Be outraged – there are alternatives

Résumé / AbstractThis article draws on a longer booklet published in May 2012 by OXFAM[1] and written by ourselves and 10 other development economists promoting alternatives to austerity, especially in Europe but also beyond as well as an article in the Financial Times by Stephany Griffith-Jones and Matthias Kollatz-Ahnen on Stimulating growth in Europe. It argues for replacing austerity with broader Keynesian policies, particularly for growth but also for a structure of growth which promotes employment, gender equality, care, reductions of inequality and which makes finance the servant and not the master of the real economy.  It argues that crisis needs to be made an opportunity for tackling underlying systemic economic problems. It also argues for international action. An original feature of the booklet is that the policies it recommends are illustrated from actions already underway in emerging or other developing countries, arguing that developed countries now need to learn from the successful policies and actions in these countries.



Europe increasingly has been caught in a trap whereby the screws of austerity were tightened while reductions of debt and deficits proceed ever more slowly. Pushed to such extremes, austerity is bad economics, bad arithmetic, and ignores the lessons of history. The narrow range of current austerity policies that were being pursued in Europe is bringing many people around the world to their knees, not only in Europe but far beyond. Austerity and cutbacks are reducing growth and worsening poverty. But there are alternatives – and this paper sets out some of the most important.


Over 10 % of adults – one in 10 – are unemployed in Europe, up by

50%, since 2008. More than one in five – 22% – of young people in Europe under 25 are unemployed –and much more in Spain and Greece.


Stimulus can increase employment and economic growth, as shown by the first phase of stimulus in 2009 when recovery did have positive effects. These should not be ignored. Yet the stimulus was not maintained – the first failure. It was not backed up with measures to overhaul bank regulation and control – a second failure. And only limited actions were taken to tackle the dangerous trends of financial globalization, growing inequality and ‘precarisation’ in the labour market – a third failure. The fact that women and care were hardly considered, if at all, constituted a fourth failure.


Europe now needs to learn from other countries. In response to the 1997-2000  East Asian crisis, countries such as Korea, Indonesia, Thailand and China vowed “never again!” They strengthened regional institutions and built up reserves. Their response to the current crisis has been to maintain growth and invest heavily in education and in programs for unemployed youth, in contrast to Europe which is often cutting back on opportunities for youth.




Readers of Challenge need little reminding of the depths and costs of the Great Depression. In the 1930s, UK unemployment soared to 22%, in the US to even more. In the US, President Roosevelt inaugurated the New Deal – with controls on banks and a vast array of actions to stimulate investment, the economy and employment – with “fireside” chats on the radio to explain what he was doing and mobilize public support.


In the UK, John Maynard Keynes wrote the General Theory to challenge orthodox economic thinking and set out a whole new approach in economic analysis and practical policy. But it was too late. By 1933, Hitler had gained power and was ahead in bringing full employment to Nazi Germany in a different way – by arms production, rapid expansion of the military and then by conquest. This, as everyone knows, was followed by the Second World War, with five years of killing, destruction and total deaths of some 60 to 80 million.


The war ended with  a  clear  determination   in the West to pursue  policies and create international institutions  to make impossible any repetition of this deadly 1930s mixture of high unemployment, national aggression and beggar-my-neighbour economic and financial policies. The United Nations was set up in 1945 to support policies that led to full employment, labour rights and rising living standards on a world scale, with recognition and support for universal human rights, backed up by strong international action to ensure economic growth and stability and peaceful resolution of conflict throughout the world. In spite of the Cold War, much of this economic agenda was achieved.


Until the 1970s, the developed countries enjoyed 25years of mostly low levels of unemployment, greater economic stability and higher levels of economic growth than ever before. Living standards rose, structures of peace in Europe were created, with a variety of policies and institutions for welfare and social protection, including sustained investments in universally available social services such as education and health. The UK established the Welfare State and other European countries various equivalents. Some 50 developing countries gained independence, joined the UN, mostly realizing economic growth and human advance never achieved before. It was sometimes called a golden age.


