Budgetary Policy: Blend of neoliberal models with revived ‘Chartalism’ or modern monetary theory?

Monday, 5 December 2011 00:00 -     - {{hitsCtrl.values.hits}}

A striking feature of both the Mahinda Chinthana – A Vision for the Future and the Budget 2012 is the open rejection of neoliberal economic models and the portrayal of the government policy as a special model developed indigenously for the country. Mahinda Chinthana rejects neoliberal models apparently on the ground of their high failure rate: they have not worked even in some developed countries which had relied on them for fostering economic growth. The Budget 2012 has gone a further step forward: it has equated the neoliberal economic models which had been implemented in Sri Lanka since 1977 with the destructive terrorist movement which had a shorter life span than the neoliberal era. According to the Budget 2012, both have been responsible for causing innumerable hardships to the people of the country.

But a closer examination of the country’s budgetary policy shows that it is in fact a fine blend of neoliberal economic models as prescribed to both developing and emerging countries in the former Soviet bloc since around 1980s with what is now known as the Modern Monetary Theory or MMT, a revival of old chartalism.

Unknown facts about neoliberal models

Liberalism has a long history in which scholars on government had argued without a final consensus whether and a government should control an economy and if so how, when and by how much. In all Chinese dynasties, dating back to 2500 years, this was a very popular subject. Even Kautilya, the 4th century BCE Indian political economist had identified certain sectors for the government and certain sectors for the private sector. For him, even issuing coins was one subject which the private sector could handle. But in the modern era, economic liberalism was best portrayed by a sharp quip which a French businessman made to his Minister of Finance in around 1680 enabling the later day economists to coin a term now known as laissez faire policies.

According to the legend, Minister Jean-Baptiste Colbert of the day had asked a business delegation led by a businessman called M Le Gendre what the government should do to promote their businesses. The sharp and immediate reply of Le Gendre was “laissez-nous faire” or “leave us be”. Nearly 100 years after this incident, economists coined the term ‘laissez faire’ to describe a system in which the government plays only a very minimum role in an economy. The 18th century British economist Adam Smith, author of the classic book of economics titled The Wealth of Nations, prescribed a system of government with minimum regulations for fostering prosperity. Since then, a new economic philosophy known as economic conservatism or economic liberalism was developed to drive an economy to a quick and sustainable economic prosperity.

Economic liberalism was made up of a number of social, economic and political policy measures as follows:

First, a society should promote and maintain traditional social, religious and political institutions. Accordingly, family, religion, cultural practices and folk arts are considered non-violable traditional institutions in society.

Second, the government should be guided by a laissez faire economic policy under which only a minimum intervention would be made by it in the economy.

Third, society should discipline itself to uphold and respect authority. This discipline should be shown in all social and interpersonal interactions without questioning the rationale, ethical foundation or morality of authority.

Fourth, society should also uphold and respect religious values which are necessary for a nation to build its own national identity.

Fifth, society should scoff at modernism since it involves sacrificing cherished and accepted traditions the maintenance of which is the goal of nation building with its unique identity.

It thus appears that the concepts of hard work, self reliance and individual liberty are the cornerstones of economic liberalism.

Except the laissez faire economic policies which uphold individual liberty with respect to economic management, one may find all others in the above list being aptly enshrined in Mahinda Chinthana – A Vision for the Future as its thematic social, religious and political philosophy that would take Sri Lanka to its promised glory in the future.

Neoliberalism is simply a modified old economic liberalism

Neoliberalism is a modified political and economic philosophy based on the old economic liberalism. It has downplayed some of the old values such as unquestioned respect for authority or religion and concentrated more on new additions which are useful for promoting an accelerated and sustainable economic prosperity of a nation. For ease of understanding and implementation without running into inconsistencies, economist John Williamson has codified them under the theme “Washington Consensus” to denote the support these policies had got in the recent few decades from the key economic institutions based in Washington DC in USA, namely, IMF, World Bank and the US Treasury.

The codification of neoliberal policies under Washington Consensus

According to the classification made by Williamson, neoliberal policies have ten key policy measures three covering the budgetary aspects of the government, five on overall reforms to be made and two on general policy measures to be implemented.

