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AN ANALYSIS – Economy in ‘precarious position’

Avinash Persaud

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Leaving politics and the blame game aside, our economy is in a precarious position. The economy has contracted sharply, cumulatively about ten per cent since the peak of economic activity in 2007. Imports have not fallen as far as inward foreign direct investment has fallen, and so we are still running a sizeable balance of payments deficit that will threaten our foreign exchange reserves if it persists. Government expenditure has ballooned, jumping by 25 per cent in a couple of years. Consequently, public debt has risen by a massive $1 500 million in a couple of years over and beyond the expenditure relating to the last Government’s PPP projects – like the Prison – which are now recorded as increased debt in 2006/2007. To put this into context, the rise in debt over the past two years is almost three times the cost of the Prison, ABC Highway, the new Justice Buildings and the new Coast Guard put together. What is to be done to rescue our beloved and fair land from these alarming trends?  Our predicament is highly related to the poor external background, and the strength of any economic recovery will be linked to the global recover. However it would be dangerous to be fatalistic about this. To paraphrase William Henley: “It matters not how strait the gate; how charged with punishments the scroll; we are the masters of our fate; we are the captains of our soul.” Parts of the world economy are recovering faster than others and so we could reposition ourselves to benefit from this, and this is not just China and India on the other side of the world but also Latin America and Canada. Guyana and Suriname provide an entry point to fast-growing Brazil that we turn our back on at our peril. Second, there is much we can do to improve the bang for our buck from public services and stimulate the economy without raising the deficit.
In the broadest terms we need to revive inward foreign investment and we need to reduce the fiscal deficit in a package of measures that preserves or even boosts investment and jobs. How do we boost foreign investment in a recessionary world without increasing the deficit? There is much that Governments can do to trigger investment without spending money by reforming the investment environment. The power of Government is not just in purse strings, but in nudging the economy in the right direction. India’s burgeoning new medical tourism industry was not dependent on government expenditure, but government helped with regulatory changes. Antigua’s new private university of medicine with 1 000 fee-paying students, and Grenada’s St George’s, did not require significant taxpayer investment, but a facilitating, activist government. International finance is in flux. There are short-term opportunities to attract responsible businesses disenchanted with their home jurisdictions because of higher tax rates and regulation, through a new business-savvy Financial Services Authority and a new, expert Regulatory Commission paid for by the firms that are being regulated. Last year the G20 countries deliberately set aside funds to help developing countries recover and invest in a green recovery.  There are grants and concessionary loans available for investing in waste-to-energy, solar power, wind power and so on that will boost economic growth and jobs without adding materially to the interest burden on debt.   Too often our approach is to swing into action by setting up a committee and publishing a brochure. We need to look around the world for the opportunity, grab the players and hang on to them until they are safely ensconced and operating in Barbados. This is what Ireland, Singapore and others do.  Doing business in Barbados would put you off doing business. Legal costs are at profit-crushing levels and Government processes are often slow and ad hoc. If you doubt me you have not tried getting something out of the Port recently or negotiating a non-standard loan.We need to internationalise our legal profession in the same way that our accounting profession is internationalised. Keep the cozy closed-shop for court appearances if you really want, but not for non-court work. Recognise equivalent qualifications: there was very little local law in a loan agreement I was involved in sometime ago and yet I paid three times the price of London lawyers, with most of that going to the lawyers on the other sideand they took six times as long as in London.
We need to move as much of Government licensing online as possible and minimise the needs for attorneys. I can set up a company in Singapore for the equivalent of BDS$30 in 30 minutes without a lawyer. What stops us doing that?In all of these “micro” things, we know what to do. It doesn’t happen because of local interests that feel threatened: lawyers, doctors, public sector staff, local big business, academics and most of the rest of us. Government either needs to work with those interests to give them peace of mind or a vested interest in the increased activity, and to be committed to getting it done by empowering people to get the job done and shortening the decision-making process, while preserving public oversight. Our problem is more political economy than macro-economic. Hand in hand with creating a more enabling environment, we need to substantially reform public services in a way that saves $300 million per year; increases efficiency and services; maintains access to the less advantaged and provides opportunities for small businesses. Here is how to do it. Subsidies and transfers to statutory corporations and agencies account for almost $1billion per year or 100 per cent of direct tax revenues. The majority of that is spent by the Ministries of Education, Health and Transport. Alongside the subsidy machine that is the Transport Board, are profit-making private sector buses. If the private sector can make buses work, maybe we should let them carry out the public service by auctioning these subsidies.  One way to do this is to say that who ever wins the five-year license to operate a route will receive a subsidy of per passenger, and to win this right they have to offer the best package of service, schedules, use of public information technology, vehicles, and so on. Alternatively, you could set the service standards and ask bidders to bid down the size of the subsidy. Winners of the auction could have their licenses removed without compensation if they fail to live up to commitments and follow strict rules on safety, public service, vehicle maintenance and pollution. This can be done in a rolling fashion on a handful of routes first so that we can see the teething problems early of the auctions. To support the democratisation of capital in this country, allied to the auctions could be access to Government borrowing rates for worker co-operatives who bid for the routes. The same approach could be used for other services like sanitation and the maintenance of water pipes and reservoirs.  The Government spends about the same amount on the University of the West Indies (UWI) as it does on public transport. Free education is rightly a sacred cow in Barbados, but the biggest impact on society comes from quality primary and secondary education. Here is one way of maintaining access to disadvantaged kids, but reducing the cost to local taxpayers of educating our middle class professionals. The Government provides a partial guarantee for a long-term loan for tertiary education at UWI or any equivalent institution. The loan is a private contract with a bank but if anyone is receiving a reverse tax credit, they provide this information to the Government and the Government pays the interest on the loan up to some cap. This could be refined so that Government support is not completely switched off as income rises, but a prospective student will know that they will only have to pay interest on the loan if they can afford to do so. How many UWI graduates are living in Barbados on reverse tax credit? 33 per cent? 25 per cent? ten per cent? How many are living comfortably abroad with the benefit of taxpayer funded education?  Health is far more complicated, but there are ways in which the budget for health can be spent more effectively which require more space than I have here. The point is that we need to act now. What we need to do is not rocket science and has been tried elsewhere. What we need are bold politicians with vision and courage, prepared to take on those who complain non-stop about the country, but would fight tooth and nail to stop anything that could disrupt what they consider to be their entitlement. To paraphrase the Democrat election slogan of 1992, “It’s the economy, stupid!”. l Professor Avinash D. Persaud holds a number of governance positions in finance, public policy and academia. He is chairman of Elara Capital PLC, Paradise Beach Limited and Intelligence Capital Limited among others.