In a world where each country has its own problems in the conjectural sense, the common ground is the similar problems they experience. Fighting inflation, imbalances in growth figures, unemployment and income inequality are the main economic causes of these headaches. Nowadays, platforms solely dedicated to these problems are being established at faculties of economics and business, and funding for new research subjects is being greatly increased. However among all of these, current account deficit problems, that are separate from the rest in structural terms, are more like the missing parts of a big dilemma. Shall we grow by borrowing or keep the capital and be prepared for a rainy day? This question seems to be governments' biggest economic gamble. Let us look at what the latest situation is in developing countries.
South American countries, that have been forced to live with devastating economic crises since the 1980s, have still not been able to recover from their wounds. Argentina, the third-largest economy in Latin America after Brazil and Mexico, had to go knocking on the International Monetary Fund's (IMF) door in May because of the sharp depreciation of the peso since the beginning of the year. A three-year standby agreement foreseeing a $50 billion loan was approved in June on Argentina's request. Meanwhile, the Argentinean administration, which has faced harsh reactions from civil servants and workers because of its eight item-list of austerity measures, is one of the leading countries awaiting different results from the same fiscal policies over and over again.After the crises of 1994 and 1998, the impact of the crisis deepened again in 2001, causing high government deficits, and devaluations brought on by high current account deficit and the burden of foreign debt forced the country to completely surrender to the IMF. While there is a serious history of crisis experience in front of the country's economy officials, who think they can power through by cutting down government spending and giving current account surplus at every turn, we will see whether there'll be a different outcome this time.
The wrong treatment and fiscal policies prescribed in the prescriptions of neoliberal economies are particularly conducive to deepening crises in South America. Similar governments keep reiterating that they will be forced to knock on the IMF's door to regain the trust of international investors, just like Argentina did after the decline in agricultural exports, increase in energy prices and the peso's rapid depreciation against the U.S. dollar. Well, when we think that the agreements reached and promises made are long-term, what effect will the regression in energy prices and the peso's recovery have on this prescription? Unfortunately, as we have witnessed in many countries flexibility is not allowed in such prescriptions. Pessimistic reports and financial braking measures, which are taken by the IMF's threats in moments when one actually needs to step on the gas instead and spreads the seeds of the next crisis, seem harsh and meaningless enough to disrupt investors' psychologies.
On the other side of the ocean, the current account balance problem and budget deficit woes in the Asian Tiger countries and the Philippines, China and Indonesia show similarities to the first periods of the Great Depression in 1997. As structural problems in the trade cycle begin to emerge in the geography, especially due to tensions between China and Iran, the impact of austerity policies on unemployment rates has been noticeable.
As the effects of medium-sized firms, which are in great debt, start to decrease on exports, the only weapon Asian countries have left in their hands as they start to lose their current surplus advantage is the borrowing rate, which is trying to be kept at a steady level. The pressure of this, regardless of market volatility, will definitely cause severe damage to these countries in 2019. Even if it works in the short term, trying to control this situation, which makes local currencies vulnerable to changes in markets, with contractionary policies instead of expansionary capital movements, will only cause the advantageous part of Asia – the power of labor capital – to perish.
I do not think one would need a lot of knowledge to predict the extent of a disastrous change to be made in the planning of qualified export-low import, the only advantage-preserving element among all current account balance elements. When we analyze that the volatility in markets pushes investors to be more selective about emerging economies, I believe Asia has started to lose its advantageous structure as 2018 draws to a close. If we assume that Middle Eastern economies are facing geopolitical risks, Latin American countries are struggling with political risks and Asia is being disintegrated both politically and economically, we will experience the bittersweet effects of trying to implement a single type of fiscal policy and achieving current surplus with the hand brake on, at a level that will lead to recession.
In a period when the U.S. economy is about to enter the largest growth cycle in its history, one must determine what is wrong with evaluating its 10-year growth projection with current surpluses and accumulations by reinforcing them with investments. Not taking advantage of investments that U.S.-based capital with surplus potential will make abroad, and avoiding the opportunity cost with contractionary moves in times the U.S. economy has been growing continuously since 2009 and has entered the longest period of expansion in its history, will create an inflationary cycle right off the bat.
Especially the spiral Brazil and Argentina have entered after hitting the brakes hard and seeing low domestic consumption should set an example for other emerging economies. If water is poured onto a pan of burning oil, even the ceiling can catch on fire. Sometimes the solution is to consume in times of crisis and have deficits in the budget with Keynesian policies, especially in days when the IMF's policies have proven to be useless in South America hundreds of thousands of times.
* Ph.D. researcher at the Private Company Economic Research Department MENA at Swiss Business School