Sun | Oct 22, 2017

Doctrinaire approach to primary surplus dangerous

Published:Sunday | July 26, 2015 | 12:00 AMDensil Williams, Contributor
Professor Densil Williams
Dr Bert van Selm (left), IMF technocrat, and Richard Byles, co-chairman of EPOC, the IMF agreement watchdog, on March 3. Van Selm has discouraged any talk of adjusting the 7.5% primary surplus, arguing that the consequences would erode the debt-reduction strategy.
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The debate is on in earnest as to whether or not Jamaica can indeed sustain the 7.5% primary surplus target as agreed with the International Monetary Fund under the extended fund facility signed in 2013.

One set of persons calls for a reduction of the target. They see it as too austere and choking the economy and inhibiting it from producing the much-needed growth to make persons lives and standard of living better off.

Similarly, another set of persons calls for the target to be maintained at all cost since it is seen as a critical precondition to lay the foundations for the economic growth that the other side is saying that is so desperately required.

A number of persons who depend on the opinion leaders to help them make a decision are looking for an either-or answer (as the saying goes, black or white; no shades of grey) as the discussion sometimes sounds very credible from either side. Unfortunately, most of the persons who speak on the subject do not reveal their inherent epistemological biases toward a particular school of thought and thus give the impression that their analysis is objective and free from value judgement.

I prefer not to take this doctrinaire approach to the discussion but, instead, look closely at the extant contextual realities and propose ways to address the issues that are germane to the well-being of all citizens.

 

THE REALITY

The is no doubt that since 2013 when Jamaica signed on to the extended fund facility with the IMF, the economy has shown improvements in key macroeconomic variables such as interest rate, inflation, doing-business scores, competitiveness scores, net international reserves, among others.

However, despite the strong performance in the macroeconomic numbers, the majority of citizens cannot say, with any confidence, that their quality of life has improved materially. This, I submit, stems from the severe lack of economic growth despite the macroeconomic stabilisation. Indeed, those persons who subscribe to the Ayn Rand views on economic management will argue that stabilisation is a precondition for growth and so there is no need to rush, as economic growth will come in the long run.

The reality, however, is that when hunger and poverty strike, humans do not have the patience to wait for the long run. It was Keynes who said, "... In the long run, we are all dead." It is imperative, therefore, that despite the stabilisation programme, the economic managers put projects in place so that growth can be generated in the short term.

I suggest that Government play a strategic role in this regard, as growth cannot be left solely to the Invisible Hand, vis-a-vis the private sector. This is too risky, especially when persons are suffering daily.

 

PRIMARY SURPLUS AND GROWTH

The Gleaner continues to remind the nation that the primary surplus target did not come from a metaphysical place but, instead, resulted from carefully studied empirical models on the economy.

While I have no doubt about the robustness of the econometric models that have been used to generate the primary surplus target, it must be noted that models generally take an atomistic view of the economy and, in most cases, cannot account for the vagaries of the political economy in which we operate.

Indeed, the outputs from models are generally a function of the assumptions underlying those models. If the assumptions are relaxed in one direction or another, different results will be generated. So, we cannot think that the results from a model are cast in stone and cannot be relaxed.

In the current environment, it is clear that running a primary surplus of 7.5% of GDP is taking a lot of money out of the economy and prevents investments in growth-inducing projects. In this environment where things are tough and economic growth has been elusive, especially in the short term, shaving off a portion of the primary surplus to invest in growth-inducement projects is a very viable option to pursue.

A primary surplus of 7.5% of GDP amounts to roughly J$122 billion at today's exchange rate, if we use a GDP of US$14 billion. A half a percentage-point reduction in this target will generate roughly J$8 billion in savings. Further, a one-percentage-point reduction will generate roughly J$16 billion in savings.

There is no doubt that putting back J$8 billion-J$16 billion back into the economy will go a far way in generating much-needed economic growth once there is a strong growth strategy.

If we accept the PIOJ Growth Inducement Strategy of 2011, we can find more than enough projects to invest in that will generate jobs, valued added to GDP and tax revenues.

For example, initiatives such as rehabilitation of RADA farms roads, upgrading of sanitation facilities, implantation of youth literacy projects, implementation of community mobilisation and youth intervention programmes, among other things, are estimated by the PIOJ to cost J$14.4 billion.

Using the 2011 GDP as base year, the PIOJ estimated that this investment could stimulate economic growth in the region of 1.5-3.1%. In terms of dollar figures, this investment would generate about J$19 billion-J$37 billion in real value added to the economy.

Further, the impact on tax revenues would be in the region of J$4.4 billion-J$8.8 billion. Also, from the implementation of these various projects, at least 1,200 jobs should be generated. The economy is in dire need of this type of stimulus.

Shaving off one percentage point off the primary surplus target and using those savings to invest in these critical projects is definitely an option that must be put on the table. We cannot be dogmatic about keeping the primary surplus at 7.5% when real suffering is taking place.

Concluding thoughts

Revising the primary surplus target without strong accountability as to how the funds will be used is not the way to go. The need for a revision is necessary, but it cannot be with the aim of paying salaries and funding opulent lifestyles.

The revision should be directed at investments in growth-inducement projects such as the ones outlined above. Indeed, the IMF, in its revision of the growth forecast for Latin America and the Caribbean on July 15, 2015, said, "Focusing government spending on infrastructure would enhance productivity, thus strengthening potential growth."

Cutting the primary surplus will provide the fiscal space so that this investment can take place in a framework of accountability and greater efficiency. Reducing the primary surplus target by one percentage point will pale in comparison to the social chaos that might arise if we do not tackle the high levels of poverty and inequality threatening the gains from the agreement thus far.

- Densil A. Williams is professor of international business and executive director of Mona School of Business and Management. Email feedback to columns@gleanerjm.com and densilw@yahoo.com.