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You must allow me to begin by thanking and commending the employers of Barbados for their recent performance of one of the most patriotic duties by any group of Barbadians since Independence.
Barbados has, over the past four years, been engulfed by its most severe economic and financial crises ever. The crisis which started as a decline in activity in the general macro-economy eventually manifested itself in the form of the declining financial performance and circumstances of the commercial enterprises of Barbados.
Despite the significant decline in their financial fortunes the employers of Barbados, have endeavoured to contribute to the stability of the society by maintaining employment levels, and in many respects, by putting the achievement of national goals above their own corporate objectives.
It is therefore quite clear that one of our strongest national assets is the determination of the private sector of Barbados to wish to contribute substantially to the building of a successful economy and society.
I address you today as the Leader of a political institution which is inspired by similar important goals.
During almost seventy five years of political stewardship, in addition to our work in other spheres, our political institution has regarded the sound and successful management and development of the Barbados economy as one of the essential reasons for its very existence.
We do not draw a distinction between building a society and building an economy. Indeed, we see the two processes as being integral and inseparable.
More importantly for the purpose of my presentation to you today, much as we are proud of the economic accomplishments to which we, like you, have contributed significantly in the past, we are not blinded to the reality that these are new times, requiring of us new strategies, new policies and new approaches.
It is from that vantage point that I share with you today a perspective on the challenges, options and opportunities for turning the Barbados economy around.
It is important that we start with a clear and sound perspective as to what it is that we have to turn around.
In this respect, we can and should start by debunking the official myth that is being propagated that the economy is stable, whether the concept of stability is meant to describe its performance, or to describe the vital relationships that govern its structure and functioning. We can also go further and challenge whether a stable set of processes are being put in place to equip the economy to make a transition at a time when great transformations are required
In respect of its performance, the Barbados economy is not stable.
It is underperforming and undeveloping.
In addition, the nature and scope of the economic crisis continues to deeper and broaden beyond what it was originally.
As regards vital relationships, there is increasing evidence that the economy is becoming less competitive. There is also strong evidence to suggest that the adjustments which are required to support sound and orderly transition from a weak to a strong economic position are not being successfully managed.
Indeed hardly any major, new transformational initiatives to bring to bear far reaching adjustments to the economy at this time have been undertaken.
This failure is deeply rooted in the official mindset, so often expressed, that our economic problems are due to the effects of international recession and that once the recession lifts, economic buoyancy will return.
That is not true.
The country’s economic problems are due in large measure to the fact that international recession has impacted Barbados at a time when many of the instruments and regimes which made the Barbados economic model successful in the past are no longer available to us, or are no longer relevant. Our problems are also due to the fact that many of the regimes are instruments which can and must be used to bring about success in the future are either not being deployed or at best, are only slowly being called upon.
These problems have been compounded by the application of inappropriate macro-economic policies, and quite frankly, the practice of inertia in situations where urgent and decisive new policies are required.
THE ECONOMIC CHALLENGE
I take no pleasure in saying that the Barbados economy is underperforming, under developing, becoming less competitive, and is displaying strong distortions in the vital relationships that ought to be in place to support a sound economy.
The evidence is overwhelming.
To begin with, it is a staggering fact that despite a 30% increase in prices since 2008, the value of goods and services produced by the economy at current prices in 2011 ($8.806 billion) was less than in 2007 ($8.9 billion).
Netting out the effect of price increases, the situation is even worse. The evidence is that the size of the economy in 2011 was smaller than it was in 2006.
Interestingly, the latest Central Bank review of the economy reveals that the only sector in which significant growth has been recorded in the past five (5) years has been the Government.
Such economic growth as has been reported, (0.2% and 0.4%) do not compare favourably with the experience of other middle income developing countries which face the same international situation, and do not come near the real growth rate required to support an improvement in the standard of life in Barbados.
Interestingly, the Central Bank’s own account implies that the economy is set to decelerate later this year. It reported that the economy was growing at the rate of 1.5% in the first quarter but that it will record growth of less than 1% for the entire year. This can only occur if the economy slows down after the first quarter.
