For over four decades, the ascendance of fiscal austerity as a multifaceted political and economic project within the larger ambit of structural adjustment has shaped the economic, political, and social realities of countries and communities across the Global South. In the context of an international financial architecture that provides little meaningful recourse for debt-distressed nations in the South, a consensus of political and economic elites across institutions, governments and the private financial sector has normalised a bias towards fiscal austerity in response to sovereign debt burdens. The dominant features of austerity, whose impacts include inadequate and failing public services in education, health, and social protection, and income inequality driven in part by regressive taxation and a deflated role for the state constructed by privatisation schemes, have led to a systematic erosion of the resilience of public systems. Austerity has also eroded a social contract that safeguards redistribution of wealth, resources, and public goods towards equity and the fulfilment of human rights, and in particular, economic and social rights. These effects perpetuate the patterns of social inequalities and economic dispossession such as loss of livelihoods, employment, or taxation targeted at the poorest and a wide-ranging undermining of the social contract through the erosion of public services and goods. It intensifies discrimination and a subterranean stream of social fissure and emotional-spiritual alienation. The gendered nature of austerity and the channels through which women and girls are adversely affected, as well as involuntarily becoming shock absorbers of fiscal consolidation measures, are also detailed in a rich body of feminist political economy analysis.
The erosion of the public sector as an institution has urgent consequences, visible in underfunded or privatised public services and social programs, weakened regulatory regimes, forgone infrastructure projects, sale of public assets, and continued privatisation of the functions and responsibilities of the state. Fiscal policy is reoriented from objectives of employment, investment-led and needs-based production, and redistribution, to that of a procyclical reduction of budget deficits, increasing interest rates, and maintaining free capital flows and continued debt servicing, even in times of crisis. Public spending and long-term investment, especially in public services and social sectors, are systematically cut in the name of achieving fiscal balance. The developmental state, which guides economic development through, for example, retaining ownership of key sectors such as industry and banking and paying attention to public expenditure to adequately fulfil the social and economic rights of its people, is now perceived as crowding out the ‘efficient’ private sector.
According to the 2022 and 2023 World Inequality Report, countries over the past 40 years have become significantly richer, but their governments have become significantly poorer. The share of wealth held by governments and public companies combined is close to zero or negative in both the US and the UK (ibid.). In other words, the totality of wealth in the world’s richest nations is in private accounts. The COVID-19 pandemic only amplified private wealth when governments worldwide borrowed between 10% to 20% of gross domestic product (GDP), on average, from private lenders. Research shows that despite the worst health crisis in a century, public systems were slashed: between 2020 and 2022, half of low- and lower-middle-income countries cut the share of health spending in their budgets; almost half of all countries cut the share going to social protection; and 70% cut the share going to education.
Through the 1980s, debt crises in many developing countries opened the door to a spate of International Monetary Fund (IMF) and World Bank loans and programs under the structural adjustment facility. These conditional loans ushered in a raw form of neoclassical economics, where indebted developing countries in balance-of-payments deficits faced little choice but to accept institutional financing requiring the reduction of public sector expenditure, capital account and trade liberalisation, privatisation of state-owned enterprises, and deregulation of safeguards and regulations, including labour rights laws. The underlying objectives, often concealed in the rhetoric of ‘good governance’ and prudential policy reform, involved timely repayments to international creditors, assuaging financial markets, and facilitating private sector investments. Faced with recurrent payments imbalances, pressures for currency devaluation, and the macroeconomic instability associated with intermittent financial-economic crises in Latin America, Asia, and Russia, the Global South turned with growing frequency to IMF loans and signalling effects to financial markets delivered by surveillance reports.
