Montreal, March 1st 2003  /  No 120  
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Harry Valentine is a free-marketeer living in Eastern Ontario. He can be reached at
by Harry Valentine
          During mid-February, the federal Export Development Corporation announced a $1.09-Billion ($1,090,000,000) line of credit for Nortel Networks Corp., after private investors had refused to provide Nortel with funds. Officials claimed that future spin-off benefits justified the investment of public funds.
          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. 
     « 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. »
          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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