All too often people in countries experiencing financial crisis are told that the road to recovery necessarily involves pain, that fiscal austerity and cuts in spending that adversely affect the lives of ordinary citizens are necessary costs of correction of macroeconomic imbalances and the consequent adjustment that is considered essential for recovery. This is repeated so often that it is now taken as received wisdom by policy makers and civil society alike – yet in fact it is not true at all. It can actually be plausibly argued that in several situations the reverse is correct, that attempts to reverse economic downswings through cuts in public spending are counterproductive and makes matters much worse. This is clearly evident for all to see in the case of crisis-ridden countries in the eurozone, for example.
The crisis in the Eurozone has not yet reached its climax, and therefore it may be premature to talk of the impact on employment since the process is still unfolding. There is absolutely no doubt that things are likely to get much worse before there is any possibility of getting better. What is certainly clear is that the combination of fiscal austerity, deleveraging of private debtors and pressure on wages is creating a deadly mix of policies that combine to create or perpetuate economic slump. In such conditions, not only does economic activity get into a downward spiral, but the labour market conditions tend to deteriorate to such an extent that the ultimate macroeconomic goals of the strategy – to achieve macroeconomic balance and external competitiveness – are actually hindered.
Jayati Ghosh is Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, at the Jawaharlal Nehru University, in New Delhi, India. Her specialties include globalization, international finance, employment patterns in developing countries, macroeconomic policy, and issues related to gender and development. She writes regular columns for Frontline in India, The Guardian in the U.K., and many other publications. She is Executive Secretary of the International Development Economics Associates (IDEAS), a network of economists critical of the mainstream economic paradigm of neo-liberalism.
She played a key role in creating a Guaranteed Employment Program throughout India. She also does advising work for governments throughout the developing world, including, most recently, Ecuador.