Cash-vs-Credit Economy: Survival of the Poor

When The Lehman Brothers and other giants went under in September 2010, many economists and speculators predicted doom for third world countries. No one knew that poor countries would survive and escape this greed-triggered calamity. Three years down the road, third world countries are still soldiering on. Recent predictions and projections show that third world countries, along with upcoming economic power houses like China and India, are doing tremendously better than expected.

Accordingly, global activity was forecast to contract by 1.4 percent in 2009 and to expand by 2.5 percent in 2010, a 0.6 percentage point higher than envisaged in the April 2009 as per the World Economic Outlook (WEO).The higher annual average growth rate for 2010 largely reflected carryover from a markup in growth during the final half of 2009. On a fourth-quarter-over-fourth-quarter basis, real GDP growth was projected at 2.9 percent in 2010, compared to 2.6 percent in the April WEO forecast. This would go on growing up to 2015.

Despite all these tidings, inflation is swelling in developing countries. They therefore have to do something about it. What is the secret behind this unpredictable turn of events?

The economies of poor countries are projected to go from strength to strength as Western countries face blowbacks thanks to their dependence on cash-based strengths as opposed to credit-based ones.

Depending on credit is as good as depending on speculations, as people spend what they don’t have. A person that owns, say $ 300,000 credit, can use the same roaming with as many banks as possible whilst the one with the same in a cash-based economy cannot pay more than one time of the same. The one using $ 300,000 in the credit-based economy can thus pay or purchase more than he deserves. This is wrongly perceived as consuming clout. Hither, the burden shifts to the future and this is where the whole problems of the economy of the world emanated.

Although the economy of third world countries is relatively stable, much needs to be done to do away with chronic economic obstacles. Corruption tops the agenda when it comes to the sluggishness of the economies of third world countries. Much needed money is lost to corruption whereby a clique of powerful swindlers turns these countries to their private estates. This coupled with maladministration and mismanagement of the same, has caused another mayhem to the citizens and the economies of these countries.

Almost all poor countries in Africa have bigger and corrupt governments that spend bigger chunks of their money doing nothing compared to rich countries that are duty-bound to provide social services. Recently, Kenyan parliamentarians were thinking about trimming their government by a half. This is a good move that must be aped by others.

The doing-nothing governments do not own or prudently manage money. This is why it’s become difficult for them to offer fat stimuli to their economies. Much money is in the hands of a few rich ones as opposed to western countries. Also they’re not threatened with being booted down by their desperately poor citizens when things go wrong thanks to concentration on fighting for making ends meet.

Another hitch to third world countries is lack of fiscal discipline. Again, the chief suspects are the governments. This has made the situation worse especially at this time when rich countries have reduced aid to them.

Another obstacle hampering the economies of poor countries is inequality in international business. Third world countries have been given a raw deal when it comes to trading internationally. We still remember how Doha World Trade Organisation’s conference ended up in a fallout between the world richest countries and poor ones. The West still turns a blind eye on this so as to keep on benefiting as it encourages the latter to believe that they cannot forge ahead without depending on foreign aid. Unexpected good performance by poor countries, if truly underscored, can act as an early wake up call for them to start thinking about shying away from depending on aid.

Another downturn for the economies of third world countries is their dependence on traditional means of production. They’re primarily agricultural. Their economies depend on the agricultural sector that in turn depends on nature. When the weather turns to be bad, it badly affects their economies.

In a nutshell, the survival of poor countries amidst the world economic turmoil must act as a reminder that they can use their own means and ways of doing things coupled with good governance to forge ahead without necessarily depending on the West. Had this survival-cum-resilience attributed to their rudimentary-regarded economies been practiced by the West, it’d become a recommended remedy for every economy of the world.    

Source: The African Executive Magazine March 6, 2013.