Counting the Cost

Austerity debunked

As Europe struggles under widespread spending cuts, it seems that the theory behind austerity may, in fact, be flawed.

Last Modified: 27 Apr 2013 08:35
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Over the course of the last three years, Europe has changed beyond anybody’s reckoning.

Greece has had to sell off its islands; Ireland has proposed selling its national forest. Britain has forced the disabled to go to work; in Spain there is the kind of unemployment levels that have in the past led to the creation of a military junta; there have been riots, and the near collapse of the currency.

And it has all been because of one thing, one overriding necessity forced on the people by the political class of a continent: austerity.

The theory goes that growth slows when a country's debt rises above 90 percent of its GDP. In other words, too much debt means the economy cannot grow. And the theory seemed sound. So sound, in fact, that it is used by politicians - mostly in Europe - to slash their spending leading to mass unemployment, anaemic growth and struggling economies.

But it does not seem to be working in Europe. And according to findings by a 28-year old graduate student, the premise upon which austerity theory was based is flawed.

Thomas Herndon, the graduate student from the University of Massachusetts, has undermined a study on austerity by the respected economists Carmen Rienhart and Kenneth Rogoff. He spoke to Counting the Cost about how he came to his conclusions.
Europe's austerity drive is also partially to blame for Slovenia's economic troubles. It is in recession for the second time in four years, and racing to avoid becoming the sixth eurozone nation to need a bailout.

As demand for its exports declines, Slovenia's banks are sitting on bad debts worth an estimated $9bn, or a fifth of its economy. It also needs to raise almost $4bn this year to refinance debt, a budget shortfall, and the banks which alone need to raise a billion dollars - a figure which international organisations and credit ratings agencies think is not enough.

Malaysia's economic outlook

We also look at Spain where, during its economic boom, there was an influx of immigrants from Spanish-speaking countries. But for the first time since records began back in 1857, Spain's population fell last year as people got out of the country to avoid the recession.
And finally, we analyse Malaysia's looming election, which looks like it will be the closest battle since independence from Britain more than six decades ago.
In that time the ruling BN coalition has delivered great economic growth, which it hopes will elevate Malaysia to a 'high income country' by 2020.

In fact Prime Minister Najib Razak plans to spend $444bn along with the private sector to achieve that goal. 
But there are some controversial policies too, especially one which favoured - and thus raised the status of - indigenous Malays but, according to the Centre for Independent Studies, also raised the country's budget deficit. 
It is a policy which forced many Chinese and Indians to leave Malaysia. More than 304,000 left between March 2008 and August 2009, compared to 140,000 who left in 2007.

It is, says the World Bank, a "high intensity migration of skilled people".

“I have no plans to return to Malaysia anytime soon, not in the near future. But what would make me return is maybe when all Malaysians are treated equally.” an immigrant said. 

Watch each week at the following times GMT: Friday: 2230; Saturday: 0930; Sunday: 0330; Monday: 1630. Click here for more Counting the Cost.

Follow Kamahl Santamaria @KamahlAJE and business editor Abid Ali @abidoliverali


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