The three relating to budgets and budgetary policies are as follows: First, governments should reduce their budget deficits to manageable levels so that they do not have to resort to printing money through central banks to finance such deficits and thereby creating inflation in the economy. This is known as ‘fiscal discipline’. Second, the governments should prioritise their expenditure shifting priority from subsidies to growth generating investment in human development (that is, education and health) and infrastructure development. Third, the governments should increase their revenue by getting many to the tax net and in the process pass the benefit to people by reducing taxes.

The five relating to the liberalisation of markets are the liberalisation of interest rates, exchange rates, trade, inflow of foreign direct investments and excessive and costly government regulations and rules that hinder entrepreneurship and business acumen of people.  

The two relating to common areas are, first, getting private sector talents to run state enterprises through public – private partnership and, second, the protection of property rights of people, namely, the physical property and human capital acquired by them, so that no one would be able to seize them except through a market transaction that compensates them properly.

Neoliberal economic models are based on one fundamental truth that has stood the test of time throughout history. That is, economic growth and sustainable prosperity of a nation come from nothing but the hard work of people. What the policies do is actually creating the best ground conditions for people to work hard. The man behind the Singapore’s economic miracle, the late Dr Goh Keng Swee, put this succinctly and cogently when he said that the leaders of Singapore called “the old guard” did not believe that anybody owed Singapore a living and the way to a better life was through hard work, first in schools, then in universities or polytechnics then on the job in the work place. He further elaborated that diligence, education and skills would create wealth and not central bank credit. Since there was no such thing as a free lunch, the Singaporeans should be prepared to pay for all public services.

Apparent death of neoliberalism

The Washington Consensus policy package came under severe criticism by late 1990s, specifically by such economists as Joseph Stiglitz, Nobel Laureate and former Chief Economist of the World Bank. While the countries in the former Soviet Union and its satellite states thrived through this policy, countries in Africa, Latin America and Asia were not fortunate enough to reap the full benefits of the package. In many countries, there were changes in the government and Sri Lanka and India have been notable examples in that regard. Even an economist like Jeffry Sachs who dedicatedly implemented it in Bolivia and prescribed the same to some countries in the former Soviet Union and Asia, including Sri Lanka, changed his stance of late, re-examining the errors in timing and sequencing the implementation of the package. By 2000, there were many who were opposed to neoliberalism as codified under the Washington Consensus. Hence, Sri Lanka government was not a loner in the global economic system that chose to reject neoliberal economic policies.

Revival through Barcelona Consensus

When the Washington Consensus appeared to have reached the state of a natural death at the turn of the century, 16 influential economists, including John Williamson, Joseph Stiglitz, Jeffry Sachs and Dani Rodrik, met in 2004 in Barcelona in Spain in a bid to make a frank assessment as to how it has gone wrong and resuscitate it again as a mainstream economic policy package. They came up with an improved version of the Washington Consensus with a new agenda in place which is now known as the Barcelona Consensus. So, instead of neoliberalism dying a natural death as predicted by many, it has now re-emerged as an evolved creature. In the new agenda, it has been proposed to integrate the poor countries with the international markets, continue with trade liberalisation move with vigour, take measures to improve macroeconomic stability, adopt only the reform measures which could work in a given country, ensure the protection of property rights and put in place a healthy governance structure applicable to both the state and private sectors. This reformed neoliberalism is in fact a move to facilitate its working in an economic system.

Modern Monetary Theory gives a new life to old chartalism

Chartalism is a century old economic concept first propounded by the German economist G.N Knapp in 1895 and supported by such great economists like John Maynard Keynes subsequently through his book “Treatise on Money”. It simply meant that governments could influence economies by making their own tokens or “charta” in Latin, the money to be used by people of their respective countries. Since that money is made money by a government order or a fiat and not by acceptance on account of its intrinsic quality, it is also called fiat money.

With the resurgence of other schools of economics opposed to this view like Austrian school, Monetarist school, New classical school, Neo-Keynesian school etc, Chartalism had a natural death as a mainstream economic body, but not without supporters who always believed in its validity and applicability. In the modern era, Chartalism has been revived by a few economists who call themselves Post-Keynesian economists in the form a new theory titled Modern Monetary Theory or MMT. The prominent economists among them are Warren Mosler and L Randall Wray of the University of Missouri – Kansas City, USA and Bill Mitchell of the University of Newcastle in Australia.

