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The repercussions of financial imbalances in Suriname
World Development. Vol. 21. No. 2, pp. 291-290, Printed in Great Britain.
1093.
03os-7.50)(/93 $6.00 + 0.00 @) 1993 Pergamon Press Ltd
The Repercussions of Financial in Suriname
Imbalances
A. R. CARAM* De Nederlandsche Bank, Amsterdam Summary.
- The paper examines the adverse consequences of excessive money creation in a small economy with reference to the situation in Suriname, located on the north coast of South America, formerly Dutch territory. The paper shows that money and monetary policy are vitally important in building up prosperity in small, open developing countries. Although monetary discipline is an absolutely essential condition for sound development, it is by no means a panacea. Economic growth can only be achieved by means of a coherent and synchronized package of varied measures influencing both the supply of and the demand for goods and services.
1. INTRODUCTION During the international conference on the problem of small economies held in Malta in 1985, I formulated a number of very general guidelines for monetary policy in such countries. ’ That paper was based on the view that such economies need to pay considerably more than normal attention to the control of money creation, especially domestic money creation. The need to devote special attention to the monetary dimension is related to the specific economic structure of such countries. In most cases the economy is dominated by a single export industry based on the exploitation of a single natural resource with the aid of largely imported factors of production. In such circumstances, it follows that an excessive domestic money creation will rapidly result in a serious rundown of foreign exchange reserves. Once these reserves near depletion, imports - by tradition exceptionally high in such countries - will of necessity have to be cut back, leading to a sharp contraction in the supply of goods. Finally, accelerating domestic price inflation will erode the real purchasing power of the population. The adverse consequences of excessive money creation in a small economy are examined in a more concrete sense below with reference to the situation in Suriname, a former Dutch territory on the north coast of South America. Suriname is a typical small economy with a population of less than half a million. Although the country is five times the size of the Netherlands, the volume of production is not even equal to I % of that of the
former mother country. Mining and bauxite processing, which is mainly in the hands of a US and a Dutch multinational, account for over three-quarters of total exports and, directly and indirectly, make a significant contribution toward domestic output, employment and public revenues. This modern industry is linked to only a very limited extent to the other sectors of the domestic economy, which remain poorly developed. Suriname’s production potential is therefore underexploited. while its economic structure is dualistic and disjointed. Partly as a result, the country is particularly dependent on imports of goods, services and capital. 2. THE MONETARY STRUCTURE THE 1970s
IN
In contrast to most other developing countries, Suriname was untroubled by any shortage of foreign exchange before 1980. Although expenditure consistently exceeded domestic output, the consequent structural balance-of-payments deficits on current account were easily financed from external sources. There were large-scale imports of foreign private capital, directed especially toward the bauxite operations, which provided a firm export earnings base. In addition, the country received financial support within the framework of international development cooperation. As a result the overall balance *The findings, interpretations, authors’ own. They should Nederlandsche
291
Bank.
and conclusions are the not be attributed
to De
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of payments of the nonmonetary sectors was generally positive and it proved possible to build up substantial gold and foreign exchange reserves. At the end of 1980 these reserves were equivalent to the value of approximately five months of imports of goods and services, well above the standard used by the International Monetary Fund (IMF).’ Up to 1980 the influx of money from abroad was of decisive importance for the monetary climate. The net inflow of foreign money during that period even exceeded the growth of domestic liquidity, meaning that domestic sources accounted for a slight net contraction of the money supply. The government resorted only minimally to domestic money creation and its financial transactions accounted for no more than 5% of the growth in the money supply (M2). In addition, the transactions between the banks and the private sector were in net terms by and large neutral from a monetary viewpoint. The Central Bank of Suriname consistently conducted a cautious monetary policy and pegged the creation of money by the commercial banks to the growth trend of the volume of output. In this way the money supply was kept in line with the growing real cash requirements of the public. In addition. the Central Bank permitted the commercial banks to recycle the long-term funds it had attracted; this did not, of course, lead to net money creation. The capital imports have not led to sufficient increases in production and exports. owing in part to a complex interaction of physical and organizational problems. rigidities and imbalances. Furthermore. because of the developmental state of the Suriname economy, the government had to devote considerable resources to building up the infrastructure, as well as to consumptive purposes. Less than a third of official capital imports was used for the direct expansion of output and exports. In particular, these funds found their way into the agricultural sector. The result was that the process of structural economic transformation and enlargement of the productive capacity made only slow progress. The production apparatus remained too small and one-sided to meet the domestic demand for goods and services generated by the capital imports. In other words Suriname found itself trapped in a vicious circle: the country remained underdeveloped simply because it was underdeveloped. Efforts to break the circle were unsuccessful. The inadequate capacity to absorb foreign capital for productive purposes meant that inflationary tensions were generated from time to time, but these were reflected to only a limited
extent in costs and prices since imports of goods and services were stepped up as soon as domestic price inflation threatened to get out of hand. As noted, there was a considerable inflow of capital, and current foreign payments transactions were in practice largely liberalized. These transactions served as it were as an escape valve for releasing excessive internal monetary pressures. The domestic monetary climate was, in other words, governed by an external regulator. The monetary approach to the balance of payments was therefore most relevant to Suriname. A substantial advantage of this monetary structure was the fact that price developments derived primarily from external sources and kept pace with price inflation in Suriname’s main trading partners, namely the United States and the Netherlands. No South American-style intlationary spirals occurred in Suriname in the 1970s. As the capital imports did not lead to sufficient increases in production and exports, the country remained dependent on foreign capital. Consequently, external official debt increased continually, causing the solvency of the economy to be increasingly undermined. Solvency was restored in 1975 when the outstanding debts to the Netherlands were waived upon the granting of independence to Suriname. This meant that the country was able to make a fresh start on its economic development unencumbered by any debts from the past. In this respect Suriname was also an unusual developing country, in that it was not required to bear the burden of foreign debt responsible for so much misery elsewhere in the Third World. Furthermore, the Netherlands provided grant aid for the cofinancing of a multiyear development program. Thanks in particular to that support, Suriname remained an oasis of calm in a monetary sense in the early 1980s.
