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What countries can cope with austerity, and why?

IMF has suggested in a report that austerity programs may be counter-productive and slow down economic growth. Financial Times on the other hand showed a different perspective as they pointed out that IMF had left some countries, proving the opposite, out of their report.

Countries such Estonia, Latvia and Lithuania have all managed cuts in public spending and, in some cases, tax raising without a critical drop in growth. How is that possible when South European countries are not able to do this without a significant hit on growth?

Does it come down to work ethic and determination of certain cultural groups? Has it to do with other economic figures and structures?

  • Oct 20 2012: "What countries can cope with austerity, and why?"

    If by "cope" you mean not getting caught in an eternal downwards spiral, then the answer is: most countries, as long as they do it DILIGENTLY.

    It's actually a simple mathematical proof. The fact that the country has a deficit problem means that every unit of currency spend by the government leads (ON AVERAGE) to less economic output than is required to give the government back its entire investment, there are also private investments in the country that contribute to government revenue. This means that cutting government expenditure leads to a downward, but convergent spiral: if you had a deficit of 10% of GDP you may have to cut expenditure by 15% of GDP and incur a GDP loss of 20%, but you will get a balanced budget eventually. The 80% of GDP you are left with reflects your country's true level of productivity.

    Now of course there is a lot of variation within government expenditures, as I mentioned already the proof is only about averages: if you buy less warships from foreign countries you won't see a single penny of GDP loss in your own country, if you cut higher education you might see (in the long term) a revenue loss that's bigger than the cut.
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    Oct 19 2012: The hold of materialism is not as firm in some countries as it is in others. The higher they are the greater the fall.
  • Oct 19 2012: ny variables