While this blog has been silent for a long time, many changes have occurred in the outside world.
The latest event that I wish to discuss here is the recent government change in Spain.
This specific change has followed closely on the footsteps of two other government shifts in Greece and Italy.
While it is clear that the governments ousted have failed to help the economy in their states recover, the big question mark over all three changes is weather the new government can succeed in such cases.
In 2009 I participated in an economic seminar in Warsaw where the keynote presentation by Richard Koo referred to the crisis. It seemed that his idea, as I understood it, is that in order to prevent a crisis slowdown in the economy the government had to see to it that the GDP did not diminish. The way he offered to do it was by increasing eh government expenditure based on loans from the banking sector. His ideas were based on the actions taken in Japan during the 1990’s crisis, where a change in the activity of the firms was observed. The firms have changed from profit seeking entities into a balance sheet cleaning entities. Investment in development and other areas went down, as the DGP was in danger of diminishing.
The government took loans from the private sector, and used it to turn the wheels of the economy, by purchasing. This allowed the firms to clean their balance sheets and once their activity was back to normal (the indicator was the rise in loan interest) the government could start cleaning its own “balance sheet”.
With the euro zone, the ability of governments to increase their spending is limited. The government cannot easily print more money (disregarding inflation and other consequences) and borrowing from the private sector, unlike increasing taxation, will allow more economic action. Under such conditions the big question would remain, where and how should the government spend its money. Should it invest in infrastructure? In human resources? In technology development and support to the business sectors?
When seeking answers to such a question one should consider several aspects:
· The conditions in the neighbouring countries (with which you do most of your trade)
· The general economic condition in the world
· The basic parameters (strengths and weaknesses) of your own country
This article will not present the new government of Spain with the answer to all these questions. However, it is important to remember regarding the above mentioned parameters that by investing in roads, water, electricity systems the state will improve its future ability to attract investments and to initiate and support growth, but it will not make it easier to turn that investment into growth if the close trading partners and the general economic situation are bad. It will have a positive effect in the medium to long term, but not in the near future – except for those employed in the work. However, investment in the infrastructure, combined with investment in the human resources of the country, will help the country come back from the financial crisis, stronger than it was before, more competitive, and will help attract not just investment, but also more HR that would be beneficial for it.After all HR are the best natural resource any country can have!!!!!!