3. FUNDAMENTAL
CHANGES lY8OS
IN THE
After 1980, in connection with a material deterioration of the political climate. a number of substantial shifts took place abruptly in the monetary structure. The weakness of the world market for aluminum products up to 1987 and the reduced competitiveness of Suriname’s export industry led to a sharp reduction in export earnings. In addition. official capital imports came to a virtual halt in 1982 when the Netherlands suspended its development cooperation agreement on account of the flagrant violations of human rights by the military regime which had taken power by means of a coup in 1980. Foreign
SURINAME receipts slumped to just a third of the 1980 level (see Figure 1). The reduction in commodity exports and of capital imports was reflected in a drop in government revenues of around 20%. Nevertheless the government embarked on an excessive expenditure drive, doubling the level of spending during the 1980s (see Figure 2). As a result the ratio of current to total public expenditure rose from 80% to 98%. The number of public sector employees rose by a fifth, so that approximately half the active labor force currently consists of public servants. By contrast spending on development projects collapsed. Over 50% of total government spending is estimated to go on wages and salaries, nearly 30% on purchases of materials and over 10% on subsidies. Barely 2% is spent on development projects. Despite the sharp reduction in revenues, current expenditure therefore continues to rise while capital expendi-
-300
Receipts
Figure
**... 1. Balance
I I995
** Payments
‘\
_E300
---
Change in reserves
_. .N
I
I
Receipts
*.-.**
----__J I
,985
1980
-9975
I 1989
of payments on a cash basis.
z
-
ture is scaled back. Instead of an austerity policy to cope with the drop in incomes the government has embarked on a policy of expansion - and that in the wrong direction. The explosion in expenditure has taken place in the absence of sound administration or adequate control over the legitimacy and efficiency of expenditure. The collection of taxes also leaves much to be desired. The state of Suriname’s public finances currently exhibits signs of anarchy. As a result of the government’s expansionary policies the budget deficit has increased from barely 5% of gross national product in 1980 to an almost world record level of over 25%. Utterly at variance with the letter and the spirit of its statutes, the Central Bank of Suriname has been involved in the monetary financing of the inflated deficit. Its loans to the government have risen rapidly. In consequence the Bank can no longer concentrate on its main task: fostering the stabil-
I 1990
’ 1975 -
293
Payments
---
Cash balance
Figure 2. Government finance on a cash basis
/* I
1989
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DEVELOPMENT
ity of the Suriname currency. In practice it has degenerated into a departmental money dispenser. The country is flooded with new money. with a five-fold increase in the money supply. Particularly serious is the fact that, in contrast to the pre1980 situation, the growth in the money supply is no longer “carried” by external factors but stems wholly from domestic sources (see Figure 3). In this way a highly disjointed relationship has arisen between the supply of goods and the money supply. Expressed as a percentage of gross national product. the money supply has risen sharply from barely 25% to a dramatic peak of about 100%. The money supply is at present at least twice the level required for monetarily balanced development. There is no lack of money therefore but all the more lack of reasonably priced goods. 4. CONSEQUENCES OFTHE EXPANSION
MONETARY
Since foreign revenues are increasingly unable to finance the rising level of material imports, growing balance of payments deficits have been arising in the nonmonetary sectors. Initially these deficits could be financed out of the country’s international reserves, but these quickly disappeared. The coverage of the money supply by the international reserves has fallen from nearly 100% to little more than 1% (see Figure 4). In addition, significant payment arrears have been run up and new external debts were raised. The country’s net external financial position is steadily becoming more negative. Suriname now no longer belongs to the select group of developing countries with a comfortable level of international reserves; instead it finds itself in the
I w30
-500~ 1975
-
company of many others suffering from an acute and permanent shortage of foreign exchange. All in all the liquidity and solvency of the economy have been seriously undermined. Suriname’s international creditworthiness is zero. Following the rapid reduction in the country‘s ability to make payments to other countries. increasingly stringent import restrictions have been introduced. Imports on a cash basis have fallen from around 65% of national product in 1980 to 20% at the present time. This reduction has been offset to only a very limited extent by the growth in private remittances by the Surinamese who have emigrated to the Netherlands in fairly large numbers over the years. In addition imports are financed by means of foreign exchange obtained from unofficial sources. The drop in imports has led to a serious shortage of goods, particularly since the previously ample stocks of commodities have been virtually used up. In the meantime reserves have been nearly exhausted. Everything is in short supply - even daily necessities, medical drugs, and raw materials and consumables for production. As already noted. investment has all but dried up. which is severely undermining the quality of the infrastructure and the productive capacity of the economy. Expressed as a percentage of domestic product, investment has slipped from nearly 20% to as little as 5%. Even in the case of the bauxite industry - the lifeline of the Surinamese economy - innovative investment has been lacking. A shift is taking place in investment from the productive sector to trading activities, with a view to securing fast profits at limited risk. Speculation is being given priority over laying a solid, sustained foundation for real economic growth.
***.** Inflow of Domestic foreign funds creation
I
I 1985
---
maxy
Figure 3. Change in money supply.
1989
Change in money suppty
295
SURINAME
‘.. I
01
I975 -
Money supply as a % of gnp
Figure
-.....
*.... . . . . . . . . . . . . . . . . . . . . . . .
1985
1980
-*-*a.
1969
Monetary reserves as a % of M2
4. Money supply and monetary reserves.
Although the balance of trade has been improving and even moved into surplus in 1987, this reversal was the result of radical import cuts. The level of consumption, output and employment has consequently fallen. The one-sided structure of the production apparatus means that productive activity is necessarily associated with a substantial level of imports. When imports are limited the domestic processing industry and trading sector suffer severe setbacks. Many businesses have been forced to curtail their activities drastically or even to cease trading temporarily. The limited size of the economy entails that import substitution is not or only barely, profitable for most production processes. In these circumstances the volume of goods supplied from domestic and foreign sources has fallen by roughly a third. Recently, the situation eased slightly because Suriname has been able to benefit from the sharp rise in the world market prices for aluminum at the end of the 1980s. Unfortunately the additional foreign exchange earned from bauxite sales has been allocated almost in its entirety to current expenditure, thereby weakening the foreign exchange position. A unique opportunity therefore has been lost to make a start on the urgently required financial reforms. With the closure of the external safety valve the surplus of money stopped leaking away to the rest of the world. A perilous situation has consequently arisen since 1982, with more and more money chasing fewer and fewer goods. This has given rise to a hitherto unknown and accelerating price spiral. It may be noted that the seriousness of inflation in Suriname is not fully reflected in the outdated price index figure for household consumption, partly because in calcu-
lating the index insufficient weight is attached to the actual prices in what is now a flourishing black market. The unofficial rate of the US dollar is indicative of the rapid acceleration in inflation. Among other things the black market rate has been pushed up by an uncontrollable flight of capital, reaching a particular peak at times of political unrest. In recent years the rate has consequently fluctuated between three and 10 times the official rate of US$ 1 = SF 1.78. The existence side-by-side of an official and a volatile black market has been conducive to all manner of illegal and inflationary practices. At present the black market exchange rates are one of the most important means for determining commodity prices. In the recurrent periods of serious shortages, this also applies to the primary necessities of life, the official prices for which remain fixed by the government. Partly on this basis it is fair to say that the average price of commodities is at present at least six times higher than in 1980. The rise in prices is considerably higher than that among traditional trading partners. Also with respect to price stabilization, Suriname has slipped back within the chequered group of developing countries during the 1980s from the first tier to a much lower ranked division. In the case of fixed-income earners, who are generally unable to secure wage increases in line with inflation, the rising prices have led to a drop in real income. Nevertheless public spending on salaries continues to increase, thereby only exacerbating the government’s financing problems. At the same time, it is striking that the country has for the present been spared the hyperinflation so characteristic of Latin America. This may possibly be attributable to the fact that
