Are We Nearing A Breaking Point? Economic Prospects Are Far From Rosy

When you do not hold the reins of power it is often easy to believe that decisions are easy. If you get a glimpse of what those who are in power have to deal with you start to understand what, who, why, and when makes decision-making difficult. Managing the economy is often much more difficult than people realise. The reason? Government rarely has control over many of the levers that make the economy work: it can collect taxes and spend the proceeds, hoping that will push or pull the economy in desired directions. With the help of the central bank pulling levers concerning monetary flows, the government may have a big influence over economic activity, but not total or even the most significant.

In small, open economies like Barbados, a lot of the forces influencing how the economy moves are foreign--they are not necessarily malign but are driven by considerations that may have little or nothing to do with the national welfare of where their activity is going on, focusing more on the national or international welfare of owners not on the island's shores. Look at LIME. Look at the Four Seasons project. Look at CLICO/CL Financial Group. Look at One Caribbean Media Group. Look at the Barbadian banking sector. Just look around.

I'm very worried. I have expounded my thesis about what the current recession may mean for Barbados' economy (see What more can government do to help improve the economy and maintain jobs?) and I have also voiced concerns about tourism-based economies in the region (see What an ill winds blows). In the former of these posts I noted:

But, one major concern should be whether Barbados' economy remains firmly coupled to the rest of the world's. My belief is that the damage being done during this recession, e.g. restaurant closures, will not be undone simply by growth resuming.

Now, I have found a body of economics commentary making the same point, but for the world economy at large (see Financial Times article). In setting the scene for this weekend's G20 Summit in Pittsburgh, a prominent economic commentator, Chris Giles, is taking off some important economic clothes. He is noting that despite all the signs that the world's economy is emerging from recession, an important penny is now dropping. The key phrase that makes my forehead wrinkle was:

Taken together, these factors leave economists in little doubt that much of the output and employment lost is not just sitting temporarily idle, waiting to come back on stream when demand and confidence recovers. It will be lost for good. The skills of the unemployed will deteriorate, some otherwise viable companies have collapsed, and capital – plant, machinery and buildings – will be scrapped.

In case the message was not clear from that paragraph, he twists the knife a little deeper:

William White, former chief economist of the Bank for International Settlements, argued last week that mismatches between patterns of global supply and demand will add to the painful adjustment. “Many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them.” The world has capacity to make and distribute goods no one can afford, and that no one even wants.

The IMF agrees. It will present evidence next month, drawn from 88 banking crises around the world over 40 years, suggesting that growth tends to return to a normal rate but that the output lost in a recession is gone for good.

In terms that most people should understand, the world will be poorer forever after the current recession. Countries like Barbados, that rely heavily on exports (yes, tourism is exporting...of services) are worse placed to be able to buy the things they need and are weighed down by an increasing debt burden--in Barbados' case, we know that this has gone over the 'magic' figure of 100% of gross domestic product (GDP).

Why am I worried? My real concern is that the body of beliefs mentioned above have not seemed into the consciousness of policy makers at large, and in Barbados in particular. Yesterday, during 'Down to Brass Tacks', Wayne Capaldi, President of the Barbados Hotel and Tourism Association, discussed what has happened with the sectors. When asked about the prospects after a dozen major restaurants had closed in the past 12 months, he contended that maybe 3 would re-emerge. I think he is being optimistic. But, what he's saying is that the sector will have to deal with a loss of three-quarters of its capacity. That, ladies and gentlemen, is not trivial. My real concern is that small economies like Barbados do not have the means to create jobs and new economic activity to compensate for that kind of loss. If that is so, then what will the country have to do?

President Obama let Americans know what it will mean for the USA (see Bloomberg report on some of his five TV interviews yesterday). He said:

“We lost so many jobs that making up for those that have already been lost is going to require really high growth rates.”

In short, people will have to live with much higher unemployment for much longer than many people thought likely. Any fall in unemployment or increase in job creation is not going to happen until well into any new recovery, and unlikely to be till well into 2010. Add to that the growing belief that the recovery will not be fast and may not be strong and we have a scenario of very hard times for those who do not have jobs or whose jobs may move to the margin.

Politicians are not known for their courage in spelling out economic realities that are not rosy. I am not suggesting that there will be any lying, but there may be a lot of economy with the truth. People will see and feel the reality, however, and as they sense any gap between their economic pain and politicians' or decision makers' remarks about what is occurring, social tolerance will be pushed to its limits. Push things to their limits and they tend to break.