The balance of power between debtor and creditor nations has become increasingly tilted as the policy conditions within structural adjustment programs—enforced by the Fund’s emergency financing programs in response to the recurrent debt crises over the last four decades—expose the extent to which social policy expenditure, as well as the economic redistribution from wealthy to poor that supports social policy, was repressed to ensure debt repayments to creditors and maintain an enabling environment for private capital. The effect of the Fund as an enforcing agent of fiscal austerity measures has protected the balance sheets of commercial banks and investors from their own imprudent lending decisions. By the late 1990s, the dominant and unaccountable role of a ‘Wall Street-[US] Treasury-IMF complex’ and its entrenchment of a pro-creditor bias in international crisis management began to take firm footing. As such, the enactment of austerity is internalised into normative compliance by most Global South states.
The ideological origins of austerity
The literature on the economic thinking and consensus-building among European economists and policymakers during the inter-war period, between World War I and II, illuminates a coherent working of logics and strategies in the formulation of the austerity project. In The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism, Clara Mattei (2022) describes the 1920 Brussels and 1922 Genoa conferences, where leading bankers and treasury officials articulated a rationale for ‘sound finance’ that subsequently congealed into a ‘world point of view.’ A conviction emerged that rooted the consensus for the austerity bias: that sound finance is not only the correct policy path, “but the only possible policy for their countries if they are to secure foreign confidence and assistance. Accepting this necessity for austerity provided ‘the basis of any economic recovery of Europe’” (Mattei 2022, 137).
Two strategies emerging from this conviction were that of consensus and coercion, as well as the intersection of both. First, that of consensus, which involved a deliberate attempt to convince the general public of the scientific validity and objectivity of austerity as an economic science. A depoliticized, or neutralised stance sought to shape public opinion on finance through the regular dissemination of economic statistics and budget publications. Deploying scientific neutrality as a shield against critique, economists persuasively justified the necessity of fiscal austerity as the “true road to economic redemption” (ibid., 147). The second strategy focused on automatic coercion, which recognized that consensus may not suffice and sought to enforce an absence of choice and the instinct to secure the material means of survival. Mattei argues that the strategy of coercion seeded the impulse of fascism, through the “principle of exempting economic policy decisions from democratic procedures, either through technocratic institutions or, as in the case of Italy, through a fascist government. Austere economists demonstrate the same anti-democratic intuitions to this day” (ibid., 143).
However, the element of coercion is embedded into the macropolicy framework itself, where technocrats devised monetary, fiscal, and industrial policies that essentially generated the process of inequality, transferring material and monetary resources from the many to the few. Essentially, fiscal austerity involved the core elements of public budget cuts, regressive taxation on the bottom segments of the income pyramid, and monetary tightening. The effects included, for example, decreasing disposable incomes, decreasing the consumption of state and people, dampening public demand, repaying external (foreign) debts of the state, decreasing imports, stabilising the balance of payments, or the public ledger, often generating a primary fiscal surplus, and establishing monetary stability. The aggregate effect is clearly that of creating an enabling environment for private capital accumulation. Cuts in welfare expenditures and social services deepened the pool of surplus, which is to be allocated for private investment or repaying government debt, which explicitly secures the profits of creditors.
Finance power drives the austerity consensus
An inquiry into the structural power that lays at the foundation of the political-economic project of austerity is rooted in the recent evolution of neoliberal financialization. Since the 1970s, three crucial shift can be highlighted. First, the merging of the five biggest global banks has generated a concentration of their power. While in 1970, their aggregate wealth comprised 17 percent of total bank assets worldwide, by 2020 this figure soared to 52 percent. Simultaneously, credit markets became centralised, defined by asset size and loan shares held by an ever-shrinking number of financial institutions. While in 1980, the US was home to 14,434 banks, by 2009 this number halved to 7,100 banks.
A second shift is seen in growing state reliance on access to credit markets, typically characterised by international sovereign bonds in foreign currency denominations with fluctuating and steep interest rates and an inability to enforce private creditors to participate on fair terms in debt restructuring processes. As a result, many Global South states now borrow far more than they earn through export revenues or taxation, generating a chronic state of sovereign debt distress. The landscape of creditors has turned sharply from official bilateral creditors to commercial lenders and non-Western official creditors. By 2021, Global South nations owed five times as much to private lenders than they did to bilateral ones. The growing presence of private creditors in sovereign borrowing creates an entangled relationship between national and global political and financial actors. Consequently, the state’s autonomy in and with finance weakens, as seen in many middle-income countries labelled ‘emerging markets.’
