WHAT MATTERS MOST: Breakdown in economic lessons
Last week, it was suggested that between 1937 and 1966, the period of decolonisation, the preconditions for an economic system to be led by an emerging middle class took root. From an economic perspective, this period was dominated by agriculture with sugar leading the way.
During the same period of decolonisation, changes to the process of parliamentary democracy paved the way for a new political class to be born out of the emerging class. As with all successful transitions, the skills sets had to be made available to the emerging class. This was done very effectively through the avenue of education.
It is self-evident that economic transformation had to be a necessary component of any change that was to accommodate the renewed expectations of all Barbadians. Furthermore, the working class in particular had to be brought on board if the transition were to be meaningful and indeed stable.
Having put the institutional framework in place for the growth of the manufacturing and tourism sectors in the mid-1950s, the two became leading sectors in the post-colonial state, with tourism especially leading the charge. In collaboration with sugar, these emerging sectors gave rise to a peaking of economic activity at the start of the 1970s.
By 1973, there was the first oil crisis which followed the breakdown of the fixed exchange rate regime that had characterised the world economy between 1959 and 1971. These two occurrences combined to put pressure on the country’s ability to handle the growing trading gap with the rest of the world. In addition, the government continued to experience rising fiscal deficits.
For the first time in the post-colonial state, the threat of economic instability emerged, creating the conditions for the first change in government. Notwithstanding that the new political class was firmly entrenched with the attainment of Independence, the struggle was now going to be over the holding of political power by one of two parties.
The rising expectations of the people had to be met for the newly-won Independence to have meaning. At the heart of the attainment was the perception that progressive governments pursued equal opportunity for all which would lay the foundation for a new social development path, even though economic resources were not yet available to match the expectations.
Stringent fiscal principles
Notwithstanding the reality, if the expectations were to be fulfilled, the Government had to depart from the stringent fiscal principles that were put in place by the colonial master. This meant having access to finance if the Government were to provide the physical and human infrastructure for economic growth and development to take place.
In this regard, rather than realise balanced budgets or even surpluses, the Government had to indulge in fiscal/budget deficits. In the midst of the new economic challenges, the Central Bank of Barbados was established and while its establishment was not justified in terms of fiscal flexibility, there is no doubt that it provided such.
The true test for the new political class was how to balance the expectations of the people with the country’s limited economic resources. Given the scarcity, the major issue became one of prioritising the people’s needs within the short- and long-term interests of the country; and in all of this, the politicians’ self-interests.
For the better part of the Central Bank era, there was recognition by both academics and practitioners that the bank’s new capability of printing money had to be managed prudently. This is why there had to be a limit on the government’s overdraft facility with the Central Bank that was legislated in Parliament. In essence, somebody had to guard the guard and this responsibility was given to the people’s representatives. Some even more limited discretion to print money was given to the board of the Central Bank, of which the governor is the chairman.
In the early 1990s, Parliament acted by bringing to the attention of the people that the government had exceeded the limit of the overdraft set by law. While this limit has not been broken during the current fiscal crisis, it is only because the board has found a way to use its discretion excessively.
The methods by which the prolonged fiscal deficits have been financed constitute a total breakdown of the lessons learnt in managing the Barbados economy since Independence. The breakdown is reflected not only in the economic setback but the threat to the country’s social fabric that has been permanently weakened.
Quis Custodiet ipsos custodes?
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.