The World Economics Association’s forum for the open review of proposed articles for the World Economics Journal and for Economic Thought is now open. 19 submissions have been posted so far. It is located at http://discussion.worldeconomicsassociation.org/.

The World Economics Association has been founded in spring 2011 and has so far attracted more than 7000 members from around 120 countries. The Journals of the association are committed to a policy of inclusiveness, openness and transparency. You are encouraged to read and comment on submitted papers that interest you. Editors will also make public comments to make their final decision making process transparent and to allow readers and authors to react and interact.

Papers submitted to the World Economics Journal include:

Microfinance and the Illusion of Development: from Hubris to Nemesis in Thirty Years, by Milford Bateman and Ha-Joon Chang

Incorporating the Rentier Sectors Into a Financial Model, by Michael Hudson

External Fragility or Deindustrialization: What is the Main Threat to Latin American Countries in the 2010s? by Roberto Frenkel and Martín Rapetti

Pension Liabilities: Fear Tactics and Serious Policy, by David Rosnick and Dean Baker

Grass Roots War On Poverty, by Alice H. Amsden

Papers submitted to Economic Thought include:

Mathematical Modelling and Ideology in the Economics Academy: competing explanations of the failings of the modern discipline?, by Tony Lawson

On the Limits of Rational Choice Theory, by Geoffrey M. Hodgson

An Evolutionary Efficiency Alternative To The Notion Of Pareto Efficiency, by Irene van Staveren

Norbert Häring is editor of the World Economics Journal.

The increasing global economic uncertainty and the prospects of a flight-to-quality, with money flowing out of developing towards developed countries, raise the question of how prepared developing countries are to protect their economies from external shocks in the coming year. But volatility of financial flows also means that, most probably, following capital flight driven by the eurozone crisis emerging markets will again experience a surge in speculative financial inflows. The threat of continued ‘boom and bust’ cycles and lack of responses from international forums like the G20 and the IMF to address global monetary chaos makes the need for central banks to take action even more urgent.

There is a welcome shift in Latin America as countries continue their slow process of acceptance and de-stigmatisation of capital account regulations. In September this year Costa Rica joined the group of countries using these regulations, when it established that short-term foreign loans received by banks and other financial entities will be subject to a holding deposit of 15% of the value of the investment.

The evidence collected in a new report by Bretton Woods Project and Latindadd, Breaking the Mould, shows that regulations on capital inflows and outflows are helping Argentina, Brazil and Costa Rica to achieve not only financial stability, but also to promote development goals like poverty reduction and employment creation. These findings challenge the current IMF stance, which gives inadequate consideration to the impact volatile capital inflows have on economic activity and employment.

There are many ways that regulating financial flows can contribute to the achievement of social goals. In addition to the now widely acknowledged negative social impacts of the financial crises that followed financial liberalisation in the region during the 1990s, the report examines unregulated capital inflows artificially inflated the value of the Brazilian and Costa Rican currencies and undermined the export capacity of their local industries. This potential destruction of local industries has direct negative implications for employment creation and poverty reduction, and explains why regulating speculative financial flows is an intelligent policy.

Roberto Frenkel, a Buenos Aires based researcher, pointed earlier this year to the link between unregulated flows of money and what is known as Dutch Disease. The policies in Brazil, Costa Rica and Argentina to disincentivise speculative flows underline the concerns of many in the region, concerns that unfortunately the IMF is currently pretending to ignore. One more time, the Fund is falling short of understanding the social implications of the policies it advocates for.

Although not always mentioned by analysts, a comprehensive set of capital account regulations is one of the keys behind the economic growth and social progress of Argentina in the post-2001 crisis period. Since 2002, Argentina implemented several measures to deal with both inflows and outflows, such as requirements for exporters to sell foreign currencies internally, regulations to deal with currency mismatches, and non-remunerated reserve requirements on short term investments, among others. These measures supported the maintenance of a stable and competitive exchange rate and increased monetary policy space, which in turn stimulated economic activity and employment creation. Furthermore, less reliance on short-term investment also places the country in a strong position in the current context of global economic uncertainty.

In this sense, while in Argentina the capital account regulations implemented since the 2001 crisis are part of a comprehensive policy ‘toolkit’ which represents a U-turn from 1990s financial liberalisation, in Brazil and Costa Rica the regulations implemented come as isolated policies responding to a particular context.

