal with growth? A first take involves responsibilities

If we believe that growth involves creative thinking and requires discretion, then we necessarily end up in the field of Politics (with capital P!), and leave the realm of technocracy.

This is substantially different than simply applying rules, which is what happens when international organizations intervene to enforce discipline.

Another obstacle is related to the budget. It’s not just a matter of having limited resources (even though, of course, larger budgets expand the set of feasible choices), but there is also an issue of “who” controls the budget. Only resources that are truly “owned” can guarantee independent (and creative) thinking.

Finally, there is an institutional issue. Growth requires a participative approach and a democratic institutional setup. A hard problem to be addressed is the coordination between the global and the national (as well as regional and local) levels of government. This is an area for multilevel governance and subsidiarity. Regional and global economic institutions may not impose growth recipes over populations but can offer useful fora for governments to discuss policy options and choices, which in the end only they can enforce.

In conclusion: if we consider rigor and growth from a purely “governance perspective”, we easily see that:

  • rigor is basically the application of rules;
  • it may be handled technocratically;
  • it has to be impartial (rules based);
  • it requires negligible budgetary resources;
  • it is easily and more conveniently delegated to supranational levels of government.

Growth, on the other hand, lays within the realm of political decisions. It implies a vision and requires making choices out of an infinite number of possible alternatives and combinations. The number of feasible choices grows with the increase of budgetary resources. Deciding on a growth strategy that is sustainable and inclusive demands democratic institutions.

 Rigor may, in fact, overrule growth preferences. The consequences are not merely economic, as they can have a significant impact on the democratic governance as well.

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