                                          PRELIMINARY
                                          VERSION, 12 June 1991
 
 
                A MACRO MODEL FOR A SMALL ECONOMY
 
 
              An empirical macro model for analysis
                of the economy of a small country
               and simulation of development policy
 
 
                     dr. Marein van Schaaijk
 
 
                               1991
 
              Copyright: c  Marein van Schaaijk 1991
 
 
 Published by Stuseco, C.Jolstraat 50, NL-2584 ET The Hague, The
                           Netherlands
 
 
           translation part one from Dutch to English:
         Paul O'Donnell, Rue Henri Caron 4, 1070 Brussels
 
 
 
 
                             CONTENTS
 
     Background                                        6
 
     A Macro Model of a Micro Economy
     -Outline                                          7
     -Purpose                                          9
     -Concepts                                        10
     -Data                                            21
 
See file Suriname2.Txt in this disk for:
 
     -Construction of the model                       24
     -Simulation                                      32
     -Abstract                                        43
 
 
 
See file MICLAND.TXT in disk 1 for:
 
     Microland                                        46
     -Abstract Microland                              47
     -The island Microland                            48
     -Seven steps to a macro model                    49
     -The book-keeping programme MACROABC             52
     -Package Microland                               56
     -Notes to Microland                              57
     -How to start a demonstration                    58
 
See file MALTA.TXT in disk 1 for:
 
     Towards an economic model for Malta
     -Statistical sources for Malta                   59
     -Main behavioural equations for Malta            60
     -Historical simulations for Malta                68
     -Further analysis of the Maltese economy         69
 
     Literature                                       70
 
     The model equations                              78
 
     Alphabetic list of variables                     87
 
     How to get                                       88
 
 
 
                            BACKGROUND
 
 In daily  life dr.  M.van Schaaijk  is the  head of  the division
'Income  and  Prices'  of  the  Central  Planning  Office  of  the
Netherlands. That  division consists  of  four economists  and two
assistent-economists, and has  nothing to  do with  the subject of
this paper. However,  two years ago  he decided to  start up again
what he had been doing in the beginning of the seventies.
  At the beginning  of the  seventies he  had been  working on the
construction of economic statistics in  Suriname. It was his first
job. When he was ready  with the construction of those stastistics
and -  most important  of  all -  the  training of  his Surinamese
counterparts, he  thought about  the construction  of an empirical
macro-economic model  for  Suriname.  However,  already  after two
weeks he had  to leave that  idea, because the length  of the time
series was  yet  to short,  and  there  existed no  theory  how to
modeling the investmentequation for a small open economy.
  In 1989 he went back to his old  dream and he had a lot of luck.
His Surinamese counterparts appeared to have been able to continue
the work on the economic statistics,  so in 1989 we had timeseries
from the  beginning  of the  seventies  up  to the  middle  of the
eighties at  our  disposal.  Besides that  there  exists  a second
important difference compared with 1976: we have now very handsome
personal computers at our disposal.  Their power is more than that
of the mainframes of fifteen  years ago, but more importantly they
are very easy to handle thanks to the modern software. This modern
computertechnology makes it possible that one person can easily do
whole the job. In the  third place he had the  luck to get an idea
how to find a solution for the investment equation.
  By these lucky  combinations he succeeded  in the realisation of
my old dream, the construction of an empirical macro model for the
analysis of the  small economy  of Suriname and  the simulation of
development strategies. See  in the  disk belonging  by this paper
(available at the conference) for an abstract.
  When this Suriname  model had  been finished,  he realised that,
looking for  a way  for the  investment equation  for Suriname, we
actually also  found a  solution for  a general  problem for small
developing countries.
  Microland is  a   somewhat generalised  version of  our Suriname
model, a  step  towards a  general  basic macroeconomic  model for
small open economies.
  On the occasion  of the International  Conference on Islands and
Small States, Malta, May 23-25 1991 we used Microland to construct
a preliminary version of a model for the Maltese Islands.
 
 
     Outline of: "A Macro Model of a Micro Economy"
 
           An empirical macro model for the analysis of
                  the micro economy of Suriname,
               and simulation of development policy
 
     When  attempting to construct  a model of  a very small,
     open economy, one real problem arises, i.e. that the law
     of the large numbers does not work in the export sector.
     In Suriname, almost 90% of the total value of exports is
     produced  by only eleven  products. Freak incidents then
     seem  to dominate  change in macro  export volume, macro
     export  price ant  total investment,  which obscures the
     underlying economic behaviour.
 
     In  this  study,  a  solution  has  been  found  for that
     problem,  i.e. by  the construction  of a   micro block,
     with  price, output and  investment given seperately for
     each of the eleven export products.
 
