Tight fiscal policy the key
Winston Cox was Governor of the Central Bank of Barbados from 1997 until 1999 and has had a distinguished career serving at the domestic and international level. He has been alternate executive director of the World Bank, deputy secretary general of the Commonwealth Secretariat, and also worked with the International Monetary Fund. Now retired and living in Canada, he was recently invited back home to deliver the 35th Adlith Brown Memorial Lecture at the Frank Collymore Hall.
In this week’s Big Interview, Cox speaks with NATION Senior Reporter Gercine Carter about the impact of the global economic crisis on Barbados, gives his insight into the problems faced and has suggestions for the way forward.
Barbados’ economic standing appears to be in a precarious position at the moment with the international rating agency Standard & Poor’s (S&P) issuing a warning to get our economic house in order or face a downgrade. What are your thoughts on this?
Cox: It is a warning and I reckon that the fiscal situation has to be kept constantly under review. If the Government is trying to do that, they can avoid the outcome that S&P has warned about. That is going to be the test of management to be able to avoid this outcome.
Do you see Government having the courage and capacity to do the things required to avoid the outcome?
Cox: Oh, I have no doubt that we have the capacity. But will we do what’s needed to be done? Could our will to implement be interrupted by events that are not economic, like the coming of an election or the expectation of an election?
How do you see coming elections impacting Government’s will to act?
Cox: The tradition has been that when an election is called, fiscal policy seems to be more relaxed, but maybe Barbadians are mature enough now so that that pattern can be changed. Sometimes the post-election consequences can be quite difficult to manage.
I would certainly hope that Barbadians are sufficiently sophisticated and have sufficient information to reverse that pattern of relaxed fiscal policy prior to election. It is the right thing to do.
France’s President Nicolas Sarkozy named Barbados among 11 tax havens deemed to be uncooperative and which he said should be shunned by the international community. Should Government be worried about this, and what do you suggest be done in response?
Cox: We keep saying Sarkozy, but quite frankly it is not Sarkozy. Whoever was chairman of the G20 was going to make that comment. What happened is that prior to the G20 meeting three agencies of the G20 prepared a joint paper on non-compliance – the Global Forum, the Financial Action Task Force and the Financial Stability Board. It was the Global Forum’s submission of a contribution to that paper which named Barbados . . . . That was the G20’s conclusion on Barbados; you have no friends in the G20.
There are specific things that the Government is doing to address the concern of the G20. If those things had been completed before the G20 meeting, it is not likely that Barbados would have been there. So I think quite frankly the appropriate response is – and they are not things we have said we would not do, there are things we are committed to doing – that we must do what we say we are going to do in the time frame that we say we are going to do them.
What in your view should be Barbados’ response?
Cox: They should say what they are doing and when they intend to do it; and when they begin to do it they should say they are doing it. And when they have done it, they should say they have done it. I believe the two components of the response are: (1) an amendment to our income tax legislation to allow us to share information with a variety of jurisdictions, even if there is no treaty obligation to do so; and the second is that we probably may need to revisit our policy on double taxation treaties versus tax information and be willing to negotiate either/ or, rather than our reluctance to negotiate tax information exchanges which does not provide any real investment incentives while double taxation treaties do so.
As a former Governor of the Central Bank, what do you think should be the stance of Government and the private sector in the current economic crisis?
Cox: I think because of the downturn globally and because of the global situation, it will get worse. The US has just demonstrated its unwillingness or inability to address its fiscal problems, and we all know what is happening in Europe. I do not believe that we have sufficient latitude to ignore these things, so I think we have to maintain a pretty tight fiscal policy.
But Government had a medium-term fiscal programme, which suggests that the targets and the strategy they have for their policy imply no relaxation of fiscal policy.
Would you recommend a wage free at this time?
Cox: I know the IMF [International Monetary Fund] had recommended one, and it is probably the one area where you can have a significant impact, and if you can negotiate wage freeze under the circumstances I think that will certainly help.
They [Government] have to adopt a policy of steady as you go, as it were. I mean, [there are] very strong economic headwinds that they are sailing into, and to continue a nautical metaphor, if you are sailing into heavy seas and strong headwinds, you have to trim your sails and hold a steady course, which is difficult.
If the analysis of fiscal data suggests that the wage freeze would be an important component of the Government’s desire to stay the course, then it must certainly be considered.
Talking about trimming sails, the IMF had also recommended Government divestment of state entities like the Transport Board and Caribbean Broadcasting Corporation. What is your view on such divestment?
Cox: Who is going to buy is always an important question. I don’t know that there is the market for any of these; I am not sure they are saleable assets. They are manageable assets, but they have to be better mnanaged so they do not become a drain on the Central Government. That is where the challenge is.