MMT’s argument: A bigger money packet makes you feel richer

Their main argument is that governments’ printing money and financing budget deficits have a favourable impact on economies because people will get encouraged to work harder due to the feeling that they are now richer than before. It happens in the following way. Suppose that the government prints money and spends on people who now have a higher money income. But they do not have an obligation to pay back such money and even the government’s obligation to pay the value of the money it has issued is just on paper and not in reality. This is because if people ask the government to pay the value of the money they hold, the government could get that money and give them new currency notes. As a result, when people have a higher money income without a corresponding obligation to pay back, they have higher money on a net basis making them feel richer than before. Economists call this feeling of richness as people’s having a higher wealth effect. The wealth effect will force them to consume more, invest more and work harder. The higher consumption will encourage an increase in supply, higher investment and working harder will raise the overall output and employment in the economy. Thus, as also argued by Keynes, money printing and financing of expenditure by the government will push an economy to a higher level of output and employment. So, the secret to economic prosperity is to have a bigger government, run budget deficits, print money and feel people richer than before because they do not have obligations relating to the money they hold.

MMT’s argument: giving government jobs is building a buffer stock of consumers

MMT also argues that governments should guarantee jobs for the unemployed. Such job guarantees issued by governments, most often at minimum wages, will raise employment, give additional income to the hands of the unemployed who would use that income to consume more and encourage production. The increased production will raise output and supply in the market thereby stabilising the prices and killing inflationary pressures. They also argue that these newly employed people serve as a buffer stock of consumers who would automatically stabilise an economy when it is in economic recession. Thus, reducing the size of the buffer stock of added consumers will reduce the budget deficits, but it will eat out the booming economy as well. Hence, the way to prosperity is to increase the budget deficits, expand the buffer stock of added consumers and allow the economy to continue its expansion.

MMT has therefore offered a dose of chartalism and Keynesianism to the modern world which has been frustrated by the failure of economies to give them jobs, incomes and means of enjoying a good life. It ignores the possibility of creating inflation and the fiat money becoming an obligation of the people because of the reduction of the real living of people due to inflation. It also ignores the possibility of a government’s raising prosperity in a foreign country because of people’s using more imported products with their new money incomes and thereby creating problems for the balance of payments and the exchange rate of its own currency. As Singapore’s Goh Keng Swee has said, financing government budget deficits through printed money is a recipe for economic disaster in an open economy as has been experienced by people of USA today. The numerous stimulus packages implemented there have not raised American incomes and jobs; instead they have created wealth and jobs in countries like China.

Sri Lanka’s budgetary policy: A blend of neoliberalism and chartalism

There are many aspects of Sri Lanka’s budgetary policy that resemble a fine blend of neoliberalism and chartalism.

Sri Lanka’s budget has tried to reduce its deficit and debt levels over the medium term from the current levels as recommended by neoliberal economic models. At the same time, it tries to keep the government’s consumption expenditure at bay by containing salary and pension expenses and increasing expenditure on education and health and infrastructure, another recommendation of neoliberal policies. The reduction of tax rates, the expansion of the number of people who pay taxes and encouragement of foreign direct investments and public-private partnerships are also important components of neoliberal policies. It also announced greater flexibility in the exchange rate, another measure recommended under neoliberalism. The government encourages FDIs, vows to ease doing business and promotes public-private partnerships. It also has liberalised trade by getting into free trade agreements with neighbouring countries and reducing the overall tariff level to less than five percent. By charging for the use of the Southern expressway, it has established that there is no such thing as a free lunch. At the same time, it runs a large government sector to ensure a bigger buffer stock of added consumers through budget deficits financed by foreign borrowings and money printed by the central bank as prescribed by revived chartalism. From time to time, it also provides “job guarantees” to passing out university graduates who cannot get jobs of their own.

Thus, the budgetary policies of the government are a fine blend of neoliberalism and Chartalism now revived under Modern Monetary Theory.

 (W.A. Wijewardena can be reached at [email protected] )

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