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COMMENTARY: The road to boom and bust

By Dickson Igwe, Contributor

The following story highlights the centrality of economics in offering direction for disaster recovery. Hurricanes Irma and Maria, add major floods, devastated the Virgin Islands in September 2017.

The country is under threat of a long economic recession owing to the September disasters. The correct and appropriate application of economics – scarce resource management – holds the key to a full recovery.

OK. The proceeding narrative is an attempt at walking the road from a growing economy to an economy that is contracting.

Understanding the route to a recession, or economic contraction is the first step in stopping an economy descending further into the pit. The pit of recession is a place of underdevelopment, poverty, and unemployment. If not managed wisely, an economic recession can last for years, leaving a country with zero to negative growth, after a five to ten year period. The economic term for the preceding is ‘lost decade’.

Zero development over a protracted period is regression.

Depression

A definition of a long period of zero growth is depression. Depression is not simply economic decline: depression is social decline. Depression disembowels a society. Years of economic contraction will leave the Virgin Islands behind the rest of the countries in the region.

Therefore, preventing prolonged economic recession is not simply a matter of good economic policy: it is also a
matter for national security. OK. Economic recession and economic depression occur under the two divergent economic models used by this writer of economics stories: austerity and stimulus. And both economic models accept the existence of the economic cycle.

The austere thinker adheres to the idea that the economic cycle – the invisible journey a country takes from economic growth to economic contraction and then back to growth – is inevitable, and a country no matter how terrible the economy, will eventually return to growth.

Consequently, minimal interference in the economic cycle by government is preferred. Government must simply ensure national safety, and the functioning of the most critical national institutions, such as the police, judiciary, and army. Government must keep out of people’s lives.

A privatized, free trading economy, with minimum government, is deemed efficient, resilient, and appropriate enough, to steer any country to prosperity. The Stimulus advocate sits on the opposing polarity. The economic cycle is not inevitable for Jack Stimulus.

A country can languish in recession indefinitely. Therefore, government must intervene in the cycle when there is threat of recession, or worse. Widespread poverty and great social inequality may be acceptable to Joe Austere; it is certainly not acceptable to Jack Stimulus.

Under the stimulus type government increases spending when contraction is a threat, especially in the area of physical infrastructure.

This spending results in increasing employment in the building and construction sector of the economy. In countries that manage their own currencies, governments can additionally lower interest rates to encourage consumer credit and business lending and increase the supply of money to create greater liquidity.

Government intervention is necessary to boost business and consumer confidence. For the British Virgin Islands, government spending – through borrowing – in rebuilding and reconstruction, is the only option government possesses to stimulate a disaster battered economy.

The multiplier effect

Economic stimulus post Irma, should feed the ‘multiplier effect’. The Multiplier Effect is simply the increase in consumer demand, and the supply of goods and services, that result from the increased circulation of cash in the market.

The Multiplier Effect is a dance between demand and supply: as demand increases so does supply to meet that demand: the result is economic growth. Of course the preceding is a simplification of the idea. Economics experts will offer myriad adjustments to the demand and supply equation.

Stimulus spending strengthens purchasing power in an economy. The wider economy is given a jolt. Under stimulus, increased consumer demand results from government intervention in the economy.

The green shoots of recovery appear. The green shoots are observed when business activity quickens. The country starts to literally look better. Business Owners look happier and more confident. Employees appear chirpier.

Families throughout the land are more confident about their futures. Emigration drops. There is a return to immigration. Looted, pulverized, and hurricane and flood damaged, shops and stores, reopen their doors. Unemployment drops.

The physical infrastructure starts to cohere to where it was before Hurricane Irma. Concrete trucks run all day and all night. The sound of heavy equipment around the country is ubiquitous.

There are hundreds of construction workers beating rafters into roofs, hammering long nails into galvanize, working on plumbing and masonry, and fitting windows and doors into frames, in thousands of damaged dwellings and commercial buildings.

The roads are crowded with men and women performing various tasks. The cleanup effort is colossal. Scores of men and women work the hills and coastal plains, wearing harnesses, wielding cutlasses and machetes, and connected with each other by ropes running the entire declivity, to ensure the Virgin Islands are pristine and wholesome.

Tourists return en masse, and Jack the wily investor ambles about the streets of the archipelago, looking at putting his cash into a resort reconstruction, or brand new marina project, or any investment for that matter, that promises to bring a greater return, than if he had left his gold in a bank vault.

This is what post disaster economic recovery looks and smells like.

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7 Comments

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  1. E. Leonard says:

    Dickson, great read. You have presented austerity and stimulus in a clear, and concise manner. Under austerity/ classical camp/laissez faire, an economy in recession/bust/contraction will move over time to full employment with little government interference. But residents want to see the economy move to boom/expansion at a much quicker pace. They want quick economic growth, jobs and want to maintain, improve and exceed their standard of living and quality of life.

