As the failure of the neo-Liberal economic paradigm collapsed around the ears of its sponsors up North, the economic profession as a whole has been trying to think outside the collapsed box. We return to this People’s National Congress-led coalition insisting on the in-the-box populist clichéd insistence on governmental giveaways. Their economic spokespersons have made no critique of the macro-economic fundamentals that undergird the budgets even as economic growth plummets. By avoiding comment on the present model, they unavoidably end up with intractable contradictions – such as cutting taxes while simultaneously increasing spending and are surprised our reserves and the real economy shrinks.
For instance, they might at least consider a programme of development based on some premises of Modern Monetary Theory (MMT), which is receiving serious attention abroad. MMTers assert that government budgets should not be subject to any sort of arbitrary balancing constraint. Instead, 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 – as has been exacerbated in Guyana after the Guyana Sugar Corporation firings – there should be excess spending making the budget unbalanced. If, on the other hand, 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. A leading light of MMT referred to this approach as ‘functional finance’.
The reason that MMTers feel confident in making this case is because they hold that a Government that issues its own currency and allows their exchange rate to float is not subject to any budgetary constraints. They can essentially issue new money – together with Government bonds, if they so wish – until they begin 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, as stated above, they are likely to experience, devaluation and inflation 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 only available to a small stratum of the population. Devaluation and inflation are then almost inevitable. Luckily for us, with the expected huge inflows of oil funds after 2020, denominated in US dollars these are no longer threats.
We can actually use Government fiscal policy to guide domestic investment decisions and ensure that the 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) is a workable method of economic governance. It allows markets to continue to function but at the same time channels investment into needed channels quickly and effectively. It does all this without the need for complex bureaucracies. All that is needed is good researchers and planners and a government 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, sadly, the Government seems only concerned entrepreneurs will be making money; not that there will be a virtuous circle created.
