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There is the widely held view that the management of a country is quite different from managing a home or a business.  For one thing, a country’s management is multi-faceted for it involves managing the behaviour of individuals from different points of view: economic, political, social, environmental, among others.  

On the other hand, the managing of a business relates to directing the behaviour of the workers to ensure the financial stability of the enterprise.  Social, political and environmental issues are not always important in the management of a small business, though environmental issues become important in large businesses.

In that regard, economists have developed different indicators to determine whether a business is being properly managed and these indicators are different from those developed to determine if a country is being well managed.  In the case of a business, the indicators can be largely regarded as financial as they relate to the inflow and outflow of money.  Managing a business is really microeconomic management and it falls within a special branch in economic theory referred to as Microeconomics.  In the case of a country the indicators are both financial and economic; and the term macroeconomic management is used in keeping with a special branch of economic theory referred to as Macroeconomics.     

What therefore is meant by Macroeconomic Management?  How does one tell whether a country is doing well or not? As stated earlier, Economists have developed a number of indicators that explain how an economy works and also to tell whether a country is doing good or bad.  These indicators are called macroeconomic indicators because they explain the functioning of the whole economy rather than that of a particular sector or business.  Macroeconomic Management thus refers to the monitoring of the behaviour of these macroeconomic indicators and taking the corrective actions on time to ensure that they behave as desired. 

In this article we will examine two of these indicators to determine whether the economy was being properly managed during the period 1998-2006.  Other indicators used to manage an economy include the balance of payments, the money supply and price level.  These will be the subject of our discussion in another article.

The Gross Domestic Product (GDP):

This is the sum of the volume of output a country produces in a specified period, usually, one year.  Because output is heterogeneous i.e. we produce many different items (beer, nutmeg, education) we express them in one common denominator by using their value.  This is done by multiplying their quantity (volume) by their price and we arrive at a value of the output. 

It must be stated that economists consider the GDP is the most important macroeconomic indicator for two main reasons.  One is that it tells the effort a people is making on their own through their work to improve their lives. So that when the GDP is rising, it means that the people are working harder and better, and vice versa.  Secondly, all other macroeconomic indicators are expressed and measured in terms of GDP. 

Every government wants GDP to be rising each year, so that when it is falling, it suggests poor macroeconomic management.  Consider the following numbers relating to GDP growth rate for the period 1998-2006.

Source: Ministry of Finance

It can be seen from the table above that the people of Grenada worked harder and better during 1998-2000, but in 2001, GDP fell because the events of September 11, 2001 in the USA affected their efforts negatively.  Nevertheless, the people made a great effort to improve their lives afterwards up until 2004 when Hurricane Ivan passed and destroyed the economy.  But even Ivan could not have dampened their high working spirit for shortly afterwards they were able to improve the lives once again as GDP grew in 2005 and 2006. 

Obviously, managing the economy in those times meant taking the appropriate fiscal and economic measures that would put the people back to work to produce the goods and services to satisfy their needs. The period in question therefore represents one of good macroeconomic management. 

The Fiscal Balance:  

This is another indicator used by Economists to determine how well a country is being managed.  The fiscal balance is the difference between government revenues and expenditures.  A good fiscal performance is one in which government revenue is above government expenditure.  But there are different revenues and different expenditures.  There are current revenues and current expenditures which respectively refer to revenue collected daily (e.g. taxes, licenses, etc) and expenditure incurred daily (e.g. wages and salaries, interest payments, etc).  The difference between current revenue and current expenditure is the current account balance, and a good indicator of fiscal performance is a current account surplus. 

Again, we can examine the numbers in the following table to determine if there was good fiscal management during a similar period.

Source: Ministry of Finance

Note: CR: Current revenue; CE: current expenditure; CAB: Current account balance

As the table above indicates, government incurred current account surpluses each year, except 2004 (when Hurricane passed); reflecting good fiscal management during the period stated.

But the current account balance is not the only indicator of fiscal management.  Another indicator is the overall deficit which explains the extent to which the government has incurred debt to meet the capital expenditure needs of the country.  In the economic literature an overall deficit not exceeding 3% of the country’s GDP is acceptable. 

Again in examining the following table it can be seen that in the main government was close to keeping the overall deficit in line with the accepted benchmark, with the exception of 2002 when the deficit grew sharply.  This increase reflected the need to put the economy on a growth path once more following the events of September 2001.  A similar explanation is provided for the high overall deficit in 2006.

Source: Ministry of Finance

Note: OD: Overall deficit as a percentage of GDP

Managing an economy is one of the serious challenges facing any government and the rating of any government depends on well it manages the economy which in essence means continuously bringing benefit to the people in the midst of political stability.

Today when we listen to CNN or any other American or British television stations, we hear that polls are regularly being conducted on how the government is doing on the economic front, on the foreign policy front and on the political front.  And in many cases the return of the government to power depends on how well it is doing on the economic front with the others being relatively secondary. In fact we would hear that once a government is bringing economic benefits to its people, i.e. once the domestic economy is doing well, the people will normally give greater support to its foreign or military policies. 

In a sense, the same applies to us here in Grenada. It can be stated that there is no doubt that the NNP government has to be given praise for the manner in which it managed the economy from 1995 and especially after Hurricanes and Emily.  The victory in three successive elections is a demonstration of the people’s support for the government’s economic policy.  Here are the facts.  

From 1996 the economy recorded positive growth annually with the exception of 2001 and 2004 when external problems and natural disasters impacted negatively on the economy.  In fact during the period 1995 – 2000 Grenada would have recorded its highest growth rate ever averaging 6 per cent.  And this is real growth, meaning an increase in output of goods and services as against a mere increase in price.  What’s more is that during that period prices remain relatively low averaging just about three per cent, which means that people did not just have more to consume but they were able to do so at prices that were not beyond their pockets.       

Of course the event of September 11^th 2001 would have accounted for the poor performance in that year but the following year the government was able to put measures in place to turn the economy around.  And in 2002 there were signs of recovery with real growth of 1.82 per cent.  These signs of recovery continued in 2003 with real growth of 7.11 per cent reflecting soundness in macroeconomic policies that turned things around in such short space of time.

We are all familiar with events in 2004 that led to negative real growth of 5.71 per cent but then again in 2005 we see an increase in economic activity of 11.03 per cent. And this took place notwithstanding the passage of Hurricane Emily of July of that year which destroyed the economy by 12.5 per cent of its GDP.

But what does these high growth meant for the people of Grenada.  In essence it meant more employment for our people as more jobs were created in the agricultural, tourism and manufacturing sectors before Ivan and in the construction sector especially after Ivan.  Unemployment level in the country fell especially before Ivan.  Once people are working, then they will earn an income with which they can buy goods and services for their consumption.  This means that there would be less poor people in our country and less crime and violence.  In short, there was relative peace and calm and freedom to associate without fear or favour.  Such are the benefits of sound macroeconomic management.

NNP Perspective week ending July 25th, 2009

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