Notes From a Native Son: Captain the Ship is Sinking – Is Worrell the Best Man to be in Charge of the Central Bank at a Time like this?
In the preface to its recent Alternative Worlds report, the US National Intelligence Council observed: “The world of 2030 will be radically transformed from our world today. By 2030, no country – whether the US, China, or any other large country – will be a hegemonic power. “The empowerment of individuals and diffusion of power among states and from states to informal networks will have a dramatic impact, largely reversing the historic rise of the West since 1750, restoring Asia’s weight in the global economy, and ushering in a new era of “democratisation” at the international and domestic level….”. In other words, even at the highest level of the inward-looking US, there is a realisation that the world is changing.
However, reading the over-optimistic, even fictional, recent central bank review of the economy and projections for 2013, one would not get this impression. The report tells us the fiscal deficit is growing, up from 5.2 per cent April to December 2011, to 6.2 per cent in 2012; personal taxes are down ten per cent and VAT fell by two per cent for the same period; subsidies to government entities rose by two per cent and interest rates rose by four per cent. Public sector debt is 54 per cent of GDP, and including the national insurance scheme, it rises to 83 per cent of GDP. But, in about or real optimism, the review predicts that growth over 2013 will be 0.7 per cent, based on the IMF predictions of growth in the US, UK and Canada, our major trading partners. Apart from the fact that I was under the impression the Caricom was our major trading bloc, to base projected growth of the Barbados economy on the projections for those three economies is economic lunacy.
The review also predicts that inflation will fall to five per cent, based “current trends in international commodity prices for food, and the IMF’s projection for fuel…”. However, having started on an optimistic note, the review goes on to contradict itself: “Tourism value-added contracted by an estimated 3.5 per cent. There were reductions of 8.8 per cent and nine per cent in US and UK visitors……” and it lists some of the perceived causes, such as the closure of Almond Resorts, UK air passenger duty, and the cessation of Redjet and so on. There is no analysis, no explanations of methodologies, no sources for the over-optimism.
(In a short blog, it is not possible to go in to all the details. If you want to see a longer version of this, please send me your email address).
It is very difficult to see how the central bank could draw conclusions from the recent IMF report, which in fact lowers its growth forecast for 2013 in the US, Europe and China – the first two of which account for nearly half of global trade (the US 23 per cent and the European Union, 25 per cent). Further, the reasoning lack logic. In 1979, the collapse of communism, advanced economies accounted for 70 per cent of the global economy, developing economies 20 per cent and communist economies the balance; developed economies now account 51 per cent of global output.
Equally, ten years ago China’s GDP was about US$2.5trn with an average growth of about ten per cent; today it is about US$7trn, adding nearly $500bn during 2013 to global output. There is nothing about the fast-growing developing nations, the economies driving the global economy, in the central bank review; nations such as China, Brazil, India, Indonesia, Turkey, Russia. This is a reality even the hard-headed American analysts recognise with great reluctance.
It is true the US is in the middle of an economic recovery, but this growth level is below historic trends and is failing desperately to show the much expected V shaped characteristic that most economists have grown to know and love. Wall Street may be showing signs of a generous return to profitability, but Wall Street is part of the problem, not the solution. It was Wall Street’s obsession with yield that drove it to export US jobs to China, leaving huge sectors of American industry struggling to survive. So, any US economic recovery must be accompanied by a recovery in jobs, which is not the case at present.
The key driver of the eurozone, Germany, has recently hit a damp patch and is itself heading for a serious slow down at best or even recession in the first half of 2013. If that happens, then it is unlikely that the eurozone will recover before 2014, at the earliest, with the French economy struggling even to register the slightest growth. German economic output has stalled and with a general election due, Angela Merkel is unlikely to be generous in trying to stimulate the troubled Southern European economies.
It must be remembered, despite the howling from the Tory Rightwing and prime minister David Cameron about bringing back more power from Brussels, Britain is globally insignificant outside the EU. With the EU being Britain’s biggest trading partner, the UK should be at the very heart of the EU and even calling for a full politician and monetary federation. So, what in this sorry state gives the central bank the confidence to base its growth projections for 2013 on the return of UK tourists is a mystery.
