– Finance Minister’s remark of no major disruption in economy is delusional
This analyst noted with concern that, in an online news outlet, it was reported that the Finance Minister posited that there is nothing to suggest that the economy has been stalled as a result of the political situation following the December 21, 2018 no-confidence motion. He then went on to state that the good news is that the economy grew by 4.1 per cent — way above the 3.4 per cent that was projected — and that inflation was projected at 2 per cent, but actual inflation was 1.6 per cent.
Now, on this note with inflation, one must understand that macroeconomic policies have two branches; those are, fiscal policy and monetary policy. Fiscal policies are administered by the central government, which means this comes under the direct portfolio of the Minister of Finance; while monetary policies and price stability, which have to do with the management of the inflation rate, come under the primary function of the Central Bank, which functions autonomously. It must therefore be understood that the outcome of inflation rate, which is quite stable and below 2 per cent, is a direct accomplishment of the Central Bank, and not the Finance Minister directly.
Turning now to the 4.1 per cent growth, of which the Minister of Finance constantly boasts, it is really nothing to boast about when one understands the GDP equation. Henceforth, though this analyst, in this column, dealt with this specific analysis last year when the mid-year report for 2018 was published, it is perhaps necessary to re-state the analysis presented in that article, in light of the honorable Minister’s recent remarks to the public.
As such, today’s article is not necessarily an entirely new article on a new subject, but rather a summary of previous articles aimed at directly challenging the subject Minister’s analysis – more or less, refuting his analysis. To this end, it is imperative to firstly establish an understanding of what GDP is, and how it is computed.
So GDP, or Gross Domestic Product, is the market value of all final goods and services produced in a country in a given time period. GDP measures the value of production, which also equals total expenditure or final goods and total income. The equality of income and output shows the link between productivity and living standards. The equation for GDP is C + I + G + (X-M); where C is Consumption (total expenditure by households), I is Investments, G is government spending/expenditure, and (X-M) is exports minus imports, which is net exports. From this equation, one would observe that the Government cannot directly influence and/or control the outcomes of three components from the equation to achieve a higher or improved level of GDP growth rate; those are, Consumption (household expenditure), Investments (I) in the economy, and net exports (X-M).
But governments can very well influence their own component from the equation, which is Government expenditure (G).
That said, from looking at total Government expenditure for the last three half-year periods, for the period January to June 2016, total Government expenditure was recorded at $89.6 billion; January to June 2017, $97.2 billion; and January to June 2018, $111.8 billion. This gave rise to increases in the levels of Government expenditure for the half year (HY) period 2016 – 2017 of $7.6 billion, and from 2017 (HY) to 2018 (HY), a difference or increase of $14.6 billion, thus doubling the level of increase of Government spending for the January – June 2017 and 2018 periods when compared to the January – June 2016 and 2017 half-year periods. What this means is that the 4.1 per cent growth for 2018 was attained largely because of the dramatic increase in Government expenditure in comparison to the corresponding period for 2017.
It is important to note that, while in theory, increases in Government expenditure are usually intended to stimulate growth in the economy, the key understanding that ought to be established in this regard is where these expenditures are allocated. If the expenditures are largely concentrated on unproductive activities such as national events, dietary, other operating expenses, local travel and subsistence, vehicle spare parts and service, and rental of buildings and things like that, then increases in Government spending like these will simply not translate to real developmental growth.
Rather, these will just be a burden on the national treasury, and therefore the allocation of Government spending is what is really important to achieve the desired outcomes of real developmental growth, and not just manipulating one component of the GDP equation, inter alia, mathematical simulation to make the numbers appear to look good.
As such, in the context of this argument, it is implied that this level of GDP growth rate does not necessarily reflect the true economic status of the economy with respect to real growth in terms of an expansion of the economy in developmental terms.
For example, this cannot be the case when the rate of unemployment remains relatively high. The last survey that was carried out showed that Guyana’s unemployment rate is 12 per cent. However, in a previous article featured under this column some time ago, it was argued that if we were to adjust that figure to account for the 9,000 plus unemployed sugar workers in 2018, then real unemployment rate would be anywhere in the region of 20-25 per cent.
The unemployment rate of a country is a key indicator of the economic health of an economy, and therefore, with a rate of unemployment hovering over 20 per cent, that is certainly not a good indicator and does not tell a good story in terms of the economic growth direction of a country. Moreover, for there to be real substantive growth of an economy, and not just artificial growth, there needs to be expansions in consumption spending, investments and net exports, and not just Government expenditure, which are largely unproductive.
