An Autopsy of Dying Economies

A bat flapped it’s wings in Wuhan, China; a catastrophe occurred in Sri Lanka, Greece, Venezuela, and Zimbabwe. The devastating impact of COVID-19 on industries was most evident in the global tourism space. Since these economies relied heavily on tourism for inflow of foreign exchange, they now suffered the wrath of borderline poverty. And hence, the title. 

A butterfly flapped it’s wings in Russia; an economic catastrophe happens in Zimbabwe and Venezuela. The tormenting Russia-Ukraine war lead to commodity price inflation which paved the path for global hyperinflation. And so, being welfare-oriented with a sheer lack of industrial infrastructure to boost GDP, Venezuela and Zimbabwe were neck deep in debts. 

Dying patients, soldiers, families and economies. Or ‘Dying humanity and economies’

What kills an economy are large fiscal and trade deficits, hyperinflation and acute shortage of bare essentials. What makes this killing more economically gruesome are factors such as civil war, that can push fragile economies to the brink. Consider the following section a morgue where we talk about the DEAD (economies). 

Greek Economy

It all started in the 1980s when instead of working towards vitalizing the economy, Greece introduced expansionary monetary policies. This paved path for peaking inflation rates, huge fiscal and trade deficits, dropping growth rates, exchange rate crises, and a huge depreciation of the Greek Drachma. In 2007, while still recovering from these pangs of incompetence in a super-competitive European goods and service market, the global financial crisis pushed Greece further down the list of sick economies. And so, it couldn’t earn or benefit from export revenues even after being a part of the European Union. 

Another dramatic blunder in the Greek economic conundrum was in 2015. So normally, sovereign debt is considered default-free, but Greece defaulted on its sovereign debt of €1.6 billion to the International Monetary Fund! (I mean, howwww!?) Above all, it literally ignored all such structural problems relating to the country’s systematic tax evasion. 

Sri Lankan Economy

The pandemic took a toll on Sri Lanka’s economy by severely impacting its tourism. On top of that, the country had also undergone a long civil war after borrowing huge loans of $ 2.6 billion from the IMF in 2009 and $ 1.5 billion in 2016. While the portrait of a dying economy hovered over the Sri Lankan skies because of these conditionalities, more deterioration was on its way.  

The newly elected government of Rajapaksa made a lot of welfare promises to farmers and lower taxes. With sinking exports of most of its products and a reduction in tourist arrivals because of the bomb blasts and COVID, Sri Lanka’s fiscal deficit rose to 10%. 

More insult to injury, the government also banned imports of chemical fertiliser to facilitate a switch to organic farming. This short-sighted policy depleted food stocks so drastically that the economy suffered hyperinflation. Currently, inflation at 15% is rising to 17.5% pushing millions of poor Sri Lankans to the verge of poverty. 

Also Read: Sri Lanka's Economic Crisis and How it all began?

Venezuelan Economy

Venezuela, the world’s 7th largest oil exporter, derived 96% of its export revenues from oil-related sectors. Its economy dealt with the crisis by cutting imports of essential products like coffee, flour, milk, medicine, and soap. Its expansionary monetary policy and deficit spending caused inflation to surge to 63.16 % in 2014.😲

The Venezuelan economy started suffering even more with low oil prices in 2015. The oil-producing infrastructure was losing ground, and despite low oil revenues, the then government did not curb spending. They denied that a crisis existed by violently repressing any opposition. Thus followed a mass exodus and affliction of citizens because of the civil war and the effects of hyperinflation. 

The chronic shortage of food and medicine, closure of businesses, soaring unemployment rates, loss of productivity, authoritarianism, and human rights violations were the order of the day and with it, the economy bit the dust. 

Zimbabwean Economy

The Zimbabwean Dollar was the official currency of Zimbabwe from 1980 to 2009. It underwent rapid depreciation against the USD, and the country experienced hyperinflation of over 175%. 🤯

Being primarily an agrarian economy, the food bowl for the surrounding areas Zimbabweans have, for a long time, suffered the misgivings of famines and droughts. Adding more impediments to the financial crisis, the government made a series of welfare payments to war veterans. It also proposed a scheme to buy land farmed by white farmers and redistribute it to the black farmers. The cost-push inflation aggravated by this land redistribution policy caused agricultural output to fall sharply.

Now, the price of goods and services doubled daily (literally) at the peak of its crisis. The government demonetised the Zimbabwean Dollar and changed the currency system to a basket of regional currencies, including the South African Rand, USD, and Euro. The agrarian collapse set off a chain reaction that ended in the Zimbabwean currency losing its value and place in the country.

The Common Killer

Apart from the theme of death, the four economies have some common characteristics-  

1. Hampered Tourism: Tourism was a major source of revenue for countries like Sri Lanka and Greece. Covid-19 turned these majors into toddlers with a 73% fall in global tourism. Sri Lankan tourism experienced a fall in revenue from ₹27 thousand crore in 2019 to a meagre ₹5 thousand crore in 2020. Greece, the country in EU most dependent on tourism for revenue, did not fair too well against the pandemic either. The over-glorified cold scared away as many as 30 million tourists that the coastal country welcomed in the year 2018.

2. Political Strife: Countries like Venezuela and Zimbabwe were frought with political strife and unrest. Civil wars, corrupt governments, and more led to loss of life and property. Venezuela’s GDP shrunk by ₹920 thousand crore from 2013 to 2018 as a result of the political turmoil.

3. Over-leveraged economies: They all accumulated considerable debts they could not repay because of the poor GDP growth, lack of export revenues, and insufficient foreign exchange reserves. For instance, Sri Lanka had pending debts of around ₹396 thousand crore, out of thich it needs to repay around ₹222 thousand crore by the year 2027 (and I thought I had it bad with deadlines)!

4. Systematic tax evasion: Papa (Finology) kehte hai, “Tax bachao!” But these countries took tax saving a bit too seriously and started evading their fiscal liabilities! Taxes that civillians would pay the government to fund welfare activities, never made it to their destination. Government’s revenues already struggled due to reduced income from tourism, fiscal revenue followed suit and Sarkaar went Bekaar.

5. Commodity-induced hyperinflation: The Russia-Ukraine war caused hyperinflation and raised fuel costs, among other expenses. All economies experienced hyperinflation, with inflation reaching multiples of 1000% or more.

The Venezuelan economy’s “price take off'' started with the beginning of Nicolas Maduro’s presidency. The inflation percentages went on an “up only” roller coaster ride from 6.3% to 1,30,060.2%.

6. Shortage of Essentials: Acute food, milk, essentials, and power shortages affected the citizens' quality of life in these countries. The following factors explain this shortage:

7. Faulty agricultural policies: The governments in power in Sri Lanka and Zimbabwe, like banning chemical fertilisers and land reallocation, seriously jeopardised agriculture in these countries.

8. The currency black market: In Venezuela creates a shortage of imported essentials. Influential Venezuelans who purchased foreign currency were more interested in profiting from the black market in US Dollars than importing essential goods for consumption.

9. Lack of Funds: Greece’s austerity measures imposed by its creditors meant that the citizens did not have sufficient money to buy essential goods. 

10. Supply Bottlenecks: Adding on to this was commodity price hyperinflation due to supply bottlenecks worldwide.

The Bottom Line

In his book, ‘A Surprising Economic History of the World,’ Alan Beattie states that countries do not develop or collapse by accident. They make choices by design. 

Some of their fiscal and monetary experiments prove detrimental due to ill-thought policies. In contrast, others, because of their farsightedness, succeed and go on to become economic superpowers.