THE HOYOS FILE: The IMF’s strange prescriptions
THIS?WEEK we will hear from the Governor of the Central Bank of Barbados how the economy performed last year, plus a preliminary outlook on what prospects for growth are like for this new year.
We should not expect too much.
The recessions in Britain and the United States, as we all know, have been receding but too slowly for anybody’s liking and it looks like the road ahead, while perhaps a bit smoother in some places, will be tough going all the same.
Last April Standard & Poor’s said that “overall, we do not expect that Barbados’ GDP will rebound meaningfully until mid-2011 or until there is a positive trend in unemployment and stronger investor confidence in Barbados’ main partners: the UK and the US”.
The International Monetary Fund (IMF) seems to concur, saying we should not expect growth beyond an average of two per cent per year for the next five years, and after 2015, a mere two-and-a-quarter per cent.
The reason is simply that unemployment is expected to remain high in both our primary markets “for the foreseeable future” and, therefore, “it is expected that the recovery in Barbados will also be weak and protracted”. – IMF Country Report for Barbados No. 10.364, December 2010, Page 9.
In fact, the IMF document fleshes out a bit more the old adage about Barbados catching a cold when the United States sneezes – which, by the way, is roughly all I know regarding economic theory.
The report recalls that in the 1991-1992 recession, and again in 2001, Barbados suffered recession even though “growth barely dipped below zero in the two advanced economies.”
This time round, “output has contracted more sharply” in both the United States and Britain, it says, which may “bode ill” for us as those economies will likely take longer to recover, with the result that “the economic rebound in Barbados may be more anaemic and prolonged than in previous episodes”.
In fact, with our GDP estimated to have contracted a further one per cent up to last September 30, the Central Bank said in its third-quarter review that “we now expect a contraction in the region of half a percentage point of GDP for 2010 as a whole”.
Just before I go on to what the IMF thinks we should be doing, it is worth noting that it puts Barbados’ economic growth over the past decade at roughly the same level of two per cent. In fact, in the boom years of 2005 to 2007 we had GDP growth of 3.9 per cent, 3.6 per cent and 3.8 per cent, respectively. – Central Bank of Barbados, Main Economic Indicators, Page 8, September 2010 Economic Review “There were clear signs of overheating in the economy,” it notes. The boom was powered by public spending on the new cricket stadium and roads, the IMF said, and PPPs like the new prison.
So, while the unemployment rate dropped to 7.1 per cent by the fourth quarter of 2007, “its lowest level in twenty years”, high inflationary pressures were at work due to rising demand.
However, these pressures were “masked” by controls on gasoline and other petroleum prices, which led to a burst” of inflation when they were lifted by the David Thompson adminstration in early 2008. Had they been lifted under the Arthur administration, says the IMF, inflation during the boom period would have been higher then and lower afterwards.
In other words, the Arthur administration kicked the inflation can down the road.
Inflation was not low in 2005 (6.1 per cent) or in 2006 (7.3 per cent) and barely acceptable in 2007 (four per cent) – Main Economic Indicators Table referenced above.
In a long and fairly confusing analysis (at least to non-economic people like me) the IMF concludes that output in Barbados has fallen by between one and two per cent per year for the last two decades. Having checked up on some of the economic concepts which the IMF used to come to this conclusion, I can only tell you that they are controversial and do not have the consensus of all economists, so that allowed me to stop trying to figure out how they did their calculations.
Instead, agreeing that we need to get this economy going again, I was more interested in their prescriptions, even if their diagnosis might, to some other economists, seem faulty.
So what does it recommend? Well, it is glad to see Barbados trying to tap into the South American market for tourists with a weekly flight to Sao Paulo, and that it is also keen on sharing the Caribbean experience with tourists from the Far East. Sounds a bit “far out” to me.
Next, and excuse me for yawning, the IMF wants us to boost growth by “streamlining and increasing efficiency in Government services.” Now that is Republican code for cutting back on social services, okay? As long as you know that, you know what to expect.
And get this: the Government could review our immigration policies so that foreign investors “are not discouraged from employing expatriate professional staff” because such people “could introduce new know-how and international best practices to the country”.
Maybe IMF staffers who visit our shores should get out a bit more besides sitting at Government Headquarters in Bay Street. They would soon discover that our embracing of such people has now almost reached fully a mature stage, with West Coast villas, brand-name shopping malls and maybe two dozen polo and country club magazines providing big clues, even if the expats were all home sleeping. Please.
And here is the kicker: “Finally, strategic investments, such as the privately funded underwater pipeline to pump natural gas from Trinidad and Tobago to Barbados, are steps in the right direction. This project has the promise of lowering the cost of electricity in Barbados, while reducing the carbon footprint of electricity generation.”
Now whether you agree with that pipeline or not, and whether you like PPPs’ potential stranglehold on the public commonwealth by major private corporations or not, I have never heard anybody make the case that such a pipeline would reduce costs to the consumer.
Never. Yes, no doubt it would reduce costs to the owners of the major corporations that would use the pipeline, like the oil marketing companies and the electricity company, but not, to my knowledge, the consumer.
And just when I was close to swallowing the IMF projections hook, line and sinker, even losing sleep over such foggy terms as NAIRU (Non-Accelerating Inflation Rate of Unemployment – don’t ask, please) and TFP (Total Factor Productivity), the IMF goes and shows its conservative philosophy once more. With a capital C.