Introduction:
The DLP government has now given its Budget programme which, intended or not, will be seen as its case for re-election to finish what it has started. But, apart from the tribal political grunts, minister of finance Chris Sinckler’s Budget Speech on Tuesday was poor in construction, lamentable in its vision and as a precursor for the forthcoming general election it must certainly signal the end for this government. Ignoring the inevitable party political noises, on a purely macro-economic basis, it is not worth the paper it is written.
Analysis:
In this blog, I will concentrate on one or two essentials and try to point out how desperately wrong the minister and his key advisers got their theory.
First, he does not appear to understand that there is an economic trade-off between growth and stability, especially with a reserved army of mainly under-qualified young people just hanging about at street corners.
This should be a priority since they pose a real threat to the social order, despite the ludicrous belief by some policy-makers that police and the defence force would be able to handle any such uprisings.
Problems in other jurisdictions, including North Africa, the Middle East, Britain and other places should be a warning. The other potential danger is demographic. If, as government intends, Barbados is to be a top-end service economy, then it needs the highly trained and skilled labour force to take advantage of those developments. As things stand, new high-powered jobs will attract immigrant workers, to the chagrin of local people, which may also lead to social unrest.
There is a conventional wisdom in Barbados, supported by many people who ought to know better, that foreign currency reserves is king, that such reserves provide stability. In fact, this has not been true since Richard Nixon abandon the gold price in the early 1970s, followed by the oil crisis, which forced Barbados, and many other nations, to peg their currency to the dollar.
Since most commodities were (and still are) priced in the dollar, this pegging provided stability since the country was then confident of the prices on the world markets. Since the 1980s, and more so since the mid-1990s, this need for massive foreign reserves has not been necessary yet, in a ironic way, developing nations have been accumulating foreign reserves much larger than at any time. The assumption that foreign currency reserves drive our economy and, thus, it will be so for the foreseeable future is highly contest.
As Joshua Aizeman (“Alternatives to sizeable hoarding of international reserves: Lessons from the global liquidity crisis”), large reserves feed large global imbalances and contribute to asset bubbles; they are also expensive to hoard, since the term premium and carry price outstrip any benefits; and, they are a form of self-insurance, hedging against externalities. However, it is highly unlikely that external shocks would affect in such a way that Barbados would be cut off from the rest of the world, through geopolitical strife or pandemics. Therefore, if this is the case, why stockpile huge sums of money (Nds$5bn, according to the central bank, or just under $3bn, according to the finance minister).
At a time of such economic restrictions, government could find better and more productive use of at least half of these reserves by investing them to stimulate the local market through a policy of endogenous growth. The dominant view of foreign reserves is based on the untested theory of market turbulence, which has occurred only during the Second World War. It is rooted in neo-classical theory, with its absurd assumptions and a notion of equilibrium and market perfection which the banking crisis of 2007/8 has shown to be a nonsense. The 2007/8 crisis brought about by a failure of risk perception, risk management and the application of those theories to the market place, i.e. sub-prime lending.
It is the belief of a great number of people, including academic economists and policy-makers trained prior to 1980s and who have not returned to the classroom since to update their knowledge. Our economy has reached the stage when endogenous growth can be the driver of further development with prudently managed importation of foreign goods and services. Consumers need discipline.
In a statement issued on June 13, this year, the central bank claimed: “To grow the economy, we must invest in activities that will increase the inflow of foreign exchange, because as soon as income is spent there is a need for additional foreign exchange.” Then it continues: “That is because everything we buy has an element of imports: either the item itself is imported, or the seller uses electricity which is generated with imported fuel, or the purchaser has driven to the place of sale in an imported car, or there is some other call on foreign exchange.”
First, in its way, the central bank is admitting that the importation of fuel for energy needs is inevitable, a view backed by the minister. If this were the case, along with all the rhetoric about a green economy, where is the policy? Why do we have to import fossil fuel when we have wind, solar and wave energy available to us?
