BVI News

COMMENTARY: BVI likely to face recession

Dickson Igwe

By Dickson Igwe, Contributor

The following story is part of a series of narratives called A Story of Disaster: Hurricane Irma and the Virgin Islands. The proceeding narrative is on the economics of disaster. It is narrated from a layman’s perspective.

Now, stimulus is tantamount to shocking a dying economy back to life. Stimulus is a type of economic defibrillator. Stimulus is an economic lifeboat. Cash for stimulus is almost always derived from the banking system, and it is imperative that governments secure the best deal possible to ensure that stimulus is effective.

OK. The classic example of stimulus was Franklin Delano Roosevelt’s New Deal. The New Deal was a massive attempt at fiscal and economic stimulus after a terrible North American economic downturn in the early 1900s.

Devastating business failure and unemployment in the USA was preceded by a collapse in consumer and business confidence in the late 1920s that further led to a stock market crash at the start of the 1930s. The great recession of the 1930s plunged millions of Americans into deep poverty as the US economy bit the proverbial dust.

The New Deal saw the US Government, and the US Federal Reserve, sink hundreds of billions of dollars in today’s value into the construction of roads, highways, bridges, and more. America’s highway network today, derived from the New Deal.

That massive investment in physical infrastructure, gave the US economy a jump start when the Great Depression of the 1930s was at its most devastating stage. Massive fiscal and economic stimulus put millions of Americans back to work which in turn brought back consumer demand and business confidence.

The US went from depression to recovery, and then on to strong economic growth. And in spite of the hiccough of the Second World War the US economy grew for decades after the war was won. The New Deal linked with the wartime economy and boosted manufacturing. This manufacturing boost came through massive public investment in the armaments industry. Men went to war in Europe and the Pacific.

Women put together the ships, submarines, planes, tanks, jeeps, and battlefield weapons that sent Hitler, Mussolini, and their Japanese allies in Asia to hell. War, despite its tragedy and destructiveness, can lead to innovation and productivity. This takes place through the inventiveness and logistics that brings one nation to victory and its enemies to despair.

Massive stimulus arguably led to the post-World War II American manufacturing boom that lasted until the early 1970s, and the OPEC oil crisis.

Then, in the aftermath of the great financial recession of 2008, it was the pumping into the US and western economies of billions of dollars that saved the US car industry. Massive stimulus saved hundreds of thousands of jobs in motor manufacturing and related industries. Stimulus saved even more jobs from being lost to a long depression in the wider western economy.

And if global financial institutions were too big to fail then it was government intervention in the form of the pouring of over a trillion dollars into banking and finance that saved the world from a prolonged economic depression, with all the associated social implications and evils of long term economic contraction.

Rapid Intervention in the western banking and finance industry in 2008, and thereafter, stopped a banking collapse and saved the world economy the terrible impact of a financial meltdown leading to a global depression.

BVI likely to face recession

OK. The Virgin Islands will very likely experience an economic recession as its Gross Domestic Product contracts in the months after Irma. The result of a decrease in revenues from its maritime, hotel, and tourism businesses that were ravaged by the hurricane. The Virgin Islands financial services industry was impacted too but to a far less degree.

These revenues from the twin pillar economy will bounce back when the physical infrastructure is back in place to cater once more for foreign guests and travellers. Investors, travellers, and tourists are critical to national revenues in tourism and services-oriented economies.

Thousands of visitors grace the shores of the territory annually, especially from the United States, Western Europe, and Canada, to sail Virgin seas, and swim in Virgin waters. Then there is the cruise industry that is especially critical for taxi drivers and tour guides, and retail kiosks, the length and breadth of the country. Tourism and financial services are the bread and butter of the Virgin Islands services-oriented economy.

The revenues from tourism and financial services are the financial lubricant that creates consumer demand in the domestic economy that further leads to job and economic growth.

It is therefore important that policymakers look at the various antecedents of world economic history in the aftermath of national crises when dealing with the economic crisis that the Virgin Islands will surely face in the coming months. A model exists to be studied.

The objective must be the avoidance of a prolonged economic recession that will batter the social and economic infrastructure of the Virgin Islands. The focus of policy must be on the type of economic stimulus that secures as quickly as possible, a return to positive economic growth.

However, any stimulus cash must be wisely and prudently managed to ensure strong and sustainable economic growth.

To be continued.

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