Central Bank and the Govt

All this is very upbeat. However, given the bases of this economic growth, it would have been wise for Mr Williams to sound a cautionary note. Mr Williams asserted that the 6.2 percent expansion of the Gross Domestic Product (GDP), as well as the projected GDP expansion to seven percent and ten percent by the end of 2006, would come from ongoing public sector construction and the commencement of operations at Atlantic LNG Train IV.

What this means is that the country’s economic growth is still dependent on oil and gas revenues. It therefore seems to stretch the phrase to describe such an economy as "in excellent health." It also means that the economic growth, as well as the drop in unemployment, that comes public sector construction is largely illusory. This is because the kind of construction being undertaken by the Government will not, for the most part, contribute to productivity. Only a small portion of this State-sponsored construction boom deals with infrastructure — roads, utilities, flood control and so on. Most of the construction boom dollars are going to be spent on low-cost housing, government buildings, and recreational facilities. None of this contributes to GDP in a way that justifies the outlay. And, since such construction must come to an end, it means that the reduction of unemployment which comes directly and indirectly from this boom is temporary.

Additionally, the energy-fuelled boom may also contribute to inflation. If more people are going to be employed in areas which are essentially non-productive, in that they do not contribute to economic growth, then the pressure on wages will cause the cost of living to increase even more. The same Central Bank report also noted that prices in building materials have almost doubled in the past year, which means that Government’s budgetary allocations now have to be adjusted upward. This makes the Central Bank’s primary task of overseeing inflation all the more difficult. The bank can implement monetary policies, but its report also advised that controlling inflation would require the development budget to be phased and wage restraint exercised. These are measures which the Government, not the Bank, have to take — and the Manning administration has given no signs of curbing its make-work enthusiasm.

Given all this, it seems paradoxical for Mr Williams to be saying that there is no evidence that the State construction projects are causing the economy to overheat — unless he was being clever with words and saying without saying that there were other factors causing inflation. We realise that, as Central Bank governor, Mr Williams must not ring alarm bells too loudly. But we also recognise that a Central Bank, as guardian of the monetary system, must always be objective. That is why effective Central Banks are always independent of political directorates, and Mr Williams should bear this in mind when commenting about how healthy the national economy really is.