Introduction:
It has not yet hit home that the real crisis in Barbadian society is not economic, nor the steady decline of public order and discipline, rather, it is the implosion of social values and the collapse of career ambitions at the margins of society. As is evidenced historically and in every liberal democratic society, the middle classes can look after themselves; but it is the poor, semi-educated, untrained who need to be guided and protected from the all-engulfing storms of globalisation.
So far our political, educational, religious and civic leaders show no sign that they understand these global and regional developments and shifting cultural sands, far less have any ideas for dealing with them. The mismanagement of the local economy and misunderstanding of global developments are just symptoms of the failure of this post-independence generation, but a careful analysis of any of our institutions and leaders would equally reinforce this.
Global Overview:
It appears as if the authors of the Barbados Growth and Development Strategy (collectively the economic affairs division of the ministry of finance and economic affairs, in collaboration with the finance division of the ministry of finance and economic affairs, the central bank of Barbados, government ministries and selected departments, in consultation with the private sector association and Labour representatives – only UWI input is missing) have been seeing global developments over the last five years through a unique prism. Maybe it is a case of too many cooks, but there is no explanation of methodology, nothing about the wider interpretation of the global economic landscape and how Barbados fits in to this. Yet, the very first paragraph of the executive summary tells us: “…the protracted nature of the global downturn led to the postponement of any significant real growth (in Barbados)….” It talks of an export-led recovery and other fiscal and monetary adjustments to return the economy to a sustainable growth path, but no roadmap of how this will be achieved.
On page two it talks of a growth target of 0.5 to 3 per cent by 2017, then 4 per cent by 2020. Then on page three it goes on to project a growth rate of 4.5 per cent between 2017 and 2020. This alone shows how bogus the figures are; make it up as you go along. According to the IMF, the global economy grew by 3.9 per cent in 2011, 3.1 per cent in 2012 and is projected to grow by 3.1 per cent and 3.8 per cent in 2013 and 2014 respectively. Over the same period, emerging markets grew by 6.2 per cent, 4.9 per cent in 2011 and 2012 respectively and are projected to grow by 5.0 per cent and 5.4 per cent in 2013 and 2014 respectively. At the same time, Latin America and the Caribbean, of which Barbados is grouped, grew by 4.6 per cent, 3.0 per cent and are projected to grow by 2.9 per cent and 3.2 per cent in 2011 and 2012 respectively.
In simple terms, some of our politicians and policymakers seem not to understand, is that Barbados has under-performed the global and regional economies significantly. And, given that no policies are in place to curb this steady decline, it looks set to under-perform up to and past 2020. Compounded over a period of time, the economic decline of Barbados, in a highly competitive global economy, looks almost irreversible, certainly under the present leaders. We also know that exchange rate stability, the monetary policy mantra, will not of itself increase trade and capital flows, since the Bajan has been fixed to the Greenback from the inception of the central bank without any significant real growth.
So, there must be other answers, such as disruption to capital flows and internal shocks, none of which the report appears to recognise. Also interesting as a complement to the study, is the central bank’s H1 review, which claims that the rate of inflation (is it CPI or RPI?) is 2.7 per cent. If that is the real rate then pigs can fly. It appears to me to be bogus – another example of make it up as you go along. The real rate must be at least in higher single figures or over ten per cent or more. This is based simply on the regular price increases, food inflation, high tariffs on food and other commodities, the passing on of price increases by retailers, plus an additional profit hike.
Talk to ordinary Barbadians and they all tell you about the high price of foodstuff, this is real, with a higher proportion of household incomes going on basic foodstuffs, it is also painful. We import inflation from most provider countries, including China, and the rising tide of commodity inflation is one of the most volatile aspects of the global economy. Since the historically high rate of inflation in the 1970s, the great post-war period when all the grand theories of macroeconomics changed, the consensus of economic theory was that such high rates of inflation impacted economic growth. It was this experience, triggered by Richard Nixon’s defection from the Gold Standard, made worse by the Arab oil crisis through to the mid-1980s, early 90s, when inflation-targeting was devised to deal with the problem. This was then the dominant theory of monetary policy, along with an independent central bank, until the 2007/8 global banking crisis and the following recession. It still remains the same. Now it looks as, according to the central bank review, that little Barbados has performed an economic miracle: low inflation and an economy bumping allow at the bottom with an inclination more towards recession than growth.
In theory, with low inflation, thus cheap money, the economy should be taking off; we know it is not, so where are our academic economists to explain this phenomenon to us? If local banks were to lend at the base rate, plus a one or two basis points, small businesses crying out for loans – and the government borrowing at 14 per interest rates – will be able to access money. They cannot because the foreign-owned banks are managing risk in a very strict way and not lending to businesses or governments.
In the developed economies the volatility is even more scary. In the short-term, the pound sterling is losing value against the Greenback, which makes it more expensive for UK tourists, the mainstay if the tourism sector, to visit Barbados. This comes as the Greenback strengthens on the back of good economic news, as the new governor of the Bank of England lets it be known that the 0.5 per cent low interest rate will remain for at least a further two years. This is bad news for investors, most of whom are the elderly.
