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GDP is Not an Indicator of Ability to pay Debt

I intended to write this week to prove indisputably that the majority of you who go around saying thatGrenadais in too much debt and that the debt has crippled the country are in more debt (privately) thanGrenada. Further, that to get out of economic stagnationGrenadamust borrow more.

However, as I formulated my ideas I was distracted by two matters. I have therefore decided to deal with them here and now as part І of this series and get back to my main line of discourse next week. In part П I will demonstrate whyGrenadahas no significant debt to complain about. In part Ш I will argue whyGrenadamust borrow its way into development and growth.

First, permit me to address the NDC/RMC people who have destroyed our beautiful country since 1983 and insist on sowing the seeds of hatred, character defamation, covetousness, envy, greed and violence among us. There is no need to go after my neck every time I write something. I am not a politician. I am not a member of the NNP.

I am a Consultant providing free and unsolicited technical advice to the galaxy and anyone who is willing to listen. In the words of Louis L’Amour “When I write about a stream, it is there, and the water is good to drink”.

In my editing I was tempted to strike out the above paragraphs because I know at the end of the day they would make no difference to these intransigent people. Their ideas are set in stone. On balance however, I think I was necessary to set out my position even for my own sake. You can’t say you didn’t know or that I didn’t tell you. At the end of the day George Bush was 110% correct when he said there are only two types of people in the whole world. “Those who are with you; and those who are against you.”

Secondly, and on a more technical note I set out to prove that most countries are using the incorrect measure of their ability to service their debts and also the incorrect measure of the benchmark of their debt. It is probably why several nations have found themselves imposing austerity measures and embarking upon structural adjustment programs that address the wrong issues and at the wrong epoch of their development.

For most countries the debt to Gross Domestic Product (GDP) ratio is used as the benchmark. In Europe theUnioninsisted on ratio of 60% for entry into the Currency Unit. At this point theUnionis at an average of 72%. and rising.

I realized that I needed to spend some time looking at the GDP side of things before moving on to the real issue, the debt.

The GDP is Market Value of all goods and services produced for the year. It can be calculated by adding (Private Consumption + Gross Investment + Government Expenditure + [exports-imports]).

It is important to note at this point that the GDP is not a measure of standard of living, debt surviving ability nor is it a measure of personal income. This fact is borne out starkly in comparing the Debt to GDP ratio of Libya (0%) where the President was violently overthrow and executed in the streets due to economic and political dissatisfaction with that of Japan (230%) which is considered one of the most effective economies in the world.(according to IMF data for 2011)

Simon Kuznets in reporting to Congress in 1932 pointed out; “the welfare of a nation can therefore scarcely be inferred from the measure of National Income”.

The GDP per capita is used to compare GDP among countries. Again one has to walk on eggs here since the theory does not always bear out the facts. The lower the ratio should mean a healthier economy. Compare the United States GDP/ capita (103%) withLiberia(14%) for example where again the former President is about to commence a 50-year jail term. Clearly something here does not follow economic logic.

So why do countries continue to use this indicator in spite of all its weaknesses and shortcomings. The answer is quite simple. From the perspective of a lender and lending institution like the World Bank or the IMF this calculation represents a convenient way to scare borrowing nations into austerity. Austerity in its strictest sense means “repay my debt first and to hell with the rest”.

In 1962 Simon Kuznets pointed out that “distinctions must be made between quantity and quality of growth, between cost and returns, between short and long run, goals for more growth should specify growth of what and for what”.

The European Central Bank President Mario Draghi recently criticized European governments for repeatedly underestimating their problems.  He advised them to borrow at reasonable interest rates and to exercise caution in cutting expenditure and in raising taxes.

In conclusion and to set the basis of my argument in part 11 of this series, I restate the following:

• The GDP is not an indicator of      ability to pay debt;
• The GDP is not an indicator of      standard of living;
• The Debt to GDP ratio is not an      indicator of debt service ability;
• Growth must be looked at from a      qualitative and quantitative viewpoint;
• The long run, medium term and      short term must be distinguished; and
• Growth must be examined for a      standpoint of what and for what.

 

Garvey Louison FCCA