We don't generally look to African American spirituals (that is, religious songs) as guidance upon economic policy, but this one time we should perhaps make an effort.
There's an old song called “Dem Bones” which largely runs as:
“Toe bone connected to the foot bone
Foot bone connected to the heel bone
Heel bone connected to the ankle bone
Ankle bone connected to the leg bone”
And given that taste of it, we can imagine how it carries on until we get to the “Neck bone connected to the head bone” and a conclusion is reached. There's a more modern version called The Skeleton Song for children as well. All rather fun but there is a deeper point here.
That deeper point being that everything is connected. One part of the whole is connected to another and it is all of the connected pieces which make up the system. This is also how chiropractors insist that your sore toe is a result of your back being out of alignment and so on. They may or may not be right, but that all bones are connected most certainly is true.
Our takeaway for an economy is that all the bits of an economy are similarly and equally connected. This is why an economy is such a hard thing to plan -- try fixing one bit somewhere and problems will pop up elsewhere. Stub your toe and your back starts to hurt perhaps. Or, as I'm about to insist, do something silly in one part of the economy and we start to see problems popping up all over the place.
Just this week in this newspaper we've the news that the Bangladeshi foreign exchange reserves are dwindling. Something must be done so that the very important people who plan things for us can actually have a plan, they're going to try and kill off non-essential imports. The only real meaning of “non-essential” being things that we'd all like to have, things which very important people have, but which those same important people think we should have to do without.
They're also trying to make it more difficult to finance imports by restricting letters of credit. Because what important people think we should have is much more important than whatever might enter our silly little heads.
We're also told that Bangladeshi RMG factories have been selling at, or even below, cost to foreign buyers. And then of course we've that long running tale of the central bank telling everyone else what the price for the US Dollar, when expressed in Taka, must be.
But economies are connected -- these are, in fact, all the same problems. It's the central bank trying to plan and meddle with the exchange rate. Do that and -- as sure as knee problems become hip problems -- those other difficulties over imports, export pricing, exchange reserves all just happen. Because of the silly plan to try to fix the foreign exchange rate.
The central bank is not, of course, trying to lower the value of the Taka against the US Dollar -- it's trying to keep it high. Well, what happens then? Imports are cheaper -- it costs less Taka to buy a dollar, anything priced in dollars is therefore cheaper in Tk. So, imports rise. Anything made in Tk and then sold for the US Dollar -- say, the products of those RMG factories -- gains less Taka for each unit sold at the same dollar price. So, keeping the foreign exchange rate high increases imports and reduces exports. We've explained two of those problems which very serious people are making plans about already.
We can and should go further -- via that thigh bone the knee bone really is connected to the hip bone. So, if we have fewer exports earning dollars and more imports spending dollars then the exchange reserves drain away. So we have also explained our third problem there. We are even getting a clue about why we can't have what we want -- because of the very serious people and their plans. Because they've already made that plan to keep the forex rate high therefore they have to have those plans to stop us being allowed to buy imports.
Now, it is true that we need to have a government. We are not anarcho-capitalists and we wouldn't like the society that resulted from ours being so. But it does not, therefore, follow that even more governance is a good idea.
Sometimes -- often I would say -- the answer is for us to have a little less governance and then the problems caused by the government fade away.
If the central bank stopped trying to keep the value of the Taka high against the US Dollar, then our problems over the trade deficit, imports and exports, prices for RMG factories, and those forex reserves would all fade away. And we would like to end those problems with all of those things.
Therefore we should stop trying to fix the forex rate.
We are done. We have done chiropractic therapy on the entire economy with one swift blow. And isn't that nice? With the added benefit that this does actually work, in a manner that chiropractic so often doesn't!
Sometimes less governance really is the answer -- especially when our problems stem from a mistake being made by those very important people with their important plans.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