It is even more disturbing that the greatest economic instability is now taking place in the three sectors, Tourism, International Business, and Informatics sectors, whose improved performance is required to ensure that the economy comes out of this downturn.
The information, as disclosed by Invest Barbados, that twelve (12) international business companies, accounting for 25% of the tax base, have left, 12 more are planning to leave and 12 more are contemplating leaving points to a potential sectoral collapse of unprecedented proportions.
In addition the virtual closure of NCO in the call industry business with a loss of over 1,000 jobs, and the continued closure of major hotel establishments point to structural weaknesses in the economy that are truly disturbing.
What is driving this, and can it be traced entirely or largely to the working of external factors?
The answer is to be found in the inflation rate, and the factors which are lie behind the new inflationary trends in Barbados.
Prices in Barbados have surged by roughly 16% over the past two years, and by 9.4% in 2011 alone. That rate of inflation is 3 times higher than that of our major international trading partners. It was also the highest rate of inflation in the entire Caribbean. Since countries in the region are facing the same external shocks, it illustrates dramatically, that the bulk of Barbados’ price increases has been domestically generated, especially by factors that have significantly added to cost of domestic production.
A small open economy will face significant competitiveness challenges if its domestic costs and prices are allowed to rise significantly faster than those of its main competitors, and if it allows this to persist while operating under a fixed exchange rate regime.
Great pressure can come to be placed on the stability of the exchange rate if traders and investors perceive the rate as being significantly overvalued as it appears to be now.
This is a matter that cannot and should not be brushed aside, especially as it bears most adversely on the tourism sector which is being called upon to drive the nation’s growth and development.
For this sector has been made to face rising cost of utilities, food and beverage, insurance, property taxes and the increase in the VAT to the point where its costs are dramatically out of line with competing destinations.
Increasing domestic costs, accompanied by significant price discounting to boost arrivals, passed on at fixed exchange rate, have undermined the financial stability of enterprises in the sector and will continue to trigger the kind of closures that have been evident recently in relation to South and West Coast establishments.
The virtual closure of NCO, a large call centre establishment, was due also to its inability to maintain viability under a fixed exchange rate, in the face of a significant increase in domestic cost.
This strong evidence of a significant decline of competitiveness is compounded by further evidence of relationships which point to a weakening economy.
One such relationship has to do with the recently reported pattern of foreign exchange reserve accumulation. It is generally known that one of the key relationships that exhibited by a properly functioning Barbadian economy is that reserves should increase significant during the first quarter of the year during the height of the tourism earning season. In some years, the increase in reserves in the first quarter exceed $250 million. In this year, the foreign exchange reserves increased by only $3.8 million in the first quarter of the year, the slowest rate of accumulation since 1993.
It is also important to understand what is happening to savings and investment in the Barbados economy. Data in relation to private capital inflows, domestic investment and the scale of public sector capital activity indicate that that they have plunged and that one of the problems which will plague the economy as it seeks to rebound from the recession is underinvestment.
To this must now be added the problem of dissaving.
Deposits in the Commercial banks have fallen from $9.3 billion in March 2008 to $8.2 billion at December 2011.
An appraisal of the main indices in the National Income Statistics reveals that net national savings have now become significantly negative (over$600 million) as Barbadians have been forced to draw on past savings to meet their current consumption needs.
A significant decline in the level of both savings and investment point to the working of an economy that is not providing properly for the future, and hence suggest that we will face severe challenges in making a substantial rebound from the current recession.
Barbados needs to be restored to a path of growth and development in which the problems of low economic growth,
falling competiveness and productivity, underinvestment and dissaving, spiralling prices, the declining viability of our main enterprises and the continuing crisis in Government’s fiscal affairs are addressed by a set of coherent policies which support and reinforce each other.
The realization of growth is the order of 0.2% and 0.4% is not a solution. Indeed, to jumpstart the economy out of its present crisis, a programme of transformation will have to be put in place to cause the economy to grow faster initially than the 3% growth that has been judged in the past to be a rate which, if sustained, will enable us as a nation to achieve our major socio-economic developmental objectives.