Further, the cuts in fuel duty contradict such a policy since any comprehensive energy policy must include transport, road building and a proper standard of road traffic management. The idea that 350 ZR van owners rushing dangerously around the street car makes a transport policy is nonsense.
In terms of macro-economics, the broad assumptions underlying the Budget Speech contradict the theory of comparative advantage, which was developed by David Ricardo in the early 19th century. China’s recent development model is based on the same principle: it imports basic or raw materials, then manufactures goods, them sells them to the world at affordable pries. It is now moving up in terms of added value to its manufactured goods, leaving the basic low-level cheap manufactures to other Asian economies. This thinking should be the basis of the restructuring of the economy. Is this beyond the imagination of this government?
One unintended revelations is that we have deskilled the nation, therefore we import most of our essential needs. In any case, pegging to the US dollar should have provided the hedging against such currency volatility; further, had the government decoupled from the greenback, pegged to a basket of commodities and currencies, then that would introduce even more stability in the economy, thereby negating the need for Bds$5bn of foreign currency. This is an economic sin. In any case, the idea of building large foreign reserves is like putting the cart before the horse.
The press release goes on to say that the main aim of the central bank is economic stability and that the main weapon in this fight is the building up of targeted foreign reserves. I, however, would put creating jobs and inflation targeting before building up foreign reserves since they would come if the goods and services we offer have an overseas market, including tourism and financial services.
In fact, by holding huge foreign reserves and maintaining the base rate historically high, given the state of the global economy, the central bank is in reality the biggest barrier to economic recovery. More than that, government could easily kick-start the economy by releasing $500m of its reserves – first by giving Al Barrack a drawdown facility of, preferably, Bds$1m a month for the foreseeable future, then gradually funding well planned small and medium enterprises, and by providing affordable homes for young professionals.
The key driver of our economy should be jobs and the roadmap for creating jobs should be privatising sections of the public sector, such as the government printery, the Transport Board, the Port, the Airport, the Housing Corporation, and other sectors. Modern economies no longer need pre-1980s large foreign reserves.
Government should also financialise the economy by providing funding for small and medium enterprises and the self-employed; those workers will pay income and VAT taxes, go shopping for goods and services, the shops and craft persons will spend money, including creating more jobs, and the economy will operate in a virtuous circle – including the importation of good and services. Ironically, if the other levers of the economy are working well, then government would not have to over-spend.
Analysis and Conclusion:
At a time of crisis, in particular prolonged economic and meltdown, you need a firm and knowledgeable hand on the till. Judged by any criteria, that person is not Mr Sinckler, who has not the training, experience nor obvious competence to be the finance minister at time when the nation is spiralling out of control, the gaps show. His Budget Speech reads like an undergraduate essay which, had I been marking it, would get a C-. You can see the revealing intellectual fingerprints of his leading economic advisers all over the Speech – and the tell-tale signs are there: economic theories that were prevalent before the 1980s, suggesting either that the adviser graduated pre-1980s, or had been taught by someone who had not upgraded his knowledge base since he wrote his PhD thesis in the 1960s or 70s.
The key drive to economic prosperity in the medium to long-term future is education and high-quality skills training. At present neither UWI nor the community college fits this requirement. What is badly need immediately is a diversification of the economy away from the traditional tourism market, create more career opportunities for 16-24 year olds by extending the school-leaving age to 18, with those who are non-academic going in to skills training such as four-year apprenticeships from the age, offering private employers incentives to employ young people, job-sharing at entry level for public sector jobs and zero-rating books, school uniforms and other equipment needed for education. You cannot put a tax on learning.
But the most important policy tool in the minister’s box both he and his key advisers do not even want to tolerate is that the Barbados dollar is over-valued: he should decoupling the Barbadian dollar from the Greenback, peg it to a basket of commodities and currencies (for the much talked about stability) and float against the vastly under-valued US dollar.
One book I would recommend to the minister is Vito Tanzi’s Government versus Markets: The Changing Economic Role of the State (For a more comprehensive version of this blog please email me)
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