Global Recession Looming: Inaction Has Consequences

Aug 24 , 2019.

Last week, the Office of the Prime Minister unveiled a three-year economic reform plan dubbed the “Homegrown Economic Reform Programme.” For a change, people of the highest order are showing their keenness to engage the public imagination with, as Bill Clinton once put it, “It’s the economy, stupid.”

It was a time in the United States when the superpower came out from its war that forced Iraq’s Saddam Hussein out of Kuwait. A young governor from Arkansas, Bill Clinton, had challenged the incumbent, George H. W. Bush, whose approval rating at the time was over an unprecedented 90pc. The United States economy was, however, in recession, which led Clinton’s campaign strategist, James Carville, to coin the popular phrase: “It’s the economy, stupid.” The following year, in 1992, Bush’s approval rating regressed to 64pc, hence Clinton’s victory to the presidency.

It is hard to think the Prime Minister’s men bear this in mind when they unveiled the administration’s road map for macroeconomic growth last week. But it is a reassuring departure from a near neglect of macroeconomic issues since the rise to power of Prime Minister Abiy Ahmed (PhD). His macroeconomic and policy advisors briefed the media that this was part of the government’s plan to address inefficiencies identified in the economy. Among other things, the programme targets the mining and tourism sectors as areas that create jobs and generate foreign currency.

Ironically, this came in the same week when international markets were facing their own challenges. The business pages of the international press were filled with stories that warn of a global recession ahead. Some notable economists are now forecasting a real possibility of that happening, beginning perhaps as early as 2020.

What triggered this episode of fear could be indicators of economic downturns, such as the “inverted yield curve,” that are hard to overlook. Primarily, they pointed toward an immanent slowdown of the United States economy. Long-term interest rates are falling below short-term prospects, showing that investors are nervous. Declining investor confidence is feeding the fear of a global recession.

Add to that an ongoing trade war between the US and China, as well as the uncertainty around the UK’s planned exit from the European Union. These are developments that are not helping either. The signal from wizards of the global economy has been one of caution. In April, the IMF’s Chief Economist warned that the world economy was entering a delicate moment. The Fund’s global growth outlook for the year is the slowest in 12 years.

It will be consequential for Ethiopia’s policy makers to ignore these as matters far removed from their reality. They are not.

There is never a good time to get hit by a global recession; however, if all these were to lead to a global recession next year, it will be the most unfortunate timing for Ethiopia. For a country with structural issues in its trade deficit (it spends five times more on imports than what it exports), the impact from a global recession cannot be underestimated. Ethiopia wants to export, attract foreign investments and beef up its forex reserves.

All these depend on the robust performance of the global economy.

Take the rolled out economic plan. The administration has identified mining and tourism as areas of focus to create jobs and generate foreign currency. They are both sectors that will be highly affected by the international investment climate and business confidence. If there is a recession, long-term foreign direct investment will dry up, and there will certainly be a lot fewer tourists travelling around the world.

And all these will be happening as the country may be entering into national elections that many fear will exacerbate skirmishes and conflicts that are already causing displacement and instability. It all seems to lead to a forecast of a perfect storm of challenges.

Some may argue this is being too pessimistic. Recessions are notoriously hard to predict accurately, and it is possible that the world may dodge a bullet. But that is hope, not a plan. The prudent thing for policy makers entrusted with the nation’s economy is to hope for the best but prepare for the worst.

Global slowdowns usually have the most impact on developing economies in expected declines that will come through lower commodity prices, a reduction in demand for export items and less tourism, as well as a reduction in financial flows like official development assistance, FDI and remittances. Also, rising import prices, tighter financial settings and high debt-servicing costs could cause debt distress.

Avoiding these conditions altogether might be impossible, but efforts could be expended and policy options set out in order to limit the damage and expedite the recovery. That would require timely and suitable responses from the administration and international development partners. One of the things to consider is to set pre-planned priorities so that possible damage to a certain sector of the economy can be contained. Redoubling efforts to increase the tax base and mobilising more domestic resources, including stronger domestic deposits, can be a wise start.

Prudent macroeconomic efforts have to be applied to expedite the creation of an enabling business environment for the private sector so as to ease the burden on the public sector. The administration can refocus its priorities in boosting competitiveness in the economy to enhance innovation and productivity, the twin challenges for Ethiopia through the years despite changes of regimes and systems. It helps to acknowledge the fact that it is not countries that compete in the global economy. Instead, it is companies that are standard-bearers and need to be supported through policies.

In an adverse economic climate, like all crises, the role of strategic leadership is crucial. It is essential that leaders rise to the occasion and inspire confidence and kindle hope, as fear and uncertainty do more damage than an empty pocket.

PUBLISHED ON Aug 24,2019 [ VOL 20 , NO 1008]

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