After Brexit: 5 ways to really ruin an economy

There's more than one way to ruin an economy

The UK’s exit from the European Union may slow European growth over the next two years – but to truly and deeply wound an economy requires more dramatic strategies.

By Jason Murphy

No-one yet knows what will be the full economic impact of Brexit, the surprise British vote to leave the European Union. The British pound quickly fell by approximately 10 per cent, and share and bond prices dropped too. It’s less clear what will happen to the “real economy” – production, consumption and jobs.

Whatever happens to the UK, though, should be kept in perspective. Even if the UK economy contracts by a percentage point or two, it will be a long way from the worst economic disasters of recent years.

To produce true economic disaster, you need to do something more misguided than deciding to leave an economic bloc. Here are five ways to really ruin an economy.

Price controls – Venezuela

To the late Venezuelan President Hugo Chavez, inflation looked easy to solve: issue a law that made it a crime to sell at high prices.

Introducing the 2011 Law for Fair Costs and Prices, Chavez spoke about tortillas – priced at B7.50 at government supermarkets, they sold for up to B40 at private stalls. This could not stand – the price control law was “to advance the struggle against the injustices of capitalism,” Chavez said.

Venezuela had a history of price controls. For a time a litre of petrol, for example, cost just US$0.01 under subsidy (which, not surprisingly helped spark a boom in smuggling fuel out of Venezuela).

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The Law for Fair Costs and Prices didn’t use subsidies. It lacked anything more than government say-so. Shortages of food and other basic supermarket goods spread, black markets thrived, riots followed.

Neither the death of Chavez nor the collapse in oil prices that once made Venezuela viable has put an end to the policies. In May 2016, CNN reported that the country was not just running out of food, medicine and electricity but even lacked toilet paper.

According to the World Bank, 2016 will be Venezuela’s third consecutive year of shrinking GDP, and 2017 is forecast to be its fourth.

Debt – Greece

Greece’s problems were that it was allowed to build debt for too long, and that it was unable to adjust when it needed to do so. It joined the European Economic Community (later the European Union) in 1981, adopted the euro as its currency, and for years funded growing budget deficits at low rates as a member of the eurozone. The deficits pushed up Greek government debt; by 2010 it was reported at 120 percent of GDP, double the supposed Eurozone limit. But the real level of debt, audits found, was almost 150 per cent.

Analysts and foreign officials began to ask questions that ought to have been asked earlier. Greece’s annual government fiscal deficit – the gap between spending and revenue – was revealed to be larger than official statistics were letting on. It was by then in fact one of the highest in the world.

Such a situation would normally trigger a currency devaluation. As an EU member, however, Greece could not devalue – a problem which made its situation far worse. The EU eventually offered bailout funds in return for a series of 13 increasingly severe austerity packages. Gross domestic product, which reached US$354 billion in 2008, dropped to US$195 billion by 2015 and fell again in early 2016, according to World Bank reports.

The Greek unemployment rate – which was 8 per cent in 2008 – now sits at 23 per cent. The combination of high public debt and the country’s inability to adjust to changed circumstances has made Greece a byword for debt-driven economic mismanagement.

Self-sufficiency – North Korea

North Korea trades very little, boasting it is “self-sufficient”. The “self” part is these days mostly true, but the “sufficient” part is debatable.

The end of the Soviet Union was substantially less welcome in North Korea than in, say, Europe. The true reality of self-sufficiency was about to dawn, with terrible consequences. It is estimated that North Korean GDP fell by more than half in the decade after 1990, from around US$2700 per person to less than US$1000 in 2000.

This period, known officially in North Korea as The Arduous March (and named after a story of Kim il-Sung leading guerrilla fighters against Japan) included a famine that is estimated to have killed between several hundred thousand to several million people.

This is not to say self-sufficiency has been devoid of successes. North Korea is a leader in production of Vinylon. Invented by a scientist who defected from South to North Korea, Vinylon is a fabric produced from locally-sourced limestone and used in clothes, shoes, bedding and rope.

You can’t eat it, however. According to the World Food Programme, “one in every three children remain chronically malnourished or stunted” in North Korea. The country has recently allowed small-scale private business in an attempt to rebuild its economy.

Lack of property rights – Zimbabwe

Zimbabwe was never rich. But the lesson of meltdowns is you don’t need to climb high to start your plunge. In 1982, Zimbabwe’s GDP per capita was US$1060; by 2008 it was just US$300, according to the World Bank.

The reign of Robert Mugabe – elected Prime Minister in 1980 and President in 1987 – has had many economic policy errors, but two stand out.

The first is redistributing farmland via violence. In 2000 an existing program to move land from white to black ownership with compensation was trampled by a state-sanctioned land seizure program that helped create a famine.

The second error was the 2005 destruction of homes and businesses belonging to opposition supporters.

Operation Murambatsvina (“Clear the Rubbish”) was an attempt to clear illegal slums, the government says. The UN says it was politically motivated, coming shortly after an election at which the opposition did well.

The World Bank in its published overview says these and other crises between 2000 and 2008 “contributed to the nearly halving of its gross domestic product (GDP), the sharpest contraction of its kind in a peacetime economy, and raising poverty rates of more than 72 per cent, with a fifth of the population in extreme poverty.”

Lack of security over your possessions will never spur much in the way of investment, and with rich white and poor black alike at risk, Zimbabwe is going from bad to worse. In 2016, with Mugabe aged 92, Zimbabwe’s economic problems are said by the IMF to have “deepened” and activity is “severely constrained”.

Poor investment – Nauru

Perhaps the greatest swan dive on this list is that of Nauru. The world’s smallest independent country in terms of both population and land area, it was during the 1970s and 1980s the world’s richest, in per capita terms.

Courtesy of its phosphate rock reserves, the country of 10,000 grew fat (quite literally – a 2007 World Health Organization report (PDF) identified 94.5 per cent of its residents as overweight). Nauru mined its tiny landmass like there was no tomorrow, digging up its dwindling phosphate reserves in the 1980s when prices were high.

The Micronesian country’s wealth was legendary, and it made attempts to diversify. Nauru bought commercial properties in Australia and the USA, and started its own airline.
Among its investments was a West End musical about Leonardo da Vinci. On opening night, much of the cabinet of Nauru was in attendance. The musical (titled Leonardo the Musical: A Portrait of Love, and running for four hours) was short-lived, and so was Nauru’s status as a wealthy country.

Exactly where the incredible wealth went remains unclear, but Nauru’s eventual net debt – hundreds of millions of dollars owed all over the world – was not. Nauru is now impoverished and dependent on foreign aid.

In 2014, Sydney University geosciences professor, John Connell, told the Financial Times newspaper that mass emigration might be the only long-run solution.

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