One leading UK economic think-tank, Capital Economics, has even expressed ‘concerns’ for the pound sterling. In a recent newsletter, it writes: “Various factors suggest that the pound might come under downward pressure. First, the economy is unlikely to grow much this year. Second, the MPC (Monetary Policy Committee, part of the Bank of England) is likely to do more QE (Quantitative Easing, or printing money) before long. Third, the current account deficit last year may have been bigger as a share of GDP than in any other years since 1990.” This, in brief, is the thriving economy that the central bank is telling the nation will grow and contribute as a key driver to the 0.7 per cent projected economic growth. It is fantasy. According to the Office for National Statistics, one-third of British people are unable to afford an annual overseas holiday.
Fiscal and monetary policy in Latin America is rather interesting, ranging from cyclically-adjusted policies, with automatic tax stabilisers, to growth policies meant to dive output gaps. Brazil, in particular, is very interesting, basing growth on the relative short-term targets of the 2014 and 2016 soccer world cup and Olympics.
Recently, the Korean minister of finance has called on the G20 to focus on the adverse consequences of quantitative easing in the US, Britain and Japan, for fear of putting inflationary pressures on the global economy. He believes that such measure may influence capital flows and undermine the Korean won, which has appreciated by ten per cent against the US dollar over the last six months. Brazil too has been concerned about QE as a ‘protectionist’ measure and has also raised questions about currency wars. A leading official from the Russian central bank has joined the chorus, claiming that the world is on the verge of very “serious and confrontational actions in the sphere, which is, not to get too emotional, called ‘currency wars’”. And the Luxembourg prime minister, Jean-Claude Juncker, has also said that the euro is getting ‘dangerously high’ – the euro has risen ten per cent against the greenback since the middle of last year.
These are not arguments going on in cyber space, but reflect on the reality of the Barbadian dollar which is fixed to the Greenback. It means if the US dollar goes up, down or cross, so does the Barbadian dollar, and we have no control over that. Outside currency union, and I am in favour of a Caricom/CSME monetary union, it is important that an independent nation-state should have control of its currency. We do not. But this war of words comes at a time of weak global demand and the drive for fair value of international currencies is one that is likely to end without a real winner. We know somethings: the Greenback is over-valued, but this is deliberate policy by the Fed given that it is the only likely reserve currency, backed by an economy responsible for about 25 per cent of global trade, versus the European Union’s 25 per cent.
I have always been concerned about central bank methodologies, including the assumptions made for calculating its inflation numbers. Since it is not made clear (we know how the Federal Reserve, the Bank of England, the European Central Bank, and other leading central banks do theirs), we may assume that the Barbados central Bank follows global practice when calculating the consumer price index based on an arithmetical mean, based on all the price increases divided by the number of goods, or the retail price index, based on a geometric mean, which calculates the average change in a set basket of X goods taking the Xth root. The RPI is important for pensioners and those on a fixed index-linked income is to protect beneficiaries against future inflationary increases. Neither method is perfect, although it is more likely that the CPI would under-estimate inflation than the RPI. However, the central bank can help by making public the basket of good it bases it geometric calculations on for the RPI. Apart from any thing else, this helps those of us who are interested in ‘shadowing’ the central bank to do numbers and test whether or not we will reach the same conclusions. This is not some small technical measure for nerds, it is important if we are the believe the inflationary assumptions made by the bank (of under six per cent in 2013, which I do not believe), given constantly rising food inflation, the fact Barbados is a net importer of food inflation, and the endogenous volatility which adds to the mix, including the wage demands from public sector unions. The objective feeling is that there is hidden inflation.
Analysis and Conclusion:
As the global economy struggles through this year, with most developed economies under-performing, the elephant in the room will be the explosion in the global population and, with it, food price inflation. These are some of the issues that do not yet appear to be on the radar of the central bank and the DLP government and its leading policy advisers. I have said here and elsewhere before that the stockpiling of foreign reserves is a hangover from another era and has no real purpose in the new globalised economy. With a reserve of Bds$1.4bn, it is like having money in a low-interest account hedging for the proverbial rainy day, when your current account debt is piling up.
Good financial planners would tell any client that, after putting aside a small amount the ‘rainy day’, the priority must be paring down debt, putting those with high interest rates top of the list, before indulging in investments and profligate living. Further, the great advantage of not being in a monetary union – even though I am an advocate of a Caricom/CSME monetary union – is that the central bank/ministry of finance is in charge of the printing presses.
And, in terms of quantitative easing, we have numerous examples of how not to apply it: Japan, the US, UK, European Central Bank, and others. The central importance of quantitative easing is to stimulate the economy, but to do so there must be a plan, and so far the politicians and policymakers do not seem to have a masterplan to rescue the Barbados economy.
