In a Twitter thread, Princeton economist Atif Mian argued that it is a “foolish policy” measure to try and fix current account deficits through “administrative actions by curtailing imports.” Enacting an import restriction regime sets up multiple auction markets where “some bureaucrat decides what is essential and what is not.”
https://twitter.com/AtifRMian/status/1616085983857876992?t=LFyG_V_uRZ0OTiO5KLSO3w&s=08
This is a “recipe for corruption,” and tends to make the bureaucrats who function as the gatekeepers of trade policy more politically influential and wealthy.
Dr. Atif Mian also argued that import restrictions tend to be economically disadvantageous, because they can cripple “production networks" by making it difficult for producers to import raw material or intermediate inputs. This tends to have a spillover effect on the country’s exports, which tends to exacerbate the balance of payments crisis that the import restrictions set out to fix in the first place.
Import restrictions aimed at reducing the current account deficit “reduces economic output” and exerts a downward pressure on balance of payments “as exports start drifting down.”
This also portends towards massive problems on the fiscal side, with Dr. Atif Mian explaining that while “tax revenue is quite elastic to growth, fiscal expenditure is not.” This means effectively that even as an economy’s growth slows down, tax receipts decrease, but the country’s fiscal expenditure – everything from government workers’ salaries to debt service, does not. This causes stronger inflation.
This creates the perfect economic storm: “falling growth and output, continued balance of payments pressures, and stronger inflation.”
In the midst of these pressures, investor confidence in the economy falters and both FDI and domestic investment “dries up” and there is widespread capital flight.
What starts out as a simple accounting measure to plug a couple billion dollars sized hole in the current account does lasting and structural damage to the economy.
The worst part of this conundrum is that this “doom loop” does damage that is completely “avoidable” if the right policy measures are taken.
https://twitter.com/AtifRMian/status/1616085983857876992?t=LFyG_V_uRZ0OTiO5KLSO3w&s=08
This is a “recipe for corruption,” and tends to make the bureaucrats who function as the gatekeepers of trade policy more politically influential and wealthy.
Dr. Atif Mian also argued that import restrictions tend to be economically disadvantageous, because they can cripple “production networks" by making it difficult for producers to import raw material or intermediate inputs. This tends to have a spillover effect on the country’s exports, which tends to exacerbate the balance of payments crisis that the import restrictions set out to fix in the first place.
Import restrictions aimed at reducing the current account deficit “reduces economic output” and exerts a downward pressure on balance of payments “as exports start drifting down.”
This also portends towards massive problems on the fiscal side, with Dr. Atif Mian explaining that while “tax revenue is quite elastic to growth, fiscal expenditure is not.” This means effectively that even as an economy’s growth slows down, tax receipts decrease, but the country’s fiscal expenditure – everything from government workers’ salaries to debt service, does not. This causes stronger inflation.
This creates the perfect economic storm: “falling growth and output, continued balance of payments pressures, and stronger inflation.”
In the midst of these pressures, investor confidence in the economy falters and both FDI and domestic investment “dries up” and there is widespread capital flight.
What starts out as a simple accounting measure to plug a couple billion dollars sized hole in the current account does lasting and structural damage to the economy.
The worst part of this conundrum is that this “doom loop” does damage that is completely “avoidable” if the right policy measures are taken.