Economics of public finance and ethics of development policy

In the second half of 2011, the economy of Bangladesh does, as it appears, face a new problem: the government borrowed a sum of Tk 111.20 billion during the first two and a half months of the current fiscal year (2011-2012). The amount borrowed was several times more than that the government had borrowed over the same period of the previous fiscal. Two critical factors -- declining revenues and rising expenditures -- have contributed to this sudden rise in government borrowing. The decline in government revenues is attributed to a drop in foreign assistance, falling overseas remittances and the decrease in sales of national savings certificates. Simultaneously, government expenditure have increased due to high import payments, extensive subsidies to agriculture, education and health, and exorbitant costs related to power plant rentals to supply the country's energy needs. Speaking at public forums, some of Dhaka's economists have expressed their concerns about the detrimental effects of borrowing a large sum within such a short span of time. While their concerns may seem outwardly well founded, their arguments -- in favour of a strong regulatory policy -- do not fully address the many lacunae that exist in their arguments. We are not against regulatory policy, but regulation alone fails to offer an encompassing solution to a complex dilemma. Our objective in this write-up is not to reiterate once more the litany of macroeconomic policies that have been put forth. Rather we will attempt to illuminate the dichotomy that seems to exists between responsible fiscal policy and economic development policies that seek to also ensure social justice. Many scholars recognise that neoclassical economics -- with an emphasis on self-regulated free market -- performs rather poorly in creating a socially just or ethical system. The Keynesian revolution has contributed to a broad new intellectual foundation that prescribes increasing economic intervention by government in the marketplace and monetary policy. The proponents of Keynesian economics argue that a budget deficit of moderate size is ostensibly designed to promote an accelerated rate of economic growth and higher levels of material welfare for the people at large - supposedly fulfilling the democratic sanctions of the populace. Professor Amartya Sen argues that the existence of a democracy ensures core values of ethics that are critical to a nation's development. He favours public action for human development that prevents deprivation and vulnerability. This is more of an ethics of development rather than mechanics of economic growth in a free market system. The ethics of development argument should not, however, disregard that an increase in welfare spending actually redistributes incomes from workers to the unemployed. A rising share of gross domestic product (GDP) taken by the state sector has a negative effect on potential economic growth in the long run. Moreover, a large and increasing public debt has been responsible for the nation's current account deficit, higher inflation and the subsequent devaluation of the national currency, crowding-out private investment and the sharp decline in the country's competitiveness in international trade. These stylized facts when working together, makes an economy fall back into a stationary state. In the case of high and explosive debt to GDP ratios, worldwide, the components have all come together to create an epic Greek tragedy for 2011. The economic situations of Italy, Spain, Great Britain, and the USA are characterised by escalating government debt, persistently high unemployment, decline in asset prices, inflation, and rising food and fuel prices. Against this background, let us have an overview of government debt across some major countries of the world, and compare relatively the performance of the Bangladesh economy in 2011. We divide the countries of the world into three categories: a) countries with a high debtGDP ratio (between 198 per cent and 63 per cent); b) countries with a moderate range of debtGDP ratio (between 62 per cent and 33 per cent); and c) countries with a low or comfortable level of debtGDP ratio (between 32 per cent and 10 per cent). The amount of debt is the cumulative government borrowings less repayments that are denominated in the country's home currency. It does not include external debt which reflects the foreign currency liability. According to the CIA World Fact Book 2011, the leading countries in the first category are Japan (198 per cent), Greece (143 per cent), Italy (119 per cent), Canada (84 per cent), France (82 per cent), and the USA (63 per cent). The countries in the second category are the Philippines (66 per cent), Brazil (59 per cent), Poland (53 per cent), India (52 per cent), and Pakistan (51 per cent). The countries in the third category -- that maintains a comfortable debtGDP ratio -- are Sweden (40 per cent), Bangladesh (35 per cent), South Africa (32 per cent), Peru (24 per cent), and China (19 per cent). According to an August 2011 report on Debt and Deficit in Bangladesh by Unnayan Onneshan, "Total debt of Bangladesh in fiscal year (FY) 2010-11 amounted to US$ 23,322.417 million that is 22.21 per cent of GDP. Total domestic debt in FY 2010-11 is US$ 1,947.97 million that is 1.88 per cent of GDP. Total domestic borrowing as percentage of GDP remains 1.5 to 3.0 per cent of GDP over the last 10 years. In FY 2010-11, the total external debt of Bangladesh amounted to US$ 21,347.44 that is 20.24 per cent of GDP." While the two sources differ in the statistics of debtGDP ratio in Bangladesh, both statistics lead to the same conclusion beyond any reasonable doubt: that the economy of Bangladesh is in a relatively safe zone. Although the scale of debtGDP ratio of the USA is exceedingly high compared to that of Bangladesh, interestingly enough both countries share the same main cause that has led to the higher debtGDP ratio: a parallel make-up of public expenditure patterns that demonstrate a progressive increase in welfare expenditure. In the last two years (from 2008-2010), increase in selected public spending categories in the USA under the Obama administration is recorded -- in terms of percentage change -- as follows: Social Security 14.7 per cent, Medicare 15.4 per cent, Medicaid 35.8 per cent, and Unemployment Benefit 204 per cent, respectively, according to a Wall Street Journal article published on October 12, 2011. Clearly, welfare was the fastest growing component of the government spending. According to Nobel laureate economist Paul Krugman, the phenomenon is "virtually an automatic response to recession rather than policy change". Others -- like Bill and Melinda Gates -- advocate that ethics has been and should be the cornerstone of domestic development policy. Two essential elements of development ethics are: i) the transformation of deplorable condition of human existence such as poverty, famine, and unmitigated basic needs; and ii) the inclusiveness of economically underprivileged and marginalised people such as the old, disabled, widowed, and climate-victims. The credibility of the present government in Bangladesh -- in terms of pursuing the ethics of development -- can be judged from the corresponding figures of subsidy in the economy. According to its ministry of finance (MoF), the subsidy appears to be 4.7 per cent in agriculture, 5.1 per cent in fuel and electricity and 12 per cent in food and fertiliser. The price of fuel oil soared in recent months, making government spending on subsidies shoot through the roof. A substantial increase in public expenditure has been due to several other programmes of poverty alleviation that include complete eradication of 'monga' (famine like situation) in the northern districts, ensuring availability of basic commodities --including rice -- to the poor and needy, distribution of free textbooks and mid-day meals for school students and free education for girls up to the higher-secondary level, giving cash allowances for the elderly and widows and doubling the wages of garment workers. The government also provides a substantial amount of money for export subsidies in many different forms, including low cost energy supply. As a result, the export earning has increased by 27 per cent in 2011. We wrap up the write-up with a few concluding remarks that reiterates the case of ethics of development and also reinforces the case of responsible fiscal management by the government. For the first one, Professor MG Quibria notes: "While Bangladesh has half the income of India per capita, it outperforms India in almost all social and human development indicators." This is not an accident, but a result of pursuing inclusive development policies by the successive governments. Nevertheless, we submit that the government should seriously consider a trade-off between welfare spending and macroeconomic stability. Under the present circumstances, the government cannot achieve both -- a faster pace of welfare and a sustained rate of economic growth. One value must be sacrificed to attain the other. We strongly believe a good macroeconomic policy should prevail. .................................................... Sania Hasnath is a graduate in Economics and Finance with Cum Laude from Emanuel College, Boston and is preparing for Law School in New York. Syed Hasnath is a former faculty member, Boston University. He can be reached at email: shasnath@gmail.com