The economy remains the most pressing issue for Barbadians and the Freundel Stuart-led administration now almost three years in office. Over the coming weeks, THE NATION and BARBADOS BUSINESS AUTHORITY will produce a series highlighting the impact of the global recession on various sectors of the Barbados economy. Today, we bring a background to the key issues that influence the Barbados economy.
The union has stated on previous occasions that Barbados, unfortunately, is a crisis community and it takes a crisis for people to do what they should do in normal circumstances. The union does not like to act against the background of a crisis because everybody in the community becomes an expert in a crisis. – General secretary of the Barbados Workers’ Union (BWU) Frank (later Sir Frank) Walcott, December 1973, during the oil crisis.
ONE of the enduring images of the first oil crisis in the 1970s was a published NATION picture of the so-called “privileged pump” in Country Road, St Michael.
It was a mini-gasolene pump where only “high officials” could fill up their tanks, against a backdrop of long queues of vehicles of ordinary Barbadians seeking scarce gas at regular petrol stations.
“While the masses in this country of ours are daily dog fighting, queuing for hours on end (sometimes overnight), begging and even trying to bribe gasolene attendants to get two or
three dollars in gas, the Barbados Government has seen it fit to designate a private pump for a privileged few high officials who, on producing a letter, can have a full tank whenever they want it,” the newspaper reported.
A letter was circulated among all Members of Parliament informing them of the pump’s existence and their prerogative not to be affected by the energy crisis.
“This immediately sparked off some controversy in the House [of Assembly],” the newspaper added, “when Opposition member Mr Henry Forde and Government backbencher Mr Frank Walcott vociferously condemned the implications of the letter.
“Both said it was not fair to the people as a whole that certain officials should have no problems in securing gasolene. They thought that such a situation could only be condoned if the gas was only for cars taking ministers and other members of the chosen few on official duties.”
The grave gas situation which gave rise to such discriminatory behaviour was the result of a newly formed oil cartel, the Arab-dominated Organisation of Petroleum Exporting Countries (OPEC), quadrupling oil prices, a flexing of economic muscles that sent shock waves around the world and landed Barbados in its first official post-Independence recession.
A definition of a recession is widely accepted as two consecutive quarters of economic decline.
And in 1973, the shock of the steep oil price hikes rocked the Barbados economy in a way that left many people one step away from the abject poverty of the 1930s that led to serious social dislocation and even rioting.
Subsequently, major economic crises – recessions – occurred in Barbados in 1981, which was the fallout from the international recession with high interest rates; in 1991 to 1993 with the Gulf War; in 2001 with the September 11 terrorist attacks on the United States; and since 2008, following the contagion spread worldwide by the collapse of the United Statessub-prime housing market.
The characterisation of the 1981 recession was less dramatic but the call for wage restraint by the then Governor of the Central Bank of Barbados still echoes in my ears and those of the hostile public. A leading trade unionist described the call as unwarranted, untimely and malicious.
Since becoming Sir Courtney Blackman, the Governor wrote: “It occurred to me . . . that my spectacular lack of success in selling wage restraint might rest in its negative connotation.” Current Governor Dr DeLisle Worrell dismissed income policy (wage restraint) as unworkable.
In its 1980 annual report, the Central Bank of Barbados noted, in the section “Prospects for 1981”, that “the combination of far-reaching income tax concessions and wage increases, well in excess of the rate of inflation, which occurred in 1980. These triggered our current troubles”.
The bank has identified domestic influences as partly responsible for worsening the economic recessions.
In particular, there was tendency for marked deterioration in the public sector around the time of the election cycle. This was especially notable in the 1981 and 1991 economic recessions.
In the case of the 1981 recession, Blackman argued that “to make matter worse, the world recession of 1981-1982 turned out to be far more severe than expected, dragging us down into negative GDP growth. Our tourism and sugar earnings failed badly, and heavy foreign borrowing was necessary in 1981 to sustain our foreign reserves”.
Blackman further argued that the 18-month IMF standby agreement in October 1982 “imposed a much-needed discipline, and the fiscal deficit was reduced by half during 1982, and even further in 1983”. He suggested that once the IMF left, “our policymakers resumed an aggressive fiscal policy and the deficits began to widen once again”.
