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.
Read more Opinion and Analysis
Jordan News
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