All this was far from perfect – over-centred on the developed countries and heavily biased in favour of the US and the dominant  world economic powers with little attention to gender equality and women’s financial autonomy, largely based on a male breadwinner model. But it showed what appropriate national action supported by international institutions and international policies  could   make   possible  in   terms   of   high employment, rising living standards and social protection for vulnerable groups of the population. Almost all parts of the world made advances, including impressive improvements in health and education. Inequality between households was kept within limits by tax policies and minimum wages, with top salaries fixed or kept by convention at much lower levels than at present.




Many of these positive aspects of policy were weakened or abandoned in the developed countries in the 1970s and the 1980s. They were also abandoned in  many developing countries, as periods of reasonable growth in Latin America and Africa in the 1960s and 1970s gave way to rapidly rising oil prices in the 1970s, and severe debt problems. Developing countries seeking finance from the IMF and  the  World  Bank had  to adopt  the new neo-liberal policies as a condition  of international support. Some of these economic actions were necessary, both to adapt to the changing structures of the world and to offset growing weaknesses of previous policies. But others were ideologically driven and undermined the previous growth model. The programmes of structural adjustment and austerity in the 1980s and 1990s had a high toll in terms of living standards and rising poverty levels. They placed particularly heavy burdens on low-income women, especially through increasing amounts  of unpaid care work.


The costs were heavy. By the mid-1990s no fewer than 57 developing countries had become poorer in per capita income than 15 years earlier – and in some cases than 25 years earlier. Even in the more successful cases of structural adjustment, letting market forces rip went too far. In almost all the countries where market forces were allowed free reign, poverty and unemployment grew, labour rights deteriorated, inequality soared and financial and economic instability increased.


Free market and financial forces have remained dominant in much of the world, even after the crises of 1998-2000 and worst of all, during the present crisis which began in 2007. However, this has not been true to the same extent everywhere. Asian countries built their dramatic economic success over recent decades on a different philosophy, with stronger public-private management and greater control of the market. This was reinforced by the experience of the 1998-2000 financial crisis when Asian GNP declined sharply. As part of their recovery, most of these countries adopted a range of bold new economic policies and created or strengthened regional policies and institutions. Asian countries were determined never again to have to go cap-in-hand to the IMF or the World Bank – and to avoid this need, they created a regional financing facility, built up significant foreign exchange reserves, introduced or strengthened capital controls, and prepared integrated regional economic plans with regular reviews and monitoring. Despite fast economic growth, however, inequality between households widened, gender inequality in labour markets and lower birth-rates of girls persisted. Nevertheless social protection is being strengthened in Asia and the idea of guaranteed economic and social rights has been gaining ground.


Latin America, another region much affected by financial  crises,  has  also  built  regional  integration to expand internal markets and invested to improve living standards. Such reactions made possible national policies for faster growth and limited contagion from the crisis of 2008-9.


Austerity in European countries has already begun to threaten economic growth and improved social protection in the rest of the world, as markets stagnate. Growth is slowing in China and India and this in turn will depress commodity prices in Africa. The prospects for people everywhere look grim, except for the richest.






It is not too late – even though unemployment, and especially youth  unemployment,  are at record  levels in Europe  and the crisis is continuing and is currently deepening.  We can learn from earlier experience in the US and UK in the 1930s. We can learn from more recent experience in developing countries, especially from China, India and other Asian countries with their “never again” rejection of orthodox austerity and their adoption of national Keynesian policies and controls, along with a variety of regional actions and support mechanisms. We can learn also from Latin America and Africa and from Canada and some countries in Europe.


The experiences of these countries clearly demonstrate that there are alternatives. But the alternatives can only be achieved by new perspectives, new policies and mutually supportive actions in a number of key areas, national and international:

Returning full employment and decent work as a major national and international goal and priority.

Giving much greater attention to gender equality and to the mobilisation of women as a force for growth and reform.

Investing in high quality care services Health, nutrition and basic education of all children and other vulnerable groups for future productivity and fairness.

