The capacity of pundits to continue debating on the economy week on week is confounding if not irritating; the GDP growth may have improved, or fallen, by 0.001 % since last week, but so what?
Notwithstanding, that for me trade deficit is the key, rather the only, indicator which a developing economy needs to focus on, until it develops to a stage where time can be wasted on the GDP debate, the regular, daily, discussion on economic indicators is fruitless.
Except even in the case of GDP, the debate should be on the quality of GDP rather than quantity; a point we squarely miss, probably because the former debate raises more questions than opportunities for celebration. But what do we get out of debating GDP every day?
The point is that economic decisions take root over a very long period, years; a principle that the vast majority of economic wizards, which includes each and every media anchor and almost the entire populace, do not seem to understand when they are criticizing the incumbents in power. Recall, that each of the previous three governments, when they took charge, complained and cribbed that their predecessors had left the economy in a mess and the country was almost bankrupt. They then proceeded with structural reforms, mostly aided by the IMF, after which they celebrated a turnaround, until the next government came in and burst their bubble. And despite all these efforts by all the governments, the economy successively went from bad to worse and each time the crisis was deeper and bigger.
Let me clarify, actions or non-actions, of the past continued to and will continue to impact the economy.
Essentially, as evidenced from the results, we seem to be not very good at taking the right decisions. And if we do not do a stock take and make the right decision to get the real economy to wake up from its slumber, the next time may be different; it may well be much worse.
So while it is fun and newsworthy to discuss the economy every week, unless we start looking at the forest, counting trees will get no results.
A recent reading strengthened two beliefs, one that the economy mattered, and secondly that it takes ages for consequences of economic decisions to materialize. On the other hand, what was an eye-opener was the origins of financial innovation; the view that father of economics started everything did take a hit.
William Goetzmann successfully, in my opinion, drives the point home that finance made civilization possible; in his book, "Money Changes Everything". It truly does!
To digress a bit, his assertion that Rome invented shareholder companies (Publican Societies) to supply services to the state was interesting; on a lighter note, I always thought corporations were a British invention to colonize the world, and that corporations have continued with the same underlying objective albeit with a different target, consumers.
His findings that archeologists agree that recording of economic transactions may have been a catalyst for the people of Urk, 3100 BC, to invent cuneiform writing, is amusing and mind opening at the same time; lends credence to the phrase, "It's the economy stupid". Finance was the reason writing was important.
Ancient civilizations also invented the most horrific WMD of all times; compound interest. That the Athenians understood financial calculations and long term planning was surprising; the bigger surprise was that they also invented privatization; the mining leases!
"Without financial innovation- and unique financial resources- the experiment of democracy in ancient Athens may not have succeeded," from the aforementioned book. What a pity! Except that only the wealthy could get to the Senate in Athens, so the concept seems to have evolved; but for some, for the worse!
It was also in ancient Athens that Solon imposed taxes on the populace to fund wars; and probably the first time fiscal deficit came into play. So we now know who to blame for the causes of the ruination of the modern world! And even more interesting reading was that the first government mortgage bailout was also in Athens in 33 BC! Another amusing finding in the book was that the earliest securities market fraud could possibly be traced back to 59 BCE. Imagine almost two centuries later, the world has still not learnt those lessons.
And then came the Romans. Income inequality apparently reached extreme levels in Rome, and the ability to create money out of nowhere allowed the Romans to expand money supply beyond physical limits of the currency; origins may have been Romans, but this can be seen in its worse form in the modern world. The argument, supported by historic noting, that even government bonds and net present values came from the ancient world, was intriguing; so IMF did not invent those!
To say the least, the book was educational and a fun read. It did rewire the view that principally the industrial age perhaps was the catalyst for most innovations in finance and the economy. Au contraire, according to Mr. Goetzmann, if I understood rightly, financial innovation was why the industrial revolution happened in Britain first.
So if nothing is new, and it has taken centuries for financial concepts to evolve and refine, does it not make more sense to carefully analyze decisions rather than focus on very short term results?
When you look at the forest the decision-making changes radically, and that is what we need to do compared with the argument on who did a better job of counting trees.
(The writer is a chartered accountant based in Islamabad. Email: [email protected])
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