|
|
Economic
Press Release
Press
Release March
16, 2005
“WHAT
IS IN STORE FOR THE BARBADIAN ECONOMY
AS WE ENTER THE CSME”
Address
by
Dr. Marion Williams
Governor
Central Bank of Barbados
to the
Barbados Employers Confederation
on March
16, 2005
Sherbourne Conference Centre
Mr.
Chairman and President, Dr. Hensley Sobers; Members of the
Executive Council; Mr. Harry Husbands, Executive Director,
Barbados Employers Confederation; Ms. Shirley Farnum, Permanent
Secretary, Ministry of Labour and Social Security; Mr. Vincent
Burnett, Deputy Chief Labour Officer; Mr. Raull Harris,
Executive Director, Barbados Chamber of Commerce and Industry;
Mr. Trevor King, Executive Director, TVET; distinguished guests,
ladies and gentlemen.
I
am pleased to have the opportunity to speak to the employers of
Barbados at this BEC’s annual luncheon on the topic of the
CSME. I am,
however, a little alarmed that you may be expecting something of
a crystal ball address and that I will be in a position to tell
you what is really in store for us under CSME.
Let
me say that economics is about probabilities and economists will
never say they are sure about anything in the future.
They will advise that there is a high, low or medium
probability of an event occurring or that certain outcomes are
likely.
I
am afraid that is precisely what you are about to hear from me.
One of the basic reasons for the creation of the CSME was that
it had become clear that the future for small countries and
small entities in the rapidly globalising world was becoming
increasingly difficult. In
negotiations, organisations have little time and patience for
dealing with a myriad of small countries.
Secondly, if one wants to be heard, it was very clear
that size made a difference to the willingness of others to
listen. The significance given to your view is greater when you
are larger and you are therefore able to have somewhat more
negotiating influence. In addition, if you can trade without
barriers in a single economic space the possibility of growth
and expansion is enhanced and the hurdles, legal,
administrative, regulatory, etc. are lessened.
As a single market we can now offer our members better
terms of operating, and greater freedom from barriers than we
offer any third country. For these reasons the Caribbean had
very little option but to form itself into a single market. We
have created a greater single economic space and a greater
market for ourselves in which we are the beneficiaries.
As
you are aware, the requirements for the proper functioning of
the CSME are the removal of restrictions on the free movement of
goods, services, persons and capital and the right of
establishment. The intention is to reduce the economic vulnerability of
regional economies by providing an avenue to expand trade and
investment opportunities, thereby lowering consumer prices and
improving standards of living across the region.
Enhanced levels of competitiveness should result from the
extension of the gains of specialisation in production and
should fortify the region’s position in the global economy.
There will, however, be losers and gainers. CSME will influence
all spheres of economic activity across Barbados, potentially
translating into significant gains for the more efficient
business entities. It
has already contributed to the demise of some of the less
efficient companies. The
financial transactions that underpin the free movement of goods
and services will intensify with greater trade, facilitated by
the removal of capital account restrictions in some countries. However, the gains are expected to offset the losses, and
should lead to better resource allocation and a net
welfare-improving outcome for the country, and without doubt for
the region as a whole.
We have already removed the barriers to trade in goods
and services. We have made some strides in the removal of
barriers to movement of persons, but there is a long and
difficult road ahead here as witnessed by the frequent dialogue
on this topic. In
terms of financial liberalisation, we have removed the barriers
to the movement of capital in the form of equity capital but
there are other areas of financial liberalisation to be
addressed.
The Productive Sectors
At the sectoral level; to date, the integration process under
CSME has proven to be especially challenging for some industries
in the Barbadian economy. Already,
there has been a contraction in output of the manufacturing
sector and a deterioration of the current account position.
Efforts to bring Barbadian businesses up to international
standards will therefore necessitate a restructuring of their
production processes, with a possible redirection of resources
to those areas where the country may have a demonstrated
comparative advantage. It
is easy to speak in general terms of restructuring production
processes but those on the ground need to translate this into
actual implementable changes in production.
Some of the weaker entities have already dropped out as a
result of competition, and it is important now that we nurture
the remaining entities – presumably the more competitive ones
- and assist them in holding their own in the more open
environment. Several
suggestions have been tabled to assist the manufacturing sector
in becoming more competitive.
