WHAT MATTERS MOST: Solution must fit problem
From a policy perspective, the two major constraints in the management of the Barbados economy are: (1) the availability of adequate foreign exchange and (2) the accessibility of financing to meet the fiscal deficit requirements. In times of economic crisis, the two constraints are so stretched that the Government is forced to borrow urgently especially from foreign sources.
It has not been difficult to diagnose the problems in all four of Barbados’ economic crises since Independence. It is known that the lack of foreign exchange is the more critical of the two major constraints identified above and this is why the country went to the International Monetary Fund in 1991.
All during the most recent crisis, it was recognised that though the current fiscal crisis is the worst ever, the lack of foreign exchange never became an issue. However, it is further recognised that the persistent printing of money at the Central Bank will eventually deplete the foreign reserves.
In the current circumstances, the bank’s foreign reserves have continued to decline. In addition, a seasonal decline will occur well into October and possibly November. This is predictable as the economy reaches its low in the third quarter and businesses buy foreign goods in preparation for the Christmas season.
This is the time of year that the need to constrain the size of Government becomes most obvious in the Barbados economy. Government revenues are at their lowest with no easing in spending.
Given the persistently poorly performing economy, the Central Bank will become more of a printing press.
When the Government was already spending excessively in 2010 and 2011, it was advised that it could afford to spend even more because of the adequacy of the foreign reserves at the Central Bank. This advice was obviously wrong from all economic perspectives.
The size of the public sector is now the elephant in the room. There are several ways to define the public sector that are influenced by the problems that are to be resolved.
If the problem is one of how to allocate the country’s limited economic resources, then the question is – does the Government choose to spend on consumption and/or investment? In the current fiscal crisis, the choice has been consumption with hardly any investment.
If the problem is one of distribution between the private and public sectors, then the question is one of how much taxation to impose on households and businesses. The Government has chosen to extract as much taxes as it can from the private sector with the resultant damage to the economy and its failure to recover.
If the problem is one of production, then the question is – how much of the goods and services provided by the Government should be produced by the Government? The Government seems to believe that it is better placed to produce services such as water, sanitation and transport, to name a few. It is evident that the issues of Government production are wide and varied.
If the problem is one of ownership, then the question – is how much of the means of production should be owned by Government?
This has been a major problem in other Caribbean countries like Jamaica, Guyana and, to a lesser extent, Trinidad and Tobago, where the governments sought ownership of banks, other financial institutions, hotels, telecommunications and mineral companies among others.
The evidence does not favour government ownership.
If the problem is one of bureaucracy, then the question is – how much of the workforce should be employed in Government organisations?
This issue is particularly sensitive as governments believe that even in the face of limited financial resources, they have a responsibility to create employment in the public sector. While it may not be good economics, it has proven to be good politics that has severe implications for the viability of the economy and the country’s standard of living.
The variety of issues raised in identifying the size of a country’s public sector ought to indicate the magnitude and nature of the problem that has to be resolved in the Barbados economy. This is precisely why the problem should have been averted in the first place.
There is really no appetite for an economic resolution which explains why it is still being masked by politics. The Government’s plan is to mask long enough to allow our economic fortune to be determined by the electorate.
Too late shall be your cry.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.