Introduction
Last week I demonstrated how huge government activity is in Guyana’s national economy. It has averaged at least 60 per cent of GDP in recent years even when we use the much larger 2006 rebased GDP series. I was careful to caution however, against drawing simplistic conclusions from this observation. There are a number of neo-conservative theorists who seek to establish that there is a relationship between the size of government activity in an economy and that economy’s economic performance thereby suggesting that, the larger the size of government activity, the weaker is economic performance. This is pure ideology and there is no reasoned scientific basis for this relation. It nevertheless finds strong echoes in present day neo-conservative circles in the United States and Europe. Such studies are intended to support political calls for reducing the size of government as the first pillar of a strategy to overcome the global economic and financial crisis and its adverse economic impacts.
This apart, readers need to be constantly aware that the size of government activity in Guyana’s economy, as I have estimated it in last week’s column is a considerable underestimation. This is because it excludes such items as tax expenditures (for which I do not have data) and the impact of government regulations on economic activity in the country, (which is too difficult to assess for a Sunday column like this). A fuller study would ideally be the subject of a technical paper, or a graduate thesis.
In order move from this measure to a position from which we can establish whether the size of government activity in our economy is too big, too little or just right, we need to determine, on balance, if government’s expenditures are the most efficient and effective agency for delivering to the population the goods and services the government provides. In this formulation efficient is determined by the yardstick of economic efficiency, and effective depends on the goals the society seeks to attain through the delivery of the goods and services in question.
My position is that, on the whole, government activity in Guyana’s economy is both inefficient and ineffective. The basic rule is: reducing inefficient and ineffective government expenditure would bring benefits to the economy in the same way that increasing efficient and ineffective government expenditures would harm it.
Economic efficiency
It is also important to note at this stage that economic efficiency is not another term for economic growth, reduction in poverty, increases in wealth, or improved productivity, as most lay persons tend to assume. To economists economic efficiency is a technical term that refers specifically to an outcome in private markets where the marginal cost of producing one more unit of any good or service just equals the marginal benefit or satisfaction to be derived from consuming one more unit of it. This outcome is always assured where perfectly competitive market conditions, as economists term it, obtain.
These conditions require that there are many private firms producing and competing with each other to produce the good or service in question. There are also many buyers of the good or service in question so that no single buyer can exert uncompetitive pressures on the suppliers.
To reinforce this, sellers and buyers, should face no barriers to either entry to the market or exit from it. This, of course, would not be possible unless information about the market is widely known and shared by participants, or would-be participants, in it. In this particular circumstance, buyers and sellers of the good and service in question together pay all the costs entailed in transactions over it.
Where these conditions do not obtain, market failure can result. And, where market failure exists economic efficiency will not be attained. Government intervention into a failed market can potentially lead to improved economic efficiency. However, while this is clear and precise in theory, in practice it is well nigh impossible to determine if government intervention improves efficiency or causes it to deteriorate.
Market failure
Another strategic concept readers need to have an appreciation of is the notion of market failure as it is used here. Again this should not be confused with other notions like inequality, increased vulnerability, homelessness, poverty, hunger, fraud, and discrimination. All these, like market failure, are undesirable. They may in some circumstances, be interrelated notions, but each possesses its own independent meaning and interpretation in economics. To be clear, however, market failure always requires the specific mismatch of the marginal cost of producing one more unit of a good or service in question and the marginal benefit or satisfaction which is derived from consuming one more unit of it.
Economists identify several specific circumstances which can lead to market failure. I cannot deal with all of these in this column, but it includes situations readers may already be familiar with.
Good examples are 1) the existence of goods and services which are ‘public’ in nature, and therefore offer inadequate incentives for them to be supplied privately; 2) the presence of ‘externalities’ or benefits external to private firms. If these firms cannot appropriate these benefits privately they lose their incentives to supply them ; 3) the asymmetric availability of information among the many producers and purchasers so that they do not stand equally informed about the market place; or 4) where monopoly power can be exerted in the market by either producers or purchasers.
With these concepts in mind, my proposition is that the economy of Guyana suffers from government activity being too big, because these activities inordinately waste national resources.
Next week I shall indicate the main ways in which this occurs.
