Posted on

WHAT MATTERS MOST: Misguided policy to blame

Dr Clyde Mascoll

WHAT MATTERS MOST: Misguided policy to blame

Social Share

Jamaica and Barbados inherited similar parliamentary, legal and civil service systems from the British, having attained Independence in 1962 and 1966, respectively. Notwithstanding, their economic journeys have been somewhat different, yet there are similarities which have become more apparent in the last six years.
From the perspective of an economic management framework, understanding the features of twin deficits, fiscal and balance of payments and the interrelatedness is paramount. These deficits reflect the economic behaviour of the government on the one hand and the nature of the countries’ economic relationship with the rest of the world on the other.
To some extent, the twin deficits are correlated, which constitutes the essence of why fiscal adjustment becomes necessary, especially in the face of declining foreign reserves.  
In the post-Independence era, both countries set up a central bank which helped to finance fiscal deficits that characterised the post-1973 period.
The first oil crisis in 1973 and the change to flexible exchange rates internationally brought substantial changes in the domestic purchasing power of Jamaicans and Barbadians vis-à-vis the rest of the world, especially in the former. In short, the local dollar purchased less. This feature is far more evident in Jamaica because of a series of devaluations of the dollar.
As a result of rising international prices, the trade balances with the rest of the world became more negative or worsened, which led to greater reliance on foreign borrowing. Jamaica, because of the reduced value of its dollar, had to find more local currency to meet its foreign obligations. This got worse over time, forcing the government to spend most of its revenue on debt servicing. This phenomenon is now becoming more obvious in Barbados, even though not on the scale of Jamaica.
The oil crisis also produced a marked acceleration in the growth of government expenditure relative to gross domestic product (GDP) for Jamaica and a decline in the rate of economic growth for Barbados. The difference in fiscal management was soon reflected in galloping fiscal deficits for Jamaica and more moderate increases for Barbados.
The effect of such fiscal indiscipline in Jamaica was revealed in the dramatic turn in the country’s net foreign reserves from surplus (US$78.5 million) to deficit (-US$171.1 million) between 1975 and 1976, which persisted for almost two decades. In the meantime, Barbados continued to experience fiscal deficits but never saw its net foreign reserves slip into deficit, at least according to the published data.
As early as 1977, the two countries sought the International Monetary Fund (IMF) assistance. In the case of Barbados, it was a financing facility of only BDS$15.1 million, while for Jamaica it was a one-year stand-by arrangement. In 1978, Jamaica went back to the IMF for a programme worth US$240 million and by 2013, it had entered into 11 programmes, while Barbados had two programmes with the IMF.
The major problem with the IMF programmes is that they do not focus on the recovery of economic growth. Instead, they focus on trade and exchange rate policies designed to protect the foreign reserves, and to let market forces determine trade and exchange regimes. There is a view that a flexible exchange rate is enough to manage the balance of payments that is the foreign reserves. This view is misguided.
In addition, it is believed that interest rate and other pricing policies are needed to mobilise domestic savings and improve resource allocation in the financial market. This view is not misguided but it is more important to prevent the government from controlling interest rates at the central bank for the wrong reasons. This is an area in which Barbados’ recent economic management has been very heavily criticised, which has its genesis in the poor fiscal management.
It is well known that in times of economic crisis, Caribbean governments have appealed to wage restraint and in some instances wage cuts to bring wage costs in line with perceived drops in labour productivity.
Typically, these restraints and/or cuts are limited to a specific period, but never before has a government been able to institute an incomes policy indefinitely as is now the case in Barbados. This misguided policy has the effect of prolonging economic decline which may explain our poor economic growth performance vis-à-vis the rest of the region.  
In the face of all the evidence from the past, the Government chose to go through a no-entry sign, with dire consequences for the country’s economic recovery and social progress.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.