Connect with us

Opinion

Surviving the World economic crisis

Published

on

The outbreak of the Covid-19 pandemic precipitated a world economic crisis. Many commentators suggest that the pandemic caused the crisis. In actual fact, several economists, such as Sri Lanka-born Howard Nicholas, have predicted this economic downturn for several years.

The roots of the crisis go much deeper than the Coronavirus. The economies of the world are mired in debt. Because of the hegemony of the financial elite, companies in the advanced industrial nations have not, for years, invested in new plants and machinery but have, instead, used government subsidies to buy back their shares from shareholders. Investors have used this mechanism to increase the apparent value of their assets, enabling them to borrow more from banks.

This is because investors expect to make money, not from the dividends enabled by company profits, but by speculating in company shares. Many of the so-called “unicorn” companies (new, fast growing companies valued at over US$ 1 billion) make no profit, but grow because investors believe they will grow in value.

Economic stagnation

For the same reason, many big companies, such as Apple, Facebook and Google, instead of increasing their own value by investing in production, or research and development, buy other companies. Profitability is increased by reducing staff numbers, or hiring temporary staff at much lower remuneration, often on a “gig” (for-the-job employment) basis. This in turn has an effect on workers’ purchasing power, which affects the growth of markets negatively.

This kind of economic stagnation occurs from time to time. It used to be solved by more “inefficient” companies (that is, companies that do not make a profit, even if they happen to be more efficient by other criteria) going bankrupt, and more profitable companies expanding into the space they create. This has changed now. For example, the old hiring-car-based company Hertz, which made a profit of US$ 168 million in the last quarter of 2019, went bankrupt, while Uber, which made a loss of US$ 1.1 billion in the quarter, is doing famously. Companies able to attract capital prosper, while those seen as not expanding, fail.

The economy recovers from such crises by investing heavily in new technological methods to increase productivity. In the last two decades, however, companies in the West, especially in the USA, have invested in technologies that enable them to extract the greatest profit from “gig” labour, and essentially in sales, delivery and other services, rather than production.

On the other hand, East Asian countries have invested heavily in high-tech manufacturing industries. China, Japan and South Korea, together, account for two thirds of all new industrial robot installations, while Europe and North America only account for 30%. In the context of the current crisis, such countries will probably lead the recovery, with brand new technologies. Other up-and-coming industrial powers, notably Vietnam, Iran and India, will also accelerate their technological capabilities.

The continued economic stagnation, in the USA, has several corollaries. In the first place, as the world’s biggest consumer of imports, the exports of export-based economies will suffer. In the second place, investors are fleeing the US Dollar for gold, the price of which has risen from US$ 48,000 per kg in March to over US$ 65,000 per kg today. The consequent fall in the value of the US dollar (from € 0.94 in March to € 0.85 today) means that exporters will be even more disadvantaged.

The USA is also the world’s biggest consumer of petroleum – using more than the combined consumption of the next two countries, China and India. The price of crude petroleum in Dubai fell from US$ 64 in January to US$ 23 in April. Although the price rose again, to US$ 43 in July, the lower value of the US Dollar means that the real increase is less than this. This means the income of the Middle East and Russia will be affected severely.

Different approaches

How have other countries coped with the economic downturn? The USA, China and Germany represent three different approaches to the problem.

Apparent economic growth, in the USA, before the pandemic, was based on short-term, low wage jobs. Once Covid-19 hit, the country experienced its fastest unemployment growth in history. In reaction, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which budgeted US$ 2 trillion (10% of GDP) to boost the economy. More than half of this went to companies, while less than a quarter went as compensation to poor people losing their jobs or otherwise affected by the crisis.

This stimulus package helped cushion the collapse of the US economy. However, the payments made to the affected poor people often went to pay immediate food and rent needs. Most of the consumer spending due to payments to individuals went to online delivery companies, such as Amazon and Uber, which employ workers on “gig” terms. They did not spend it in shops and supermarkets which employ permanent staff, so unemployment rates remain high.

Unfortunately, even this funding ended at the beginning of August. The government and the opposition (which controls the legislature) argued about a new stimulus package. President Trump wanted to spend only US$ 1 trillion, reducing payments to unemployed people. The opposition Democratic Party wants to spend US$ 3 trillion, mostly on benefits to the affected people and on government programmes, including schools. The two sides could not agree.

“The Democratic Party continues to insist on radical left-wing policies that have nothing to do with the China [sic] virus,” Trump said. On 9 August he signed four “executive actions” regarding payment of reduced unemployment benefit, a moratorium on income tax for poor people, relaxing rules on evicting tenants and action on student loans. Critics say the executive actions may not be workable.

