Dear Editor,
Poor nations such as Guyana are not islands unto themselves in this global economic village. When the developed world stops buying, underdeveloped nations simply cannot sell. In addition, when family and friends abroad lose their jobs and experience devaluation of their portfolios, the plight of disappearing remittances worsens the debacle. This global recession is familiar terrain in many respects for poor nations that have existed in many ways in a relative state of economic recession and depression for decades with no blinding light in sight. Despite this tragic history, it is patently clear that when the rich of the world sneeze the poor will certainly catch a cold. When that happens, governments traditionally engage in spending sprees and deficit spending to extricate themselves from the quagmire. The question is whether such a classic Keynesian response is the right one for the underdeveloped world.
Because of reduced demand and consumption in the developed world, revenue from primary products exported by the Third World will sink drastically. History has taught us that third world nations traditionally tend to borrow from external sources to fund spending. Fiscal and economic restructuring to cut waste and improve efficiency are normally forgotten ideas. Third world nations have lived in the borrowing bowl of the developed world for decades, benefiting from a constant stream of international aid from various international agencies and wealthy nations and a constant stream of remittances from family and friends in the diaspora. Increased deficit spending by third world governments in these testing times is likely to come from ramped-up international borrowing in times of worsening economic pressure. For most poor nations that have already been in relentless spending mode for most of the past decade without significant gains, there is no evidence to suggest that increased spending equates to viable economic gains. It simply has not worked then and will not work now.
Increasing the national debt during a global recession is not exactly sound fiscal policy. To use the example of Guyana, its national debt in 2008 was US$833.7 million after growing by 16% from 2007. Debt service payments increased by 11 per cent to US$21 million in 2008. Guyana’s debt increased 16% despite the good revenues received for exports in 2008. In the impending doom facing the export market in 2009 and 2010, it is likely that Guyana’s national debt will increase by a minimum of 16% per annum for each of these two years.
A more reasonable assumption in the current crisis would be an increase of 32% in 2009 and 2010 to account for the dramatic decline in export revenues and the global recession and deflationary influences on prices. Therefore, Guyana’s national debt should increase anywhere from US$133.4 million to US$266.8 million in 2009. Guyana’s US$21 million in debt service payments in 2008 accounts for roughly 2.5% in the 2008 national debt. Using the above numbers and estimates, Guyana’s debt service payments may increase in the range US$24.17 million to US$27.5 million per annum during this global recession. Using the worst case scenario of 32% per annum for 2009 and 2010, Guyana’s external debt should increase from US$833.7 million in 2008 to US$1452.7 million by the end of 2010, a significant increase requiring more cash from a battered economy to service debt. Paying more in debt payments in an environment of diminishing foreign exchange revenues is a risky descent down a slippery slope. For this reason, aggressive deficit spending during a recession that generates a significant increase in debt service payments saddles future generations with the plight of greater generational debt. Rising debt has a more profound effect on poor nations than on wealthy nations.
Then there is the factor of incompetence in managing any relief measures, a concept that third world nations are known to strongly embrace. Ineffective administration and lack of planning will likely play their regular roles of downgrading and negatively impacting the effectiveness of any relief efforts. Waste will play its devilish part. In addition, governments of poor countries may use the global meltdown as an excuse to engage in political-driven and partisan spending programmes with no real benefit to the wider economy. This is standard modus operandi in many third world nations and the resulting failures are known.
In nations rich with corruption, graft and waste, relentless deficit spending is a licence to loss. Deficit spending may simply provide more money for more corruption and waste or may renew atrophied sources of corruption with resulting marginal actual benefit to the economy at large. In times of recession when spending is required to exercise its greatest impact for the benefit of the entire economy at large, corruption can seriously strip away the real and intended value of the spending.
While the spending surges being unveiled around the world are likely to have some effect in the developed nations, they are unlikely to have any productive effect in the economies of impoverished nations. Fiscal conservatism should be the mantra of poor nations. Recessions afford poor nations an excellent opportunity to tackle corruption, waste, mismanagement, inefficiencies and other vices affecting their economic and financial system. These actions could result in significant savings for the public without engaging reliance on foreign debt. Readjustment, realignment, restructuring, waste trimming and corruption degradation may be the best weapons to ensure the nation saves a lot of money, does not spend without obtaining a tangible return and is not fixed with a burgeoning debt load for generations to come.
Yours faithfully,
(Name and address
provided)