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one way or another a minimum package of basic commodities is nearly always available. Moreover, the public at large would still appear to entertain hopes of recovery. Owing also to the limited opportunities to spend at reasonable prices, sizeable bank balances are held for lengthy periods at decidedly negative real interest rates. As a result of these balances, the average velocity of circulation is not particularly high. This overhang does, however, form an exceptionally hazardous explosive charge which could be detonated at any point. In these circumstances the amount of money spent would take off in a way beyond the control of the monetary authorities. 5. IN SEARCH
OF SOLUTIONS
Reviewing the above, the conclusion is inescapable: the excessive domestic money creation in Suriname has led to a number of serious disadvantages. Among other things, these have included physical impoverishment, a flight of capital, the undermining of the international liquidity and solvency of the economy, a drop in real incomes, a weakening of the country’s competitiveness, the undermining of the propensity to invest, the emergence of speculative trading practices and the distortion of relative incomes and wealth. These disadvantages are not matched by a single national economic benefit. For the authorities, the ability to create money out of nothing has proved an irresistible temptation. The situation is creating an atmosphere of social discontent. Continuation of the present unbridled money creation will accelerate the process of real economic decline so that, at a certain point, general living standards may fall below a critical minimum. This process involves the danger that the two pillars on which the economy rests, namely the bauxite industry and remittances from abroad, will be weakened to the point that they can no longer sustain the increasingly rickety structure. It is by no means inconceivable that the country could lose contact with the modern world economy. The very viability of the economy is increasingly at stake. Against this background a broad debate in society has arisen concerning the problems confronting Suriname. Numerous proposals have been made for reversing the process of socioeconomic decline. In the discussion it is rightly stressed from various quarters that the political entanglements since 1980 are the underlying cause of the considerable deterioration of the financial situation and that this situation can improve only if a healthy political and social climate is created. In the economic area, easily
the most attention has been attracted by a recently publicized suggestion to form a commonwealth between the Netherlands and Suriname, possibly even extending to the formation of a monetary union. Closer links between the two countries are warmly endorsed, since this would in all probability mean that additional financial resources and manpower would be made available admittedly under certain stringent conditions to help overcome the crisis. Caution is, however, in order and there is certainly no room for undue expectations, particularly since a shift is taking place in Dutch development cooperation toward a more business-oriented approach. As the dramatic deterioration in Suriname is essentially due to persistent economic mismanagement, Suriname will itself have to bear the lion’s share of the burden of reform and restructuring. Despite the extensive discussions insufficient purposeful action has as yet been undertaken. The government has confined itself to a handful of measures in an effort to skim off some of the surplus liquidity. In November 1986. for example, the Central Bank of Suriname replaced the banknotes in circulation with new ones, partly with a view to rendering illegally exported banknotes worthless. As a result of this measure the circulation of banknotes fell, according to the Bank. by 6%. The effect of the measure was, however, rapidly undone by the creation of new money. At present there is twice as much paper money in circulation as in 1986. In addition the government has stimulated savings deposits held with the banking system to be converted into bonds. A comparatively small proportion of the short-term funds has thus been converted into long-term securities, with a corresponding reduction in the public’s immediate spending opportunities. The government has, however, partly reused these funds to finance current expenditure. Given the present level of overspending, the proceeds from the conversion operation should, of course, have been used entirely for paying off the national debt with the Central Bank. In addition, this measure did nothing to eliminate the cause of the excess liquidity, namely the inordinate budget deficit. The problems have simply been shifted to the future, when interest and repayments will fall due, which will then once again be freely disposable by the public. Another objection is that the measures taken to date have only been ad hoc and do not form part of a coherent program of reform and recovery along the lines of those implemented in a number of countries by the IMF and World Bank. In Suriname it is feared that such a
SURINAME
program would require undue social sacrifices in the short term, thereby further upsetting the delicate political balance. In particular, there is an aversion in certain circles to a formal devaluation of the national currency a resistance which is not, however, always soundly based. Here again Suriname finds itself trapped in a vicious circle: the political and economic crisis has led to social discontent, which in turn makes it difficult to take the necessary measures to tackle the crisis. With this in mind, financial support from the European Community is being used to commission a report from a foreign private consultancy organization setting out an action program in which explicit account will be taken of the social consequences.
6. A POLICY
FOR THE 1990s
Although the aforementioned report has not yet been completed, it is clear that the medicine to be prescribed by the consultants will not amount to a wonder drug capable of painlessly curing the problems facing the economy. There is no getting around the fact that restructuring the distortions in the economy will require sacrifices, resolve, initiative and effective economic pohties. With respect to the latter it should be noted that the quality of the government machinery that will have to handle such an operation leaves much to be desired, among other things because a considerable number of senior officials have left the public service over the years for the private sector or have gone abroad. Once again a vicious circle arises: the poor quality of the government agencies has contributed to the political and economic crisis, while the crisis means that funds are lacking to improve those institutions. Nevertheless the situation in which Suriname finds itself is not a hopeless one; the country has a considerable level of natural resources per capita of population, while it can also draw on development assistance from the Netherlands. In addition, the economy is small and manageable, so that it could be restored to a sound footing given a genuine willingness to that end. In this sense, Suriname is considerably better placed than many other developing countries grappling with similar problems. Despite the inherent differences in structure, the developments in various South and Central American countries provide evidence that although a program of reform and adjustment is painful, the consistent implementation of such policies may be expected to generate satisfactory results in due course. According to rough esti-
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mates by international organizations, the real growth in output in these countries in the first half of the 1990s will be around 5%. This follows the general structural stagnation in the past decade resulting among other things from unsound budgetary and monetary policies. This reversal in the economic outlook for Latin America stems from what may without exaggeration be termed a silent revolution in attitudes toward the role of government in the domestic economy. Previously, governments occupied a dominant position and were involved in everything; under the new vision, the role of government should be confined to its key tasks and to creating a healthy socioeconomic atmosphere for private sector activities. On the basis of the experience in other countries, an essential precondition for the reform and restructuring of the economy of Suriname is the attainment of consensus in society. The social partners can make a material contribution in this respect by reaching agreement on the strategy to be pursued. The social partners will need to conclude an agreement aimed at fashioning a climate in which sustained productive activity can flourish. In this respect good intentions are not, of course, sufficient in themselves. As part of such an agreement - as far as the economic aspects are concerned serious understandings will need to be reached in broad outline on the following matters:
(a) A macroeconomic framework A macroeconomic framework is needed within which the national goals for the next three to five years can be clearly formulated, priorities laid down and the effects of the various measures evaluated. In this respect it is important to realize that the problems cannot all be resolved at once.
