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Fault Lines: Life, Debt, Default and a Failure to Invest

The following blogs authored by a young Barbadian Economist Simon Naitram who is currently an assistant lecturer at the University of the West Indies while pursuing a PhD from the University of Glasgow (featured image: Simon Naitram) David, Barbados Underground Life, debt, and now default. Barbados has reached the final stage of its illness. This isn’t…

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The following blogs authored by a young Barbadian Economist Simon Naitram who is currently an assistant lecturer at the University of the West Indies while pursuing a PhD from the University of Glasgow (featured image: Simon Naitram)

  • David, Barbados Underground

Life, debt, and now default. Barbados has reached the final stage of its illness. This isn’t our sob story. This is the tale of how we got here. This post isn’t a eulogy—it’s a lesson, a warning to our future selves.

The reason the government has defaulted on the country’s public debt is simple: the government just doesn’t have enough money to both keep paying back its loans and keep the country’s services running. The government chose to keep the country running.

How did the government reach this breaking point? Did the government simply borrow more than it could repay? The economics of government debt aren’t that simple. The government might have borrowed too much—it certainly made some bad financial decisions—but that’s not the real economic story.

The underlying economic mistake leading to default is that our government did not invest. It’s not that we spent too much money. Instead it’s that we spent our money on the wrong things. For a decade we did not invest in a brighter future. Nodebtw that we’ve reached that future, it’s a dark and miserable place.

A government’s debt is measured relative to how rich its people are. Bill Gates borrowing a million dollars isn’t the same as me borrowing a million dollars. The richer we the people are, the more money the government gets from taxing us. A 20% tax on $100 gives the government way more revenue than a 20% tax on $20.

Read full text – Life, Debt, and Default

Barbados’ giant economic hole is entirely of our own making. Our distress stems from one fatal flaw: we do not invest.

Let me make it plain. Investment in new businesses, new technologies, and new ideas is the only way to generate sustainable economic growth. Economic growth is not just an economist’s foolish cravings. Economic growth is the only path to prosperity. Investment is needed for economic growth, and without economic growth, we perish.

Why is it that we don’t invest? What can we do to fix this fatal flaw?

The first problem is that we save only 13.6% of our income. The rest of the world saves 23.1% of its income. Our savings are paltry in comparison to the investment hole we need to fill. We simply don’t put aside enough money for our businesses to invest.

And yet, commercial banks don’t want our cash. They offer us a ridiculous 0.05% interest rate on our savings. Why? In 1990, the banks lent 68% of our savings to businesses. Lending to businesses is risky, but it is productive investment that generates high returns and grows the economy. In 2018, the banks have lent only 28% of our savings to businesses! Banks have stopped channeling our funds into productive economic activity—which is in fact their one job.

Read full text – Failure to Invest

339 responses to “Fault Lines: Life, Debt, Default and a Failure to Invest”

  1. WARU Avatar
    WARU

    Let’s see how this initiative produces in the next 10 years, both governments wasted decades turning their people into low salary workers with no viable futures, this new approach to educating the population should prompt a turn around in how wealth and job creation are viewed.

    And as long as it is understood acknowledged that small businesses are not supposed to STAY small, but GROW and EXPAND into self sustaining job creating machines, preferably into generational job creators if family owned, there should be some progress made going forward..

    https://barbadostoday.bb/2018/11/24/sutherland-calls-for-curriculum-reform-in-schools/

    “As Barbados’ economy undergoes a transformation, the minister responsible for Small Business, Entrepreneurship and Commerce says there’s a need for curriculum reform in schools.

    Minister Dwight Sutherland was speaking Friday at the City of Bridgetown Cooperative Credit Union, Lower Broad Street Bridgetown headquarters during the launch of the Agricultural Entrepreneurship Programme.

    The programme is hosted by the Barbados Entrepreneurship Foundation (BEF) and the COB.

    Sutherland said Entrepreneurship, which is a Caribbean Advanced Proficiency Examination (CAPE) subject, should be rolled out in all the sixth form secondary schools.