    On the other hand, stimulus/Keynesian Camp/expansion entails government interference/investing to quicken the pace to boom and full employment. Government typically can achieve this through direct investment and adjustments to fiscal and monetary policies. Hurricanes Irma and Maria have thrusted the BVI economy in a tail spin, hovering near a recession. Consequently, an infusion of capital is needed to move the economy to boom/expansion and avoid the economy plunging into a recession or even a depression. Deficit spending is required to stimulate the economy. It will require BORROWING and strategic allocation of borrowed resources. There will be opportunity or implicit cost to stimulus spending.

    Thus, government is proposing investing $721M over five years to stimulate the economy. The proposal is out for public feedback. This is an opportunity for the public to weigh in and let its voice be heard on 1)what to invest on, 2) how to invest scarce resources and 3)for whom/what to invest on. Moreover, you and others have raise concerns about investing over $200M+ on extending TBLIA at this time, given the huge needs and wants that territory is now grappling incident to the two category 5 hurricanes that decimated the BVI.

    Undoubtedly, due to the damages cause by Hurricanes Irma and Maria and the historic flooding of 07 August 2017, the VI is faced with a mountain of needs and wants. The needs and wants dwarfs the resources available.

    Consequently, government must strategically, tactically allocate and prioritize available resources for capital and operations and maintenance projects. As such, in regards to the $721M recovery plan, anticipates that government will hold a series of town hall meetings in each district where presenters will provide a project template outlining how each project was selected and prioritized. These meetings will provide an opportunity for the community to weigh in on recovery plan, questioning the plan, expressing preferences and suggesting solutions.

    • Socrates says:

      Is the town hall meetings just a suggestion or a hope or an actuality? When and where are the town hall meetings? Will an agenda and project selection template be issued before the meetings? Who will be presenting the meetings?

      Further, does the economic recovery plan appeared as it was just slapped together? Is this a recovery plan that government already had on the shelf? If no why did government not already have a recovery plan? Should not government have anticipated that at some point the BVI would have been hit directly by a major hurricane? Is the BVI in the hurricane belt?

      Undoubtedly, though government employs too many consultants, would a seasoned and experienced consultant on economic recovery development be a good use for a consultant? Did this recovery plan resulted from a brain storming exercise and still needs to be fleshed out?

  2. Sam the man says:

    Accountability – why do we allow the government to be so lax in this regard? they don’t even pay their electricity bills so we need to insist they publish their financial accounts for the past term – which they should have done but haven’t and why is that? corruption and nepotism reigns supreme…but we just sit back and allow it so we are just as guilty…

  3. Watcher says:

    One small correction. Screww the galvalume on, dont nail it. Then it will not blow off in the next hurricane.

  4. Economics says:

    Another good write up Igwe. With only 13 representatives of the people (i.e. our government) it is far fetched to assume that the experience and intelligence lies within to adequately address our situation. Further, economic policy applied to first world nations is not that applicable to one of the smallest countries in the world. The reality the BVI is in dire need of foreign investment, foreign loans, foreign grants, foreign labor and foreign expertise to succeed.

    Let’s not forget our reliance on foreign currency. We cannot fire up the printing presses and simply print dollars to provide the “stimulus” that Keynesian theory suggests.

    In fact the first stimulus has occurred through foreign aid, private fundraising from abroad, and then through private insurance companies. To be fair the government has provided stimulus through waiving import taxes and relaxing the labour code – both of which are appropriate.

    Moving forward, loans to which the BVI may ultimately default and likely be at least partially forgiven is the most likely source of stimulus we are going to see.

    Out of necessity, the BVI will likely be providing outsiders with greater incentive (low or no tax and other favors) i.e. Trickle Down/Supply Side economics to attract foreign investments.

    No doubt government will be accused of selling out, but in order to attract foreign capital it has little choice but to revisit existing laws and create a more business friendly environment.

    Money needs to come from a variety of sources regardless of economic theory and what I have outlined above is my best guess as what is most likely going to happen.

    • Disinterested says:

      “Moving forward, loans to which the BVI may ultimately default and likely be at least partially forgiven is the most likely source of stimulus we are going to see.” Really! Nonsense. Why would anyone issue a loan knowing that fhere is a high probability that the loan recipient will default. That is gross mismanagement of resources.

      • Economics says:

        Thanks for giving me a chance to back up this statement as I do like substantiated points of view. The BVI is going to need hundreds of millions of dollars at a minimum and its ability to repay that is questionable at best and you are exactly right that nobody is going to provide a loan under those circumstances. That is precisely why the UK has provided “loan guarantees” for half a million pounds to back such loans to which the BVI may never fully repay. Again, thanks for asking for clarity!

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