At the macroeconomic level, governments all across the world have been relying on fiscal and monetary policies to restore internal and external equilibrium, especially in times of economic and financial distress. Generally, when economies are in recession and the country follows a flexible exchange rate system, it has the options of turning to both fiscal and monetary policies to restore economic order.
That we have seen time and time again in many of the world’s leading economies such as the United States (US) and China. Faced with a fixed exchange rate regime, it is often said that monetary policies are virtually ineffective in bringing about real increases in gross domestic product. Hence, in that scenario, governments have little choice but to rely on fiscal policies to grow and develop their economies.
With only a few exceptions, most Caribbean countries follow a fixed exchange rate system. The member states of the Eastern Caribbean Currency Union (ECCU) stand out in that regard because they all share a common currency in an arrangement that results in the pooling of international or foreign reserves. Hence, unlike a country such as Barbados that is constantly in a huge struggle to manage its level of foreign reserves to protect its exchange rate parity with the US dollar, no such pressure is placed upon the member countries of the ECCU.
Nonetheless, both Barbados and the ECCU member states share one thing in common when it comes to macroeconomic policies to effect growth and development: they all must rely heavily on fiscal policies to influence economic activities since monetary policies do not hold much promise given the fixed exchange rate regimes in place in those countries. Hence, as often as one could recall, there is always constant reminders that those countries must put their fiscal houses in order to ensure economic stability. What this means is that fiscal discipline must become the order of the day.
It is for this reason mostly that this author finds it rather interesting that both the governments of Dominica and St. Kitts and Nevis have made extremely bold moves in relation to wage increases in the public sector via announcements that clearly coincide with the holding of general elections. In Dominica, the public sector unions were calling for a 10 per cent increase in wages and salaries over a three-year period but were offered instead no increase by the government. But no sooner the reality of general elections hit home, the government’s negotiating team was instructed to offer a five per cent increase in wages and salaries to public officers. In his recent budget presentation, the Prime Minister of St. Kitts and Nevis has suggested that there will be an increase in wages and salaries to public officers in 2015 as well as a one-month bonus payment to all public servants in December 2014 to compensate for the sacrifices they would have made over the past few years.
Given the known effects that a government’s fiscal stance can have in relation to debt accumulation, the current account of the balance of payments, and overall growth in the economy, I would hope that the governments of Dominica and St. Kitts and Nevis are careful enough to ensure that their actions vis-a-vis increases in wages and salaries offered to public officers are supported by detailed analysis of the general economic impacts of such increases in public spending.
After all, these fiscal tales emerging from both countries must reflect the triumph of economics over politics and not the other way around.
Brian M. Francis, PhD, lecturer in the Department of Economics at the University of the West Indies Cave Hill Campus. Email: [email protected]
