Notes From a Native Son – Imposing Prices and Incomes Controls as a Fiscal Tool

Hal Austin

Barbadians are feasting in the last chance saloon on a bloated Titanic, too inebriated with massive debt and an artificial ‘developed’ lifestyle to notice the vessel is fatally holed. As Martin Weale, a member of the Bank of England Monetary Policy Committee, has said, it is deleveraging now or passing on a punitive debt to future generations. But, as yet, it does not seem as if policymakers are even aware of the extent of the Barbadian problem; no one is prepared to tell the emperor he is naked.

It is quite clear to anyone with a searching eye that Barbadian consumers are having a tough time. Prices are going up by leaps and bounds, private employers are resisting any calls for increases in wages and are in fact making people redundant. In fact as they make more and more people redundant, government is hopelessly trying to bridge that gap by giving pay rises to the public sector, which, in the long term, is socially divisive.

There is not the slightest sign of any fiscal discipline, and it is not clear what monetary responsibilities, apart from holding on to ‘returnees’ pensions for an extra week and being cheer-leader in chief for the almost religious, but misleading, dogma of foreign reserves. In the meantime, a number of professional and academic economists and policymakers are giving intellectual cover to the government by trying, vainly, to explain away the incredibly high inflation as just imported food and energy prices which will ‘pass through’. The theory is right, but the reality is totally different. Commodity prices can in fact pass through and have very little medium-term impact on real inflation.

But this is not exactly the case in Barbados. The reality, as I have pointed out, is that importers and shop owners are not only passing on the increases in imported food and energy, but adding to it. So, the bottom line is that government is increasing tariffs and, at the same time, adding VAT to the imports; then the importers are passing on those increases, adding a bit more, and adding VAT to the shop owners; then the shop owners are passing on those full prices, adding a bit more, then adding VAT.

There are practical examples: the Oistin’s supermarket that imports carrots from Canada, sells many of its items at prices far beyond those charged in other Caribbean islands and, incredibly, adds to the recommended retail price of some publications. What is amazing is that consumers have not boycotted this supermarket; for the simple reason, I believe, that they do not realise the power of consumerism. And, even worse, political and civic leaders are failing to give any leadership to the people hardest affected by this exploitative environment, the elderly, poor, unemployed and disabled.

The real threat is that imported, commodity inflation will feed through in to the real economy which will lead, understandably, to wage increase demands by workers and trade unionists. Policymakers can only explain away imported commodity inflation as a one-off in its early phase, but once it continues action must, or ought to be, taken.

Prices and Incomes: A Brief History:
During Britain’s post-war reconstruction, a principle of fairness was introduced in to policymaking, with specific attention paid to those groups that had suffered most during the hostilities. One fundamental part of the principle was that industry should not be allowed to profit from shortages and problems created by the Second World War.

Between 1946 and 1948, wages increased by 14.2 per cent, which led to the Personnel, Incomes, Costs and Princes White Paper, in February of that year, which concluded: “There is no justification for any general increase of individual money incomes.” The following October saw the introduction of the Stafford Cripps wage freeze, followed in September the following year with the devaluation of the pound sterling and the abandoning of the cost of living sliding scale.

Between 1950 and 1979, there were numerous attempts to control wages and prices by various UK governments, Labour and Tory, using a variety of tools, including the Council on Prices, Productivity and Incomes (August 1957), Incomes Policy, the Next Step White Paper (February 1962), National Incomes Commission (1962) and the Statement of Intent (April 1964).

After the Wilson Labour government came to power in October, 1964, in December there was the Joint Statement of Intent on Productivity, Prices and Incomes; February 1965, the White Paper, Machinery of Prices and Incomes Policy; March 1965, the National Board for Prices and Incomes (with the TUC agreeing to a 3-3.5 per cent norm for wage increases);  April 1965, another White Paper, Prices and Incomes Policy; July 1965, White Paper, Prices and Incomes Standstill Period of Severe Restraint, which introduced a six-month wage freeze; and that November there was another White Paper, Prices and Incomes Policy: an Early Warning System.

In March 1966, Labour won the general election and in August 1966, a Prices and Incomes Act was put on the statute book; in March 1966, Labour published a White Paper, Prices and Incomes Policy after June 1967; in April 1968, another White Paper, Productivity, Prices and Incomes Policy in 1968 and 1969, which set a ceiling of 3.5 per cent wage increase ceiling, with the exception of productivity improvements.