    “The course of study is only pursued by a few schools. Perhaps there is the need to embark on a more extensive rollout among a greater number of schools in the near future,” he said.

  2. Pachamama Avatar
    Pachamama

    David

    We will concede that the CB statistics maybe right. But are not at all convinced that the net number represents a pool of investible capital, as is popularly memed. Anomalies like these are unlikely in capital deployment. Certainly, there is no evolutionary trait within the Bajan which would prevent her from seeking arbitrage, despite hurdles, even if risk-averse.

    Acceptance of less than one percent on ‘savings’ means an erosion of account, in real terms.especially when high bank charges are imposed, as the main way for brick and mortar banks to make money from customers.

    There are obviously real problems with the number still. For example, a few years ago we saw tens of millions in dormant accounts with local banks. Maybe dead people!

    Of course there are many other hurdles to determined the investability of ‘savings’.

    We noticed that you did not deal with the structures permitting some ‘investors’ to be given higher and higher protections from the loss of their capital while others are to assume riskier areas at the margins. Those who would want to cry out for people with any savings to invest are doing the work of the predator-corporatist, they want to make mutton out of investors/sheep.

    All the money, liberated into the ‘economy’ ends up in few hands. Unless the underlying structures change the risk factors for average investors will guarantee an avoidance of what you call capital investment by dormant savers.

    Savers, pensioners, workers, all over the world, for more than a decade now, have not gotten a fair shake. Most of the gains came from speculation on financial instruments, using people’s savings, of course, but with little or no trickle down.

    Separately

    Our reading of the tenor, in this blog and others, is that the population is lowering its expectations of this BLP one-party government, real politique, would you say?

  3. David Avatar
    David

    @Pacha

    Not certain about your assumptions. What we can agree is the financial system in Barbados lends mainly for consumption. We need institutions to lend for developmental.

    By the way banks now pay 0% interest and the credit unions will be forced to follow suit soon.

  4. Talking Loud Saying Nothing Avatar
    Talking Loud Saying Nothing

    “People of different backgrounds and political ideologies from all over France gathered in what seems to be a clear example of the country’s fight against a government that is increasingly losing popular support.”

    https://www.aljazeera.com/indepth/inpictures/yellow-vest-protesters-clash-riot-police-champs-elysee-181125063405266.html

    We entangle ourselves with well-meaning economic debates which tend to disappear into the ether. Until we address the legitimacy of our two main parties the BLP and the DLP to govern this country then we will continue to regress. If both parties – as would appear to be the case – have no interest in the well-being of their fellow citizens then we need a paradigm shift on how Barbados is governed.

    These are uncomfortable truths but must be debated out in the open. If our past and current government(s) were truly concerned about investing on the rock they would have committed themselves to this from the very first day of our independence.

    Investment is a tool that elevates and bring seismic change to the quality of the development of a country. Investment should never be used as a tool to enrich the Williams’ clan or to allow well know individuals to evade paying their taxes whether it be for water, corporate taxes and the rest.

    So carry on smartly talking about investment. But please be aware that if you want to see real investment in Barbados then you need to dis-invest with both political parties.

    As Hal always says, black bajans and white bajans should start to cooperate with each other because both parties risk being mere bystanders in a Barbados that is poised to dramatically change for the worse at both a social and an economic level.

  5. David Avatar
    David

    We have discussed this issue many times. We need real change all agree. How will we achieve it if we cannot have a relevant campaign financing approach to how we manage our business? Will a new political parties or parties emerge without being able to adequately finance its strategy? Talk is cheap. We have homogeneous societies in the region unlike abroad where sectarian interest is able to generate meaningful impact.