It is a tall order, but it can be achieved provided sustained effort is accorded to managing and mastering our policy and programme responses.
Managing the Programme of Fiscal Consolidation
The Barbados economy cannot be put back on a sustainable growth path unless the disorder in the public finances of Government is brought under control, and the state gears itself to play a constructive rather than a destabilizing role in national economic affairs.
The excessively large fiscal deficits, triggered in large measure by runaway expenditure and borrowing for non-capital activities must be brought under control as the first order of business.
It is however essential that the correct approach to dealing with the fiscal problem is followed to avoid the situation where in attempting to solve a problem, the state merely ends up creating a bigger one.
Nothing that the Government has done recently gives us the confidence that this cardinal error will be avoided.
Government has already exhausted the option of correcting the fiscal problem by revenue raising measures.
The great unmet challenge is to manage and control expenditure.
This is however the area in which the greatest deficiency has occurred, and where the greatest disorder is set to persist.
The adjustments which are necessary to restore fiscal order by controlling expenditure have been made almost impossible to achieve because the State has locked itself into patterns of increased expenditure from which it finds it difficult, for political reasons, to disengage.
Already swollen bureaucracies especially in statutory boards have been bloated by the addition of new numbers. Increased funding is being provided for high profile political programmes. The medium Term Fiscal Strategy of Government has been revised to allow increased expenditure this fiscal year of over $300 million on the expectation that cuts of $75 million per year can be made in each succeeding year.
The taxpayers of Barbados are being asked to finance a political rather than a developmental programme.
The critical issue that will have to be addressed is that as to how expenditure on education and health will be managed. The high level of human development Barbados has attained has been generated largely as a result of sustained investment in our social capital, especially education and health care.
The great challenge before us therefore is to make fiscal adjustments while enabling the strength of our social capital to continue to be a factor which drives our development.
This will require policy innovation rather than crude expenditure cuts to be the instruments by which fiscal consolidation is pursued, to ensure that the achievement of growth and development can remain within reach while the fiscal problem is being tackled. I cannot overemphasize the need for policy innovation in dealing with education.
In an increasingly knowledge based global economy, Barbados will depend more than ever on the quality and diversity of its skills to support its development.
The current new arrangements for funding tertiary education, if persisted with, will mean that the enrollment of Barbadian students at the University of the West Indies (and not just the Cave Hill Campus) will have to be reduced by 50%. Barbados has already has a deficit in relation to tertiary training. Such a decline in enrollment would be catastrophic.
A sustainable programme for funding tertiary education therefore has to be devised. As an immediate temporary measure, contribution rates to the National Insurance Scheme should be reduced and the equivalent amount converted into a Higher Education Levy.
In addition, the existing Registered Education Saving Plan should be modified to allow not only relief from the withholding tax on interest, but the full contribution as a tax credit, so that people can begin to save more for their children’s University Education.
And a Special Task Force should be established to advise on the optimal financing arrangements for tertiary education, including the appropriate mix of loans and grants, terms of access for different income groups, and terms of access for persons seeking to be trained in different disciplines, taking into account the weight that different skills have in contributing to national development.
The successful building out of the Cave Hill Campus as a University Town Ship equipped with a Science Park, as our nation’s foremost link to the Global technological community must be supported.
By a similar token, innovation can and should be brought to bear in the way in which access to health care in Barbados is financed.
The provision of health care in Barbados is still very much a private sector matter.
Tax credits should be introduced to enable individuals to finance more of their health care by investing in health insurance.
And incentives should be provided to encourage private investment in top quality health care facilities to make Barbados the hub of health care provision for the region, and health care an area of growth for the national economy.
Finally, an appropriate programme of fiscal consolidation for Barbados must have at its core a programme of privatization with the proceeds used to peer down debt; as well as an expanded programme of public private sector partnerships to convert into opportunities for private sector growth, activities that have historically been deemed to be areas for the involvement of the state.
