The big ECB can learn from small island nation of Samoa

When September 7, 2009, begins a very exciting day in Samoa, an island nation in the Pacific Ocean. On that day, the law passed in April of the previous year will be implemented. Until September 7, 2009 they drove on the right in Samoa. However, the country decided to drive on the left from 6 a.m. on September 7, 2009.

The reason was mainly practical. Samoa buys just about everything in Australia, New Zealand or Japan. That 'everything' also includes vehicles. In all three trading partners mentioned they drive on the left side of the road. The result: Samoans have to buy their cars in the US. And those are expensive. By also driving on the left, residents can bring in cars from Australia or New Zealand, making the cars much cheaper for the Samoans. There are also many Samoans living in Australia and New Zealand, who have to get used to it every time they fly back and forth – and pay attention! – which side of the road to drive on.

A good preparation
The decision to drive on the left was not simply accepted. Vested interests and habituation – virtually everyone who had a car had the right-hand side of the road – led to protests and strikes. Nearly 10% of the population took part in the largest demonstration against the plan. However, the government persevered. It was feared that many accidents occurred during the conversion. That hardly happened and the reason is that the switch was well prepared.

In the months between the amendment and its implementation, the government widened roads on the islands, roadside warnings were swarming, speed limiting measures were taken on the roads and the speed limit was temporarily reduced significantly. Around September 7, 2009, the sale of alcohol was banned, the Red Cross stockpiled blood as a precaution, and the government declared September 7 and 8 as public holidays, giving many a day off.

On that morning of September 7, 2009, a siren sounded at 06:00. Everyone who was on the road at the time had to stop and then change lanes. Due to the good preparation, the radical operation went smoothly, without casualties.

Example
The European Central Bank (ECB) can learn a lot from Samoa in this regard. In 2022, the structurally changed inflation environment will force that bank to change its course, since it has kept interest rates at 0% for a decade and buys government and corporate bonds on a large scale. However, the new course requires higher interest rates and stop buying debt securities, making it comparable in terms of impact on society to switching the other side of the road.

What Samoa has shown is that such a major operation can go smoothly and without too many shocks - except for getting used to the new situation. Provided you prepare things well and in good time. That is what the ECB must do. Do not raise interest rates now, but prepare the outside world for the new situation, in which interest rates will rise. Announcing that change in time gives everything and everyone time to anticipate it. So that when the time comes and the monetary siren sounds as a sign that interest rates will rise from that moment on, there will be no chaos. The alternative is for the ECB to bury its head in the monetary sands. That does not prevent the course from having to be changed, but it is a bad thing for society. Because no preparation increases the risk of chaos and many victims.

Speaking of Samoa and notable changes, by the way: in 2011, the country was tired of being the last country where New Years Eve is celebrated. In 2011, the government decided to move virtually on the world map by moving from the east to the west side of the International Date Line. In 2011, Samoa skipped a whole day: after December 29, December 31 followed. It should therefore be possible to stop buying government and corporate bonds by the ECB. You just skip a month once and then continue.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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