Who’s and why’s of a stimulus

Tanim Ahmed*, NewAge, April 23, 2009

It is evident from the outlay of the stimulus package and the specific measures focusing upon export sectors that the package presumes a continuation of strong outward orientation of the economy, although a more inward orientation might help Bangladesh to fare better through the financial crisis.

WITH limited resources, the government’s recently announced stimulus package was bound to disappoint some quarters. The money, a little over Tk 3,425 crore, could only go so far. And towards that end it only appears to have hurt the sentiments of those directly involved with readymade garments. Economists and experts have been conspicuously silent on this issue which should be enough of an indication that few sympathised with the demands of the garment manufacturers, although the knitwear sector could have used some assistance which even the finance minister later agreed at a meeting with the knitwear manufacturers.
   

It is evident from the outlay of the stimulus package and the specific measures focusing upon export sectors that the package presumes a continuation of strong outward orientation of the economy, although a more inward orientation might help Bangladesh to fare better through the financial crisis should it begin to tell upon Bangladesh’s international trade prospects. Then again a stimulus package aimed at countering the effects of an international financial meltdown that might only affect the economy indirectly, the government would, for the short term, look towards providing assistance to the export sectors.
   

However, on the outward orientation, even as much as can be gathered from the projections for the next fiscal year, the government does not appear much concerned about creating employment, generating demand or boosting local consumption in order to sustain the economy. The sole exception is the poultry industry perhaps only to prove the rule. This industry is hardly export-oriented and aimed fully for local consumption. Having been doubly hit many poultry plants were forced to shut down with thousands losing their jobs. 
   

When the military-controlled interim regime brought about sweeping tariff measures, apparently upon the advice of the International Monetary Fund, increasing the tariffs for a number of industrial raw materials and decreasing them for finished consumer and luxury goods, the poultry sector saw its production costs soar with feed, chicks and equipment becoming much costlier almost overnight. This was followed by the avian flu scare. Thus, assistance to this sector would generate some employment and subsidies would also help keep production costs low that would eventually result in lowering chicken prices on the market thus increasing consumer welfare.
   

Similar to poultry, the dairy sector, which is apparently going through a tough time, could have been included in the package with cash assistance and higher incentives in order for the cost of dairy production, especially milk, to become cheaper. Apparently, the major brands of dairy milk suppliers are refusing to purchase milk as powder milk has all of a sudden become cheaper. There is a strong demand for dairy milk in the cities, where people are compelled to choose from milk brands with the nagging suspicion of feeding their children with melamine-tainted milk. A large section of residents in Dhaka would be willing to pay a handsome premium for dairy milk of good quality. This is perhaps one of those few sectors that would show immediate results with some government assistance.
   

The increased cash assistance to the export sectors would surely contribute to their competitiveness, especially when considering that manufacturers and producers of like products in other countries might get similar assistance. But this assistance also presumes that the export market will remain as it is with its demand as before. The package does not suggest that the government apprehends the consumption of foreign consumers who are more directly hit by the financial meltdown would shrink at all. But that will very likely happen in case of high-end products while low-end high-volume products might fare better. That is perhaps one reason that the garment sector continues to exhibit little sign of being affected.
   The matter that begs further explanation is how the government would raise these funds as they have been allocated in addition to what there was in the budget. This would either have to be through higher taxes or through new money. Both would have strong implications for an economy where the government is trying to stimulate the market. Alternatively, of course and perhaps that is a more practical solution, the sourcing of these funds might only need some paperwork. It is only common knowledge that funds allocated for the annual development programmes under the budget seldom get spent. In fact, this year a large portion of those funds will almost surely remain unspent and all the government would have to do is reallocate them. But since it would be the same lethargic bureaucracy managing and channelling the funds and the same government machinery trying to spend the money, at least a portion of the funds might very well end up unused as is typically the case. As has been pointed out before by economists and experts, the problem is more to do with efficient and effective spending of funds rather than the act of allocating these funds.
   

If the rate of implementation of the stimulus package is anything similar to that of the annual development plan that the government has displayed in the last two years, then the business quarters would not have much to look forward to. One can only hope that political direction would help the bureaucracy become somewhat more earnest.
   

Interestingly, agriculture was included in the stimulus and allocated a large chunk, Tk 1,500 crore, as subsidies. One wonders how that subsidy is going to be used. At the very end of boro season, the farmers would not require funds for either irrigation or fertiliser as it would hardly help the yield at this point. An announcement by the agriculture minister, Matia Chowdhury, that fearing corruption and irregularity the government has decided against it precludes the possibility of direct cash assistance to the farmers. 
   

Corruption or irregularities, however, do not seem to deter the government from providing direct assistance to the exporters. Surely it is a much more complicated and a far more taxing exercise for the government to execute such a programme for farmers, but the benefits would also be equally rewarding, for the government as well the people, its constituents. With rice prices falling through the floor, farmers are dreading the time that they will have to harvest their crop and take it to the market to sell.
   

The other measure to help the lot of poor farmers was an additional outlay of Tk 500 crore for the recapitalisation of small loans. However, there are no indications that this effort will be coupled with that to relax the prohibitive amount of paperwork and requirements for the small and marginal farmers to avail such facilities. But the bigger question still remains the price of rice, which according to a number of observers has plummeted not entirely due to economic reasons but due to the government’s agreement with the garment factory owners’ request to sell the allotted rice through open market sales instead of rationing it to the garment workers. This had apparently caused the prices to plummet in the market as well. But the allotted rice remains unsold and the government is now burdened with substantial stock of rice procured from the last boro yield. Unless this is off loaded soon, the government will be unable to carry out fresh procurement this boro season, which is likely to be another good harvest.
   

The package, which is worth less than even one per cent, closer to half a per cent in fact, of the entire GDP does not address the prospect of increasing employment generation in the domestic market. It is important because one of the major unsettling impacts of financial crisis or recession is an increase in unemployment also giving rise to social tension. Employment generation could well be one of the main tools counter those effects. In that respect that package remains almost entirely silent. Although one would hope that the budget for the next fiscal year would lay strong emphasis on the domestic economy, creating employment, raising demand and boosting consumption, there is little indication that it would receive the kind of attention it deserves.

*Contact: tanimahmed@gmail.com

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