     In fact, it boils down to the incorporation of knowledge
     of  business economics into this  macro model. The macro
     approach  makes  it possible  not  omly to  construct an
     empirical  macro model  for a  small, open  economy, but
     also  provides the possibility of bridging the gap which
     seperates business and macro economics. In this way, the
     interaction  can be studied between  costs and prices at
     the  micro level, and  economic growth and  wages at the
     macro level.
 
                based on observable relationships
 
     Because  there is a specific  data set for Suriname (see
     below)  and the  country has  experienced very divergent
     patterns  of  economic  development  in  its  past,  the
     equations of the model could be validated.
 
     In  addition to this, the model was tested in historical
     simulations:  the  period  of growth  from  1954-60; the
     1962-67  period  with controls  on the  investment push;
     from  1968-75 with modest growt;  the years 1976-82 when
     "money  was no  object"; the collapse  of 1983-87. These
     historical simulations form an analysis of the country's
     economic development.
     A  forecast is also made for the period 1988-2001. Based
     on a short overview of recent literature on the subject,
     simulations  were  made  of  various  policy  variables.
     Furthermore,  the model is used to merge together in one
     re-structuring  package the many suggestions put forward
     from  various  quarters, to  re-organize the  economy of
     Suriname. Due to the micro-macro character of the model,
     the  role of prices  and black market  are analysed. The
     simulation  of a re-structuring package is uesed in this
     book  only  to  illustrate the  model,  but nevertheless
     demonstrates   that  with  such   a  package,  returning
     Suriname's  economy to health would present considerable
     difficulties, but it would not be impossible in economic
     terms.
 
                       Micro macro dataset
 
     This  contains  some six  hundred  time series  over the
     years    1954   to   1987   inclusive,   together   with
     comprehensive  information over the  way the time series
     were established. In this way, one can take into account
     the  quality  of the  data, which  for various  years is
     quite  different  for  certain  variables.  A consistent
     framework  is important for  analysis. For this purpose,
     the   national   accounting   programme   MACROABC   was
     developed.   For  the  years  1854-87  it  provides  the
     sectoral   accounts,  the  national  accounts,  also  in
     constant prices, monetary statistics, tha balance of the
     labour  market,  and  financial  variables.  There  is a
     wealth  of primary information available about Suriname,
     and  thanks to the Micro  macro dataset and Macroabc, it
     is now well structured and accessible.
     Apart  from the macro time  series, the Micro macro data
     set  contains a lot of information at the meso and micro
     level,  such  as data  on prices,  manufacturing output,
     export values, planned acreage for certain products.
 
                         Set of diskettes
 
     All  data in the Micromacrodataset  is also available on
     diskette, as is the national accounting program MACROABC
     (which   is  used  in  conjunction  with  a  spreadsheet
     program).   Macroabc  can  also   be  useful  for  other
     countries. In the meantime, it has already been used for
     Suriname,    Microland,   the    Netherlands   Antilles,
     Czechoslovakia and Malta.
 
 
PURPOSE
 
The issue studied is:
 
The construction  of  an empirical  macro  model for  analysis and
simulation  of  the  small-scale  ("micro")  economy  of Suriname,
containing a  micro-block for  an entrepreneurial  approach to the
productive part of the  economy at the  level of production, which
model  can  subsequently  be   used  in  simulations  of  possible
development strategies.
 
This study consists of four parts.   The first part deals with the
development of  concepts.  It  concerns mainly  the  scale  of the
economy, the  micro-economic  approach to  the  productive sector,
monetary theory,  the contrast  in  usefulness for  forecasting of
wage equations  and  equations  for other  behaviour.    The micro
viewpoint is crucial to this study for two reasons.
 
In the first place,  by taking this route,  the influence of costs
and prices on economic development can be analyzed better.  In the
second place, because  in a small,  very open economy,  the law of
large numbers does not work in the export sector, which means that
an important  part of  the  economy in  small countries  cannot be
properly modelled at  a macro  level.   In this  study, it appears
that a micro approach offers a solution.
The second part of this study  concerns the collection of the data
and the production of the statistics, in order to fill gaps in the
material.  This statistical work  is dealt with comprehensively in
the Micro macro data set which is published seperatly.
 
The third  part of  this study,  concerns the  construction of the
macro-micro model,  MACMIC.    The  equations  of  this  model are
firstly  (in  part,  simultaneously)  estimated  over  the  period
1955-87.    Then  the  model   is  tested  using  five  historical
simulations.
 
The fourth part  of this  study contains  simulations and analyses
with the  model.   The historical  simulations with  the model are
used  for  the  analysis  of  the  socio-economic  development  of
Suriname in  the years  1955-87.  Finally, the  model is  used for
partial simulations  in  various  partial  periods,  including the
period  1988-2001,  and  the  simulation  of  possible development
strategies.
For the programs and the  instructions for the model, please refer
to the micro macro data set and the set of diskettes.
 
 
CONCEPTS
 
A micro view in a macro context
 
In the past  decade, there  has been  a reassessment  of the price
mechanism and entrepreneurial behaviour.   In developed countries,
this has  led  to a  limitation  of  the scope  of  the government
machine.  In East European countries, this change in thinking that
had even more consequences for  the economic order.  In developing
countries,  adjustment  and  re-structuring  programmes  are being
considered.   These  are  attempts to  bring  excessive government
intervention back  under  control.    Hopes  are  being  pinned on
improvements in  the economy  being  brought about  through giving
more  freedom  to  individual  initiative,  and  re-instatement or
introduction of the regulatory function of the market.
 
