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Objective public policy (Part 2)

Clyde Mascoll

Objective public policy (Part 2)

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The better part of my professional life has been spent arguing that there is an optimal size for government, especially in Caribbean-type economies, which is determined by the government’s capacity to tax and its ability to borrow from both local and foreign sources. In both instances, understanding the size and structure of the economy is vital.
In the early 1990s, Barbados had a major fiscal problem, but it was the foreign exchange crisis that drove the economic crisis. Since 2008, there has been no foreign exchange crisis, but the economy is smaller and the Government is bigger. The crisis is therefore fiscal!
Having had the experience of the early 1990s, it is still unbelievable that the Democratic Labour Party Government chose the current fiscal path in 2008. The reality is that it did so out of ignorance and it is left to us to resolve the attendant problems.
There are differences in approach but there is one inescapable truth: sending home Government workers is not the solution because it is anti-growth. But please stop swelling the ranks of Government at this time!
In last week’s article, a public policy framework was outlined that embraced five major interrelated economic objectives: (1) growing the economy; (2) lowering the fiscal deficit and debt; (3) creating employment in the private sector; (4) controlling inflation and (5) protecting the foreign reserves.
In Part 2 of this series on objective public policy, the focus is on growth and the foreign reserves. What is economic growth? First, an economy is measured by spending, of which consumer spending is the largest component. Unfortunately, consumer spending is measured only on an annual basis.
When there is more consumer-spending, the economy is growing. In Caribbean economies, most of what we consume is imported and so it is always preferred that more consumer-spending is accompanied by the earning of foreign exchange.
In all economies, local spending accounts for the majority of the economy. When the Government pursues policies that restrict or reduce such spending, the economy experiences less growth and may even contract.
Since 2008, local spending power has declined and has accounted for most of the 16 000 jobs lost in the private sector. Businesses are affected when heavy taxation, salary and wage restraint and rising prices combine to reduce spending power.
In the presence of adequate foreign reserves, the increased taxation was designed to reduce the fiscal deficit. In so doing, the Government compromised economic growth and jobs in the private sector. Over the last four years, the Barbados economy got smaller but the Government sector was one of only two sectors which experienced growth. The other sector was finance and other services, which grew by 1.3 per cent when compared to 10.3 per cent in Government.
So bad were the effects of Government’s policies on local spending that the Barbados economy experienced an unprecedented fall in spending in 2010 when compared with 2009. Barbadians do not need this kind of analysis to know what they have experienced, but the analysis is important so that the international environment alone is not used as the blame for the Government’s incompetence.  
In looking ahead, alternative policies must seek to inspire economic growth, especially since the country is able to pay for goods and services from abroad. Growth is necessary to assist in addressing the following: (1) the fiscal deficit; (2) employment in the private sector; (3) lowering the debt to GDP ratio.
The time for using the foreign reserves as a scare tactic is over. The new emphasis has to be on growing the economy via a combination of local spending and investment; the fear that local spending impacts negatively on the foreign reserves is highly overstated.
Since Independence, local spending has been the engine of economic growth but we understand that foreign investment and spending are important partners in our development strategy. We must seek to marry the two realities and not become so mentally enslaved as to not recognize that greater reliance must be placed on local spending at this time.  
Such flexibility is essential but it must be grounded in a deeper understanding of the issues in this second phase of Independence. The missing link between the economics and the politics is an appreciation for what size of Government we can carry as a country.
This link requires willing and mature leadership! To be continued.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]