The title of this article is derived from an article by Edgar Tsimane in the Mmegi of 22nd January 2009. I am, in essence, responding to the issues and statements raised in the article and attributed to the Minister of Finance and Development Planning regarding whether to bailout faltering mines or not.
I have written extensively on the likely impact of the financial melt down on the fledgling mines and the resultant potential loss of production and jobs. I have also written on the current thinking on economic stabilization policies versus the conventional wisdom. With regard to the state of thinking on the economic stabilization policies, it is interesting that the Minister seems to be inclined to adopt the conventional wisdom, i.e. that during times of economic crisis you adopt austerity measures; measures that are intended to save cash by curtailing fiscal spending, adopting measures that seek to increase tax revenue through increases in tax rates and/or broadening of the tax base and expenditure switching policies, such as currency devaluation.
In the words of Olivier Blanchard, the Director of the Research Department and economic counselor at the International Monetary Fund (IMF), the reason why the IMF and other governments in mature economies have chosen to go against the grain with regard to conventional economic policy is because we are dealing with unusual circumstances epitomised by sharp and deep declines in aggregate demand in mature economies underpinned by a credit crunch, financial meltdown and a contraction in economic activity, a crisis of historical proportions, in deed, a crisis only rivaled by the Great Depression. This is why even the IMF is advocating for substantial fiscal stimulus not just in rich countries by across the world each according to what they can afford.
Unlike the past economic shocks, this one is going to be deep and protracted for the simple reason that the source of the economic shock that we are experiencing is multi faceted originating in the crisis in the sub-prime mortgage lending in the US, the resultant credit crunch which has affected many, including the mining houses in Botswana, coupled with the financial melt down which has caused hemorrhaging of mature and emerging financial markets alike.
In my view, these episodes have only expedited what has always been an economic slowdown that was coming anyway, an economic slowdown that has, as a result, transformed into a recession that could easily transform into the kind of economic depression that was seen in 1933.
It is for this reason that fiscal authorities ought to think differently this time around and not be misled by the experiences of 1979 to 1983, which, by comparison, are nothing compared to what the world economy is currently experiencing and is likely to endure in the months and perhaps years ahead. It is for this reason that I wish the Minister could have responded differently to calls for fiscal stimulus. The fact that our commercial banks, here in Botswana, are foreign owned does not mean that they are insulated against the credit crunch in more mature economies. After all, these banks are controlled from their head offices in their home countries and there are already signs that they have adopted policies that restrain credit not just because of the fact that everyone is doing that in their own countries but also because during times of economic slowdown, banks typically apply brakes on the growth of their lending books because bankruptcies tend to gather momentum during those times.
The Minister also gives the impression that bailouts are unknown to him; how much has he spent on cattle farmers every time there is an outbreak of foot and mouth disease?
If the economy does ultimately recover as we all hope, loans to these mines and possible tax rebates to small businesses will ensure that these businesses do not fold and lose jobs and hence it could be postulated that the Minister will recover his money.
These mining houses badly need capital, be it debt of risk capital to fund their growth plans and they cannot obtain this capital from the usual sources because of the credit crunch.
Now if the Minister has confidence in the ultimate recovery of the economy, perhaps he should rethink this stance. He will not be setting a precedent as those with short memories and bounded rationality might think; he has long set the precedent with the outbreak of foot and mouth disease and other similar bailouts.
The world economy is going through extra-ordinary times, times that require a different mind set on economic stabilization policies which, if properly structured, targeted and coordinated the world over, can affect the state of aggregate demand, by influencing the lending decision of banks, by strengthening their balance sheets and relieving them of the so called toxic assets not because governments have unlimited resources as the Minister is quoted as having said but because we have confidence in our action and hope that the worst can be avoided.
Instituting bailouts does not, in itself, amount to being reckless, but it is how the bailouts are structured, targeted and implemented that can be counterproductive. On the other hand, failure to act can itself be reckless and short sighted and enhance lead to long-lasting and undesirable outcomes.