This re-assessment also  took place  in the  science of economics.
This has led  to greater  attention being  given to micro-economic
behaviour by  manufacturers in  a  macro-economic context:  how do
macro-economic variables  such  as  pay rises  and  exchange rates
affect investment at a micro  level, and what are the consequences
of this behaviour by business  for economic growth and employment?
For  this  reason,  in   discussions  about  the  construction  of
macro-economic models,  a  micro viewpoint  has  been high  on the
agenda of  researchers  for  some years.  (i.a.  de  Koning, 1984;
Driehuis e.a. 1988; Mankiw, 1988; Stern, 1989).  An important step
was already taken some  years ago when Den  Hartog and Tjan (1974)
introduced the "vintage"  approach into the  CPB (Central Planning
Bureau) models.  This approach,  in which more attention was given
than in the past  to actual behaviour by  business, inspired us to
seek a micro-economic approach to investment behaviour.  The CPB's
desire to  have  a  more  micro-economic  oriented  empiricism was
already recorded at a much  earlier date (Theil, early 1950s), but
too little data was available. The  number of products is so great
that an empirical micro approach to the behaviour of manufacturers
seems impracticable.
 
The  re-assessment  of   behaviour  by  business   and  of  market
mechanisms is  particularly  important  in the  case  of Suriname.
Precisely because that  country had  two major  sources of foreign
exchange and government funds (bauxite and development aid), there
seemed  to   be  no   bounds  to   the  expansion   of  government
intervention.   In  the mid-seventies,  there  was an  increase in
these revenues, due  to the appearance  of the IBA  (the "OPEC" of
the  bauxite-producing  countries)  and  a  quadrupling  of annual
development aid.
The combination of a  collapse in bauxite  prices at the beginning
of the  1980s, the  suspension of  development aid  after December
1982,   and   an   inadequate   policy   response   (import  quota
restrictions), exposed the  fundamental weaknesses  in the economy
of Suriname.  The  suspicion exists that  this was the consequence
of lack of interest  in the behaviour by  business, and neglect of
the market mechanism  in the  development strategy.   That sort of
assertion can only be  analyzed in a consistent, empirically-based
framework.  Even in the  formulation of development policy, where,
in addition  to actions  by government,  behaviour by  business is
also explicitly included, and the necessary consideration is given
to the operation  of markets  (including the  determination of the
exchange rate),  an empirical  macro-economic model  is necessary,
and this  needs  to  contain  a  micro  block  concerning business
behaviour.   A  micro  approach  is  not  only  desirable  for the
analysis, but also because a macro approach is not really feasible
for the export sector.  As Suriname is a small-scale and therefore
limited economy (around 90% of exports are accounted for by eleven
products), the law of  large numbers does not  apply in the export
sector.
 
Apart from this, we usually  talk about Suriname's "micro" economy
because the country is  small (four hundred thousand inhabitants).
This should not lead  to confusion about  the nature of Suriname's
economy.  It is  macro, because the country  has its own currency,
rate of exchange, import duties,  pay negotiation process, and its
own institutions.
 
No macro-economic model exists for Suriname.  For the construction
of the  macro  part  of  a model,  it  matters  little  whether it
concerns a  large or  a small  country.   For  example, it  is not
important whether the  amounts appear in  millions of Suriname, or
in billions of  Dutch guilders.   For that  part of  the model, we
cannot take advantage of  the small scale of  Suriname, but we can
use  the  internationally   available  theoretical  knowledge  and
practical expertise.
 
Cost/price ratios
 
An important  step  was  already  taken  towards  a micro-economic
viewpoint a long time ago,  with the introduction of the "vintage"
concept into empirical macro models.   This takes into account the
phenomenon  where   new  capital   goods  (machines,  agricultural
infrastructure) can  be very  different  from those  previously in
use.  The  differences arise from  technological developments, and
the changes  which  occur  over  time  in  the  price relationship
between labour, capital and imported  goods.  Changes in costs can
lead to certain vintages  no longer being  viable, and their being
rejected.   In the  context of  this study,  the possibilities for
choices which arise in the installation of new vintages in respect
of  differences  in  the   labour-capital  relationship  are  less
important.  In  a small  developing country like  Suriname, one is
always referring to the  sort of capital goods  which are for sale
at a  given period,  even if  they are  not totally suited  to the
prevailing circumstances  in Suriname.   As  a starting  point, we
assume the basic idea of the  vintage approach: it is necessary to
make a  distinction between  the decision  to acquire  new capital
goods and the decision to retain  or reject the existing ones.  If
one  looks  at  the  economy  of  Suriname  from  this theoretical
background, then a number of concrete examples can be seen.
 
