The Wisdom of the Market - By Peter Blair Henry | Foreign Policy

The Wisdom of the Market - By Peter Blair Henry | Foreign Policy -  Click here to read the entire article.

"Stock market reactions to economic reforms provide powerful forecasts of policy effectiveness because changes in stock prices reflect the average opinion of thousands of shareholders who care little for ideological debates and simply consider whether a given change will create or destroy value. This predictive ability makes market movements an important complement to the traditional backward-looking measures Washington is fond of, including growth, inflation, and unemployment."

"By enacting large, unprecedented policy changes over the last three decades, developing countries turned around their economies and became the "emerging markets" that now drive global growth. When it comes to the debate in Western countries over the merits of austerity versus stimulus, for example, emerging economies' stock markets show us that one size does not fit all. In countries where large, persistent deficits have seduced governments into monetizing their debts and have spawned runaway increases in the cost of goods and services, the stock market tells us that austerity or "cold-turkey" policies designed to stop spiraling inflation dead in its tracks are both necessary and desirable. In contrast, equity markets react extremely negatively to government policies that doggedly pursue fiscal austerity when inflation is not out of control."

"When the government of a country accumulates liabilities beyond a manageable threshold, both lenders and borrowers must acknowledge their mistakes and share the burden of adjustment. Debt relief was given to the 16 Brady countries on the condition that they adopt additional economic reforms to drive growth: labor market reform, greater commitment to free trade, and privatization of inefficiently run state-owned firms. The countries that implemented and sustained these reforms began to flourish. The three countries that failed to sustain reforms under the Brady plan -- Jordan, Nigeria, and the Philippines -- experienced a much smaller initial rise in the value of their stock markets than the other Brady countries: 30 percent versus 60 percent. And those increases completely evaporated within a year as their lack of commitment to reform became clear."  Peter Blair Henry, February 08, 2013.

On May 09, 2012, in an article, titled "A Misguided Judgment: How President Jonathan and His Advisers Squandered a Golden Opportunity", I had this to say:

"Over the years, in spite the skepticism or suspended judgment that I have in the petroleum subsidy scheme in Nigeria, I have always resisted the temptation to engage myself in the arithmetic of the funding methodology for the obvious reason: I hate Mathematics. Nevertheless, I am quite familiar with the basic principles of economics and strategic management. In a similar vein, I have a good understanding of the fundamentals of subsidy as they relate to pricing and competitive markets.  Thus, it is reasonable to assume that when government intervenes in the market and help to defray the cost of production or part of it, it makes the final product less expensive for the final consumers to buy than it would have been without the intervention or the subsidy. In the area of export, it enhances competitive edge in relation to similar products by other suppliers in the same market - foreign or domestic - because the subsidized products are cheaper to buy."

"Sadly, those assumptions do not hold water in our (Nigerian) domestic petroleum market in terms of availability and pricing. The more funding our government injects into the petroleum subsidy scheme, the more scared petroleum products remain and the more expensive the final prices are at the gas pump. In hindsight, what I take away from the petroleum subsidy scam in Nigeria is that before we condemn the usual suspect (the international financial institutions that we love to hate for, in our reckoning, always recommending deadly economic pills as panacea for our sluggish economic growth), we must first ask ourselves whether the patients (African countries) administer the drugs as prescribed by Doctors (the international financial institutions)."  

Alex Ehimhantie-Aiyo Aidaghese, May 09, 2012

By the way, Peter Blair Henry is a Rhodes Scholar. He holds a Ph.D.  in Economics from MIT, and he is the Dean of NYU Stern School of Business, New York, New York. Here, we reached exactly the same conclusion, though through different courses of action and timing. His conclusion is based on research and case study. On the other hand, ours is based on common sense, leadership training, and learning over the years. We might not be speaking to the same audience, but the message remains the same - financial discipline matters. 

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