By Kumar David –
Hope springs eternal in the human breast; otherwise everyone has to throw in the towel and give up. However, we must have realism to deal with reality, by which I mean that we must look global reality in the eye and take its measure, or else we will be planning in the void and writing on water. Simply put, what transpires in the global economy will be the most important factor influencing what becomes of Sri Lanka and millions around the world. Covid-19 will go, maybe within a year (there are a few breakthroughs in perfecting a vaccine) but instability in the global order will not. World output and employment are in deep decline hence both supply and demand are diving simultaneously. Supply chains have been disrupted, nay fragmented. Led by none other than mighty America the world is not on the edge but right inside a debt abyss. In a word, the universe of finance capital is declining and falling. I could back these statements with reams of statistics, copious references and colourful charts but I am charged with writing synoptic essays in about 1500 words, not proving chapter and verse.
Let me now state the hypothesis I advance today. Most who write on how to get Lanka out of an economic chasm do not place it adequately within its inescapable global context. Reference to the deep global decline is cursory. “When the tourists come back”; “Let’s set up a sovereign equity fund” – for virus-stricken visitors and global capital-markets neck deep in debt, respectively! Of course commentators know that the global economy is in bad shape, but take the briefest measure of the depth of its impact on the well laid plans of mice and men in mother Lanka.
A lot of stuff local economists and columnists put out is good. The weekly columns offered by Nimal Sandaratne, Sirimal Abeyratne, W.A. Wijewardena and writers in the Financial Times (SL) are fine; no naysaying that. Don Manu is enjoyable and though not an economist often overlaps the dismal science. Jayanath Colombage in the Daily Mirror 24 March had a well written and content-wise good quality piece. Then there were the two big inputs, comprehensive submissions made to Basil’s Task Force by Pathfinder and the Chamber of Commerce. Disagreeable sod that I am, I would like to make critical comments about every one of these pieces, but life is of limited duration so I give that a pass to focus on my objective which is to grumble that nobody is locating the discourse adequately within the worrisome global scenario.
As it is impossible to deal with all I will pick on the Chamber of Commerce’ multisectoral post CV-19 revival proposals. This is not a critique of the proposals as a whole which though written from the standpoint of the private sector is good in parts. What I question is if the underlying global perspectives are adequate; for example, in the sections on Capital Markets, Apparel, Tourism, Trade & Manufacturing and International Logistics. One comment on tourism is enough to put my concerns in perspective. Major airlines have started selling off portions of their fleet and have cancelled large orders for new aircraft. That’s their judgement of the global travel scene in the next period!
The Chamber is truly whistling in the dark on capital markets. It enjoys visions of a Sovereign Equity Fund (Beggar’s Treasure Chest) where deposits are made by global private investors to be doled out to flagging local companies. Dream on! Sovereign funds like Singapore’s Tamasek are overseas investment arms for the city state’s huge reserves. The opposite of the Chamber’s vision of begging at a time when global private funds will not go anywhere except at high interest rates; 10-year SL government bonds are trading at 9 to 10% yield! On what initial research are the Chamber’s expectations grounded?
Regarding Apparel the Chamber’s concern is subsidies to meet wage bills. Its external perspectives are to find regional supply chains instead of China dependence, cosying up to SAARC and seeking duty free export markets. The only realistic proposal is that, at least at this late stage, an attempt should be made to mend the long-neglected relationship with SAARC. Apparel exports are facing a hard time if there is a prolonged recession – see (vi) below about “reshoring” in the US. The impact of reshoring in the West on employment in Lanka will be devastating. Sri Lanka’s improving manufacturing base faces the same threat. Regional agreements going beyond trade but incorporating manufacturing and trade – Free Trade Zones will have to be integrated – are one way to deal with a recessionary environment in the advanced economies. The suggestions for improving the capability of Colombo Port, Hambantota Industrial Zone and the Digital Economy are useful
My intention is not to find fault with the Chamber’s Proposals, though it is the only one I have had space to examine here. My intention is to suggest that with these proposals as with all the reports and documents that I have had the opportunity to examine in respect of reviving the nation’s economy after the hard knock of recent months, it would have been beneficial had the Chamber examined global trends and positioned its proposals in this context.
