13 simple truths about the economy

I’ve been trying not to comment on the sad state of Egypt’s economy for a while. So rather than commenting, let me state a few things that I know are usually true, regardless of the time or place:

  1. You cannot defend your currency when you are out of foreign currency reserves and with a negative balance of payment. Sooner or later you need to float. The sooner the better. If you chase the dollar it takes you down and leaves you bankrupt with a big debt, higher inflation, and a ruined economy.
  2. The solution to a balance of payment deficit is more exports. Help your exporters export more — give them incentives and all the support you can.
  3. State capitalism does not work. It produces some quick results over the short term, but eventually it destroys the market and the institutions that make it work. It is easy for the state to take over the economy, or some sectors of it. Undoing that is hard, costly and painful.
  4. Economic ratings are based on political stability as much as they are based on economic performance. If you read any country economic report or risk analysis you will find that it starts  with the political context. Democracies are at a premium; authoritarian regimes are penalized. Why? History says democracies, despite their mess, are more stable over the long term.
  5. People or companies respond to incentives, not to orders or decrees. Give them a positive incentive to do what you want and they will do it. Order them, and they will do the opposite. They work to protect their economic interests. They will exchange the dollar with whoever gives them the higher price. They want to preserve and grow their wealth.
  6. You cannot attract foreign investors if you can’t keep your local investors. The first thing a foreign investor does when he visits a new country is have dinner with some local investors. You can imagine what they talk about over dinner.
  7. People spend and invest based on their “mood.” When people are scared, they don’t spend and the economy goes into recession. When the mood is scary, investors don’t come (local or foreign). When the mood is optimistic, people spend and invest, and the economy grows.
  8. Investing in infrastructure is great, when it supports more production, exports or jobs. Roads that connect an industrial zone to an export port are great. Roads that lead to nowhere are bad investments.
  9. The foundation of any economy is the “rule of law.” When contracts are not enforced and property rights are not protected, you are considered a risky place to invest. And even when people invest, they tend to take their profits overseas immediately.
  10. Nobody is conspiring against you; they’re just implementing their (usually public) economic and foreign policies. Others just care about their interests. They will help you or fight you if that serves their interests.
  11. This is not the worst time to have an economic crisis: interest rates are super low (which means low cost for borrowing) and oil prices are also low (good for non-oil exporting countries). You’re lucky, but don’t waste your luck.
  12. The IMF is the “lender of last resort.” It was designed to rescue countries that are about to go bankrupt. The price of the rescue package is usually a painful austerity program to restore economic stability, including policies such as tax hikes, cuts in subsidies and public spending, devaluation, privatization, and all these nasty things. It forces governments to do things they ought to do, but at the wrong time when the political price is too high.
  13. Extreme wealth and income inequalities are bad for economic growth, and they’re also very dangerous for political stability. Investing in social safety nets has the highest return on investment; from economic, political and security perspectives.

This post originally appeared on Facebook, and is republished with permission.

Ayman Ismail 

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