In April 1968, the late Barbara Castle, Labour secretary of state for employment and productivity, told the Labour Party conference that she was not going to preside over a prices and incomes policy in which she was expected to tell consumers that they just had to grin and bear rapid price increases. Declaring war on what she called unnecessary price increases, emphasising that the Wilson government had taken a tough line on wage increases and it was not going to avoid putting a damper on price increases.

Speaking shortly after publication of the government’s Prices and Incomes White Paper, it was made clear that the government was prepared to stick to its recommendation of a 3.5 percent conditional wage increase. The reality then, and now, is that both wage and price increases should be based on what is happening on the ground and not just on national bargaining agreements, but on modern productivity criteria or on increases in either the retail price index or the consumer price index.

Earlier that month, her colleague Peter Shore, economic affairs minister, had faced a barrage of accusations from his backbench colleagues that the policy would lead to industrial strife. The July, the new Prices and Incomes Act was introduced; in October 1969, the National Board for Prices and Incomes was merged with the Monopolies Commission to form the Commission for Industry and Manpower, followed in December with a White Paper, Productivity, Prices and Incomes Policy after 1969, which set the range for settlements between 2.5 per cent and 4.5 per cent, but was smashed by two engineering agreements of 18 per cent.

In June 1970, the Heath Conservative government abandoned the Prices and Incomes Board and introduced a voluntary policy in its place under the direction of the then National Economic Development Council (Neddy), faced with growing cost-push inflation. Heath and his chancellor Iain  Macleod were not keen to push through a policy unless it formed part of a wider collective agreement to base wage increases on economic growth.

Policy Initiative:
One of the first things the DLP government should have done, regardless of the resistance from business leaders and trade unionists (in particular the hotel and tourism sectors) was to establish a powerful prices and incomes commission with strong regulatory teeth. This would have introduced controls on energy and commodity prices and the incredible wage demands that we have seen.

Such a policy would not mean that prices could not be increased, but the proposers would have to justify any such application to the commission, and, as a matter of policy, any increases passed on would not include any additional rises. But, policymaking has been crowded out by lots of economic dogman, humbug, half-baked ideas and juvenile politics.

Analysis and Conclusion:
Retail prices are also a reflection of the exchange rate and, since 1975, Barbados’ monetary policy has been set by Washington and the Federal Reserve, not the minister of finance or the central bank. Not to repeat my call for a decoupling – replacing it either with fixing against a basket of currencies and commodities or floating – economic theory shows that pricing models is not just an outcome of manufacturer behaviour.

What badly needs investigation in Barbados is an analysis of the price dynamics at retail and wholesale levels.It is my belief that government and the middle people, the wholesale importers, impose incredible mark-ups on imported goods, leaving the end users to pay the full price – even in times of financial strain.

It is in understanding the pricing mechanisms between primary producer or manufacturer, wholesaler and retailer that the pass-through theory relates to the knowledge of whether the retailer, manufacturer or tariffs play a central role in price setting. There is a trade off between growth and stability and this obsession with growth is at the risk of stability.

Barbadians must be told in no uncertain terms that in the short term it is better to have a reduced standard of living – everyone sharing the financial pain – than just a few fat cats doing well, quite often from the public payroll, while the vast majority of people suffer.

This is the great unannounced policy of the government, what is called ‘internal devaluation’ – inflating away salaries, in effect a salary cut; interestingly, when the recent call for a ten per cent nationwide salary cut, apart from the fact that politicians were not in the queue, there was little mention of the reality that high inflation inflates away wages, leading to a fall in living standard due to affordability.

Either by design or coincidence, this is in effect the new government fiscal policy. Apart from this policy by theft, another outcome of the economic crisis is public inaction. A much better strategy by ordinary people is for small shopkeepers to form a wholesale cooperative to use as the vehicle for importing and distributing food, cutting out the extortionate middle man, and even give serious consideration to bringing out a range of own-brand products. Any gains could then be passed on to shoppers.

If the DLP government does not have the power, or the urge, then it should introduce new legislation giving it powers to intervene in wage bargaining, even within the private sector. If it does not, there is a real danger that the Social Partnership agreement it is locked in to, a local form of corporate government, will be its undoing.

Finally, there is an elephant in the room, which is not discussed by government, the central bank or the public intellectuals, and that unwelcome guest is run-away inflation. Inflation is an incredible tool in an environment in which there are huge fiscal and current account imbalances in that it reduces government debt by default.

