Why I call for investment in innovation, as explained by simple economics
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.
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?”
Published in Jordan News:
https://www.jordannews.jo/Section-36/Opinion/Innovation-productivity-and-mounting-debt-30709
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