A SENSIBLE programme of public works is more likely to stimulate the economy in Cyprus than injecting cash into the banking market, according to Professor Peter Williamson of the Judge Business School, University of Cambridge.
In an interview with the Cyprus Mail, Williamson said: “People have made excessive attempts on monetary policy and not enough attempts on fiscal policy, and the reason for this is that it is slower and harder to get a good public works programme going than it is to reduce the interest rate by another half per cent”, he said. “But the problem is that to reduce the interest rate by another half per cent when somebody is already laden with debts or doesn’t want to borrow has absolutely no impact. So I actually think we should focus on public works activities.”
Williamson was speaking during his recent visit to Nicosia, to address the 2009 Marketing Summit organised by the Cyprus Institute of Marketing (CIM).
He believes that it is extremely difficult for the government to get the banks to use liquidity injections to reduce lending rates and thus ease the debt burden on consumers, because it is “trying to do something that goes against the problem that we have. The problem we have is that our balance-sheets are bust. So I don’t understand why they think that when you pump more money into the system, the banks are not going to use it to restore their own balance-sheet.”
This is why public works are beneficial to the economy in the current conditions. Williamson said: “If you can’t make the banks lend and you can’t make consumers spend because they’ve got to rebuild their balance-sheets, then one way you can actually get economic activity to happen is to do it directly.”
The crisis has exposed the horrendous levels of household debt that have built up in many economies. According to September 2008 figures, British households were the most indebted in the world with an average debt rate of 167 per cent of income, with a rate of 140 per cent of income in the US and 135 per cent of income in Spain. Although the level of average household debt in Cyprus is unlikely to be as high as this, Williamson still thinks that it is wishful thinking that people will spend their way out of the recession.
“Politicians see the short-term answer as being that people will consume their way out of the recession. But my view is that it’s not going to happen, for a very simple reason. Although the average person doesn’t understand all of the complexities of this mess, they basically understand one thing, and that is that we have spent too much and saved too little, and that we need to rebuild our balance-sheet. When you wash away a lot of the financial jargon and complexities, some of that conservative common sense is a better reflection of what is going on”, he said, adding: “In fact, most recent saving statistics suggest that people are actually cutting back their consumption.”
Injecting liquidity into the banking market can never be the complete answer. “Supposing this monetary stimulation works, and the economy suddenly starts to grow. We’re still left with the problem that there’s not enough saving and too much consumption, so the imbalance hasn’t gone away, and unless we fix that imbalance it will come back to bite us.”
