BVI News

.

COMMENTARY: Recovery Agency a path to ‘great governance’

By Dickson Igwe, Contributor

The recent 10 to two vote in the Virgin Islands legislature allowing for the establishment of the Disaster Recovery Agency is a vote for transparent, accountable, equitable, measured, and well-audited governance.

The Virgin Islands has taken the first step down the road towards economic growth, leading to a fully developed country, after decades of non-transparent and unaccountable governance. The Disaster Recovery Agency is a platform leading the territory towards great governance.

OK. It is vital laypersons understand the global borrowing narrative. And this is why: borrowing inhabits a major portion of the economic universe of austerity and stimulus. Both economic cultures adopt specific postures on the matter of government borrowing, debt, and public spending. The following story is a look at national debt from the perspective of austerity.

Now, the belief of economists of a supply-sided persuasion – the disciples of austerity – is that national debt of over 90 percent of GDP is bad for the economy. However, national debt of over 100 percent of GDP is not unusual in the present world economy.

High national debt

High government debt, which begins with annual deficits that grow higher, and then becomes interminable like the USA debt model, eat up public revenues in the form of interest payments on the debt.

High national debt negatively impacts private savings by discouraging thrift and driving up personal credit. A highly leveraged economy is the result. The link between public and private debt is an established fact of economics. Thrift or ostentation are opposite cultures driven by government economic policy.

High leveraging means that internal and external debt levels, both consumer and business, are at a place of concern for lenders. The risk of mass bad debt rises.

Austerity advocates believe leveraging destroy business confidence, stifles public investment, cripples government, stops business innovation, and eventually, national productivity declines.

The preceding leads to slower and then reduced economic growth. The end result is recession or depression.

Ultimately – if uncontrolled – government is unable to pay interest on the debt. Government either restructures the debtor goes bankrupt: the Greek Model.

Global lenders

Banks that have lent money to the government are unable to recover the loaned cash. When this happens, global institutions such as the IMF, World Bank, or a cartel of international banks intervene to save a complete collapse of the country’s banking system.

These organisations help the government to restructure its debt by further lending. Frequently, stipulations are made that handcuff government to the policies and cultures of these international organisations.

Investors and savers may lose their money invested in the banks within the territory of the defaulting country. Banks limit withdrawals. The economy goes into depression. There is a great increase in business and personal bankruptcy.  Investor and consumer confidence plunge.

Government is unable to pay its way in terms of providing essential state services and paying public servants. The economy collapses. High unemployment, business closure, and deflation are the norm as consumer demand contracts heavily. There is a banking collapse. A financial meltdown can lead to civil and political unrest.

The preceding narrative is the central theme of the austerity culture on national debt.

It is the reason Greece was left to ‘hang’. For austerity advocates, cutting spending and increasing taxation is the answer to deficit and debt control. Austerity is part of the creative destruction model that eventually leads to renewed economic growth.

Stimulus works

However, stimulus advocates believe the preceding theory of unsustainable debt, deeply flawed. In a deflationary global environment where inflation is benign, and the cost of borrowing low, public borrowing – even heavy borrowing – is the single way to stimulate a recessed and contracting economy.

Eventually, a recessed economy returns to growth, and government is able to reduce its debt and annual deficits from increasing national revenue.

Fiscal and economic stimulus alone leads to real GDP growth for Jack Stimulus.

Government intervention and management of the economy is non-negotiable.  Post World War II economic history is on Jack the Stimulus Advocate’s side.

Stimulus works!

Copyright 2018 BVI News, Media Expressions Limited. All Rights Reserved. This material may not be published, broadcast, rewritten or distributed.

5 Comments

Disclaimer: BVI News and its affiliated companies are not responsible for the content of comments posted or for anything arising out of use of the comments below or other interaction among the users.

  1. Economics says:

    In summary, the writer is saying that governments who can’t live within their means (austerity) should simply borrow, pay more interest, and spend more and that will fix the economy.

    Has anyone ever heard of any one “spending their way to prosperity?” The writer sites post WW2 history, approximately 70 years ago as the era that supports his assertion.

    I would like to draw attention to a more recent example of Stimulus. The US attempted a trillion dollar stimulus within the last 10 years that was supposed to generate millions of jobs and fix the economy.

    What did it get? Failure to curb employment, very low economic growth, a doubling of national debt and an electorate so disgruntled they elected a highly controversial President.