The inflows that flooded Brazil and Costa Rica during the period 2009-2011 are not productive but speculative investment, mainly what is known as ‘carry-trade’ investment, where investors borrow in countries with low interest rates and lend into countries with high interest rates. Historically low interest rates in rich countries, and high interest rates in Brazil and Costa Rica because of inflation targeting policies, stimulated a surge in flows. The surge both induced exchange rate appreciation and increased their exposure to a sudden stop. This was clearly expressed in September this year when the eurozone crisis stimulated a strong outflow of capital from emerging markets, depreciating the Brazilian real by 14% against the dollar in only one month, forcing the central bank to intervene for the first time in two years in order to support the value of the currency

In order to make speculation on the Brazilian real less profitable and stop exchange rate appreciation, Brazil implemented a 2% tax on foreign purchases of stocks and bonds in 2009 and a 1% tax on financial derivates in July 2011. The same motivations are behind the regulations implemented by Costa Rica in September this year. Several studies showed that the regulations in Brazil have been effective in slowing inflows and reducing the pace of exchange rate appreciation.

Despite this positive impact, in the case of Brazil, and especially in the case of Costa Rica, it could be argued that the regulations implemented are too late and too little. Too late because they only implemented regulations once the value of their currencies was already heavily affected and the composition of flows shifted to larger proportions of short term capital. And too little because the measures are not comprehensive.

In Brazil, continued high interest rates, tax exemptions to foreign investors, and record profits in the financial sector make a 2% tax look too small. In fact, the evidence shows that the impact of the tax was stronger when the tax rate was increased to 6% in November 2010. In Costa Rica, following IMF advice, they decided to take action only after three years of strong exchange rate appreciation. Furthermore, the reserve requirement implemented covers only short-term loans, and leaves other flows unregulated, including trading activities on stocks and bonds. This suggests that there is still scope for short-term investments to affect the financial stability of the country. It is important to note that Costa Rica faces limits on imposing further regulations because of existing Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs).

Latin American countries should continue their efforts to regulate financial flows in ways that benefit their citizens. The available evidence shows that using capital account regulations as a last resort policy, as advocated by the IMF, increases financial instability and puts jobs at risk. In order to increase the effectiveness and development impact of capital account management techniques, they have to be implemented early on as part of a comprehensive policy framework. Their effectiveness will increase with regional coordination; current discussions at Unasur (Union of South American Nations) on coordinated response to the crisis are a good sign.

Juan O’Farrell is research assistant of Finance and IMF at the Bretton Woods Project. See their new report, “Breaking the Mould: how Latin America is coping with volatile capital flows”

The European Leaders agreed in principle at their meeting in Brussels on the 8th/9th of December 2011 to adopt tougher sanctions on the euro area countries that break the ‘new’ rules of what used to be the Stability and Growth Pact (SGP), what is now called the ‘fiscal compact’ (FC). The FC requires that tax and spending plans be checked by European officials before national governments intervene. There will be automatic actions against those countries that are deemed to have budget deficits that are too large. In effect the new agreement tightens the rules of the old SGP, but with no apparent improvement, as the FC retains the principles of the previous SGP but with the one addition that breaking the deficit rules may actually be punished in some way.

The limits of the fiscal compact (as in the SGP) are in effect to balance overall budget over the cycle and limit the national budget deficit in any year to a maximum of 3 per cent of GDP. Under the fiscal compact the 3 per cent limit is retained, and the balanced overall budget is formulated as ‘structural budget’ to not exceed 0.5 per cent of GDP, and this is to be written into national constitutions or equivalent. In place of the previous threat of a 0.2 per cent of GDP ‘fine’ for exceeding the 3 per cent limit (though never implemented even though there were 40 cases where the 3 per cent limit was breached), there will be automatic consequences, including possible sanctions, unless a qualified majority of euro area countries is opposed.

It is readily apparent that the ’fiscal compact’ does nothing to address the perceived problems of national governments with large budget deficits, which cannot be funded through capital markets, except insofar as it somehow changes the European Central Bank’s attitudes to directly or indirectly funding those deficits. More seriously it does nothing to address the major problem of the Economic and Monetary Union, namely the large current account imbalances – ranging from a surplus of 7 per cent in the case of Germany to deficit of 10 per cent in the case of Greece (figures for 2010).