It also paves the way for the foreign-owned banks to rob savers by offering them a below inflation interest rate on their savings – with the connivance of the central bank – and massive rates on any borrowings.
What makes the 12 per cent inflation rate in Barbados so inexcusable is that in the Eurozone, the US, UK and Japan interest rates are below one per cent. And Ben Bernanke, chairman of the Federal Reserve, the US central bank, has already said that the rate would remain at effectively zero rate for the next 18 months or so.

The central bank and the ministry of finance must explain to ordinary Barbadians why the rate of inflation is so high, apart from the hokum pokum of pass through.

18 thoughts on “Notes From a Native Son – Imposing Prices and Incomes Controls as a Fiscal Tool

  1. The Caribbean has always been an area where BIG GUNS can rape and pillage with impunity. We have never been a unified force to confront the predators face a face. Barbadians will NEVER boycott a WHITE business. They will however despise a small black business and wish for their demise. This is an unspoken rule that Bajans adhere to. If a country’s is sole income is dependent on TAXING everything including your own dog what do you expect? It is not advantageous for the government to encourage and give incentive to farmers when they derive more taxes from imports.

  2. Hal Austin wrote
    “It also paves the way for the foreign-owned banks to rob savers by offering them a below inflation interest rate on their savings”

    What are the rates in Barbados?

    These are the rates in Canada and most of the Banks in Barbados are Canadian.

    Nuff laymen on this blog need the facts in simple terms.

  3. stupeeesss. so who’s this naked emperor? we all know we are having a difficult time. what are saying, no one is willing to tell the naked emperor? i don’t understand ur logic. we know what we are experiencing, we know the cause, we also know who’s to blame; what we need to know is how to change it to our favour without hurting those in the middle. the rich need not help; the poor get all kinds of assistance, house repair, welfare, bills paid. it’s the middle class that fall between the cracks. too rich to qualify for anything,yet not rich enough to be stress free. many of us are now called the working poor.

  4. BTW Hal Austin, u need to reduce ur writings, i read the first para only.. many will too. i don’t know who u are trying to impress but it read like utter total crap. u know that u could have said it in simple English. the audience u want to reach will have no time to read this blog – don’t think that i did not understand…but i was taught in school about writings such as urs. u want to impress, this is not the audience.

  5. Who am I to argue with a financial guru but I don’t believe price controls work.
    Firstly, Government would need an army of people to enforce the rules and that would cost taxpayer’s money. Even with that army, if I was an importer, I would find a way around them.
    If the maximum price I was allowed to charge for a 106g tin of sardines was $2.50 and I could not make money at that price I would do the following:
    1. Stop importing them. Result – a shortage of sardines in Barbados.
    2. Source a different tin size and charge what I want.
    3. Stop selling single tins; instead sell a pack of 2 tins for whatever I want.
    Government could change the rules to bring me into line on points 2 and 3 but they couldn’t make me import if I chose not to.

  6. As we have explained in many of our previous submissions there is no such thing as INFLATION.

    It is height of bad thinking to subscribe to some notion that there is something called INFLATION existing anywhere, when scientifically or philosophically such cannot exist or be proved to exist.

    The concept of INFLATION is another farcical concept. It is simply another bogeyman concept

    The PDC strongly believes that the fundamental reason for esp. so-called economists and their cohorts in the private and public sectors of Barbados making many people in the country believe that there is something called INFLATION is, in the final analysis, to support the of use monetary and fiscal policies by the government/Central Bank/Financial System as a means of taking, whenever it suits them, as much money out of the hands of the broad masses and middle classes as possible when they transact business, and/or when seeking access or actually accessing money in the financial system to make it harder to do so.

    Such has the despicable result of making such people poor or poorer.

    Also, it is far more ludicrous for these so-called economists and their cohorts in the private and public sectors in Barbados to make many people in Barbados falsely believe that there is something called IMPORT INFLATION, than for them to, again, make these same persons falsely believe that there is something called INFLATION, by making it believed that this other ruse called IMPORT INFLATION REALLY EXIST, WHEN CLEARLY IT DOES NOT.

    IMPORT INFLATION does not exist because, given what it is described as, it does not involve costing (increasing the costing of) the goods and services in the currency of Barbados, from the point of the preparing, manufacturing/processing/distributing of the goods or services overseas, to the point of those goods and servces arriving in Barbados.

