WHAT MATTERS MOST: Chickens home to roost
I GIVE THE YOUNGER ECONOMISTS one piece of advice: “Never compromise your professional training.”
For some reason, the economics profession attracts excessive criticism. It is one in which the experts rely solely on the politicians to execute their recommendations.
The discipline, as it is known today, started out as political economy. Yet, there are some who believe that economists are “limited”.
In fact, this observation is at variance with the depth and breadth of knowledge that the discipline demands through the stages. It compares favourably to other disciplines, in terms of its relevance and application to practical, day-to-day problems confronting the world and its people.
In fact, the practice of all disciplines starts with some consideration of economics such as output, cost and price. In today’s world, almost everything has market value. Knowledge is no longer simply valued by the complexity of its rhetoric but more so by its ability to add value.
Unfortunately, economists can never be sure that their expert diagnoses and resulting prescriptions would be appreciated and accepted by the political leadership. This is precisely why it is best not to compromise in giving the latter policy options to choose from. The timing of the options is a critical factor in how self-interested politicians react to advice.
In this regard, it is no mystery why the new administration in 2008 found it so difficult to respond in a conventional way to the economic recession. President Barack Obama successfully introduced a stimulus package that worked. The local administration ignored such convention. The Barbados economy suffered. It is yet to recover.
In 2008, the national debt was 66 per cent of gross domestic product. It is now more than double that figure. The Government ran a current account surplus. There is now a deficit of more than $550 million on that account. The Central Bank held no Government debt. It now holds almost $2 billion. In short, the economic fundamentals were sound, with unemployment at a historically low rate.
As far back as the second half of 2007, two trained economists sat in an informal meeting and discussed that the world economy was going into recession. At the time, the Barbados economy was healthy enough to withstand what was coming in 2008.
A thorough diagnosis of any economy should lead to just a few recommendations. It is best to check the economy’s history to observe past symptoms and prescriptions to see what worked. There was nothing peculiar about the symptoms in 2008 since the cause was external. This narrowed the path through which the bug could affect the local economic system.
Reduction in imports
Fortunately, the initial contraction in economic growth was accompanied by a significant reduction in imports, which improved the county’s foreign reserves cover in 2009. The Government’s fiscal position, however, suffered not from a traditional fiscal stimulus, but reduction in revenue and the maintenance of expenditure.
What followed 2009 was economic madness. The Government never focused on restoring growth in the Barbados economy. The lack of growth meant that the Government was not getting a natural increase in revenue and opted to increase revenue through increasing tax rates, introducing new taxes, and reducing allowances and deductions for households and businesses. The policy choices were wrong.
By 2011, when the fiscal position reached its lowest ebb ever, the Government was advised that it could carry a bigger fiscal deficit because the foreign reserves were adequate. In the circumstances, severe pressure was placed on the National Insurance Scheme and commercial banks to finance the spending of Government. This proved unsustainable.
Eventually, the Central Bank became a printing press, which was initially denied. At that stage, the Government needed to be told about the known dangers of printing money. Instead, increasingly new and ingenious ways were being found to accommodateand protect the Government’s fiscal ignorance. This too was unsustainable.
The private sector and others, who are now making noises, were informed of the dangers but did not have the guts to speak at the time. They were apparently waiting for the economy’s death, which does not happen, even in Zimbabwe.
Last week, I wrote: “This is the season for evaluating which stocks have the most value and which can be sold or abandoned.” The stock of Central Bank Governor Dr DeLisle Worrell is now being evaluated by the politicians, and so this week’s revelation was deliberately timed.
What matters most now is the way forward!
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: [email protected]