The debate over the Government’s spending in according with their manifesto programme continues unabated, not surprising in view of our new circumstances occasioned by oil revenues. However, we have been particularly disappointed with the Opposition insisting only on the populist clichéd insistence on Governmental transfers. There’s no critique of the macro-economic fundamentals that undergird the budget. Does this mean they agree with those policies? Then maybe they ought to say so. By avoiding comment on the present model, the Opposition unavoidably end up with intractable contradictions – such as cutting taxes while simultaneously increasing spending, without explaining where the funds would come from, or their impact on the economy.
For instance, if they want to be original, they might outline a programme for our development that would be based on some premises of Modern Monetary Theory (MMT). MMTers make the claim – following in the footsteps of Abba Lerner – that the Government budget should not be subject to any sort of arbitrary balancing constraint. Instead, Lerner and the MMTers advocate that the Government budget balance should be conceived of strictly from the point of view of real economic variables. Thus, if there is unemployment, the budget should be unbalanced; while, if there is high inflation due to output capacity being outpaced by demand, the budget should be moved closer to balance; or even, in certain cases, into surplus. Lerner referred to this approach as ‘functional finance’.
The reason that both Lerner and the MMTers feel confident in making this case is because they hold that a Government that issues its own currency and allows its exchange rate to float is not subject to any budgetary constraint. It can essentially issue new money – together with Government bonds, if it so wishes – until it begins to see inflation. Inflation, then, is the only real constraint to a Government that issues its own currency and maintains a floating exchange rate.
However, if a developing country tries to spend up to the point of full employment while maintaining a floating exchange rate, it is, as stated above, likely to see devaluation and inflation take place, as the weakened currency chases more and more imported goods that the country’s own domestic industry cannot produce. As incomes rise through Government spending programmes (and potential rises in real wages) people will be more inclined to seek out goods and services that were previously thought of as available only to a small stratum of the population. Devaluation and inflation are then almost inevitable – unless, of course, the oil-generated forex compensates.
What to do? We can actually use Government fiscal policy to guide domestic investment decisions, and ensure that some of the goods and services people desire as their incomes rise are produced at home, rather than abroad. Then we need be less concerned with currency devaluation and inflation, as these goods and services will be denominated in the domestic currency. And we can kill two birds with one stone by also exporting.
Let’s say people are buying more top-end furniture. We have an abundance of high-quality woods in Guyana, but our manufacturing capabilities are substandard. The Government can establish public-private partnerships to fund one or more industrial furniture manufacturing centres to international standards. Kilns, designing and marketing expertise can be shared. Jobs are created, more money is spent domestically, and the export market can be opened up.
This governmental intervention (dirigisme) – like the gas-to-shore project – is a workable method of economic governance. It allows markets to continue to function, but, at the same time, channels investments into needed channels quickly and effectively. It does all this without the need for complex bureaucracies; all that are needed are good researchers and planners and a Government (and in Guyana an Opposition) willing to incentivise investment that serves the public purpose. Coupled with the functional finance approach as laid out by the MMTers, the possibilities for fostering growth are endless.
But, in Guyana, the Opposition will only be complaining that entrepreneurs will be making money; not that there will be a virtuous circle created. You can’t make omelettes unless you crack some eggs.