A third turn is the imbrication of state governance with finance, as the interests and priorities of capital market creditors are uplifted above the needs and demands of citizens. In turn, private actors start to exercise increasing influence over national policymaking. Consequently, the debtor or borrower state must take care to gain and preserve (the financial market’s) confidence by obediently servicing the debt it owes them and making it appear credible. The power exerted by creditors is anchored in the proposition that access to credit from markets and lenders requires that policymakers implement what ‘keeps their creditors happy and not scare away potential investors. What then constitutes the terms of this imperative? While the minimum requirement may entail servicing foreign debt repayment, including accrual of interest, to creditors, the expectation underlying debt repayment is the implicit and yet mutually understood priority of ensuring “market confidence” or demonstrating “sound macroeconomic fundamentals.”
In 2016, the IMF’s Deputy Director of Research, Jonathan Ostry, wrote, “…it is surely the case that many countries have little choice but to engage in fiscal consolidation, because markets will not allow them to continue borrowing” (2016, 40). While the focus is on indebted nations, the lack of ‘choice’ in undertaking fiscal consolidation transcends the challenges of sovereign debt. Even when some Global South states possess debt-to-GDP ratios deemed ‘sustainable’ by credit rating agencies and the IMF, the macroeconomic surveillance reports of the IMF still advise most developing nations to “maintain sound and macroprudential indicators.” Immediately preceding the upsurge in financialization marking the current moment, the political scientist Lindblom asserted that policymakers become bound to the imperative of creating an enabling investment environment at all times and to quickly recuperate market confidence when national figures become unstable or uncertain (Lindblom 1982).
In this sense, ensuring alignment to investor and creditor preferences for low inflation, attractive interest rates, low sovereign debt, and malleable regulatory environments facilitates an internalisation of economic austerity. The effect in many developing countries is that of reining in public expenditure to meet low deficit and inflation criteria, even when it involves constraining social spending and domestic investment priorities. The IMF’s role as an agent enforcing austerity to shield the balance sheets of financial market actors, from commercial banks to investment banks and hedge funds, from their own risky lending has become increasingly visible. Political economists have long articulated the evolution of a ‘Wall Street-Treasury-IMF complex’ and its explicit bias toward creditors in macroeconomic governance and lending. As such, the enactment of fiscal discipline is embedded across many nations in the Global South.
Financial Dependency Rooted in Liberalisation
Since the 1970s, dependency theorists and thinkers have examined the dynamics of financial dependency. Egyptian dependency thinker and economist, Samir Amin, addressed the politics of lending from the core to the periphery. Amin proposed that the periphery is prone to a ‘chronic tendency towards deficits in the external balance of payments’ that generates a parallel chronic tendency ‘towards the need for external financing.’ In Amin’s analysis, the periphery lacks the integrated internal market that many core regions possess, in terms of a dynamic feedback loop between productive sectors of the economy and domestic revenue, investments and markets. Such a nexus is critical to supporting economic self-reliance and a diversified productive sector. The disproportionate reliance on exporting a narrow range of agricultural and other commodities, and labour-intensive and low-technology products, does not always generate domestic revenue and employment to scale. Furthermore, the export-oriented development model constructed through successive waves of trade liberalization, is typically dependent on consumer and buyer markets in the core.
