The Perils of Retro – Economics

    The ignition to economic growth that we have seen around the globe since the 1990s was the effect of economic liberalisation. This economic thinking prevails on the premise that governments become smaller and that more space is given to private enterprise. This results in higher efficiency, a better allocation of resources, less waste and higher growth. Opening the economy to new markets and foreign capital and investment will sharpen enterprise competitiveness. Improved competitiveness, be it in manufacturing or in services, boosts market growth, investment and employment. The opening of Malta’s economy in the late 80s and 90s, followed by privatisation, increased foreign investment, entry into Europe and the euro area, have contributed to steady real economic growth, sectoral diversification, increased employment opportunities and resilience to the financial and debt crisis of 2008 and 2010. Growth in emerging economies like China, Brazil and India are all a result of liberal economic policies.

    The time of festivities may however be over. Also as a result of a crisis which has its roots in financial liberalisation (meaning unregulated creativity and innovation in financial products and their sale, besides the fundamental deficit in ethics and morality), we are seeing signs of a return to the economics of the seventies. A few weeks ago in one of my blog contributions I expressed my fear of a return of nationalisation. This had caused havoc around the world with bloated inefficient monopolies that employed incompetent cronies, and provided lousy services. There are today further signs of retro-economics.

    Around the world we are seeing countries returning to protectionist policies, creating tariff barriers on imported products. “Buy local” campaigns have been launched in countries as diverse as Australia and China. Notwithstanding the knowledge that raising trade barriers (and not necessarily by raising tariffs) will prompt retaliatory measures and deepen economic slowdown, left leaning governments are introducing protectionist measures that are even subtler than simply increasing trade tariffs.

    “Currency wars” are also on the scene, with the return to the exchange rate manipulating policy to artificially increase the country’s competitiveness. Japan is at the moment actively forcing down its currency, sparking complaints from other countries, and tempting competitors to go into a “currency war”. The sentiment around European countries to exit the euro is also a reflection of these currency tensions, believing that politicians will be in a better position to manipulate their exports price.

    This leads us to another serious threat to economic liberalisation with attacks on Central bank independence. The “politicisation of exchange rates” in countries like Japan and non Euro countries and giving the tool for devaluation to politicians will be a great blunder as it accentuates the risk of returning to the devastating results of the economic policies of the seventies, namely economic stagnation and inflation.

    Why have I raised this issue of Retro- economic policy when we are comfortably part of Europe and a net beneficiary of being members of the euro zone? The election campaign has raised spectres of the past. There has been a trait of nostalgia to the economic policies of the seventies and eighties. The nostalgia for government’s interventionist role in the economy by generating (mostly unproductive and unnecessary) employment, creating a culture of dependency and killing initiative and entrepreneurship, and instituting centralised planning and heavy handedness in implementation. It is time to reflect on the perils of retro economic policy.

    Joseph FX Zahra
    Economist