Notes From a Native Son: Has the Central Bank Failed to Give the Nation Any Direction on Economic Recovery
The governor of the Central Bank appears quite clearly to have lost all sense of balance as far as the local economy is concerned. Not only has he been in office for the last five years or so, he is yet to come up with a publicly available reasoned and detailed plan for rescuing the nation’s economy from the situation it is in. His recent obvious confusion about the constitutional role of the Central Bank adds further to the confusion. Even local journalists are confused.
Dr Worrell’s reported U-turn on a policy announcement – a veiled criticism of the government, then claiming the government was on track – was but the latest in a series of embarrassing episodes. But first, we must get the legislation right. The Central Bank Act is irrelevant to the new financial architecture post-2007 and the new global regulatory paradigm. I said before, and say again, that the Act needs serious reform, giving the Bank a legally defined role, on par with the Federal Reserve, Bank of England and all the other major Central Banks. Be that role inflation targeting, financial stability, or even more explicitly, managing unemployment rates, there must be a benchmark against which we could measure the Bank. Now we have a situation in which the governor is publicly expressing views about fiscal policy, and one local website even describing the governor/central bank as the government’s primary monetary and fiscal adviser. Not at all. The central bank should be independent of the government of the day and should be reporting direct to parliament.
Government should have the right to recommend a future governor, but it should be left to parliament, sitting in committee, to confirm that appointment. In terms of its remit, the Central Bank should have responsibility for monetary policy, with the minister of finance in charge of fiscal policy. If the governor is not clear about that then it should be made clear. Revenue policy is not to do with technocrats, but rightly for elected politicians. That is another issue that has got to be clarified. But, in a situation in which the minister is out of his depth, and has an obvious professor/student, or master/pupil, relationship with Dr Worrell, the reality is that no matter what the legal situation, the de facto one is that Dr Worrell will be the puppet master, pulling the strings from behind the screen.
Ignoring these slight constitutional technicalities, there are more worrying things about Dr Worrell’s recent reported speeches. Recently he has made some rather bold statements, if reported correctly: that the debt/GDP ratio does not matter, and even ventured that Japan, a nation with a 230 per cent debt/GDP ratio, does not have any economic problems. His other suggestion that government needed a new fiscal adjustment strategy is right, so why did he withdraw it the following day? Was political pressure put on him, if so his professional integrity should compel him to go public and stick to his guns. After all, it is his professional and intellectual reputation at stake.
Ignoring for the time being the semantics of ‘new policies’ versus ‘adjustments’, the point is that something has to be done, and soon. If so, then what? Rhetoric is one thing, but spelling out the details is something else and it is the detailed plans that the nation needs. Barbadians are very good at talking but when it comes to action, implementing detailed policies, they fall away. Interestingly, in his press briefing, Dr Worrell fell back on the old canard of maintaining foreign reserves at the current level, of just over Bds$1bn. This is negative and self-defeatist, as we know from post-war economic history. At the time of the Bretton Woods conference, the USA Treasury was pushing for a continuation of the fixed rate exchange, which FDR had put in place with the 1934 Gold Standard (an exchange rate of US$35 per ounce of gold), but underlying this was that Fort Knox had enough gold to see the US through. Now, interestingly enough, it is the official US position that fixed exchange rates are part of a currency war – thus its tension with China. FDR was an economic determinist and the economic policy as part of wider foreign policy, a view supported by Harry Dexter White, who led the US delegation in the talks. But as part of Britain’s post-war restructuring negotiations the UK had to sell off US-based subsidiaries of UK companies, get rid of its colonies (despite the historic myth of an uprising by the colonised) and at one point Britain was even considering offering Jamaica, Trinidad and British Guiana to the Americans as part of the deal, which the US rejected. Three years later, in 1947, Britain accepted the Marshall Plan and constitutional independence for Greece, Palestine and India soon followed. All this happened at a time when Britain was running out of US dollars and it is now conceded that Britain rushed in to the Marshall Plan arrangement (see: Benn Steil’s The Battle of Bretton Woods) because of Keynes’ obstinacy. Sir Richard ‘Otto’ Clarke, a senior UK civil servant felt Britain could have borrowed the necessary money privately from the American Import and Export Bank or from Canada.
