Dear Fellow Senegambians,
I read a lot about argumentes and counterarguments on Senegambia. I am writing this piece from Germany, a country that fought tragedic wars with its neigbours. Today, the same countries with toatally different races have come together to create European Union, European Commssion, European Central Bank, European Parliament, European Courts of Jusitice, and name them on. More interestingly, France and Germany are working out one school syllabus system, and to snchronize their cultures and education systems. Here in Germany, the ingriedients of most products are written in six languages, and all the policy documents of the Union are written in these six languages, a cost that will never exist in Africa. With the expansion of the Union, the Union wil witness huge imbalaces culutrally, politically and economically between and among memeber states; but still they need them in the Union. Non-economists always wonder how such diverse states in all aspects have chosen to work together under a union.
Today, the world is run by Multinational enterprises which have transformed the world market from many-player market to an oligpolistic one and then cartels. In a many-player market, the so-called perfect competitive markets, no one player can influence the decisions of the markets on prices and quantities, the exit and entrance are cost-free, the economic profit is zero, and there exists full information. This is an ideal situation of the market economy which has never existed and it will never exist; but it is the examplary benchmark for evaluting other types of markets such as oligoploy. In an oligopoly market, you have few big players and many small competing players. the big players can make abnormal profit, a profit higher than the normal profit; because they can change the market prices and quantities through coordination of decisions. This coordination of decisions by the multinational enterprises has rendered the fiscal and monetary policies of many big states ineffectice. For example, A uniletral expansionary fiscal policy in one state increases the interest rate in that country. This increased interest rate will induce the multinational enterprises(MNEs) to move capital to that country not as foreign direct investments but as portfolio investments just to reap the incremental margin and then pull out. The coming of capital will cause the country to hold excess foreign reserve as a result the currency of the country will appreciate inducing its citizens to buy more foreign goods and services; and this in turn will reflect in the balance of payments as current account deficit. This is not the end scenario, what about the foreign portfolio investments that come to the country because of high interest rate? What about the domestic private investments that now face high interest rate in their economy? What about the fiscal expansion and the current account deficits, can they go on forever?
The above questions are all related, an answer to one may fully resolve the puzzle about the others. The porfolio investments by the MNEs will remain in the domestic economy as along as they are speculatively sure that the country will maintain higher interest rates above all other countries --- a miracle!!!. the " thy neighbour effect" principle will come to play. Other countries who lost their capital to you will too increase their interst rates to get back the capital; as a result MNEs will automatically and abruptly move out of your market causing your currency to plummet down drastically and forcing some of your banks and companies to close down because they have to sell their assets and prematurely liquidate their investments, shutting down production and sending workers home; a catastrophe that can send a coutry to 50 years or more backward and roll the governments and the social fabrics. This type of catastrophe hit Mexico in 1994, then Argentina and Brazil and recently Sounth East Asia in 1997. These countries are still reeling to come where they were.
In the face of high interest rates the domestic investors will simply shelve their investments and make way for the government which can only borrow. Domestic private investments will shut down and the death toll will be high on the ordinary civilians. But you may say the government can make up for the withdrawal of the private investors. Market economists may labelled biased if they attempt to answer this. But ask the socialist and communist economists what happened when governments have taken over from private investors; the result is damn clear on the faces of former Soviet Republics and Socialist countries; even the so-called welfare economies such as Germany, France and Scandinavians are today feeling the pain after all good intentions and assistance given by market economists. The Fiscal expansion either via reduced taxation or borrowing is ultimately borrowing. If the government reduces tax it must explain where did it get themoney to meet the expenditures that were financed by the reduced amount of the tax. The answer it can give will not be beyond the following: by printing more money, by borrowing from abroad or domestically and by scraping the expenditure in the amount of the reduced tax. Borrowing domestically or scraping the expenditure have already neutralized the objective of the fiscal expansion; if it borrows domestically, it takes back the tax it has given to the citizens. If it scrapes the expenditure, it renders some capital and citizens unemployed. The terrible thing happens if it has to print money to meet the tax cut. This will result in the well known phenomenon in Africa, the so-called stagflation. Stagflation means high inflation levels coupled with falling economic growth rates and developmets. Eeven non-economists can bear witness that real income levels in Africa have been stagnat or declining while prices kept rising. This caused the genral public to comprise their quality of living and surrender to mass products poor and inferior goods and services, second hand products. if you want it but your income cannot afford, the market will change the contents of the products and services to be equivalent to the your purchasing power. Even food contents and health service contents are compromised in Africa. This stagflation; it kills slowly but sure.
