Holes in economic policy

Given such signs, it might almost seem as though a country is better off when its economy is not operating at full capacity. But the IMF economists are actually working backward — their premise is that the factors listed are a sign of an economy that has reached capacity. However, determining economic capacity is not a simple task. “Capacity” is defined as the amount an economy can produce using its current equipment, workers, capital, and other resources at full tilt. But calculating capacity requires measuring the output gap of the economy — ie how far current output is below what it would be at full capacity.

Unfortunately, since nobody really knows what an economy’s potential output is, the size and direction of the output gap can be misdiagnosed which, in turn, can lead to errors in macroeconomic policy. When this happens, positive indicators in purely fiscal aspects can create negative indicators in specific social aspects. Trinidad and Tobago certainly does not appear to be enjoying as a society the fruits of a full-capacity economy. This no doubt is why the IMF analysts recommended the design of “well-targeted social programmes” which would “enable the country’s population at large to benefit from the energy windfall.”

Indeed, we suspect that this language was carefully chosen — the implication being that the Government’s existing social programmes are not well-targeted. The main sign of this is the high crime rate. While crime has many causative factors, a wide gap between the haves and have-nots is a primary one. The unemployment rate now hovers around seven percent, which means that absolute poverty rates have almost certainly declined from the 20 percent touted in the last major survey.

Yet crime has risen, implying that a certain section of the populace has needs and wants which are not being met. (The alternative view — that a specific group in the populace is simply bad and lazy people — is untenable and certainly does not lead to any practical solutions for reducing crime.)

One long-term measure is to institute policies that will bring more of the population into the productive sector of the economy (which does not include the CEPEP initiative). In this regard, diversification of the economy assumes more than obvious fiscal importance. The IMF report advises that public spending be contained in order to reduce the non-energy deficit. According to the Central Bank, that deficit has gone from -6.6 to -9.7 in the past three years — which is to say that national spending is being financed mostly by higher oil and gas prices.

And the 2005 Public Accounts Report notes that from 2002 to 2005, the Government’s expenditure has constantly exceeded its revenue.

It would be virtually impossible to find the exact connections between these factors and the fact that a significant section of the populace is not benefiting from the economic upswing. Yet the correlation between rising expenditure and rising crime is very strong.

This is why the Government must rethink its macroeconomic policy, especially in regard to social spending, as a matter of urgency.