An Autopsy Report of Dying Economies

2 Aug 2022  Read 114 Views

An apt title to portray the current condition of Sri Lanka, Greece, Venezuela, and Zimbabwe can be- ‘Man Vs Economy: the labour for roti, kapda, aur makaan’ (food, shelter, and clothing). 

A bat flapped it’s wings in Wuhan, China; a catastrophe occured in Sri Lanka, Greece, Venezuela, and Zimbabwe. The devastating impact of COVID-19 on industries was most evident in the global tourism space. Since these economies relied heavily on tourism for inflow of foreign exchange, they now suffered the wrath of borderline poverty. And hence, the title. 

A butterfly flapped it’s wings in Russia; an economic catastrophe happens in Zimbabwe and Venezuela. The tormenting Russia-Ukraine war lead to commodity price inflation which paved the path for global hyperinflation. And so, being welfare-oriented with a sheer lack of industrial infrastructure to boost GDP, Venezuela and Zimbabwe were neck deep in debts. 

Dead Economies around the world Dying patients, soldiers, families and economies. Or ‘Dying humanity and economies’

What kills an economy are large fiscal and trade deficits, hyperinflation and  acute shortage of bare essentials. What makes this killing more economically gruesome are factors such as civil war, that can push fragile economies to the brink. Consider the following section a morgue where we talk about the DEAD (economies). 

Greek Economy

It all started in the 1980s when instead of working towards vitalizing the economy, Greece introduced expansionary monetary policies. This paved path for peaking inflation rates, huge fiscal and trade deficits, dropping growth rates, exchange rate crises, and a huge depreciation of the Greek Drachma. In 2007, while still recovering from these pangs of incompetence in a super-competetive European goods and service market, the global financial crisis pushed Greece further down the list of sick economies. And so, it couldn’t earn or benefit from export revenues even after being a part of the European Union. 

Another dramatic blunder in the Greek economic conundrum was in 2015. So normally, sovereign debt is considered default-free, but Greece defaulted on its sovereign debt of €1.6 billion to the International Monetary Fund! (I mean, howwww!?) Above all, it literally ignored all such structural problems relating to the country’s systematic tax evasion. 

Sri Lankan Economy

The pandemic took a toll on Sri Lanka’s economy by severely impacting its tourism. On top of that, the country had also undergone a long civil war after borrowing huge loans of $ 2.6 billion from the IMF in 2009 and $ 1.5 billion in 2016. While the portrait of a dying economy hovered over the Sri Lankan skies because of these conditionalities, more deterioration was on its way.  

The newly elected government of Rajapaksa made a lot of welfare promises to farmers and lower taxes. With sinking exports of most of its products and a reduction in tourist arrivals because of the bomb blasts and COVID, Sri Lanka’s fiscal deficit rose to 10%. 

More insult to injury, the government also banned imports of chemical fertiliser to facilitate a switch to organic farming. This short-sighted policy depleted food stocks so drastically that the economy suffered hyperinflation. Currently, inflation at 15% is rising to 17.5% pushing millions of poor Sri Lankans to the verge of poverty. 

Venezuelan Economy

Venezuela, the world’s 7th largest oil exporter, derived 96% of its export revenues from oil-related sectors. Its economy dealt with the crisis by cutting imports of essential products like coffee, flour, milk, medicine, and soap. Its expansionary monetary policy and deficit spending caused inflation to surge to 63.16 % in 2014.

The Venezuelan economy started suffering even more with low oil prices in 2015. The oil-producing infrastructure was losing ground, and despite low oil revenues, the then government did not curb spending. They denied that a crisis existed by violently repressing any opposition. Thus followed a mass exodus and affliction of citizens because of the civil war and the effects of hyperinflation. 

The chronic shortage of food and medicine, closure of businesses, soaring unemployment rates, loss of productivity, authoritarianism, and human rights violations were the order of the day and with it, the economy bit the dust. 

Zimbabwean Economy

The Zimbabwean Dollar was the official currency of Zimbabwe from 1980 to 2009. It underwent rapid depreciation against the USD, and the country experienced hyperinflation of over 175%. 

Being primarily an agrarian economy, the food bowl for the surrounding areas Zimbabweans have, for a long time, suffered the misgivings of famines and droughts. Adding more impediments to the financial crisis, the government made a series of welfare payments to war veterans. It also proposed a scheme to buy land farmed by white farmers and redistribute it to the black farmers. The cost-push inflation aggravated by this land redistribution policy caused agricultural output to fall sharply.

Now, the price of goods and services doubled daily (literally) at the peak of its crisis. The government demonetised the Zimbabwean Dollar and changed the currency system to a basket of regional currencies, including the South African Rand, USD, and Euro. The agrarian collapse set off a chain reaction that ended in the Zimbabwean currency losing its value and place in the country.

Zimbabwe in 2008 had the world's highest inflation of 79,600,000,000%.


The Common Killer

Apart from the theme of death, the four economies have some common characteristics-  

  • Hampered Tourism: They depended on tourism revenues, and Covid-19 decimated this aspect of the tourism-based economies such as Greece and Sri Lanka.

  • Political Strife: They were devastated by the prolonged political scrabble and civil war, which ravaged the country and the economies of Venezuela and Zimbabwe.

  • Over-leveraged economies: They all accumulated considerable debts they could not repay because of the poor GDP growth, lack of export revenues, and insufficient foreign exchange reserves. 

  • Systematic tax evasion: Most of these economies had systematic tax evasion, which could have facilitated growth-oriented capital investment.

  • Commodity-induced hyperinflation: The Russia-Ukraine war caused hyperinflation and raised fuel costs, among other expenses. All economies experienced hyperinflation, with inflation reaching multiples of 1000% or more.

  • Shortage of Essentials: Acute food, milk, essentials, and power shortages affected the citizens' quality of life in these countries. The following factors explain this shortage:

  • Faulty agricultural policies of the governments in power in Sri Lanka and Zimbabwe, like banning chemical fertilisers and land reallocation, seriously jeopardised agriculture in these countries.

  • The currency black market in Venezuela creates a shortage of imported essentials. Influential Venezuelans who purchased foreign currency were more interested in profiting from the black market in US Dollars than importing essential goods for consumption.

  • Greece’s austerity measures imposed by its creditors meant that the citizens did not have sufficient money to buy essential goods. 

  • Adding on to this was commodity price hyperinflation due to supply bottlenecks worldwide.

Fallacious economic policies and fiscal and monetary experiments lead to the destruction of entire economies. The citizens are left bereft of bare life essentials.   

Conclusion

In his book, ‘A Surprising Economic History of the World,’ Alan Beattie states that countries do not develop or collapse by accident. They make choices by design. 

Some of their fiscal and monetary experiments prove detrimental due to ill-thought policies. In contrast, others, because of their farsightedness, succeed and go on to become economic superpowers. 

In addition to these human-made disasters, natural calamities and epidemics also play their part.
 

About the Author: Ayushi Upadhyay | 238 Post(s)

A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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