Welcome

Dennis Jones is a Jamaican-born international economist, who has lived most of the time in the UK and USA, and latterly in Guinea, west Africa. He moved back to the Caribbean in 2007. This blog contains his observations on life on this small eastern Caribbean island, as well as views on life and issues on a broader landscape, especially the Caribbean and Africa.

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Saturday, April 26, 2008

Bread prices rise. So does hot air.

So bread prices will rise by some 12 percent percent, with a basic loaf rising from B$4.55 to B$5.05 from April 28 (see report in The Nation). No surprise after local flour prices rose 30 percent two weeks ago (and it's the basic ingredient) and diesel prices were increased 76 percent last week (and the fuel is used in baking and transporting baked goods). The price of various goods will increase between 10-25 cents.

The debates will rage on about who will feel the pain and whether that could have been distributued better. One commentary yesterday, by Ezra Alleyne (see The Nation report), takes the current Democratic Labour Party (DLP) government to task for keeping its balanced budget commitment and with that raising diesel prices by 76 percent and gasolene prices by 25 percent, and reducing substantially the difference in favour of diesel between the costs of the fuels. The increases will affect many consumers with higher costs imposed on fishermen, food producers and distributors, operators of public transport vehicles. We all eat and we all need to move around, he contends. The previous Barbados Labour Party (BLP) government had absorbed more of the cost increase and not passed these on to the population, he contended. He also goes on to mention how the previous government had paid some B$20 million to civil servants as a one-off in 2005 when the cost of living rose over 5 percent; the government got back B$7 million in taxes. If the DLP had been prepared to follow its predecessor of running a budget deficit (that is having more spending than revenue) then life would be better for all, is the implication.

Political commentary is interesting. It is not neutral, like many arguments. Someone commented to me last week that Mr. Alleyne is a BLP supporter (actually the comment used a different noun, and it's interesting what comes up as the first article on a Google search--an unflattering commentary on that 2005 episode and Mr. Alleyne's commentary). Now that "support" comes out in the "analysis" and implications of fairness/unfairness. When the DLP aims to balance the budget, all you get is pain--no gain. BLP absorbs the costs, and that is seen as gain with little pain.

Interestingly, the IMF reports on the Barbadian economy showed that it had a balanced budget in 2006 and was looking to increase the deficit to 4 percent in 2007 (see IMF Public Information Notice). One economic commentator, Patrick Hoyos, however, has reminded us what the IMF said Barbados needed to do (see Broad Street Journal report) . In its 2007 annual consultation with Barbados it said that the pass-through of petroleum prices needed to take full effect:

“The mission also encouraged the authorities to increase the prices charged by major public enterprises, some of which have not been raised for several years. ... In particular, oil price increases would have to be fully passed on to consumers.” (Staff Report for the 2007 Article IV Consultation, page 11).

The report also states that:

“The January 2006 increase in domestic fuel prices implied almost a full pass-through of international oil price increases. However, the further increase in international prices since then has only partially been passed on.”

The IMF continued its call for Barbados to rein in its overall debt by exercising other options that would also raise, not lower, the cost of living:

“Fiscal consolidation is needed to bolster international reserves and reduce public debt. Announced policies are unlikely to achieve the government’s debt objective. ... The government has a range of options to achieve such savings, including reining in future projects, improving tax administration, raising VAT rates and reducing tax exemptions, and adjusting selected utility tariffs.” (Staff Report for the 2007 Article IV Consultation, page 14).

Changing the application of VAT remains an option to the government. So does targetting rebates to specific needy cases (the poor, or small business, or farmers), rather than taking the VAT off that much wider basket of goods as promised during the elections. So, to my mind the petrol price increases are dealing with but one important element of getting public finances onto a different footing. So, the jury is still out about what the overall budget picture will look like.

But packaging is important. Clearly, facing the budget realities of a country is something that has to be done with the levers of power in hand not from the luxury of oppostion. Also, economic circumstances change and how the government manages its budget is one of the keys to economic success. Deficits, surpluses, or balances in budgets have consequences. If you only think about today you will come to one impression but there is always something ahead. Without going into an economics tutorial, we can ask if everything seeming hunky-dory today means hunky-dory forever. It is legitimate to ask the question, if you spend more than you earn, and plan to borrow to cover the gap, who is going to pay that price and when? What happens if you cannot borrow? Tomorrow's generations do not necessarily want to be carrying the debt created today. In that sense, Mr. Alleyne's commentary is interesting in what it decides to leave unsaid.

