Time to question the effectiveness of the austerity measures

With the emergence of the Rupee and Credit Crises since late 2011, both the former and current governments carried out strong austerity measures.
This has been coupled with the central bank bringing out new financial requirements that have choked the credit supply or supply of money in the economy.
Many would argue that what the Royal Monetary Authority (RMA) did, though extreme and least desired, was ultimately unavoidable. This was because the RMA was taking huge rupee loans and paying huge interests just to meet the rupee imports driven in part by credit.
However, there are an increasing number of people – both inside and outside the government, now starting to question the effectiveness of the government’s austerity measures. There are those who would even say that the austerity measures are proving to do more harm than good.
The ongoing austerity measures received an even stronger boost when the new government took office. The Prime Minister and Ministers themselves, led by example, doing away with many frills and luxuries. This was a good and symbolic move that most Bhutanese admired and celebrated.
The problem, however, was that this austerity move was soon extended to the entire government machinery.
For a small economy, already reeling from the lack of credit, the government’s austerity measures came like an unintentional ‘one two’ punch knocking the economy off its feet.
The new government gave such a strong priority in austerity measures as the economy had become the key focus point during the 2013 elections. The issue of a large government debt and a government spending beyond its means was raised several times.
Though PDP was spot on with the economic issues and problems, the new PDP government’s solution of a strong austerity measures may actually be making a bad situation even worse.
The main reason why austerity measures are not of any help, especially in Bhutan, is because the government and government-owned companies are still the biggest players.
Also, apart from the 24,000 civil servants and under 10,000 civil servants working in the government, around 30,000 small businesses conservatively employing at least around 60,000 private employees in Bhutan, directly or indirectly, depend on government spending.
So when the biggest source of revenue and business for most ordinary Bhutanese goes into austerity mode, the impact are immediate and deep affecting almost all sectors of the economy.
Some ‘small’ examples would be stationery shops, catering services, consultants, contractors, media, architects, shops, etc.
Austerity is not only slowing growth down, but also leading to higher unemployment as agencies and companies are not hiring and in many cases cutting down on manpower.
The term ‘austerity measures’ became popular in the late 1980’s and early 90’s as part of the Washington Consensus that prescribed some very ‘market-fundamentalist’ measures to economic problems by Washington-based institutions like the World Bank, International Monetary Fund (IMF) and the US Treasury Department.
Their solution to a budget deficit is to significantly cut down on government expenditure and sharply increase taxes.
After the 2008 crisis, many international countries – especially in the Euro Zone adopted austerity measures. In most cases, austerity measures failed miserably and made matters worse. What was generally observed is that austerity measures slowed down economic growth, created higher unemployment and increased the debt to GDP ratio. There is now a growing international consensus that austerity actually makes matters worse and restricts economic activity at a time when it is needed most.
Though the world has learned its lessons and is adapting, Bhutan is still going by the failed Washington Consensus mantra that has been particularly harsh on least developed countries.
It is of no surprise that both the RMA and Ministry of Finance are advocating austerity measures that include very high taxes and stringent control of government expenditure. In many ways, both these agencies have received a lot of technical support and advice from the World Bank and IMF are simply spouting the Washington Consensus.
The government should come out of its current austerity path if it wants to save what is left of the economy, create jobs and strengthen our finances.
Realistically in Bhutan’s case – a more thorough study on the detailed project reports of mega projects and cost effective construction will save the government much more money than any amount of austerity measures.

We are not jumping on the austerity bandwagon. A healthy economy is by far the most important thing.

Helle Thorning-Schmidt

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