WHAT MATTERS MOST: Please go back to basics
There is no wonder that this country’s cadre of younger economists is unwilling to speak in public. Basic principles that have been taught and observed about small Caribbean economies are being abandoned. These include:
(1) realizing surpluses on the government’s current account;
(2) ensuring adequacy of the foreign reserves to maintain the fixed exchange rate;
(3) pursuing growth as the only sustainable strategy.
During the early 1990s economic crisis, which is characterized by balance of payments and fiscal difficulties, the Sandiford administration was vilified for being irresponsible. In the last five, Barbados has had a fiscal crisis, not an economic crisis, because of the adequacy of foreign reserves. This most recent crisis is the direct result of poor policy choices, which started in 2008.
So why did Sandiford not escape the criticism but the 2008 administration did?
It was evident as far back as 2009 that the Barbados government had abandoned the basic principle of realizing a surplus on its current account and when it was recognized, remained indifferent. The sustained indifference created the single biggest threat to Barbados’ prospects for economic growth and development. It was too fundamental a change in policy not to become the basis of major public discussion among economists.
Instead, there was silence! When the silence lifted, it was surprising to find that the most fundamental principle for fiscal management in Barbados was pushed under the carpet, something that Sandiford did not experience. Why?
Since 2008 and more so in recent times, the Governor of the Central Bank has spoken and written about the adequacy of the country’s foreign reserves. Indeed it has been the only bright light in the economy and the saviour. If it were not so, the Government would have had to enter a programme with the International Monetary Fund. Instead it sought the route of a “home-grown” Medium Term Fiscal Strategy.
The notion that the Barbados fixed exchange rate is under threat is a convenient abandonment of the workings of the economy. Over the last five years, in spite of the weak economic performance, net foreign reserves at the Central Bank have stood up better than in any previous five-year period.
In addition to the decline in the country’s imports, which means less spending of foreign currency, Barbados’ external debt servicing has declined and will continue to do so for the next decade. These two factors have contributed to the unexpected performance of the foreign reserves in a period of anaemic economic growth.
There is therefore no threat to the exchange rate. The argument of a threat is to nullify the call for increasing domestic spending or alternatively putting money in the people’s pocket; it defies our training and the reality.
Furthermore, in circumstances where government’s servicing of foreign debt is declining, the use of the Central Bank’s reserves will decline as well. So the level of reserves is even more adequate than in normal times. What a privilege!
There is another compelling fact: interest rates in the United States are at an historical low. This means that investing our foreign reserves abroad has been fetching us very little in terms of interest earning. The question is, why in the face of adequate foreign reserves would we prefer to invest abroad rather than boost our domestic spending to trigger growth at home? It is baffling that there is contention on this obvious matter.
Finally, it has taken two to three years for it to be recognized that growth is the only sustainable way out of the current economic morass. This leads to the most puzzling abandonment of all. The reality is that Barbados’ economy has been led by domestic spending. It is idealistic to believe otherwise.
The truth is that theoretically it is better for our economic growth to be fuelled by foreign exchange inflows. This provides the cushion to absorb the impact of domestic spending on the foreign reserves. However, it is impossible for 70 cents out of every dollar to leak out of the economy and go overseas.
The Government gets at least 15 cents out of the dollar and therefore the distributor’s mark-up and the retailer’s mark-up would effectively account for the other 15 cents. This is impossible in an economy that has arguably the highest local value-added in the region.
The late Wendell McClean published a paper of pricing in the distributive sector that settles this discussion from its micro-foundations.
Please embrace the basic teachings!
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.