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The public debt
By
DD Phiri - 17-06-2002 |
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Public debt is another term for government budget deficits. When a government has failed to raise enough revenue through taxes, fees and gifts, it resorts to borrowing.
It usually borrows from the domestic or local market by issuing bonds or treasury bills. These are in the form of IOU. The loans are payable within a short period. In normal circumstances, the rate of interest is modest.
Since the days of Adam Smith, economists have had different attitudes towards government debts. In the earlier period, most economists and business people saw the public debt as a burden. The more government borrowed, the some people raised alarm that the state was heading for bankruptcy.
But can a government get bankrupt? Writers on the French Revolution do point out that King Louis XVI’s government did become insolvent. Changing ministers of finance repeatedly failed to save the situation and eventually le deluge, the flood.
Somewhere in his writings, Professor W. Arther Lewis of the West Indies says that no country in history has been too poor to fight a war. Therefore, if a nation badly wants to develop economically it can make the necessary sacrifices. This statement seems to be substantiated by the careers of both Napoleon and Hitler.
After telling us that the budgetary problems Louis XVI faced with his ministers Turgot and Necker, we find Napoleon suddenly waging highly successful military campaigns against neighbouring monarchs. How had a country with an insolvent government suddenly become rich enough to fight great wars?
When Hitler came into power in 1933, Germany was suffering acute economic problems. There were six million unemployed people. The government was failing to pay the reparations that the victorious Allies had imposed on Germany. But suddenly Hitler was re-arming the country. He was expanding the navy and was building impressive autobahns (motor ways). Within a short time, unemployment had ben wiped out. Hitler was now ready with his programme of lebensraum, expansion into other regions of the European continent to find living room for his people.
This suggests that the real wealth of a nation is to be found not in the accounts books showing debts and credits but in the resources of the land and the resourcefulness of the people. Professor Paul A. Samuelson in his best-selling economics text book informs us that in 1818 England had an internal debt estimated at double its GNP. I suspect these were partly due to her involvement in the French and Napoleonic wars.
Whatever the case, it was during the period of England’s greatest indebtedness that both economically and militarily she towered above nations of the world. Is this not a paradox? Are we not generally warned that too big a debt saps the energy of the nation. Indeed, there was an alarm against England’s growing debt in the whole of the 19th century.
Lord Macaulay tells us “at every stage in the growth of the debt, it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing and still bankruptcy and ruin were as remote as ever. The prophet of evil made no allowance for the effect produced by the incessant progress of every experimental science, and the incessant efforts of every man to get on in life. They saw that the debt grew and they forgot that other things grew as well.”
The last sentence does enlighten us as to why England did prosper despite the heavy debts. The debts were internal, the government borrowed from Brown, and repaid interest on the loan from taxation on Smith. The wealth did not leave the country.
What is more notable in Macaulay’s account is that science, technology and the economy were growing at the same time as the debt. There were people in England who were struggling to improve themselves. It is possible that a good part of the debt was injected into economic growth centres. Someone said show me a millionaire, and I’ll show you the man who has used other people’s money.
People who grow rich using other people’s money actually spend the money on acquiring income generating assets. It is when a loan is spent on ephemesal utilities that it fails to leave behind productive assets.
This does not mean that a government’s debt or deficit when financed entirely from internal resources is painless. By borrowing extensively, government forces interest rates to go up. Private business people finding interest rates unaffordable shy away from the capital market. It is said heavy borrowing by the government crowds out private enterprise.
This is bad because as it has been debated time and time again private enterprise is an engine of growth and dynamism in any economy. Anything that discourages private enterprise is inimical to the economy.
Though when you tax Smith to pay Brown, the money does not leave the country, taxation may weaken Smith’s inclination to work and generate income if a big chunk of his earnings is being taken away by the government to pay Brown.
Where governments engage in extensive borrowing, people tend to hold their wealth in mere bonds instead of sinking their money in factories, land reclamation and other value adding activities. Bonds are just paper wealth, not comparable to buildings, motor vehicles or computers on which the private borrower would have spent his money.
Governments raise capital from abroad to pay for goods and assets which are not available within the country. What is the use going to the bank to borrow millions of kwacha to buy maize and feed starving people if there is no spare maize within the country. You have to borrow dollars to buy maize from America or from another country that uses dollars as its foreign reserves.
A government may borrow from other governments, foreign banks, individual millionaires. Repayment of foreign loans has to be made in foreign currencies. You get foreign currencies when you successfully export your own commodities or manufactures to foreign countries.
This amounts to the same thing as exporting our tobacco or textiles and not getting paid for it or not getting paid in full. Where foreign loans are concerned wealth is transferred to another country. It is this kind of loan that causes panics if a country runs short of reserves and is unable to meet its external obligation.
When a small or weak nation owes a debt to a bigger nation, the chances are the creditor nation will be interfering in its internal politics. In the 19th century, Egypt lost its sovereignty when it failed to repay the Suez Canal debts that it owed the British and French governments.
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