Recently, the governor of the central bank, DeLisle Worrell, wrote a rather interesting essay for a leading economic website putting a case for small economies, using Greece as the model. Since the governor has avoided any public debate about the sorry state of the Barbados economy, which can be put down to simple rudeness, arrogance or even contempt – maybe he is just busy – his views can therefore be construed as a contribution to the Barbadian conversation by proxy. For Greece, read Barbados.
It can also be read as an insight in to the kinds of advice the governor has been giving his less experienced boss, finance minister Chris Sinckler. In his article, governor Worrell said: “It is now reluctantly accepted at the IMF, the |World Bank and in international policy circles, that these small open economies are disproportionately affected by global shocks that raise import prices and cut demand for their exports, and it is costly for them to build resilience to adverse influences from abroad.”
This view, however, can be and is disputed. Nobel Laureate Paul Krugman and former deputy governor of the Bank of England, Howard Davies, are just two highly influential academic and financial economists to questions the prevailing orthodoxy.
In simple terms, September 2008 was D-Day, the moment Lehman Brothers collapsed because of cash flow problems with US$600bn of assets on its books. It was the moment when the dominant consensus on macro-economics died. So, Dr Worrell’s regurgitation of an orthodoxy that had outlasted its usefulness was, intellectually disingenuous to a large degree, and at best looking backwards.
His argument that small open economies are different is untenable. He said: “International economic shocks hit them especially deep and hard, and in the short term they have little choice but to absorb the blows and try to remain on their feet. Above everything, they should protect the value of the currency, by allowing the shock to feed through to a fall in real income.”
This view is theoretically mis-leading, but of far more importance is that this self-justification, presumably for the professional advice he is giving his younger and less informed boss, the minister of finance, can in part be one reason why the Barbados economy is in more trouble than comparable small economies.
The reality is that emerging market economies have been out-performing developed economies for the last decade – driven in large part by Brazil, India, India and China – although over the pasts two years there has been a noticeable reduction in this growth. Last year emerging markets contributed 39 per cent of global GDP, even though they represented only 14 per cent of the MSCI World Index and since the beginning of 2012, the MSCI World Index is up 11 per cent. This is predicted to grow to 50 per cent of global GDP by 2025 and to 30 per cent of global benchmarks by 2030.
In short, there is enormous growth potential in emerging markets, of which Barbados pretends to be a leading member, even if it is necessary to remind ourselves that China’s GDP, measured at purchasing power parity with the US, is only 17 per cent, while Indonesia and India are less than 10 per cent.
Most people agree that the mathematics of debt dynamics suggest that growth slows as the debt to GDP ratio rises unless there is a fiscal initiative to reverse or manage the process. Given this, stripping away the party political bias and the emotive nonsense, it is important to look at the facts regarding the mis-management of the Barbadian economy.
In 2008, Barbados had a public debt of US$3.2bn, about $11,988 per person, a debt to GDP ratio of 74.3 per cent; the following year this had risen to a debt of US$3.6bn, per capita of $13,277, a debt to GDP ratio of 82.7 per cent, an increase of 15.1 per cent. By 2010, this had grown to a debt of US$$4bn, a per capita equivalent of $14,864, a debt to GDP ratio of 94.4 per cent, a 11.9 per cent rise; by 2011, the public debt had risen to US$4.4bn, a per capita debt of $15,965, a debt to GDP ratio of 96.7 per cent, and a rise of 8.2 per cent.
This year the figures are even more staggering: a public debt of US$4.8bn, per capita $17,460, a projected debt to GDP ratio of 97.7 per cent, a rise of 9.9 per cent. For next year, general election year, this is predicted to be: public debt of US$5.3bn, per capita of $19,247, debt to GDP ration of 100.4 per cent, a projected rise of 10.3 per cent.
The Barbados economy has deep structural imbalances which, despite claims to the contrary, have nothing to do with business or economic cyclicality. The public purse has too heavy a burden of the national wage bill, employing over 50 per cent of the employed, direct or indirect; government expenditure is too high, a huge part of which can be reduced; there is an over-dependence on tourism and the other service sectors, which creates a diversification void; and there is a need for new markets, from tourism to exports, a key part of re-balancing.
The argument about austerity versus prudent spending is a straw man, since most leading global economists are agreed that government must stimulate national economies until the private sectors can take the strain.
What they are disagreed about is how best to spend that money, if quantitative stimuli is what is needed or tougher austerity.
In Barbados the situation is a lot different. The debate has been over the government’s casual use of guarantees to increase public debt, in many cases off balance sheet, including underwriting Bds$120m of debt for Four Seasons with the Inter-American Development Bank, a five star luxury hotel, with attached private dwellings. Government has also been recklessly encouraging the hard-pressed national insurance scheme to invest in high-risk projects, including Four Seasons. But government recklessness has gone beyond just Four Seasons. In August education minister Ronald Jones, in announcing the national scholarships, exhibition scholars and national development scholarship winners, also announced that the lucky recipients may be the last group to have to return to work on the island on graduation as a condition of obtaining the awards.
