Sen on austerity and structural reform

Amartya Sen writes on austerity, comparing the futility of the Troika extracting primary surpluses from Greece and its other debtors to the self-defeating strategy of the Entente powers extracting reparations from Germany, the subject of a blistering critique in Keynes’ ‘Economic Consequences of the Peace’.

But he chooses not to explain the real nature of the bargain.  He asks why ‘structural reform’ should be paired with austerity.  Especially, as many contend, the latter makes it harder to carry out the former.

What is actually happening is that debtors are offered a range of possibilities.  At one end is the option of getting no more funding at all, in return for which the debtor country can run itself as it wishes, but under its own steam, and in this case coping with default, capital controls, and perhaps exit from the Euro.  Then beyond that there is a sliding scale of increasing amounts of further funding, in return for which the creditors want something in return.  That something being ‘structural reform’.  Either to satisfy a desire for a sense of fairness (however well or badly founded) amongst the funding voters, or to try to prevent another bout of financial mismanagement (as they see it).

So, the deal is not ‘austerity plus reform’.  Instead the deal is:  ‘if you want to avoid super-strong-austerity by taking more money from us, carry out reform.’  Another way to express Sen’s discontent is:  ‘the creditors should offer more funding than they are currently for the reforms demanded.’  It’s pretty obvious why they don’t.  The creditors’ taxpayers would rather keep the money for themselves and don’t value much the diffuse benefits of solidarity that may one day accrue a long time down the road.  Can you blame them?

The other aspect of Sen’s article that needs a coda is his point that the austerity demanded makes the structural reform required harder to implement.  There’s undoubtedly truth in that.  But – and this is presumably how the creditors see it – there is also truth in precisely the opposite.  The Greek polity, like many both in crisis and outside of it, has swung behind self-destructive microeconomic policies, and costly macroeconomic ones [early retirement, paying public sector employees to produce not much, high minimum wages, uncompetitive public procurement, high costs of hiring and firing, onerous regulations on business formation].  Without the carrot of extra funding [which Sen correctly but misleadingly calls ‘austerity’] these policies will not be undone while they are seen as desirable by voters.

So, while ‘austerity’ [translate:  too little extra funding compared to cutting a defaulter loose] makes some structural reforms harder to implement (through mechanisms yet unspecified) it also makes it more likely to happen.


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11 Responses to Sen on austerity and structural reform

  1. This is a stunningly bad article. Impressive.

  2. It’s impressive to read,after so many years of destructive policies an article that it’s so bad,so ignorant,so superfluous.
    The joke of the day.

    • Tony Yates says:

      I would normally delete comments like this, favourable or unfavourable, for not actually having any content. But this is funny, since it’s nicely self-contradicting along all dimensions.

    • blenheim says:

      Nikos – do you disagree with the author’s assertion that austerity in Greece would be more severe without the IMF/EU deal? If you do disagree, why? If not, what precisely do you disagree with in the above article? Genuine question.

  3. kalamake says:

    Reblogged this on Thought for Food and commented:
    Most salient point: Without official creditors, the unavoidable austerity is even harsher. See also my blog “Μνημόνιο για cocktail parties”

  4. Tony Yates says:

    Please resubmit without the senile comment

  5. blenheim says:

    Thanks a lot for this article – the point that austerity would be *worse* without official creditors is often ignored (indeed, this is often true in IMF programme countries). Of course, this is not to understate the suffering of the Greek people.

    The one hesitation I’d have is that Greece may have chosen to default in 2010 if they hadn’t been in the Euro with IMF support. The reason they arguably didn’t is that the Trioka didn’t want them to – as they were worried about contagion to Portugal etc. But from a Greek perspective, not defaulting at the outset may have raised the total fiscal consolidation they required – and as such, you could argue that they should be cut some slack relative to any other country in their position.

  6. donald says:


    I think there are a couple of problems with this post.

    First, lots of informed people think that a small primary surplus would be sensible (Simon Wren Lewis, for example). I think Greece agree. But as far I can see, this isn’t on the table at all – ie there’s no amount of refomr that will get their creditors to agree to that.

    Second, I’m not sure Greece’s creditors (at least in public pronouncements) fully seperate structural reforms and austerity – often when they say structural reforms they seem to mean austerity.

    So, there might be arrange of options available, but it not at all clear that they’re fair/good/reasonabke….

    • Tony Yates says:

      Thanks for the comments.
      on ‘First’. Depends what you mean by ‘small’. This year’s offer might be ‘small’, but still ambitious. If credible and far reaching reform was on the table I am sure the creditors would have been more generous.
      on ‘second’. I read structural reform to be about the supply-side and regulatory framework, [the things in brackets in my original post]. The creditors of course avoid the term ‘austerity’ completely to describe their funding/debt terms offer.

      I am not trying to say whether the offers are fair or reasonable, but just pointing out what the offer schedule is, which I think Sen obscures completely.

  7. AD says:

    Regarding the argument of funding taxpayers not willing to write another check for Greece see below

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