The machinery of the Marinburg  sugar plantation was a miracle of
innovation at  the time  of its  installation at  the turn  of the
century.  This  modernization led  to high  productivity and sugar
yields.   Technological  development  has  progressed  since then,
leading to a  relative decline in  the world sugar price.   Due to
the falls in  the market  price, sugar  could only  continue to be
produced at Marinburg after  the Second World  War by paying very
low wages,  and  during the  seventies,  even with  that  low wage
level,  the  level  of  variable  costs  was  still  too  high  in
comparison with the market price, so  that it was no longer viable
to continue  production.    This problematic  also  affected other
products, such as coffee,  cocoa and coconuts.   No investment was
made while there was not a technology which could raise production
to the point where not only  the variable costs but also the fixed
costs (depreciation on investment)  could be paid  back.  The life
of  the  plantation   was  extended   artificially  by  government
subsidies and  the  employment  of  immigrant  labour,  for "slave
labour" wages which young people in Suriname declined to accept in
the way their parents  had done.  The  theory of the family living
standard  function  offers  an   explanation  for  this  behaviour
(Stiglitz, 1989).  A  government campaign "kot'  shing a no shing"
(don't be  ashamed about  cutting sugar  cane) could  not overcome
this.  At  Marinburg, (at least  at the start of  this study) the
machinery from the turn  of the century was  still more or less in
operation.
 
Another case is  that of  rice cultivation.   In the  past, it was
grown  by  small  farmers  using  old-fashioned  methods,  and was
modernized in the 1950s and  1960s.  Technological innovation made
mechanized  agriculture   possible.     With   government  support
(development funds were used to carry out infrastructure projects)
the market  price  was  greater  than the  sum  of  the  fixed and
variable costs  in modern  rice growing.  Investment became viable
and the rice acreage rose.
 
Inspired by the  vintage theory  (Den Hartog and  Tjan, 1974), the
experience in  Suriname, the  Tanzanian model  (Lipumba, 1988) and
the work  of Tobin  (1977) and  Precious (1987),  the behaviour of
business concerning  production  and investment  decisions  can be
formalized as follows.  Three situations can be discerned.
 
Where the market price is equal to or greater than the some of the
fixed  and  variable  costs  per  unit  of  output,  production is
increased, because investment is viable.
If the price  to the  producer lies  below a  reference level, the
fixed costs are  not paid  back.   Expansion of  production is not
viable, but  production is  nevertheless  continued.   Cutbacks in
production only occur when the price to the producer is lower than
the variable costs per unit of output.
 
The price/cost curve  (price to  the producer divided  by the cost
price per unit  of output) is  therefore of decisive significance.
The production function,  the relationship  between production and
average cost and is extremely simple, although not linear, because
there are two turning points.  One of these lies where the selling
price is equal to the sum of the fixed and variable costs per unit
of output.  Above this level, production is viable, and below this
point,  production  stagnates  or  is   cut  back.    Cutbacks  in
production occur below the second  turning point, when the selling
price is equal to the variable costs per unit of output.
 
Every manufacturer has  information about  the production function
for his product.  The  production function varies from one product
to another.  This function is  defined at a particular time by the
presence of a particular vintage of capital goods installed in the
past; the present state of technology;   and the prices of labour,
capital and  intermediate  input.   The  manufacturer  can  make a
distinction between  the  cost/price  ratios  of  existing capital
goods and new investments.   When doing  this, the manufacturer is
confronted with all kinds of problems of assessment, and has to be
guided by  his  own expectations  about  future costs  and prices.
With the proviso that  accidents can happen, it  is likely  that -
at the risk of going  out of business if he  is wrong - he will be
well informed  about  the  production  functions  and  the turning
points in the price/cost  curves.  From the  macro viewpoint it is
important to  indicate that  the relationships  between production
and average cost can vary  enormously from one product to another,
and can  also change  over the  course  of time.   There  is great
variation in products,  and the various  cost components also vary
from year  to year.   All  this information  becomes known  to the
manufacturers of the various products over the years.  This wealth
of  knowledge  at   the  micro-level  tends   to  become  lost  or
inaccessible.  Even if all cost calculations (production functions
and price/cost curves) were available to  us, we would not be able
to see  the  wood  for  the  trees, due  to  the  immense  mass of
information.  Any analysis is  therefore only possible once we are
able to formalize  the outline structure,  even if the information
is somewhat restricted.
 
This formalization  takes place  by  defining boundaries  in three
ways:  concerning the number of separate variables, concerning the
length of  the  period  analyzed,  and  concerning  the  number of
products which have to be examined separately at the micro level.
 
