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.







**You may contact me by e-mail at livinginbarbados[at]gmail[dot]com**

Thursday, December 18, 2008

A Manifesto For The Caribbean: Professor Persaud's View

One of my Bimshire economist friends is the wise and learned Professor Avinash Persaud. He has been rising into the stratosphere of talking heads on financial crises and financial markets, on which he's a bit of an expert. He's the founder and CEO of Intelligence Capital (see their website at http://www.intelligence-capital.com/). I don't want to puff him up too much so that when we have one of our increasingly regular breakfasts together, either on a Saturday or midweek, I still have some kudos left to give. Avi, aka "The Husband" (see Notes from a small rock), may always be in need of an uplift if his beloved wife has been tying him to the tree in their yard and giving him his daily lashes for forgetting to do pick up the twins from school.

Avi is a Bimshire-born boy, but not one of the standard issues. He has a famous economist for a father and a novelist for a mother. So, one the one hand he is a natural whiz at economics, and on the other hand he can weave a good story if needed. He also has a British accent almost as clear as mine and a sense of humour and use of words that give mine a good run for the money. But, as they say, without further ado, let's get on with the show.

Avi has been whizzing around the major European and North American capitals advising on the global financial crisis and living it up in limos, but he has been thinking about his home spot a lot. Here is what he has to offer.
I have just returned to Barbados from a quick tour of G7 capitals in my role as an economic and financial advisor on the current financial crisis. It is a wonderful morning in Barbados and it seems like a million miles away from the panic of the markets and policy makers in G7. It's cool, there is a little “Christmas breeze” and the sky is a wonderful baby blue with a few white fluffy clouds. I am sure it is the same across much of the Caribbean.

But all is not well in Bim, or any Caribbean tourist economy. There are murky economic clouds on the horizon. When I was last in Bim in late October, I predicted a 20% drop in tourist revenues over the following year – in part this was a realistic assessment of the economic recession hitting Barbados’ main tourist markets (the City of London, Canada, and the West Indies) and in part a wake up call to an industry still talking about a Barbados exception and the resilience of the “high-end”. Seeing the collapse of Aston Martin sales and "posh" building company, Robert Ellis, I now think I was being conservative.

When in London the source of most insight is your London cabbie. At the end of November when I was passing through London, one told me that "a couple weeks ago business had dropped off a cliff” and sure enough, a few weeks later, the November economic statistics revealed some of the steepest drops in consumption and production in the industrial economies. Last Tuesday my London cab driver told me that “business is worse than dire. All the Christmas parties have been cancelled.”
For some reason the Caribbean tourist establishment always reaches for the same rescue blanket – subsidise air tickets. They seem to be addicted to this seemingly quick fix, but this strategy will inevitably fail the long-run goal of preserving the net value the islands get from tourism. Quite apart from the potential long-term damage to our branding (you will never see “The Four Seasons” selling discounted hotel rooms) this crisis is not about Barbados/Grenada/St Lucia becoming relatively expensive and requiring a subsidy to make to more competitive, it is about a loss of income of our core customers. In short, there is not a great deal a small island can do to withstand this kind of external shock, but there are a few, important things.

One of the key criteria for initiatives is that they have longer-term benefit as well as bringing short-term benefit. (Subsidising “bums on seats” fails that test.) Another criteria is about supporting national income during the crisis.
Normally the best way of getting income into an economy quickly is through construction spending. Construction workers are paid cash and they spend it. The number of immigrants who man the construction teams complicates this story, but we must also be very careful about selecting projects that will improve our long-term economic capacity. No bridges to nowhere, please. This is the time for the government to embark on a project to make an island become a “wireless island”, where there is free wireless-Internet connection everywhere on the island below certain bandwidth. This would spur business activity, increase local sourcing, support entrepreneurism and general knowledge transfer and shift the brand of an island towards a more business friendly place. There are many other business facilitation initiatives the government could push through in the unity of a crisis. Better flood defenses so that heavy rains seen this season are less disruptive in the future would also be a good choice of infrastructure investment. This is the time to consider expensive, alternative energy projects like wind and solar farms. The islands could also do with a new school and hospital here and there. Construction spending will not reach all parts of the citizenry and a one-off welfare and reverse tax credit payment would help too.

Governments will worry about the impact this will have on the fiscal position and by extension the balance of payments. I think there is some confusion here. Deficits are easy to fund in a recession – people have few other places to put their money. A budget deficit of 5% would be funded, though, it would have been far easier to fund, if the Barbados government had followed my advice in the months before October to over-fund the deficit when there was local liquidity. That liquidity has now disappeared as I predicted it would - though this was an easy prediction to make. The problem is making sure that fiscal deficits are not ingrained in the system, but fall back as quickly as they rise. I readily admit this is easier said than done. Expenditures have to be delivered in one-off form and not for consumption purposes.
Barbados’ balance of payments will come under pressure, but not because of the fiscal deficit.

The Barbados current account deficit was not financed by purchases of government bonds as a result of faith in the fiscal position, it was funded by real estate and real-estate related inflows from the UK and Trinidad. UK purchases were bolstered by a UK housing boom and a strong pound. Both are now gone. Trinidadian purchases were based on a strong petro-economy that will face challenges with oil prices around half of the level budgeted for. A slowing economy will help by reducing our import bill, but only at the expense of rising unemployment or underemployment. Overseas funded PFI projects to build infrastructure that will either generate or save foreign exchange revenues, like wind/solar infrastructure, toll roads, paid-for Internet access, would help the balance of payments in the short and long-term.

Another important idea that will help manage the crisis and will do wonders to an island's business brand was put forward by Barbadian entrepreneur Sir Ralp (Bizzy) Williams at the national consultation. The idea is not new. Bizzy argues that if there is a 20% shortfall in revenue say, instead of cutting 20% of the workforce and increasing unemployment, with the associated social ills, firms would commit to keeping workers on if they agree to work one less day a week and take home one day’s less wages (20%). Left like this and workers are taking all of the hit, but spreading it around themselves. They should negotiate conditions that ensure managers share some of the pain too. Managers could agree to participate in the 20% wage cut without the day off. If governments could support private initiatives like this, using their good offices as a broker, it would be a tangible result of social partnership and transform the business reputation from inflexible to flexible overnight.

There are three things to do then. First, try and arrange international PFI for construction projects that will boost long-term revenues or reduce expenditures like wind/solar infrastructure and a wireless island project. Second, initiate a one-off boost to welfare and reverse-tax credits. Issue a bond to fund this, call it the Solidarity Bond and urge everyone to take part in it, to do their share. Third, let the government act as an honest broker to support employment and wage flexibility agreements.

Avi knows that I am not fully on board with all of these ideas, but it would be useful for the local audience to think about them.

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