It is flattering to hear the talk associated with restructuring the Barbados economy. But there is a more immediate need to correct Barbados’ fiscal circumstances, which have been the predominant cause of the country’s ongoing debt problem, the continued burden of excessive taxation and the extremely slow recovery of the economy.
Students of post-World War II Caribbean economic history know that the literature sought to answer three basic questions. First, how do Caribbean economies work? Second, what are the socio-economic impacts of how these economies function? Third, what ought to be done to improve the workings of these economies to realize the expectations of the populations of the region?
It is impossible to answer any of these questions in a thesis, far less a column. However, there are key features of Caribbean economies that will always inform any analysis. These include smallness, high import propensities, issues of productivity and the need to export.
In the post-independence period, especially after the first oil crisis in 1973, some economic vulnerability emerged such as persistent fiscal deficits, growing national debt and low economic growth rates. It ought to be noted that the features of the vulnerability were managed differently across the economies.
The differences in economic management explain why high public debt and a few maturing sectors are responsible for the macroeconomic uncertainty and limited scope for productivity growth in the Jamaica economy. Excessive financial resources have gone to debt servicing at the expense of public sector investment has also adversely affected productivity growth.
In contrast, Barbados’ debt servicing was not of the magnitude of Jamaica’s, although it has experienced persistent fiscal deficits and growing public debt. These occurred in an environment of maturing sectors in its output structure, but the rate of economic growth has been moderate rather than low, to which public sector investment has contributed.
The contrast between Barbados and Jamaica was very evident prior to 2008. This was especially so in the way in which Barbados avoided the pitfall of the government spending more on current expenditure – wages and salaries, goods and services, transfers and subsidies and interest payments – than it received in revenue. It is the single largest fiscal sin that a government can commit.
The fiscal sin accelerates the government’s inclination to borrow, its temptation to tax and its capacity to stifle economic growth. As a consequence of such sin, the economy’s ability to earn foreign exchange is compromised and with it the rate at which the economy can be transformed.
Barbados has now quietly entered the first phase of state clientelism that the economy cannot carry. According to Carl Stone, clientelism is a mechanism by which to institutionalize a power structure that is distinguishable from the class-based politics. When the state pays for the patronage, there is an irreversible cost that eats at the heart of those who produce and ultimately at their productivity.
At a time when the country should be in a position to transform itself in the face of the global challenges, it is not prepared to blossom but rather to turn in on itself. This forces the Government to become even more parasitic, which is the opposite of what is required.
The single biggest requirement of any Caribbean economy is to earn adequate levels of foreign exchange. The political forces of clientelism and the economic demands of parasitism are at variance with preparing a small open economy to meet its greatest need.
In fact, current access to adequate levels of foreign exchange is the only reason why the Barbados economy is not yet in the hands of the International Monetary Fund.
In the circumstances, where Barbados has been so poorly prepared, the Government is hoping to borrow $350 million from international sources, notwithstanding the very high cost it will have to pay given the country’s junk bond status.
The foreign borrowing not only pushes back the day of reckoning for Barbados, but it also camouflages the level of Government borrowing from the Central Bank.
The new mantra of the Governor of the Central Bank that Barbados does not have a debt problem is designed to accommodate the additional borrowing identified in the Estimates for current fiscal year 2013/14.
However, if the Government is unwilling to learn from history and more so refuses to accept the obvious diagnoses, it will continue to follow misguided political and economic models of growth and development. Time will tell!
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.