Notes From a Native Son: Bad Economics and Bad Policy-making Are the Root Causes of our Economic Problems

Hal Austin

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.

Emerging Markets:
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.

Barbadian Reality:
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.

Structural Imbalance:
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.

0 thoughts on “Notes From a Native Son: Bad Economics and Bad Policy-making Are the Root Causes of our Economic Problems

  1. Mr. Austin has yet again hit the nail right on the head. If Worrell really wanted to make a more accurate comparative analogy in terms of world economies, then I believe that pinning Barbados up with that of Malta would draw a much more Vivid picture as to how Barbados’ economy is lagging in Comparison to that of Malta (despite Malta being a member of the troubled E.U).

    And I also concur that much of the debate about the economy is not FOCUSED AT ALL!! For all people do is relegate to finger pointing and party politics while there is a SERIOUSLY IMPENDING need for the Cronies in Parliament to put their fat heads together and actually pump out innovative plans that can actually help to stimulate growth. Instead, this spate of inertia seems to have climbed another level as we have even the Central Bank’s GOVERNOR OF ALL PEOPLE BLINDLY conscripting to theories and policies that have already proven to be useless and/or detrimental to open market economies.


    And Hal Austin has already laid out his solutions (as have I) on this blog many a times; only to have it ignored by the masses due to a SEVERE lack of interest in the national economy. Mr. Austin ismerely stating that he URGENTLY stresses that our politicians stop their childish and selfish ways and actually work quickly to restructure Barbados’ economic as well as legal (and hopefully political) systems in order to initiate a shift fro a service based economy to a PRODUCTIVE ONE.

    This is a most troubling sign for me that the fate of Bim has been sealed, and I cannot say that her future is shining in any light. Bajan society has now become one that doesn’t PROPERLY HOLD ITS POLITICIANS to account, so the people’s tolerance of the foolishness that unfolds in parliament have themselves to blame as well. Bajans should be taking to the streets and rallying right now just like the angered protestors of Iceland, however I fear that due to a mass ignorance of economic awareness and knowledge has come to surface in the face of Bajans. Its as if the people have been made to be so docile to the point that they will accept any load of crock coughed up by these pathetic politicians.

  2. Yet they say that Barbadians are literate and a large percentage are highly educated, if that was so these problems that are being highlighted and rubbish accepted from the politicians and civil servants would never be.
    Barbadians have become a people of lazy goofers who only desire is to be spoon fed, and because of the mentality politicians and civil servants alike take full advantage without any fear of repercussions.

  3. The Barbadian mindset must first change for there to be any positive transformation to Barbados economic woes.
    The slave mentality must be wash out to sea first. Tourism is a modern day form of attending to the slave master…servitude mentality….mental bondage

    • In the quote from the IMP rep, here is what she had to say:

      Speaking during an interview at the just concluded High Level Caribbean Forum hosted by the International Monetary Fund (IMF) in Trinidad, IMF deputy division chief Therese Turner-Jones stressed that Barbados’ efforts needed to be stronger even as the country headed fast into a general election.

      “One of the things we [the IMF] are learning from lessons around the world is that for our medium-term fiscal strategy and fiscal consolidation to be credible, the most important thing is that it needs to be frontloaded,” she told the WEEKEND NATION.

      Which are the countries she is referring? What is the historical basis for the comparison? Barbados and other small island economies are operating in unprecedented economic tomes no?

  4. @waterman you are really dumb. Since tourists come in all colours not just white. Chinese people, spanish people, etc. You must first over come your own short sightedness and inherent prejudices, someone such as yourself could never lead because you have no vision.

    • @Posh

      You need to use you best comprehension here. It is not about the ‘colour’ of the tourist but moreso the demand of the industry.

  5. Check what is happening in Greece as of yesterday. All along I thought it ironic that those morons the rioters were pelting the same police whose salaries are also being cut.

    Now the police have had enough. After not being allowed holiday and day off time since the rioting started off and on in Greece (whenever it was) some of the police have blocked the riot police HQ to stop them from getting to protests.

    They plan even more cuts to police/fire/military etc salaries, after the 30% cut last year I am wondering how much left do they have to cut?

    If we continue down our path, we won’t have rioting like Greece tho I cannot say for sure because Barbadians today are different from Barbadians in 1994. But certainly we will have to endure cuts too…

  6. @david
    really? you support the idea that tourist is one of servitude? Give me an example, when you go to any restaurant overseas are you not waited on hand and foot by overly polite people that it is almost embarrassing?

    • @Posh

      The use of the word prostitution is being used in the context of what we have to do as a country to sustain tourism.

  7. @ David | September 7, 2012 at 8:58 AM |

    Sounds like the first musical notes of warning of the pending arrival of the Economic Pied Piper with a bag of special measures to bring pain and shame on the children of Bim.

    The miller has been warning about the growing rat population in the millhouse.
    But it seems that with this tune from the Piper there will be some rats ready to jump ship.
    Just hear Chris: “It wasn’t me who did it!” Blame OSA, the last David or the coming David.
    At least Mr. Physical Deficit has gone into hiding far below deck in the bilge room.

  8. It is that bondage mentality that I speaking about when people don’t really understand the true concept of tourism especially in small island state where it is the maim economic driver. How can a nation that spend so much on education have a population with so small an understand, no wonder why every tut man and sammy can take bajans for a ride.

