Pride Comes Before A Fall? Heeding The Credit Rating Warnings

Except for those blithely ignorant tourists who think that Barbados is part of Jamaica, no sensible person would ever confuse the two countries. Much has been written about the divergent paths that the countries have taken in their economic policies and performance over the past 30-40 years.

A working paper published by the National Bureau of Economic Research in January 2009, by Stanford economists, Peter Blair Henry and Conrad Miller, and titled Institutions versus Policies: A Tale of Two Islands examined the divergent macroeconomic paths taken by Jamaica and Barbados since independence. It argues that while both countries started in 1960 from a similar colonial heritage - including property rights and legal institutions - and a similar small-island economic base, they experienced "starkly different growth trajectories in the aftermath of independence". Between 1960-2002, Barbados' per capital GDP grew roughly three times as fast as Jamaica's. Thus, the income gap the two countries became about five times larger than at the time of independence. Jamaica suffered a sharp decline in its standard of living after 1972, with Jamaica's growth (-2.3% a year) slowing much more dramatically than that of Barbados (-1.2%). In more easily understood figures, the per capita income gap between the two countries moved from real per capita GDP in 1960 of US$3,395 in Barbados, compared to US$2,208 in Jamaica - an income gap of US$1,187 - to Barbados having in 2002 real per capita GDP of US$8,434, against US$3,165 in Jamaica - an income gap of US$5,269. Shockingly, the income gap between the two countries now exceeds the overall level of Jamaica's per capita GDP.

In analysing the factors that might account for the variation in the growth trajectory of the two economies, the authors argue that "countries have no control over their geographic location, colonial heritage or legal origin, but they do have agency over the policies that they implement. Of particular importance for small, open economies (that is, most countries in the world), is the response of policy to macroeconomic shocks such as a fall in the terms of trade. Pedestrian as it may seem to say, changes in policy, even those that do not have a permanent effect on growth rates of GDP per capita, can have a significant impact on a country's standard of living within a single generation."

At the heart of the difference are the policy choices made. But those choices also cover what a government believes it can implement. Jamaica's governments chose a route that has involved heavy borrowing, and devaluation, but they have never been able to get good control over wages (in part due to unions relative strength and other institutional problems). Many would say that those choices reflect a certain political trade off as well as lack of will to tackle some deep-seated problems in the economy and the results--large fiscal deficits, high debt ratios, high interest rates, and a sharply devalued currency--are merely the playing out of that.

In 1993, the International Monetary Fund recommended that Barbados devalue its currency in order to stimulate production and return the economy to full employment. Barbados used a 'Wage and Price Protocol', whereby workers and unions agreed to "a one-time cut in real wages of about nine per cent and agreed to keep their demands for future pay rises in line with increases in productivity. Firms promised to moderate their price increases, the government maintained the parity of the currency, and all parties agreed to the creation of a national productivity board to provide better data on which to base future negotiations."

This was costly for all parties, and was even fought in the courts. However, the actions led to overall monetary restraint, fiscal discipline, and wage cuts which helped to restore competitiveness and openness to trade. This, Henry and Miller argue "had the side effect of enabling the monetary authority to maintain the exchange-rate parity without losing external competitiveness. In contrast, Jamaica's policies were never consistent with maintaining commitment to any parity the government might have wanted to adopt."

Having gone along these divergent paths, Jamaica can teach Barbados many things, not least in the realm of negatives to avoid.

Jamaica is on a slippery economic slope on many fronts, and one aspect of that is that when you need it most it is hard to find anyone to say a good word for you when a few would be really welcome. In the economic area, having just been downgraded by Standard and Poor's, Jamaica got the boot in the proverbial goolies when Moody's Investors downgraded the country's local and foreign currency bonds from B2 to Caa1 with a negative outlook (see Gleaner report). But it is not just the downgrade that is damaging. The reasons given are chilling. According to the Gleaner, 'Moody's said delays in reaching an agreement with the International Monetary Fund (IMF) factored in the downgrade'. Moody's naturally said the IMF agreement was crucial to "maintain confidence, meet this year's government funding needs and provide foreign currency inflows to sustain the external position". A 'CCC' rating signals that the ratings agency sees the debt issuer as 'vulnerable', and is an alert to investors that there could be interruption in servicing of the debt. Moody's rating obligations as 'Caa1' means seeing them as of "poor standing and are subject to very high credit risk". Bitterly put, Jamaica is seen to be on the verge of defaulting.

Perceptions mean so much. Good looks are important but cannot trump poor performance and Jamaica is now getting the hurricane breeze for too long not dealing with its fundamental problems, especially that heavy debt burden and getting its budget into shape.

Cue Barbados.The PM stated in Parliament this week that with regard to the recent downgrading by a credit rating agency of its outlook for Barbados from 'stable' to 'negative' that "investment grade is great and we will seek to save it". But, he made it clear that he not going to maintain investment grade "at the expense of the quality of life in this country...not going to do it at the expense of jobs in Barbados...". He stressed that "if Barbados has to step down a peg to step back up ten, we will go down first and will rise back up and we will prosper" (see extract alongside from The Barbados Advocate). Would that things were so easy. The Nation's cartoon yesterday, reproduced here, has an ominous tone. I would suggest to not contemplate glibly sliding down, thinking that all one has to do is put the engine into reverse and then all would help turn the country back up. Events have momentum. Sportsmen know and often repeat that winning is a habit. But they also know that losing is also a habit and once it becomes a habit even good play tends to be not enough to secure winning results. Taking that metaphor, that is the problem if one assumes that slipping is alright. The world starts to see you as who you now are and quickly forgets who you used to be.

The Advocate editorial yesterday (see Advocate editorial) seems to acknowledge that things must change. It began with “Barbadians must buckle down and adjust their lifestyles to survive this economic downturn.” Then it urged Barbadians to prioritise their spending. It is worth reading carefully what it feels are valid criticisms and what is critical for success:

Barbadians are highly literate, but we spend more time in the clubs and bars than in the library or at the many free lectures on important issues such as health and finance that can empower us even further.

Barbadians are educated – many to the tertiary level – but many of us lack the confidence to start our own businesses.

Barbadians are healthy, thanks to State-provided health care, but more and more of us are killing ourselves with inactive lifestyles and unhealthy diets.

Our much-touted 97 per cent literacy rate and our progressive social programmes are all for nought if we cannot move on to the next stage of our development.

It is time for each Barbadian to take more responsibility for his or her own success. It is time for the State to see a return on its investment.

I repeat, the world starts to see you as who you now are and quickly forgets who you used to be. If Barbados does not get the message quickly whatever pride there was in having built over several decades a sustainable economy wont count for much if debt becomes unsustainable. It does not take as long for an economy to crumble.