Next, I need to concisely elaborate my expectations for the world economy as it heads into a tough decade. Instead of the usual declining GDP and falling employment, burgeoning global debt, disruption of investment, trade and supply chains and potential trade wars, for a change I offer you a different approach. Today money-supply will be my statistic – obviously in America. MZM (hereafter just M) the broadest money-supply measure had increased to $ 20 trillion by April 2020 in the US. The velocity of money (V) however declined substantially. What the two taken together mean is that while the Fed is pumping oceans of cash into capital markets (a policy called QE or MMT), investors are shirking and economic activity is slowing down. In theory M x V = prices (p) x output (O); but because of the contrarian movements of M and V their product has not changed much. Hence, we have the strange result that though big money is pumped in, neither output(O) nor inflation (proxy for p) are moving significantly. Economic stagnation already! Inflation not yet! This is the rut the US and the capitalist world is unable to climb out of.
Nouriel Roubini, better known as Doctor Gloom acidly remarked on 28 April “CV-19 has arrived at a bad moment for the global economy. The world has been drifting to financial, political, socioeconomic, and environmental risks, all of which are now growing acute”; (Project Syndicate). Structural imbalances in the global economy were exacerbated by policy mistakes creating downside risks that made another crisis inevitable. Now that it has arrived risks have become acute. Recession may be followed by a lack-lustre recovery in 2021, but a depression will follow later in the decade. Roubini enumerates several risks but some of his theorising is incorrect. I have rectified them, and a reliable enumeration is as follows.
(i) Deficits, debts and defaults. Response to the CV-19 entails a massive increase in fiscal deficits at a time when public debt levels are already high. Loss of income for households and firms means private-sector debt levels will rise leading to defaults and bankruptcies.
(ii) The demographic time bomb (aging population) in the West means that public spending on health care and welfare must increase.
(iii) Large scale unemployment leads to personal insolvency. A slack in production will increase the risk of corporate bankruptcy. The US labour force is 165 million, 40 million unemployed means 20% of the labour force is now unemployed. These numbers are huge and make economists shudder. The worrying dimension for us is (iv), (v) and (vi).
(iv)) When millions lose their jobs income and wealth gaps widen further. Advanced economies will re-shore production from low-cost regions; tough luck China, Vietnam, Bangladesh and Sri Lanka.
(v) De-globalisation and renewed protectionism will undermine trade and undercut the potential benefits of comparative advantage. Not good for countries with copious supplies of cheap labour.
(vi) Automation will hasten, the less educated will suffer fanning flames of populism and nationalism, a backlash against democracy will reinforce this. Economic insecurity will drive civil disorder.
(vii) Monetary policies have become skewed. Governments, desperate to avoid public wrath, corporate bankruptcy and deal with fiscal deficits have resorted to the printing press in style. At some point this will result in inflation and in the context of what has been said the result is stagflation.
In respect of (vii) here is a debate about whether capitalism is heading for inflation or deflation. This is odd. Some economists expect that disruption of employment and of society in general, leading to decline in demand, will end in deflation. Supply side shocks (fall in production) and mass unemployment they argue will drive a fall in commodity and oil prices, causing deflation and cutting the ground under central bank efforts to deflate debts by inflation. Paradoxically, the new normal, money supply expansion, should have led to inflation.
Other economists however take the conventional view that excess money, fiscal deficits and supply-side shortages due to de-globalisation will make inflation and in its wake stagflation inevitable. The reason this did not happen post 2009 was for special reasons. Goods price inflation was kept in check by China which deployed hundreds of millions from rural areas into modern industry. Goods produced by cheap labour poured into Western markets. Furthermore, though Fed indulged in QE it did so in the form of expanding bank reserves which do not enter the real economy like cash but stay in the interbank market. By remaining within the financial, and not the production and supply economy, QE post 2009 led to asset price, not goods price inflation. Stock, commercial property and other asset prices inflated which suited financial vested interests.
It is reasonable to keep an open mind about how the global economic pendulum will swing; inflation or deflation, inflationary or deflationary stagflation. We are in completely uncharted territory this time and the responses of central banks is unpredictable and utterly unconventional since bank overlords themselves are muddled and jinxed. [For a recent primer on conventional inflation targeting read W.A. Wijewardena.
My grumble in this piece is that not enough thought is being given to the impact of impending global economic disorder in the next year and the next decade on the design of domestic economic strategies. In truth I am not aware of any discussion forums or the usual circuit of seminars where the future of the global economy has been targeted. Better, broader understanding in the public domain will be very beneficial.