Submitted by Trained Economist
The challenges we now face must be put into a context and avoid the Tea Party like angry lashing out and politicizing of issues. The Barbados situation reminds me so much of what Obama faces in the USA.
1. It is easy to forget how dependent the Barbados economy is on tourism and international capital flows (especially for property investments). Given that the global recession was been especially long and severe, and the recovery weakest in the major source markets for our tourists and capital flows, it meant that Barbados would be severely impacted in terms of tourist arrivals, tourist expenditure and international capital flows. Aggregate demand, GDP, employment, government revenues and foreign reserves were bound to be negatively impacted. In 2008, Real GDP grew by 0.2%, it declined about 4.8% in 2009 and grew by around 0.3 % in 2010. Given those numbers and the length and depth of the global recession in our major source markets I am not persuaded by arguments which suggest that domestic policy aggravated the impact.
I would like to take you back to 2001 after the September 11 bombings. Our major source markets went into recession after the September 11 bombings and in 2001 Real GDP in Barbados fell by 3.4% and again by 0.4% in 2002. Very few would have argue that the post 911 recession was of the scale of the current recession, and the recovery was far more robust and sustained, but look at the impact it had on Barbados. The reason it had that impact was not because of a failure of local policy then, it was because of the openness of the economy and the reliance on tourism and international capital flows. The then government launched a major counter cyclical program but we still had two years of declining GDP. In the face of a recession of the scale encountered by our source markets and the slow recovery, a domestic growth solution is not a very practical one for Barbados given the structure of our economy.
2. It is very easy forget that Barbados runs a fixed exchange rate regime and maintaining such a regime requires foreign exchange reserves. I want to remind persons that attempts to grow the Barbados economy from domestic sources typically leads to major drainage of foreign exchange which can endanger the fixed exchange rate regime. As the global economic crisis unfolded in 2007/2008 there was a loud clamor in Barbados for a fiscal stimulus package along the lines of the US, and along the lines implemented in 2001/2002. There did not seem to be too much concern for debt levels and credit ratings then, the scream was for a stimulus package so that we could keep growth and the good times going.
I think that a major fiscal stimulus was sensibly resisted because of the likely impact on the foreign exchange reserves at the very juncture you could expect a slow down in tourist revenues and international capital flows (our main sources of foreign exchange). The government opted to engage in foreign borrowing to shore up the reserves. I think this was a wise and proactive move to protect the Barbados dollar and the reserve cover has remained adequate during this very trying period. If we can get through this with our exchange rate regime intact I would think we had achieved a major success.
3. It is very easy to forget what happened to the public sector over the last 17 years. In 1994 the public sector pay roll was 21,000, it now stands at 30,000. In the 17 year period there have been numerous pay increases, not linked in any way to productivity or growth in government revenues. Since the restructuring of the public service in 1991 and the election results of 1994, both parties seem to have taken the political lesson of “not touching public sector jobs.” It is now in fact unconstitutional to cut public sector salaries.
Faced with a large public sector payroll, the current administration has sought to avoid paying the political price of public sector job cuts, and chosen to maintain the public sector payroll, as well as free at the point of delivery access to most public services. The length and depth of the global recession and the weak nature of the recovery means that this laudable policy is a costly one. The cost is being felt in terms of the public sector deficit and the level of debt. I cannot help but feel that many of the persons who now scream about the deficit, credit rating and debt levels may well scream just as loud if sizeable cuts were made in the public sector and/or services. I have noted the screams about the adjustments in the drug service and UWI.
Many seem to have bought into the notion that there is a domestic growth, no pain or sacrifice solution for Barbados in the face of the challenges faced by our major source markets. I think its very easy to dream off and forget reality. In the face of the current circumstances in our major source markets if we want to maintain the public sector payroll and free at the point of delivery access to public services, then we should be prepared to accept the consequences, which are a large deficit, more debt and lowered credit ratings. It may be perfectly okay for Barbadians to make that choice until things recover.