  6. Mariposa Avatar
    Mariposa

    Locals not going to invest in barbados
    Local interest lays solely unto themselves and why not and rightfully so
    Present govt game plan is to devastate and not replenish pensioners and investors saving and give the return on govt instruments in a timely fashion
    However can cut intersts rates on Corporation on a policy of hopes and dreams which might never happen or might be far way off in the foreseeable future
    Hard to understand the logic of a govt slowing down its revenue base on a policy that does not gurantee long term or short term gains in the future
    This govt has resorted to a formula of vodoo economics in terms of borrowing to build an economy while expecting corporate barbados to fill in parts of the economic puzzle which is not going happen.
    A corporation has no interest in govt balance sheet
    Going forward corporations used a measuring stick of profit and losses
    Right now barbados is in the lossing category and remains a high risk factor for investors

  7. John Avatar
    John

    “The Prime Minister announced an increase in the standard corporation tax rate from 25% to 30%1. This change takes effect from 1 October 2018 and is expected to generate an additional $57 million in tax revenue.”

    Measures aimed at broadening the tax base help to ensure that everyone pays their fair share of taxes. This increase in corporation tax is one of the burdens businesses face in light of Barbados’ mission critical recovery. The increase to 30% is reminiscent of income years past where the corporate tax rate ranged between 37.5% in 2002 and 33% in 2004. Thirteen years onwards companies see the 30% tax rate of 2005 reemerging.”

    “It is not clear whether this new tax rate applies to the entire 2018 income year or will be prorated from 1 October 2018. It is hoped that the new Tax Administration and Management Information System (“TAMIS”) would be configured to handle these changes.”

    https://www.ey.com/Publication/vwLUAssets/ey-barbados-mini-budget-2018/$FILE/ey-barbados-mini-budget-2018.pdf

    ++++++++++++++++++++++++++++++++++++++++++++++++++

    Not being an accountant I pose this question to get some clarification based on the mini budget commentary prepared by Ernst and Young..

    If an increase of 5% generates tax revenue to rise by $57 million wouldn’t simple math dictate that a decrease of 25% would cause it to fall by 5X?

    5X$57million = $285 million

    How can $240 million be the total tax revenue of both domestic and off shore Companies in 2016?

  8. Donna Avatar
    Donna

    I am going to ask a foolish question here, David. What are the main expenses that require campaign finance?

  9. John Avatar
    John

    The only way the change to 5% (increase offshore, decrease local) could be revenue neutral is if the tax revenue from Offshore companies is a great deal higher than from local companies!!

    The increase in tax revenue from offshore companies would have to be $285 million to offset the decrease to local companies.

    Am I imagining things?

  10. Mariposa Avatar
    Mariposa

    What barbados govt need to understand is that the Industrial Age has been repalced with the technological Age which is moving forward at rapid speed
    So much so that the Robotic Age has been making its input and leaving foot prints all over the world
    This is the path and most likelihood that corporations would pursue towards investment.which now begs the question is our educational system equipped prepared and ready to teach students and have them accredited in those areas which will be important to restructing and building an economy

  11. Talking Loud Saying Nothing Avatar
    Talking Loud Saying Nothing

    …………”homogeneous societies” within the Caribbean! I don’t see much of that in Barbados. Nor in Guyana, neither in Trinidad. The Caribbean region is probably more class conscious than France, UK and most developed countries.

    You stated that a new party or parties will need to find a means to “adequately finance its strategy”. We do not need to search for finances to fund the development of our country. We simply need to withdraw ourselves from the white heat of consumption and to live within our means.

    We have to develop the mentality of a country that has just come out of a war. In the UK – post world war two – the British developed a mentality called “make do; and mend”. We need to acquire this mentality and quickly.

    I would suggest that we take a long walk in the wilderness and throw over-board all those services and products that are bringing stress to our home-grown domestic market. We will need to put a prohibition order on this government from borrowing any more money.

  12. Mariposa Avatar
    Mariposa

    No !it is not imagination
    There is a saying Timing is every thing
    What is missing from this govt policy is timing one that resolves around many economic factors
    Throwing out the baby with the baby tub is what govt have done at a time when the economy is fragile and global and international markets are volatile

  13. David Avatar
    David

    Homogeneous meaning ‘samey samey’.

    Waling away is an outcome, the challenge is to persuade stakeholders to buy into a process to get you the outcome.

  14. WARU Avatar
    WARU

    “What are the main expenses that require campaign finance?”

    Offshore accounts…lol

  15. David Avatar
    David

    @Donna

    You need to flip the question, why do we look the other way while the two established parties attract distasteful sums of money to force a message.

