Do Good Things Come To Those Who Wait? Economists Talk About Issues

I love the fact that a public debate on economic issues is now going on that involves a good number of people who call themselves professionals in the field. I have said on several occasions that I felt that those who should be able to engage well on this topic seemed to have decided that relative silence was the line to follow. I really thought that the airwaves and newspaper pages would have been filled with 'expert' opinion from before the time I got here, because some of the seeds of the current economic problems were already planted here and starting to sprout, and those that came from the wider world economy were also beginning to show their first brown shoots. But, all good things come to those who wait. Pity that letting the issues fall without the kind of public engagement that now seems to have started meant that more time was lost on getting a better general understanding of some of the solutions that will be needed. I do not think that many of the hard solutions have yet been made clear but I am sure they will, in actions, if not in words

We economists talk a different language, with all of those different deficits, equilibriums, counterparts, elasticities, and so forth. But what we usually do that others can follow is stay with a certain logic, so that even if you disagree with what we are saying you should be able to retrace our path, suspending belief as needed on where we will reach.

I was glad to read that the new central bank governor, Dr. Delisle Worrell, has come out and spoken publicly on some current issues. The position of governor is more than just overseeing the financial system and making sure that it is healthy. It is more than just overseeing the banker to the government and protector of the national currency. A good governor needs to give impartial economic policy advice. Doing that may mean straddling that uncomfortable barbed wire fence between technical imperatives and political realities. In some countries, that is very simple because the governor is just the mouthpiece of the government and numbers may be made to fit the desired story, or if they do not then nothing that knocks the government will pass the governor's lips if he or she wants to stay in the nice leather chair for long. But, often, even when the central bank is not independent, the governor can be at loggerheads with his ultimate political masters as he or she 'tells the truth' about economic developments.

I'm not going to make the straddling anymore painful. But I am going to watch how that works out. The new governor is absolutely right to say that the recent downgrading of the economic outlook by Standard and Poor's 'should not be cause for any panic'. But I do not recall anyone really saying that it was. It was a reflection on where a rating agency thought the economic was headed, and it was not dire, but one of several warnings that have come from many quarters, including from the government and central bank in different form and in other words. I think a lot of agreement exists on the path that the economy is taking. The question is how far down the path will it go. The IMF said that with regard to debt levels there was a risk of them becoming 'unsustainable': that was not a prescription, but a flashing light that says 'action is needed'. They did not discuss the consequences of being saddled with unsustainable debt.

The governor said that Barbados is 'not going the route of borrowing on the international market, choosing to use less expensive sources of funding'. He included 'making low risk government securities available to investors'. I take that to mean tapping the domestic market. That route may well be good. But, it's ironic that 'low risk' was assigned to government securities. I read yesterday some reviews of a new book by Professors Carmen Reinhart and Kenneth Rogoff, This Time It’s Different. They document the history of eight centuries of “financial folly.” As one reviewer wrote 'What we learn from it is what we already knew – that borrowers are often perfidious, crises are usually insidious, and bankers are morons.' (see Daily Reckoning).

Reinhart and Rogoff remind us that always and everywhere, debt leads to trouble. Too much debt caused France to default on its sovereign debt eight times. Spain defaulted six times before 1800 and then another seven times later. Economic historians know that this pattern of soverign defaulting went on for centuries. Typically, say Reinhart and Rogoff, public debt increases 86% over a three-year period following a financial calamity. Then come more catastrophes, caused by too much debt in the public sector. Rightly, then, the world is very scared that both Britain and America are now running deficits of more than 10% of GDP. Neither has a creditable plan for reducing debt or deficits. Much more trouble lies ahead, many foresee.

Just last night, financial markets went into a tizzy because Dubai hinted at a delay in sovereign debt payments (see Bloomberg News).

I am not suggesting that Barbados is likely to default. But a government is risky if it cannot pay easily. Governments that start to be seen as heavily indebted--and a ratio of debt/GDP puts Barbados squarely into that category--will be seen as riskier. That perception is only removed by continuously servicing payments, but now people are more wary and that can be the small kernel of a problem that may grow into a much tougher nut to crack.

Dr. Worrell also mentioned something that made me stand up--not that it's new, but that he said it, and in so doing highlights for me a brewing dilemma. It is that government spending is detrimental to the country's international reserves, by facilitating imports through maintenance of government jobs: Barbados spends about 76 cents of every dollar on imports, he cited. Maintaining adequate reserves is one of his jobs. But, I do not see the government doing much to curb its job creation. So, my question is when will the reserves feel the pinch? Yes, 20 weeks import cover is a good level, but when the main sources of foreign exchange are less than before--from tourism receipts and foreign direct investment, mainly--and government is not curbing spending, how do you hold that level?

The discussion is underway and better that people hear the official views well expressed so that they then can pose questions.