Stability and Risk:
So, there are no slivers of light creeping through the cracks to give us hope. A lot of the background noise about foreign reserves, price and inflation stability can at times appear contradictory and confusing, and they are. However, changes in global macro-economic management over the last two decades and the maturing of the futures markets have in the main made the obsessive over accumulation of foreign reserves redundant. The basic policy objective behind foreign reserves is risk management: of commodities, prices and trade flows. If our main concern is food security in case of severe global or regional exogenous shocks, then there is no evidence apart from rhetoric of any organised preparation to offset any such shock. On the other hand, if the concern is maintaining a collective lifestyle that, in all seriousness, ought to be abandoned, then the policy itself is a moral hazard. Although the economic landscape in the developed markets is as volatile as it has been for some time, with banks in both the US and Europe still going through an intense period of restructuring and adjustments, there is no obvious immediate threat to our food security. In any case, with the emergence of futures markets, government and the central bank can secure better guarantees for food commodities through playing the futures markets.
Green Economy|:
Barbados has been flirting with a green economy since the first Rio Conference in 1992 when most readers will remember Erskine Sandiford returning to the island and launching a much hyped conference. But it was hype, nothing has happened since, under both BLP and DLP administration, not even the basics, like a clean and tidy public space (men still urinate in the alleys off Broad Street in broad light), collecting the rubbish and domestic waste at regular intervals. It is not unusual to see motorists casually dropping rubbish from their vehicles along the ABC highway. These are the first principles the government should concentrate on: regular collections of domestic waste, proper street cleaning, etc.
And, in terms of structural development, all these and more can be achieved under a privatised rubbish collection firm, part-owned by workers and ordinary Barbadians and managed professionally. In fact, government should long have a recycling strategy in place, with a paper, plastic and metals recycling plants established, with the more successful even taking in trade from the other Caricom and Caribbean islands. It should have a strategy to provide lighting and energy to homes and businesses over an achievable period, say five years, with 70 to 80 per cent of that energy coming from wind, solar and wave. In fact, this energy strategy, along with a coordinated planning strategy, both part of a grand development plan, would embrace restrictions on private vehicle use, compelling hotels and other major plants to provide wind and solar energy to their plants along with water desalination and recycling machinery. All these and more – along with proper incentivisation, ie VAT reductions on the importation of relevant plants – are the kinds of environmental policies that would justify the use of the phrase ‘green economy’; as things stand, it looks as if politicians and policymakers are colour blind.
The Rule of Law:
First principles aside, every advanced civilised society, or one that aspires to such status, must be piloted by the rule of law, civil and criminal. In civil law, business people want to know their intellectual property rights are protected, that contracts have legal weight in law, that the court system works, and, most of all, that if they want to move money and assets from one jurisdiction to another there will be no unnecessary obstructions. The reality is that the rule of law has broken down in Barbados: some civil cases have been caught in the court logjam for twenty years or longer; there is no guarantee, given the normal procedures, when cases will be heard, when the judges will write-up their judgements or if the winners and losers will adhere to the courts’ findings.
In the criminal courts, the situation is not just worse, but frightfully so: the police system has broken down, as can be seen from the awful way the commissioner has been removed from office; magistrates use the remand system as a form of penalty, quite often people are remanded for longer than the statutory maximum imprisonment for the alleged offences. In fact, the denial of basic human rights is part and parcel of the criminal justice system in Barbados and sentencing in particular. To talk of development and progress we must first make sure our frontline institutions work. If a nation’s development is to depend on human and social capital, on innovation and creativity, then innovators must be guaranteed their intellectual property, their designs, the products of their creativity, cannot be routinely stolen by rivals. They need the certainty, if need be, of the legal system. Where is our patent court? How many patents have been registered in Barbados since the end of the Second World War? Where are our design schools, the academies of precision engineering? Ignore tourism for the time being, our only world-class product is rum making, which has been reduced over the years to little family-run, cottage industries. If young school-leavers want to learn to be rum distillers where do they go to learn? The community college? The university? No, they must apprentice themselves to a family friend, or a friend of a family friend, to be taken on.
Government must sort this out, and urgently, by giving a legal definition to Barbadian rum, setting up by a school of rum-making, with a dynamic research and development sector, as a matter of urgency. If necessary, they should import the relevant leadership.
Analysis and Conclusion:
The first thing that needs to be dispelled in the deficit reduction/quantitative easing debate is the private sector good, public sector bad one. I work with too many highly profitable private financial services companies that are badly managed dinosaurs to accept this premise, but they still seem to survive. What we need are more sophisticated analytical skills to negotiate this corner. However, having said that, the failure of the Growth and Development Strategy is that it has got the first principles wrong: it does not understand that the economic architecture has changed, that since 2009, the global economy has continued to grow, driven mainly by emerging markets, led in the main by China. The authors have failed to recognise this new reality, so to engage with them on a serious level is a waste of effort. Only out of respect for ordinary Barbadian people will one even attempt an orderly intellectual discussion.