But do you think given the present fiscal challenges facing Government, they can continue funding things like free secondary education?
Cox: I think that is a debate that we have to have. I think the debate would probably start at tertiary level rather than the secondary level. I know any proponent of changing the funding for tertiary education is going to be accused of kicking down the ladder on which they climbed, but we have to get past the emotion and very seriously look at the issue . . . .
When you are in this kind of situation you have to look at every available option. The question is who in the political arena wants to kick off that debate.
Should we be printing money at this time?
Cox: Well, I wouldn’t phrase it “at this time”. Printing money is never recommended.
Cox: Because of its potential inflationary consequences and its impact on balance of payments. I think the impact is the one that is more important to us.
What in your view can be done to further build the tourism sector, considering the downturn in visitor arrivals as a result of the impact of the crisis on Barbados’ traditional source markets?
Cox: I am not sure there is a lot you can do. You just need to continue your marketing efforts and be more imaginative in your marketing efforts. You need to keep your name in front of the market . . . . It has certainly been affected by the weaknesses in the major generating economies, Europe and the US.
The other emerging markets like Argentina and the South American markets, one, they are new, and two, I don’t know how strong they are. Do they have the capacity to replace our traditional sources? I doubt it, but these are places that are worth exploring.
If you were Central Bank Governor would you do anything differently in managing the current crisis?
Cox: As I said the other night, I am very glad DeLisle [Central Bank Governor Dr Worrell) is doing the job. I am not sure I would handle things very differently. You are probably pretty much constrained by circumstances and, quite frankly, we always maintain a healthy scepticism about the efficacy of monetary policy.
Should Barbados float the dollar?
Cox: Float it against what? No, I don’t think Barbados should float the dollar. It would not do anything. It is not going to make more tourists come to Barbados. Is it going to reduce our costs? I don’t see how it would.
A barrel of oil is still going to cost you X US dollars whether the Barbados dollar is floating or not. The market is too small any way.
In that context, it has often been suggested that the Caribbean should have one common currency. What is your view?
Cox: Well, I rather suspect that that is an idea whose time has come [but] I am not aware of any strong move in the direction of a common currency.
I don’t think that recent events in Europe are a good advertisement for a common currency either, unless there are other infrastructural underpinnings on the fiscal side . . . .
We have a very good example of common currency in the East Caribbean Central Bank. That is one part of our colonial inheritance which has survived intact.
I usually find it very difficult once you have broken the egg and made the omelette, to get back to the original egg. You can’t unscramble the egg. A lot of effort has been devoted to the creation of a common Caribbean currency, but it has progressed painfully slow and I would venture to say that it is dead in the water.
And if it wasn’t dead, the recent woes of the euro have not been a good advertisement for common currencies.
There is an ongoing debate on whether National Insurance Scheme (NIS) funds should be invested in the Four Seasons project. Have you been following it, and what are your thoughts?
Cox: I am not au fait with it, but I read bits and pieces in the Press. I have no difficulty with the use of NIS funds to fund private enterprise. What I have difficulty with is where the private sector is unwilling to put its own funds.
If the private sector is not willing to put its own funding, I am not sure the NIS should be the substitute. Also, the whole question of the whole NIS portfolio, I don’t know what the portfolio is like, so I’d be hesitant to put the NIS as the major funder of this project.
Executive chairman of the Four Seasons project, Avinash Persaud, has stated his determination to raise all the necessary funding to complete Four Seasons rather than wait on investors. Barbadians are questioning the wisdom of using NIS funds to do this. Do you think they should be as concerned as they are?
Cox: It is a legitimate question to raise because you need to be convinced about the viability of the project, that it can service its debts, that the funding will generate income. Some people who have looked more closely at the project than I have, question that.
Others say it is a good thing; but it seems to me that a lot of the time the debate is taking place in the absence of data.
I assume that Government has data on which they have made a decision to fund it, which they are not releasing to the public. I don’t see why the Government should make any decisions on the basis of information that is not public knowledge. That speaks to more openness and transparency and inclusiveness.
Are you saying that openness on the part of Government is not there?
Cox: Well, if the data is not available to the public, you have to ask where is the openness.
How do you see the way forward for Barbados?
Cox: We have to improve. I think that a lot of emphasis should be put on improving the efficiency with which we do business in the public and private sector. We have to be very alert in efficiently servicing the business that is conducted here.
That is one way to ensure growth, given the challenges that we face in terms of our perception as a tax haven, in terms of the attack from the OECD [Organization for Economic Cooperation and Development], and also in terms of the slowdown of the global economy. We have to improve our productivity.
Are you planning to come back to Barbados to work?
Cox: I don’t have any immediate plans to come back and work in Barbados. The short answer to that would be I could be persuaded to come back.