Wayne Henry, Contributor THE DEBATE on the role of a Government in an economy is an ongoing one. Some feel that the Government's influence on economic activities should be minimised, and that the free market system should be relied upon efficiently to allocate the resources of the economy. The market operating free from Government intervention or regulation, they argue, has inherent within it the ability to both reward efficiency and punish inefficiency, through the mechanisms of demand, supply, profit and loss.
In a competitive environment, the firm that produces a good or service relatively more efficiently than other firms, should be able to charge a lower price or have superior quality. Consequently, there will be a relatively larger demand for that good or service and ultimately greater profits. Those firms that are not as efficient will suffer loss in the form of lower profitability or otherwise.
ACTIVE ROLE
Others postulate that the Government must play an active role in the economy and use its influence to ensure more even distributions of income, revenues and profits throughout the economy. Particularly, with the occurrence of unforeseen economic events (shocks or disturbances), the Government must act to restore normality and stability to the economic landscape. There are two types of policies or plans of action through which Government can influence economic activity. The first is fiscal policy or budget policy. The fiscal budget is the Government's plan of expenditure and revenue collection, the most common being through taxation. If the Government wants to stimulate or spur the economy through expenditures, it will spend more, giving persons in the economy more income with which to produce or demand goods and services. If it wants to stimulate the economy using taxes, it will decrease tax rates, giving persons in the economy more income after taxes for the same purposes described.
Another way in which the government can influence economic activity is through monetary policy. This is conducted through the central bank, and speaks to the control of the supply of money in the economy. If the central bank increases the money supply and there is no change in the demand for money, then interest rates (the price of money) will fall.
CHEAPER
This makes it cheaper to borrow, and typically results in an increase in investment and spending and overall economic activity. Regarding the present scenario, in economic terms, Hurricane Ivan represented a shock to the Jamaican economy. There were production losses experienced in various sectors of the economy. Agricultural output declined, the bauxite sector experienced losses through damaged ports and lost exports, transportation losses affected distributive trade among other sectors of the economy, sections of the tourist sector suffered structural damage, unemployment has increased, and so on.
GOVERNMENT INTERVENTION
The scenario is one that lends itself to Government intervention to stimulate the economy and to restore economic activity. Of primary importance should be the need to reinstate the livelihood of persons who have been dispossessed, ensuring the restoration of their well-being and welfare. Ideally, the government could simply increase its spending to the affected areas of the economy, and possibly cut taxes and interest rates to provide relief and enable persons in their reconstruction and restoration efforts.
But unfortunately, it is not that simple. The level of influence that the government can exert in the economy is dependent on the degree of flexibility it has with regards to its policy tools. In Jamaica's case, with respect to fiscal policy, the government is constrained by its level of indebtedness and its debt obligations. Increasing the debt burden by borrowing more to assist in reconstruction and recovery efforts may prove more costly to the economy in the long term. Significant deficits lead to higher interest rates and tend to crowd out investment in the private sector and stifle economic growth. Much of this we've seen in times past. The decision not to borrow for reconstruction purposes therefore seemed a prudent one.
INTEREST RATES
On the monetary side, the central bank will face difficulties in maintaining interest rates, let alone lowering them to stimulate the economy. The reduction in agricultural output due to the hurricane, coupled with the record high oil prices, will create inflationary pressure in the economy. Even if the central bank does not move to combat inflation by raising interest rates, these rates can still increase if money demand increases in response to higher prices. If the central bank then moves to accommodate the increased money demand by increasing money supply, this would further fuel inflation.
The hands of the Government are fairly tied with respect to the level of influence it can exert in stimulating the economy toward recovery at this time. The onus therefore seems to be on the private sector, firms and individuals alike, to step to the plate in what represents a golden opportunity. Much has already been done, but as the Office of National Reconstruction (ONR) can attest, more can always be done. Any effort on the part of the private sector toward reconstruction and recovery, by way of donations, grants, concessions and other assistance, will in essence be self-serving though garbed in benevolence, because a restored economy augurs well for all.
Wayne Henry, Ph.D, is a Lecturer in the Department
of Economics, UWI, Mona.
email:
wayne.henry@uwimona.edu.jm.
