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| Sunday, 29 August 2004 |
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| News Business Features Editorial
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Budget deficit, inflation and economic development Prof. Jagath Wickramasinghe, Professor of Economics, University of Sri Jayawardenepura A controversy has developed among the economists and politicians that large budget deficits and high inflationary tendencies have been over emphasised as factors undermining economic development. The neo-liberalists give a prominent place to containing both budget deficit and inflationary tendency in the economy in their development strategies. On the other hand, Keynesian economists give very little importance to containing these two items in economic development efforts. Neo-liberalists argument is that with the enlargement of budget deficit as a result of expansion of government expenditure money supply will increase and inflationary situation ensues as a result. Such an inflationary tendency distorts the economy and exports are adversely affected, savings are discouraged and imports are encouraged hampering domestic production. As a result extra pressure is brought to the currency of the country in the world market and depreciation of the currency would be the final outcome. Depreciation of the currency would further aggravate the existing inflationary trends. Such a situation demands further expansion of government expenditure leading to further enhancement of the budget deficit. The expansion of the government expenditure too in turn, "crowds out" the private sector investments. This cycle would develop into a stag-flation, ie, stagnation of the economy with high inflationary trends. Keynesian economists do not accept this as inevitability. They are of the view that expansionary policies of the government encourage economic development and hence, government should expand investment and encourage private investment as well, so that the extra income generated by such investment would pave the way to uplift the economy. The resulting budget deficit and inflationary tendency would be short lived and eventual supply increases would look after them in the economy. However, they do not believe as the neo-liberalists do that all government expenditure would "crowd out" private investment; government expenditure on such items as health, education and training and infra-structural facilities would "crowd in", ie, such acts would give an extra impetus to the private investment resulting in higher economic growth. The purpose of presenting the above brief account of the current diversity in thinking on strategies of economic development is to show that neither there is any consensus on the most suitable strategy of economic development of a country, nor is there any unanimity on the relevance of the crucial economic indicators in the development process, in spite of the attempt of our opposition politicians to show otherwise. This is what our people should understand. Each country should choose the most appropriate strategy after taking into account the ground situation of that country. Resurrection of Keynesian economics will do enormous benefits to developing countries which are struggling to achieve rapid development getting out of the shackles of the international financial institutions. No economist will deny the powers of free market economy to lift a backward economy in a free world economy. As Bhagwati has pointed out quite a long time ago, free trade policies of a developing small country in a distorted world economy results in immiserising growth of that country rather than promoting economic growth. This is a crucial fact that any person who is concerned about the process of economic development should realise. Sri Lanka is a developing country with a per capita income of less than $1000. Poverty is fairly widespread although there is no unanimity on the extent of its incidence. The type of demand management envisaged by the neo-liberal economic strategy, in such an economy, would definitely result in a backlash by way of riots and insurgence activities, destroying lives and property. On the other hand, deprival of educational opportunities and malnutrition resulting from neo-liberal development strategies become serious constraints on the long-term development of the country. In developed countries widespread social security schemes are available, whereas in the developing world such schemes are rarely available. Hence, drastic cuts in social welfare activities by the government are counterproductive. It is common knowledge that the developed countries resort to numerous schemes of subsidy to protect their agriculturalists and both direct and indirect obstacles have been placed on agricultural and manufactured imports from the developing countries. Export subsidies are a common policy measure in the developed countries. In fact, the World Trade Organisation's Seattle trade conference failed due to the disagreement between developed and developing countries on these trade issues. Would any sensible professional recommend the type of liberalisation of the economy as envisaged by "Regaining Sri Lanka" in this hostile international economic environment? The main attempts of the international financial organisations are focused to prevent the developing countries from adopting a development strategy aimed at developing their domestic economy and they accomplish this task in the shrewdest way. Should we fall into such traps? Consideration of Budget deficit and inflationary trends, though are of some importance in economic development efforts are not very crucial; there are more important aspects that should be considered in economic development efforts. Lack of political clout of governments to bring in structural changes adversely affecting well to do and pressure groups like business organisations undermines development. Indiscipline of workforce is one major area. The productivity of any investment is undermined by the indiscipline in the state sector employees as well as the politicians. The politicisation of the administration is another stumbling block in enhancing productivity. Resurrection of a work culture among the workers will go a long way in improving productivity of investment. As against neo-liberal policies that result in untold hardship to people, numerous policy measures are available to improve productivity and achieve higher growth. Hence, time has come to concentrate on other factors leaving the economy to rectify any distortions resulting from large budget deficit and high inflationary tendencies generating from a "big push" effort in development of the domestic economy. |
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