Introduction:
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.