What matters most to me is to educate the readers. This is not always the easiest medium through which to do so especially when some of the material is deemed to be technical. But the teacher has to find a way to do so in the interest of his readers and his country, without regard to perception.
There are several ways of measuring a country’s national income, output or aggregate demand. However, the best way, especially for policy purposes, is to separate the aggregate/total demand for goods and services into demand from domestic/local sources and demand from foreign sources. In this sense, when we demand from foreign sources we are importing. If foreign sources demand from us, we are exporting.
Apart from foreign sources demanding from us, locals also demand. The local demand comes in the form of consumption or investment. In addition, this local demand comes from private people or the Government. Given that my interest in this article is to explain that the Government’s demand is at the heart of the country’s current difficulties, the Government demand is treated separately.
In light of the above, it is possible to represent the economy’s total demand as the sum of all private consumption, all private investment, all Government consumption and investment. Since locals also demand goods and services from foreign sources, we have to add the imports to all the other demand of the locals. A country therefore has to be careful about what it imports because it has to use foreign currency to pay for the imports.
In order to be able to pay for imports, a country has to export goods and services to foreign people to earn the foreign currency. This is why a country has to earn foreign exchange for basic survival far less to prosper. If the country does not earn enough foreign currency to do what it has to, then it has to borrow.
What is enough foreign currency depends on the demands of the private people and the Government. In most cases, it is the excessive demands of the Government that put Caribbean countries in trouble. The excessive demands of private people cancel out themselves as those who have excess money lend to those who do not through the financial system – commercial banks, credit unions, for example.
Since governments do not earn money but tax people to get it, they are far less disciplined than private individuals and have different motives. Most times, the excesses of the government cannot be handled through taxing the people and therefore they have to borrow from local or foreign sources.
This country has reached the stage where neither taxation nor borrowing can solve the excesses of the Government. The only way out is through cutting expenditure. It is evident even to the most partisan among us that there is nothing to show for the Government excesses of half a billion dollars over the last three years. There is a reason for this!
A dollar spent by a Government on a capital project makes a healthier contribution to economic growth than a dollar spent on the current side.
Therefore, in cutting expenditure there also has to be expenditure-switching to help grow the economy. This is where management and leadership are required.
The key to managing any Caribbean economy is to manage the demands of the Government which are ultimately paid for by the private citizens who pay the taxes or whose taxes are used to repay the loans of the Government.
The ultimate price in managing such an economy is the absence of foreign exchange. The demands of Government and the absence of foreign exchange are inextricably linked.
It is, however, possible to mask the link by borrowing from foreign sources, in which case Government’s excessive demands may appear to be sustainable.
The economics of public finance is in a sense sophisticated home economics. If it smells wrong, it is wrong!
Clyde Mascoll is a professional economist and Opposition Barbados Labour Party spokesman on the economy.