Controlling the Growth of public expenditure by changing the application of technology in the public sector, as well as its institutional arrangements, must also feature prominently as essential parts of the programme to restore order to public finances.
BUILDING A FIVE STAR SOCIETY AND ECONOMY
Barbados is a relatively high wage economy, the anchor of whose development is a fixed exchange rate.
The development path that such an economy must and can feasibly pursue is one in which it sells high valued, top quality services at premium prices.
To achieve this, we have to be uncompromising in our determination to make Barbados a Five Star society at the centre of which is a five star economy.
For this reason, the state has to sustain its involvement, by direct investment and new partnerships in attractions, infrastructure and general amenities to enable Barbados to be marketed as a quality destination, and a society that can attract and support economic activity and investment on the sheer strength of the quality of life factors that differentiate us from many of our competitors.
The programme of the BTII that accomplished much on this score in recent times has gone into recession and must be re-energized.
Equally a considerable investment in the full restoration of the Scotland District as contemplated in the programme set out in the Scotland District Authority Act of 2007, which regrettably has been ignored, is a national necessity and should be treated as our most important single public sector investment.
Indeed, the rehabilitation of the Scotland district will not only help us to address issues of food security. It will allow us to ensure that the scenic charm and splendour of that section of Barbados, that add so much to the appeal that Barbados offers remains part of the quality experience that Barbados is in danger of losing.
In relation to the International Business sector, with the loss of unique tax benefits, Barbados must seek increasingly to differentiate itself as both a top quality place to live and a top quality place to do business to hold and attract more investment.
But it is in regard to the future development of the tourism industry that a strong and uncompromising commitment to the Five star type development is required.
On this matter the issue of cost and profitability in the Tourism sector must be addressed as a matter of urgency to ensure Barbados maintains upgraded and profitable hotels and attractions to persuade more local and foreign investment and development in the sector.
There are several West Coast and South Coast hotels (particularly on the south coast) on the market for sale for extended periods of time including the 90 room Sandy Bay, 58 room Tropical Escape, 130 room Silver Sands, 55 room Caribbee Hotel and the Regent St. James. The pending closure of Almond Beach Village will now be added to the growing list of closed hotels. In addition there are several dilapidated assets have reduced the sustainability of Barbados’ Tourism product.
Barbados is also at risk of being viewed as a “tired” destination given that there has not been the development of any new attractions in recent years. Further to this the island has suffered from the loss of several attractions such as the Graeme Hall Sanctuary, the Ocean Park at Newton, Bajan Helicopter and the Helicopter Tours.
To improve the overall quality of the Barbados product offering in order to deliver higher levels of value for money, issues relating to the economic cost of a quality vacation experience must be addressed.
We however also recognize that if Barbados is to continue to capitalize on its high quality market status, it must improve the quality of its products, that is, the entire vacation experience.
A major new financial initiative to support substantial private investment to lift up the quality of our tourism product is now desperately needed to help bring this about.
The Tourism Relief Fund did not fully meet the needs of the sector is in this respect.
A special Tourism Development Bond should be floated to make use of some of the excess liquidity in the financial sector and the NIS, the proceeds of which should be made available at relatively concessional rates to investors in the sector to finance the systematic upgrading of the capacity of the sector.
The Barbados economy cannot have a successful future if we are left with no option but to sell our most important service as a heavily discounted product at bargain basement prices.
TOWARDS A NEW DEVELOPMENT MODEL
Sometimes a speech become important only for the one major point that it makes.
The one major point that I would wish this speech to make is that Barbados must move to the adoption of a New Development Model.
I earlier made the point that our current economic problems can be attributed not just to the impact of global recession, but to the fact that those recessionary forces took effect at time when fundamental changes were being made to factors which have traditionally made economic activity possible in Barbados, in a way to strip them of their traditional positive impact.
The confluence of these two acts of adversities now makes it imperative that we undertake fundamental transformation to the very culture in which business in Barbados is organized and made to function.
We need to rest our future success on the adoption of a new Development Model in which factors which played a large part in generating activity in the past come to play a diminished role in the future.