These include the development of specialty products,
particularly those that command higher prices in the
international market and an emphasis on higher value-added
products.
Understandably,
with the right to establish anywhere in the region, industries
will gravitate to locations with abundant resources, with low
energy costs and competitive wages.
High production costs, related to high wage rates, and a
dearth of abundant natural resources place Barbados at a
disadvantage vis-à-vis its CARICOM counterparts, in the
production of most goods. This
means that higher levels of productivity will be required of
Barbados. It also suggests that we may have to look at our
capital - labour ratios and retool our enterprises to make
greater economies and make greater use of state-of-the-art
equipment.
At
the same time, where Barbadians see the opportunity for
operating competitively elsewhere in the Caribbean, they should
seize it. This
option is now open to potential investors. We know, on the
ground however, that there are tremendous challenges and that
nationalism is still very strong in the Caribbean, despite CSME,
but these are hurdles that we will have to cross. Meanwhile,
investors wanting to enter into the wider Caribbean should do so
as long as the competitive environment and the prospects are
good, provided of course, it is affordable at the macro level.
On
the other hand, Barbados has always been a strong supplier of
services. A
well-educated workforce, good infrastructure and a favourable
business environment, can translate into significant gains in
the provision of services, and many entities have already moved
to supplying their services cross-border. We have seen it in the
construction sector especially.
In addition, consultancy services of every form and
description have been provided to the rest of the Caribbean by
Barbadians for decades. We must not, however, believe that
because we may have a comparative advantage in services – and
I say, “may” – that the competition is any less stiff than
it is in the trade in goods. We must compete here as
aggressively as we compete in any other sector.
In addition, as globalisation overtakes regionalism, we
have also to simultaneously compete with the entry of companies
from third countries outside the region in the provision of
services. The technology permits it and it will be very
difficult to exclude them.
We ignore them at our peril.
Employment
With labour set to move freely within the region under the CSME,
the implications for the employment situation in Barbados have
come under increasing focus. While production is expected to
gravitate towards lower-wage jurisdictions, labour would
theoretically be attracted to higher-wage jurisdictions, of
which Barbados is generally acknowledged to be one. This would
indicate a potential surplus of supply over demand in the
Barbadian job market, at least in the short-run, which could
push down wages. However, it should also be noted that, at least
in theory, the integration of regional labour markets should
ensure that over time, equilibrium is reached between labour
supply and demand across the region.
A number of other factors could affect the analysis, such as the
comparative cost of living in Barbados as opposed to other
regional jurisdictions. Furthermore, given that the categories
of labour currently being allowed to move under the CSME are
those principally with higher skill levels, with which Barbados
is perhaps more heavily endowed than other jurisdictions, it is
possible that there could be a net outflow of labour from
Barbados – provided Barbadians are prepared to accept lower
wages elsewhere.
The
External sector
The contraction in activity in the productive sectors also has
implications for the external account of the country. This is
particularly worrying to the extent that the fall-off in
production is being accompanied by a significant rise in
retained imports from the region. Indeed, the steady
deterioration in Barbados’ export performance has its genesis
in the provision of duty-free access for CARICOM goods from the
early 1990s and the resulting increase in competition in the
domestic market, which seemingly impaired local producers’
export capacity. Imports
in particular from Trinidad have grown tremendously. However,
judging from the shopping of Barbadians in Trinidad, shoppers
are buying, not only Trinidad-produced goods.
If this is so, then we may have to ask ourselves why is
it not possible to purchase these goods directly – is it
sourcing? Surely we have a reputation for being a nation of
traders!
The
challenge for our balance of payments is further compounded by
the liberalisation of the capital account required under CSME.
The removal of exchange control restrictions on capital
account transactions within the union essentially constitutes a
removal of restrictions with the rest of the world, given that
some other countries within the Area do not have exchange
controls on extra-regional capital transactions.
However,
in the absence of capital controls, capital flight is possible
where there is a differential between the domestic interest rate
and interest rates abroad. Unbridled outflows could therefore
put the maintenance of Barbados’ current fixed exchange rate
regime at risk. Consequently, while capital account liberalisation process is
ongoing, we are proceeding cautiously with regard to certain
types of transactions in order to avoid any significant
disruptions arising from unregulated short-term capital flows.
Liberalisation
also has implications for the independence of monetary policy.