Reducing extremes of inequality as a step towards a fairer and more dynamic society, with less poverty and more social solidarity.

Controlling the banks and financial sector to make them servants of the real economy not masters.

Strengthening international action to support recovery – as well as to tackle the scourges of unemployment, inequality and climate change for sustainable growth over the longer run.

Strengthening   international   institutions   –to   make these institutions more representative of the emerging countries and other developing countries.

Mobilising the necessary public awareness and political support for these alternatives.



Stimulating European Growth


Strategies to overcome the European crisis only focused on collective austerity are not working. A key missing ingredient is the urgent restoration of growth, which European citizens demand and several leaders are increasingly stressing. However, meaningful actions on a sufficient scale have not yet been taken.

It is encouraging that Francois Hollande, the new French President, has suggested a new programme for European growth, which in principle has been accepted by European leaders at the summit in late June, 2012.The programme adopted by the leaders would represent increase in investment up to 1% of European Union GDP. It is key that it is implemented quickly and on sufficient scale, so as to have sufficient impact soon on growth and employment; there are concerns that implementation could be too slow, given for example that European Investment Bank lending has actually fallen this year, instead of increasing as the leaders have suggested.

We outline below the key elements of this programme, based on the work done previously by one of the authors of this essay (Stephany Griffith-Jones) with Matthias Kollacz-Ahnen, and Lars Andersen. Though the measures outlined below, on a scale somewhat larger than the package adopted by the Eurozone leaders, are important- as they could generate over 1 million jobs-, they should be accompanied by other growth oriented measures. For example, countries having fiscal space, such as Germany, could expand government spending, especially if they do it via a balanced budget; the UK also has room for a more gradual reduction in government spending than it is currently doing. Furthermore, wages in Germany could be increased, which would be beneficial both for German workers and for the rest of Europe.

One specific way of  significantly stimulating European growth, which has  just now been  in principle adopted is to greatly expand lending by the European Investment Bank (EIB) within Europe, so that it  finances increased investment, especially but not only in the countries  suffering  most from the crisis. By boosting investment to help restructure those economies with viable projects and make them more competitive, this could have positive medium-term supply effects; in the short-term it would also contribute to expanding aggregate demand in all European countries, lifting growth and employment.

One crucial advantage of this proposal is that with fairly limited public resources, a very large impact on investment, growth and employment can be achieved with the benefits of leverage. A second major advantage is that, as an existing successful European institution – the EIB – can be used, the measures can be quickly implemented.

There are two promising paths to use limited public resources to achieve important multiplier effects. The first is to achieve leverage with the EU budget. A very small amount (as proportion of the EU budget), equal to €5bn a year could be allocated as a risk buffer. This would allow the EIB to lend an additional €10bn annually both for financing infrastructure projects (project bonds) as well as projects to promote innovation. The project bonds would imply that 25% of the project would be advanced by a private investor, the EIB would finance the next 25%; with a mezzanine tranche; the remainder would be invested by pension funds and insurance companies; regarding the mezzanine tranche, the EU contribution would finance half the risk assumed by the EIB. Thus, €5 bn from the EU budget- leading to financing by the EIB of €10bn- would lead to project finance of €40bn annually.

The second path is to increase EIB capital by EU member states. Only a very small proportion of capital, (5%) has to be paid-in. Therefore if this paid-in capital is doubled, it would require only a total of €11.6bn from EU member states. Rating agencies accept a leverage of eight for the EIB to maintain its AAA status. Therefore, an increase of paid-in equity of around €12bn would allow the EIB to expand its lending by €95bn, which is an impressive multiplier. If this additional EIB lending was spread over the next four years, an additional €10bn could be lent in 2012, €35bn additional lending could be done in 2013, and €35bn could be lent annually in both 2014 and 2015. Because typically the EIB co-finances 50% of projects, with private sector or others contributing the other 50%, this would result in additional investment of €190bn.