However, by removing that contractual obligation the government runs the risk of encouraging, even subsidising, the brain drain. And in a remarkable display of his ignorance, he said: “Up to now we are still bonding persons to return to Barbados to gain of their knowledge. Persons who don’t get scholarships or exhibitions or awards are not bonded. “They go and study and when they are finished they can leave; so this is under consideration to see if National Development Scholars…will have to be bonded. You might be the last group who are.” Quote clearly he missed the point. Individuals funding their own study overseas obviously have the freedom, immigration restrictions aside, to settle where they want.
But those whose study has been funded by the taxpayers have a moral – and it should also be legal – obligation to return to the island to pass on some of their new knowledge, or, conversely, repay the full cost of their study so that others may also take advantage of such opportunities. In many ways, the abuse of the national insurance scheme is party and parcel of this abuse of Barbadian tax payers, only this has been the worse, not only in being used as a piggy bank by central government, but in its investment policies.
About 65 per cent of the NIS funds are invested in Barbados (mid-2012) and when the DLP came to power it was as high as 75 per cent. This is economic lunacy in every which way. It is basic investment theory that funds must be diversified across geographies, business and economic cycles, sectors and asset classes to provide a balanced portfolio. So, to invest 65 per cent of the pension pot in the Barbados economy is totally irresponsible, it also explains why the NIS has been investing so heavily in office accommodation and other public sector projects.
There is also a myth, which somehow has lots of currency in Barbados, that the NIS has reserves with which it could meet its commitments for up to eight years without any further contributions. But this is a myth. The national insurance scheme has long-term commitments to provide a retirement income for retired beneficiaries who are not active members, not just for eight-year .
Given increasing longevity, some of those contributors now aged under 45 may live for another fifty years or so and it is to meet these commitments that the scheme’s investment policy should be designed.
Nothing so far that we have seen suggest that the people responsible for managing the fund, and their political overseers, have any understanding of how a pension scheme works or how its investment policy should be structured.
Analysis and Conclusion:
It is generally conceded by most economists (Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt, and others), that if debt reaches 90 per cent of GDP it slows median growth rates by one per cent and average growth falls by even more. Reinhart and Rogoff find that this slowdown is the same for developed and developing economies, although developing economies are greatly affected by the debt to GDP ratio reaches 60 per cent, which impacts on growth rates by two per cent. At higher ratios growth is reduced by about 50 per cent and inflation rises as the debt ratio increases.
Apart from public debt, Reinhart and Rogoff also point out that it is necessary to look closely at the rate of private debt, households and businesses, which falls drastically during financial crises as people reduce the debt burden.
No matter what school of economics we belong to, no matter which political party we support, the brute reality is that the global financial crisis was caused by debt, but its repercussion in Barbados was not only debt, but dancing to the one-note samba of tourism. Yet, for some mysterious reason, the minister of finance and his economic advisers believe that by ploughing Bds$120m, or $180m, of however much it is, in to Four Seasons, subsidising retailers of high-powered luxury cars and splurging on even more public spending, without proper management of public funds, will somehow get us out of this mess. It is like giving an alcoholic more alcohol and expecting a result other than an early grave.
The late Ian Little, in his book, Boom, Crisis, and Adjustment (1993), warned: “Countries should be fiscally prudent. They should not become very heavily indebted, especially with short-term obligations. They should be aware of huge, dramatic government-inspired projects.” If the essay on Greece was meant to be an intellectual and theoretical justification of the governor’s position, which presumably was in line with government policy, it has failed to offer any solutions to the specific macro-economic challenges facing Barbados and this government’s wider strategy – over and above a practically useless document. So, if it was the governor’s intention to draw positive conclusions from the Greek model, he has made a mistake.
In the governor’s analysis, he has forgotten one thing. Despite its membership of the European Union and the eurozone, Greece is not a classical so-called first world nation. Athens may be a developed city, but rural Greece is a backward agrarian nation on the fringes of Europe and the Middle East. So, to compare the economic problems in Greece with those in Italy and Spain, where there are more developed political and economic structures, is like comparing apples and pears.
Reinhart and Rogoff conclude: “Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 per cent and above) are associated with notably lower growth outcomes.
“In addition, for emerging markets, there appears to be a more stringent threshold for total external debt/GDP (60 per cent), that is also associated with adverse outcomes for growth. Seldom do countries simply ‘grow’ their way out of deep debt burdens.” Put simply, there are risk premia, including the trade off between repaying off huge debt and tightening fiscal policy. The DLP government is determined to increase public sector debt while at the same time adamantly refusing to tighten fiscal policy –n despite this, it is willing to pick a fight with the international rating agencies when they downgrade the economy. In the old saying, something must give.
Only time will determine if undying loyalty to the DLP and its clear mis-management of the economy is going to cancel out prudent management of the economy and our obligations to future generations. The bottom line is that the Barbados economy is structurally unbalanced in four key ways: the public debt is out of control, the public’s share of the national wage bill is too high, it is out of kilter with its regional peers (just check the figures against Trinidad and Tobago) and it has and unhealthy dependence on the tourism sector.
These are structural problems, nothing to do with economic or business cyclicality, as some would have you believe. These are the issues that Barbados should be debating from every classroom to rum shop to street corner to workplace to church and place of worship. What has been surprising is that a number of highly respected intellectuals have gone on the record as supporting Dr Worrell’s flawed views. I beg to differ. I believe he is wrong in terms of social policy and wrong in terms of macro-economic theory.