An even more important part of the new model must be that we bring to the front burner new instruments for development and entirely new processes in both the public and private sector that entirely change the way of business activity is conducted and the very culture within which enterprises in Barbados are formed and nurtured.
And what are the forces that are and must drive change?
First, with the signing in 2008 of the EPA with Europe, and the start of the negotiation of a new Economic agreement with Canada, the era of trade preferences has effectively been brought to an end.
We will have to continue to restructure our economy to accommodate more international competition in and for our domestic market.
Secondly, a significant part of the development of our modern economy has featured the expansion of our International business and financial industry based on a unique tax benefit with Canada that was not available to other Caribbean jurisdictions. That Exempt Surplus Provision is now available to competing Caribbean countries which enter Tax Information Exchange Agreements with 12 countries.
We have therefore lost an important point of differentiation in this field. To hold and secure a competitive advantage in this sector, we must devise new ways to so affect the cost and ease of doing business that will cause enterprises to want to stay or to invest in Barbados.
Third and more important, more and more of global economic activity is being shaped and driven by the accelerating revolution in Information and Communication Technology. As such, the capacity to create, distribute and exploit knowledge has become the chief factor which now defines and defines the competitive advantage of nations. In addition, broadband networks have become an even more vital part of the economic infrastructure of modern societies than physical infrastructure. And their availability at affordable prices have a greater bearing on the scope and pace of economic activity than instruments such as fiscal incentives and the like.
Transformational digital technologies are therefore the chief factors which are now defining production possibilities, and setting the conditions within which productivity and growth are being attained.
The most successful societies are those which attain the highest mark in the Global Information Surveys (Sweden and Singapore).
We need to emulate them.
Having established a basic framework to make technological readiness an important element of national development, Barbados needs to avoid any slippage, and to go to the next level in relation to the deployment of ICT as a factor in its development.
However, in the Global Information Technology Report 2010-2011 Barbados ranked 38th out of 138 countries, as compared to 35th the previous year.
There has been slippage.
It has been also reported that Government usage remains extremely low (70th), characterized by inadequate e-Government services and little e-participation.
It is now beyond compelling that we do everything that is required to convert Barbados into an E-country, and like other small countries like Singapore and Sweden, become a major information and communication hub.
This applies as much to the private as to the public sector, for despite the existence of a legislative frameworks for over a decade, severe challenges have been experienced in making e-commerce a significant way of doing business in Barbados.
The ICT revolution is not only transforming the costs of doing business, but opening up new avenues for entrepreneurs who have not been traditionally part of business activity to be able to enter and to compete in the global marketplace on more effective terms than ever before.
The goal of making Barbados the number one Entrepreneurial hub in the World by 2020, to unleash such a positive economic force, must be earnestly and actively pursued as an integral part of a new Development Model for the country.
Having led the country for 14 years, it is perhaps best that I should be the one who now says that which needs most to be said.
It has been well observed that some men grow to love their chains, and with time come to regard them as wings.
In a word, this captures much of the dilemma of our development. For much of the economic potential of Barbados has been buried under a welter of arcane an archaic practices, especially in the public sector , which add significantly and unnecessarily to the cost or reduce even more significantly the ease of doing business in Barbados. There is a profound difficulty in having the public sector embrace new practices that can convert it into a meritocracy capable of achieving higher levels of productivity because of fears about supersession and the like.
To progress, business facilitation, and the adoption of best practices in respect of the ease of doing business must become as important an instrument of economic management and development as fiscal incentives, human resource development, the use of protectionist devices as other such instruments have been in the past, and must be given Leadership by the Office of the Prime Minister.
Public Sector Reform, to improve quality, timeliness and cost of delivery services to the general public, but aimed also at helping to lay the foundation for the emergence of a more competitive economy through enhanced business facilitation must be pursued in a pervasive and all inclusive fashion.
There are a few related matters on which I can only glance but which will be vital to making the new Barbados Development Model successful.
First, to build a stronger economy based on entrepreneurship and technological readiness, there is need for significant innovation to be brought to bear in the functioning of our financial system.
