In a December QL article, I presented the case that government policies
involving grants, low-interest loans and low-interest central bank policies
precipitated the high-tech boom, then the high-tech malinvestment boom
which included the stock market, then finally the high-tech meltdown (see
STATE MEDDLING CREATED THE HIGH-TECH BUST,
le QL, no 116). Anytime government "invests"
money in one area of the economy, it has invariably done so by directly
or indirectly removing the same amount of money from elsewhere in the economy,
where it may have been used more efficiently and more productively.
Market
responses to malinvestment
The spin-off benefits of this new loan will accrue to Nortel's suppliers,
who along with their other customers will regularly test market demand
for their products or services by fluctuating prices. Market responses
to these changes usually provides accurate business planning information,
except when government intervenes in the economy. The easy state funding
given to companies like Nortel enables them to increase the demand for
various items. As they make new purchases, they will also raise prices
as the demand and sales of these items increase. In the short term, the
suppliers will benefit, before they receive misleading signals from the
market about its longer term future. These mixed signals result from simultaneously
increasing demand and prices, caused by state action.
Other companies who buy the same products and services from Nortel's suppliers
will also pay the higher prices. As a result, many marginal telecommunications
and high-tech businesses which operate close to the bottom line risk operating
at reduced levels of viability and profitability. Several may have to postpone
or abandon new product development, discontinue certain product lines or
lay-off staff, while others may close their doors. By that time, several
of Nortel's suppliers may have already malinvested as a result of the misleading
market signals. These suppliers have the choice of disregarding the market
signals and risk an early business upheaval, or postpone their business
upheaval by answering the artificially induced market signals.
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« Anytime government "invests" money in one area of the economy,
it has invariably done so by directly or indirectly removing the same amount
of money from elsewhere in the economy, where it may have been used more
efficiently and more productively. » |
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Nortel's line of government credit from the Export Development Corporation
enables them to stimulate foreign consumption (market demand) and expand
into foreign markets. Since the American market is presently in a downturn
and will remain in a downturn during and after the conflict with Iraq,
attention may instead turn to improved telecommunications development in
Africa. Half of the $1.4-billion foreign aid mentioned in the recent federal
budget will be allocated to Africa. About the only thing that the African
recipients can do with Canadian foreign aid is make purchases from Canada
if they wish to assure themselves of continued future Canadian foreign
aid.
If the African recipients are astute, they will restrict their purchases
to politically favoured Canadian enterprises, such as telecommunications.
Canadian officials will then showcase how Canadian technology is benefiting
Africa while creating new high-tech jobs in Canada, along with all the
spin-off benefits to Canada's economy and courtesy of Ottawa's partnership
with industry. They will be sure to show how Canadian health care expertise
(tele-medicine) has become available at African hospitals and clinics,
courtesy of new internet-based telecommunications technologies from Canada.
The usual fairytale will be sung to the effect that future economic spin-off
benefits will more than cover the costs of researching, developing and
implementing the new technologies in Africa. However, the detrimental impact
on other areas of the Canadian economy, from where money was removed to
fund the state's showcase, will not be recognized.
When the present round of government partnership and investment in the
telecommunications unravels, there may in fact be unintended spin-off benefits.
More internet e-mail solicitations for investment funding are likely to
arrive from Nigeria. As well, several Canadian companies may use the improved
internet connections into Africa to reduce their operating costs,
remaining viable by outsourcing their data processing requirements to very
low cost providers located in African centres. The state's malinvestment
into improved telecommunications would at least have this unintended spin-off
benefit. When the African enterprises are flourishing by providing low-cost
data and information processing services to Canadian companies, the Canadian
high-tech and telecommunications sectors may again be in another state-precipitated
downturn.
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