  16. John Avatar
    John

    Neat thing if the tax revenue increases from offshore companies … FOREX!!!!!

  17. WARU Avatar
    WARU

    “I would suggest that we take a long walk in the wilderness and throw over-board all those services and products that are bringing stress to our home-grown domestic market. We will need to put a prohibition order on this government from borrowing any more money.”

    Exactly..the Barbados populi have to learn to REDUCE THEIR SPENDING SIGNIFICANTLY…to only necessities…..maybe then the ministers will learn that the island does not need a quarter of the forex wastage that they have all convinced themselves over the last 30 years that they need, despite them all knowing… they cannot afford..

  18. TheOGazerts Avatar
    TheOGazerts

    A Happy good morning to all…

    @TLSN
    Interesting post.
    I’ll just change this to these “We have discussed these issues many times”.

    I used to believe the “answers” just like the issues are known, but lately I have come to doubt if we fully understand the problems or know the answers.

    I will take the sewage mess as an example.
    We have 300-500 engineers in Barbados, but from this body with decades of university training, no answers can emerge. For a brief second BAPE raised it head but added nothing to the discussion.

    We had one administration struggle with this issue. They provided (broken) timelines and resorted to a George Bush like “Mission Accomplished” stunt by running in an out of the sea.

    A second administration takes over and despite numerous reports to the public, the problem remains. I seem to recall a recent story indicating that the sewage mess cannot be fixed. With our legion of engineering professionals, it took us two to three years to realize that we cannot solve the problem.

    But this is the type of problem that I expected us to be able to fix within a reasonable time. If we are unable to solve problems that require pen and paper, picks and axes, machines and other physical tools, how can we solve the intangibles? Can we solve problems with our educational system, our legal system, our government, the attitude of our people, the split into two groups of Bajans, B’s and D’s

    (I will avoid asking “if the sewage mess became a great con as some people made a ton of money off of this project. It is sad that the nation’s business seem to be conducted as a money making affair for some.)

  19. Vincent Codrington Avatar
    Vincent Codrington

    @ David BU

    Thanks for uploading the Budgetary Proposals and Strategic Plan of the OSA Administration in 2007. It reinforces my assessment that OSA may be the best Minister of Finance this country ever had.

    In it I see no support for your assertions. Except to underline that Small Open Economies need to be closely managed by a team that seeks to understand their peculiarities.

  20. Hal Austin Avatar
    Hal Austin

    By the way banks now pay 0% interest and the credit unions will be forced to follow suit soon.(Quote)

    If this is the case, then the foreign-owned banks are more bandits than even I believe. To begin with, the purchasing power is greatly reduced by the rate of inflation; then savers have to pay to get cheque books and make other payments. This is highway robbery.
    Were is the regulator? It is all going to end in tears. Barbados is a failed state.

  21. Vincent Codrington Avatar
    Vincent Codrington

    @ Hal Austin at 9 :29 AM

    You should know from your readings that when interest rates approach zero ,the regulators no longer have a policy lever. That is the stage which we have reached for nearly three years now.

  22. Mariposa Avatar
    Mariposa

    As i stated foreign enviromentalist had to take action which made barbados govt understand the error of its way in the way it was handling the Sewer debacle
    Errors in filtering water into our sea ways and under ground water system
    Errors in destroying the environment
    Errors which would lead to health concerns for the entire nation
    Yes this govr continue to pull Giant Hoax on the entire country in its social and economic policies

  23. TheOGazerts Avatar
    TheOGazerts

    I dislike when others point to the US or the UK and say “it happens there also”, but low interests rate are a worldwide phenomena. In the US, it is true they did not reach zero but they were very close to zero. The best saving accounts in the US are paying around 2%, but rates of 0.04% are not unusual.

    I would not expect Barbados with limited “investment’ opportunities to have higher rates than elsewhere.
    And with small sums of money there is little difference between 0% and 0.04%.

    But 0% is ‘unacceptable’. Instead of just banking our money we may need to find other ways to ‘use’ our money.