Before considering the commitment into a national constitution, one should examine carefully whether a country can ever achieve a ‘balanced structural budget’. Some countries may, but others may not, yet this is being imposed on all. Consider what a balanced structural budget means: at a level of output, which is deemed to be potential (or others such as corresponding to a high level of employment) government revenue and expenditure are to be in balance. In turn this implies that private investment equals private savings plus capital inflow (equal to current account deficit) – and that this equality holds at potential output and that the equality holds for the intention to invest, intention to save, etc. It is not that the equality holds at some level of output but at the specified level of potential output. Some neo-liberal economists may believe that saving and investment intentions can be aligned at potential output (or full employment), but where is the evidence?

There is a clear lack of symmetry here – structural deficits cannot be more than 0.5 per cent, but any level of structural surpluses is allowed. Those countries which have conditions conducive to budget surpluses, such as strong net exports and high rates of investment, can have such surpluses; those which have conditions requiring budget deficits to sustain demand, net imports and high levels of savings relative to investment, cannot deploy deficits.

The ‘fiscal compact’ assumes that an upper limit of 3 per cent of GDP is consistent with a near balanced structural budget despite the swings in economic activity and associated swings in budget deficits as the automatic stabilisers take effect. As a rule of thumb a 1 per cent fall in GDP below trend leads to around a 0.7 per cent rise in the budget deficit – hence a more than 3 per cent drop in GDP before trend with a structural deficit of 0.5 per cent would lead to a country breaching the limit. Note that this is a drop in GDP below trend – and could come from an actual drop of more like 1 per cent (with a 2 per cent trend growth rate).

The implication of automatic sanctions is that the sanction is applied whenever the budget deficit exceeds 3 per cent of GDP, whatever the reason. A shortfall in demand, a financial crisis which brings recession, the need to respond to a national disaster are not apparently to be allowed. The aim of a balanced average (‘structural’) budget is actually a significant budget surplus when calculations are made (as they should) in real terms; that is with allowance for the impact of inflation on real value of government debt. But more significantly it would involve a very substantial excess of tax revenue over current government expenditure (excluding interest payments). Further, it makes no allowance for governments to be able to borrow to fund public investment. The profoundly undemocratic nature of this approach is clear – the unelected European Commission can ‘request’ that the elected national parliament and government to change its budget. It is also undemocratic in that it would seem to prevent a political party putting forward a Keynesian economic manifesto; even a programme including the ‘golden rule’ (borrowing for public investment) would be ruled out by the EC.

The ‘fiscal compact’ is anti-democratic and seeks to impose balanced structural budgets, which often cannot be achieved and which will further unleash the forces of fiscal austerity.

Philip Arestis is the Director of Research at the Cambridge Centre for Economic & Public Policy and Senior Fellow in the Department of Land Economy at the University of Cambridge, UK, and Professor of Economics at the University of the Basque Country, Spain. Malcolm Sawyer is Professor of Economics at the University of Leeds, UK.

Earlier this fall, I crossed the Pacific Ocean from the island nation of Kiribati, which I am privileged to serve as President, to visit the United States.

In the days just before the tenth anniversary of the terrorist attacks of September 11, I saw and heard many references to the “resilience” of the American people. President Obama spoke of it, the covers of magazines displayed it. There is no doubt that Americans have found within them the capacity to absorb tremendous shocks, to adapt and heal from unimaginable disaster.

I listened as my American hosts spoke about your economic challenges. I understand that the hardship in your country is great. I heard of many people who are jobless, “underwater” on their home loans, and struggling to make ends meet. I know the deep insecurity that many of you feel.

These same ten years have brought another sort of disaster to my country, a constellation of low-lying, reef-fringed islands scattered across 1.3 million square miles of the South Pacific. On average, our islands are just two meters above sea level. Scientists anticipate sea level rise of one meter or more as a result of climate change within this century. You begin to see the catastrophe that Kiribati faces.

The citizens of Kiribati are resilient, yes, and I am proud of their efforts to face our grim reality. For Kiribati, climate change is not an issue for the future. We are feeling the effects now. We have begun to relocate families from places where homes are already being washed away. This is something the international community needs to understand and address. We are all citizens of this planet. We have a moral responsibility to one another.

I came to the United States to participate in a conference on resilience hosted by Ecotrust, a non-governmental organization in Portland, Oregon. Participants came from around the world to share the stories of their home regions, and to find common cause in the face of  unprecedented challenges. The threats of climate change, economic crisis, and cultural upheaval are felt in every region.

I was pleased for the opportunity to tell Kiribati’s story, although I could not offer a happy ending. But more than that, I was pleased to learn about efforts from around the world to pioneer paths for people and nature in the world that we share today: Efforts to support Arctic communities as the snow and ice that underpins their culture disappears. A campaign by nations around the Baltic Sea to designate the world’s first “eco-region.” An educator’s remarkable effort to train illiterate grandmothers to bring solar energy to rural villages in India and Africa.