To this programme of significantly enhanced EIB lending could be added some additional resources from the EU budget, to an important extent drawing till end 2013 from existing unused European Structural Funds. Further funds could be easily allocated to growth from the new EU budget from 2014 onwards of €25bn annually.

In total the additional EIB and EU resources allocated to growth could reach €35bn in 2012 and go to €60bn annually in the 2013-2015. The resources for 2013-2015 would correspond to around 0.5% of EU annual GDP. As they would be allocated to finance increased investment and working capital, the latter for small and medium enterprises, this would have a major impact on EU growth and employment. It is interesting that these resources, with a total dimension of almost 2% of EU GDP would be similar, though somewhat smaller, to those of the Marshall Plan. Hopefully they would also contribute to a significant renewal of growth dynamic in Europe.

It is both feasible and urgent to set up a reliable investment program of this size, to foster a growth impulse that carries Europe forward.

We have estimated the impact that such a programme could have on EU growth and employment in 2013 and 2014, with the help of the international macroeconomic model HEIMDAL. We use conservative assumptions for the impact on investment, of half of the additional EIB and EU resources in 2013 and 2/3 in 2014. We also assume the most affected countries (such as Greece, Portugal, Spain, and Italy) would receive the greater part of the resources.

The modelling shows that such a programme would result in a minimum additional increase of average EU GDP of almost 0.6% in two years. Furthermore, more than half a million jobs would be already created in 2013, with accumulated additional EU job increases of over 1.2m by 2014. The southern European economies would have larger percentage increases than the average, though all EU countries would benefit, due to the important cumulative effects not just of increased investment at home, but also of increased European trade.

This figure does not include effects of increased EIB lending, via commercial banks to provide much needed working capital to credit constrained small and medium enterprises, which will stabilise or increase employment and output significantly further. Last but not least, growing confidence will result in increased private investments which are not included here, too. The impact on jobs will clearly be well above 1.2m.

It is urgent to act now and lay the foundations for renewed European growth and job creation. Our proposals offer a concrete, feasible and cost-effective way of doing exactly that. It is encouraging that EU leaders in their June summit to took such similar measures to the ones just proposed. It is key that they be implemented on a sufficient scale and with the necessary speed that the difficult situation requires.




More than 24 million people are unemployed  in Europe today, over 17 million in the Eurozone and nearly 3 million in the United Kingdom, figures which at the beginning of 2012 still seem to be on the rise. The percentages of the workforce unemployed in February 2012 was as a high as 23% in Spain, 19% in Greece, with an average of 10.8% in the Eurozone and just over 10% among the 27 countries of Europe as a whole. Unemployment was lowest in Austria and the Netherlands, both under 5%.

Unemployment  in  Europe  is 50% above what it was at the beginning of 2008, when it was 16 million, rising sharply after this as the economic crisis deepened. Perhaps the most serious figure today is the youth unemployment rate – about 22% of people under 25, over one in five, even not counting those in full time education.1

Worldwide, the need for job creation is also great, though the rates of unemployment are often lower. The latest ILO report2   suggests that global unemployment has exceeded 200 million and is still rising, with 50 million jobs wiped out since  the start of the crisis in 2008. Unemployment amounts to 6% of the total global workforce, with many more on low incomes working in the informal sector or in rural areas. The number of unemployed young people, aged 15-24 years, has reached 75 million, 4 million more than in 2007.


From 1950-73, average unemployment was well under 3% in the UK and across Europe. But as employment policies received less priority, unemployment rose. National and international policy shifted ever further towards free market policies – and unemployment in Europe rose to an average of 6% from 1974-83.3 Over the 1980s, globalization and the shifts to financial dominance in the process of globalization led to further increases in unemployment to an average of 9.2% over 1984-93.



The first phase  of  stimulus  in and  recovery in 2009-10  did have positive effects, which should not be ignored or underplayed. Governments took action, nationally and internationally, much better than during the crisis of the 1930s. The stimulus added to demand a total of about 1.7% of world GDP4. Banks were massively bailed out, costing Europe and the US an amount equal to one-sixth of world GDP. More positively, national, regional and multilateral development banks sharply increased their loans.