By limiting  the number  of variables  in the  micro-block, we can
draw support from  the idea  that our  purpose is  to consider the
behaviour  of  manufacturers  from  a  macro  viewpoint.    In the
analysis of the above-mentioned behaviour it is mainly a matter of
demonstrating how that behaviour  is influenced by macro variables
such as pay and import prices.
The number  of individual  years concerns  the period  1954-87.  A
shorter period would  be undesirable  if a  reliable assessment of
the macro-block is to  be obtained.  The  length of this period is
sufficient to  gain  a  view  of  the  rise  and  fall  of various
products;
The restriction  of  the  number  of  different  products requires
selection criteria.    Before  deciding which  products  should be
distinguished at a micro  level, it is  desirable to examine which
areas of  economic  activity could  be  modelled without  too much
difficulty at a macro  level, and those where  analysis at a micro
level is essential.
 
In the protected part  of the economy,  a mechanism operates which
is different from that in the part of the economy which is subject
to intense competition from abroad.   In the protected sectors, it
can be anticipated  that the  variables in  the numerator (selling
price index)  and  the  denominator (cost  price  indices)  of the
price/cost curves will change in a similar way.  In the absence of
foreign competition, there  is the possibility  of passing on cost
increases into  price increases,  so that  businesses do  not make
losses.  In  that part  of the  economy, it  is not  the change in
price/cost ratio, but rather change in demand which is decisive in
determining the level of  output.  Firstly,  we shall examine this
dichotomy.  Later,  it will  be considered,  for that  part of the
economy where price/cost  ratios are  dominant, how  to select the
products for inclusion in the micro-block.
Dichotomy
 
Concerning this  dichotomy,  we could  develop  various approaches
which would  ultimately  lead to  the  same division  of companies
according to sectors.
 
The semi-input/output  analysis (Tinbergen  and Bos,  1962; Rasul,
1964; Kuyvenhoven, 1978)  distinguishes between the "international
sector" and  the  "national  sector".    The  international sector
produces  goods  which   can  be  traded   internationally.    The
intermediate goods which are used by the international sector come
partly from the domestic market, but  as these are goods which can
be  traded  internationally,  they  should  also  be  able  to  be
imported.   In  project planning,  the  input-output relationships
which  exist   ex   post  between   companies   which  manufacture
international  goods   can   be   left   aside;   thus   the  name
semi-input/output analysis.
 
The difference between the  international and national sectors can
be  considered  from  the  price-determination  angle,  instead of
starting with  input-output relationships.   This  distinction was
made in the  early 'sixties  in Norway (Aukrust,  1977) and there,
reference was made to the "exposed" versus the "sheltered" sector.
Firms  in  the  exposed  sector  are  subject  to  intense foreign
competition, while firms  in the sheltered  sector are not subject
to foreign competition at all, or only to a limited extent.  Firms
in the sheltered sector can pass  on cost increases in the form of
price  increases,   without   losing  market   share   to  foreign
competitors.   Due to  mutual competition,  it can  be anticipated
that no  abnormal profits  will  be made,  so that  the price/cost
ratio remains at around 1.
 
In the exposed sector,  changes in costs are  difficult to pass on
in the form of  price increases, without  suffering loss of market
share.  Foreign competitors may be experiencing different patterns
of cost changes.   A small country like  Suriname which only has a
small share of the  world market for  its various export products,
where mass-produced  articles  are  concerned,  has  little  or no
possibility of  charging any  other  price than  the price  on the
world  market.    Empirical  research  in  this  study  shows that
Suriname's  exporters  can   be  classed   as  price-takers:  with
temporary exceptions, the export price from Suriname is restricted
by the world market for the product.
 
Where there is a discrepancy between the trend of the world market
price and  the change  in the  price/cost ratio  for this product,
this leads to a different price/cost ratio, which implies, growth,
stagnation, or  cutbacks in  output.  The distinction  between the
international or exposed sector on  the one hand, and the national
or sheltered sector on  the other, also appears  to have been made
in the  economy of  Suriname  (SPS, 1963),  but under  a different
name: "leading" versus  "following".  This  was described (in SPS,
1963) as follows:  "leading firms  exhibit a  development which is
independent of  living standards  - they  themselves define living
standards - whereas  the following firms  follow changes in living
standards".   Later,  the  distinction between  basic  and derived
sectors was described in  development planning in Suriname (Essed,
1973: SPS,  1975).   This  is a  classification of  the industrial
sectors which  displays many  similarities with  the split between
leading and following  firms.   This means that  a sector includes
supplier firms  from  other  classifications of  firms.    In this
study, we refer to  leading (international, exposed) and following
(national, sheltered) firms.
 
Within the leading sector, a further breakdown can be made between
the export sector, and that group  of firms which produces for the
domestic market  in  Suriname,  but which  is  subject  to foreign
competition.  For  practical reasons  (lack of data,  there are so
many products  that  modelling on  the  macro level  would  be too
complex) we are  unable to  separate out  the latter  group and we
include them in the following sector.  In practice, we are working
with a distinction between the export  sector on the one hand, and
the domestic sector producing for the domestic market on the other
hand, both those parts  which are and those  which are not subject
to foreign competition.   The scale of  production in the domestic
sector in  the macro  block  was derived  from domestic  sales (by
definition consumption and investment).  In that regard, the share
of direct and  indirect imports  for the  requirements of domestic
sales is  also  important.   The  change  in imports  is  not only
determined by  change  in  domestic demand.    Differences between
domestic and  import  prices should  also  be taken  into account.
Where there  is a  divergence  between the  patterns of  change in
these two prices, there  is substitution between home-produced and
imported products.   Thus, in  the macro component  of this model,
the  influence  of  relative  prices  should  also  be  taken into
account.  In  the export  sector, which  is modelled  at the micro
level, it  is easier  to take  into account  the role  of relative
prices.
 