Without drifting too far away from the subject, by the early 1970s the Americans’ prize possession, Fort Knox gold, was running down, which led to President Nixon taking precipitate action in 1971 against the gold standard. The point is that reserves are there for hedging against exogenous shocks, not as prized possession to be kept in some foreign currency or local bank account. Cyprus is now offering to sell off euros400m of its gold reserves to settle its sovereign debt problem.
Even if we were to accept that there is no economic consensus on how best to navigate the global crisis, it is nevertheless clear that Dr Worrell needs to do say more substantively on the economic problem facing the nation. He is simply wrong on all the significant issues he has so far spoken publicly on and the only thing worse than some of his outrageous contrarian views is the total silence of academic economists. This crisis is their moment, it is the time for trained economists to step up to the plate and give the nation guidance. But due to a combination of their job insecurity, uncertainty about their intellectual capability, or just discursive cowardice, they continue to remain deaf, dumb and blind to the slow car crash that is the Barbados economy.
Dr Worrell comes over like a secular preacher: good times are around the corner, the economy is going to return to growth, the bad times are just a test of national nerve, but don’t give up. However, the hungry must be fed and neither Dr Worrell nor the minister, Chris Sinckler, has the barley loves or small fishes to feed the thousands. In simple terms, Barbadians need answers. And for a party that has had a full parliamentary term to think through its policies, and, since February 21, even more time to do so as a matter of urgency, this is poor showing in anyone’s books.
If the government and Central Bank are really intent on QE, as minister Sinckler has announced, then we have a number of models from developed economies to guide us. There is the |Bank of England, which has injected £375 in to the markets, but most of that has been buying back bonds from banks (63 per cent of all sterling bond issuance is held by the BoE), yet there is talk about funding mortgages and small businesses. That money could have been used to fund mortgages and small and medium enterprises direct by establishing a post office bank, similar to the old Giro and TSB Banks. What the BoE and UK Treasury have done is to give banks money to pay down their gearing and to build up a massive war chest. So we know that is not the model. In fact, that is similar to the one the Bank of Japan used in the troubled 1990s, giving householders cash which they dutifully saved, but differs from the one introduced by the new prime minister and governor of the Bank of Japan.
There is also the Federal Reserve model and that of the European Central Bank.
So far, neither Dr Worrell nor minister Mr Sinckler has said anything about the proposed Quantitative Easing, if it is going to be new money, and if so where is the money going to come from? And, given the usual lack of detail when announcing new policies, neither have they said how the Bds$600m stimulus, the sum mentioned, is going to be spent.
Low Cost Programmes:
Given government and Central Bank inaction, there are a number of things they can do without imposing any further burden on hard-pressed tax payers and which would provide jobs and go a long way towards helping with public safety. The most urgent of these financial stability initiatives should be job creation, in particular for the all-important 16 to 24 year olds, the cohort that is almost certainly at the centre of the plague of choke and rob crimes.
Organising such a scheme for non-graduates is relatively simple: turn the focus on providing skills for these men and women and provide remedial education to those who are badly in need of further education, and attach conditionality to it, such as making the courses compulsory for those who want government jobs or access to state-provided skills training. Separate the small business unit from the civil service and make it self-governing, although current staff will retain their civil service benefits, with a non-executive board of directors, made up of business people, retired accountants and trainers, but exclude trade unionists and party supporters.
The SBU could be funded with the Bds$10m in dormant bank accounts (underwritten by the government), the same amount of money that the David Thompson government gave to the Barbados Turf Club and to Clico. Government can also look at alternative business models, such as employee-owned, cooperatives and mutuals, which have a better record of survival than ordinary commercial enterprises, led by some of these young unemployed people. It would be amazing how thoughtful and creative some of these young people could be if given the opportunity, with the only thing holding them back being suitable funding, guidance and the confidence of policymakers. And, I would not repeat the list that I have published here before, such as privatising all the peripheral public sector departments that are not central to the role of government. By privatising I do not mean selling all the nation’s assets to foreign rich kids with bulging wallets, but to the workers and ordinary Barbadians.
Government should make it policy to turn the nation in to an equity-owning democracy, and at the same time turn the existing 17 post offices in to Post Office Banks, paying all 30000 or so public sector workers through the new bank. All this can be done within weeks, leaving the big figure developments for more considered thought and ideas, such as developing a private housing market, a new companies’ Act controlling the behaviour of majority shareholders, the taxation of cross-border firms, allowing the raising of corporate bonds and corporate governance.
