This article appeared originally in Gulf News: link to original article
Fluffy economics – this is what I am going to use to refer to economic policy planning that is based on hindsight and hunch instead of proper thinking done by actual economists.
If you Google the term, you will find reference to the cost-benefit analysis of owning a pet. It is not about that. Fluffy economics is about planning one’s economy without having adequate resources at hand, both prior to the planning process, during the planning process, and sometimes during execution too.
Lacking the resources is unintentional when there is no proper data collection and analysis to inform policy planning, and when the country lacks the human capital and talent to manage the process from start to finish. The intentional lack of resources refers to not preparing for the future, i.e., by not paying attention to data and human capital issues earlier on and setting up short- and long-term strategies to address them.
No room for specialists
With income from hydrocarbons and other commodities for a few, the human capital and talent issue becomes easier to handle as talent can be imported to contribute to overall development. This, nevertheless, is only a temporary fix.
In other cases, and for countries with less or no hydrocarbon revenues, the attempt at sophisticated economic policy planning becomes conditional upon whatever human capital and talent available. In most cases, those are individuals who have already studied economics and could help during the initial planning and development stages.
As a field however, and despite its growing importance, there still seems to be less emphasis on the need for both generalists and specialists in economics, covering a wide array of sub-fields and topics. For instance, both the education and health sectors were under the spotlight thanks to COVID-19, and there are sub-fields in economics for each that could better inform economic policy planning for countries post the pandemic.
Devoid of data
But first, what is fluffy economics? It has specific traits that make it distinct with regard to economic policy planning. Essentially, not being based on a solid foundation. One, fluffy economics bases economic policy planning on none to very little data.
This could be because there is no data to begin with, or that poor collection has been done since the formation of a country in a few cases, or since gaining independence in other cases.
To illustrate, and while modelling comparative advantage for the purpose of food security analysis, data limitation and data estimation were key restrictions in my analysis of multiple countries. For countries, such restrictions would make it difficult to formulate appropriate agro-economic policies.
Disasters in the making
Examples here include the post-colonial agriculture policies in few African countries, where agriculture was taxed in favour of establishing an industrial and manufacturing base as part of a more extensive import substitution strategy. With mixed results to show for the latter, agriculture suffered, and Sub-Saharan Africa is the world’s most food insecure region.
In the Middle East and North African region (MENA), at least two countries restricted rice cultivation by farmers due to diminishing water resources. With time, such a policy could permanently degrade rice cultivation.
Two, fluffy economics does not rely on specialised economists in its economic policy planning and execution. Though what defines an economist nowadays seems to be a loose term with no set definition in sight, it is safe to presume that one needs either to be an economist by education, by training, or by a mix of both.
Learning the concepts, theories, and how to model can be through any form of education, including short-term courses. Meanwhile, understanding those and applying them in the field could prove tricky and take years to master.
Many tweaks later
Secondly, what are signs of a fluffy economy? One, there are too many economic policy reversals and U-turns. Done by economists, and based on sufficient, accurate data, economic policy planning would only require tweaks driven by results from impact assessments. Doing a whole U-turn, whether it is economic policy planning or any other, means that the policy planning process has been flawed all along.
Moreover, having the same economists who have been involved in policy planning oversee policy execution and implementation, even if they are not directly involved in it, would minimise errors and make sure that the thinking is delivered all the way through.
Two, there will eventually be an endemic slowdown in the economy, if not stagnation and shrinkage. Such a slowdown does not require a financial or any other crisis to expose it.
A creaky foundation
Since the main problem with fluffy economies is in the fundamentals of the economy, like the lack of real and thorough diversification in the economy and its revenue streams, cracks start showing all over it. With a creaky foundation, a crisis, whether it is the 2008 Global Financial Crisis (GFC) or a COVID-19 one, would apply enough pressure to widen the cracks, hindering economic recovery and delaying economic growth.
To wrap up, fluffy economics can be seen in part or in full within a country depending on the presence of one or more of the above explained traits and signs. Mainly, fluffy economics has to do with flawed economic policy planning, and sometimes even execution, by non-economists.
With time and numerous economic policy U-turns, the flawed process creates cracks that expand under the pressure of financial and other crises, exposing weak fundamentals. Those result in stagnating growth in best-case scenarios, or an economic stalemate and even shrinkage in worst-case scenarios.
This becomes harder to salvage the latter the planning stage of an economy is. The last thought that I want to leave you with: What happens to fluffy economies in the long run?