Introduction:
The IMF’s light-touch analysis looks as if it was not intended to cause offence, rather than to provide a roadmap to help the nation escape its present economic problems. Reference to the erosion of the tax base is one example, a situation cause by micro-managing, a lack of a broader policy agenda and political interference. The routine waivers and exemptions, along with the underwriting of debt, are the outcome of policy failure, which the report should have made clear, and the corruption of ideas. Nothing better illustrates this than the apparent secret deal the government has made with the Butch Stewart-owned Sandals. It is an agreement that should be made public as soon as possible, if only to stop rumour and suspicion. However, it has pinpointed the urgent need for improvements in the management of public revenue: “In addition to revenue losses from tax expenditures, staff analysis found gaps in revenue yield caused by weaknesses in collection, including for example a low ratio of tax collected to tax payable at the Inland Revenue administration and weak control and audit functions. “In addition, both revenue administrations lack management reports that could be used to improve performance monitoring.” In other words, gross incompetence across the revenue management section of the civil service, which comes directly under the remit of the prime minister or the minister of finance. Further, to obfuscate and fool the public, the recent change in the Auditor General’s report, from one in which departments were named and shamed to one in which the juxtaposition of accrual accounting figures has introduced an element of opacity.
The IMF’s report’s call to strengthen public finance management should lead to widespread sacking of all those accountable. This reminds me that sometime ago I asked a senior politician if newly appointed ministers were given any training about financial and personnel management, given that many of them came from backgrounds of being lawyers in small practices, and her/his reply was no. So, people without any experience of managing people or money, on being elected can often find themselves being accountable for budgets of millions of dollar s and staff of hundreds.
The report goes on to recommend improvements in fiscal reporting, and continues: “As a starting point, the ministry of finance should begin producing regular quarterly budget execution reports containing outturns on revenues and expenditures…” The prime minister is minister for the civil service, the source of most of the nation’s low productivity.
UK Economy:
There seems to be a fantasy that with a growing UK economy tourists from the home counties and provinces in the UK will flock to Barbados to sun themselves on the beaches during the day, and get drunk in St Lawrence Gap at night. It is nonsense. Nothing better sums up the perilous state of the UK economy than the speech given by the Chancellor of the Exchequer, Britain’s finance minister, 48 hours ago while on his way to the G20 meeting in Australia. Despite a lot of background noise, the reality is that the British economy has grown by only 1.9 per cent in 2013, the highest growth since the 2007/8 global banking crisis. Even so, as the Chancellor has pointed out, the economy is not yet secure. Or to put it another way, if this is the economy that Barbadians are waiting on to drive their tourism sector, then quite clearly they have more confidence in the UK’s economic performance than people working at the coal face do. The Chancellor said the UK recovery was still “unbalanced” and the deficit reduction had to continue.
The real lessons are simpler: long-haul tourism is a luxury and most British workers have not had a pay increase above the rate of inflation for years, in other words they have had real wage cuts. In any case, most people have opted to pare down their household debt and re-build their savings to the tune of 20 per cent of their take home pay. If they do decide to go on holiday, they prefer to stay in Britain or go to southern Europe, Spain or Greece. The only people for whom a long-haul Caribbean visit is essential are people from a Caribbean background, the very people that tourism marketing is not aimed at. Just take a look at the Sandals promotions. These are the people, by the way, who spend large sums of money while visiting the Caribbean, as gifts to relatives and friends, buying property, paying property tax and other forms of business. In fact, Chancellor George Osborne had every right to be concerned: an economy over-dependent on financial services, one that productivity has fallen back to 2005 levels, and a need to rebalance to manufacturing is not in good shape. The trap that Barbadian policymakers are bogged down in and their inability to be creative shows, if nothing else, the absence of thorough research and analysis on which sound policy should be based. If nothing else, economic analysis is the search for causation, not just an attempt to add to the mountain of rhetoric.