One of our greatest challenges is not the absence of ideas, but the inability often to marry those with ideas with sources of funding to implement them.
The Central Bank of Barbados has just published its first Financial Stability Report which draws reference to a financial system which is well capitalized, awash with liquidity, capable of meeting the most stringent stress tests, but which is dominated by retail commercial banks which are risk-averters.
Such a financial system will not meet our needs of the future.
Barbados must evolve a broader-based and more diversified financial system which caters to the non-traditional entrepreneurs who are likely to emerge as a result of the ICT revolution.
And it is not appropriate for this role to be assumed by the state only or in large measure.
The various parts of the private sector must meet with the leaders of the financial sector and devise private sector stratagems by which we can begin to fund more systemically the creation of new enterprises and the expansion of existing ones that are sure to come on stream if we make Barbados more technologically ready and more entrepreneurially conscious.
Secondly, there must be national consensus that a productivity based Incomes policy must become an essential part of a new economic framework for the growth and development of the Barbados economy.
Our attention turns to the need to induce and sustain high levels of productivity during times of economic crisis. But such attention falters once conditions improve and there is a reversion to the settlement of claims in a manner which confers transient advantages but which can work to undermine the competitive position of the country overtime.
In the final analysis, our progress will only be real and sustainable if it is rooted in our increased productivity.
Third, to put Barbados back on a path of growth many of the macro-economic management policies which have been employed over the past 4 years need to be reversed or substantially modified.
The overall net effect of these policies have been to ensure that domestic recession in Barbados, caused initially by a fall in international demand, has been made more pronounced and prolonged by a substantial fall in domestic demand.
At least 75% of the Barbados economy is driven by domestic spending. When our foreign exchange reserves position is weak, as it was during the recession of the early 1990, there is no real scope to use the stimulation of domestic demand as a means of ensuring growth.
But Barbados does not have a foreign exchange problem. At March 2008, with the onset of the recession, our foreign exchange reserves stood at over $2.5 billion.
Every account of the Central Bank has since then said that our reserves position remain health and above the levels required for safety reasons. Some element of stimulation of the economy can therefore be contemplated by increasing domestic demand.
The Government has sought to improve its fiscal position by a substantial increase in the rates of both direct and indirect taxes. This however has had the effect of so significantly reducing domestic purchasing power as to cause the economy to grow at a slower rate than was possible and was warranted.
Indeed, it is instructive to recall that there was supposed to have been a spurt of growth of 3% in 2010, Growth for the year turned out to be 0.2%.
Conditions for growth in the agricultural and manufacturing sector, and for the small and micro enterprise sectors which provide a wide range of quality of life services require that there be an increase in domestic purchasing power.
To achieve it is imperative, that the tax free allowance be restored.
Barbados’ growth prospects can also benefit from adjustments to the tax bands and from the introduction of a middle income tax rate, between the basic and marginal rate of 25%. These matters need immediate and urgent attention.
Our growth prospects would also be enhanced by a review and modification of the existing energy pricing policy.
In a service economy structured like Barbados, energy is one of the major inputs in the production process. Energy should therefore attract a tax regime that reflects its status as an input rather than a ready source of tax.
In any event, the high cost of electricity in Barbados has been influenced largely by the variations in the fuel charge adjustments. There in turn are influenced by the terms under which BNOC sells fuel oil to the Light and Power Company.
Everything points to the fact that the BNOC has used its monopoly position to do some price gouging at the public expense.
If these practices were being indulged by a private sector monopoly, they would have been rightly and roundly condemned by the Minister of Commerce.
The Government needs to act to protect the public from the rapacious behavior of its own state monopoly.
Ovid once observed that there is no excellence without difficulty.
These are indeed difficult times for Barbados. And I seek not to make light of the enormity of the task which has to be undertaken to successfully put Barbados on a path to strong growth and sustainable development.
But it can be done, if we are resolved to covert our difficulties into opportunities, and our opportunities into new spheres of excellence.
We can, we must, and we will.