“Six guarantees”

China, the world’s biggest manufacturing nation, the first to suffer from the Covid-19 pandemic, has seen its economy recover. According to “The Economist” magazine’s Intelligence Unit in Beijing, local government investment, in public medical facilities, city infrastructure, old community renovations, transport, power grids and telecommunications, drove construction growth. This, in turn, stimulated production of construction-related machinery and goods, driving up manufacturing output.

The Chinese government has revealed a “six guarantees” recovery plan, based on creating jobs, giving financial support to ensure livelihoods, protecting small and medium enterprises, food and energy security, stability of the industrial supply chain, and facilitating the path from lockdown to a vital social life.

The Standard Chartered Bank says that China’s government is prioritising social goals ahead of GDP growth by creating employment and indicating that fiscal policy will be its preferred way to stimulate the economy. Officials have suggested that they are willing to almost double the budget deficit to support gross domestic product growth, while allowing money supply and credit growth to reach higher levels. There also appears to be a clear shift in China’s strategy; moving from an export focus to paying greater attention to domestic demand, to releasing consumers’ potential, and investing in new and traditional infrastructure projects. It projects a growth rate of 2-3% this year, a surprisingly high outcome for an economy which shrank rapidly in the first quarter of this year.

“Green” recovery

Meanwhile, Germany, the biggest European economy, has put in place a radical “green” recovery plan. The € 130 billion plan consists of fifty measures designed to boost consumption and speed-up economic recovery. The Government of Germany’s actions will be structured on this recovery plan. It is based on three pillars: € 78 billion on short-term economic recovery (about), about €5,000 billion on investment in future-proof and green technologies, and, € 3 billion on European and international solidarity (in addition to the efforts of the European Commission’s recovery plan).

Reducing VAT by 3 percentage points (12 percentage points for the catering and restaurant sector) – to stimulate consumption and revive employment in businesses, particularly in the hard-hit food and beverage sector – will cost the government € 20 billion.

The short-term recovery plan includes a huge green effort: subsidies on consumption of renewable energies, together with a carbon tax, will move use to electricity from other modes. In the transport sector, subsidies for buying electric vehicles are doubled, and support is given to battery and charging infrastructure, modernising commercial vehicles, ships and aircraft, and to public transport and railways. The construction sector has € 2 billion allocated for energy efficient retrofitting to existing buildings.

A key point in the plan is the new green hydrogen (produced by electrolysis from renewable electricity) sector, for which the government is allocating € 3 billion to develop 10 GW of electrolysis units by 2040. Together with the budget for European and international solidarity, this will put Germany firmly in the lead in this technological area.

Lanka’s markets

In the second quarter of this year, the USA’s gross domestic product declined by 35%, and the government recorded 23 million people as unemployed, the highest rate in 80 years. In the European Union the GDP declined by 7%, and unemployment increased to 14 million. In Britain, GDP has declined by 9%, driving unemployment up to 2.5 million. In Russia, GDP dropped 8%, and unemployment rose to 1.7 million. Middle Eastern economies will slow by 5%, affecting migrant labour employment.

These are Sri Lanka’s biggest markets. This shrinkage will adversely affect Sri Lanka’s economy. Both exports, and foreign labour opportunities, will decline. With a collapsed tourism sector, this will allow the country little foreign exchange to buy the things it needs.

In this situation, what can countries like Sri Lanka do? There are a few simple answers to this question. First, reduce imports to match the reduction in foreign exchange sources. Second, find new foreign markets to replace the declining economies. Third, find new products to replace the ones currently being exported. Fourth, develop the domestic market for domestic products, to advance the economy.

Of course, walking the talk will be less simple. How can it be done? The path taken by the USA is the road to ruin, while Sri Lanka does not have the financial resources to emulate China or Germany – although it can emulate many of the measures they have put in place, on a far smaller scale. It remains for the state to create the policy parameters to drive recovery on new paths, using our existing resources, and developing indigenous knowledge. New technology will be a large part of this, but we must use it wisely. We have an educated population which can adapt itself rapidly to new skills. That is our biggest resource in this economic battle.

Vinod Moonesinghe

 



Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Opinion

Regulate sports in popular schools ahead of big matches

Published

on

The Big Matches between popular schools in Colombo and main outstation cities are round the corner. In the past school sports was in the hands of former sportsmen and sportswomen who loved the game as well as their school. They devoted their time and money to coach the budding youth without any monetary gain for themselves.