The IMF's Regional Economic Outlook for the Western Hemisphere (see report) indicates that in 2007 "Caribbean countries' public sector debt burdens [were] very high". Barbados has in recent years had a better budget balance than Caribbean average, compared with Jamaica which has consistently been worse than average in recent years. That difference in budget performance has economic consequences that some would say are clear in terms of slower growth and higher inflation in Jamaica than in Barbados. The IMF goes on to say that the "region continues to stress its commitment to reducing debt levels further over the medium term". So, in that regard, the latest announcements by Barbados' PM suggest he is acting in a manner consistent with that commitment.

I have no political favourites with regard to Barbados' government but try to see things with a neutral's eye. I have no remit to be an economic commentator in Barbados and will leave that to others including Partick Hoyos. But I do wonder again what are Barbados' economists doing when these discussions are taking place. I again hear their silence and wonder why it is so deafening.

4 comments:

RJH Adams said...

Hi Dennis. Love the blog, discovered via a friend.

Due respect etc but must chuckle a little at your last para. No political favourites but possibly a professional one: on leave or otherwise an IMF man is unlikely to publicly push back greatly on the quotes cited from his own institution.

Politics goes to the heart of the debt issue in Barbados (as it does in most things). And a frequently valid criticism of the IMF (and not only in Bds) is that it either ignores or under weighs these considerations when writing its prescriptions. It looks too often, rightly or not, concerned only with ends and not means.

Governments, of course, frequently go the other way - too much focus on means and not ends.

Now it may be that the prescription is this time the "right" one economically (insofar as there are rights and wrongs). Certainly it is one that, with a change of government, is politically implementable - the incumbents have enough electoral cover to place the pain-blame on the other side.

Yet the question I would ask (because the answer is usually an assumed positive) is was the debt taken on a Bad Thing and incurred with little thought of its consequences (as I think the delicate thread of argument running through your post suggests)?

Frequently the yes camp use the 'tomorrow's generations do not necessarily want to be carrying the debt created today' you refer to. Yet tomorrow's generation will be wanting good infrastructure (without getting into the politics - again - of what kind of infrastructure, sporting or transport).

And, although this is too frequently a concept spat out, it is right, in terms of both accounting and natural law, that the cost of a major capital investment is spread over its useful life such that its users (regardless of their generation) all pay their fair share.

One may have strong 'reflex' reservations about debt levels (albeit that but a third is externally owed): on that count the consensual electoral trigger has been pulled. And that is a good thing - which I say that firstly as a Barbadian, secondly as a BLP man.

But context is everything.

Cheers,

Rawdon

Dennis Jones said...

There is a popular misconception that the IMF does not take politics into concern. It does. But that is different from trying to be political or influence politics in offering economic advice. The political context is very much in the minds, but it's a dimension for local decision makers to work with, and in that sense they have options to choose from.

There's a common adage, which is that it's better to borrow for investment than to support consumption. So, plying borrowed funds into a viable project should make more sense than using those funds to keep personal spending in tact. So, in principle: international airport (probably good); Kensington Oval (probably bad, as there seem to be few plans to make it revenue generating); cushioining oil price increases (probably bad).

RJH Adams said...

Distinction in para 1 noted. I am not at all sure that its being mindful of political context is perfectly aligned with the options menu the IMF sometimes offer patrons. But, as you say, à la carte decisions are for local policy makers to come up with.

Still, despite its apolitical aspirations, the IMF is already highly political. Like S&P and the WB, the organisation is widely held in such high, unquestioning regard by many Barbadians that when it says "reduce public utility supports" (for example) it is making a political statement - whether it likes it or not. Voters do take it into consideration and, depending on the prevailing political atmosphere may act accordingly.

Small aside on infrastructure. Why should the utility of stadia be judged primarily on its revenue generating capacity? Roads are not (yet). Nor are hospitals or libraries or museums or the police service etc etc.

But even casting aside social utility argument there is a (not readily quantifiable) case that Kensington has already indirectly generated significant revenues; and that over its life will continue to do so (particularly if WI manage to win more often).

The stronger case against it, I think, is really one of opportunity cost - bats vs butter.

Dennis Jones said...

Not sure I would put a sports stadium in the same social goods basket as a hospital. I would hope that the decisions were well based in terms of cost-benefit analysis. I would also feel more comfortable if the decision makers shared what that analysis looked like so that over time we could see how it holds up.

On favourites, I really am trying to put out what I know not what I feel.Being an insider does not stop a critical outlook.

Countries like Barbados, who are not under programs so do not have to meet certain targets to get financial support from the IMF or World Bank have a lot of latitude to ignore advice.

We cannot go back and ask what might have been done by BLP had they won the election and were still in power. They now have the luxury of taking some free shots. That's politics so it's part of that game.