Abenomics:
The rest of the developed world, although growing, is not yet there. Only last week the Bank of Japan responded to weak than expected GDP figures by expanding its two key drivers of economic growth, increasing the incentives for more bank lending and loosening monetary policy, which led to a one per cent fall in the yen against sterling and the US dollar. The expectation is that this should boost exports to those key markets. It is simply limping along. The US is a further example that the global economy is not yet on firm footing; proof of this was when the hedge fund manager George Soros last week hedged US1.3bn, 11.13 per cent of his fund that the S&P500 will go through a bearish phase, a crippling collapse.
Keen observers of the equities markets will rightly believe that Soros has seen something in the US stock market that most of us have not seen, or that the global economy is not yet over the 2007/8 crisis. In a recent note on its 2014 outlook to investors, Blackrock, the fund manager, has warned clients that they should be prepared to pull out of global stock markets at short notice. Global growth is driven by momentum, not earnings, and broadly warned that markets are riskier than they at first appear.
Latam Economies:
For reasons to do with our colonial history and language, our closes neighbours, Latin America, with a population nearly the size of that of the European Union of 500m, is largely ignored by our policymakers. But it is not a market that we can continue to ignore. On February 10, Chile, Colombia, Mexico and Peru, apart from Mexico the second eleven of Latin America, signed a Pacific Alliance agreement to remove the vast majority of their import tariffs and pave the way for greater trade among the various nations. Given that the signatories account for a total population of 210m, a GDP of US$2Trn and a GDP of US$10000 and account for 40 per cent of all Latin American and Caribbean trade, it is clear this is a bloc we cannot ignore. Yet, in our mad scramble to restructure our economy, apart from a few speeches about attracting Brazilian tourists, Latin America is largely ignored. To go one step further, given the rhetoric about heritage tourism, Cuba and Panama in particular should have a great attraction for tourism promotion given the number of people ion those countries of Barbadian heritage.
Sovereign Wealth Fund:
There is a lack of policies to stimulate consumer demand in Barbados, the main reason why the economy is anchored in its current flat-lining position, because of fear or ignorance on the part of politicians and policymakers. This much is evidenced from the discussions IMF officials had with local politicians, civil servants and academics. It is clear, however, that officials and advisers are not thinking outside the proverbial box, if not they would have looked at the creation of a Sovereign Wealth Fund as the nation’s key investment vehicle. With a simple remit: growth of two percentage points above the base rate, government could ring fence the health part of the national insurance scheme, bulk sell all annuity liabilities for those aged over 75, then rollover the rest of the fund in to the newly created SWF. Apart from replacing the existing national insurance scheme with a compulsory long-term saving scheme, with a graduated worker/employer saving starting from about seven per cent of disposable income to a joint 20 per cent within five years. The SWF should be given a global remit with asset allocation brief given to it annually by a professionally competent board. A typical remit would be: 45 per cent equities, 35 per cent fixed income (gilts and corporate bonds), five per cent cash, ten per cent high returns and five per cent property. Stock picking will be left to the professionals.
Conclusions and Recommendations:
The biggest priority for this government is the growing rate of long-term unemployment. It is particularly so given that the bulk of the unemployable are young school leavers, those aged 16 to 25 year olds; this is the ticking time bomb that may go off at any time. Nothing about this government (nor to be fair the Opposition), its rhetoric, policy-making, absolutely nothing suggests that getting young people in to jobs is a priority. Of course, this is not a consideration for the IMF, all the Bretton Woods organisation is concerned with is drafting a map for the government out of its fiscal mire, its unprecedented current account deficit and the mountainous debt to GDP ratio. In fact, the IMF recommendations suggest that the lack of a clear and comprehensive medium-term fiscal framework has contributed to the excessive deficits and public sector borrowing, and the gradual expansion of the state in to productive sectors.
In short, the so-called medium-term strategy document produced by party members and sympathetic advisers is not worth the paper it is written on. Regular readers of this forum would have heard similar remarks months ago. The report also comments on the chaotic and often conflicting relations between the Barbados Statistical Service and the central bank. Most objective people now dismiss central bank figures as bogus, but that it continues is a scandal. One great omission on the part of the IMF is the urgent need to digitise government administration, education and tourism; government should also invest in digitising the private sector, especially where it interconnects with government. All these reforms will lead to productivity improvements and, therefore, to economic growth – and they can be achieved at no real cost to taxpayers by making those who will benefit most pay for the improvements.