    No Mr. Igwe, Stimulus does not always work. There is a reason why governments should live within their budgets. It is called basic economic sense.

  2. E. Leonard says:

    As a result of 2 devastating Cat 5, catastrophic hurricanes in Sep 2017, Irma and Maria, along with a historic flood in Aug 2017, the VI/BVI government was thrusted in the unusual situation of defict spending to deliver vital services; it has a $50M+ deficit in its fiscal 2018 budget. The delta may entail borrowing to make up the shortfall, creating a deficit, increasing the national debt, and increasing debt to GDP ratio. Some other locales defict spend to deliver services, increasing their debt to GDP ratio. What is the definition of GDP and is a high debt to GDP bad?

    Among many definitions, GDP is a measure of the ability to repay debt and how long it will take to repay debt if all revenues were dedicated to repaying debt. For example, a debt to GDP ratio of 90% means that if government dedicates 90% of its revenue to debt it can payoff its debt in the current budget year. However, this is not practical; a much less percent of revenue is practically/realitiscally dedicated to debt; government has many other obligations. What is a high debt to GDP ratio? It depends.

    Some scholars are of the opinion that a debt to GDP ratio of 1) 60% for developed countries and 2) 40% for developing countries are prudent. I will take a wild guess that the BVI debt to GDP is about 20%. Some borrowing room available to meet needs.

    Further, the severe 2017 weather systems thrusted the BVI’s economy into a less than a boom state. Normally, an economy left alone will under the Classical View correct itself from bust to boom through market-based solutions(laissez faire philosophy). This typically takes too long; another more urgent solution is needed. Thus, the economy has to be stimulated (Keynesian View) to bring the economy back to full employment quickly. Consequently, the VI will have to defict spend to invest in and stimulate its economy. Borrowing to stimulate and invest in the economy to promote economic growth and development, as well as rebuilding, is good debt.

    Moreover, as Dickson noted, the 10-2 vote in the HOA to set up an Agency to manage and monitor the expenditure of up to a £300M (~$403M) loan guarantee from the UK was a good start in investing in and stimulating of the BVI economy. The BVI has a challenging yet great opportunity to rebuild the economy and territory. It must take advantage of the opportunity.

    It (BVI) can patiently wait for the economy to gyrate through the business cycle from boom to bust or it can borrow/deficit spend to stimulate the economy/prime the economic pump and shorten the business cycle. It needs to put the territory back to work. Pinging hammers, buzzing saws, roaring equipment……..etc may not be sexy but are sweet sounding. They are evidence of progress.

    • Quiet Storm says:

      “Pinging hammers, buzzing saws, roaring equipment……..etc may not be sexy but are sweet sounding.” Lol!

  3. Disinterested says:

    Dickson and E. Leonard, two other stimulus hawks, promoting deficit spending to fuel the economy. Instead, what are needed are some tough austerity measures to curb our voracious appetite for profligate spending. From the bloated and under performing civil service, lack of value for money on many capital construction projects, cost overruns on capital projects, ie, Tortola Pier Park, awarding contracts to inexperienced contractors, poor production, poor transparency and accountability…….etc all needs some serious structural adjustments.

    We (people) need to demand long-term and sustainable actions. We must stop slaughtering the territory’s future on the political patronage altar. The same dependency behaviour that was employed to enslave our foreparents we are adopting; we are totally dependent on government. Government reps are more than willing to feed us at the trough and if we threaten to revolt, the faucet is threatened to be turned off. We go along to get along.

    Furthermore, in the territory’s rebuilding effort, people need to demand a national development plan. We cannot just replace things in like kind; lack of a national development is the territory’s Achilles Heel. Every in coming government doing its own thing is not a national development plan; the plan should be codified into law. If we need to borrow, we must do so with a blue print, purpose, plan……..etc.

    The hurricanes provided a great opportunity to plan/replan, a Renaissance of sorts…….etc. let’s do dis ting but let’s do it right. If we must borrow, let’s make sure we get value for money, money is spend for its intended purpose, money can withstand an independent audit trail, and there are transparency, accountability, good governance and fiduciary responsibility.

    • @ disinterested says:

      recent history- circa 1945 to the present has proven the durability and sustainability of stimulus- austerity is the source of the boom and bust global economy that has created a global oligarchy where 100 families control global wealth- most world economists worth their massive paychecks are stimulus hawks- so there you have it in a nutshell

Leave a Comment

Shares