Examining fiscal adjustment
It is universally recognized and accepted that independence, whether of an individual or a country, comes with increasing responsibility.
When this is applied to Barbados and Jamaica, there are interesting lessons to be learnt as the indiscipline of the latter was always in contrast to the more disciplined approach of the former. The difference is no longer discernible and a case may be made for a reversal of roles in recent times.
Having attained Independence from the British in 1962 and 1966, respectively, Jamaica and Barbados were quick to establish central banks. By 1977, the two countries sought the assistance of the International Monetary Fund (IMF) for the first time. To date, Jamaica has entered into four IMF Extended Arrangements and seven Standby Arrangements, while Barbados has had two Standby Arrangements.
The difference in the number of IMF programmes may be indicative of the respective fiscal discipline or indiscipline. The establishment of a central bank gave both countries access to another way of financing the fiscal deficits of the governments. This way of financing is not the most desirable, since it has negative implications for the country’s stock of foreign reserves held by the central bank.
It is equally universally recognized and accepted that the printing of money by small Caribbean-type economies, without real currencies, is not the way to pursue macroeconomic stability and so controlling their fiscal deficits is a sine qua non. This is as true as John 3:16, unless of course you do not believe in the Bible. Strangely enough, the damage done by the printing of money has already been observed.
In spite of the abundance of evidence, there are still a few naysayers who believe that positions taken on the economy are personal and devoid of intellectual rigour. Yet, they in turn offer the view that Barbados’ problems are all externally driven.
My disappointment with two senior economic advisers is perhaps best illustrated by appealing to the contents of the Central Bank of Barbados’ most insightful policy publication to date entitled Central Banking In Barbados: Reflections And Challenges. It was edited by Harold Codrington, Dr Roland Craigwell and Cleviston Haynes.
Again, it is universally recognized and accepted that in countries with fixed exchange rates like Barbados, monetary policy is ineffective that is vis-à-vis fiscal policy. Dr DeLisle Worrell in the publication cited above stated in support of the accepted view: “It is generally accepted that monetary policy cannot make up for lack of fiscal adjustment. It must be stressed as well that monetary policy cannot make up for insufficient fiscal adjustment. Fiscal adjustment must be appropriate and sufficient.” Fiscal adjustment means adjusting government revenue and spending to reduce the deficit and protect the foreign reserves.
Adjustment not followed
In recent times, the same Dr Worrell recommended a major fiscal adjustment that has not been followed. The appropriateness comes not only in the amount but in the length of the adjustment period. Notwithstanding the political rhetoric, the total measures needed to achieve the required fiscal adjustment have not been implemented and the major measures have been abandoned.
So important is the management of Government finances that Dr Worrell opined: “No macroeconomic problems arise so long as fiscal policy is managed so that government complements private spending.” This is a remarkable observation that speaks to how the country is in the current fiscal condition. It states emphatically that it should a complement, which is contrary to what has happened in the Barbados economy in recent times, with the Government choking off private spending.
The context of Dr Worrell’s observation is best understood when he further stated: “The fixed exchange rate strategy maintained through fiscal adjustment of aggregate demand – not via central bank foreign exchange controls – is the best example of a policy which is successful because it enjoys general popular endorsement.”
In the Barbados economy as in other Caribbean economies, fiscal policy is at the heart of prudent management of all aspects of the economy, including the exchange rate.
It should be evident that Jamaica’s inability to maintain a fixed exchange rate started with fiscal imprudence way back in the 1970s.
It took another 30 years for the wrong fiscal stance to be taken in Barbados and five years over which the stance became the norm, for it to be remembered that fiscal adjustment is sufficient.
The views articulated by the writer over the past five years are not personal; they are universally accepted and therefore known to the Government’s economic advisers.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected]