Introduction:
Barbadians are now getting some external scrutiny of the economic mess the nation is in and shining a torch in those cobwebbed corners is not a happy site. According to the recent IMF report, government has finally committed itself to a number of key proposals, but these still remain opaque and unarticulated, even if they had to be dragged kicking and screaming to admit there are in a deep economic hole. However they may manoeuvre, it is clear the offer of redundancies and a few cutbacks in spending are not the answers the economy needs at this time nor, indeed, do the growing army of un(and under)employ young people want.
The report itself admits this in its introduction, pointing that in December 2011 a previous IMF delegation had stressed that the widening fiscal deficit and debt were the key areas of concern and proposed a “credible fiscal consolidation plan” to resolve the issue. But, the DLP government asked for a postponement because of the general election, which, as we know, the DLP won. So, it is clear, that political chicanery won the day and the DLP deliberately misled the Barbadian electorate during the February 2013 campaign, especially its promise that there would not be any redundancies.
The reports also makes it clear that there is no available full information on financial performance of public enterprises, not only revealing the opacity of government, but, I suggest, not only hiding one of the key sources of heavy leaking of taxpayers’ money, but of gross managerial incompetence. The real problem with the Barbados economy, however, is structural, and deeply so: a public sector which is lacking in up-to-date technology, a working force that believes that taxpayers have a duty to keep them in jobs, a political culture that mistakes the ruling political party as the state, and a portfolio of small businesses and land that the state should not own but should dispose, if only to rebalance its finances. The only real reason for this ever-expanding portfolio of state-owned assets is the control it gives politicians, in terms of jobs for their supporters and a sense of personal social status.
Analysis:
With the ‘great’ IMF now delivering its sermon from on high, a bit Washington Consensus light, all froth but not substance, the DLP Government has still not made clear what its strategy for recovery is. As I write, the nation is yet to know how many people will be made redundant from the public sector, although the IMF states 13 per cent. Given the absence of accuracy numbers, it is very difficult to enter any serious debate or carryout a legitimate analysis of government policy. So, let us assume that there are about 30000 people on the public sector pay roll, 13 per cent of those will about 3900; so far government has said it will be sending home 3000 workers by the end of March. But this is not the end of the matter, since that will impact in a number of ways. Government tax take will diminish, however slightly, a matter that has so far not been raised, not even in parliament; most, if not all of these people will at some point be eligible for state benefits and there will be a drop in national insurance contributions. Consumer spending will also be down, leading to pressure on some parts of the private sector, which may lead to redundancies or at least wage cuts.
As the report states: “Central government gross debt has risen sharply since 2009. The debt-to-GDP ratio has climbed from under 60 per cent in 2009 to 94 per cent at end-September; including government securities held by the national insurance scheme (NIS), it rose from about 80 per cent to 128 per cent. “The gross financing requirement in 2013/14 is 15.4 per cent of GDP including the rollover of short-term debt. The deficit has been financed increasingly with short-term funds from domestic sources. “In the first six months of 2013/14, domestic financial institutions and the central bank provided the bulk of the financing in the form of T-bills, while the NIS provided about 11 per cent in the form (of) longer term debentures. “NIS holdings of government paper are estimated at about 67 per cent of its portfolio, above the guideline recommended in the 13th actuarial review to limit holdings in government securities to no more than 57 per cent.” It warns: “Going forward, the capacity of the NIS to absorb new government debt will be limited by balance sheet constraints as the operating surplus has declined to near balance.” The report does not make clear that the main reason why government has to depend on domestic credit is because with its record borrowing in the international markets will be prohibitive.
For the last five years the main developed markets – the US, Japan and UK – have had central bank interest rates of below one per cent. Had the Barbados economy not been in such trouble, it would have been relatively easy borrowing in the international markets at under six per cent, rather than a domestic market that is charging up to 15 per cent. Further, the report’s condemnation of the mis-use of NIS funds does not take in to consideration the contradiction of conventional investment strategies, especial for a fund with long-term liabilities.