(b) Reform of public finance The consistent reform of public finances is needed, aimed at eliminating the budget deficit by reducing current expenditure and boosting revenues, for example, by the improved collection of taxes. This in turn will create room for an expansion of investment. In future the government should strive to adhere to the golden rule of public finance whereby current expenditure should be financed out of taxation while borrowing should be permitted only for capital expenditure aimed at generating an adequate level of output and exports.
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(c)
Sound
monetury
DEVELOPMENT
relationships
(e)
The restoration of sound monetary relationships by creaming off surplus liquidity is also critical. Here various options are in principle available, ranging from the implementation of a crash program consisting of a one-time devaluation of all financial assets to a more gradual approach in which the government sells certain of its assets. such as land. state enterprises and foreign exchange to be obtained from development aid, to the private sector at a realistic price. In the latter case the money equivalent obtained will need to be simultaneously destroyed. In this respect it is vitally important that the Central Bank no longer be used as a “cheap” money factory for financing government deficits. The Bank should be given independence in its operations, released from political caprice and permitted to evolve into a genuinely professional organization. The Bank should confine itself largely to the promotion of price stability by means of sound monetary management. Any domestic borrowing by the government should in future be conducted via a public money and capital market, thereby enabling the market mechanism to do its work. The amount that the government is permitted to raise in this market should be limited to the point that its debt commitments do not impose an excessive burden on the budget and that sufficient room is left for the private sector to raise capital at attractive rates of interest.
(d) Increasing
investment, exports
production
and
A strategy along three lines is needed to increase investment, production and exports. First, this policy will need to be directed at the maintenance, revitalization and expansion of the existing production capacity. Second, a number of new growth pillars will need to be created based on the available natural resources, consisting of large-scale. primarily export-oriented and, as far as possible, interrelated economic complexes. Third, viable small-scale projects need to be promoted in order to meet the population’s basic personal and communal needs, such as foodstuffs. water, clothing, shelter, medical care and education. The government should not undertake such production itself but should encourage small and large private entrepreneurs, both domestic and foreign, by creating a stable and attractive social and economic climate.
Cost and price policy
The formulation of a cost and price policy is needed to generate comparative advantages for production and exports. One important factor in this respect is to ensure that the increase in wages remains in line with labor productivity gains. With a view to restoring the competitiveness of the industrial sector and eliminating the black markets. there is no way around a significant formal devaluation of the currency. These goals should not be achieved by expanding the official regulations but by effective deregulation and by promoting the orderly operation of the market mechanism. (f) A social program A social program is necessary to support the weaker members in society. Here again various options are in principle available, such as guaranteeing the availability of a minimum package of primary necessities at an acceptable price or broadening and deepening the system of social security benefits. The basic premise should be to get away from the notion that the government needs to subsidize virtually the entire community. Instead, the government should confine itself to the provision of temporary support to people genuinely in need. The financing of the program must of necessity be soundly based. In addition the government should encourage the absorption into the production process of at least a proportion of these people by means of education and training. (g) Relations
with foreign
donors
Normalization and intensification of relations should occur with foreign donors. In this respect the essential precondition is for Suriname to provide clear evidence that it is committed to the consistent implementation of a sound program of reform and restructuring. But no matter what efforts are made, the task will be beyond Suriname’s resources alone. External capital as well as technical and economic know-how will be indispensable and can help appreciably to alleviate the pain of reform. In this respect ways will also have to be explored of tapping the skills and experience of the Surinamese community in the Netherlands. (h) Program
of reform
The reform and restructuring program must be entrusted to a small, resourceful team of mana-
SURINAME
gers. This would ensure that the day-to-day management of the economy is not unduly influenced by short-term considerations of all sorts of pressure groups and that greater priority could be given to a policy designed to provide the highest possible domestic economic return in the long term. Charting the main lines of the policy and supervising the implementation of that policy should, of course, remain in the hands of the democratically elected organs.
7. CONCLUSION In the introduction it was stressed that special attention needs to be given in small economies to controlling the domestic creation of money. The developments in Suriname demonstrate the validity of this view with almost startling clarity. In such countries apart from political and social stability financial stability must be ensured. This will create a climate of confidence, which is essential for a successful process of real economic growth. Money and monetary policy are therefore vitally important in building up prosperity in small, open developing countries. Although monetary discipline is an absolutely essential condition for sound development, in itself it is by no means a panacea. Economic growth can only be achieved by means of a coherent and synchronized package of varied measures influencing both the supply of and the demand for goods and services. From the above discussion it is also abundantly clear that, of the various policy instruments at the government’s disposal, the management of public finance is of decisive importance for financial stability. The pressure exerted by all sorts of interest groups means that there is a continual temptation for the authorities to increase the level of current expenditure. In a small economy, however, it rapidly becomes clear that
299
giving in to this temptation on a large scale is counterproductive and that a high price has to be paid for the neglect of financial stability. Unsound financial management cannot but exacerbate existing physical problems and cause serious damage, which can only be corrected by undergoing a painful process of reform and restructuring. Here again prevention is better than cure. A great deal of misery can undoubtedly be prevented if continual discipline is exercised to limit the growth in the domestic money supply and to gear the money supply to the optimal real economic growth prospects in the longer term. Unfortunately, this fundamental and widely accepted monetary rule of thumb is all too often conveniently disregarded so that a particular group can make quick gains. The rule of thumb is, however, based on an ineluctable economic law which will, sooner or later, assert itself, especially in a small economy. Against this background and in view of the fundamental relevance of price stability for a healthy social and political climate, there have, rightly, been increasing calls for central banks to be given autonomy. This call has been particularly evident in recent times among those advocating a European Economic and Monetary Union and the restructuring of the financial apparatus in Eastern Europe. According to this school of thought the sole object of a central bank should be to promote monetary stability at the highest possible level for general economic activity. With this in mind a central bank must indicate the overall monetary room for maneuver within which the financial dispositions of the economic agents should take place. This will ensure that the pursuit of other goals does not place such demands on money creation as to undermine price stability. The achievement of these aims, however laudable in themselves, by means of debasement of the currency is bought at an excessive price and can never be sustained.
NOTES 1.
See Caram
(1989).
2.
The
given
figures
from publications and the Central in the text have
been
of the Suriname Ministry Bank of Surinam.
of Finance
derived
REFERENCES Caram, A. R., “Guidelines for monetary policy in small developing countries” in J. Kaminarides, L. Briguglio and H. N. Hoogcndonk (Eds.), The
Economic Development of Small Countries The Netherlands: Eburon, 1989).
