Globalization and the Future of Liberian Economic Policy
By Geepu Nah Tiepoh
Jan 9, 2001
Two sets of forces have combined in the last decade to challenge the Liberian society and economy. One of these forces was the outbreak of civil war in the early 1990s, resulting in national political chaos that culminated ironically in the enthronement of the major warlord (the repercussions of which Liberians are still suffering). The other set of forces that have concurrently challenged Liberia is the increasing global dominance of the liberal economic policy vision which reemerged in the early 1970s after nearly twenty-five years of relatively strong state economic intervention (1950-1973), and has since gained growing momentum under the thesis of globalization. On the domestic front, economic liberalization and globalization seeks to enforce private entrepreneurial dynamism, state economic withdrawal, and social economic austerity through privatization, deregulation, and government budget cuts. On the international front, it seeks to globally integrate national economies and policies by removing restrictions on international trade, and direct and portfolio investment flows. At both levels, economic globalization poses real policy challenges to the economies of the world.
In the last ten years or more, such implications and effects of globalization have been at the center of national and international economic debates around the globe. Unfortunately, due to Liberia's persistently tumultuous political climate, in which the country has remained politically and economically paralyzed under leaders who have now become international pariahs, the country has been preoccupied, however justifiably, with extinguishing flames of armed conflicts, restoring domestic political sanity and peace, and reconstructing basic economic and social life. In this process, Liberians have sidestepped other equally important challenges shaping the future of their country's long-term economic development and policy.
But just as the Civil War and its persistent political and social repercussions have commanded and continue to deserve the national attention, the current trend of economic globalization has serious implications for Liberian economic policy and wellbeing, which too deserve and must claim our attention. While the efforts aimed at restoring domestic political and social sanity have been inevitably justified, they have side-swept other equally important and crucial development issues, such as the implications of globalization for long-term national economic development and policy. Some may argue that it is futile to be concerned with Liberia's long-term development issues, especially at a time of heightened domestic political incapacity. After all, the country cannot even effectively sustain short-term development under the current dismal political conditions. But such an argument would be extremely naive because, while the present Taylor regime does not have the requisite political capital and capacity to be concerned with long-term economic development, in view of its deep-seated crises, it must ultimately leave power (by any means necessary). Thus, it would be unwise for Liberians to be preoccupied with only the current political and socioeconomic crises of the country and await the demise of Taylor before refocusing on long-term development issues. Such an approach would be tantamount to awaiting the departure of an unqualified captain of a defective ship before learning about the defects of the ship. In contrast, however, it is more sagacious for the prospective captains to be concerned with both the global challenges or defects of the ship and the conduct of the present captain so that by the time the latter leaves, the new captains would have been in a stronger position to sail the ship. Therefore, we need to know about the global policy challenges facing the ship of the Liberian economy even as it wobbles under Taylor. We need to know how the sea waves of globalization banging on this ship are likely to impact on our future ability to control it once Taylor leaves.
One of the key policy implications of globalization, which has received increasing attention, is the effect of international capital flows on the ability of governments to control their own national economic policies. The conventional view is that advanced communications technology and financial market deregulation have made it possible for international financial capital and foreign direct investments to move more freely across national boundaries in pursuit of better rates of return (i.e., higher interest and profit rates). Because of this, countries that need to attract and retain international investments must avoid undertaking expansionary monetary or fiscal polices, as well as 'strategic' industrial policies, that lower such rates of return below world levels and restrict the behaviors of transnational corporations, since these attempts will prompt investors to react strongly by moving their finances to other countries promising better returns. Any country disregarding this wisdom risks short-term capital flight and the outflow of foreign direct investments. Such capital fight can in turn precipitate a decline in the country's exchange rate and thus pressure its central bank to raise short-term interest rates in order to prevent further depreciation of the domestic currency.