A simple observation: in a recent report, the World Bank study, it was said that seven of the ten fastest global economies were in Africa. And we have seen the likes of Turkey, Brazil, China, India, Australia, and a host of European countries, making tracks to Africa, mainly to access natural resources, to equally to open or improve trade routes. I have suggested, backed by others, that Caricom should open two high commissions/trade missions in Africa, one in South Africa and the other in West Africa, to build our commercial, diplomatic and political contacts, and also to secure our medium and long-term food supply. So far this issue has not come on the radar of our media, politics or public conversation, even though the clock is ticking away. It is this intellectual poverty, typified by the management of the central bank, that is causing us to commit economic suicide. There is also an element of intellectual dishonesty, with Worrell always being defensive, telling us what would not work, but never saying what he would recommend to the minister and the government.
On the other hand, there does not seem to be a link between the central bank’s projections and the 200-page tourism strategy document put out by the ministry of tourism. Nor, indeed, is there any obvious recognition of the fact that long-haul tourism is a luxury, which few hard-pressed people, who do not know if they will be in a job in two weeks, two months, or a year’s time. Then there is the policy blindness, the wishful thinking, the pray that tourism will take off as if did during the boom years.
Since the global banking crisis of 2007/8 this government has not made a single move towards developing an alternative to tourism, of developing counter-cyclical policies, or creating a job creation programme, of funding start-ups and small and medium enterprises. But, to create a small business environment means the financialisation of the Barbadian businesses and that means banks and shadow banks lending, and Barbados does not have any locally-owned banks.
It also means creating the legislative and regulatory framework which would allow credit unions (an dynamic alternative business model to the publicly owned and the equity-owned models) to become players in deposit-taking, lending and retail product designing and distribution.
In the final analysis, we are between a rock and hard place: a finance minister that is not equipped for the job and a central bank governor that is stubborn, obstinate, old-fashioned and, most of all, wrong in his policy recommendations. The nation is crying out for positive monetary ideas to rescue this sinking ship, and intellectually redundant neoclassical mantras are not the answer; it is like getting a blacksmith to do in a lifetime what a good welder could do in a few days. There is no one-size-fits-all model of quantitative easing. The Bank of England used its £350bn to buy assets off banks in the hope that banks will go out and lend; they did not. They used the money to pare down their balance sheets.
The Japanese in QE one gave money back to consumers hoping that they would go out and spend, they did not; they saved the money. The US used their as a rescue fund to save banks such as Lehman Brothers and AIG, and to rescue the limping car industry; some of it has paid off, with the US being the only major economy growing, if slowly. And, the ECB used its power to underwrite southern European debt, with the expressed hope that it would stimulate their cramped economies; so far it has not.
In fact, eurozone problems are dragging down the German economy, which was largely built on the expert of luxury cars and high-quality machined goods. Germany also built an economy on lending to the Greeks, Portuguese and Spanish in order that they bought German-made goods.
One model that could be appropriate for Barbados, as I have suggested before, is that Bds$500m of the reserve fund can be used to stimulate the economy by putting $50m in to funding a small retail bank to support small business start-ups and households, providing residential mortgages, credit cards, motor and home and content insurance, all based on the balance sheet. Some of the money could also be used to fund a sovereign wealth fund which would be used as the hands-off investment vehicle for the state, taking an equity share in badly managed and money-losing small family-owned hotels with an expressed exit clause once they have returned to profitability.
And, in terms of job creation, making all entry level public sector job a job share for under 25-year-olds, and encouraging the private sector through fiscal incentives, to do likewise, on condition the new employees are not related to the owners of the enterprises or their relatives or friends. These are all ideas to stimulate the economy which seem to pass the central bank, and ministry of finance, by. Worrell’s reported claim that growth had to be driven by the private sector is mistaken; it should preferably be driven by the private sector, but there are three drivers of economies: consumers, corporates and government.
The US economy is currently being driven by consumers, who have returned to the market. If consumers are spending, corporates make money and spend on stock and machinery; they employ more workers who pay income tax and national insurance, they also save and try to improve their lives by repairing their homes etc; government tax take improves and the economy grows because of this activity.
If, however, there is a loss of confidence and a threat of being made redundant, consumers stop spending and save, corporates deleverage their inventories and stop hiring, they may even make existing staff redundant; government tax take drops. This is where the NeoKeynesian stimulus comes in by spending money on infrastructural improvements, thereby creating jobs, stimulating consuming spending, etc.