(Delft,
1093.
03os-7.50)(/93 $6.00 + 0.00 @) 1993 Pergamon Press Ltd
The Repercussions of Financial in Suriname
Imbalances
A. R. CARAM* De Nederlandsche Bank, Amsterdam Summary.
- The paper examines the adverse consequences of excessive money creation in a small economy with reference to the situation in Suriname, located on the north coast of South America, formerly Dutch territory. The paper shows that money and monetary policy are vitally important in building up prosperity in small, open developing countries. Although monetary discipline is an absolutely essential condition for sound development, it is by no means a panacea. Economic growth can only be achieved by means of a coherent and synchronized package of varied measures influencing both the supply of and the demand for goods and services.
1. INTRODUCTION During the international conference on the problem of small economies held in Malta in 1985, I formulated a number of very general guidelines for monetary policy in such countries. ’ That paper was based on the view that such economies need to pay considerably more than normal attention to the control of money creation, especially domestic money creation. The need to devote special attention to the monetary dimension is related to the specific economic structure of such countries. In most cases the economy is dominated by a single export industry based on the exploitation of a single natural resource with the aid of largely imported factors of production. In such circumstances, it follows that an excessive domestic money creation will rapidly result in a serious rundown of foreign exchange reserves. Once these reserves near depletion, imports - by tradition exceptionally high in such countries - will of necessity have to be cut back, leading to a sharp contraction in the supply of goods. Finally, accelerating domestic price inflation will erode the real purchasing power of the population. The adverse consequences of excessive money creation in a small economy are examined in a more concrete sense below with reference to the situation in Suriname, a former Dutch territory on the north coast of South America. Suriname is a typical small economy with a population of less than half a million. Although the country is five times the size of the Netherlands, the volume of production is not even equal to I % of that of the
former mother country. Mining and bauxite processing, which is mainly in the hands of a US and a Dutch multinational, account for over three-quarters of total exports and, directly and indirectly, make a significant contribution toward domestic output, employment and public revenues. This modern industry is linked to only a very limited extent to the other sectors of the domestic economy, which remain poorly developed. Suriname’s production potential is therefore underexploited. while its economic structure is dualistic and disjointed. Partly as a result, the country is particularly dependent on imports of goods, services and capital. 2. THE MONETARY STRUCTURE THE 1970s
IN
In contrast to most other developing countries, Suriname was untroubled by any shortage of foreign exchange before 1980. Although expenditure consistently exceeded domestic output, the consequent structural balance-of-payments deficits on current account were easily financed from external sources. There were large-scale imports of foreign private capital, directed especially toward the bauxite operations, which provided a firm export earnings base. In addition, the country received financial support within the framework of international development cooperation. As a result the overall balance *The findings, interpretations, authors’ own. They should Nederlandsche
291
Bank.
and conclusions are the not be attributed
to De
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of payments of the nonmonetary sectors was generally positive and it proved possible to build up substantial gold and foreign exchange reserves. At the end of 1980 these reserves were equivalent to the value of approximately five months of imports of goods and services, well above the standard used by the International Monetary Fund (IMF).’ Up to 1980 the influx of money from abroad was of decisive importance for the monetary climate. The net inflow of foreign money during that period even exceeded the growth of domestic liquidity, meaning that domestic sources accounted for a slight net contraction of the money supply. The government resorted only minimally to domestic money creation and its financial transactions accounted for no more than 5% of the growth in the money supply (M2). In addition, the transactions between the banks and the private sector were in net terms by and large neutral from a monetary viewpoint. The Central Bank of Suriname consistently conducted a cautious monetary policy and pegged the creation of money by the commercial banks to the growth trend of the volume of output. In this way the money supply was kept in line with the growing real cash requirements of the public. In addition. the Central Bank permitted the commercial banks to recycle the long-term funds it had attracted; this did not, of course, lead to net money creation. The capital imports have not led to sufficient increases in production and exports. owing in part to a complex interaction of physical and organizational problems. rigidities and imbalances. Furthermore. because of the developmental state of the Suriname economy, the government had to devote considerable resources to building up the infrastructure, as well as to consumptive purposes. Less than a third of official capital imports was used for the direct expansion of output and exports. In particular, these funds found their way into the agricultural sector. The result was that the process of structural economic transformation and enlargement of the productive capacity made only slow progress. The production apparatus remained too small and one-sided to meet the domestic demand for goods and services generated by the capital imports. In other words Suriname found itself trapped in a vicious circle: the country remained underdeveloped simply because it was underdeveloped. Efforts to break the circle were unsuccessful. The inadequate capacity to absorb foreign capital for productive purposes meant that inflationary tensions were generated from time to time, but these were reflected to only a limited
extent in costs and prices since imports of goods and services were stepped up as soon as domestic price inflation threatened to get out of hand. As noted, there was a considerable inflow of capital, and current foreign payments transactions were in practice largely liberalized. These transactions served as it were as an escape valve for releasing excessive internal monetary pressures. The domestic monetary climate was, in other words, governed by an external regulator. The monetary approach to the balance of payments was therefore most relevant to Suriname. A substantial advantage of this monetary structure was the fact that price developments derived primarily from external sources and kept pace with price inflation in Suriname’s main trading partners, namely the United States and the Netherlands. No South American-style intlationary spirals occurred in Suriname in the 1970s. As the capital imports did not lead to sufficient increases in production and exports, the country remained dependent on foreign capital. Consequently, external official debt increased continually, causing the solvency of the economy to be increasingly undermined. Solvency was restored in 1975 when the outstanding debts to the Netherlands were waived upon the granting of independence to Suriname. This meant that the country was able to make a fresh start on its economic development unencumbered by any debts from the past. In this respect Suriname was also an unusual developing country, in that it was not required to bear the burden of foreign debt responsible for so much misery elsewhere in the Third World. Furthermore, the Netherlands provided grant aid for the cofinancing of a multiyear development program. Thanks in particular to that support, Suriname remained an oasis of calm in a monetary sense in the early 1980s.
