Chart of the Week: Austerity in IMF Agreements, 2001-2018

By Rebecca Ray

Austerity – tightening government budgets during an economic downturn – has long been discredited as a recovery strategy. Instead of economic growth, it can lead to lower social spending, hurting the poor at the most difficult time and raising inequality thereafter. Furthermore, it can prolong economic downturns, dooming countries to downward cycles instead of recovery, as happened famously in Greece following the 2009 financial crisis. But austerity has historically been associated with International Monetary Fund (IMF) agreements, and scholars have discussed the extent to which the IMF may continue attaching austerity conditions to its loans or leave them behind.

In November 2020, the Boston University Global Development Policy Center published a working paper analyzing trends in IMF-conditioned austerity following the 2009 financial crisis. As global civil society calls for less austerity in the recovery from the current COVID-19 crisis, it is worth examining how well the IMF responded to such calls after the last crisis.

The working paper measures IMF-conditioned austerity in the 21st century through a new variable, the Fiscal Adjustment Indicator (FAI), which calculates how much budgetary tightening or loosening was expected in each IMF agreement from 2001 through 2018, expressed as percent of GDP per year. Positive FAI values indicate IMF-prescribed austerity (as tightened budgets are reflected in more positive fiscal balances) and negative values indicate IMF-prescribed budgetary loosening (as more relaxed budgets are reflected in more negative balances).

As this Chart of the Week shows, FAIs did not significantly shift downward after the 2009 financial crisis. Instead, they fell for just one year before rebounding to their pre-crisis levels. In other words, the IMF required less austerity of their borrowing countries during the crisis, but thereafter returned to business as usual. If the IMF changes course during the post-COVID-19 recovery and forgoes a return to austerity, it will be incumbent on global civil society to remain vigilant and ensure that these changes become lasting reforms.