  24. Hal Austin Avatar
    Hal Austin

    @Vincent,
    Are you mistaking the retail banks’ zero interest rates (robbery) with the central bank’s nominal interest rates(monetary policy)? The regulator has the power, no the responsibility, to enforce a floor for retail bank savings accounts.
    But there are policy levers, as you described them. One such was the introduction of quantitative easing by the Japanese. Helicopter money, as it is called.

  25. David Avatar
    David

    Low interest rates was manufactured between the then governor and the banks to channel excess liquidity to savings bonds and other government securities (we know how this ended).

  26. Vincent Codrington Avatar
    Vincent Codrington

    @ David BU at 10 :06 AM

    Prima facie it would appear so to you. But pray tell, which came first the excess liquidity in the Banking System or the need for the GoCBB to finance the GoB fiscal deficit and deteriorating Official Foreign reserves?

  27. David Avatar
    David

    @Vincent

    Does it matter?

  28. Vincent Codrington Avatar
    Vincent Codrington

    @ Hal Austin at 10:05 AM

    The Commercial banks deposit rates , the CBB discount rates and banks’ excess liquidity are all connected. In the light of no economic growth the banks took a lending averse position. They are supposed to earn profits for shareholders.

    I think there was a lack of cooperation/coordination between MoF , the CBB and the Bankers Association in dealing with an economy in recession.

  29. David Avatar
    David

    @Vincent

    An interesting comment. Care to elaborate? If we hold the position true how would collaborate have made a difference?

  30. Vincent Codrington Avatar
    Vincent Codrington

    @ David Bu at 10 :32 AM

    When Institutions collaborate, to use your terminology, they move in the same direction to achieve mutually satisfying objectives. The National objectives are economic growth and full employment. These generate,tax revenues, profit and incomes to service bank debts and a positive rate of return on savings. Savings generate loan capital and around and around we go.

  31. Backooful Jack Avatar
    Backooful Jack

    @PLT offshore companies actually contributed about $120 million of our $240 million, taxes from that sector is actually up by $60 million this year so I guess that the MoF is saying that we can way more easily grow ta revenue from International business than from local business since local only contribute $120 at a 30 percent rate anyway whereas international companies currently contribute about $180 million of at 2 percent rate. That may be the logic behind the decision to converge so far downward.

    I also think that the idea that growth during the Arthur years was due to borrowing is a partly a myth, people need to remember that international business was booming and so was FDI both which plummeted after 2008 and has no returned to those levels. Here is and extract about the capital account of our balance of payments in 2007:

    “the capital account of our balance of payments registered
    an estimated surplus of $717.4 million in 2006, roughly $134 million
    more than in 2005 and the largest surplus on record.”

    Note that the same was true for the financial account because of Internationl business and FDI. Service exports weren’t doing badly either.

  32. Hal Austin Avatar
    Hal Austin

    @Vincent,
    The banks’ profitability is based on their return on investment, their investment policies. Growth is a macroeconomic phenomenon, a bank can be highly profitable in an economy in recession.

  33. Pachamama Avatar
    Pachamama

    David

    People have come to see German real estate, or Japanese, cars, or imported food as worthy of consumption because of the structures which have prevented ‘investment’ historically. These are the same people who you say have money in de banks, getting zero or minus some percentage.

    For example, when Bajans came back here from Panama wid nuff money your Parliament passed a law to limit the amount of land which could be bought by them, one acre we seem to remember. Were you not then fostering the consumption culture which continues to this day? Do you suppose that could ever change unless those actions are properly reversed, with compensation?

  34. David Avatar
    David

    @Pacha

    Can you cite those laws for the ignorant with us?

  35. Talking Loud Saying Nothing Avatar
    Talking Loud Saying Nothing

    Sadly, we appear to have missed the boat.

    https://barbadostoday.bb/2018/11/22/leslie-barbados-goofed-on-world-cup/

  36. Vincent Codrington Avatar
    Vincent Codrington

    @ Hal Austin at 11:29 AM

    Banks make the bulk of their profits from loans to the private and public sectors. We do not have many, if any .investment banks.