We know very little about how the NIS is run, whether it uses passive or active managers, its asset allocation policies, who undertakes its research, the diversification of its portfolio, all this is kept carefully hidden from public view. Even investing 57 per cent of the NIS fund in government gilts, as the IMF reveals, is a bad strategy since market efficiency should dictate that the fund’s investment universe should be global, and it should have a proportionate percentage invested in accumulation (equities, to grow the fund), fixed income (gilts and corporate bonds to meet near-time liabilities), property, small amounts in cash and a similar amount in high-risk alternative investments. I suspect a lot of the lending is to do with political pressure and ignorance on the part of senior executives and the board of the NIS, a number of whom have no real professional experience in fund management although some may have academic familiarity with the process.
The report continues, and I quote because there have been points raised by myself and a number of other observant people on numerous occasions which are very similar. In paragraph 7, under the sub-headline: Monetary policy has not been consistent with the fixed exchange rate framework, the report continues: “A new interest rate policy was instituted in 2013 that made the three-month Treasury Bill rate the benchmark rate and directed the central bank to intervene in the auction market. “Under this policy, the CBB (central bank) absorbed about 44 per cent of T-bills issued in the first 11 months of 2013 and short term interest rates fell by about 50 basis points. Credit to the private, which had been contracting since 2011, nonetheless continued to fall.” Again, it is basic macroeconomics: the refusal of the foreign-owned banks to lend to small and medium enterprises, the key driver of the economy, was the main obstacle to financial intermediation. The central bank could have used its purchasing power of government gilts not to buy freshly minted short-term bonds, but to buy gilts off the banks on condition that the additional liquidity would have been used to lend to small and medium enterprises. Further, government, either through ignorance or stubbornness, has in fact refused to substitute that lack of bank funding with shadow banking or a strategically planned quantitative easing (on par with Obama’s funding of the Detroit car industry, which is now back on its feet) – the cheapest and most effective way of which was the creation of a post office bank (with a 17-strong established distribution network) or by introducing legislation to create a trade union/credit union/cooperative retail bank. So, there is a vacuum where an effective, well capitalised, well supervised and regulated banking system and monetary policy ought to be.
The other failing is that the government, like previous governments before it, has depended too much on the national insurance scheme as a piggy bank, which it can dip in to as it likes, and a mountain of commercial credit to pay for their programmes. This credit-based growth, as Lord (Adair) Turner, the former chairman of the UK’s Financial Services Authority and one of the most authoritative public intellectual economists in Britain, has led to rising leverage and debt overhang, a natural outcome of this credit-intensive growth. It is a policy based on a total disregard of the investment strategies and actuarial assumptions behind a hybrid contributory and pay-as-you-go pension scheme and ignores completely the scheme’s future liabilities. Part of the inept management of public accounts is reflected in the increase in the growing current account deficit, which the report could have said more about. Explained in simple terms, if the government gets Bds$100 in revenue during the tax year, but its expenditure is Bds$101, it is living beyond its means. This principle applies to households as it does to governments. The basic principle is for government to forensically audit its outgoings and cut back where necessary. This is true in principle, even if a government differs from a household in that it also invests for future generations. But that a government, fully aware of the global economic crisis, can still continue to spend taxpayers’ money as if it was going out of fashion borders on the fraudulent.
The other mantra which has captured the thought processes of most Barbadians is the redundant one of accumulating foreign reserves, presumably in preparation for an external shock of some kind. It is an obsession that has no basis in modern macroeconomics, the mantra of an evangelising old guard tat is convinced that financial economics has not moved on since the 1960s and 70s. This obsession with foreign reserves only serves to obscure the real shortcomings of the central bank’s reluctance to enter the futures and derivatives markets and its overall bad management of the nation’s finances. By entering the futures and derivatives markets the central bank will free-up much needed cash that can be invested in other more urgent and pressing assets. (Without overburdening this analysis, see: Joshua Aizenman, et al : “International Reserves and Swap Lines: Substitute s or Complements”, National Bureau of Economic Research, Working Paper 15804). Continuing to stockpile foreign reserves, in the vain expectation of some severe externality, is voodoo. By definition, we do not know what the external shock would be, but the last real shock the Barbados economy faced was on September 22, 1955, Hurricane Janet, and two years later the nation had entered a contract with the construction engineers Costain to embark on the biggest capital project in its history. Huge reserves will not be of any real use if the external shock is a new strain of bird flu from China, or some terrorist attack on Grantley Adams International Airport. The foreign reserves mantra is preached mainly by worn out economists who did their studying in the 1960s and early 70s and have not really freshened up their knowledge of macroeconomic theory since graduation. Some of them probably even continue to teach from their old undergraduate notes.