Whereas, domestic economic circumstances might indicate the need
to keep interest rates low, if regional rates are high, in the
context of an open capital account, then there is more pressure
to raise rates in order to keep money at home, even though the
domestic cost situation would suggest that interest rates be
kept low so as to reduce the cost of operations of businesses.
On the other hand, many of the changes associated with the CSME,
e.g. the enhanced ability of companies to establish a commercial
presence anywhere in the region, could result in increased
capital flows into Barbados, provided that we maintain and
encourage an attractive investment climate.
We have already seen this inward flow with respect to the
banking system.
Under
the CSME regime, current trends in the financial sector are
likely to be reinforced, in that the cross-border provision of
financial services, as well as the integration of financial
markets, will become even more of a reality. This should produce
a number of benefits for consumers: widening the range of
financial services available to consumers, lowering the cost of
these services and generally promoting competition and greater
efficiency in the day-to-day transactions taking place within
the Barbadian economy. However, full advantage can only be taken
of these benefits in the context of full liberalisation. It will
therefore be important to judge how far and how fast that
liberalisation process can take place without creating domestic
disruption and excessive loss of foreign exchange reserves.
The spate of mergers and acquisitions which have taken place in
recent years have been influenced by the need for corporations
to benefit from economies of scale.
With large corporations now dominating almost every
sector in the field of finance, regulators will have to guard
against any attempts by financial institutions to abuse the
rights and privileges associated with the CSME by engaging in
anti-competitive practices. However, with consolidated
supervision and policy harmonisation forming an integral part of
the CSME process, it is anticipated that this potential problem
should be kept at bay.
Mergers
and acquisitions have been more evident in the banking and
insurance industries – it may abate but I do not think that it
is over. At the
level of securities trading, I expect to see continuing strong
activity. Hopefully,
within the next year or two, we will see greater harmonisation
of the stock exchanges in the region, where there are similar
listing rules, similar take-over criteria and, most importantly,
trading from a single book.
I
consider that the establishment of a single stock exchange
creates the opportunity for the development of a Caribbean
numeraire currency. Certainly,
if there is one book there should be one currency in which
transactions are denominated.
If we do nothing about it – it will be the US dollar
– by default. If
we take a conscious step to create a regional numeraire currency
– and it could be of equivalent value to the US dollar so as
to eliminate any conversion difficulty when we actually do
create a single transactions currency in the region.
I
think also that the use of a regional credit rating agency will
become increasingly important.
We already have one in the Caribbean Information and
Credit Rating Services (CARICRIS).
In order to encourage surpluses in the country to be
invested in deficit countries it will be important that
potential investors know the value of their investment. The
recently established regional rating agency will help to
establish the value of corporations across the region so that an
investor in Barbados can more easily rely on specialists in the
field to value the quality of companies and the strength of the
balance sheet of companies – say – in St. Lucia or Dominica.
A
number of steps of this kind to set up institutions which
facilitate regionalism are being taken both by governments,
government related institutions and by the private sector.
These are the kinds of tripartite initiatives which we
need to ensure that the appropriate framework for the smooth
functioning of the CSME is property enabled.
In
order for the CSME to function effectively, there is a need to
harmonise, and I would go so far as to say, “unify”, the
rules and guidelines governing the conduct of businesses across
the region. The CARICOM Secretariat has started with the
financial sector and has framed a Financial Services Agreement.
This is a very important step as it sets out guidelines
within which the sector should operate.
However, we will need to do more to minimise and,
preferably, eliminate the differences in our legislation, and in
our criteria for establishment in the various sectors, in order
to eliminate regulatory arbitrage and reduce corporate
legislative shopping within the Caribbean.
I
strongly feel that our Chambers of Commerce across the region
must be strongly involved in the process.
This means, by implication, our Employers Confederation
as well. I believe
that this is why the distinction is made between the single
market and single economy. Yes, we can more quickly become a single market – however,
in order for us to see ourselves as a single economy our
economic and corporate rules and legislation will need to be
more closely harmonised. In
a sense, we are fortunate, in that the basis of our system is
British – though in recent years many countries have modelled
themselves on Canadian legislation - that is, the
English-speaking Caribbean. However, harmonisation within the
French and Spanish-speaking Caribbean will be a little more
complex.