Two elders from the Haisla Nation in Canada described the struggle to defend their traditional homeland, the largest intact coastal temperate rainforest in the world. Sixteen years ago, their community rejected offers of logging jobs and instead created the Kitlope Heritage Conservancy in a co-managed partnership with the Province of British Columbia. They call it their “gift to the world.”

The phrase struck a chord with me, because the people of Kiribati have also made such a gift. Three years ago, we declared 160,000 square miles of our Phoenix Islands a fully protected marine park, off limits to fishing and to any extractive use. Today these pristine islands and waters are a United Nations World Heritage Site – in fact the largest World Heritage Site.

I think these gifts lie close to the heart of resilience: A decision to say “This is where we stop taking from the earth, and start giving back.” We need many such gifts to the world. Kiribati is a poor country that relies heavily on its marine resources for its income, but we did not hesitate to make our gift.

The Haisla elders spoke of a “magic canoe” in which we might travel together into the uncertain waters ahead. I am eager to get in that canoe and to paddle hard for my nation. I am ready for a long journey. But I fear that when we reach Kiribati, we may no longer find a place to go ashore.

This month I am representing Kiribati at COP 17, the United Nations Climate Change Conference in Durban, South Africa. I don’t expect the conference to produce an answer that has eluded the international community for years. But I have arrived in Durban with a new question.

To my American friends, and to the other industrial economies that today face great uncertainties and difficult choices of their own, I ask: Are you prepared yet to build a way of life that does not depend on taking from the earth? Will that be your gift to the world?

In Kiribati and in many other places, our resilience depends on the answer.

His Excellency Anote Tong is the President of Kiribati.

What are the ethical responsibilities of sovereign nations? How can we expect nations to behave, in regards to climate change? We often hear that  nations will inevitably try to shape policy in ways that serve their own interests, where “interests” are largely defined in terms of short-run economic growth. Yet, if every nation sets this as a goal, we are—to use a particularly apt colloquialism—cooked.

I’m afraid that economists are particularly to blame for this perverse framing of the issue. In the economics mainstream, people are thought of as autonomous individuals who are driven by a desire to maximize their own levels of personal satisfaction.  Sociality,  care, ethical responsibilities, and environmental impacts are not part of the story. The insistent teaching of this approach over the last century or so has led many people to believe that selfish and even opportunistic behavior is simply “natural” or “standard” in commercial life—and therefore both excusable and unavoidable. A number of scholars of economics, law, and politics have extended this approach to thinking about governments, considering states as simply  “economic man” writ large.

Eric Posner and David Weisbach’s  wildly mis-named 2010 book Climate Change Justice, for example, is a precisely-argued exposition of such a position. They make national self-interest foundational: “we need to think about how to solve the climate problem in a way that  even selfish states would agree to” (138).  Any  proposal must, by their lights, satisfy the “the principle of International  Paretianism: all states must believe themselves better off by their lights as a result of the climate treaty” (6). Distributional goals are set aside as the topic of some other discussion, to take place  elsewhere. The stonewalling of climate policy by the United States is excused as a case of the U.S. “just tryingto exercise its bargaining power,” which they regard as simply a”common state behavior” (114). Notions of collective responsibility are dismissed as being contrary to the “standard assumption” of individualism (101). They conclude that “an optimal climate treaty… could well require side  payments” not to poor countries, but “to rich countries like the United States” (86).

But to whom are the assumptions of self-interest and individualism “standard”? They are standard—and peculiar—to those who think of the world in “economic man” terms. Envision a book along these lines called Schoolyard Justice.  Picture a school playground in which a big, tough bully has taken control of all of the balls and bats, and refuses to share. What principle should be applied to straighten things out? Well, first, of course, we would have to grant the bully the right to keep all that he has amassed. Perhaps all the other kids could pool their lunch money,and bribe the bully to lend them a ball. Doesn’t leave a whole lot of work for the “justice” part of the book title to do, does it?

Fortunately, there are richer conceptions of justice available, and deeper understandings of what citizens expect of themselves and their countries. Even little kids understand that greed and bullying are not fair. And most people want both themselves and their countries to be the “good guys” not the “bad guys.” This is what made the George W. Bush administration’s support of waterboarding so distressing for many Americans across the political spectrum. People are often willing to make sacrifices for what they believe is a good and noble cause. Many people offer up even their health and their lives to liberate people abroad from tyranny and torture, or protect families back home. Lose those high aspirations—let “our” side be one that tortures (or let the real reason for a war be the interests of Big Oil)—and the confidence that we are the “good guys” deflates.

