Phasing Out Dependency on Others: Its Possibility

 

A community, say, ‘Subsistence Society’ lives on their own produces. It does not depend on other societies or communities. They run their livelihood out of what they produce within the community. They maintain sustainable living. But development touch enters in to the society from another community, say, ‘Development Society’. It is a modern society enjoying luxurious livelihood with different amusements. ‘Subsistence Society’ tastes new experiences. These lead them to see dreams for changes.

‘Subsistence Society’ starts converting themselves from subsistence to abundance for which they need scope to create the position. It is not easy to go to the reach. ‘Development Society’ takes the opportunity which is nothing but trade in goods and services with ‘Subsistence Society’. Goods and services are started to be supplied by ‘Development Society’ to ‘Subsistence Society’. But there comes a challenge how purchases are to be paid off by ‘Subsistence Society’. Supplier society provides a solution. They will take specific goods from ‘Subsistence Society’ against such supplies. This is a barter form of trade. But they mutually arrange an agreement for which ‘Development Society’ extends time to receive goods from ‘Subsistence Society’ in case of imbalance. This is the beginning stage of supplier’s credit, a delayed payment method.

Supplier’s credit is a payment method under which suppliers provide goods and services for which they receive payments at later dates. In trade operations, buyers buy goods from sellers on credit. Goods are sold in retail and accumulated sales proceeds are used to settle the payments. Supplier’s credit can be used for purchases of raw materials. The credit period supports to process finished goods. As a result, supplier’s credit is a mitigation tool for working capital needs. This credit can either be available from domestic sources and external sources. Procurement of raw materials from external sources is executed widely by supplier’s credit among others.

‘Subsistence Society’ comes to the net of supplier’s credit. It indicates progress of economic activities. Fulfillment of increment in needs takes the society to an upper level. It is true. But upward trend in economic activities need to be adopted, manufacturing activities can support a lot in this regard. Production of finished goods needs input contents. ‘Subsistence Society’ is not in a position of its availability. It needs to source from ‘Development Society’. But suppliers are reluctant to provide input contents on credit. They require cash payments. In this case, financiers in ‘Development Society’ come forward to make payments to suppliers immediately on delivery of input contents. They are to receive payments with interest against their finances from manufacturers of ‘Subsistence Society’ after a certain period of time, say 180 days.

Extending finance by financial institutions for procurement of goods and services is known as buyer’s credit. This is available domestically and from external sources. Sourcing of raw materials from external sources needs financing supports. Buyer’s credit in this case works as a bridge for production time and cash conversion cycle. Along with supplier’s credit, buyer’s credit enters in to ‘Subsistence Society’. These indicate that the economy is moving forward with changes of living standards and sound employment. With the inclusion of financing net, the economy is moving fast with sound growth path. No chance is to face challenges if ‘Development Society’ is within the jurisdiction.

Financing from beyond jurisdiction requires to meet some preconditions. Local currency is merely useable for settlement of payments against procurements from external sectors. Foreign money is in need, which is earned basically from supply beyond borders of goods and services. Income in foreign currency is also earned through working abroad by people of home country. Without sound sources of income in foreign currency, financing from external sources may lead an economy to a disastrous situation. Let us see what is to happen in case of ‘Subsistence Society’.

‘Subsistence Society’ would produce to meet their needs. They would not depend on external sources. Their life was not glittering but their living pattern was sustainable since they were with nature. They would rarely face health hazards. However, if they would face, lives would go to the destination of no-return. Over time, they would jump to development path for which they would take external supports. Whatever the support is, it is not free of cost. It needs payments to be generated from external sources at least up to the extent of payments needs.

Society in subsistence becomes commercialized. Later it is in creditization. Finally it comes to the world of financialization. According to Hyman Minsky, an economy experiences three credit phases: hedge phase, speculative borrowing phase, and ponzi phase. The hedge phase is stable, where borrowers have enough cash flow from investments to cover both the principal and interest payments. In the speculative borrowing phase, cash flows from investments cover only the borrower’s interest payments, but such flows cannot pay off principal amount. Under the ponzi phase, borrowers’ cash flows from their investments are not enough to cover the interest and principal payments. The economy in phase can predict whether it is heading toward instability.

The economy of ‘Subsistence Society’ is in development stage depending on financial supports from external sectors in the form of credits. The economy as a whole is a creditor requiring to pay off liabilities. In terms of credit phases, all economic actors may not be under ponzi phase; rather they may be in hedge phase. With regards to foreign money, the situation may be in ponzi phase provided its inflows in foreign money cannot support required outflows. In this situation, different negative effects become visible from depreciation of local currency, adverse movement of price level, substantial size of shadow market of foreign money suppressing inflows of income generated abroad by people of home country, etc. Different measures are found adopted to bring stability particularly for transactions with external sectors. But the ponzi phase is the result of liquidity in foreign money. Administrative measures can do nothing unless inflows are rebounded.

‘Subsistence Society’ faces the situation. They started thinking what is to be adopted as policy tools. Administrative actions work for the time being but become inoperative later. On the other hand, it is not easy to bring income of people working abroad through official path. But payments against export are mandatory to be repatriated within the prescribed time. How to increase exports becomes a central point for discussion. Export is concentrated in few products produced by export oriented industries. They enjoy privileges in import duties exemption with conditions to export all outputs. There are many items potential for exports but they do not avail duty benefits at import stages since these products are sold in local and foreign markets. In case of duty waiver, other items can enter in to export basket as new products.

Manufacturing industries save, in true sense, foreign money since they support to refrain from imports of finished goods. Import substitution is, to some extent, as good as export. What is to happen in case of duty waiver for inputs and intermediate goods? Analysis shows that this can easily suppress price level of the economy, leading to stability in exchange rate. As such, ‘Subsistence Society’ decides to revisit tariff structure for inputs and intermediate goods for manufacturing industries. The revisit suggests duty waiver for goods to be imported by industrial enterprises producing outputs for domestic market and foreign market. Loss of duty needs to be covered by indirect taxes. This helps to rebound the economy with enhanced liquidity in foreign money through increment in exports.

Bangladesh economy is in unusual situation to manage external sectors. It tries to bring stability in exchange rate through extra incentive by banks and liquidity support for Government imports from international reserves. But exports are in brackets of few products having no sensitivity in price decreases in case of depreciation of local currency. Wage earners’ remittances are reported to face troubles due to excessive demand otherwise. Enhancement in liquidity through export promotion can support to rebound the situation. Should the economy not follow the proposition adopted by ‘Subsistence Society’?

 
Mehdi Rahman works in the
development sector.