However this stimulus was not maintained –a first failure. It was not backed up with measures to overhaul bank  regulation  and  control  –a second failure. And only limited actions were taken to tackle the dangerous accompanying trends of financial globalization, growing inequality and ‘precarisation’ in the labour market – a third failure. The fact that women and care were hardly considered, if at all, was yet another failure.


Bold and more comprehensive measures should have been taken – but were not, at least not in Europe and the US. Most governments shied away from special measures to attenuate the consequences of the crisis on labour. Coordinated by the international organizations in the 2008 crisis, governments acted as a banker of last resort – but not as an employer of last resort for protecting  workers  and  stimulating  employment.  In this respect, the treatment of labour was totally different from the treatment  of finance and capital. The banks gained but the people suffered. More serious, the lack of broader action meant that the crisis still continues.


The severe  and  continuing   problems  with  the public debt in the UK and with Euro-debt in the Euro- region underscore this situation. Instead of supporting measures directed towards higher growth and more employment on a trajectory which would reduce public debt-GDP ratios, governments are slashing public expenditure. This in turn is slowing growth and making it ever more difficult, if not nearly impossible, to reduce public debt-GDP ratios. Europe is increasingly caught in a “No-growth, Low-growth” trap whereby the screws of austerity are tightened while reductions of debt and deficits proceed ever more slowly, if at all. This is bad economics, bad arithmetic and blatantly ignores the lessons of history.



Employment: priorities for action

1. Employment creation, especially for youth, should be made a top priority of macro-economic policy for recovery, not left as a by-product of reviving economic growth; a key solution  to the current  jobs crisis are expansionary fiscal policies, not austerity;


2. A target for employment creation should be set, linked to a target for reducing the number  of unemployed and the rate of unemployment. For the medium run, a target of 5% unemployment as a maximum would seem reasonable – the level in Europe of five years ago. In the US, unemployment is still high at 7.8%, though down from 9.5% a year ago. There should be a separate target for youth unemployment


3. Action towards employment creation can draw inspiration from recent actions in developing countries.


a) the adoption of programmes and incentives to increase employment both in the public and in the private sectors. India, for example, established in 2005 The National Rural Employment Guarantee Act –which entitles each rural household to 100 days of unskilled work  a year. At minimum wages, this has provided some billion days of work, half for women, mostly on public works. A similar scheme with

World Bank support has provided work and incomes for two and a half million people in Nepal,

b) boosting production in employment- intensive industries and services, both private and public, especially in small enterprises and in health and care. Austerity cuts to health and education need to be weighed against the loss of jobs in the sectors and the benefits of continuing teachers and health workers in employment as opposed to the costs of paying them unemployment benefit.

c) the adoption of special short to medium-run programmes for the expansion of employment. The net cost of these should be calculated, taking account of the savings that would be made in unemployment and other benefits. In Costa Rica, stimulus programmes focused on youth, with cash grants paid to mothers on condition that their children stayed in secondary school. In Thailand, training programmes for youth were established as part of stimulus, with a focus on entrepreneurship and the skills required for setting up one’s own business.


4. Job creation needs to be a priority but it must involve the creation of decent jobs that allow people to earn a living with dignity and fulfilment of their rights at work as well as their right to work and to combine earning a living with responsibilities for care of children, sick people, and frail elderly people.







At the beginning of the 21st century, levels of poverty and inequality are staggering. The richest 20% in the world enjoys more than 70% of global income, while the poorest 20% only obtains two paltry percentage points.


The richest 1% (61 million individuals) had the same amount of  income  as  the  poorest  3.5 billion (56% of the world’s  population).  At the bottom end, two in five of the world’s population, live below the international poverty line of US$2 a day; of those, one billion people live in extreme poverty, surviving on less than $1.25 a day.6


Although many of  the  super-rich  hardly  notice the price increases, the poor truly suffer. Local food prices are 80% higher, on average, than before 2007. The impacts of high food prices on poor families have been devastating, increasing hunger and malnutrition which may have irreversible impacts on children. Further, austerity measures have been reducing public expenditures for social goods and  services in  most countries, at a time they are most needed.



