ECONOMIC CRISIS: OPPORTUNITY FOR DEVELOPMENT

ECONOMIC CRISIS: OPPORTUNITY FOR DEVELOPMENT

 

Responding to the challenges of the economic crisis may pave the way for new opportunities to development and growth. Drawing upon the logic of sound economics and from the experience of endeavours by countries overcoming the burden of credit crunch and economic catastrophe it appears feasible to achieve substantial levels of growth. This can be done by exploiting the climate of uncertainty and instability that the global recession has produced to drive forward with programs of structural change and courageous new policies to amend outdated practices and parochial attitudes and misconceptions.

It is imperative to recognize that the economic crises open up opportunities for novel policies which are divorced from old certainties and perceived truths. Many believe that the solution out of economic hardship is heavy government investment to ailing sectors of the economy. This may be true in cases of balanced budgets and ample natural resources which make abundant funds available for new government initiatives. In the case of Uzbekistan, for example, the government successfully provided the Banks with adequate funding to put their finances in order and further assist private sector enterprises to achieve their business goals. Likewise, the government was able to support large infrastructure projects in heavy industry, agriculture and large public works (roads, railways, bridges). It is also worth noting that the government in Tashkent was able to provide tax reductions to sectoral businesses (i.e export industries) to sustain international competitiveness as well as allow small enterprises to survive in turbulent economic environments.

In most cases, however, these blessings are not available. The countries therefore that have the misfortune to struggle with major deficits and long term debts they will have to choose exit paths from the crisis with different attributes. The experience of heavy government spending within an environment of deficit budgets or large national debts have not proved hitherto successful. In Britain and the USA the heavy financing of the economy either through the Banks and other ailing financial institutions or through stimulus packages do not seem to have produced spectacular results. Likewise, foreign borrowing to finance consumption and public sector spending (and not exclusively long term investment projects like e.g in Uzbekistan) have proved disastrous. In Greece, for instance, foreign debt as a percentage of the country’s GNP has risen to an astronomical 120%. Traditional policies of government spending do not appear to offer solutions to the relative impasse.

It appears that structural changes and private sector solutions may provide the best opportunity for successful exit strategies. The natural instinct of governments in cases of financial trouble or deficits is to turn to heavy taxation. In an economic environment of creeping recession however and serious financial hardship further taxation does not guarantee increased money inflows. On the contrary, the tax burden stifles the economy and reduces public sector income. At the same time, the market suffers due to a lack of adequate purchasing power by large sectors of the population. Increased taxation therefore, is a mechanism of further public sector hardship rather than a tool to reduce deficit and balance budgets.

As the policies of the Uzbek government proved, reducing direct taxation enabled small enterprises to gain new footing in the economy while exports were significantly encouraged. It is obvious, that even with lower tax rates, the overall expanding performance of the economy provides the coffers of the state with more income from taxpaying actors.

Another important feature of a successful exit strategy from the embrace of crisis and recession is the attraction of foreign direct investment. To achieve this some important structural changes have to be effected. Apart from the low rates of taxation it is necessary to establish a stable, simple and comprehensive tax regime in the country. Taxes have to be simple, easy to discern and without need of expert taxation officials to interpret laws and government regulations. Moreover, they need to be stable. In a country with frequent changes of its tax requirements there is a slim chance that foreign investors will be attracted and make the precarious effort to start a business adventure in its economy. Along with the stable tax regime it is necessary that bureaucratic red tape is radically reduced. In countries where the start of an enterprise calls for innumerable permits, many administrative approvals and countless inspections it is evident that few, if any, foreign investors will risk their capital. Doubtful and blurred business requirements lead to limited entrepreneurial initiatives.

Growth finally calls for a radical reordering of a state’s labor legal provisions. When free redundancies are prohibited by law for the sake of protecting employment the final result is the prohibition of employment itself. Very few employers decide to expand their employee or labor force when they know that in case of economic hardship it will be next to impossible either to change their employees or fire some of them for salvaging their enterprise. Making the labor legal environment more flexible allows for the creation of more jobs, encourages more employment opportunities and allows employers and workers to cooperate in a more trusting work environment. There is need of course of adequate protection of redundant employees for the duration of their remaining out of work.

It is also imperative for a growth strategy to open up the services market. This requires abandoning all provisions which prohibit entry to professions on the basis of special priority allocations, exclusive permits and favorable provisions for special social groups. It is impossible to establish a thriving market with barriers to movements from the one profession to the other. As the Uzbek paradigm proved it is also of paramount importance that dead end enterprises or bankrupt businesses are not salvaged by the state. They should be put under Bank servicing and sold to new owners or left to their fate. A dynamic free market regime recognizes profit and success but it also considers economic failure one of its essential features. It is a prescription to failure when an economy prohibits free entry of independent actors to the market but when it also prohibits failure and bankruptcy.

Crisis is a state of the economy when institutions are tried and established practices tremble. Many view crises in awe. Some fear its uncertainties and anticipate further

disaster. A crisis however can also establish new beginnings. A country can only gain if a crisis is viewed as an opportunity and not as a menace.