Off the mark: Policies and debacles

Published : 9 July 2011, 03:59 PM
Updated : 9 July 2011, 03:59 PM

Economic policy-making is going through an interesting time. Huge opportunities are beckoning, but there are also many risks. Steering the economy in this environment is a challenging task. The rewards of correct policies will be large in terms of accelerated economic growth, but wrong policies could condemn the economy to stagnation for a considerable time.

The present government took over the reign of the nation at an opportune moment. The global economic crisis had ended and the world economy was well on its way to recovery. The fear of double dip recession had receded and economic prospects had started to look bright. Commodity prices that had sharply increased during 2007-08 started falling steeply from the middle of 2008. By the beginning of 2009, international commodity prices had fallen to their pre-crisis levels. This had helped to bring down the domestic prices.

By the second half of 2009, essential prices in the domestic market had fallen to a comfortable level. Agricultural output, especially rice output, was at a high level. It was claimed that the better performance of agriculture was instrumental in bringing down the prices. Industrial production and exports started picking up during the first half of 2010. Economic outlook of the country seemed bright. The government praised itself lavishly assuming these to be the results of its good policies and sincere work. Some of its leaders confidently talked about raising the growth rate to a double digit figure in about a couple of years.

The recent global recession has unexpectedly opened up great opportunities for the business sector of Bangladesh. With many countries including China forced to restructure their economies, Bangladesh is emerging as a possible supply hub of the world for manufacturing of some labour intensive products such as apparels. Whether Bangladesh can fully exploit the opportunities depends on the ability of the business community to successfully position them strategically to attract foreign buyers. For them to do so effectively, supportive economic policies and infrastructure must be put in place.

A rapid growth of the economy is possible only if the private sector grows at a fast pace since nearly nine-tenths of the economy is private and the private sector has proven to be more efficient than the government sector. The key actors in the future economic development of the country will be the business community since they are the primary drivers of the private economy. It is essential that their collective interests are clearly understood when formulating national policies. It is not clear if the business community have carefully analysed the consequences of some government policies such as rental power, subsidies, free trade areas, foreign investment, transit etc. on the future of business.

The interests of employees and consumers must also be protected from possible unscrupulous business excesses. Business objectives will be served best if they can articulate their views keeping in mind that their interests must be consistent with the broader national interests. Otherwise business will lose broad-based popular support, which will be counterproductive for business in the long run.

The global economy is in a constant flux. In order to do well in this environment, both the government and the business community must have a good knowledge of the recent economic trends and developments. They must also have an adequate understanding of the processes that give rise to these trends and developments. Only then they can devise appropriate responses in order to ensure that Bangladesh does not lose out in the fierce global competition for market share. Such an understanding can be gained only through painstaking study and research on the subject by qualified professionals.

The damage that can be wrought on the economy due to a lack of research was aptly demonstrated by the recent stock market collapse. There was no shortage of talk show specialists in the subject, but there was no systematic conceptualisation of the problems plaguing the stock market before its collapse. During the long period during which the stock market went on an impossible steep ride, no study or research was undertaken by the Ministry of Finance or other concerned agencies to come to grips with the problem (unless they already knew and acquiesced with what was happening). A consequence of this was the reckless changes in policies, sometimes on a daily basis in response to adverse outcomes. Another consequence was the emergence of witch-hunters, and the incorrect diagnosis of inappropriate activities of a few scamsters and the Securities Exchange Commission (SEC) as the primary reason for the stock market carnage. Since the scamsters and the corrupt SEC were nobody's favourite, it was easy to make the allegation stick.

A careful research would have brought to light the fact that stock markets do not usually collapse because of criminal activities of some scamsters. Stock markets in many countries collapsed during the financial crisis and global recession of 2007-09. But few diagnosed criminal acts as the primary reason for the collapse although there was no shortage of such acts (recall the Madoff affair).

In general, a series of policy mistakes coupled with conducive economic conditions at home or abroad lead to a collapse of a stock market. The scamsters only take advantage of the situation to make a quick buck (the possibility that they may collude with the regulators and policymakers to create such a situation cannot be ruled out). If a large amount of money is kept in clear view in an empty house with doors and windows open, it is an open invitation for theft. The primary responsibility of theft, if committed, of course lies with the thieves. But one must question the competence and intent of the people who left the money in open view instead of keeping it locked.