But, see what has happened today. Sports coaches selected by the schools demand millions of rupees to coach the students. And this is readily agreed and paid by the school authorities. In the good old days the members of School teams were provided free meals during match days and also Sports equipment. But it is not so now. The school earn millions of rupees from big matches played for a duration of two, or three days in some cases, and this money could be utilised to buy the required cricket gear such as bats, pads gloves, boots, etc,. I understand a pair of cricket boots is in the region of Rs.18,000 to 25,000. Can a poor village lad who is enrolled to an affluent schools in Colombo, based on his performance in Education and Cricket afford this? These lads should be given all the support to continue in their respective sports rather than drop out due to financial constraints

Coaches in some schools are in the payroll of big-time businessmen whose children are, in the so called pools. Parents of children engaged in a particular sport should not be permitted to come in as sponsors as this would be rather unethical.

The Big Matches between popular boys schools are around the corner and I suggest that the Sports Ministry ensures performance based selections rather than on other criteria.

 

D.C.Atukorala

Colombo

Continue Reading

Opinion

‘Post turtle’ revisited

Published

on

 

I have written about this amusingly thought-provoking creature, the ‘post turtle’ to ‘The Island’ around three years ago (appeared in the opinion column of The Island newspaper on the 19th of June 2018, titled ‘The post turtle era’). The story, which I am sure most of you have heard/read already, is obviously not a creation of mine and I happened to come across it somewhere, sometime ago. 

And for the benefit of those, who haven’t heard the story, it goes like this:

“While surturing a cut on the hand of an old Texas rancher, the doctor struck up a conversation with the old man. Eventually, the topic got around to politics and then they discussed some new guy, who was far too big for his shoes, as a politician.

The old rancher said, ‘Well, ya know he is a post turtle’. Not being familiar with the term, the doctor asked him what a ‘post turtle was’.

The old rancher said, ‘When you are driving down a country road and you come across a fence post with a turtle balanced on top, well, that’s your ‘post turtle’.

The rancher saw a puzzled look on the doctor’s face, so he went on to explain. ‘You know, he didn’t get up there by himself, he doesn’t belong up there, he doesn’t know what to do while he is up there, and you just wonder what kind of a dumb ass put him up there in the first place’.”

Now I was having this nice, little siesta, the other day and suddenly there appeared ‘the turtle’ in front of me, sitting on a fence post, seemingly doing a precarious balancing act as the post itself was too high for it to give it a try to jump down to the ground. Not that it probably wanted to do it anyway for it looked quite contended and happy sitting there doing absolutely nothing. And no doubt some loyal and dumb all rolled into one, must have put him up there and been feeding it well too, for it looked quite contended and fat showing a thick head that kept turning to the left and then to the right, while its tongue kept on lolling out as if it was saying something, which must have been absolute gibberish and rubbish anyway.

What a fitting and symbolic representation, 

I mean this ‘post turtle’, of the lot, or the majority of it sitting across ‘the oya’, I mused on after I woke up from my snooze.

Many of them get there thanks to the gullible voter, who while ticking the boxes, thinks: he/she will surely deliver the goods this time as promised! 

And those two-legged post turtles inside the edifice, bordering the Diyawanna, like the one in the story, keep uttering sheer rubbish and spitting out incomprehensible mumbo jumbo, all in return with thanks to those, who tick the boxes in their favour.

Their statements such as ‘what is oxygen for, to eat?’, is just one among many such stupendously stupid utterances of theirs and I don’t want to tire you with the rest, for they are well known and far too many.

Now I have only one question for you before I end this:

When are we going stop being ‘those dumb asses’, once and for all?

Laksiri  Warnakula  

Continue Reading

Opinion

Abuse of use of title Professor

Published

on

I read with much interest the letter by Mr. Nissanka Warakaulle, regarding the above matter, in the issue of the Sunday Island of 18th April 2021. I agree fully with the contents of his letter. He should be very familiar with the regulations as he is a former Registrar of the University of Colombo. I wish to highlight another instance where it is abused. In the 1970s, the title of Associate Professor was created. Until then there were only three categories of Professors. Firstly the holder of the Chair, secondly a co-Professor and thirdly, an Emeritus Professor. There were also, Lecturers, Senior Lecturers and Readers. The title of Reader was replaced with the title Associate Professor, which is meant to be a designation, to be used after the name. However, this category of academics started using it as a pre-fix, dropping the word Associate!

Profesor Sanath P. Lamabadusuriya MBE
Emeritus Professor of Paediatrics,
University of Colombo

Continue Reading

Trending