Global Economy:
But the world in 2014 is a different place to that in 2007/8. We have already seen China’s economy, for most of the last 14 years the most dynamic in the world, has recently returned growth figures of 7.7 per cent, most impressive for the majority of developed economies, but a wake-up call to what was the fastest-growing and largest emerging market in the world. As Jay Bryson of Wells Fargo has pointed out, at the end of 2012, developing nations accounted for 49.6 per cent of global GDP, and although 2013 figures have not yet been confirmed, it looks as if this figure will rise to over 50 per cent. This growth confirms what Pascal Lamy, the former director-general of the WTO called the Geneva Consensus, the increasingly central role that developing nations now play in global trade. These developments, the new normal, play on the blind side of the people who manage the Barbados economy and are responsible for monetary and fiscal policy. None of this figures in their analyses or debates on economic policy, what little discussion they have narrow-focuses on foreign reserves. It is like asking someone on the eve of the discovery of the internal combustion engine what mode of transport would he prefer, knowing full well most people would ask for a faster breed of horse. There is a paradigm shift, and has been with a vengeance since the early 1990s, in the way we manage national accounts and currencies, and the stockpiling and warehousing of foreign reserves is not it; even at a household level we no longer stash our money in a savings account, we invest, make it work for us. It has gone further than this. In the old days of the 1980s, when we talked about a developing economy we often meant one based on the development economic theories of Sir Arthur Lewis, Gerard M. Meier, Joseph Stiglitz and others. Modern developing economies are increasingly consumption driven, rather than just producing the raw material for a commodity-hungry developed world. We now live in a global economy in which 35 per cent of exports from developed countries now go to developing economies, up from 20 per cent in 2000, and that trajectory is going further north and faster. But a lot of this growth is based on debt, about US$8trn, an increase from US$5.7trn in 1997, as Lord Turner has pointed out. The world has changed and policymakers and academics who fail to keep up will be left behind.
Conclusion:
The DLP government is learning the hard way that we now live in a globalised world and governments and their advisers can no longer operate in an opaque and deceptive way. Further, all economies, no matter how small, are now globally inter-connected, and a high wind one part of the world can lead to crashing waves the other side. It is relevant therefore to remember how the Asian crisis of the late 1990s occurred. All the key nations were linked to the dollar, all had huge current account deficits and falling foreign reserves. This cocktail of macroeconomic imbalances came tumbling down like a deck of cards once the Thai government decided to devalue the baht in July 1997. The Stuart government has not yet learned this simple fact of global economics and is still operating as if it is the repository of all wisdom when it comes to the financial economic government of the nation. Even though the IMF report should act as a wake-up call, it does not deal with the offloading of non-core assets, such as the state-owned Transport Board, a portfolio of under-performing hotels, a massive land bank, massive shares in LIAT, post offices, the inability to auction a television licence, an inability to collect VAT and national insurance. The decision to establish a revenue authority is not the same thing as collecting outstanding revenue. This is made worse when one considers that VAT is a tax paid at the point of business with the private sector acting as collectors for the state. All civil servants have to do is to collect the money, failing which the guilty party will be prosecuted and barred from running a business. It is organisational competence, not creating a new organisation, that is the real solution.
Equally, the lack of up-to-date and accurate information on the financial performance of public sector enterprises, including statutory bodies, is not a coincidence, but a deliberate attempt to mislead the IMF and the general public.
Any competent organisation would have produced annual reports, giving details of the business, future plans and its profits and losses, if only for internal use. The report’s authors also make a mistake of assuming that the financial sector is well capitalised, but has produced no evidence for this, apart presumably from central bank assurance.
But there is another way of looking at the banking sector (since there is no substantial shadow banking or non-banking sectors, apart from insurance), and that is to assume that the regulatory and supervisory systems are weak and that the banks manipulate a local light-touch regulatory regime lacking in expertise. How does the central bank carry out its stress tests? By examining capital adequacy and depending on the inadequate Basel III requirements? It is common knowledge that banks have one of the most flawed business model in modern capitalism, with some major international banks at the dawn of the global crisis having an asset to liability ratio of six per cent. Even local businesses have a minimum average ratio of 30:70. If any small business person had such a ridiculous asset to liability ratio and went to a bank to borrow money s/he would be chased out of the building. Banks are allowed to get away with this because of the discrepancies in their accounting practices. Banks do not have to explain in their annual reporting their liabilities in a way that any other ordinary business will have to. In this way they avoid runs, the main concern of governments, especially if the central bank is lender of last resort and will have to rescue troubled institutions.
