Different answers to the same questions

Different answers to the same questions

It’s a good idea sometimes to write down all the important questions that are frequently asked but have not successfully been answered definitively: Does strong demand always create a high growth rate? Is this growth sustainable? When governments try to support economic activities through stimulus packages, why do these efforts sometimes fail? Do high growth rates widen the current account deficit in every economy? Why is the current account deficit a risk for some countries? Et cetera, et cetera.

It is quite difficult to give the same answers to these questions for every country when external elements are becoming as important as domestic ones and people’s reactions to economic policies are so variable. At first glance it seems rational to defend the idea that loose monetary and fiscal policies always create strong domestic demand and consequently support high growth rates. Then why have stimulus packages not been able to increase domestic demand sufficiently in the United States? Another question: During the first oil crisis, when Western governments began to implement easy money policies in haste to stop the rise in unemployment created by their wrong policies, why did inflation accelerate instead of growth?

Another important question is about the sustainability of high growth rates. Naturally, Western governments’ main concern is the probable negative impacts of a worldwide recession in their national economies. However some domestic problems, both economic and political, might also reduce the sustainability of high growth rates. It is not difficult to remember most of the economic crises that Turkey has faced since 1950.

There is also the question of why high growth rates are not widening the current account deficits in some countries but are first widening the foreign trade deficit and consequently increasing the current account deficit over gross domestic product ratio in some other countries. The answer is simple: If the value added of the exportable goods of the second group of countries is modest and exports depend mainly on imports of energy, raw materials, machinery and equipment and the like, accelerated growth increases the double deficits.

Last but not least, is it true that the current account deficit is a serious risk for every country? Naturally it is not the case for every country. The obvious example is the United States; naturally, authorities, economists and a large proportion of the business leaders in the country think about and sometimes talk about the risk but do not put the problem at the top of their agenda. However, in some other countries where financial markets are quite fragile, current account deficits are seen as a serious risk. Whenever economic or political turmoil occurs, nationals and foreigners usually rush to foreign exchange markets. Exchange rates jump to unbelievable levels in a very short time, interest rates follow the same pattern, and all macro-economic balances deteriorate. Remember again the last important crisis in Turkey before 2008. During the same time period, many Latin American countries faced the same problems.

In short economic policies have different repercussions on different economies. If people are panicked because of a surprise rise in unemployment, as happened in the United States in 2008 and 2009, they prefer to keep the extra money provided by stimulus packages in their pockets instead of spending it. On the contrary, if people are not pessimistic about the near future, tight monetary and fiscal policies won’t be able to change their shopping habits but will change their propensity to save. All these make economic problems more complex, requiring first more sophisticated theories to understand them before rational solutions. Unfortunately none of them exist at the moment.