3. FUNDAMENTAL
CHANGES lY8OS
IN THE
After 1980, in connection with a material deterioration of the political climate. a number of substantial shifts took place abruptly in the monetary structure. The weakness of the world market for aluminum products up to 1987 and the reduced competitiveness of Suriname’s export industry led to a sharp reduction in export earnings. In addition. official capital imports came to a virtual halt in 1982 when the Netherlands suspended its development cooperation agreement on account of the flagrant violations of human rights by the military regime which had taken power by means of a coup in 1980. Foreign
SURINAME receipts slumped to just a third of the 1980 level (see Figure 1). The reduction in commodity exports and of capital imports was reflected in a drop in government revenues of around 20%. Nevertheless the government embarked on an excessive expenditure drive, doubling the level of spending during the 1980s (see Figure 2). As a result the ratio of current to total public expenditure rose from 80% to 98%. The number of public sector employees rose by a fifth, so that approximately half the active labor force currently consists of public servants. By contrast spending on development projects collapsed. Over 50% of total government spending is estimated to go on wages and salaries, nearly 30% on purchases of materials and over 10% on subsidies. Barely 2% is spent on development projects. Despite the sharp reduction in revenues, current expenditure therefore continues to rise while capital expendi-
-300
Receipts
Figure
**... 1. Balance
I I995
** Payments
‘\
_E300
---
Change in reserves
_. .N
I
I
Receipts
*.-.**
----__J I
,985
1980
-9975
I 1989
of payments on a cash basis.
z
-
ture is scaled back. Instead of an austerity policy to cope with the drop in incomes the government has embarked on a policy of expansion - and that in the wrong direction. The explosion in expenditure has taken place in the absence of sound administration or adequate control over the legitimacy and efficiency of expenditure. The collection of taxes also leaves much to be desired. The state of Suriname’s public finances currently exhibits signs of anarchy. As a result of the government’s expansionary policies the budget deficit has increased from barely 5% of gross national product in 1980 to an almost world record level of over 25%. Utterly at variance with the letter and the spirit of its statutes, the Central Bank of Suriname has been involved in the monetary financing of the inflated deficit. Its loans to the government have risen rapidly. In consequence the Bank can no longer concentrate on its main task: fostering the stabil-
I 1990
’ 1975 -
293
Payments
---
Cash balance
Figure 2. Government finance on a cash basis
/* I
1989
WORLD
294
DEVELOPMENT
ity of the Suriname currency. In practice it has degenerated into a departmental money dispenser. The country is flooded with new money. with a five-fold increase in the money supply. Particularly serious is the fact that, in contrast to the pre1980 situation, the growth in the money supply is no longer “carried” by external factors but stems wholly from domestic sources (see Figure 3). In this way a highly disjointed relationship has arisen between the supply of goods and the money supply. Expressed as a percentage of gross national product. the money supply has risen sharply from barely 25% to a dramatic peak of about 100%. The money supply is at present at least twice the level required for monetarily balanced development. There is no lack of money therefore but all the more lack of reasonably priced goods. 4. CONSEQUENCES OFTHE EXPANSION
MONETARY
Since foreign revenues are increasingly unable to finance the rising level of material imports, growing balance of payments deficits have been arising in the nonmonetary sectors. Initially these deficits could be financed out of the country’s international reserves, but these quickly disappeared. The coverage of the money supply by the international reserves has fallen from nearly 100% to little more than 1% (see Figure 4). In addition, significant payment arrears have been run up and new external debts were raised. The country’s net external financial position is steadily becoming more negative. Suriname now no longer belongs to the select group of developing countries with a comfortable level of international reserves; instead it finds itself in the
I w30
-500~ 1975
-
company of many others suffering from an acute and permanent shortage of foreign exchange. All in all the liquidity and solvency of the economy have been seriously undermined. Suriname’s international creditworthiness is zero. Following the rapid reduction in the country‘s ability to make payments to other countries. increasingly stringent import restrictions have been introduced. Imports on a cash basis have fallen from around 65% of national product in 1980 to 20% at the present time. This reduction has been offset to only a very limited extent by the growth in private remittances by the Surinamese who have emigrated to the Netherlands in fairly large numbers over the years. In addition imports are financed by means of foreign exchange obtained from unofficial sources. The drop in imports has led to a serious shortage of goods, particularly since the previously ample stocks of commodities have been virtually used up. In the meantime reserves have been nearly exhausted. Everything is in short supply - even daily necessities, medical drugs, and raw materials and consumables for production. As already noted. investment has all but dried up. which is severely undermining the quality of the infrastructure and the productive capacity of the economy. Expressed as a percentage of domestic product, investment has slipped from nearly 20% to as little as 5%. Even in the case of the bauxite industry - the lifeline of the Surinamese economy - innovative investment has been lacking. A shift is taking place in investment from the productive sector to trading activities, with a view to securing fast profits at limited risk. Speculation is being given priority over laying a solid, sustained foundation for real economic growth.
***.** Inflow of Domestic foreign funds creation
I
I 1985
---
maxy
Figure 3. Change in money supply.
1989
Change in money suppty
295
SURINAME
‘.. I
01
I975 -
Money supply as a % of gnp
Figure
-.....
*.... . . . . . . . . . . . . . . . . . . . . . . .
1985
1980
-*-*a.
1969
Monetary reserves as a % of M2
4. Money supply and monetary reserves.
Although the balance of trade has been improving and even moved into surplus in 1987, this reversal was the result of radical import cuts. The level of consumption, output and employment has consequently fallen. The one-sided structure of the production apparatus means that productive activity is necessarily associated with a substantial level of imports. When imports are limited the domestic processing industry and trading sector suffer severe setbacks. Many businesses have been forced to curtail their activities drastically or even to cease trading temporarily. The limited size of the economy entails that import substitution is not or only barely, profitable for most production processes. In these circumstances the volume of goods supplied from domestic and foreign sources has fallen by roughly a third. Recently, the situation eased slightly because Suriname has been able to benefit from the sharp rise in the world market prices for aluminum at the end of the 1980s. Unfortunately the additional foreign exchange earned from bauxite sales has been allocated almost in its entirety to current expenditure, thereby weakening the foreign exchange position. A unique opportunity therefore has been lost to make a start on the urgently required financial reforms. With the closure of the external safety valve the surplus of money stopped leaking away to the rest of the world. A perilous situation has consequently arisen since 1982, with more and more money chasing fewer and fewer goods. This has given rise to a hitherto unknown and accelerating price spiral. It may be noted that the seriousness of inflation in Suriname is not fully reflected in the outdated price index figure for household consumption, partly because in calcu-
lating the index insufficient weight is attached to the actual prices in what is now a flourishing black market. The unofficial rate of the US dollar is indicative of the rapid acceleration in inflation. Among other things the black market rate has been pushed up by an uncontrollable flight of capital, reaching a particular peak at times of political unrest. In recent years the rate has consequently fluctuated between three and 10 times the official rate of US$ 1 = SF 1.78. The existence side-by-side of an official and a volatile black market has been conducive to all manner of illegal and inflationary practices. At present the black market exchange rates are one of the most important means for determining commodity prices. In the recurrent periods of serious shortages, this also applies to the primary necessities of life, the official prices for which remain fixed by the government. Partly on this basis it is fair to say that the average price of commodities is at present at least six times higher than in 1980. The rise in prices is considerably higher than that among traditional trading partners. Also with respect to price stabilization, Suriname has slipped back within the chequered group of developing countries during the 1980s from the first tier to a much lower ranked division. In the case of fixed-income earners, who are generally unable to secure wage increases in line with inflation, the rising prices have led to a drop in real income. Nevertheless public spending on salaries continues to increase, thereby only exacerbating the government’s financing problems. At the same time, it is striking that the country has for the present been spared the hyperinflation so characteristic of Latin America. This may possibly be attributable to the fact that