For example, as an insight in to this new reality, Latin America, our neighbours notorious for military coups and hyper-inflation, is showing remarkable growth; China, despite a slowdown, is growing at the rate of 7.5 per cent (miracle figures in the more developed economies), the renmimbi is appreciating against the Greenback, and, only the day before July 4, General Motors, the car manufacturing company rescued by the Obama administration, announced that in the first half of 2010, it sold more cars in China than it did in the US. Barbadian policymakers and politicians must understand this is the new reality; as I have pointed out before, China is now basing its growth strategy away from the first-stage export-led growth to a consumer-driven one. China has a rising middle class that is bigger than the entire population of the United States, most of them anxious to obtain the things we take for granted in the West – white goods, televisions, cars, overseas holidays, etc. So, those doomsayers who claimed that the Chinese economy was going to have a hard landing must be drowning in their own tears now.
Any medium and long-term development strategy must have a proper understanding of the real world, not the one we would like it to be. This is the intellectual faultline running through the Growth and Development Strategy. In the eurozone unemployment is running at an average eight per cent, in some Southern European states youth unemployment is above 50 per cent and this is coupled with an extraordinary brain drain – from Europe to Brazil, Argentina and even Mozambique. Europe is in serious historical deep-structural crisis, not just the post-crisis calming winds. Apart from the high-tec manufacturing of Germany, which depends on the Chinese market for sales, Germany is still reeling from lending Southern Europeans money to buy their products, an economically suicidal euro-trap. In North America, the US is bringing its offshore manufacture back to Mexico for a variety of reasons, including Chinese industrial espionage and the theft of intellectual property rights; China’s move up the value chain and the rising cost of its products; and Mexico’s membership of Nafta, its geographical location and its relationship with the US and Canada.
There are also geo-political currents which are changing the landscape for the first time since the Monroe Doctrine. The present shouting across boundaries between Venezuela, Bolivia, Nicaragua and, to a lesser extent, Brazil, on the one hand, at the US, is symptomised in trivia such as Edward Snowden, the security whistleblower, but the real underlying reasons and fears is the battle for regional political and economic dominance. Our policymakers and politicians cannot even feel how the winds are blowing in their own backyard. They are out of step, out of tune, and out of contention. Nowhere in the Growth and Development Strategy is there any passing recognition of the developments taking place in Africa nor of the continent’s enormous potential. Yet, as has been noted on many occasions, if the early 21st century is China’s, the latter half of the century is Africa’s to lose. The other question that we must ask ourselves is if other Caricom central banks and politicians and policymakers have the same regulatory, supervisory, legislative and policymaking difficulties we seem to have or are we an exception?
Finally, there is the important issue of big data, capturing it and then stripping and monetising every bit of it as fuel for the development of the nation. Everyday the public and private sectors accumulate massive amounts of data on visitors and trading partners, without any noticeable benefits to the nation. Quite clearly they do not know what to do with the information and, as usual, are too stubborn to ask for help. Nothing in the report acknowledges the central importance of micro, small and medium enterprises in the creation of jobs and reduction of poverty, yet SMEs are the biggest drivers of jobs and growth in all developed economies. To recognise this central importance, however, government will have to face the growling bear of foreign-owned banks treating Barbadian customers like displaced peasants, refusing to lend or even offer sound business advice. Such a situation calls for tougher regulations and supervision of these cross-border banks, or diversifying in to other forms of balance sheet retail and non-banking financial institutions. Government would also have to take a long look at fiscal reforms by providing new incentivised forms of savings vehicles, which so far it has not shown any inclination to do.
It is an oversight, however, which can be costly in the long run, since it shows an ignorance of the recent history of business. Most of the dynamic new global technology companies started life in a dormitory bedroom or garage by some student or young adult, from Apple, Facebook, Google, to LinkedIn and others. By failing to establish new funding bodies for the small business sector and innovators we may be killing off very bright new ideas at the root. Barbadians should remember that it was a Barbadian student in Canada, a member of the Emptage family, who first invented an internet search engine, long before Google was even dreamed of. Instead of now writing a book about Google, Mr Emptage should be professor of computer studies at UWI, Cave Hill campus. Missed opportunities are a Barbadian disease and the virus is the comfort zone of a public sector salary with a guaranteed pension at the end of a working life.
There is a great debate about hoarding reserves, see, for example: See:
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“Large Hoarding of International Reserves and the Emerging Global Economic Architecture”, Joshua Aizenman, (National Bureau of Economic Research)
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“International Reserves and Rollover Risk”, Javier Bianchi, Juan Carlos Hatchondo NS Leonardo Martinezx
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Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration”, Joshua Aizenman and Daniel Riera-Crichton
The blogmaster invites you to join the discussion.