Barbados has to be price competitive
BARBADOS IS A VICTIM of failed economic policies, not a global recession. This failure is reflected in the underperformance of the Barbados economy against the rest of the Caribbean over the last four years.
Not surprisingly, the underperformance became more evident in the aftermath of the ill-conceived taxation policies in the budget of 2010. These policies contributed to prices rising three times as fast as the average in the region, which set the platform for the continued woeful performance in the tourism sector.
Tourism accounts directly for 12 per cent of the national income. However, when the relationships with the rest of the economy are considered, tourism is said to account indirectly for 43.9 per cent of national income, according to the World Travel and Tourism Council.
This indirect measure makes Barbados the sixth most tourism-dependent economy in the world. In light of this fact, it is imperative that economic policies be geared to increasing the competitiveness of the tourism sector, especially when the emphasis is on earning foreign exchange and the international business sector is underperforming.
Since every economy in the region has faced the same international environment since 2007, the argument that the latter is solely responsible for the state of the Barbados economy is simply false and loaded with ignorance.
Imagine that St Lucia is now the preferred destination for British tourists. Further imagine that some of the British tourists pass through Barbados to get to St Lucia.
Try to explain how and why the rest of the region is outperforming Barbados. Certainly, the international economic environment cannot be blamed for Barbados’ performance when the others are facing the same environment. Come again, apologists!
Assuming that the physical accommodation sector is in place and that there is airlift, the thing that determines the performance of the tourism sector is its competitiveness.
Further assume that the service in the sector is comparable, and the issue becomes price competitiveness. A simple measure of the latter is the relative change in local prices in the two countries.
When the Government increased the VAT rate, the excise tax along with utility costs, the combination contributed to the rising cost of doing business. If the local business is providing goods and/or services to locals, the impact is on reduced spending power of households.
However, businesses that cater to foreign spending have a different problem – that of staying price competitive with those in the region. Put simply, the Barbados tourism sector is now less competitive vis-a-vis the rest of the region because of the failed economic policies of the Government, especially since 2010.
Given the indirect linkages with the other sectors in the economy, it is clear that poor performance in tourism cannot be tolerated. Furthermore, when local demand for goods and services is compromised by the lack of spending power, the combination of depressed foreign and local spending in the economy spells disaster. This combination has been allowed to persist for too long and disaster will turn into catastrophe within the next eighteen months.
The only way to break this cycle of downturn is to deliberately target the tourism sector. The approach is not simply about marketing since the product has to be price competitive in the first place. In short, there is a need for a two-pronged attack to reverse the fortunes in the sector.
Putting the emphasis on alternative energy to turn around the economy in the short-term is an insult to the intelligence of thinking Barbadians. Of course, alternative energy is the future but tourism is the present.
Unless the Government is able to borrow $350 million or more on the foreign market, the current stock of reserves will drain out of the sink, since the outlet plug is loose and the inlet tap is dripping because of the underperformance in the tourism sector.
Like any stock of water in a kitchen sink, the level rises and falls in direct proportion to what is coming through the tap versus what is going out through the bottom. But success in foreign borrowing will only delay the day of reckoning for the Barbados economy.
Eventually, the economy has to generate more foreign exchange than it is using. Similarly, the Government has to extract more revenue from a growing economy and not by increasing tax rates. Ultimately, households have to be able to earn their way out of the present misery through access to jobs, higher productivity/income and less relative tax burden.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]