Stimulus package and the recession
ON Sunday the finance minister (FM) announced the much awaited "stimulus package" -- Tk.3,424 crore instead of the Tk.6,000 lobbied for by the FBCCI -- covering the agriculture, power, and export sectors.
Tk.450 crore is earmarked for three export sectors, Tk.1,500 crore for farm subsidy; Tk.600 crore for power sector, Tk.500 crore for agricultural loan recapitalisation facility, and Tk.374 crore as reserve for the social safety net.
Some leaders of the RMG sector were disappointed. They shouldn't be. This sector brings in forex earnings of approximately $4 billion while expatriates' remittance in recent months has been around $10 billion. So, shouldn't scarce resources be allocated to economic entities that promise the highest return?
At a time of declining exports, due to external shocks, the best way to keep domestic workers employed and factories running is to create domestic demand by discounting prices for domestic consumers. Bailing out funds recipients, exporting products at lower prices to keep their supply chain competitive and active, would be tantamount to transferring benefits to foreign consumers at the cost of domestic tax payers.
That seems unwarranted at this time since -- as the FM observed -- export growth of the readymade garment sector was not yet "bad." So, firms in RMG sector receiving stimulus funds should invest them in modernising their capital equipment.
Some of the funds for the agricultural sector (including fisheries, poultry, and livestock) also should be invested in procuring efficient equipment, and the farmers' woes should also be taken into consideration in any bailout venture. Buying rice to keep the market price high should be a priority. Besides, funds should be diverted to infrastructure development.
On remittances, the FM referred to the ongoing diplomatic initiatives to protect the expatriate labour market and explore new ones. That's not enough. Returning expatriate workers should be retrained for better future job prospects abroad.
The FM has rightly observed that the effect of global recession on our economy isn't comparable with other Asian economies -- especially those integrated with the global capital market and the banking sector. In fact, the size of the stimuli and the recent data indicate that any adverse effects on the economy so far are mild at best but warrant vigilance. This also calls for a review of how recession is defined and measured.
In US, recession is characterised by declining real GDP growth for two consecutive quarters. However, the severity of recession is measured by how far the actual GDP is below its full employment level -- the so-called "recessionary gap," or GDP gap.
The American concept of full employment GDP refers to a situation in which everyone who is willing and able to work finds a job. At full employment GDP, the measured unemployment is still positive -- mostly due to structural and frictional unemployment (workers leaving one job and searching for another/moving to another job are experiencing frictional unemployment, estimated at around 4% -- but non-existent in most developing economies).
For Bangladesh, full employment GDP may be defined as the GDP that can be produced when all available land, capital, and all other non-human resources are fully employed. The reason for exclusion of labour in my definition for Bangladesh economy is obvious -- there are many times more job seekers than the economy's capacity to employ them in a well defined activity, ceteris paribas. Besides, in a predominantly agro-based economy, measuring unemployment isn't an easy undertaking.
So, how do the policy makers measure recession in Bangladesh without knowing the full employment level of unemployment -- hopefully not the same way BNP's finance minister Saifur Rahman forecasted GDP growth in Dec 2005. While discounting Bangladesh Bank's estimate of GDP growth range of 6.3 6.8%, he made his own prediction of over 7% growth based on his "visual drive by construction sites" from Dhaka to Sylhet (DS: December 23, 2005, The FM's drive by GDP growth model).
Regardless of how recession is measured in Bangladesh, expatriates' job losses and declining remittances and export demand are external shocks that cannot be offset with any amount of domestic fiscal incontinence. However, discretionary spending will be almost perfunctory once spillover effects of external shocks inflict the threats of massive unemployment and shutdown of businesses and factories.
In an open economy, external shocks are regular occurrences -- and government responses must not be opaque and desultory; instead they should be targeted in a cautions and measured way -- as the FM presciently and progressively did while bypassing the vested interests' usual critiques of the just released stimulus package.
For all latest news, follow The Daily Star's Google News channel.
Comments