In adhering to the above view, governments have allowed financial globalization to hold hostage their macroeconomic and industrial polices. Monetary authorities in both developed and developing countries are now swinging to the appetite of the financial markets for higher rates of return. And in such a race for getting the 'prices right', fiscal conservatism has become the order of the day. Governments are told not to spend too much and run deficits, as such deficits are believed to cause inflationary monetary growth leading to reduced real interest rates. As a result, even during periods of mass unemployment and slow economic growth, governments are advised to desist from making significant investment spending and maintaining lower interest rates. The theory is that government spending can "crowd out" private investment projects as it competes for scarce savings in the economy, and thus keeps interest rates high. And since this "sound finance" theory also believes that it is only the private sector that can properly manage investments and create jobs, it frowns on significant government spending and economic investments.
With respect to the Liberian situation, one can readily dismiss this argument that it is government competition over scarce savings that has caused the very high interest rates in the economy. Since the inception of the IMF Staff-Monitored Program (SMP), the country has been under a tight monetary regime, with the Taylor government required to refrain from borrowing from the Central Bank and private banking system. IMF Staff reports indicate, for instance, that net claims on government from the banking system have increased only "marginally" (1.2 percent) for 1999. However, in spite of this obvious lack of government competition over loanable funds, average lending rates have been extremely high (from 26 percent at the end of March 1998, they fell only to 17 percent at the end of October 1999). Such high interest rates are therefore more a result of the extreme lending risk conditions facing banks, and the government's own tight monetary policy which has possibly caused a shortage of loanable funds. In short, the theory of sound finance is at least problematic in this particular Liberian case.
Notwithstanding, Liberia, which not too long ago emerged out of a self-inflicted civil war of economic and human destruction, and whose economy is still plagued by mass unemployment and hollow growth, has had to travel this traditional route of tight money and fiscal conservatism. It has now become a regular routine for the Taylor government to pledge balanced or surplus budgets for each coming fiscal year, even though such commitments are hardly kept. For instance, under pressure from the international institutions, such as the IMF, the government pledged a balanced budget for 1999 but recorded a deficit of $US2 millions (or 0.5 percent of GDP) for that year. And as if to outdo its previous promise and impress the international financial markets and institutions, the government again targeted a surplus of US$2 million for the January-June 2000 period, only to register a deficit of $US4 million (or 1 percent of GDP). A balanced budget on a cash basis was also pledged for the last half of 2000 (the verdict is still out). In all cases, these deficits were incurred not for productive investment activities but for consumption expenditures, such as purchases of government vehicles and presidential and security-related outlays (IMF Staff Country Reports for 1999 and 2000).
The above point brings us to considering a different kind and unconventional view of government deficits. There are many economists who believe that government deficits and debts, especially debts held domestically, do not always and necessarily pose a doomsday. First, the simplistic view that inflation solely originates from public deficits and monetary growth, which partly underpins the monetarist opposition to government spending, is not valid. Besides the fact that the crucial theoretical assumptions underlying this view are not always supported, it is also the case that certain structural factors can cause inflation as well. Second, if the rate of unemployment is high, and economic growth and capacity utilization are low, such as those conditions in Liberia, and if government deficits are for investment and capacity creation rather than consumption expenditures, then such deficits cannot be viewed as the cause of these phenomena. For example, can it be convincingly argued that high government spending and deficits per se are responsible for the current mass unemployment and slow economic growth? (I insist on saying slow growth because even though IMF Staff reports indicate that Liberia's real GDP grew by 20 percent in 1999 and is expected to register 15-20 percent for 2000, the same reports show that per capita income has remained very low, at about one-third of its pre-war levels. This simply implies that because the economy is emerging from a very low GDP base, the current rates of growth, however impressive they may seem, are insufficient to amount to any meaningful per capita income levels. At current GDP growth rates, it is going to take long time for per capita income to attain its prewar levels).