 
Monetary aspects
 
In the monetary field,  a debate has  raged between monetarists on
the one hand,  and structuralists on  the other hand (Keynesians).
Broadly speaking, the  monetarists regard  the money  supply as an
exogenous factor, which determines the  volume of output and price
levels, while the structuralists view changes in prices as arising
mainly  from  conflicting  claims  from  employers,  employees and
government, through which  the money supply  is determined through
demand.   Following  on from  the  work of  others  (Harris, 1981;
Johnson, 1987; Ikani,  1987) we take  into account the possibility
that both tendencies contain some  truth, and that empiricism will
decide in  the case  of Suriname.     It is  not our  intention to
pronounce  judgement  on  the  correctness  of  one  of  these two
tendencies, but to  combine the  useful elements  of both theories
for the  benefit of  our model.   The  Ikani study  is interesting
here, because it  deals with  inflation in Iran,  a country which,
like Suriname, has abundant sources  of foreign exchange (in Iran,
from oil) and also ran  into revolutionary troubles.  We estimated
a price equation  based on Ikani  (1987), in which  the changes in
consumer prices were explained by changes in the money supply, and
real growth of  output (the  two monetarist variables)  and by the
cost factors of  wage costs  per unit  of output  and input prices
(the two structuralist  variables).  It  appears that in Suriname,
both approaches contribute to an explanation of inflation.
 
Micro foundations for the consumption function.
 
Particular attention is  paid to the  consumption function, due to
its contrast with wage equations, which will be discussed later.
 
Before any  equation  can be  produced,  choices must  be  made in
respect of  the  specification  of the  equation.    Assuming that
economic behaviour  is  universal,  one can  benefit  from studies
carried out in other countries when drawing up this specification.
However, wherever  possible, it  is  desirable that  this equation
should be  constructed  as far  as  possible  on the  basis  of an
analysis of economic behaviour in Suriname.
Using a micro data set from  1969, the consumption function can be
built up  at a  micro level.   This  refers to  the data  from the
Budget Survey which was  carried out on 592  households.  In these
cases, the head of  household was in  employment.  The consumption
ratio is known for each family.  The breakdown appears normal (see
figure 5.4.2.).  The  mean consumption ratio  seems to be situated
just below 1.  Although various households may have very different
consumption ratios in other years,  the law of large numbers leads
us to  expect that  there will  still  be a  tendency to  the same
average  consumption.    A   macro  consumption  function  can  be
specified, where  the  relationship  is  shown  between  change in
consumption on the one hand, and  change in income, split into pay
and income from profits, on the other hand.
 
 
Wage determination processes.
 
To understand properly the operation  of the economy in developing
countries, it  is  necessary  to examine  the  role  of structures
(Janssen, 1986).  This is particularly the case for the process of
wage determination: attitudes play an important role in the labour
market, whereas institutions exercise  a dominant role in changing
wage levels.
Family ties are very strong in developing countries, especially in
rural communities.   Living  standards are  more a  matter for the
individual  than   the  family   (Stiglitz,   1989).     This  has
consequences for the labour market.   Let us suppose that a family
has more  than one  wage-earner, and  an unemployed  member of the
family has to choose  whether to accept  a poorly-paid, dirty job.
The slight  increase  in the  family's  income will  be considered
against not only the unpleasantness of  the job, but also the loss
of status which will affect the  entire family.  The theory of the
family living  standard function  is particularly  relevant, where
there is a wide spread  of pay levels.   Indeed that is when there
is the  greatest chance  of large  discrepancies occurring between
the (potential) income of two members  of one family.  This is the
case in  Suriname,  see figure  2.3.1.:  there are  relatively few
employees  with  a  pay  level  which  is  around  average, but  a
relatively great number with a high or  a low income.  This can be
explained by  the  phenomenon  that the  lowest  wage  groups face
competition from poor  countries (consider the  sugar cane cutters
from Guyana  and  Haiti),  whereas  those  with  higher  levels of
qualifications in Suriname  can aspire to  the level of prosperity
of the country  where they  completed their studies,  and to which
they could emigrate with comparative ease.
 
In  addition,  the  theory   with  regard  to  "efficiency"  wages
(Stiglitz, 1989)  is also  important.   This theory  first used in
respect of  developing  economies  (which has  also  been reliably
applied  in  developed  economies)  states  that  it  is  not only
productivity which determines  pay levels,  but also  that the pay
level can determine the level of productivity.
 
