Tiny economies cannot print massive reserves of cash, by raising vast amounts of financial capital from global investors, such as multi trillion dollar economies can.
Multi trillion dollar GDPs, such as the US, Germany, and UK, have the ability to borrow near unlimited amounts of money from investors through the issuance of various debt instruments at the lowest rates of interest. Global investors view these economies as safe havens.
However, small economies with GDPs between $1- $50 billion- like most Caribbean Islands- must fund their own pandemic riven economies. Small economies are left to sail on unpredictable and stormy seas by themselves in the present economic crisis.
Small and struggling economies can borrow from global investors in the present environment: that is an option. However, unlike their trillion dollar counterparts in the north, who can dictate their proposals to willing investors, small economies do not have that power.
Increasing national debt in a crisis through international borrowing can place a developing country at the mercy of institutions such as the IMF and World Bank for years, through indirect political control, economic control, and high debt obligations, lasting years.
Indebtedness to global financial institutions and banks further limits a government’s ability for public investment, and limits the governments control over the financial management of its own economy. This places public policy at the ‘’beck and call’’ of global investors.
To avoid the preceding, social funding – where individuals within a country fund economic activity through direct contributions- is the answer. In the case of Corona, it is funding to keep the poor and needy afloat, thereby leaving government to manage scarce fiscal resources, without the additional burden of managing charity.
Now, as the economic famine settles in, with a worldwide economic depression that some experts predict will wipe $87 trillion off the value of the global economy, governments that manage small economies that depend on a single or dual source of income, such as these Virgin Islands, will have to adapt to an austere environment.
Why: because, no one knows when or how this Corona Virus Pandemic ends. Numerous experts: scientists, epidemiologists, virologists, and so on and so forth, believe this pandemic will go on indefinitely. A vaccine and cure is unexpected before the end of 2021.
Then, reopening economies in the midst of a pandemic is no guarantee of economic recovery. Consumers drive economic recovery in the pure capitalism model.
Today, consumers are fearful. Fearful consumers zip their wallets. The reason consumers are fearful is the severe contraction caused by lock down and social isolation in the world economy. When consumers observe failing businesses and increasing joblessness, they adopt savings and thrift as a form of self- preservation from social and economic dislocation.
Savers do not drive the type of consumer spending that further drives economic recovery.
Economics is first and foremost human behavior. Consumer and business confidence depends on the health of the economic environment. The pandemic has instilled a climate of fear. And until consumers are confident to go out and shop, and exist as they did before this pandemic, economic growth will either be anemic, or nonexistent.
So how does an economy and society such as these British Virgin Islands survive in a collapsing economy?
The answer is social funding. The idea is not new.
A social fund is an account into which the whole community contributes: organizations and individuals.
A social bond is linked to a social account that offers global investors an opportunity to contribute. A social bond operates over a fixed period of time, and in the present environment will be used to support the needy through injecting capital into the account from investors.
Cash from these investors will be paid into the social fund account for disbursement.
Yes, the social account will pay the investors when the fixed term is up, but that will be covered by contributions into the account by the general public and local organizations.
A social fund is a charitable effort.
Will a social account linked to a social bond work? It should, when one considers the alternative, which is a government dipping into its scarce reserves, and borrowing in a contracting economy, which in turn is years of interest payments, negatively impacting government’s ability to spend and build a prosperous and sustainable economy.
Best keep social security, and social health funding intact, and fund the unexpected disaster of a sudden crisis such as a hurricane, earthquake, and pandemic, that rips away livelihoods through community effort.
Social funding managed by independent and nonpolitical assessors, using strict means testing to decide who is eligible for help is the way to go.
Connect with Dickson Igwe on Facebook and Twitter.