Taylor, U.S. Dollar And Public Ignorance
By Sumowuoi Pewu
A little over two years ago, Charles Taylor was campaigning for the presidency in Liberia and making promises of all sorts and to lend credibility to his many promises, he procured rice from the Republic of Taiwan and distributed it amongst his constituency. Confounding even his critics, Taylor made himself over in a crowded field of presidential wannabes and projected an image as the one person who had a sustained connection to the ordinary household in Liberia. Outhustling, out-maneuvering and double crossing even some of his fiercest opponents, Taylor managed to do the imponderable, bringing most Liberians into his cheering line and virtually assured himself as a drop of goodness in a sea of insanity.
To get such outpouring of goodwill from the Liberian people, Taylor made promises beyond his ability. For example, he promised the receipt of billions of dollars from Taiwan and Libya to help him reconstruct the country he helped destroy in 7 years of factional fighting. Then, Taylor sought to exploit the two perennial mainstays close to the hearts and smiles of Liberians, the U.S. dollar and the "glossy" past prosperity in the '70's. Because these two past staples evoke nostalgic empowerment and authority with Liberians, even rising to the level of catechism, just citing these images of authority resurrects the earlier and more promising paradigm Liberians once dreamed of. Taking advantage of a restless population, Taylor exploited a nation nostalgic about its past and rode to power on the general fear of Liberians seen their country's future being foreclosed to lawlessness, anarchy and a general feeling of hopelessness.
Mimicking his style of drab clothing from the late presidents William V.S. Tubman of Liberia and Mobutu Sese Sekou of Zaire, Taylor promised Liberians in the 1997 elections that if elected, he would reintroduce the US dollar as the official currency for Liberia and promised prosperity. Liberians from all walks of life were ecstatic by Taylor's promise. I recall then meeting an older Americo-Liberian woman at Mina's Restaurant in Atlanta and, in no uncertain term, denounced the late Samuel Doe for his policy of introducing the Liberian dollar that induced economic disaster for Liberia. I tried to assure her that if Taylor lives up to his promise, he could bring much needed relief to Liberians. In the same vein, I warned her that the issue of the US dollar in Liberia was more complicated than a mere promise from Taylor. I explained to her that the necessary macro-economic levers needed to stabilize the Liberian economy were heavily burdened by factors (marginal capital inflows into the domestic economy and declining export earnings) mostly beyond Doe's control. I reassured her that though Samuel Doe must have significantly contributed to inflation getting out of control through increased public sector spending, he was not to be blamed entirely for the mismanagement of the Liberian economy.
The lady, apparently not convinced by my brief explanation, proceeded to ask me an entirely justifiable question. How come "we were in power" for more than hundred years the declining export earnings did not dry up the US dollar but only under Samuel Doe? I again assured the lady that the issue was more difficult than she was willing to understand. But even as belligerent as she came across, she echoes the sentiments of most Liberians be it Americos or indigenous.
The U.S. Dollar: What's The Real Deal?
The issue of the US dollar is so confusing for Liberians that many would never understand it beyond the blunt jawboning of who's responsible and who's not. Naturally, much of the issue of money and economics is like a trip to a distant planet. It is strange land even for most educated people, far removed from the economics of an ordinary household. It is populated by weird creatures-hedgers, arbitrageurs, the Gnomes of Zurich, the snake in the Tunnel, crawling pegs, IMF wizards, etc.
To understand why the U.S. dollar vanished in Liberia but Singapore holds billions in its official reserve, we have to be willing to understand the basis of international trade and the effects of various government policies in the exchange of exports of goods and services for imports of goods and services. The super highway built to link all the separate parts of international trade is called the "Balance of Payments." The BOP is a set of accounts that reflect all flows of value between a nation's residents and those of the rest of the world during a period of time. Unless we are familiar with the BOP, it is hard to see what the Liberian government's borrowing abroad from Citibank or the International Monetary Fund (IMF) has to do with a decision to buy Pussava (Parboiled Rice) from Ohio, how repaying that foreign debt relates to Liberia's sales of rubber, iron ore and timber, or how the sale or lack of sale of our gold and diamond could affect Liberia's money supply and interest rates.
Understanding the balance of payments is also key to understanding how people trade one country's money for that of another country. Even the flow of international human capital shows up in the BOP. When I send money to Liberia from the United States to purchase dried fish or send money back home to Ma Korto (my mother), it shows up in the BOP. The balance of payments concept is pretty straightforward though some economists make it look complicated than it really is. The BOP has five significant balances: merchandise trade balance, goods and services, current account balance, net private capitals flows and overall balance. The concept of the BOP is short, the country that exports more goods and services than it imports, has a current account surplus which equals net foreign investment or the net accumulation of foreign assets minus foreign liabilities which is usually a large positive share of GDP. A nation that has net foreign investment, is a nation that is investing part of its national savings abroad instead of just in domestic capital formation. The value of national savings must equal domestic capital investment plus foreign investment. An improvement therefore in Liberia's current account balance must be accompanied by increase in national product relative to national expenditure. If our exports of product can not expand, then national spending must fall in order to decrease imports.
