THE VERY NATURE of economic systems suggests that inevitably there would be some degree of connectedness between and among economic variables, rendering economic policymaking a rather imperative component of the daily activities of those charged with the responsibility of efficiently managing the country’s financial resources and plotting the overall direction of the economy.
And so, from time to time, for example, pundits raise questions in relation to the impact of high fiscal deficits on the public debt and by extension growth within the local economy. Any serious government would treat an essential matter like that with the level of seriousness it unmistakably deserves.
The challenge, often, in the real world, is that there could very well be a gigantic disconnect between what economic theory suggests and the outcome of empirical investigation. For example, going back to the early days of classical economics with the likes of Adam Smith and David Ricardo, many would come away with the unambiguous conclusion that international trade is good for economic growth and development.
Hence, by opening borders, reducing tariffs and other forms of non-tariff barriers to trade, and pursuing generally liberal-type economic and financial policies would lead to more prosperity in countries that so do. But, does empirical evidence overwhelmingly support this assertion? The short answer is no!
The challenges faced in establishing a positive correlation between trade and growth are no different conceptually from those economists confront in relation to the public debt-economic growth nexus. But, does that mean we should ignore or downplay the potential implications rising public debt could have for a country’s economic growth prospects?
In commenting on the focus of Government’s policies prior to the actual presentation of the Budget in the House of Assembly, the Minister of Finance insisted that: “For the coming financial year, we want to work towards the stabilisation of the debt situation so that we move from adding digits to the debt ratios to start subtracting. Once you get it stabilised by doing the measures that we are doing, then it is going to fall, so we can expect that.”
Given the prevailing economic circumstances in the country, the minister is duty-bound to address the high debt burden that continues to be one of the major limiting factors in the country’s quest for growth.
To trivialise such an important issue by taking comfort in the notion that there is no conclusive empirical evidence that high public debt restrains economic growth is to be highly misguided.
The trivialisation of the idea of a negative relationship between high public debt and economic growth is based to a large extent on the robust debates that followed the findings that “whereas the link between growth and debt seems relatively weak at ‘normal’ debt levels, median growth rates for countries with public debt over roughly 90 per cent of GDP are about one per cent lower than otherwise; average (mean) growth rates are several per cent lower.
“Surprisingly, the relationship between public debt and growth is remarkably similar across emerging markets and advanced economies.” These results were reported in a 2010 study entitled Growth In A Time Of Debt by notorious economists Carmen M. Reinhart and Kenneth S. Rogoff.
Are we in Barbados prepared to be so naive as to ignore what is clearly a common sense matter that high public debt can hurt the country’s growth potential? To do so is to palpably discount what seems a rational association between two key macroeconomic variables!
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