Not even Posner and Weisbach, it turns out, can completely ignore the fact that we need some “good guy” behavior in regards to climate change. While their ideal treaty would be in the self-interest of every country, countries would afterwards, they argue, be under a strict ethical obligation to abide by the treaty (170). How convenient, for the countries that have been well-off all along.

So, instead of framing the question of global climate policy in terms of national self-interest, how about we frame it in terms of “doing the right thing”? How about we motivate it with the appeal of being “the good guys,” instead of being the people our grandchildren will hate, or being the people that many of our (I write as an American) contemporaries the world over see as the biggest jerk on the block? This is not a matter of naively believing in altruistic behavior: It is a pragmatic approach that takes into account the mulitplicity of human motivations. It’s time to take global politics back from the economists.

Julie A. Nelson is a Senior Research Fellow at the Global Development and Environment Institute (GDAE) at Tufts University and a Professor of Economics at the University of Massachusetts, Boston.

Back in September I was sitting in the salubrious office of an official from one of International Financial Institutions – when he slouched back in his chair, sighed and said ‘I can’t even bear to read those G20 communiqués – they are so vacuous.’ That evening, I found myself at a dinner hosted by DC law firm Jones Day where former Mexican President Zedillo branded the G20 ‘a disappointment.’

But last week Christian Aid welcomed the G20′s bold pronouncements on tax havens, financial transparency and development. President Sarkozy went as far as to say that havens that didn’t comply would be excluded from the international community. A whole programme of work on tax and development was agreed.

This was a major coup for organisations like Christian Aid and the Tax Justice Network that just three years ago were struggling to garner political support for these issues.

But haven’t we been here before? Back in 2009, the G20 declared ‘the era of banking secrecy is over.’ Yet this year the UK and Germany agreed to deals with Switzerland in lieu of tax from offshore account holders. Why didn’t the UK and Germany just get the information and pursue these individuals for what they owe? Banking secrecy, of course. It is alive and well. These deals, branded a disgrace by Christian Aid, were applauded by the Swiss bankers association for preserving their treasured ‘privacy’; read secrecy.

Meanwhile, the G20’s development working group took forward a piece of work on Domestic Resource Mobilisation – helping developing countries to raise their own taxes.
Of course the G20′s role is high level political statements and policy coordination. We shouldn’t expect it to deliver the world. But has it delivered anything?

Of course NGOs are always going to push for more. But are the G20 even following the advice they have requested from international experts? Last year the G20 asked intergovernmental organisations and international financial institutions to write a report. And the report is pretty good. It makes recommendations on exchange of information, transfer pricing, compliance of multinationals and capacity building for tax administrations – all important issues which we have been pushing.

Our scorecard compares the recommendations made, with what the G20 actually delivered. The scores that we attribute to the G20 simply evaluate their response to that expert opinion.

On this objective analysis of tax issues, the G20’s welcome political commitment has been translated to decisive action on only one of twelve suggested actions, while some tentative progress has been made on only three other issues.

‘Passes’

The G20 has urged Multinationals to improve transparency and full compliance with applicable tax laws. This sends a strong political message to Multinationals that tax dodging is no longer OK in developing countries and provides civil society and governments with the political backing to stand up to companies.

‘Could do better’

The G20 agreed on strong support for capacity building for designing and efficient managing of tax administrations and revenue systems. But they failed to commit any finance to make this a reality.

All G20 countries agreed to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters – a tool to facilitate exchange of tax information – and have offered to exchange information automatically, although only on a voluntary basis. While this sends a strong signal that the crackdown on tax evasion is a priority, loopholes and caveats within the agreement mean that it could remain ineffective. We need evidence that this agreement is actually working and that secrecy jurisdictions will be strongly invited to participate before we know whether it is worth developing countries signing on. And of course, without tax havens signing on, it remains of limited value.

The G20 has encouraged International Organisations to strengthen their programmes to assist developing countries diagnose their transfer pricing legislative needs and adopt, and then effectively implement, transfer pricing rules. This is clearly something that many developing countries want and need in order to challenge the abusive transfer pricing which costs billions in lost revenue every year. But the G20 failed to commit any resources to this.

