Applicability to the Polak Model as a Factor Affecting the Outcome of Austerity Policies

Abstract

Many of the IMF’s loans to struggling countries require the borrowing country to implement austerity. A set of policies meant to restore a country’s economy and ensure that the IMF’s loans are effective. Though the policies work in some countries, in others they lead to economic decline. As the IMF continues to place austerity it is important to understand factors that could be affecting the outcome of these policies to prevent economic disaster. We theorize that the Polak Model, an economic model underlying the justification behind austerity, doesn’t apply to all countries, leading to poor economic policy due to an incorrect understanding of a country’s economy. To test if applicability to the relations outlined by the Polak Model is a key variable leading to the mixed outcomes of austerity we examined countries where austerity was detrimental (Greece and Argentina) and countries that were better off after austerity (Estonia and Croatia) by reviewing existing research on the countries’ economies’ application to the Polak Model and outcomes of austerity measures in those countries. We hypothesize that if austerity measures were detrimental to a country’s economy, then it would fail to fit the Polak model while a country that improved following austerity would fit the model. We find that our hypothesis is supported, indicating that the IMF must evaluate to which countries the Polak Model applies before pushing austerity instead of assuming that the model holds true for all countries and implementing ineffective policy based on flawed economic reasoning.