Subsidies, Investments & GLCs

I suppose the main issues have already been raised in my preceding post, but I cannot help myself from going at this subsidy thing again because there are many worrisome things about the way the subject matter has been raised and is being dealt with by the government and the government men.

1. The first worrisome thing for me is that the subsidy issue could be dealt with in isolated. One argument is that the subsidy, if maintained, will grow over time. Obviously. If the population grows and the economy grows and if the value of money falls. This happens because the subsidy is a percentage of the economy. How, is it not a wilful misrepresentation of statistics to quote a figure projected over time and presents the absolute number as a ballooning number. I am not necessarily in favour of subsidies, but I would like the facts about them to be present properly.

2. The second worrisome thing is that the justification for the removal of subsidies, apart from (1) above, is not clear either. If it so that the government can spend on other projects or is it to reduce the deficit. If the deficit is the issue, subsidies and other projects may have to be cut. And, by definition, going for a reduced budget deficit as per the GDP without any improvement to the investment climate, is a policy move that will definitely induce a recession in the local economy.

3. The third worrisome thing is investment. We should discard this old Keynesian thought (not necessarily Keynes') that even wasteful government projects will trigger off renewed growth in the economy through the multiplier effect. Recent local economic history has disproved this hypothesis. Given the leakages in the economy, and even the GLCs are now going abroad to investment, the income multiplier of any government expenditure is likely to be less than the sum spent on projects. There should be a clear cut strategy to encourage local private investments, the most important element of which is confidence of the people in the consistency of government policies.

My optimism is that the government has taken some positive leads especially in the NKRAs re corruption and education. The biggest challenge is the NEM which must be about the encouragement of local private investments. There is a serious need to review the mandate of the GLCs which seem not be building the productive capacity of the economy; GLCs are presenting crowding out local private investments through their monopolies, hallowing out the economy by investing abroad and concentrating on obtaining financial returns to financial capital. We need real economists in charge of GLCs.