2%
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DEVELOPMENT
one way or another a minimum package of basic commodities is nearly always available. Moreover, the public at large would still appear to entertain hopes of recovery. Owing also to the limited opportunities to spend at reasonable prices, sizeable bank balances are held for lengthy periods at decidedly negative real interest rates. As a result of these balances, the average velocity of circulation is not particularly high. This overhang does, however, form an exceptionally hazardous explosive charge which could be detonated at any point. In these circumstances the amount of money spent would take off in a way beyond the control of the monetary authorities. 5. IN SEARCH
OF SOLUTIONS
Reviewing the above, the conclusion is inescapable: the excessive domestic money creation in Suriname has led to a number of serious disadvantages. Among other things, these have included physical impoverishment, a flight of capital, the undermining of the international liquidity and solvency of the economy, a drop in real incomes, a weakening of the country’s competitiveness, the undermining of the propensity to invest, the emergence of speculative trading practices and the distortion of relative incomes and wealth. These disadvantages are not matched by a single national economic benefit. For the authorities, the ability to create money out of nothing has proved an irresistible temptation. The situation is creating an atmosphere of social discontent. Continuation of the present unbridled money creation will accelerate the process of real economic decline so that, at a certain point, general living standards may fall below a critical minimum. This process involves the danger that the two pillars on which the economy rests, namely the bauxite industry and remittances from abroad, will be weakened to the point that they can no longer sustain the increasingly rickety structure. It is by no means inconceivable that the country could lose contact with the modern world economy. The very viability of the economy is increasingly at stake. Against this background a broad debate in society has arisen concerning the problems confronting Suriname. Numerous proposals have been made for reversing the process of socioeconomic decline. In the discussion it is rightly stressed from various quarters that the political entanglements since 1980 are the underlying cause of the considerable deterioration of the financial situation and that this situation can improve only if a healthy political and social climate is created. In the economic area, easily
the most attention has been attracted by a recently publicized suggestion to form a commonwealth between the Netherlands and Suriname, possibly even extending to the formation of a monetary union. Closer links between the two countries are warmly endorsed, since this would in all probability mean that additional financial resources and manpower would be made available admittedly under certain stringent conditions to help overcome the crisis. Caution is, however, in order and there is certainly no room for undue expectations, particularly since a shift is taking place in Dutch development cooperation toward a more business-oriented approach. As the dramatic deterioration in Suriname is essentially due to persistent economic mismanagement, Suriname will itself have to bear the lion’s share of the burden of reform and restructuring. Despite the extensive discussions insufficient purposeful action has as yet been undertaken. The government has confined itself to a handful of measures in an effort to skim off some of the surplus liquidity. In November 1986. for example, the Central Bank of Suriname replaced the banknotes in circulation with new ones, partly with a view to rendering illegally exported banknotes worthless. As a result of this measure the circulation of banknotes fell, according to the Bank. by 6%. The effect of the measure was, however, rapidly undone by the creation of new money. At present there is twice as much paper money in circulation as in 1986. In addition the government has stimulated savings deposits held with the banking system to be converted into bonds. A comparatively small proportion of the short-term funds has thus been converted into long-term securities, with a corresponding reduction in the public’s immediate spending opportunities. The government has, however, partly reused these funds to finance current expenditure. Given the present level of overspending, the proceeds from the conversion operation should, of course, have been used entirely for paying off the national debt with the Central Bank. In addition, this measure did nothing to eliminate the cause of the excess liquidity, namely the inordinate budget deficit. The problems have simply been shifted to the future, when interest and repayments will fall due, which will then once again be freely disposable by the public. Another objection is that the measures taken to date have only been ad hoc and do not form part of a coherent program of reform and recovery along the lines of those implemented in a number of countries by the IMF and World Bank. In Suriname it is feared that such a
SURINAME
program would require undue social sacrifices in the short term, thereby further upsetting the delicate political balance. In particular, there is an aversion in certain circles to a formal devaluation of the national currency a resistance which is not, however, always soundly based. Here again Suriname finds itself trapped in a vicious circle: the political and economic crisis has led to social discontent, which in turn makes it difficult to take the necessary measures to tackle the crisis. With this in mind, financial support from the European Community is being used to commission a report from a foreign private consultancy organization setting out an action program in which explicit account will be taken of the social consequences.
6. A POLICY
FOR THE 1990s
Although the aforementioned report has not yet been completed, it is clear that the medicine to be prescribed by the consultants will not amount to a wonder drug capable of painlessly curing the problems facing the economy. There is no getting around the fact that restructuring the distortions in the economy will require sacrifices, resolve, initiative and effective economic pohties. With respect to the latter it should be noted that the quality of the government machinery that will have to handle such an operation leaves much to be desired, among other things because a considerable number of senior officials have left the public service over the years for the private sector or have gone abroad. Once again a vicious circle arises: the poor quality of the government agencies has contributed to the political and economic crisis, while the crisis means that funds are lacking to improve those institutions. Nevertheless the situation in which Suriname finds itself is not a hopeless one; the country has a considerable level of natural resources per capita of population, while it can also draw on development assistance from the Netherlands. In addition, the economy is small and manageable, so that it could be restored to a sound footing given a genuine willingness to that end. In this sense, Suriname is considerably better placed than many other developing countries grappling with similar problems. Despite the inherent differences in structure, the developments in various South and Central American countries provide evidence that although a program of reform and adjustment is painful, the consistent implementation of such policies may be expected to generate satisfactory results in due course. According to rough esti-
297
mates by international organizations, the real growth in output in these countries in the first half of the 1990s will be around 5%. This follows the general structural stagnation in the past decade resulting among other things from unsound budgetary and monetary policies. This reversal in the economic outlook for Latin America stems from what may without exaggeration be termed a silent revolution in attitudes toward the role of government in the domestic economy. Previously, governments occupied a dominant position and were involved in everything; under the new vision, the role of government should be confined to its key tasks and to creating a healthy socioeconomic atmosphere for private sector activities. On the basis of the experience in other countries, an essential precondition for the reform and restructuring of the economy of Suriname is the attainment of consensus in society. The social partners can make a material contribution in this respect by reaching agreement on the strategy to be pursued. The social partners will need to conclude an agreement aimed at fashioning a climate in which sustained productive activity can flourish. In this respect good intentions are not, of course, sufficient in themselves. As part of such an agreement - as far as the economic aspects are concerned serious understandings will need to be reached in broad outline on the following matters:
(a) A macroeconomic framework A macroeconomic framework is needed within which the national goals for the next three to five years can be clearly formulated, priorities laid down and the effects of the various measures evaluated. In this respect it is important to realize that the problems cannot all be resolved at once.