On the basis of a structuralist  approach, it can be explained why
the level  of unemployment  is so  high, particularly  among young
people, while at the  same time there is  a shortage of sugar cane
cutters.   This approach  can explain  why when  there was  a high
level of unemployment, there  was no absolute  fall in pay levels.
Institutional factors are also dominant for the explanation of the
modification of pay  levels.   In Suriname, the  usual annual wage
adjustments  are  settled  by  collective  bargaining  agreements.
Although these CBAs  are frequently  concluded per  firm, there is
nevertheless a  considerable  degree of  coordination  between the
various CBA negotiations.  This  arises from the fact that despite
the large number of CBAs, one of the trade union leaders is always
involved, and they can be counted on the fingers of one hand.  The
employers are  not organized  in one  large association,  but they
meet each other  in two  organizations, namely  the VSB (generally
the larger firms)  and the  ASFA (for  the smaller manufacturers).
Furthermore, a certain measure of coordination is exercised by the
Arbitration Council, the body to  which employers and trade unions
submit  any  disputes.     In  addition,   the  grass-roots  union
membership  is  quickly  informed  about  the  situation  in other
collective bargaining agreements via  the press and "mofo-koranti"
(literally "mouth-newspaper") which operates at lightning speed in
a small community.
 
Due to  this  institutional framework,  one  could expect  a trend
towards uniform contractual  wage determination.   It appears that
over time, changes  in pay do  not display significant differences
between industrial sectors.   This has  important consequences for
the economy.   Thus the  increases in productivity  in the bauxite
sector  -  the  result  of  the  Brokopondo  investment  - led  to
substantial increases in  wages in  this sector.   These increases
then had effects  on the rest  of the economy, where  there was no
corresponding increase in productivity.
 
Because of the  dominant role of  the institutions, wage equations
form (together  with exchange  rate equations)  an exception among
the behaviourial equations in  the macro block.   Changes in wages
can  be  explained  to   a  large  extent,   but  are  not  easily
predictable.   Calculation of  pay equations  provides significant
coefficients for consumption price changes and unemployment, while
in  the  constant  term,  among   others,  the  trends  in  labour
productivity can  be  perceived.   Social  partners can  decide to
change their behaviour quite  easily, and then  the changes in pay
levels deviate from  the result of  the wage equation.   So we can
include a wage equation in the model,  but it needs to be borne in
mind  that   this  equation   only  has   limited  usefulness  for
forecasting.  The pay equation therefore needs to be considered in
a different light than the  other behaviourial equations, such as,
for example, the consumption function.
Behaviour by the government.
 
Wage equations are  - in accordance  with international practice -
grouped with the  behaviourial equations.   Not all countries have
an institutionally-dominated wage  determination process.   In the
case of  Suriname,  wage  equations should  be  included  with the
institutional  (or  semi-behaviourial)  equations.   Institutional
equations mainly concern  the government.   By an institutional or
semi-institutional  equation,  we   mean  an   equation  which  is
estimated in a similar  way to a  behaviourial equation, but which
can only  be deemed  to  have any  predictive value  under certain
defined hypotheses.    Statistically  significant coefficients and
calculation  results   of  semi-behaviourial   equations  give  no
guarantee  of  the  stability  of  the  coefficients.    Where the
coefficients are used  in simulations, these  are only hypotheses.
So one can establish over the years a fixed connection between the
yield of a particular tax and the  basis for it, but this does not
tell us whether  the government is  going to decide  to change the
rate of tax next year.
In fact the use of an  institutional equation is nothing more than
a refinement of  an approach which  considers government variables
as exogenous.   In  semi-behaviourial equations,  the coefficients
are indeed exogenous,  even if  they are  defined on  the basis of
calculations over the past.
 
The  use  of  semi-behaviourial  equations  instead  of  exogenous
variables has the  advantage that with  the model, defined aspects
of government action can be analyzed via a simulation, which gives
the direct and indirect effects on other government variables.  In
practice, in  the  preparation  of government  policy,  it  is not
really practical for  all ministries  to agree  immediately on the
basis of  a first  simulation of  a policy  proposal involving one
ministry.   It  can be  useful  in the  first round  to  work with
institutional equations which  are estimated  on the  basis of the
past,  following  which,  on  the  basis  of  the  first  results,
government policy is established  and the government variables are
completed   in    accordance    with   the    policy   hypotheses.
Semi-behaviourial  equations   can  thus   form  a   useful  tool.
Moreover, the  inclusion of  semi-behaviourial equations  have the
advantage that partial  analyses are  estimated over  the past, in
the  sense  that   relationships  are   examined  between  various
government   revenues   and   expenditure   with   other  economic
indicators.
 
 
                               DATA
 
Micro macro data set
 
After  the  first  theoretical  examination,  we  encountered  the
problem  that  the   available  data  set   was  too  limited  and
incomplete.  Suriname  has produced National  Accounts since 1972,
but due to changes in  definitions, there are various series which
are not comparable.   There  are no monetary  statistics which are
consistent with the National Accounts,  which is a serious problem
when  trying  to  construct  a   model  of  a  country  which  has
fundamental monetary  problems.   The available  series concerning
the labour market  were also inconsistent.   Concerning inflation,
only a price  index for  consumption by  households was available.
Data on  production, export  volume and  export value  and planned
acreages had already  been collected per  product for decades, but
not arranged in a long, consistent series.
 
