In this series OF ARTICLES on public policy, it has been indicated that there are a number of alternative policies for the Barbados economy that are based on which of the following objectives to emphasize: (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 designing the overall architecture for the Barbados economy, it is important to harmonize the competing needs of the public and private sectors; to emphasize the most pressing short-term goals; to balance these goals with the country’s long-term development perspective and to be aware of the rhythm of external influences.
In pursuit of these basic tenets, it is critical that the size and structure of the economy are seen as constraining factors in the design. In recent times, there have been some attempts to compare what is happening in Europe with the experiences of Barbados since 2008.
The attempts are feeble at best because they fail to separate the structural issues in the economy and the design issues induced by poor policy choices over the last four years.There is only one thing common to the circumstances in Europe and Barbados, and by extension the Caribbean, and that is the size and perhaps structure of the public sector. In recognition of this, the debate about austerity versus stimulus applies to both circumstances.
However, this debate is nothing new and has its genesis in 1930s Keynesian economics, which revolves around the role of government in the pursuit of the economic objectives outlined at the beginning of this article – this interpretation is deliberately simplistic.
Indeed, calls were made to stimulate the Barbados economy as early as 2008, and the then Prime Minister rejected them. Unfortunately, while rejecting the calls, the Government was doing its own brand of stimulus that is now responsible for the country’s fiscal crisis. In short, stimulus is the use of government spending to spur economic growth, while austerity is the cutting of government spending to reduce the fiscal deficit and eventually debt.
The intention of stimulus is to stimulate economic activity, which means increasing spending in the economy. However, stimulus is supposed to have an effect on spending for a specified period of time, with one year seen as too short and two years as too long. Therefore, an ideal time for a stimulus package is eighteen months.
Since a stimulus has a definite time period for execution, the spending is typically on capital projects. This means that the spending is one-off; that is, it is not recurring expenditure. As capital projects involve the private sector, such government spending impacts on employment and creates growth.
Notwithstanding the ignorance done by the current administration in using recurring expenditure as stimulus while rejecting the proper notion of stimulus, it is not appropriate to go the route of austerity at this stage. It is even more inappropriate to consider austerity in the face of an adequate stock of foreign reserves.
In short, austerity is anti-growth – and economic growth is the biggest requirement in addressing Barbados’ current economic problems. Therefore, no well trained economist would propose austerity for Barbados at this time. However, this does not mean that there are no fiscal issues to be addressed.
The fiscal issues have to be dealt with over the medium term, and the best way is to grow the Barbados economy such that the public sector becomes a smaller proportion of it over time. In the process, the restructuring of the public sector to become more relevant to a more modern technologically driven economy is an imperative.
The public sector must become a more genuine partner in facilitating private sector investment. As indicated recently, such investment demands new approaches to the pricing of money, energy and technology. The price of money has to be changed through some reforms in the financial system. The price of energy has to reflect better public policy and since energy is a major artery in small economies, the ownership of the sector must be reflected in less government and more private businesses and households.
Understanding the difference between ownership and control is fundamental to changing the political perspective of what the size and structure of government ought to be in building a new economy. The time for its greater leadership and less management is now!
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email clydemascoll@gmail.com.