    @ Backooful Jack at 11:14 AM

    Thanks for correcting the misinformation re the performance of the Barbados Economy in the years under OSA leadership.

  37. Hal Austin Avatar
    Hal Austin

    @Vincent,
    The key role of retail banks is to lend – that is their investments. The returns on those loans (unsecured loans, mortgages, etc) are their profitability. Investment banks, what used to be called merchant banks, are different. They operate in the wholesale markets.

  38. Vincent Codrington Avatar
    Vincent Codrington

    @ Hal at 4 :18 PM

    As a financial journalist you have the luxury of being imprecise with language. As an Economist/financial analyst I have no such lassitude. I am expected to be more rigorous.

  39. Hal Austin Avatar
    Hal Austin

    @Vincent,
    I am a pensioner. I hope we are not going to have a long drawn out discussion about this? I am not sure how imprecise my language is and about what? The role of retail banks is to lend; the returns on their loans are their profits. Investment banks work in the wholesale markets.

  40. Pachamama Avatar
    Pachamama

    David

    http://www.loopnewsbarbados.com/content/uwi-receive-ps200-million-reparation-payment

    We see the UWI – Jamaica, will receive 200MM pounds sterling from the University of Glasgow based on Beckles’ reparatory justice agenda and that university’s involvement in chattel slavery.

    We could never understand the basis on which one man or institution could claim a legal right to the debt owed people still surviving the horrors of the Transatlantic Slave Trade for its deployment in a mis-education system which continues the suffering of the descendants of the very slaves.

  41. David Avatar
    David

    UWI educates for the benefit of the society one can reasonably argue.

  42. Vincent Codrington Avatar
    Vincent Codrington

    @ Hal Austin at 4 :33 PM

    No. There is no need for a long drawn out debate. I perfectly understand your position.

  43. Pachamama Avatar
    Pachamama

    David

    A story is told where a rock struck a man. In court, the thrower was found guilty and thereupon a fine imposed. The magistrate found that that fine was payable to the court.

    The victim begged the magistrate to speak, whereupon he said ‘your honour, did the rock hit the court?’

    Again the victim is asking you, ‘was the UWI enslaved for 400 years, and counting?’

    Or, ‘did the rock hit the UWI’?

    LOL

    You see, you talk about the lack of investment but if other people are seeking to withholding our moneys, as if the modern day enslavers to a mis-education. How can the masses ever have any significant personal equity, capital accumulation, if a neo-slavery system can emerge to claim the rights of the old slave master.

  44. David Avatar
    David

    @Pacha

    On a peripheral note you are aware that several governments including Barbados are delinquent in their dues to UWI?

  45. Pachamama Avatar
    Pachamama

    David
    Of course, but prudent financial management requires that you can’t deploy somebody else’s ancestral capital to cover the current mismanagement of Caribbean governments and the UWI.

    Why should the owners of that capital, not the Caribbean government, not have a say, as individuals?

    The UWI is behaving like the tyrant otherwise condemn here.

  46. David Avatar
    David

    @Pacha

    How would you have shared if it was your call?

  47. Pachamama Avatar
    Pachamama

    David

    This whole structure sounds wrong, high-handed to us. Irregular!

    We certainly would not prioritize a proven system of mis-education and the extension of a medical industrial complex which can never be afforded by poor countries, as are being proposed.

    It is the UWI which is one of the main causal factors why this region is in its current state.

  48. David Avatar
    David

    Agree the UWI business model is not ‘fit for purpose’ 🙂

  49. Pachamama Avatar
    Pachamama

    David

    If we had good cadre of public interests lawyers, like the ACLU, we would suggest an injunction against the UWI and Caribbean governments.

    What they have conspired to do is no less than robbery, in broad daylight.

    David Comissiong was the only one generally known. But since his political ship came ashore there is no more interest by him with these ‘trite’ matters.

    This again is the workings of the UWI mill of useless lawyers.

  50. fortyacresandamule Avatar
    fortyacresandamule

    @David. I agree. There is no way UWI should be the sole beneficiary of those reparation payouts. The cash portion especially, should be deposited in some kind of trust fund.

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