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On fiscal policy advice, the failure of the austerity programs in Europe to achieve their stated goals of reducing debt-to-GDP levels and restarting economic growth is causing a rethink on the efficacy of the austerity approach. For several decades, the major bilateral and multilateral aid agencies would not give aid to a country if the IMF did not first deem its macroeconomic policies to be ???prudent??? and ???sound???. This should be among the first features of the old system to be done away with in any post-2015 global development framework. But on 9 October 2012 the IMF made an historic and outrageous concession about how terribly wrong its models had been in estimating the degree of social and economic harm caused by the deep budget austerity it has long advocated. New IMF research found that the economic damage from aggressive austerity measures may be as much as three times larger than they had previously assumed, and now the IMF is actually warning the Eurozone countries to ease up on their harsh budget-cutting because it is counterproductive to restoring economic growth (and eventually getting deficits down). Just as critics of the IMF have long argued, the Fund itself now concedes that deep public expenditure cuts in a time of recession actually make things worse, akin to digging oneself into a deeper hole, because the subsequent drop in employment, consumer demand and future growth rates all contribute to lower tax collections and thus make deficits bigger. The stunning concession left many developing countries that had previously fallen victim to IMF conditionality flabbergasted.
And then, just to highlight that politics and ideology continue to trump the facts, the IMF spoke out barely one week later admonishing Portugal to stay the course with its current harsh austerity program ??? as if their newly announced research did not exist. This striking turn of events bears important lessons for any post-2015 global development framework: developing countries must have the policy space and freedom to choose their own macroeconomic policies and aid should not be conditioned on economic policy reforms demanded by external actors.
On the question of wages, too, a new post-2015 framework must do more than the MDGs to protect workers and ensure the basic working conditions the ILO describes as ???decent work??? are better established and protected. In sharp contrast to the free market philosophy which has long claimed driving down wages to make your exports more competitive is the best way to achieve higher economic growth, the approach taken in a post-2015 agenda must be based on important new research that is increasingly refuting these claims. For example, a recent ILO study shows that not only does pushing wages down actually lower overall economic growth rates, but when multiple major economies are all doing this at the same, it has a cumulative negative impact on global GDP ??? just the opposite of what is needed at a time of global economic slowdown. This old view that it is good to lower wages is largely responsible for shifting the benefits of increased worker productivity into the hands of shareholders and exacerbating growing trends in economic inequality.
The policy conclusions of the ILO paper shed light on the limits of international competitiveness strategies based on wage competition in a highly integrated global economy, and point to the possibilities for correcting global imbalances through internally coordinated macroeconomic and wage policies in which stimulating domestic consumer demand plays a much more important role in achieving higher and more inclusive economic growth. Indeed, the post-2015 agenda must rethink the externally-focused dominant export-led growth model and replace it with a model more focused on building new domestic industries and strengthening domestic consumer demand in developing countries.
While it may be the case that the most powerful countries and donor agencies currently seeking to influence the post-2015 agenda will be opposed to many of the reforms outlined above, it is also true that there are increasingly outspoken social movements and civic advocacy efforts around the world calling for these sensible reforms. These include the many groups that comprise the Europeans for Financial Reform coalition and its counterpart in the United States, Americans for Financial Reform, along with new social movements such as Strike Debt! and international efforts such as the Tax Justice Network. The growing strength of this movement inside the US was arguably reflected in the recent victorious US Senate campaign to elect Elizabeth Warren in the state of Massachusetts, despite overwhelming odds and tremendous counter-pressure by the US financial services industry.
Although the political struggle between advocates of greater financial regulation and those who wish to keep the global casino open for business is likely to continue, it is clear that any post-2015 global development framework must meaningfully address these and other national and international financial reform issues if it is to have any legitimacy or popular support. Moreover, these challenges will have to be confronted in the new agenda if it is to prove more successful than the previous MDGs.
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The views expressed in this article are those of the author and do not necessarily reflect the institutional position of CESR