The global economic direction of the post-financial crisis period has been that of austerity. The size of the deficit has become the measure of government’s economic performance.
In a time of high public debt, falling revenue from commodities and stagflation, it is no surprise that the economic debate in Ghana has focused on reducing the deficit. In fact, in my economic posts on this blog the goal of deficit reduction has featured regularly.
Of course liberal economists like Paul Krugman, Joseph Stiglitz, Simon Wren-Lewis and Thomas Piketty have been warning that austerity is not only unnecessary but will also slow down recovery. The strength of their arguments can be seen in how the IMF has started warning against needless austerity.
But in Ghana, we continue to get warnings about the debt and deficit dominating the economic debate. Yet there is one economist going against the austerity currents. He is Kwame Ofori Asomaning, MD of private equity firm, Ghana Growth Fund Company.
In a well-received article for the Business & Financial Times, he argued brilliantly that as long as we have a current account deficit, government can only reduce the budget deficit by reducing savings in the private sector. By using the national income formula he derived:
Private Sector Surplus (Savings) = Public Sector Deficit + Current Account Deficit.
This means that a private sector surplus requires the public sector to take on a deficit equal to the savings of the private sector when there is current account deficit. He therefore criticised the deficit targeting which has become the government’s preoccupation since the IMF programme. He argued that cutting the deficit will require robbing the private sector of savings. Please read the whole article here, it’s very rewarding.
And in a second article he reinforced his argument and basically asked for a larger money supply with a promise to follow up with an argument on how our inflation was not one which could be cured with interest rates.
One can derive from his arguments that he’s not too big a fan of the accumulation of foreign debt. And truth be told a lot of his arguments in his second article could’ve been made better with the consideration of Ghana’s large external debt.
But whether one agrees with Mr Asomaning or not, he is certainly someone whose opinions should be included in the public debate. This is because economic consensus which is mostly just the terms of our creditors could prove dangerous. We need to look for alternatives in the long run.
We need space to develop infrastructure, create jobs and invest in the people and it is clear an economic goal of cutting deficits is inconsistent with that. A true economic debate is needed. If we proceed with the assumption that smaller deficits should be the goal then there really is no debate.