This leads to a structural dependence on borrowing foreign exchange to meet their financing needs. Consequently, the economic articulation of the periphery conforms ‘to the needs of accumulation at the core’, often resulting in a continual fiscal imbalance in the periphery’s public budget. In other words, national expenditure needs chronically outweigh national revenue. This imbalance of the budget, or balance of payments, is then overcome by ‘structural adjustment’, or reducing the public expenditure side of the ledger. The disarticulation of domestic economies in the periphery is then rooted in great measure within externally focused productive capacities that systematically generates financial dependency on the core to access credit in order to, for example, pay for imports, finance investments and expenditures as well as maintain debt and interest payments arising out of borrowing. Through this lens of dependency theory, the formation of the ‘debtor’ or ‘borrower’ state across the periphery is characterised by a continual accrual of debt that is rooted in the asymmetrical structures and conditions of production created by the legacies of economic colonialism.
In the contemporary context of inequalities in the global political economy, the constraints, and barriers that the South experiences are systemic, in that they are embedded into the very design and function of international trade and finance. Obstacles to economic diversification are woven into trade and investment rules that prohibit the use of the very industrial policy tools and strategies that facilitated employment generation, value-added production, backward and forward linkages between primary commodities and manufactured goods as well as food security, for example, within industrialized countries. Insufficient diversification in domestic economic sectors reduces the possibilities of generating financial resources, and financial autonomy, from within domestic production. Other significant political economy challenges to generating sustained and sufficient domestic revenue include intellectual property rights controlled by industrialised countries and their outright refusal to agree to technology transfer clauses in trade, climate and financial negotiations and agreements, as well as trade liberalisation and privatisation requirements encoded into trade agreements and loan conditions.
A key dimension of systemic liberalisation is that of free capital flows, and its prerequisite capital account deregulation. Financial liberalisation, underpinned by currency deregulation, creates surges of ‘hot money’ inflows from North to Global South when interest rates are low in the North and high in the South. When this calculus starts to reverse directions, surges of outflows result, triggering currency depreciations which may trigger financial and debt crises as the cost of debt servicing and import payments increases with a weaker currency. In the context of a pervasive anxiety over volatile capital outflows, and the domino effects of financial instability, economic recession, and debt crisis, many South governments have turned to a strategy of self-insurance. In other words, governments have over the decades self-insured their economies through accumulating foreign exchange reserves as a buffer in times of financial crisis and capital outflows, as well as building local debt markets to raise capital. Developing countries have increased their reserve holdings from an average of about 5% of GDP in 1990 to an average of 30% in 2018. Central banks and sovereign wealth funds in Asia and among oil exporters have emerged as prominent players, and sources of funds in international capital markets. Approximately 66% of foreign exchange reserves are held in dollars, while the euro share of foreign exchange reserves is about 25%.
Self-insurance against the volatility in external financing flows through the accumulation of foreign exchange reserves generates an inequity bias. Global South reserves are essentially invested in rich countries’ assets, which creates a perverse reality where developing countries are systematically lending to rich countries at low- or zero-interest rates. As developing countries accumulate reserves, global imbalances between surplus and deficit countries are worsened and a deflationary bias is created, in that dormant reserve holdings have a contractionary effect on the world economy. This asymmetry of global reserves entrenches systemic inequity and instability into international financial architecture. Meanwhile, reserve accumulation is not a systemic or sustainable solution to prevent financial vulnerability and instability, or the threat of conditional loans enforcing austerity measures from the IMF. In the absence of both a normative acceptance of capital account regulations, or capital controls, by international capital and financial markets, and in particular credit rating agencies, as well as the lacuna of an adequate global financial safety net, developing countries are left with little option but to accumulate reserves as a form of self-insurance.
The large sums of financial resources frozen in reserves are essentially foregone development resources, which, if invested in social and economic development needs, could yield higher long-term returns, and allow countries to reorient from extraversion to domestic economic autonomy and self-sufficiency. A key force that works against the prioritisation of capital controls is neoclassical economic theory, and the internalisation of its rationale among policymakers in countries across all development levels. Neoclassical rationale suggests that capital account regulations can drive up the cost of capital and curb incoming investments. Neoclassical economists present evidence that is consistent with the hypothesis that capital controls increase market uncertainty and carry the risk of reducing the availability of external finance, which in turn lowers investment levels.
