For as long as anyone can recall, the issue of the size of government in and out of the Caribbean and the extent to which it has contributed to the growth pattern of an economy has been debated time and time again without any real end in sight.
Despite being a topic that has been widely dealt with in the economics literature and in policy discussions in the region and globally, it still remains quite relevant today, particularly in the context of small, open economies like those in the Caribbean. Why?
Only last week, for example, the Governor of the Central Bank of Barbados Dr DeLisle Worrell presented his latest economic review and noted that the Barbadian economy grew by only 0.2 per cent in 2013 and is expected to grow by 1.6 per cent in 2015. No real growth is expected in 2014.
Despite the absence of real empirical analysis, no one in Barbados would deny that the country’s growth performance is definitely linked to the size of the Government.
To put it bluntly, the relatively high ratio of public spending to GDP (an acceptable measure of the size of government in the economics literature) in Barbados has hurt the country’s growth capacity in the past few years and from an anecdotal perspective, the statistical figures released by the Central Bank on the current and future state of the local economy supports this bold assertion.
Barbados has been chosen to illustrate my argument because of the composition of public spending and the findings of an econometrics study done by Atrayee Ghosh Roy in 2012 on the very same issue in the United States.
The study, entitled Revisiting The Relationship Between Economic Growth And Government Size, published in Economics Research International, found that “an increase in government consumption slows economic growth, while a rise in government investment enhances economic growth. Furthermore, the results also show that government investment crowds out private investment.” Nothing surprising there.
In Barbados, Minister of Finance Chris Sinckler recently informed the nation that the fiscal deficit in 2013 was somewhere in the region of $800 million. Of that total, less than $100 million can be attributed to capital expenditure. Therefore, logically, based on the Minister’s own figure, the current account deficit in 2013 stood at about $700 million.
The problem here has to do more with high spending and less with low revenue – a conclusion based upon the same minister’s admission that the Government is now forced to rely on expenditure cuts to bring the fiscal deficit down – cuts that include the sending home of thousands of public servants in and out of the general public service.
Given the findings of the study done in the United States, it seems logical to conclude that the huge size of the Government in Barbados has contributed significantly to the low growth patterns on display over the past four to five years. This empirical relationship is critical because as Atrayee Ghosh Roy correctly observed, there really isn’t any robust explanation of the link between economic growth and government expenditure in the economics literature.
Going forward, then, Barbados as well as other countries in the Caribbean must take serious steps to reduce the level and growth of public expenditure if they are serious about returning their respective economies to sustained economic growth path. Otherwise, the pattern of sluggish economic growth rates will continue ad infinitum. And that is certainly not what the region needs at this? crucial juncture.