  9. There are many who understand clearly that we cannot sustain a public wages bill exceeding 40m per month for very much longer, and never should have had to. Here is the dilemma: the BLP did a very good job of replacing our sugar cane agriculture with offshore banking and services. The problem it created was a labour surplus which was then folded into the already inefficient civil service (doubled in the BLP’s 15 years). In order to reduce the size of the civil service we have to find something to do with the civil servants, people who have been trained and educated in poor time-keeping, poor attitude, inefficiency and many more unemployable attributes. If they continue to retire at the rate of 5% to 7% per year, the next gov’t could take the ‘non-replacement’ stance to reduce the wage bill by at least 25%. What is the solution? We don’t have a Panama Canal to build, no WW1 and WW2 KIAs to replace in UK and no ability to export the barely-skilled to the rest of CARICOM. Until we find an export market for our people we cannot solve the civil service problem. I argue that it would be better for our economy to pay them to stay home, at the rate they suffocate business people in this country we are all going to be frustrated into dormancy sooner rather than later. Alternatively, it would cost $32M to subsidise the sugar industry at 2000 production levels, half of the annual CBC subsidy. That would bring back a few thousand jobs and make the island look considerably better as well but would Bajans ever return to the fields? Not according to today’s newspaper. The only practical solution is a lease-treaty with a resource-wealthy partner like Guyana to create a new colony within its borders. Before you laugh at the ‘Hong Kong Plan’, think about it seriously. It helps that Guyana owes us a bit of money and has itself suffered ‘brain drain’ badly for decades 🙂

    • For information this blog was sent to the Governor as an fyi, of course he is free to respond to it if he wants.

  10. This is got to be the BEST Article I’ve seen in a long time. The problem is most Barbadians are like most USA citizens, they believe what the politicians tell them and do not think for themselves.

  11. Hal Austin needs to lead –that is Take ACTION and stop talking. Action is needing
    What is Hal Austin DOING ?
    is the question–
    -Not what Hal Austin -and more of his ilk, are doing.
    Talk is good only when action follows as a result–If not like they say, we can just —-STFU

  12. 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.

    David surely the statement above is a blatant falsehood. Who is Hal Austin ?Besides writing stories riddled with fibs for BU does he contribute anything of worth to civilisation?

    • Hal would have to explain his position, he did say ‘public debate’ which means he does not include the quarterly press briefings

  13. I worry about this “slavery mentality” attitude even when it is expained as “bondage mentality”. If it is “slavery” to work in the tourism business then it is “bondage” to work for a supermarket or in an office – in which case we are in big trouble.
    A large part of our problem in Barbados is a lack of productivity and unfortunately, being productivity means taking the opportunities available and working them to the maximum.
    Are we saying we want to dump tourism because it is demeaning to work in the industry? Why is it prostitution to try to maintain an industry which provides so much income to the country and so many jobs?
    A 1st world country might not call it prostitution, they might call it Government support, or perhaps marketing.

    • @St George’s Dragon

      Here is a brain teaser for you. Do you remember the name of the bigshot economist the government/central bank paid to deliver a lecture recently and his best comparison of our economy was to Singapore?

      Do you know that Dr. DeLisle Worrell attended the same schools and universities as some of these people? Do you know he did his tour of duty working for external financial agencies? The problem with us people from the islands we do not have confidence in the people we have produced, we always feel the urge to follow. The reason we are where we are has to do with greed and consumption.

  14. Do you all know the story of the English King Canute? He was fabled to have stood on the beach commanding the tide to retreat. It didn’t.
    I fear that the Governor of the Central Bank is doing the same right now with the IMF.
    We may not like the IMF’s recipe for economic health but I afraid we must accept that their view is just a statement of the conventional view of world economics.
    If we want to deal with world economic players (so borrow money from foreign banks, issue bonds for purchase by foreign investors and companies, attract foreign companies to Barbados) we will find that we have to play by their rules.
    Canute, apparently, intended the tide-stopping exercise to demonstrate to his courtiers that the powers of Kings were limited. I suspect that Deslisle Worrell will find that his argument about economic strategy will show that the powers of the Central Bank Governor are similarly limited when it comes to ruling world-wide perception of the Barbados economy.

  15. @ David
    Delisle Worrell may have attended the same universities as people in similar positions in 1st world countries. He may have worked in the same 1st world organisations. He clearly does not agree with mainstream 1st world economics.
    When you say “we do not have confidence in the people we have produced” sometimes we may have to come to the conclusion that they are wrong.
    Look at this way. If we had 20 Deslisle Worrell look alikes who had been through similar but slightly different lives, I suspect we would have several different views from them. We would have right wing Deslisle Worrells telling us that we should devalue the dollar, and we would have left-wing Deslisle Worrells telling us that we should have higher minimum wages. With just one Desilsle Worrell, we have just one “truth”.
    Going to “the same schools and universities as some of these people” and doing his “tour of duty working for external financial agencies” would therefore be just a list on the CV, not a guarantee of gold-standard advice.
    It should not be a case of of having no confidence in the people we produce; we should always test what they tell us. Tricky, when they are the experts. I guess we just need more of them.

  16. Most sensible economists in the world are frustrated as seen in this quote taken from an article on NBC website.Not genius Owen Arthur
    By John W. Schoen, NBC News

    Economics 101 says a massive dose of easy money is supposed to be a reliable cure for a sluggish economy. For the first time in decades, the prescription isn’t working, to the rising frustration of central bankers in the U.S. and Europe

  17. Hi Clone
    Supp Dawg…..
    “Economics 101 says a massive dose of easy money is supposed to be a reliable cure for a sluggish economy.”
    What has this to do with BIM? what is ur angle?

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