‘Failures’

The G20’s major opportunity lay in pressurising tax havens to share information with developing countries to live up to its 2009 commitments. This is a missed opportunity for the world’s leaders to take a leadership position and ensure that their commitment to ending banking secrecy is delivered.

The International Organisations suggested that the G20 look into the feasibility of making further improvements to the transparency in reporting tax information by MNEs taking into account existing regulatory proposals for the extractive industry developed by the US and EU. Yet the G20 failed to make recommendations on as issue which is already law in one G20 country and is likely to be implemented in many others across the EU very soon.

Similarly the report recommended that G20 countries disclose information on tax exemptions in their own countries thus showing a leadership position on transparency – a crucial tenet of tax reform – but this proved too difficult for the G20.

Finally, the International Organisations recommended G20 countries undertake an analysis of the impact of G20 countries’ tax policies on other countries. This is particularly relevant because corporate tax reform – such as the UK’s review of its controlled foreign company rules- could have a significant impact on developing countries by increasing the incentive for UK companies to shift taxable profits offshore. But again the G20 failed to act.

Next steps?

Not a great score this time – but the political momentum generated should not be underestimated. To have the G20 recognise the harmful impact of illicit capital flight and the importance of tax for development is a significant coup. Civil Society Organisations will keep pushing G20 countries to deliver on their commitments with concrete supporting actions. So as the road to Mexico begins, we shouldn’t be surprised if the voice of civil society and governments in both the North and the South becomes much stronger.

David McNair is Principal Economic Justice Adviser at the UK-based international charity Christian Aid.

While markets expect eurozone leaders to exercise effective leadership and take action to resolve the eurozone’s sovereign debt crisis, citizens in peripheral European countries are trying to make ends meet under drastic cuts in wages and pensions, rising taxes and massive layoffs.

While the public debate and the media focus their attention either on European banks and their recapitalization needs or on the planned rescheduling of private bond holdings and the future capital needs and powers of the European Financial Stability Facility– the euro zone’s rescue fund– the anxious voices of impoverished families in Greece, Ireland, Portugal , Italy or Spain are not even recorded.

While the future of the euro hinges on the collective capacity of member countries to safeguard financial stability and avoid further contagion, the future of decent jobs for young Europeans is under threat, fueling massive protests by angry youth in most European countries.

While talks in academic circles focus on the exigency of further deepening European integration via a fiscal union, European solidarity and the legitimacy of the European social model are questioned in the streets and squares of several European capitals.

The dissonance between the public debate in policy and media circles and the everyday reality of average families in Athens, Dublin, Madrid or Lisbon is widening.

Unless these voices are heard and early action is taken to mitigate the jobs crisis and the dramatic fall in living standards of millions of Europeans, social and political unrest will become hard to manage and the prospects for sustainable growth and social cohesion will be stalled.

The effects of the 2007 financial crisis have indeed been dramatic in Europe. The banking crisis rapidly evolved into a liquidity and sovereign-debt crisis for peripheral countries, most notably for Greece, exacerbating in the process the solvency risks for European banks. According to the IMF’s latest global financial stability report “nearly half of the 6,500bn euro stock of government debt issued by euro area governments is showing signs of heightened credit risks”. While guarantees have been quickly extended to banks and credit institutions, wage earners, pensioners, public sector employees, the self-employed and the young have experienced dramatic reductions in their standards of living. In the absence of effective automatic stabilizers, liquidity shortages coupled with tough austerity measures have shifted the costs of adjustment on the shoulders of the most vulnerable.

Growth rates turned negative and unemployment rates have risen sharply, reaching 20% in Spain, 16% in Greece, 14% in Ireland and almost 12% in Portugal. Youth unemployment is high in all countries, exceeding 40% in Greece. Average gross earnings are declining for most middle-income working families, as wages and pensions in the public sector are being cut and minimum wages and contracts are renegotiated in the private sector.

Prospects are bleak. Unemployment, income disparities and vulnerability are expected to deteriorate even further in these countries, especially if growth prospects stall in Europe. Both the IMF and the OECD have already adjusted downwards their growth estimates for 2011 and 2012.

The prospects are not much better in many other parts of the world. The 2007 financial crisis has left large segments of societies highly vulnerable to over-indebtedness, housing market collapses, asset market volatility, deep recession and job losses.

According to OECD and ILO estimates, four years after the eruption of the financial crisis, “200 million people are out of work worldwide, close to the peak recorded at the depth of the Great Recession…twenty-million jobs are still missing in the G20 countries to regain the pre-crisis employment rate , and the job shortfall may increase to even 40 million by the end of 2012.”

