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Peopleonomics: Looking under thy nose

Economics

This column has been contributed by a PhD student of Economics exclusively for Anti-Orientalist.com who chose to remain anonymous.

Imagine, you have a good business idea, and that you need money to fund it. Where would you go? You would go to the nearest bank. Another option is to attract some investors. If you are very desperate, you would go to loan sharks. But what about family and friends? If they trust you, and believe in your idea, they will gladly help. Trust is the ultimate deal maker in business and economic transactions. Think about the made in Germany vs made in China. Therefore, no matter how little each member of your social circle could help, the total amount could cover the required costs.

Let’s apply this logic to governments. Governments need funding to finance infrastructure and other types of developmental projects and they need to raise funds for these projects. In normal political and economic conditions, and regardless of whether this is the best option, governments can and usually easily borrow from domestic or foreign lenders. They also often bend backwards to  attract investments from the private sector, be it domestic or foreign.

Lenders and investors usually require interest rates or rates of return that depend on the nature of the project, global rates, and  risks associated with the country’s political, economic and financial conditions. Unfortunately, this could result in many necessary projects not to be implemented or be underdeveloped due to lack of funding, as the rates required by financiers could become extremely high. Even worse is when many of the less fortunate countries accumulate debt to the point that debt becomes a political and economic problem, thus they “solve” the problem of financing projects by creating a deeper and long-term problem.

When you add political constraints to the mix, like sanctions, foreign funding becomes simply not possible, at any rate. What should governments do in this case? A simple answer is to borrow domestically. For the right “price” domestic banks would be willing to fund government projects. However, this “price” would be very high, and will be paid out of citizens’ pockets. Since government loans are usually paid back out of citizens’ pockets, through taxes and similar means, then why not go straight to the people? That is, why not turn to your people to fund “their” projects?

A practical way to do this is to issue shares or bonds that people can buy, to invest in and fund these projects. This way, a government can solve many difficult problems. First, of which is the direct problem of finding funding needed for important projects. Second, absorb excess liquidity in the economy that is going to less productive or non-productive investments, like real estate, gold and so on. Digging deeper, one could find other benefits of this type of funding, in terms of the distribution of a country’s income and wealth for example.

Nonetheless, here comes the real challenge. If people don’t trust the government, they would not risk their savings to fund it. With corruption and similar problems, people, including the writer of these lines would not trust the government with a penny. Nevertheless, it should be kept in mind that in the contemporary world, through media, political opponents of a state can create a crisis of trust through fake news and alter reality. Just think about how when the news reports in October 2017 revealed that Japan’s Kobe Steel faked data for metal used in planes and cars, most people still viewed Japan and Japanese products as the benchmark of high quality. This would not be the case if Kobe Steel was a Turkish or a Chinese company. Why? Because the corporate media already violated the trust of the global public in made in Turkey or China concept.

All the governments which are fighting for their independence and facing sanctions, looking for solutions in plain sight is as important as thinking about global strategic issues.

Our call is the following; fix your broken doors and windows, because the thief is always right around the corner. This approach will automatically contribute to boosting trust of the population, thus cultivate an environment where the local population will be willing to inject cash and “suffer” the short term political consequences.

 

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