While there are compelling arguments against opening the capital account to the volatilities of global finance, there are institutional frameworks and regulations that can be crafted and certain appropriate segments of the account that can be liberalized to alleviate such distortions.
Another useful approach is the assessment of our commendable macroeconomic standards vis-à-vis passive microeconomic interventions by the government. We’ve managed to keep fiscal deficits within the internationally accepted thresholds, our debt is of very high standards, recurrent expenditures are financed entirely through domestic revenues, inflation is within acceptable bounds and unemployment is relatively manageable. But on the microeconomic front, government intervention has been incoherent and businesses still face bottlenecks in starting up and operating. Hence, there is a clear presence of supply side constraints which have invariably inhibited us from harnessing our full productive potential. However, the implementation of the Economic Development Policy should address a number of these concerns. Countless attacks have been launched on the government’s fiscal operations giving the impression that they originated from extremist austerity driven critics. It is difficult to believe that a developing country that is constrained by its terrain and scattered settlements would come under criticism for delivering much needed infrastructure. Even in the realm of austerity we must acknowledge that Bhutan’s debt is of very sustainable quality and fiscal deficit has always remained below GDP growth rates. Critics may argue that there are areas of government spending that could be rationalized but in my estimation this would result in savings accruals of a maximum of Ngultrum 500 million whereas we are dealing with a current account deficit of 15bn. So government spending is not the major factor.
A recent study by the BCCI attempted to plot government spending against private credit. Any amateur economist would be able to identify the technical flaws of deriving relationships from such simplistic methods. One of the deficiencies is the issue of omitted variable bias. With private credit being determined by many other variables the simple filtering of government spending as being the major contributing factor amounts to intellectual dishonesty. Even if government spending did genuinely lead to credit expansion, due to the private sector attempting to capitalize on government construction activities, laying the blame on the government is dishonorable. When receiving official development assistance, be it unconditional or project tied, the detailed cost breakdown of every project is generated. For instance transportation costs are also factored in project expenditures so the government could resort to the alternative of hiring Indian services but in the name of promoting the private sector the opportunity was extended to private contractors who availed colossal loans to purchase heavy duty vehicles and machinery. Laying the blame on the government for inducing the private sector to take on credit is an attempt to vindicate themselves, even Wall Street bankers used similar shades of arguments.
The government is not entirely vindicated but it definitely wasn’t the driving factor. There were areas where the government could have intervened to promote productive capacities through prioritized lending, incentivizing savings, taxing ostentatious consumption and restraining harmful speculations in the real estate sector, but it wasn’t directly responsible for the crunch. To