Political leadership is needed more than ever to regain confidence and trust in our collective capacity to restore growth, ensure financial stability and improve the prospects for millions of people by creating decent jobs, and fighting poverty and social exclusion.

In a globalizing world, traditional policy prescriptions are not likely to work. Capital is footloose and seeks not only profitable but also secure opportunities across the globe. As long as financial markets are not subject to effective regulation, speculative attacks on hard currencies, sovereign bonds or in commodity markets continue to threaten financial stability and to disrupt trade and investment flows.

Austerity policies, even if effective to curtail national budget deficits, cannot by themselves make home markets attractive to new productive investment which is lured by expanding sales and profitability. Drastic cuts in public sector wages and government spending often bring about a sharp deterioration in government services and end up crippling essential security, tax collection, education and health services. Similarly, in the absence of effective social protection systems, deregulation and privatizations coupled with massive layoffs have made, in many cases, a few super-rich and others desperately poor and marginalized.

The devastating experience of structural adjustment programs for large segments of the population in Latin America, Eastern Europe or Asia in the 1980s and 1990s should be studied carefully and the same mistakes should not be repeated in Europe or elsewhere. Trickle-down theories have proven to be unfounded if not dangerous. Where full-time jobs with pensions have been suddenly eliminated and replaced with precarious or undeclared employment that offer no protection whatsoever, human insecurity, vulnerability and inequality have increased rapidly, with detrimental effects on long-term productivity and growth.

This collective experience should guide policy-makers in Europe as they seek to address the crisis and its multiple manifestations in Europe’s member states.

Restoring competitiveness and growth, while ensuring social cohesion should be the key policy challenges for all EU countries. The resumption of growth is a necessary condition for any sustainable rescue of European sovereigns. For this to happen, creditor countries, in close coordination with their G20 counterparts, need to reverse policy gears and pursue a coordinated fiscal and monetary expansion to spur investment and economic activity. Debtor countries could then sustain demand through export growth while they continue to implement fiscal consolidation policies and major structural reforms to enhance their competitiveness, spur investment and expand their tax base.

Apart from positive growth, a sustainable rescue also requires investments in productive and human capital to produce quality jobs in the near future. It requires R&D, industrial, and environmental policies to create incentives for the needed restructuring of European enterprises and economies and for promoting product and process innovation. It requires active employment policies to boost jobs growth and prevent young people and vulnerable groups from falling into long-term unemployment. It also requires effective social policies to tackle social exclusion and fighting poverty.

Thus, a sustainable rescue from the European sovereign debt crisis requires a policy-coherent approach across fiscal, structural and social policies. Deficits cannot be cut and debts cannot be managed over the long run if the redistributional effects of policies on work incentives and work conditions, on tax compliance , on productivity and growth are not seriously taken into consideration in the design and implementation of policies. Fiscal consolidation programs can be successful only if they do not stifle productive investment and do not generate large adverse distributional consequences which, by breaching social rights and weakening existing social consensual processes, end up undermining the implementation of needed reforms. So far, European leaders have been myopic on these important interlinkages between the economics and the politics of managing reforms.

For these reasons, ongoing fiscal adjustment programs need to be complemented not only with structural measures to enhance price and structural competitiveness but more importantly with an integrated set of employment and social policies designed to guarantee income security and access to basic social services for all, paying particular attention to vulnerable groups. It is noteworthy that the heads of the OECD and the ILO made an urgent appeal to Labor and Employment Ministers at the recent G20 meeting “to put employment and social protection at the centre stage of global policy discussions.”

The Social Protection Floor initiative, as foreseen by the World Commission on the Social Dimension of Globalization in 2004, and launched by the heads of the UN agencies as one of the nine UN joint actions to cope with the effects of the economic crisis, fills this conceptual vacuum and provides a comprehensive, coherent, and nationally-driven framework to deliver a minimum level of social protection for individuals and families.

The recent published Bachelet Report (2011) provides an important roadmap to effective policy design and implementation based on best practices and country-wide experiences. Active employment policies to improve job retention and creation, minimum income policies, extension of social service coverage especially with regard to education , health and social security, and improvements in social protection delivery systems can go a long way to enhance human security and welfare and facilitate the acceptance and effective implementation of reforms. Alternatively, badly designed or ineffective social protection systems can exacerbate social tensions, increase informality and undeclared work, and undermine fiscal objectives and adjustment policies including tax compliance, tax returns or the payments of social security contributions.