A number of policies by the Ministry of Finance and Bangladesh Bank created the conditions in which the scamsters flourished. The policy of legalising black money if invested in the share market was the initial impetus to the stock market bubble. Subsequently, a host of policies including a reduction of returns on alternative assets such as savings certificates and bank deposits, a large increase in money supply in a moribund economy with few real investment opportunities, allowing banks to invest heavily in the share market, generous loans for share investment, a sudden increase in the cash reserve ratio at year-end closing time of commercial banks and the weaknesses of regulatory framework created the right environment for the scamsters to flourish and a bubble to be created. Note that the SEC could be conceivably held responsible for only the last item in this long list. The rest were determined by either the Ministry of Finance or Bangladesh Bank.

Even when it was all too apparent that the stock market was in the grip of a bubble, government leaders, as well as media-declared experts, gave sermons that the rising stock prices were indicative of the robust health of the economy. This further encouraged people to invest more in the stock market thus fuelling the expansion like a giant Ponzi game.

If the government or the relevant agencies including business organisations had encouraged serious research on the stock market, either the bubble could have been prevented from forming or the damage could have been contained. As it happened the government and the central bank went with the 'conventional wisdom' (in the Galbraithian sense) that provided a superficially plausible explanation of what was happening. The explanation was convenient as it targeted a few widely disliked share market scamsters and some allegedly corrupt SEC officials. The enquiry committee led by a current beneficiary of the Ministry of Finance (who is also an ex-employee of Bangladesh Bank) in its report did not seriously look into the policy bungle by the Ministry of Finance and Bangladesh Bank in this sordid saga, and heaped all blame on the scamsters and the SEC. It only strengthened the conventional wisdom, and was predictably widely praised. The report dealt only with the symptoms and did not look for the real causes of the malaise.

The Ministry of Finance acted quickly on the most convenient suggestions of the report by removing the top executives of SEC and replacing them with a group of party faithfuls in the name of restructuring the SEC. This did not help to stem the rot, the share index kept on sliding suggesting the depth of the malaise. The most egregious thing in this sordid saga is that of the hundreds and thousands of people involved in the share market (on all sides) the only person to be put on the dock is the chair of the enquiry committee himself! It is a damning statement of the state of governance in the country. The ordinary investors lured into the market already lost a large part of their savings in this gargantuan scam. They are unlikely to look kindly at the government that did not do much to prevent the scamsters from fleecing them in such a blatant way.

Surprisingly, the government has again opened up opportunities for the formation of a bubble in the share market by allowing black money to be whitened through investment in the share market. The finance minister, after initially opposing such whitening, acquiesced to the demand when the prime minister weighed in. The well-informed market had expected such an amnesty, and this had the predictable effect. The general index increased by more than 15 percent within 5 weeks from its lowest value on 26 May 2011 reminding one of the heydays of 2007 and 2010.

The difference between a clever country and an ordinary one is that the former anticipates a problem while the latter reacts to the problem. In some situations there would probably be not much difference between the two, but in many situations the consequences of not anticipating a problem could be very costly. For example, even if a small country such as Bangladesh had anticipated the adverse consequences of climate change, it could do little to change the situation. However, it could do a great deal to change the outcome if it had anticipated the consequences of the past policies pertaining to the stock market, trade restrictions, education or population growth.

To provide the government and the business community with information and analyses that are necessary for correct policy formulation there should be some good business and economics research institutions specialising in various areas. Despite there being a good number of research institutions in both the public and private sectors, they are unable to meet the national need. The principal reason is the paucity of research fund. The inability or unwillingness to devote sufficient resources to research activities has come to mean that the economics and business research has failed to attract significant number of appropriately qualified professional researchers. Another reason for this shortcoming is that research is mostly foreign funded. Consequently, it reflects the research and other interests of the overseas paymasters. The quality of research has suffered as a result. This is further complicated by the rise of pseudo-researchers or what Professor Nurul Islam called 'informal economists' who are confusing the public (and the policymakers) with conventional wisdom. Much of what goes in the name of research is little more than what is already widely believed or known, and discussed in the news media.

As long as this situation continues, we may expect repeated policy mistakes.

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M A Taslim is a professor of the Department of Economics, University of Dhaka.