Can the government meet tax cuts by borrowing from abroad? Yes, of course. The conditions of the MNEs for getting loan is simple; that is open up your market and that the government should not be allowed to do capital expenditures. Then what should the goverment do with the loan it has taken from the MNEs? And What do the MNEs mean when they say open up your market?
I will continue from here next time; I have to go for discussion with my supervisor.
At the end of this piece, I will expalin why we need union of states to counter the unions of the MNEs; and that because of MNEs the powerful states of the world and once warring states have now chosen to come under a union to have a powerful bargaining degree when it comes to negotiate with the MNEs. Gambia and Senegal are a simple mouthful of the MNEs but charity begins at home. Making Senegambia will influence our neighbours to do so and consquently we can have African union. Who can tell me where and when the European Union was born?And what was the force behind if not economics?
Have a good day
Bukhari Sillah
>Can the government meet tax cuts by borrowing from abroad? Yes, of course. The conditions >of the MNEs for getting loan is simple; that is open up your market and that the government >should not be allowed to do capital expenditures. Then what should the goverment do with >the loan it has taken from the MNEs? And What do the MNEs mean when they say open up >your market?
>I will continue from here next time; I have to go for discussion with my supervisor.
"For those of you, who have not followed this piece from the begninig, please, read the archieve; because you may find it difficult to follow".
when the government borrows from abroad increasingly, Ricardian Equivalence emerges; named after a famous eighteen century Enlglish economist, David Ricardo. David Ricardo said, well economic agents are rational beings, they would look up at the government's behaviour and wondered how the government could pay the debts. they would conclude that the government had no other course but to tax and increase the tax on the economic agents in the country, and that the government would fight for foreign currencies to pay the foreign creditors. The rational economic agents would set up mechanisms to hedge themselves against these future disasters, which are reduced disposable income due to increased government taxation and expected high inflation due to increased price levels, which in turn stemmed from the government's demand for foreign currency to pay foreign credtiors. The rational economic agents have very simple answers that are save more and more and buy more inflation hedge investments such as hard currencies land and buildings than previously. The consquence is that what has been expected has already taken place: the hard currencies would disppear from the domestic economy, prices of land and buildings would become prohibitive, with more savings the real rates on deposits would fall, some times to negative values.
Worse still, the stock markets and other financial intermediaries such as banks mutual funds and finance and investments companies (forget about stock markets and finance and investment companies, because they do not really exist in Gambia) that have been loaded with portfolio investments of the MNEs have to maintain high returns or crash. Maintaning high returns ,for the banks, it means maintaining high lending rates. This is possible if the central bank colludes with the commercial banks to hike the lending rates, because according to market forces ( under the situation we analyze) all the rates should fall including the lending rates.
In economics, collusion is possible if the market is run by few big players and that any member who cheats will make biger profits than under the collusion but the retaliation by other members can send every body out of the business. If the government allows the interest rates (lending rates here) to fall, its objective of fiscal expansion is defeated, because the loans it has taken from abroad will fly out of the country: the MNEs will liquidate their portfolio investments and move their capital out forcing the central bank and the commercial banks to increase their demand for hard currencies to meet their supply of domestic currency by the MNEs: now everybody is searching badly for the hard currencies, the public is demanding them for inflation hedges, the financial intermediaries and the government are also demanding them to satisfy the MNEs who are selling the domestic currency to go out of the country----- this is the crash.
