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OP-ED: Puzzles in economics

  • Published at 04:44 pm October 6th, 2021
Economics puzzle

A two-handed economic analysis

Economists together with state administrators predict the movement of the economy.

They do not consider the ‘should-be’ state of the economy. 

Non-state actors like multilateral entities - World Bank, IMF, and ADB exercise this type of predictions for the globe, including regions and countries separately.

People should, generally, live in a nation state with a standard quality of life.

To achieve the standard quality for all people, administrators of a nation state make different calculations focusing on upward income.

In the process of calculation, they take technical support from economists advising different prescriptions to adopt for the betterment of livelihoods.

The projections are basically calculated sitting on arm chairs in offices without considering the extent of doable work for the economy.

Gross domestic product (GDP) is the basic economic calculation consisting of four components: consumption, government expenditure, investment and net trade with foreign countries.

Both public and private sectors are included in the components. Change of any components entails to change total GDP position.

To boost up quality of life, purchase of durables by consumers such as white/brown goods like television, freeze, washing machine, etc. may be required, leading to positive growth in GDP.

Easy consumer credit may increase purchases of such durable items.

The end result of such sales is expected to bring income growth.

The increment in income is to be used for repayment of debt.

In this case the income equation is: Income = Consumption + Tax + Repayment.

The year end result may come to different situations like: Consumption = Income + Consumer Credit, or Income = Consumption – Tax – Consumer Credit.

This is a deficit situation in which consumption is supported by credit from banks.

In an ideal situation, the deficit should be financed out of previous years’ savings for which current consumption needs to be rationed.

Consumer credit may create extra demands in the economy which needs extra outputs.

If expected outputs are not produced domestically, the excess demands need to be supported by imports.

Otherwise, demand will be covered by existing output causing the price level to move upward.

The situation will result in: GDP = ↑P*C + ↑P*G + ↑P*I + NX.

Consumption by way of credit is nothing but consumption at future income.

Credit bubble for consumption without incremental investment to support outputs will definitely push it to bust.

Predetermination of policy

Central banks formulate monetary policy setting targets of money supply including expected interest rate.

The predetermination is conducted by way of a bookish formula for growth and price level.

Information of so called historical surveys is considered for the incremental projection of money supply.

Money supply with credit growth including consumer credit needs proper assessment for the betterment of the economy.

Central banks should employ their professional efforts in this regard without predicting their own monetary issues of what to receive as incremental profits to be transferred to Government exchequer or employees’ benefits.

On the other hand, commercial banks should do quality work without being busy with fulfilling their targets by extending ‘devil’ finance to their customers.

Credit expansion should lead to expanded investment for output enhancement.

Consumer credit before income earned may be extended for demand creation in the short run.

But there should be a balance between investment and consumption.

Otherwise, heavy consumer credit leads the economy to face a puzzle for contraction since unchanged income will need extra savings for debt servicing at individual levels. The result will be: ↓GDP = C + G + I + NX.

Theoretically individual savings is transformed into investment by way of financial intermediaries.

In practice, autonomous credit creation may lead investment to grow. This investment should increase income in future.

Non-income creation investment is, in real sense, a ghost outlay.

Effective investment brings an increase in output with employment and brings ↑GDP = C + G + I + NX.

If the investment is not effective, it will not contribute to the economy, rather creating problems to the lenders.

The situation is very much worse if the investment is made artificially.

It indicates capital flight in disguise of import payment, creating external liability to increase for the economy as a whole.

The situation, created by so-called entrepreneurs to divert funds abroad, records investment with import of capital goods for which payment is affected.

But inoperative capital goods will not generate outputs in future and creates problems for balancing transactions on the account of external sectors. As a result, GDP will move down: ↓GDP = C + G + I + ↓NX.


Animal spirits play over the shoulders of entrepreneurs.

They are always in investment moods provided that they feel comfortable. 

If comfortable confidence at home does not prevail, they will move abroad with investment.

Capital control does not allow them for such investment movement abroad. But how will they move abroad?

Whatever is repatriated abroad is either out of earnings domestically or from external debt. Something cannot be repatriated abroad out of nothing.

There are different channels for repatriation of funds abroad. Trade channel is, though blamed much frequently in the name of so called misinvoicing, risky channels since every transaction is recorded at different regulatory points.

Moreover, export is executed under buyers’ market at price lower than fair value, with mere scope to make under-invoicing further.

Beside trade, non-resident income and other income from invisible accounts are better channels since these incomes are rarely possible for predetermination.

These are recorded at the time of receipts from abroad.

The fund receivable from abroad may be used for investment abroad without their entry into the country.

Beneficiaries of such incomes are settled by investors in local currency.

Hence immediate effects are rarely found in the context of consumption but external accounts are negatively affected since the repatriation is not touched in the books of resident banks.

This leads GDP to move down: ↓GDP = C + G + I + ↓NX.


Regulatory framework does not permit residents to invest abroad.

Hence, earning against investment channeled abroad without using official arrangement cannot be repatriated.

This creates the possibility of such an invested amount for permanent stay abroad, unless a general waiver is granted.

With respect to the Bangladesh economy, the export sector depends mostly on a single product – readymade garments (RMG).

Volatility in this sector will jeopardize our export trade.

But we need to continue importing essentials and capital goods for which foreign currency is required.

In absence of export earnings, the economy may need to again depend on external debt for day to day payment obligations of import liabilities.

But investment abroad through official channels may support external accounts by repatriation of income earned thereon.

Economic work sitting on arm chairs in offices by economists gives birth to two handed analysis – in one hand and on the other hand.

Consumption through borrowing may either lead to (i) economic growth and price level change, or (ii) external liability.

Credit led investment results in (i) economic growth, or (ii) capital flight and credit default.

Restrictions on capital flows result in (i) unofficial capital flights, or (ii) necessity to intervene in foreign exchange market by regulators for local currency stability.

One sided analysis is required to go for action.

But subjective analysis can rarely bring precision.

This results in a mismatch for trade-off between theory and policy. Policy is basically based on two handed theories.

Theories are turned into policies through fine-tuning.

 But trade-off policies on fine tuned theories are not so easy to be implemented since they contain two hands.

As a result, there are conflicts between economists and policy makers. 


The author works in the development sector and can be reached at [email protected]

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