AS I SEE THINGS – Economic theorizing versus policymaking
THE MAGNITUDE of the social and economic problems facing countries all over the world are forcing academics and policymakers alike to come up with new and creative ways to resolve those challenges in a sustained manner.
Thus far, no country has been able to put together a mix of policies that have really worked or even shown great potential to do so in the aftermath of the 2007-2008 global financial and economic crisis. And that is despite the wide range of ideas that have been put on the table to date.
A major setback in the current environment is the distinction that ought to be made between economic theorizing and policymaking. You see, economic theories do provide interesting insights for policymaking, but lines clearly have to be drawn when it comes to practice.
A major reason for this conclusion is that theories are often constructed with certain assumptions in place and hence policy prescriptions follow. In the real world, all things can change simultaneously.
Furthermore, policymaking is usually accompanied by deep political considerations. When those two factors are taken together, it is straightforward to see why actual economic policies can easily depart from what economic theorizing may suggest.
To illustrate this point, I wish to refer to an article in the Wednesday, September 12 MIDWEEK NATION – Which View Best For Our Economy? – by Sanka Price. The article documented various policy options for Barbados based on opinions from different quarters, including the Democratic Labour Party (DLP), Barbados Labour Party (BLP), and the International Monetary Fund. Even though it posed an important question, the author did not offer a specific answer. But I will, without repeating the details of the various views contained in the article!
In a nutshell, Barbados’ economy has been struggling to respond to the various challenges it faces.
Two of the major problems include low economic growth rates and the high fiscal deficit, particularly on the current side. It is no secret that from a fiscal perspective, economic activity can be positively influenced by cutting taxes or increasing expenditure because both of these policies are expansionary in nature. Increasing expenditure can also be generated on the consumption side by cutting taxes, thereby raising the amount of disposable income in the hands of consumers. This is one of the suggestions coming from the BLP.
The DLP, based on what we have witnessed to date, has been more inclined to raise Government expenditure to stimulate the economy. Theoretically, both approaches can grow the economy.
Hence, the option chosen should reflect the economic reality, specifically the fiscal and debt situation.
On the fiscal side, the current account deficit remains high in the eyes of rating agencies and the BLP even though Government seems satisfied with the progress made to date in reducing the level of the deficit. Given the economic composition of current expenditure, the wage bill presents the major challenge.
Theoretically, cutting the wage bill is the easy way out. And that is what the IMF has suggested. Practically, neither the DLP nor the BLP will publicly embrace that option, especially with a general election just around the corner.
To address the fiscal deficit, the BLP has suggested privatization as an option to “raise large sums of money” while the DLP is holding fast to its medium-term fiscal strategy of a gradual reduction in the deficit through some cuts in expenditure and greater efficiency in revenue collection.
It is clear, therefore, that in context of the Barbadian economy, particularly in relation to the fiscal situation, policymaking can depart from what economic theorizing suggests. And that position is evident in both the DLP’s and BLP’s perspectives.
Given what we know to be the main stumbling blocks in the economy and considering the options available, I believe the approach to stimulating the economy through tax cuts and the raising of funds without accumulating further debt hold greater promise for Barbados because they would be less burdensome on the country.