The
implications of the CSME for employers as Human Resource
professionals are many. It
will be important that HR departments work within their
organisations to ensure that high standards are set and that
excellence is rewarded, for it is through this process that the
good candidates show their worth and the entire level of
performance is lifted.
Rewarding mediocrity in the same way that we reward high
performance, breeds complacency and leads to low levels of
productivity. We
have to keep on lifting the bar so that employees know what is
expected of them. In
this way, our workforce will be able to hold its own and retain
their jobs against the competition in the face of free movement
of labour. It is a well-known fact that those who emigrate are usually
those who are willing to work hard.
Barbadians must be aware of this, and instead of trying
to keep them out, they must be prepared to work harder.
I
take the opportunity here to speak of training.
In the context of CSME, our training must be futuristic.
We need to look not only at where our firms are today,
but where they wish to be and how they get there.
If productivity requirements mean greater
state-of-the-art equipment, then we must train persons in these
fields. I
constantly say that we are technologically challenged.
When the high-tech gadgets which we buy fail – there
seem to be a few people who can fix them.
HR trainers must therefore be conscious of the training
requirements which will make us globally ready – if we are
globally ready we will be CSME ready.
We will need to use the Internet more, use journals
- find the right areas where training is being delivered,
and encourage investment in training.
This is the one sure way in which our labour force can be
prepared to compete in CSME.
If you aim for the skies you may land in the treetops.
Aim or the treetops you not may get off the ground.
I
am aware that employers and especially human resource
professional will wish to focus on the issue of culture
assimilation within enterprises, and on the application of
ground rules which are based on giving the best candidate the
job – especially where in today’s environment, that
candidate may not be a Barbadian national.
However, we have always had to deal with these issues, so this
is not new. My only
advice is that the most important challenge facing Barbados is
to improve its competitiveness.
I believe that if employers and HR professionals focus on
this they will get the desired responses from their employees.
In
some organisations the development of pay-for-performance
appraisals are being considered.
This may, at first, appear to have nothing to do with
CSME. However, it has to do with motivation, hence it has to do
with getting the best, getting the best employees means
improving our competitiveness – so we are back to what is good
for us in order to flourish within CMSE – improved
competitiveness.
We
will all need to put systems in place that will ensure that our
employees aim for high levels of productivity, this will include
reducing work stoppages, reducing absenteeism and a closer
control of wage costs. This,
coupled with the nurturing of a culture of greater
entrepreneurship, will be the key to getting the best out of
CSME.
Already, given the reduction in the rate of tax from $40,000 to
$37,500 and other tax related concessions, there is likely to be
a significant increase in disposable incomes.
Last year, there was a tremendous surge in spending. Net
domestic assets of the banking system, which comprise credit to
government and credit to the private sector, rose by 50%. We are
looking at a situation where disposable incomes will rise even
further in 2005 because of the tax benefits that have been
given. Ask
yourselves “Is there really scope for giving wage increases on
top of that? What
will happen to disposable incomes? What will happen to
spending?” I hesitate to incur the wrath of the unions, but I
am an economist and the numbers stare me in the face.
I suggest that you put in to your employees that we put
Barbados first and that competitiveness is very important –
for the good of themselves and future generations.
Conclusion
In conclusion, there are several steps still to be taken to
ensure
that CSME becomes the opportunity which we are convinced it can
be for Barbadians. However,
not all of these initiatives are in the laps of the officials.
Yes, the further liberalisation of the external capital account
is. However, the
restructuring of the productive sectors to make them more
competitive is another major challenge facing the country going
into the CSME, and it requires a combined effort.
With judicious action at the policy-making level, and
with the support and input of the public sector, these
challenges can be met. On balance, the CSME can produce net benefits to the
Barbadian economy by providing a harmonised framework for policy
formulation, as well as a larger market, with greater
opportunities for employment, investment, production and trade.
One that will provide Barbados with the economic and bargaining
power necessary to combat external threats and overcome resource
constraints.
However,
what’s in store will, to a large extent, depend on our
willingness to seize the opportunities presented to us.
We can chart our future in CSME – not one sector or
group alone – but with every group, sector and organisation
determining what it wants and setting out to get there.
What is in store for us in CARICOM will be largely determined by
the efforts we make and by the initiatives we take to influence
the outcomes we want.
March 16, 2005
|
|