Analysis and Conclusion:
As things stand, government and the Central Bank are trapped like rabbits in oncoming traffic lights, they do not know if to go or come, jump or stand still. All they know – or should realise – is that they are in the frame and the nation is looking to them for new ideas and policies. To date, they have failed the nation.
There has been no national debate of quality, or at least in official quarters, about freezing public sector salaries, new revenue streams such as an inheritance tax, higher taxes on second homes for overseas buyers, higher road taxes and higher duties on alcohol, tobacco and sugary sweet drinks, all of which have long-term health consequences. But the most important and urgent discussion to be had is about the Dr Worrell’s views about the high debt to GDP ratio which can often mean that a government is far less not credit worthy than one with a low debt to GDP. But Dr Worrell is not exactly wrong, since few things are that black and white, but he must put his case; having the ability to fund one’s credit – whether household or government – is the key to the modern management of finances. However that presupposes a number of things, such as reserves, or the savings one has in the bank, or having the necessary protection insurance in place. If not, for households sudden shocks, such as unemployment, the death of the breadwinner, or unexpected expenditure can often upset the applecart. The same goes for governments, with the only difference being that governments have the freedom to print money and inflate away its debt. Given this, we are not sure if there is reason and logic in Dr Worrell’s views, since he fails to go in to detail, either out of the belief that no one would understand what he is talking about, or, and I am sure this is not the case, he himself does not know what he is talking about. But the view that somehow it is economically more rational for Barbados to raise money in the local money markets with a low credit rating, at punitive rates of approximately 15 per cent annually, when it could do so in the low interest international markets, should be fully explained.
If the DLP government was in a position to borrow money in the UK, Japan or the US, where base rates are all below one per cent, thereby paying a few basis points above that rate – for example one per cent plus 400 basis points – that would be a saving of about ten per cent a year. I am not a mathematician, but, for example, with a loan of Bds£1bn, paying 15 per cent interest a year, that would cost taxpayers over roughly $150m dollars a year over the period of the loan; but at five per cent, it would be a saving of about Bds$100m a year. Can Barbadian afford to waste that amount of money while piling up Bds$1bn of foreign reserves? That is more than it would take to fund a small retail balance sheet bank.
All this is theoretical since Dr Worrell has not told us what policy initiative he would like to see in order to rescue the economy. Is he in favour of QE, or does he favour what Robert Shiller, often described as one of the world’s top 100 economists, calls the paradox of thrift? Shiller tells us: “There is one way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion. “That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government borrowed) declines.”
As we have seen with Cyprus, read Barbados. If a small nation has a large budget deficit, it will be forced to borrow more than it raises in revenue, leading to a decline in credit worthiness and subsequent downgrading by the credit agencies. If the real interest rate on debt is greater than the real rate of growth, the economy is heading for a storm. If Dr Worrell does not agree with this economic consensus view then he ought to say and explain why not.
If all this is not convincing then I refer him to Reinhart and Rogoff (This Time is Different), and Yeva Nersisyan and L. Randall Wray, who quite clearly and rightly suggest that short-term higher government debt is acceptable in the short term, but in the medium to long term may impact on growth. Earlier the Central Bank had announced changes to its interest rates in order to protect the ‘small saver’, it claimed. But with official interest rates running at about three per cent, but with the new protection rate at 2.5 per cent, then small savers are still losing real purchasing power. More important, it is very difficult to believe that inflation in Barbados is running at 4 per cent, or five per cent, or even ten per cent. I believe that the real inflation rate in an import-dependent economy such as Barbados must be at the minimum of 15 per cent. We import commodity inflation, and corrupt traders not only pass the full inflation rate, they add to it to make a higher profit on commodity price inflation to boot. The only way to control and monitor this effectively is to create a prices and incomes commission, but this idea is not popular with the so-called Social Partnership.
Finally, under Dr Worrell’s leadership for over five years, the Central Bank has failed to deliver any sustainable monetary policy to return Barbados to the level of prosperity it aspires to and deserves. Maybe his communication skills, especially when discussing complex financial issues, are not the best. Then he should get training. However, his latest outburst should be seen in the context of economic policymaking and, as such, raises questions over his suitability for the position. In the end, despite his soothing reassuring words, the brute reality is Barbados faces a long period of economic weakness, with all the social problems that will bring in its wake. Time is short.