It is about time that European leaders, the G20 and the international community abandon shock-therapy recipes that have proven to have devastating effects on employment, growth, social cohesion and democratic institutions and promote instead, coherent and fair structural adjustment programmes that protect basic human and social rights and are sustainable and effective over the long run. It is encouraging that recently the G20 Leaders in Cannes recommended that labour and employment issues should be examined alongside economic, monetary and financial issues in order to strengthen policy coherence and enhance coordination of economic and social policies. Clearly, when implementing fiscal consolidation measures social protection policies are not the problem, but part of the solution, since they can support aggregate demand and generate income and tax revenues.

Prof. Louka T. Katseli is a Member of Hellenic Parliament and was formerly Greece’s Minister of Labor and Social Security.

Yet again, the G20 Summit, held in Cannes last week, yielded insipid communiqués that merely rehashed past commitments, outlined policies the G20 countries are already doing, and reiterated the EU’s party line to assuage markets on the eurozone debt crisis.  The FT reports that the G20 has once again proved meager results despite lofty promises, casting its own irrelevance against the gloomy realities of the world economy.

Drawing a parallel between the ineffectual coordination in the G20 forum with that of the EU’s internal faultlines and lack of democratic policymaking, analysts have remarked that the G20 is a microcosm of the multitude of global malaise: persistent imbalances, the failure of democratic and collective action, and the lack of structural reforms.

At the core of the G20’s macro-policy agenda is an elite consensus that there is too much sovereign debt in the world and so governments have to reign in public budgets through fiscal austerity.  As both Paul Krugman and Gerry Epstein have pointed out, this was the case in last year’s Seoul summit, which called for ‘fiscal consolidation programmes’ in developed countries despite massive levels of unemployment.

This year’s Cannes Summit was marked by the much-awaited-for Eurozone bailout package and the drama that ensued after the Greek Prime Minister responded by calling for a popular referendum to decide on the Brussels-designed programme.  The reason for the political panic in Greece is that Greek citizens have, for a while now, been up in arms in protest against the severe austerity sentence attached to these bailouts.

Greece’s dismal outlook reaffirms that austerity fixation, in both monetary and fiscal policy, remains the ideological foundation of both the EU and the EU-led IMF.  Despite a 17% unemployment rate and plunging output in Greece, the condition of financial support is continuing fiscal austerity: cuts in public sector jobs, wages and pensions, spending in public goods (education and health are usually first in line), privatization, and so on.  As FT commentator Samuel Brittan said, “The Greeks are being told by international institutions and creditor countries to squeeze, squeeze and squeeze again. I know how I would have voted in a Greek referendum on the package, were it to have gone ahead.”

However, according to the self-appointed G20 leaders, not all countries have to undergo fiscal belt-tightening.  Last Friday’s communique clearly stated that “countries where public finances remain strong commit to let automatic stabilizers work and take discretionary measures to support domestic demand should economic conditions materially worsen.”  Countries with large current account surpluses are instructed to “increase domestic demand” and “move towards more domestic-led growth.”

According to the G20 Action Plan for Jobs and Growth, the US, despite being the world’s largest debtor country, is to aim for “medium-term fiscal consolidation” while in the short-term is allowed to focus on a recovery package composed of “public investments, tax reforms, and targeted jobs measures.”

These statements reiterate the policy advice in a surprising IMF staff report to the G20 finance ministers meeting in Paris on October 14-15.  The report was surprising because it marked a sharp turn from the IMF’s traditional austerity prescriptions by stating that, for advanced G20 economies that are not in high debt, “fiscal policy should navigate between the perils of undermining credibility and undercutting recovery.”

So, if a government has the luxury of fiscal space and sustainable debt, they are being urged, by the IMF, to focus on short-term stimulus and public spending for growth, while delaying austerity for the medium-term.  This would, as the IMF says, “create space for providing further support for fledgling recovery.”

As for the debt-mired lot of Greece and Italy, countries that arguably need stimulus spending for recovery and growth the most urgently, the IMF and the G20, unsurprisingly, confine them to press ahead with “fiscal consolidation,” even as evidence of austerity undermining growth and increasing unemployment mounts.  As the Italians and Greeks face an unnecessarily harsh penance of looming austerity in the coming weeks and months, they will have to question whether their commitment to the eurozone and its single currency still matters more to them than economic and social well-being, and control over their own future.

Bhumika Muchhala is a policy analyst in the Development and Finance Programme at Third World Network (TWN).