This fiscal indiscipline persisted and in 1991, the country was experiencing severe external disequilibrium, requiring a faster pace of adjustment and involving a mix of macroeconomic and structural measures. Fiscal and external equilibrium were quickly restored but slow execution of structural measures resulted in Barbados’ failure to draw down fully on the resources under the standby arrangement”.
This quick restoration of fiscal and external equilibrium was done at the price of wage cuts in the public sector and the cut of thousands of workers in the same public sector. The 1991 economic recession would come to be characterised as the worst in the country’s history as household incomes were decimated and standards of living plummeted.
Central Bank economist Cleviston Haynes says Barbados’ recourse to IMF financing reflects the impact of pressures on the external accounts with the rationale for intermittent drawings varying from precautionary in 1977 to the need to secure external liquidity and address fundamental disequilibrium in the economy in 1992.
Key macroeconomic indicators for the period 1975-1995, he notes, demonstrates the similarities in the features of the economy in the period immediately preceding the request for IMF arrangements.
“While there was no discernible pattern for inflation in the pre-IMF programme,” Haynes adds, “because of the strong influence of external factors on prices, the economy was already in recession at the time of the 1982 and 1992 IMF programmes.
“Large fiscal deficits coincided with significant interest rate hikes and increases in reserve requirements were implemented to curb the growth of private sector credit. In addition, there was intense pressure on the international reserves associated with a marked deterioration in the external current account, the result of sluggish export growth ands rapidly rising imports.”
In a 1979 paper on The Balance of Payments Crisis In The Caribbean: Which Way Out?, first Governor of the Central Bank, Sir Courtney Blackman, suggests the policy mix, including a measure of voluntary wage restraint and the introduction of selective credit controls and import controls on motor vehicles, was a critical influence in protecting the balance of payments in which Guyana and Jamaica were already involved.
“However,” Haynes notes, “as demonstrated later, the maintenance of external viability rests on the balance between financial discipline and a vibrant export performance.”
Haynes says the 1982 IMF borrowing underscored the vulnerability of the economy to external shocks and the need to maintain a sound macroeconomic framework.
He argues that the development of a disequilibrium in external and fiscal accounts is attributable to several causes.
“The crisis itself was preceded by strong economic growth between 1986-89, influenced in part by growth in tourism and by expansionary fiscal policies.
“However, efforts to broaden the economic base for foreign exchange earnings had still left the economy almost dependent on one sector – tourism, and there was increasing concern that the foreign exchange earning sectors were losing competitiveness.
“In addition, with a fillip being provided to consumption and investment in non-traded activities, the import reserve cover was not adequate to protect the economy against external shocks created by a slowdown in economic activity in industrial countries and the impact of the Gulf War on tourist travel and unsustainable domestic policies.”
Haynes suggests that the relaxation in fiscal discipline almost immediately after the 1982-84 programme provided the impetus for the unsustainability of domestic policies.
“The sharp reduction in direct taxes in 1986 created excess liquidity as the private sector adapted to the increase in disposable income,” he says.
He says Government engaged in extensive commercial borrowing between 1985-1990, “but as spending picked up and external debt service ballooned in 1990, the foreign exchange reserves came under pressure.
“The sharp rise in Government spending on wages and capital formation in the lead-up to the 1991 general election raised the public sector deficit for financial year 1990/91 to 7.4 per cent of GDP, comparable only to that of 1987, the first full year of the 1986 tax regime.
“The construction in domestic liquidity together with the increase in public sector external debt service shifted the burden of financing Government onto the Central Bank at the expense of the reserves,” Haynes notes.
Loss of confidence
“The liquidity situation worsened rapidly in the first half of 1991, as a loss of confidence in the exchange rate regime precipitated a crisis in the foreign exchange market.”
The current economic recession is now being described as the worst ever and the question is how does it differ from those of the past and have we learnt any lessons to help us cope with it?
So far the Central Bank of Barbados is still boasting of the country’s level of foreign reserves especially in relation to the import coverage, so it seems as though this is one way in which the current recession differs from that of 1991.
According to the bank, the foreign exchange deterioration was more severe in 1981 and certainly in 1991. As a result, the wolf is so far being kept from the door of the Barbados economy, but how long could the IMF be held at bay?
On the other hand leading economists in Barbados are all agreed that the fiscal position of the Government is the worst it has ever been, given that the current account of Government was in deficit to the tune of almost $450 million in 2009, following on from a previous high in 2008. According to the Central Bank of Barbados, this fiscal situation is expected to persist in 2010 and beyond.
