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Africa, don’t swallow the poison pill of austerity any more

- Thokozile Madonko and Fabio Andrés Díaz Pabón

The continent’s debt crisis is not of its making. And cutting back on public spending will only aggravate the problem.

In the aftermath of the COVID-19 pandemic, millions of people around the world have fallen into poverty. That includes an estimated 55 million people pushed into poverty in Africa.

Yet, amid the threat of recession and continuing inflation, at the precise moment when needs are greatest, governments across the continent – from Ghana to South Africa – are reducing public spending.


Roots of the crisis

The continent has 34 out of the world’s 39 Heavily Indebted Poor Countries, per the World Bank, under constant and intense pressure to repay what they have borrowed.

Yet this crisis is not of Africa’s making – it happens to sit in the middle of several international developments that created this storm.

Before the COVID-19 pandemic, several African countries had followed the advice of international financial organisations like the International Monetary Fund (IMF) or the World Bank on importing cheaper food and other goods rather than investing in producing them locally.

This, in principle, made sense. About 86 percent of Africans are income poor and 140 million of the continent’s people are food insecure, so governments needed to look for cost-effective ways to supply their populations with food and goods.

That model, however, came undone due to the supply-chain disruptions caused by the pandemic. The dependency on imports led to an increase in prices. As inflation was biting different countries, Russia’s full-scale invasion of Ukraine in February 2022 added fuel to the fire, with two of the world’s largest food suppliers and one of its biggest oil producers involved in a war.

Yet the reasons for this surge in inflation are being misdiagnosed by those in positions to affect global prices, whose rise is being treated as though caused by increased conspicuous consumption by everyday people.

Enter the ideology of austerity.

The logic of austerity

Austerity, in simple terms, is cutting back on spending and wages to reduce inflation as well as so production of companies and sectors can take place at a lower price.

But here’s the problem: While buying a new presidential plane is an expenditure, protecting people’s health and livelihoods is an investment. However, champions of austerity treat investments in social protection as an expense.

African governments are prioritising debt repayments over social spending. It’s a game without an end in sight.

The United States Federal Reserve keeps raising interest rates to curb inflation in the world’s largest economy. But this increases the interest rates on external debt repayments, too.

Trying to reduce debt makes sense but now is not the time – and cutting back on social spending is not the answer. While we seem to be at the tail end of the pandemic, the inflationary shocks due to supply-chain disruptions continue thanks to Russia’s war on Ukraine. Food prices remain at least 30 percent higher than before the pandemic. So, the argument from some African economists to aim for a “year of austerity” is not only misguided but also harmful.

Take the case of Ghana. Despite chronic shortages of doctors, high vacancy rates and more than 40,000 graduate healthcare trainees waiting to be employed, health spending is set to be cut from an already paltry 2.3 percent of gross domestic product in 2022, to just 1.8 percent in 2025. Economists might celebrate some money saved in Ghana but they are not accounting for the extra deaths this might cause.

This isn’t innocent: Ghana is being held to ransom if it wants a $3bn IMF bailout.

Other countries like South Africa are proposing “tough trade-offs”, resulting in reduced public spending on social services. In a country with unemployment close to 40 percent, this is not a wise option.

This does not mean wasteful spending should not be curbed. But social services for the population are no waste and thinking of them as such elicits the dark subtext about austerity – who can, and who can’t, be sacrificed?

Austerity in disguise?

Another aspect of reducing public spending is revising consumption-based taxes. For example, value-added tax (VAT) accounts for about a fourth of all tax revenues in Sub-Saharan Africa. VAT is a consumption tax on goods and services and, as a source of revenue, has become more important globally during the last 20 years.

It is often described as a growth-friendly way to stabilise debt. Yet, the evidence on the ground suggests that VAT is in fact a regressive tax. For example, in South Africa, these tax hikes have increased the costs of consumption for lower-income households, compounding the pressure from the shock of inflation, lower budgets for public services and higher unemployment.

Governments describe austerity as a shared, short-term sacrifice aimed at producing shared long-term gains. This, however, hides the deeply unpleasant reality that neither the sacrifices nor the gains are or will be shared equally.

This is illustrated by how windfall taxes, or taxes on wealth, are terms muted from these conversations about making “collective efforts”.

The austerity entry fee

Our argument isn’t new. Unfortunately, those who confuse economic advice with dogma tend not to hear it.

Austerity is another form of structural violence and oppression. It is as much about structural reform (budgets, labour markets, money supply and privatisation) as it is an ideology that has been used in the past by authoritarian regimes.

In Africa, macroeconomic management has no doubt been turbulent but has also closely followed the dogma of austerity. This pursuit of austerity has entrenched inequality, unemployment and poverty among the majority.

Austerity as a government policy, in practice, is an entry fee to international financial clubs, but this entry only serves elites and their finances (thus the deafening silence of the absence of wealth taxes).

Africa can build its own path and future and can respond to the challenges it faces. For that, it must be able to think and act by and for itself.

The article was first published by Al Jazeera. 

Thokozile Madonko is a research manager at the Southern Centre for Inequality Studies and Fabio Andrés Díaz Pabón is a research fellow at the African Centre of Excellence for Inequality Research (ACEIR), University of Cape Town.