Myself nowhere close to be an economist, I naively can claim to have a solution to all economic problems of developing countries. Send high level delegate to Washington DC to meet the gurus at the IMF and World Bank. Note down carefully their suggestions of monetary and fiscal policies. Come back to your country and just do the OPPOSITE. Within six months you will see your financial crisis is over and the economy is booming.
Joseph: the prophet and the chief economist
In short, the ruler of Egypt at his time saw a dream that disturbed him: seven fat cows were eaten by seven lean cows, and seven thin heads of grain swallowing seven healthy full heads. No one could interpret this dream. Prophet Joseph could. The seven fat cows are seven years of plenty. They are followed by seven years of famine (lean cows). During the first seven years of plenty, Egyptians must consume economically and store food to be spend wisely during the famine years.
Eventually, King of Egypt gave Joseph the charge of the finance ministry. During the famine years, people from all over the region would rush to Egypt -hearing about its plenty and the wisdom of its finance minister. Joseph then would distribute measured quantity by head counts of household. Thus, Egypt and all its surroundings survived this economic downturn and innovated the much useful macroeconomic countercyclical principle: Save during boom to be able to spend during bust.
Let us now turn to our times and see an example of a nation who proved the effectiveness of Joseph’s model for our times: Chile.
Chile’s Countercyclical triumph
Above is the heading of an article in the Foreign Policy by Jeffrey Frankel who is an expert on Chilean economy.
Chilean economy depends on copper, much like the Persian Gulf countries depend on oil. There were years of plenty around 2008 when price of copper hit historical high ($800 per metric ton). Bachelet - Chilean president at that time - decided to save the money for the lean cows. In 2009 the ugly cows started to emerge, the price of copper plummeted and Bachelet and Andrés Velasco - her finance minister- started to increase spending and fly through the headwinds comfortably.
Here are some success ingredients that made this triumph possible.
Much like Joseph, Bachelet create a budgetary rule and codified it into a law whereby clear target are set and clear definition of what is boom and what is bust is written. Most governments would avoid rule based economic policies and resort to some ad hoc arrangements to survive their four to five years election terms.
Monitoring of such budget targets were not set by people in the finance ministry who would -out of vested interest- give rosy pictures, but by independent body.
Bachelet enforced implementation of this codified rule and did not allow violation under the temptation of plenty even if that cost her lower approval ratings. I would imagine many of todays governments try to spend during times of plenty to boost their approval rates and win the next election, even if they knew the country would go bust in future. Most governments are selfish and look eagerly to fatten their personal coffers at the expense of the public.
If Bachelet had sent Velasco to Washington DC, the IMF guys would surely advised him to be “pro-cyclical” and boost its GDP and growth. They would advice him to spend less at the time of low copper price bringing the country into recession.
Prophet Joseph’s story proves how economic success can arrive with a combination of power of prediction (i.e., interpretation of dream) and enforcing an accountable management of resources. Much of today’s problems and how to solve them are not new if our leaders can resist their selfish temptations and have the guts of go back to divine scriptures for guidance.