Top incomes in the UK have continued to soar, in spite of the financial crisis. The typical FTSE boss earned 75 times more than the typical employee in 2006 – and one year’s  pay rise was £400,000 compared with the employee’s  increase of about  £700. These gaps have continued to widen – and in 2011 the incomes of civil servants have been held to 1% even while inflation increases by 4 or 5 times as much7.


A recent OECD study showed income inequality among  working  age-people in  UK since 1970s has risen faster than in any other wealthy country. By 2008, incomes of the top 10% were about 12 times higher than the bottom 10% in UK, up from 8 times in 1985. In other developed countries the gap is about 9 to 1.


The share of the UK’s super-rich – the top 0.1% – in GNP in 2005 was 14.3%, double their 7.1 share in 1970. About half of the top 1% of income earners is found in the financial sector. At the same time as top incomes have soared, the state has done less and less to narrow the gaps. From the mid 1970s to the 1980s, the tax-benefit system offset more than 50% of the rise in income inequality. Today it is only 20%.


The extreme inequality in the distribution of the world’s income is leading many in Europe to question the current development model (development for whom?) and its accrual of  benefits mostly to the wealthiest. Social discontent is becoming more widespread in Europe and all over the world, and governments are losing legitimacy. The ILO has created a “social unrest  index”, highlighting global levels of discontent  related to unemployment, worsening of living standards, lack of confidence on governments  and  perception  that  the burden  of the crisis is not  being shared  fairly. The ILO’s World of Work Report 20118 warns of a significant aggravation of social unrest in over 45 of the 118 countries surveyed.


There are strong arguments for greater equity. Social justice is the first one. Economic and political arguments are the second. Inequality is economically dysfunctional. When consumption  is highly concentrated  in the top wealthiest income  groups,  an  economy  is inefficient, increasingly unstable and, as the IMF has shown, slow to recover from crisis.


This was the case in the roaring 1920s which led to the great crash and ended in financial crisis, and was corrected only by the New Deal and later post-war policies. Post-war policies raised people’s incomes and domestic demand, enhanced human  capital, productive employment and increased economic growth while keeping income inequality  and  top  incomes  in  check.  Governments then became more involved in guarantees for universal education, medical care, social and housing assistance, minimum retirement  levels and the enforcement of labour and antidiscrimination laws. It worked again. The populations of Europe, Japan, North America, Australia and New Zealand experienced a growing prosperity unseen in history.


The lesson is that extremes of inequalities can be reduced if governments are committed – and they can be reduced fast. Today, we need a similar push. A “New Deal” is needed, both  for developed and  developing countries, in which the benefits of growth are shared by all, instead of the few. We need a fair and just social contract for the 21st century. A recovery “with a human face” would be inclusive, expanding employment opportunities, sustaining health and education services and providing social protection support for those below the poverty line; a recovery that prioritizes the most disadvantaged children, women and families as matter of social and economic justice.

the gap is about 9


Reducing inequalities: priorities for action

1.   Diminishing   extremes   of   inequality   needs again to be made a focus of policy, in countries and in international institutions and agencies12.

2. Macroeconomic policies need to put more focus on   employment-generating   and   pro-poor   growth, in rich countries as well as in poorer ones. Economic growth needs to be assessed not  only by the rate of economic growth, important  as that is, but also by its composition and impact on employment and income distribution.

3. Tax systems should be made progressive and sufficient  revenue  generated  to  support  actions  in favour of social protection for the poorest groups. Public expenditure should also be reviewed to reduce expenditures on the items often hidden or neglected – perverse subsidies for large-scale agriculture, fossil fuel development and military spending, for example.

4. Minimum wages should be introduced  and maintained at decent levels.

5.   Expenditure   for   social   services  needs   to be sustained, when necessary with new schemes introduced to extend health and education for all.