The above only begins to illustrate a complex and historical web of constraints on the policy space for equitable development generated by multiple forms of liberalisation which serve to hollow out domestic revenue generation, and economic sovereignty for social development and tackling climate change, in large parts of the South. Augmenting these systemic trade and financial forces of economic disarticulation is the financial drain from the South to the North through corporate and investor tax evasion and avoidance, which further strengthens the South’s necessity of having to turn toward external financing. Recent research illustrates that the South lost approximately $7.8 trillion due to tax evasion and avoidance carried out primarily by firms and investors in industrialised countries during the 10-year-period from 2004 to 2013. Most critically, the African continent incurs losses of approximately $90 billion a year through tax evasion and other forms of illicit financial outflows. Empirical research conducted in 2018 quantifies financial drain from the Global South through unequal exchange since 1960 amounting to $62 trillion, and when accounting for lost growth in the South, almost $152 trillion.
In light of the multiple dimensions of trade, financial and tax deregulation and liberalisation that generate layered forces of fiscal drain, many South nations have little recourse but to raise financing by issuing sovereign bonds at high interest rates in order to attract investors. Part and parcel of attracting investors is the project of maintaining investor and market confidence, which drives the implicit priority of South policymakers to maintaining a ‘macroprudential and sound’ economic and financial landscape. In other words, domestic economic and financial indicators, such as the fiscal deficit, inflation rate, interest rate and overall balance of payments, for example, must be amenable to investors and markets, on a constant and consistent basis. Even while exogenous shocks, such as the current food and fuel price inflation, or the global financial crisis induced by the U.S. mortgage crisis in 2007–2008, have adverse impacts on the macroeconomic and financial stability of the South by no direct doing of their own, South nations must confront the adverse market consequences. For example, capital outflows and currency depreciations result in many South governments yielding toward increasing sovereign bond spreads and tightening domestic monetary policy in order to assure and secure market confidence. In this way, the accountability gap apparent in many South regions on the part of policymakers to deliver and ensure economic and social rights, public services, and climate financing toward achieving the SDGs and the Paris Climate Agreement, for example, can be understood as a consequence of how the structural power of finance demands that states fulfil the interests of creditors over at the expense of communities.
Resistance and struggles for structural and ideological transformation
- Over the last several decades, campaigns and movements to essentially ‘end austerity’ have burgeoned on every scale, from local to national, regional, and global. From the street protests in cities across the Global South, from Nairobi to Manila and from Tunis to Quito, people decry the ravages of budget cuts that weaken and erode the public sector role of social provisioning, regressive taxation that hit the poor and women hardest, food and fuel subsidy cuts that make it impossible for people to meet their basic needs, attacks on labor rights that further exploit workers, and privatizations that create loss of livelihoods without safety nets. Mass protests and counter movements have surged across the globe over the course of decades, decrying austerity’s devastating toll and castigating it for deepening social injustices. Meanwhile, the empirical, data-based evidence, across time, geography, and context, demonstrating that austerity has neither restored income growth nor reduced unemployment has only mounted over the years, including by academic research illustrating how the economic methodology in support of austerity is conceptually flawed.
- The gendered nature of austerity and the channels through which women and girls are adversely affected show how women become ‘shock absorbers’ of fiscal consolidation measures. A feminist political economy lens situates an intersectional understanding of the social-reproductive sector at the center, illustrating how social reproduction buffers societies from the economic, social, and physical effects of crises by taking on additional caring labor, both paid and unpaid, inside and outside the household, including in the informal sector. A central point of contention in feminist political economic analyses of austerity is that the underlying organization of the economic, social, and political systems that prioritize growth in the production and finance spheres neglects or omits social reproduction, with the result of passing the costs of austerity onto the most vulnerable groups in society, especially low-income women. The effects of austerity measures, such as public expenditure contraction, regressive taxation, labor flexibilization, and privatization, on women’s human rights, poverty, and inequality occur mainly through three dominant channels, also known as the ‘triple jeopardy’ of gendered austerity. These are diminished access to essential services, loss of livelihoods, and increased unpaid work and time poverty. Budget cuts by the state often reduce or eliminate the very programs and services which primarily benefit women. Reductions, eliminations, or freezes to the public wage bill, to social protection transfers and welfare benefits such as unemployment insurance, housing, child and disability benefits, and to consumption subsidies for poor people create heightened economic insecurities.