Before an  empirical  macro model  can  be constructed,  it  is of
course necessary to  have time  series available of  such a length
that the  various  economic  processes and  period  of  growth and
recession can be observed.   For this reason,  we started with the
construction of  a  micro  macro  data  set.    This  consisted of
collection of primary data and the production of statistics.
 
We point out  that much  of this preliminary  statistical work was
completed before  the the  model  was devised,  in order  to avoid
mixing up  statistical  work  with the  calculation  of  the model
equations.  We emphasize that in the production of the statistics,
no use was made of behaviourial  hypotheses.  In the production of
the National  Accounts use  was made  of estimates,  but these are
very different estimates from those which are used in behaviourial
equations.   So,  in  the  production of  the  Annual  Accounts of
Suriname, sampling  is used.   For  example, on  the basis  of the
average value-added per worker in and the total number of workers,
one can estimate the total value added per sector of industry.  In
a few  cases, it  appeared  impossible to  fill  gaps in  the time
series.  In those case, interpolation  was used.  The figures thus
derived were preceded in  the micro macro data  set by a $ symbol,
which shows that these  are interpolated figures.   This method of
working has the advantage  that the data set  was made as complete
as  possible,  which  increased  the  convenience  of  comparison.
Information which is  preceded by a  $-symbol is not  used for the
calculation of the equations for the model.
 
This extensive work  is described  in a  separate publication, the
Micro macro data set.   In that publication,  a detailed report is
given on  the completion  of the  National Accounts,  (which exist
from 1972 onward) for the  years 1954-72, the completion with data
on prices  and  labour  market variables,  and  the  production of
monetary statistics  for 1954-1987  which are  consistent with the
National Accounts.  A spreadsheet programme MACROSA was developed,
which requires a minimum of input, but which produces the complete
National  Accounts  and  monetary  statistics.    In  addition, we
gathered and  organized  a wealth  of  micro data,  which  is also
included in the micro macro data set.
 
Products in the micro-block
 
We shall now concentrate on the export sector and consider how the
influence  of  micro  variables   on  the  price/cost  curve,  and
therefore on  the behaviour  of firms,  can be  modelled.   At the
micro level, but  also formalized,  so that  we can  still see the
wood through the trees.
 
              Table 8.1. SHARE OF TOTAL EXPORT VALUE
 
 
                         1954           1973           1986
 
         Alumina          0.0           39.8           49.2
         Prawns           0.0            0.5           10.7
         Rice             3.0            5.7           10.0
         Aluminium        0.0           12.3            9.7
         Bauxite         73.8           23.6            7.5
         Cooking bananas  0.0            1.1            3.1
         Tourism          1.0            2.8            1.6
         Plywood etc.     5.0            2.4            0.6
         Unprocessed wood 1.4            0.3            0.2
         Coffee           1.3            0.0            0.0
         Sugar            0.1            0.1            0.0
         Other           14.3           11.5            7.5
 
         Total          100.0          100.0          100.0
 
Suriname's exports include a wide  variety of products, which were
subject to change over the years.  This is similar to the primeval
forest of Suriname,  which has  a wide variety  of tree varieties.
There is one type of tree which grows twice as high as the others,
namely the  kankan  tree.   In  the varied  package  of Suriname's
exports, there are  a few  kankan trees.   Because many production
processes  require  a   minimum  level  of   output,  below  which
production is not viable,  and Suriname is  a small country, there
is only room  for a few  important products.  From  an analysis of
the last three centuries,  it appears that  only two products were
responsible for  more  than half  of  the  export value.    In the
eighteenth  century,   these  were   sugar  and   coffee,  in  the
mid-nineteenth century sugar and cotton, then sugar and cocoa, and
at the end  of the nineteenth  century gold and  cocoa, then sugar
and gold, and  thereafter at the  start of this  century sugar and
balata, then  sugar  and  coffee,  followed  in  the  'thirties by
bauxite and coffee.
 
Bauxite remained  dominant  until  the end  of  the  'sixties then
alumina and aluminium  emerged, and subsequently  took over as the
two most important  export products.   After  bauxite, alumina and
aluminium, other important products  over recent decades have been
rice,  prawns,  unprocessed  wood,  plywood  and  tourism  (mainly
holidays by emigrants from Suriname).   Although the production of
coffee and sugar appear no longer  to be important for the future,
we include these two  products in the  micro-block because in this
way, empirical material could  be obtained about  the issue of how
changes in the price/cost  ratio can lead  to the disappearance of
products.   The eleven  products  which are  separated out  in the
micro-block are to be found in  Table 8.1., which also gives their
share of export value.
 
 
 
 
 
 
