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The road from Boom to Bust- part A

Dickson Igwe. Photo: VINO
Dickson Igwe

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 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. 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 privatised, 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.

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, pulverised, 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.

To be continued

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6 Responses to “The road from Boom to Bust- part A”

  • watcher (30/12/2017, 09:45) Like (6) Dislike (0) Reply
    another good read but we need the NDP gone
  • E. Leonard (30/12/2017, 12:39) Like (7) Dislike (0) Reply
    Dickson, austerity and stimulus in a nutshell. Under austerity/ classical camp/laissez faire, an economy in recession/bust/contraction will move overtime to full employment with little government interference. But residents want to see the economy move to boom/expansion at a quicker pace. They want quick economic growth.

    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 has 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 an opportunity or implicit cost to stimulus spending. 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 and 3)for whom/what to invest.
    • One word (30/12/2017, 13:56) Like (4) Dislike (1) Reply
      I wouldn't want this government anywhere near my neighbourhood and I live in Long Look
  • Dickson Igwe (30/12/2017, 14:09) Like (8) Dislike (0) Reply
    I concur Edgar- but I cannot understand the overwhelming sum of cash - over 200m- to go for airport construction when the country is basically unsafe and in a terrible shambles- remember hurricane season will be with us again in a few months- and another Irma will turn the dump site at Cox Heath and the tons of debris on the hills into a worse tragedy - clean the country first and get rid of all the garbage and debris before you build Coney Island
    • @Dickson Igwe (03/01/2018, 18:12) Like (0) Dislike (0) Reply
      U making sense. The Airport shouldn't be a priority at this time.. Help the damage businesses and hotels get back on their feet so they can employ...Employment at present is key..This Man from 6 must always get his way.. Brandy wine bay beach project We tired beg for it to be stopped..Its Nothing but a waste of tax payers money..Hope the Airport aint end up like brandy wine bay...
  • freedom (02/01/2018, 21:10) Like (0) Dislike (0) Reply
    Maybe now is the time to ask for help from outside, before it reaches the stage from which we can no longer recover.

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