Dear Minister,
It is my understanding that you will be holding a seminar on the economy on June 27, at which it is hoped solutions to the economic crisis in Barbados will be aired. As I have not been invited, and will not be in Barbados at the time, as a loyal Barbadian I will like to make one or two suggestions for your consideration.
Let me begin by stating that I am somewhat amazed that after nearly six years we are now having this national discussion, it is one that we should have had five years ago. However, this is not a party political point, just one which recognises the urgency of the mission. It is also important that invitations to take part in the national conversation is not based on party loyalty, but on what one can contribute to the quality of the debated.
The Problem:
It is easy to make excuses blaming the continuing crisis on the previous administration – which, as I have mentioned, left office nearly six years ago – or on the global ‘crisis’, which to my mind is a total misreading of what is taking place in the global economy. To remind you, the global economy is growing, driven in large part by China and the other emerging economies, and indeed by the United States; the question is how a small island economy fits in this global reality, rather than how the reality fits in to the needs of a small island economy. In other words, your growth strategy must be based on what is taking place, rather than what took place in previous decades or what you would like to take placed.
The new global architecture is different: first, despite the background noise about globalisation, global inequality is getting worse. There is now a greater divide between the wealthy and those just making ends meet, both on a national and individual level. Barbados is now at a fork in the road and you, your colleagues in government, technocrats, advisers and business people must make a crucial decision: do we want a fairer society, or is it every man and woman for him/herself? Before answering, just remind yourself of recent events in Greece, Turkey, Spain, France, London, Brazil and the rise of organisations such as Occupy and the Far Right in Europe. If it reminds you of events before the Second World War, you are perceptive.
It is now a universal truth that an unequal distribution of global or national wealth will impact on growth – and social harmony. If you accept this position, and it is one promoted by both the International Monetary Fund and the US government, then the core strategy is the redistribution of wealth in Barbados. Global inequality is one of the dark stains over the three decades of financial globalisation. Of all the fast-growing economies – Brazil, Russia, India, China and South Africa – all are marked with the deeps wound of abject poverty sitting cheek by jowl with obscene wealth. The wealth divide in Brazil is wider than in any other significant nation in the world, China bars its rural citizens from moving to urban areas and there are good reasons why the Chinese government bases its growth projections on growth of 7.5 per cent – that is what it takes to prevent social breakdown. This is a nation with 19 per cent of the global population, but only 6.5 per cent of land mass, five per cent of businesses are officially owned by the state, but 50 per cent of workers are on the state payroll.
Over the last 30 years, 450m rural workers have moved to urban areas and a further 234m are trapped in the repressive Hukou system – a permit to move from their rural base, that is why it has a policy of exporting its population. Further, it also has 6 per cent of available water and 1.1 per cent of its oil. The old Chinese development model was based on massive importation of resources, add value through cheap labour, then export at prices that made the rest of the world take notice. It has now moved in to phase two of that development, based on the 300m – and rising – middle class, what economists call demand-driven growth.
Put simply, with a middle class the size of the US, and with rural workers all wanting to move to urban areas, where the jobs are, China can continue to grow by providing the consumer needs of its own population.
Things we take for granted these emerging middle class people need: from fridges, washing machines, television sets, to motor vehicles, insurance, overseas holidays; within the next decade they will dominate global tourism. India has got its own problems, with the vast majority of its citizens illiterate, or being just able to read and write.
Roadmap:
We have got to decide as a society if these are the development models we want, or do we aspire to a more even distribution of wealth and prosperity. We are all familiar with the US and its terrible disparity between the wealthiest and poorest, as the Obamacare debate quite clearly exposed. The top ten per cent of Americans own 47 per cent of the wealth; 14 per cent of Americans receive food stamps. IN short, there is no perfect path to development.
New Programmes:
Of course, issues of wealth redistribution must be handled sensitively, but you must be bold and brave. First, the bulk of global wealth is in property and in most Western liberal democracies property tax is biased towards home owners: mortgages get special tax treatment, the increase in the value of the property often goes untaxed, and, in those jurisdictions in which there is no inheritance or death tax, the value of property is passed on to future generations free of taxes. Without going in to too much technical details, these are the basic facts on property taxation. Ignore the loud mouths and introduce an inheritance tax; impose a tougher taxation framework on property; introduce higher taxes on second and holiday homes; and homeowners who are not domicile in Barbados for taxation purposes introduce a new and tougher foreign residents’ tax. For non-citizens who have retired or settled in Barbados, for tax, health or social reasons, tax them on their global earnings.