6. Cash transfers for vulnerable groups may be needed with housing support and human rights enforced. This will mean focusing national development strategies and  programmes  on  the  worst  and  most pervasive forms of discrimination that confront the achievement of justice in each society – whether this involves addressing gender gaps and the disadvantage or exploitation of women and girls; the neglect of people with disabilities; or the exclusion of minority ethnic groups and indigenous peoples.

7. Inequality needs to be tracked as a measure of economic and political progress.

8. These priorities need to be introduced into reforms of the IMF, the World Bank, the WTO as part of operating in the interests of the majority of people.




The financial sector, both national and international, has two main functions. Firstly it should serve the needs of the real economy. Secondly, it should help manage and mitigate risk.

In the last two decades it has done neither. It has not provided sufficient sustainable finance for key sectors like that of small and medium enterprises (SMEs) or infrastructure, especially green investments; it has generally failed to finance housing, adequately and sustainably, especially for poorer  people. It  also has created risk; this has led to numerous and costly crises, starting in the developing world with the debt crises in Latin America that led to the lost decade of that region’s development, but then continuing in East Asia in 1997/8, as well as in numerous other countries; since 2007, there has been a major crisis in the developed North Atlantic region, with large effects on the rest of the world in some periods.

This is not inevitable. When  the financial sector has been well regulated and controlled, and when well- run  public banks have played an important  role, the financial sector has played a positive role to support and  not  undermine  the real economy. Examples are post WWII USA and  Europe, and  many developing

countries (like Brazil and India) then and today. The positive experience is clear for public institutions in Europe, such as the European Investment Bank (EIB) at a regional level, and German KfW (Kreditanstalt für Wiederaufbau) at a national level, and in developing countries,  such  as the  BNDES (Banco Nacional  de Desenvolvimento Econômico e Social) in Brazil.

Countries need therefore a far smaller, simpler, more transparent and accountable financial sector, focused  on  lending  to  the  real  economy,  not  on making exorbitant profits and salaries for the financial sector  and  its  outrageously  over-paid  employees. If this  transformation  does  not  happen,  it  will make it increasingly difficult, if not  impossible, to finance sustained  and  equitable  growth.  A  weakened  and crisis-prone real economy will serve the interests of the financial sector, not the reverse as it should!

Good regulation must be complemented by effective taxation  of the  financial sector,  which  has been under-taxed (indeed the financial sector does not pay Value Added Tax). One valuable proposal, which builds on the ideas of Keynes and Tobin, is receiving increasing support,  especially in Europe. This would imply all financial transactions would be subject to a very small tax; the current European Commission and Parliament proposal is for a 0.01% tax on all securities, as well as a smaller tax on derivatives. Such a tax would imply that the financial sector could make a fairer contribution  to the recovery from the crisis, which it contributed so much to cause. It would give significant revenues to governments for fiscal consolidation and/or for investing in more sustainable growth. The tax would discourage  more  speculative activities, reducing  the risk of future crises, as well as raise revenue in a more progressive way than other taxes.


Transforming the financial sector: priorities for action

1. A top priority is for the financial sector to be regulated  effectively. This requires  comprehensive equivalent regulation of the entire financial sector, including  the  shadow  unregulated  banking  sector, which in the US and Europe is larger than the banking sector.

2. Regulation of capital adequacy, leverage and liquidity must be rigorous and counter-cyclical (the latter to compensate for the natural boom-bust pattern of financial markets and banks, so damaging to the real economy).

3. Speculative activity should be discouraged where the social risks created outweigh any possible benefits to the real economy. Banking activities should be regulated so as to separate utility banking from more risky activity, as was done in the US in the 1930s with the Glass-Steagall Act.

4. Public policy should be directed at the reform of bankers’ remuneration systems, to link them to long term performance rather than short-term results.

5. The unhealthy power and influence that the financial sector has over regulators and politicians should be reduced. Together with the reform of funding for political parties, this would give greater autonomy for politicians to serve their electorates and not the interests of the financial sector.

6. Good regulation must be complemented by effective taxation  of  the  financial sector,  such  as  a financial transaction tax.

