In the continuum that is time, few have witnessed an economic time as bizarre and different from the norm that was as is. Considering the recent events, it is impossible to view and understand the current events with the stoic non-concern of a cow standing in the rain. In this brief analysis, I will segment this article into four sections. First, analysing the basic economic machine in general terms. Secondly, elucidating the generalised machine in relation to the Third World. Thirdly, a look into former crises that have had similar effects as the present COVID 19 pandemic. Fourth and finally, the platform for recovery.
The Economic Machine
In viewing the economic machine that is the Third World, we must first look at the aspects and forces that have the likelihood of affecting it. A practical way to understand an economy brings into play described by hedge fund giant Ray Dalio aspects or terms like money, credit, debt inflation, deflation, etc. These aspects all kotow under the number of transactions that take place in an economy (millions of transactions can take place in an economy from buying gum to a million-dollar transaction).
An economy thus would be the sum of transactions or the total spending of that economy. To realise the total spending of an economy we would have to add all the money and the credit exchanged for goods, services, and financial assets. The total spending in the economy is one of the true building blocks of the economic machine. All these transactions take place in different markets, from the bubble gum market to the hotel market.
The major players in the economy of course would have to be the Government and the Central bank. These are the players that control the most volatile parts of the economy like credit, however, for this article my concern will be on the Central bank. This institution has the ability to control the economic cycle of the economy because like a lever it can increase or decrease the amount of spending in an economy. How? Walk with me… you see a major factor that controls the economy is how much spending there is in that economy. If there is more spending, banks charge high-interest rates and when the interest rates get too high there is less spending because people are turned off by the interest rates.
So, where does the central bank come in? it is the interest rate determinant, when they get too high the central bank reduces the interest rates to offset a recession and stimulate borrowing and vice versa is true, where the interest rates are too low it increases the interest rates to reduce borrowing to offset depression. This is how inflation and deflation are controlled. And thus how the economic machine stays afloat.
The Generalized Machine in relation to the Third World
The Third World, of course, is less developed, what do I mean, there is less of most things but in two words …less spending. Why? Because of the more the spending the better the economy. There is less buying, less selling, less money, less credit, less borrowing, less lending, etc., the economy is one that is highly uneven and highly centralised considering the fact that the highest earners are concentrated in the capitals and cities.
To improve the growth cycles of an economy there must be borrowing, this is because an economy cannot grow on the incomes of its citizens alone and even if they can, growth will take much, much longer. So what’s the solution? Borrowing from our future selves (a term coined by Ray Dalio). What do I mean, you go to a bank and borrow money thus improving your ability to increase your productivity, and thus your future self has to pay what your present self has borrowed with an interest. Note the more spending the better the economy, and what you spend someone else earns thus banks give out more loans to businesses, which helps them grow, and people also earn from these businesses and spend elsewhere in the economy, its thus for this reason that an economy experiences upward curves as people borrow and the downward curve as people payback.
The 3rd world economy has slowly but surely grown, one of the reasons I allude to the fact that people just didn’t have the income and the proper collateral and credit to qualify for loans from banks but as investors have increased and entrepreneurs have risen hand in hand with other sweet factors like increased asset values (just look at growth in pricings of land in Uganda especially in developed areas), spending pre-COVID 19 should have been at a high point.
COVID 19 as obviously seen has caused a storm of downturns and problems in a formerly smoother economic climate. Uganda at the time was seeing good numbers in relation to exports and also importing a good amount. The pandemic led to a widespread stay at home order, this is worrying, why, because many entrepreneurs run on a thing called debt and it’s a hail storm waiting to happen if debt repayments continue to rise whilst incomes remain low. What do I mean?
How can you pay the same monthly payments yet you are earning less than what you earned before you qualified to borrow. It is possible that debt burdens will become too large to payback.
Hypothetical effects of such situations can include a recession, a depression, or worse a deleveraging. The quick explanation is that a recession results in less output of an economy making interest rates are too high leading to deflation because people don’t want to borrow leading to decline in spending while in a depression is a bigger form of recession there is a long term downturn, interest rates are low, less money and credit is in circulation. High-interest rates in such instances are counteracted with low-interest rates to cancel the other out.
The problem comes with deleveraging, why, because unlike in a recession where banks want to lend but people don’t want to borrow and vice versa, here no one wants to lend and no one wants to borrow. Interest rates are so low they can’t be decreased any more, the asset value has collapsed, people have withdrawn most of their cash, and it just becomes a sea of confusion. My concern is whether this financial year will end with more growth and debt or only with debt and minimal growth.
Many economies have experienced the full brunt of such situations, we start with the 1929 United States of America that experienced a depression, Japan in 1989 with its equity and real estate crisis, Spain and Italy in the 2000s and the US again in 2008. Of course, each of these situations had their own individual traits and problems but depression was definitely common among them.
The platform for recovery
What were some of the panaceas that these economies took to alleviate the situations that they were in? In those countries with deleveraging, incomes fell, credit disappeared, asset prices dropped, creditworthiness or ability to access loans crumpled, and worst of all interest rates could not save the day because they were already as low as could be. Some of the ineffective methods they tried to undertake included cutting off all forms of spending and reducing of debts, these two didn’t work because they were deflationary because in the long term they decrease spending and as I have stated repeatedly, the economy isn’t your mother if there is no spending there is no growth.
The other two worked to an extent, redistribution from the haves to the have-nots, how taxing the rich among other forms such that stimulus can be given to the have-nots to regain footing and improve their ability to pay their debts, note that the government as well is not your mother and that’s why debts can’t just vanish even if they are just numbers. The other solution is to just print more money distribute to the institutions and increase circulation of the money, however in some of the country’s care had to be taken to avoid inflation due to easy access to money, this was a problem in countries like Germany.
So what do I think about what’s happening in the world right now and what platform is there for recovery? I believe the 3rd world can’t avoid to let this crisis knock on the door and catch them off guard, incomes should be guaranteed to the employed, and debts should be restructured but cautiously because if stretched out too long, the already low incomes will be stretched out too thin and decrease spending power in the economy.
Problems with the unemployed and the rural economy are a topic for further analysis and discussion however Jeffrey Sachs in his book The end of poverty notes great disparities in world economies considering the different abilities among countries to achieve modern economic growth this similarly can be alluded to individual economies, we see as clear as day that the 3rd world is one of grossly unequal growth with the highest contributors to the per capita income algorithm being the employees in companies and the civil servants not making up even 10 percent of the population, what is ironic is that the biggest contributors to the Gross domestic product(GDP) are also most likely the ones earning much less(agriculturalists especially in sub-Saharan Third World) thus worrying on how income or stimulus can be guaranteed to the unregistered subsistence population. It wouldn’t be advisable for people to take bank loans for non-productive things like food and clothes as these cannot generate more money or in other words are not productive, in such a climate that would be bad because as incomes stay stagnant but debt burden increasing would be difficult.
In summary, as said in the film Star Trek into Darkness, “today is a privilege to call our own. A story that will be told for 1000 years”. In the words of Lee Kuan Yew, “…people are not able to provide themselves their most fundamental needs, they need the support and organization of a tribe or government…” strong decisions will have to be made such there can be stability in the affairs of people. The problems the economy is facing and will face are not small but we must hope that her capacity to deal with those problems is much greater.