On the above question, it is obvious that government spending and budget deficits per se are not the primary cause for the widespread unemployment in the Liberian economy. If there is any link, it is the nature of government spending and deficits that must be blamed and not the act of running deficit itself. We are told, for instance, that the US$4 million budget deficit registered for January-June 2000 was for consumption spending on presidential and security affairs. The money to finance that deficit was obtained by taking US$2.5 million away from civil service wages and US$1.5 million from other non-wage items. Thus it is such acts of running unproductive deficits, which take money away from the productive labor forces towards near-deadweight activities, that have to be condemned.
As indicated previously, one of the main reasons for which the conventional view of globalization is against government deficits is that such deficits increase money supply, inflation, and thus reduce real interest rates. And when real interest rates are eroded, this leads to abrupt short-term capital flight. There are other economists, however, who question the absolute validity of this view. These economists doubt the wisdom of raising interest rates as an incentive for preventing capital flight. They argue that if international moneylenders lack confidence in the enforcement of financial contracts, no increases in interest rates will be enough to keep them at home. International financial investors are attracted to countries not merely because of high interest rates, but also because such countries may have appropriate institutional structures that ensure confidence in the enforcement of financial contracts (Epstein, 1996). For example, no higher level of interest rate may be sufficient to attract foreign portfolio investors to a Government of Liberia bond, given the precariousness of state institutions in the country.
The above position implies that, contrary to the conventional liberal view, reducing interest rates or profit rates below world levels does not automatically spark capital flight and exchange rate depreciation. It is possible for countries to have more autonomy to implement expansionary policies that lead to reduced interest rates as well as improved growth opportunity without necessarily provoking disruptive capital fight, if such countries can also institute contract enforcement structures that ensure investors' confidence. But there is a caution here. Not all contract enforcement confidence structures are suitable for enhancing progressive and autonomous policy goals. As Epstein (1996) argues, the kinds of enforcement mechanisms associated with current regional free trade and investment agreements, which require governments to extend the right of national treatment to foreign investors, are not likely to promote progressive policy even though they may enhance investors' confidence. On the other hand, there is a growing movement questioning the very wisdom of allowing free and unregulated international capital mobility. Advocates for this position believe that national governments should have some control over which types of capital that they want in or out of their countries. This is because if abrupt flows of short-term financial investments are disruptive of progressive economic policy goals, then the best way to stop this disruption is to control such flows directly.
In a way, capital controls appear feasible when one considers the policy tradeoffs involved. According to the Mundell-Fleming model, in open economies there are tradeoffs between the goals of independent domestic monetary policies, exchange rate stability, and free international capital mobility. Governments and central banks cannot simultaneously enjoy independent monetary policies (that is, have the power to control domestic interest rates); stabilize or fix their exchange rates; and allow unrestricted capital movements. They can only achieve two of such policy goals at a time. For instance, a country that has chosen to allow unrestricted capital flows and exchange rate stability can only do so at the cost of the independence of domestic monetary policy. But if a country prefers to have monetary independence and unrestricted capital flows, then it would have to be prepared to face exchange rate volatility. It therefore follows, from this model, that countries can forfeit unrestricted capital flows (that is, impose appropriate controls over capital movements) and at the same time try to achieve monetary policy independence and exchange rate stability. In practice, however, this is not the policy combination that suits the current globalization agenda.
To conclude, the implications of globalization for national economic policy are complex to be adequately addressed in this brief. The intention here was to set this discussion using one critical element of the globalization phenomenon for illustrative purposes. My central argument was that the Liberian economy, like all other national economies, faces serious global forces that have to be studied and discussed even as the country wobbles under reckless and self-paralyzing political adventures. The disruptive forces of globalized financial markets are set to attack any national economy regardless of which government they find in power. However, under an effective, capable, and democratic state system, and with the appropriate knowledge of the global forces, Liberia may be able to harness whatever positive effects there are in globalization and fight off those that threaten her national autonomy. Surely, this we cannot achieve under the current political situation, but we must begin to deliberate on the forces of globalization.