    What import inflation, what!!

    So much for this political mind disease called ECONOMICS!!

    We in the PDC have devised the theory/principle of the cost of use of money in Barbados to give a fairly good idea of how the USE of money, IN EVERY COMMERCIAL, BUSINESS, SOCIAL, SECTOR, have income, payment or transfer costs to individuals, businesses and others, and how such costs are transferred from point to point via business transactions.


  7. While this is an important topic, Mr Austin has chosen an unfortunate analogy to make his point, and is further hampered by a lack of appreciation of the critical difference between this crisis and any similar previous ones such as the post war period in England.

    First the analogy
    If we agree (as the bushman has previously done) that the Titanic analogy appropriately represents out current position, then there is very little practical difference between the reactions of those Bajans that Hal criticised – “feasting in the last chance salon”, and those reactions which he is recommending – “more prudent feasting on the lower deck(?)”, driven by government imposed limits on excesses.

    In a couple hours time, both the ‘feasters’ and the ‘prudent’ will be at the bottom of the Atlantic being converted to fish food anyway….

    Second is the difference
    Never before has the travelers been on a terminally wounded vessel as with the Titanic. In the past there were cases of severe bad weather or survivable damage to the ship which required short term sacrifices until the crises passed.

    With the actual Titanic, the only thing that made sense was to take an early, conscious decision to align oneself with a reliable lifeboat….and not be distracted by the feasters OR the sacrificers….

    It is easy to “pooh pooh” a lifeboat while the massive Titanic remains above water…things begin to look quite different when the tilting begins before the final plunge….

  8. BT:
    Your analogy is basically sound, excepting the definition of the life boat.
    Is this a religious or a real world construction?
    Fatalism or revolution, what is your considered way forward?

  9. I’m not an economist, but price controls don’t seem to work. The result of price controls is empty shells in supermarkets and stores. An acute shortage of items and a triving blackmarket with exorbitant prices.

  10. Solutions are easier in a larger economy but greater competition in the market has to be the main answer. Pricemart undoubtedly has lower prices on the whole that the local players so more international companies may help (what is the name of the company developing a store next to Automotive Art at Welches?).
    Then why not have a Government incubator scheme to help develop a new generation of small entrepreneur importers. Make it easy for new businesses to source goods, ship them and get them through the Port here. Inevitably some form of Government financial assistance would have to be involved and the trick would be to find a way of making it work – not like the UDC scheme that hit the headlines a week or so ago.
    The elephant in the corner of the room, as Hal Austin says above, is Government taxes and duties. I guess these make up a large proportion of the cost of imported food and goods. Government needs to reduce the cost of the public sector and increase its efficiency so taxes can be reduced.

  11. @ Straight Talk
    Man ST, the Bushman did not define the life boat above :). The problem is that you know very well what represents the only available rescue vessel – and you are (as usual) preempting Bushie.

    Secondly, what kind of leading question is this you are putting? Religious or real world construction?

    The Bushman does NOT deal with anything “religious”. Religion is nothing but a distraction from reality.
    If you had said SPIRITUAL then Bushie would hasten to point out that the two (Real World / Spiritual) are inextricably interwoven….and hence the “lifeboat’s” relevance.

    Indeed ST, you are old enough and wise enough by now to understand that what we consider ” real world ” is but a small and temporary subset of the “SPIRITUAL”.

    • @St. George’s Dragon

      Do you mean Cost U Less?

      Your suggestion that government needs to look at the system of importation with a view to restructuring how it levies duties.

      You are aware there is an equation which must balance i.e. tc + ps = ti

      If tc (taxes collected are significantly reduced then ps (public services) become compromised if ti (taxes on imports are negatively affected.

  12. I repeat – the amount spent on the public sector is too high and the cost of this through taxes and duties is affecting everyone’s cost of living, including food and other import prices. Government needs to address this or the dreaded IMF will make them do it when Barbados gets the next ratings agency downgrade.
    Of course, we all know that the Government will not do this in the run up to the election. It was interesting to note, though, that the estimates showed spending cuts in the following two years. Perhaps they are hoping to get another downgrade, hoping to get re-elected and hoping that the IMF will come in and take the blame for the cuts that everyone knows are going to happen.
    And no – this is not an anti-DLP position; the B’s would be doing exactly the same.

    • @St. George’s Dragon

      Are you making the point to reduce import duties or are you now moving the argument to cost of government, perhaps both?

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