(b) Reform of public finance The consistent reform of public finances is needed, aimed at eliminating the budget deficit by reducing current expenditure and boosting revenues, for example, by the improved collection of taxes. This in turn will create room for an expansion of investment. In future the government should strive to adhere to the golden rule of public finance whereby current expenditure should be financed out of taxation while borrowing should be permitted only for capital expenditure aimed at generating an adequate level of output and exports.
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29x
(c)
Sound
monetury
DEVELOPMENT
relationships
(e)
The restoration of sound monetary relationships by creaming off surplus liquidity is also critical. Here various options are in principle available, ranging from the implementation of a crash program consisting of a one-time devaluation of all financial assets to a more gradual approach in which the government sells certain of its assets. such as land. state enterprises and foreign exchange to be obtained from development aid, to the private sector at a realistic price. In the latter case the money equivalent obtained will need to be simultaneously destroyed. In this respect it is vitally important that the Central Bank no longer be used as a “cheap” money factory for financing government deficits. The Bank should be given independence in its operations, released from political caprice and permitted to evolve into a genuinely professional organization. The Bank should confine itself largely to the promotion of price stability by means of sound monetary management. Any domestic borrowing by the government should in future be conducted via a public money and capital market, thereby enabling the market mechanism to do its work. The amount that the government is permitted to raise in this market should be limited to the point that its debt commitments do not impose an excessive burden on the budget and that sufficient room is left for the private sector to raise capital at attractive rates of interest.
(d) Increasing
investment, exports
production
and
A strategy along three lines is needed to increase investment, production and exports. First, this policy will need to be directed at the maintenance, revitalization and expansion of the existing production capacity. Second, a number of new growth pillars will need to be created based on the available natural resources, consisting of large-scale. primarily export-oriented and, as far as possible, interrelated economic complexes. Third, viable small-scale projects need to be promoted in order to meet the population’s basic personal and communal needs, such as foodstuffs. water, clothing, shelter, medical care and education. The government should not undertake such production itself but should encourage small and large private entrepreneurs, both domestic and foreign, by creating a stable and attractive social and economic climate.
Cost and price policy
The formulation of a cost and price policy is needed to generate comparative advantages for production and exports. One important factor in this respect is to ensure that the increase in wages remains in line with labor productivity gains. With a view to restoring the competitiveness of the industrial sector and eliminating the black markets. there is no way around a significant formal devaluation of the currency. These goals should not be achieved by expanding the official regulations but by effective deregulation and by promoting the orderly operation of the market mechanism. (f) A social program A social program is necessary to support the weaker members in society. Here again various options are in principle available, such as guaranteeing the availability of a minimum package of primary necessities at an acceptable price or broadening and deepening the system of social security benefits. The basic premise should be to get away from the notion that the government needs to subsidize virtually the entire community. Instead, the government should confine itself to the provision of temporary support to people genuinely in need. The financing of the program must of necessity be soundly based. In addition the government should encourage the absorption into the production process of at least a proportion of these people by means of education and training. (g) Relations
with foreign
donors
Normalization and intensification of relations should occur with foreign donors. In this respect the essential precondition is for Suriname to provide clear evidence that it is committed to the consistent implementation of a sound program of reform and restructuring. But no matter what efforts are made, the task will be beyond Suriname’s resources alone. External capital as well as technical and economic know-how will be indispensable and can help appreciably to alleviate the pain of reform. In this respect ways will also have to be explored of tapping the skills and experience of the Surinamese community in the Netherlands. (h) Program
of reform
The reform and restructuring program must be entrusted to a small, resourceful team of mana-
SURINAME
gers. This would ensure that the day-to-day management of the economy is not unduly influenced by short-term considerations of all sorts of pressure groups and that greater priority could be given to a policy designed to provide the highest possible domestic economic return in the long term. Charting the main lines of the policy and supervising the implementation of that policy should, of course, remain in the hands of the democratically elected organs.
7. CONCLUSION In the introduction it was stressed that special attention needs to be given in small economies to controlling the domestic creation of money. The developments in Suriname demonstrate the validity of this view with almost startling clarity. In such countries apart from political and social stability financial stability must be ensured. This will create a climate of confidence, which is essential for a successful process of real economic growth. Money and monetary policy are therefore vitally important in building up prosperity in small, open developing countries. Although monetary discipline is an absolutely essential condition for sound development, in itself it is by no means a panacea. Economic growth can only be achieved by means of a coherent and synchronized package of varied measures influencing both the supply of and the demand for goods and services. From the above discussion it is also abundantly clear that, of the various policy instruments at the government’s disposal, the management of public finance is of decisive importance for financial stability. The pressure exerted by all sorts of interest groups means that there is a continual temptation for the authorities to increase the level of current expenditure. In a small economy, however, it rapidly becomes clear that
299
giving in to this temptation on a large scale is counterproductive and that a high price has to be paid for the neglect of financial stability. Unsound financial management cannot but exacerbate existing physical problems and cause serious damage, which can only be corrected by undergoing a painful process of reform and restructuring. Here again prevention is better than cure. A great deal of misery can undoubtedly be prevented if continual discipline is exercised to limit the growth in the domestic money supply and to gear the money supply to the optimal real economic growth prospects in the longer term. Unfortunately, this fundamental and widely accepted monetary rule of thumb is all too often conveniently disregarded so that a particular group can make quick gains. The rule of thumb is, however, based on an ineluctable economic law which will, sooner or later, assert itself, especially in a small economy. Against this background and in view of the fundamental relevance of price stability for a healthy social and political climate, there have, rightly, been increasing calls for central banks to be given autonomy. This call has been particularly evident in recent times among those advocating a European Economic and Monetary Union and the restructuring of the financial apparatus in Eastern Europe. According to this school of thought the sole object of a central bank should be to promote monetary stability at the highest possible level for general economic activity. With this in mind a central bank must indicate the overall monetary room for maneuver within which the financial dispositions of the economic agents should take place. This will ensure that the pursuit of other goals does not place such demands on money creation as to undermine price stability. The achievement of these aims, however laudable in themselves, by means of debasement of the currency is bought at an excessive price and can never be sustained.
NOTES 1.
See Caram
(1989).
2.
The
given
figures
from publications and the Central in the text have
been
of the Suriname Ministry Bank of Surinam.
of Finance
derived
REFERENCES Caram, A. R., “Guidelines for monetary policy in small developing countries” in J. Kaminarides, L. Briguglio and H. N. Hoogcndonk (Eds.), The
Economic Development of Small Countries The Netherlands: Eburon, 1989).
(Delft,