Innovation, productivity, and mounting debt

Why I call for investment in innovation, as explained by simple economics

Amman green arrow increasing
(File photo: Jordan News)
Amman green arrow increasing

Yusuf Mansur

The writer is CEO of the Envision Consulting Group and former minister of state for economic affairs.

Apologies in advance for using the word “I” in this article; however, I have been preaching for years now that the government should focus on and invest in innovation for decades now, and all calls and justifications seem to fall on deaf ears. The formula is simple: innovation leads to increased productivity, which increases everyone's income, including the state. Today, in yet another attempt, the argument for why innovation is so necessary is explained with a simple numerical example.اضافة اعلان

The ratio of debt to GDP is currently around 115 percent or a debt of JD39.4 billion to a GDP of JD34.3 billion. The interest rate on the debt is between 7.5 percent and 2 percent, according to the Ministry of Finance publications. To make a back-of-the-envelope calculation, let’s assume, for simplicity, that the interest rate the government is committed to paying is 4 percent.  Note that this is slightly less than the average of the two rates of interest.

Now let’s turn to the amount of interest the government has to pay at the end of the year as a percentage of the GDP. Note that this will not be 4 percent because the debt has exceeded the GDP. The arithmetic is straightforward. The interest to be paid is 4.6 percent of the GDP, which is the product of multiplying the 4 percent by the 115 percent (since the interest is on total debt and not the GDP). Hence, the government has to come up with 4.6 percent of the GDP (or JD1.576 billion) to pay the interest on the debt.

But what is the income of the government from the domestic economy? It is around JD10 billion (numbers are rounded), which is 29 percent of the GDP.  That is, for every Jordanian Dinar spent in the domestic economy, the government receives in taxes and fees 29 piasters. So, if the economy grows by 6 percent, the government income will grow by 30 percent of that, which is 1.8 percent of the GDP, which is nowhere close to the 4.6 percent needed to pay the interest. Indeed, the economy has to grow by 15 percent for the government to pay the 4.6 percent interest, which is not bound to happen under the current modus operandus.

Since Jordan is not looking at a 15 percent growth rate this year, the best it can do is to borrow to offset the interest on the debt. In other words, the government takes more debt (this time from the IMF, hence the new “reform” programme) to settle an old debt. Why? Because it has not been able to achieve the desired growth rates to enable it to meet existing debt obligations. Again, why? Because the borrowed funds go to pay salaries, pensions, and debt. Note that some of the debt repayment is leaked outside the economy.

Instead, had borrowing been focused on innovation and the encouragement of R&D, it would have motivated higher productivity, which means income growth. Once the average citizen’s income rises, so would the income (domestic revenues) of the government, which would enable it to settle the debt. This is the formula that all have to understand and work with. Otherwise, every cabinet of ministers will use regional and global happenings as an excuse for the dismal growth rates that the Jordanian economy suffers from.

The current policy has not departed from the usual paradigm; it is a business-as-usual mindset that continues to do the same and achieves the same unacceptable results. Why repeat failed policies? Isn’t this reminiscent of, “The definition of insanity is doing the same thing over and over again and expecting different results?”

CEO of the Envision Consulting Group and former minister of state for economic affairs.

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