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BEHIND THE HEADLINES: In recovery – not recovered

Tony Best

BEHIND THE HEADLINES: In recovery – not recovered

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Call it an economic tale of two countries – Puerto Rico and Barbados.

One is on “the brink” of economic calamity and the other is in trouble but not nearly as bad as its neighbour.

Consider Puerto Rico, which a decade or so ago was hailed for being on course to attain developed economy status. At that time too, Barbados, labelled by the World Bank as a “high income” island – a nation with an enviable Wall Street credit rating of A- was considered “a model” of economic and social development among emerging markets.

Puerto Rico is on the “brink” of bankruptcy fuelled by some of the same things that are raising questions about Barbados’ economic stability – a mountain of debt, high unemployment, stagnant economic growth, and an inability to collect most of the taxes owed to the government.

Add underfunded pension plans, rising crime, and jittery domestic and outside investors to Puerto Rico’s woes and it would become clear why pessimism is on a worrisome gallop.

“The Puerto Rican government is desperate with a failed economy, a steady rise in crime with the failed war on drugs policy to complement it,” stated Timothy Alexander Guzman, an independent researcher who focusses on political, economic, media and historical issues.

But Guzman wasn’t alone in drawing attenton to what may be an economic calamity in the making in a country that Barbados and many of its English-speaking neighbours emulated as recent as the early 1990s.

“Puerto Rico is in trouble, after years of bad policies, mismanagement, excessive debt and bad luck,” the New York Times complained recently in an editorial.

“Its economy has been shrinking or stagnant for a decade and the unemployment rate sits at nearly 12 per cent. The Commonwealth and its utilities have a debt of US$73 billion, its public pensions are woefully underfunded and one state agency has warned that the government could be forced to shut down soon because it might run out of money.”

The bad news doesn’t end there. The vital tourism industry attracted 3.2 million tourists in 2013, a half million tourists less than the Dominican Republic. There’s more. The poverty rate in the United States (US) territory stands at about 44 per cent, forcing more and more Puerto Ricans to flee to the US mainland.

The issue for Puerto Rico is what to do next? The international economic environment changed considerably since the island, once an agricultural economy, transformed itself into an industrial zone, mainly through the appeal of Operation Bootstrap, an incentive-laden initiative that attracted US firms seeking lower operating costs but high profits. The successful shift away from labour intensive agriculture into manufacturing raised individual incomes and living standards was anchored to the import-substitution philosophy that was sweeping Latin America and the Caribbean in the 1960s, Barbados included.

Indeed, Barbados found it so appealing that it developed its own incentive scheme, Operation Beehive, copying many of the tax schemes offered by Puerto Rico. Barbados, quite sensibly, invested in its young people’s education, in the health of its adult population for half a century, and the collective determination of a majority of Bajans to propel their country to new economic and social heights. Unfortunately, it has been going downhill in recent years. Its once stellar A- credit rating has fallen to junk and may fall even more.

For Puerto Ricans, they see their country’s future resting in the hands of US lawmakers in Washington, who they believe can do more by allowing the island to file for bankruptcy, a move that would reduce its fiscal burden. This would be done appointing a financial control board to oversee economic management, by spending more on tourism promotion, and by raising taxes to boost government’s finances. Just as important, it should increase spending on education but borrow less.

The introduction of a 16 per cent value added tax (VAT) as proposed by Goveror Alejandro Garcia Padilla should improve government revenue but the administration must carry through on its plan to conduct an extensive public information campaign about the rewards of VAT.

Barbados introduced its VAT system in the 1990s and it has paid handsome dividends for the country. In Barbados’ case, it too must seek to raise more revenue, not by imposing additional tax burdens on people, but by improving tax collection. It must also tackle the inefficiencies in its public service and court system that’s evident in the backlog of cases which must be adjudicated.

Last week, the International Monetary Fund complimented Barbados for making “strides” on its adjustment programme and tourism-led (economic) recovery, the stabilisation of its foreign reserves and the strong inflow of private investment. But it was also quick to urge the Government to place a priority on “fiscal adjustment” with a medium “debt anchor” guiding the annual budget. The IMF wants the Government “to continue lowering the overall wage bill”, one of the Caribbean’s highest.

Charlie Skeete, a retired Inter-American Development Bank senior economist, also had some good things to say about Barbados, especially its “return to positive – or at least not zero or negative – growth”. In addition, he pointed to the ability to keep inflation rates relatively low while maintaining stable foreign reserves.

But he cited rising unemployment, the poor performance of the collapsing sugar industry and the stagnant construction and distribution sectors as evidence that there was “grist for the mills of both the sceptics and the believers”.

The plain truth, Skeete wrote in Business Barbados, “we are behind in our implementation deadline, in achievement of our targets, and the amount of remedial medicine that needs to be taken for achievement of our state goals. We are in recovery, not recovered”.

In other words, Barbados has a long way to go before it gets out of the woods.