The Advent Of Liberia's Economic Problems
In the early 1970's, Liberia was a net exporter of raw materials to developed nations and emerging markets. Liberia's export earnings (the money the country received in exchange for the sale of rubber, iron ore, timber, etc.) grew considerably thereby, enabling the country in expanding its official reserve assets, mostly denominated in US dollars assets and the country's increased its reserve position with the IMF known as the Special Drawing Rights (SDR). In the late '70's however, owing to diminished demand for iron ore and rubber coupled with heavy borrowings to support spending, Liberia shifted into a net importer of merchandise; a situation that significantly impacted the country's terms of trade from a current account surplus to a deficit. Despite a declining export earnings, the government went ahead with its commitment to host the OAU Conference in 1979 increasing its capital needs to finance imports and consumption that far exceeded annual export earnings. As public expenditure spiraled out of control, government's borrowings exponentially rose to the extent of negatively affecting the overall debt portfolio of the country and subsequently sent the Liberian economy into recession.
As Liberia's balance of payments deficit rose, pressure increased on the country's foreign exchange earnings and official reserve assets, forcing the country to borrow even more heavily to support domestic consumption. With this situation, the US dollar was no longer flowing and this led to shut downs and laid offs at the Liberian Mining Company, Bong Mining Company and LAMCO. The accompanied social pressure mounted and subsequently led to the April 14, 1979 Rice Riot; which in part, was due to government's inability to subsidize rice from its diminished export earnings. A year later, the government was overthrown by military enlisted men, led by Samuel Doe.
With the ushering in of the 1980s, the country continued increased public sector borrowings which predictably resulted in inflationary spending as government overall revenue intakes dipped. As government's debt servicing rose, the government mounted little efforts to stabilize the economy instead, sought quick fixes by introducing a local currency to temporarily support domestic spending. The introduction of the Liberian dollar was by no means a bad idea to control inflation through monetary policy. The government, on the other hand, could not control the Liberian money supply when it has as it official currency the U.S. dollar that it does not own. Only the U.S. Treasury and Federal Reserve can increase or decrease the US money supply and set key discount rates. But owing to a lack of discipline on the part of the Doe regime in tightening monetary control, the regime increased the new money supply. As it would be expected, the situation immediately resulted in hyperinflation with both consumer and producer price indices taking off to the roof. Fiscal and monetary policies meant to adjust and correct these imbalances were fervently ignored. Fiscal indiscipline marred this era with disastrous consequences for the economy.
The Emperor Comes To Town
Charles Taylor's civil war in 1989-1997 was the final nail in the coffin of the economy as the economic infrastructure collapsed and subsequently resulted in the lost of approximately seven billion dollars in export earnings. The consequential effect of this crisis soon rendered the country unable to service its external debts amounting to approximately 3.4 billion dollars. Recognizing these challenges in the Liberian economy, I was therefore shocked to hear Taylor promised the reintroduction of the US dollar in Liberia without explaining the implication to the Liberian people. Unfortunately, the general lack of knowledge of government's operations in Liberia encourages people to make wild claims without the benefits of explaining how those claims will be achieved. Taylor is aware that the issue of the continuing flow of USD in Liberia depends on lots of external factors sometimes beyond the control of the Liberian government.
Why has he not been able to reintroduce the USD in Liberia two years since he was elected president? If I am correct, Taylor is a Bentley College educated Economist? I am sure Taylor might know like most of us that it is absolutely germane to stabilize the economy through a set of institutional reforms that emphasize monetary and fiscal policies to control inflation and reduced public spending in the non-productive sector of the economy. Liberia needs to formulate an economic strategy that focuses on the reduction of unemployment by attracting foreign investment to develop manufacturing and a service sector of the economy. The country needs to develop appropriate growth models that will sustain growth and increase savings and investment in the domestic economy and reduce government's spending. The growth focus for the Liberian economy ought to be a set of principles and practices that ensure conformity between budgets and external trade balance and/or, maintain an equilibrium level between the two. Our government should encourage external borrowings only for productive purposes; i.e., the set of reforms instituted should be geared to sustaining savings and capitalization in the Liberian economy.
Unless these steps are taken, no amount of political pronouncements from Taylor will necessarily bring back the USD to Liberia. Declaring the U.S. dollar as your official currency does not mean you can now walk in the U.S. Treasury and pick up any amount of U.S. dollars and take it back home. Whatever amount of U.S. dollars that flowed into the Liberian economy in the past was obtained through foreign trade. The only exceptions were unilateral transfers or foreign assistance given by friendly governments.
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