- The Right to Development (RTD) was first proposed by a Senegalese jurist, Keba M’baye, in 1972 and was awarded its first legal recognition in the 1981 African Charter on Human and Peoples’ Rights. The Declaration on the Right to Development (DRTD) was adopted by the General Assembly in its resolution 41/128 of 4 December 1986. It stimulated a rethinking of development strategies in response to the failure of growth-centered neoclassical and neoliberal narratives and frameworks by underscoring a development that integrates the structural and systemic, the individual and the collective, the national and the international, with awareness of the indivisible and interdependent nature of development. The DRTD’s articles and principles have the active potential to redress the structural power of finance and the distortion of the role of the state. Specifically, the DRTD centers on the creation of an enabling international environment for structural policy change that upholds principles of sovereign equality, social justice, and equity; free, active, and meaningful participation; fair distribution of the benefits of development and fair distribution of income; self-determination and permanent sovereignty over natural wealth and resources; and equality of opportunity for development for all nations and individuals who make up nations. Articles 2.3, 3.3, and 4.2 of the DRTD stipulate that States have the right and duty to cooperate with each other in order to enable the formulation of national development policies toward promoting ‘a new international economic order’ that achieves the above principles through the realization of all human rights.
- The call to decolonize economics is gaining traction across the transnational global justice movement, as well as international civil society and progressive academia. One starting point is the recognition that the discipline of neoclassical economics is a colonial construction. The characteristics of a universal theory of supply and demand, quantitative methodologies, and an origin in the European context supply neoclassical economics with the linear, techno-modernist, and singular language of modernism. What then are the strategies through which the discipline of neoclassical economics can be not only contested but also reshaped? A conscious engagement with a pluralism of economic knowledge, methods, and praxis is one place to start. At least nine major schools of economics and various other, smaller schools can be considered in delinking, including feminist, ecological, Marxist, Keynesian, developmentalist, and structuralist schools. Where neoclassical economic theory says that societies are made up of rational and selfish individuals, risk is calculable, choice, exchange, and consumption are most important, and the free market will automatically correct inefficiencies; structural, feminist, and development economics say societies are composed of gender-unequal class structures, the world is complex and uncertain, the most important domain of economies is production and human welfare, including the care and informal economies, and the state must use active fiscal policy to redistribute income to poor people, diversify economies, create jobs, and protect local and small businesses.
A significant body of literature on decolonizing research methodology asserts that Eurocentric ways of teaching and research are inadequate in explaining Southern experiences, while a plural landscape of knowledge exists not only as critique but in its own legitimacy. Methodological sophistication in mainstream economics, based on quantitative econometric modeling, limits the research questions that can be asked in the first place and particularly their relevance outside industrialized economies. At the same time, the rigid scripture of econometric methodology is a prerequisite for publication in top-tier academic journals. Similarly, most institutions of higher education in the South operate within Eurocentric canons and methodologies that lack social science and liberal arts interdisciplinarity, particularly with histories of economic thought in the era of political decolonization. Such histories would elevate the thinking of Southern thinkers associated with the project for a New International Economic Order, such as CLR James and Kwame Nkrumah, who proposed centralized federal states, critiqued international hierarchy, and sought to secure national self-determination towards political and economic equity on a global scale. Given that a central unit of analysis in macroeconomics is the nation-state, the way such thinkers questioned the legitimacy of the state as a postcolonial construction marked by divisive and arbitrary features of colonial rule and proposed ways to disperse and delegate sovereignty beyond the state, fuels a decolonial turn in economic thinking.