But this is not the case in Barbados. It is almost certain that banks do not explain to supervisors or regulators their lending assumptions, therefore their capital adequacy is not properly explained; and, even if they were, they will tell the central bank that their foreign parent banks will cover any short falls. And they will get away with it, be they subsidiaries or branches because the banking regulatory and supervisory systems operate by deference. The report’s authors have at times taken the self-confirming myths of central bank and civil service staff too much to heart, such as that Barbados is highly competitive. Although this is qualified, by pointing out that that is when compared with other Caribbean nations, it is really still disingenuous.
Its claim that ‘domestic’ banks appear to be well capitalised, lacks a clear definition since domestic is a mute point, given it also makes clear that the foreign-owned banks – with the parent companies of three are domiciled in Canada, two in Trinidad and Tobago and one in the US, with the assets of the Canadian-owned banks accounting for 75 per cent of total banking assets. This raises further serious regulatory issues since it is not clear who regulates local banks and, if the central bank, as is the legal position, who the real regulator is. To be competitive, an island 166 square miles and in which most official business is concentrated in the space between the City, Bay Street, Whitepark and Warrens, it should not take longer than five working days for an entrepreneur to register a new business. Where there is a cash purchase for a property, the entire process should not take longer than two working days for the sale and purchase of that property. Of course, all this is not the civil servants’ fault, although they are responsible for a large part of it. The bulk of it is caused by lazy, and in many cases, dishonest lawyers who tend to operate like a Mafia.
Good government would break up this professional monopoly by separating out advocates, those with permission to appear before the high courts and the Caribbean Court of Justice, and legal consultants, those permitted to give advice in their chambers but not to appear in court. Government should also introduce licences for conveyancing, labour law specialists, health law specialists and others, people who on qualifying would have the right to appear in the high courts representing clients on those specific subjects. Of course the lawyers and their supporters will scream, but this is one way of introducing a new professional competitiveness in the economy. We also need transparency in governance, with politicians and senior civil servants who appear to be living above their official incomes explaining the source of their wealth or having it seized and face criminal prosecution for abuse of public office. In real terms, Barbados has had nearly five decades of under-performance, years of lost productivity, which are now creeping up on us like disease in old age. We know our knees are not what they used to be, but we hardly remember when as teenagers we were kicking hard breadfruits around the playing field. Those days off from work, and when at work talking more than working, taking the children to school and then arriving at work just before lunchtime, not answering the telephone and leaving work early, all these and more will eventually come back to haunt us – and they have. One black hole that is not talked about by unions, policymakers or politicians is the massive cost to the taxpayer of absenteeism, but again the IMF appeared to have overlooked this. It would be worth while if the government commissioned a report on this from the university.
As Dilaka Lathapipat and Thitima Chucherd, writing about the Thai economy reminded us of developing economies: “In addition to building up a highly-educated and well-trained workforce, having a well-functioning labour market is crucial for a country to enhance its economic efficiency and competitiveness.” The authors also remind us of the definition of labour market efficiency: flexibility, controls on wage fluctuations, easy re-allocation of workers. We only have to look at the public sector trade unions, like the 10 per cent pay claim put in by the National Union of Public Workers, just months before a massive redundancy programme.
Of course,, most of these approaches are outside the IMF remit and are rightly the concerns of the ruling party, but it is basic macroeconomics that unless there is an improvement in productivity there will be very little or no growth.
It is also important to note that poor productivity in Barbados, in particular the public sector, is not just cyclical; it is rooted in deep structural flaws and in a post-independence culture that the state will provide. Making a few people redundant without fixing the fundamental problem is just pushing the can down the road. The machine of state is grinding to a halt because it is out of oil and it needs fixing.
In the final analysis we urgently need a new national mind-set, which places things such as fashion, cruises, whisky, four-by-four petrol guzzlers, foreign holidays, home improvements, and other materialistic trivia come second to securing one’s financial future. We have to get real as a people and as a society.
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Reading: Rene M. Stulz: “Should We Fear Derivatives”, NBER Working Paper 10574, 2004;
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Neil Irwin, The Alchemists: Inside the Secret World of Central Bankers
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