To postpone the crash, the collusion must occur to hike the lending rates. This hike will keep the deposit rates and the lending rates very far apart resulting in high transaction costs. These high transaction costs will send the domestic private investors out of market, those few left will face declinig demand for their goods and services because the economic agents now save more than they consume. The falling real rates of the deposits will cause the economic agents to shift their resources to inflation hedges. Domestic consumers and entrepreneurs will now all borrow to buy inflation hedges such as hard currencies, land and buildings because the returns on these assets are higher than that on the bank loans. The intervention in the market due to the collusion will cause the domestic currency, managed by the central bank to protect the collusion , to be gradually overvalued. The MNEs will spot this gradual overvaluation of the domestic currency, and they too will start selling the domestic currency. This will force the government to negotiate with MNEs the terms of the loans; the MNEs will demand them to devalue the domestic currency ---- the only solution, and this is another crash. The final crash stems from the behaviour of the consumers and entreprenurs as they invest more and more into land and buildings, the money that should have been used to supply food items, cloth, foot wears, education services and health services, etc, are now stuck in land and buildings. If you want to buy travel services you sell land or building, if you want to buy a bag of rice you sell land or building, if you get sick and you want treatment you sell land or building, and so on. Land and buildings are not outputs they are inputs of production; doing business with inputs of production add nothing to the economic welfare and independence of the citizens.
Ask Africa with the vast inputs of production from mineral, timber, crops and fertile land, what did it gain from selling them?. Ask the Arab world, what did they gain from selling petrolium? These oil countries are no where categorized under developed countries, transition countries or developing countries. They have their own title category, called oil producing countries. That is, all their developments are artificial. I do not want to delve into this, but consult economic books and see why these oil producing countries are not found under any of the three categories aforementioned. When people resort to buying and selling the inputs of production, they do only speculative investments and less output will be available in the economy. Because it is a domestic affair, the international community will care less about the increased prices of land and buildings in the Gambia. They care only if these increases translate into inflation and the collusion of the central bank and the commercial banks still remains; a pressure will amount for the domestic currency to be devalued if not the MNEs will ask for its money. But there is no money, all the money is stuck in land and buildings. Foreigners can help, they will bring in the coveted hard currencies for which all the domestic economic untis crave and buy the domestic inputs, land and buildings ----- foreign ownership of the prodution inputs ... a calamity for domestic producers and consumers. The foreigners will use the inputs to produce what the foreign markets demand not what the local citizens demand.
This is why the MNEs want you to open up your market. By openning up your market, they mean no capital control, so they can pull out any time they like. They mean if the collusion occurs, then you should allow your currency to be devalued or else the currency should be floating. They mean foreign ownership into your economy should be widely open, so that when you cannot pay them, they can take the domestic assets and aution them in the international markets.
Why these MNEs do not allow the governments to do capital expenditures such as roads, bridges hospitals, courts, police forces, investments in human capital and more enlightment projects for the public. The MNEs want to avoid the IMF embarrassments. The IMF in the sixties and early seventies gave huge loans to African governments who then put the money into capital expenditures such as mentioned above; things then looked good and fine. But IMF has Paris Clubs and others behind who actually work for profits. They demanded IMF to give them back their money because the investments were making no profits. That was true, you cannot expect hospitals, roads, bridges, courts, etc, to make profits. But the money must be paid; How? Simple; restructure your economy. The money you had to spend to maintain the capital expenditures, that was the money you had to give to IMF as installments until the loan was finally drawn out. Workers had to be laid, roads and bridges left without maintenance doomed to ruin, hospitals left unattended to, human capital left unmaintained resulting in poor education qualities, poor recruits and poor executives. This was an ebarrassment for IMF, countries it has claimed to help; it has ended up ruining them. The MNEs just want to see the same government so that when they come to negotiate the terms of loans, words such as ' I told you' and ' this is what we have agreed upon' can be repeated loudly to deafen the governments. If the governments refuse to be deafened, they wage economic and political wars against the governments; and everybody knows who will win the battle. Thus, if the governments use the funds in a way that will qualify them to see the MNEs again in the next meeting, the MNEs will have no problem with that type of fund use.
The emergence of the MNEs has forced Europe to forge a union whereby economic policies are hamonized to prevent the MNEs from arbitraging on economic policy differences, a behaviour that can defuse the effectiveness of such policies and bring havoc on the affected country as explained above. Thus, if we are serious about economic developments and growth, we must ignore all our differences, forget the Berlin walls and stick together as a strong economic block.
Have A good day
Bukahri sillah
From this piece, you can see how powerful are the MNEs