7. A significant expansion of efficient public banks, especially to finance investment (including in renewable energy), as well as sectors poorly served by the private financial sector, such as SMEs. Banks nationalised due to the crisis could be turned into public banks. Where public banks do not exist, they need to be created.

8. If the private financial sector continues to resist regulation or evades good regulation, then larger parts of the financial sector should become publicly owned: the financial sector is really a means to the end of fair and sustainable growth, and not an end for its own exclusive benefit and that of a small elite.





Most, if not all, of these priorities for action in employment, gender equality, income inequality, financial   control    and    international    coordination will gain the support of a majority of citizens in the countries that need to make them – much more than sustaining support for austerity. At present, in contrast, the false view that austerity is the right  and  only solution  is dominant amongst political elites in Britain and much of the rest of Europe. This is reinforced by the belief that financial markets will threaten any deviation from this orthodoxy. And those who wish to see a smaller role for the state and a larger one for the private sector are using the crisis as an opportunity to cut back the state.  Support for cutback policies  is  also  encouraged by powerful corporations,  especially in  the  financial sector and among other moneyed interests in the more developed countries who feel that the long-run benefits to them from austerity will outweigh any short run costs.

Neglected in these beliefs and interests is the fact that stronger action from the state is needed to get back to more dynamic national economies as well as for a more  stable and balanced global economy. This is the lesson of the past and as of today in the more successful emerging countries, like Brazil and  Indonesia,  India  and  China.  Stronger global and regional action is thus a major priority from which countries in all parts of the world can gain and which all countries therefore need to make a central part of their own national economic strategies for the short-run and the long-run. It is also needed to tackle climate change and other forms of environmental destruction. This must include support for the most deprived regions and groups in all countries and global support for the least developed countries, if these groups and countries are to have a stake in the outcomes.

Leaders of the world need to regain the ision and  determination to strengthen and rebuild the international system sufficient to tackle the challenges of the 21st century as well as to prevent another global crisis. This will require ways to strengthen the alternative more progressive voices and to improve democratic processes both at national and international levels. In the US and in many developed countries this must include campaign finance reforms.


Leaders and journalists in  the  media  need  to be outspoken. They have a critical role in building understanding and demands for new approaches. So also do professionals and students in schools as well as in universities and many others in NGOs and religious organisations. All need to bring home the basic message: austerity is failing. Alternative approaches are needed. Action is needed now.




1. World Bank. 2012. World Development Report 2012 on Gender Equality and

Development. Washington D.C.: The World Bank.

2. ILO.2012. Global Employment Trends 2012: preventing a deeper job crisis. Geneva: ILO., (accessed 13/11//2012)

3. Maddison, A. 2006. The World Economy, Volume1: A Millennial Perspective, Volume 2: Historical. Paris: OECD.

5. Torres, R. 2010, ’Incomplete Crisis responses: Socio-Economic Costs and Policy

Implications’ in International Labour Review, Vol.149-2, pp. 227-237.

6. Ortiz, I. and M. Cummins. 2011. “Global Inequality: Beyond the Bottom Billion

– A Rapid Review of Income Distribution in 141 Countries.” Social and Economic

Policy Working Paper. New York: UNICEF.

7. Peston, R. 2008. Who runs Britain and who is to blame for the Economic Mess we are in? London: Hodder and Stoughton, p10.

8.  ILO.  2011.  World  of  Work  Report  2011.  Geneva:  International   Labour

Organization, pp.12-17 (accessed 8/3/2012).

9. Fuller details and examples can be found in Cornia, G.A. and B. Martorano. 2011. ‘Democracy, the New Left and Income Distribution in Latin America over the last Decade’ in Valpy Fitzgerald, Judith Heyer and Rosemary Thorp, Overcoming the Persistence of Inequality and Poverty, Basingstoke: Palgrave Macmillan, pp 172-199





[1] Richard Jolly et al, Be outraged –there are alternatives (Oxford, OXFAM) 2012.

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