There are other areas of government crying out for change. Government can reform the national insurance scheme by bulk-selling its existing annuities, its liabilities for annuitants over the age of 75, and form in its place a long-term compulsory savings scheme with three key pre-retirement entry points: to fund higher education, marriage and home ownership. Here we have the hugely successful Singapore model as an example which, since independence in 1965, had led to a 90 per cent home ownership.
A further example of government incompetence in education policy was the mad rush to introduce fee-paying for undergraduate studies. Had the policy been thought through, it would have given the insurance sector time to introduce higher education savings vehicles in order to minimise hardship on poorer students, it would also have given the university much-needed time to also put in place an endowment scheme that, in time, would itself offer scholarships and fellowships to aspiring students and for post-graduate work. The badly-thought out idea is still needs serious reform, preferably the introduction of a funding system based on the highly successful Yale Endowment.
Another example of poor management is the lack of the introduction of a proper performance measurement system not only in education, but right across the public sector, along with improvement metrics. With a secondary educational system in which 70 per cent of pupils fail to get five CXC grade between A and C, yet the system continues year after year with this systemic failure being bedded in to the entire educational system is nothing short of criminal. Barbados seems to take pride in its class-based educational system with certain well-known schools out-performing the other local schools year after year since the war. Pupils from these schools often go on to get Barbados Scholarships and the opportunity to study at leading foreign universities to return home in top positions. It is a type of inequality which is not encouraged by the state, but actively culturally encouraged, with parents subscribing to it by queuing up to get their children in these schools. It is a system in which parents, teachers and politicians have no great desire to change, while the teachers’ union representatives behave to my mind like organised gangsters. The recent events at Alexandra School come to mind.
The bottom line is, no matter what the politics, this incompetence is reflected in the nation’s skills base and ultimately, productivity and therefore GDP growth. Of course, Barbados is caught between the fierce historic grip of economic growth versus political maturity, which is outside the IMF remit. But in a political culture in which the tribalism of party loyalty comes before the interest of the nation, the rest of society will remain, at least for this generation, anchored in the irrationalism of a deep pit of own ignorance. So, debating a new political economy without accepting the wider reality that as people we are not just economic beings, will get us nowhere. There is also an ethical side, which is that the many local businesses that government owes money to have not even been mentioned in the report – Barrack, COW Williams, and many others. Again, to the IMF technocrats, these were just details, issues of no substance, yet the central bank could have been told the ethically and economically right thing to do was to give both Barrack and COW Williams access to a central bank drawdown, or just print the money and pay them off.
Prime minister Stuart’s fantasy about China and Chinese tourists is a one-way bet; for Barbadians to get in to China they have to go through a long visa application process and even then there is no guarantee they will get one. Further, like Japan, despite its terrifying ticking demographic time bomb, due in the main to its fractured one-child policy, China still turns its back on any idea of immigration as one way out of the problem. China has enough internal problems of its own: one of the largest, if not the largest Muslim population in the world to the extent that certain parts of Beijing are designated Muslim areas; and, further, with 400m of its population not even speaking Mandarin, China certainly has problems. The numbers are piling up: in 1980, China was the 13th largest economy in the world. It is now, in 2013, the second largest and is set to be the largest by 2015, according to some projections. Consumption represents 40 per cent of its GDP, compared with 70 per cent for the US and 55 per cent for India. China’s share of the global economy grew from about four per cent in 1980 to 18 per cent in 2013 and is expected to reach 20 per cent by 2015. The global economy is still in the midst of an historic readjustment process and although there are green shoots of growth there is still huge output gaps and demand shortage.
Once again, I hate to be the bringer of bad news, but if we do not shape up as a nation it may spell the end of the lifestyle we have grown to know and love.
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