Corporate Taxes:
I suggest you revisit your corporate taxation arrangements and target those corporations that use Barbados as a tax haven. Stop cross-border corporations from using the tricks of internal accounting, such as transfer pricing. I suggest a two-tier taxation regime for such cross-border companies, an initial tax claim, based on the declared revenue of the branch or wholly-owned subsidiary domiciled in Barbados. The onus then moves to the company to prove that all the revenue was not profit, get them to list expenditure item by item. They will have to detail such charges as income tax, national insurance, proper internal transfer pricing, etc. Once the final numbers are agreed, then the second and final tax demand will be issued. This also sends the right message to those multi-national companies looking for a haven to hide their enormous profits. They will be told in no uncertain terms Barbados is not playing ball. I suggest you read the SEC report on the American Insurance Group.
SMEs and Social Enterprise:
Ignore the badly argued advice that suggests that every new micro-, small, and medium enterprise must pay corporation and income taxes and national insurance. Tax breaks for new SMMEs is an incredible incentive for talented, skilled and enterprising people to set up new commercial, social enterprise and cooperative businesses. This does not mean they get away tax free, most of these people will still be paying VAT. What you have to do with skill is introduce tax breaks – on the principles offered to foreign-owned new businesses – with a limited period.
Sovereign Wealth Fund:
Minister, set up a Sovereign Wealth Fund which will become the vehicle for national investments, by rolling a number of existing public and statutory organisations in to a single body. Whatever you do, however, it must be managed by professionals and the government and central bank must be kept at arms length – and it must be independent of the national insurance scheme. Give the SWF a performance target, for example, 1.5 per cent above base rate, and a pre-determined asset allocation objective; leave the stock selection to the experts – and give it the authority to do deals.
Leisure and Tourism Infrastructure:
As I have said be bold, in fact be bolder than bold. For decades Barbadian politicians and policymakers have been scared of big capital projects. In fact, we have had two since the end of the Second World War and only one-ish since constitutional independence. The first was that remarkable job done by Sir Grantley Adams to reclaim the space between Pelican Island and the mainland. To this day the full importance and economic significance of that project is not fully recognised, either by ordinary Barbadians or by our economic historians. It is a disgrace.
The second was the ABC highway, interesting but a botched project – stand by the airport, decide the quickest way to get tourists to the West Coast, and cut across the country. It was municipal vandalism of the worst kind. But we are where we are. Any leisure development must be based on the needs of ordinary Barbadians and tourists are fully welcomed to enjoy the facilities. Think of developing Seawell as a small town centre, with at least one low-cost hotel, boutiques, restaurants, shops and a visitor centre; install a mono-rail track running east from the airport to Codrington College, in the first stage, giving travellers an opportunity to enjoy excursion rides; also think of developing the area around Ragged Point and Culpepper Island as an all-year funfair and visitor centre, with rides, and an aquarium, etc. The other part of the leisure infrastructure you should consider is the construction of three leisure and sports centres – one in St Michael, one in St John and one in StLucy/St Peter. A dry-ski ride in the Scotland District, complete with an indoor climbing wall, squash and badminton courts, a cinema, restaurant and piazza, giving people a vision of the East Coast and developing the local economies will be very popular. The unthinking will rubbish these ideas on the question of costs, but that is because they are limited in imagination. The role of government is to facilitate, provide the legislative and regulatory framework, not own or build everything. Your job is to draw up feasible plans and invite funders, foreign and local.
Finally, please remember that sound growth is built on structural reform, rather than fancy fiscal and monetary games, and the financialisation of the economy is key to this. Look again at the massive reserves the nation has sitting there doing nothing, waiting for some imagined external shock. It is based on an outdated economic theory. Use some of the money to develop the nation.
I know yours is a tough job, but I wish you and your colleagues good luck. One thing, do not tolerate people talking for talking’s sake at your meeting, often repeating the old and tired mantras. As for new ideas, or in management speak blue sky thinking; tell them to think the unthinkable., start with a blank sheet of paper, do not reject any new idea, no matter how ridiculous it may seem. The world is changing. China will overtake the US as the leading global economy by 2020, one thing to remember is that China is a communist country and all the banks are state-owned. So it is a different economic game entirely.
Whatever you do, do not allow the Chinese to poke you in the eye; those bi-lateral arrangements are biased towards the Chinese, including allowing their imported workers to stay on in the country they have worked in. Say no to that; tell them that your immigration rules must be respected.
Sincerely,
Hal Austin
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