ECONOMIC STRATEGY IN A TIME OF CRISIS
By Courtney N. Blackman, PhD
Central Bank of Barbados/UWI Lecture
June 30th 2011
Thanks very much for attending my lecture – especially here at the Central Bank where I spent the most satisfying and, I think, the most fruitful years of my professional life. I will share with you my perspective on the most severe crisis Barbados has experienced since World War II. My perspective reflects four decades of intensive study of economics, and fifteen years of experience as a national economic decision-maker. And for the benefit of the Press, I speak only for myself.
SEVERITY OF THE CRISIS
I don’t think Barbadians understand the severity of the current global financial crisis, the most devastating since the Great Depression of the 1930’s when a quarter of the U.S. work force was idled. Several iconic Wall Street financial institutions, like Merrill Lynch and Bear Stearns, have vanished, more than 200 commercial banks across the nation have failed, and the U.S. Treasury and Central Bank have injected over a trillion dollars in major financial institutions, like Bank of America, and industrial corporations, like general Motors, deemed “Too Big to Fail”.
Meanwhile 14 to 15 million Americans are out of work, more than 5 million have lost their homes to foreclosure, and even more have seen sharp reductions in their pensions and retirement savings. The contagion has also spread to Europe where Iceland, Ireland, Greece and Portugal teeter on the edge of national bankruptcy. The UK itself has enacted severe austerity measures to deal with its massive deficit. It is not surprising that, with our two major capital and tourist sources in economic stress, we in Barbados should be feeling the effects. Indeed, I would argue that things in the USA and the UK are even worse than they are in Barbados.
THE CRISIS IN ECONOMICS
Economic crises occur when unpredicted and highly disruptive events lead to sharp departures from the normal pattern of economic activities. In such circumstances, conventional economic theory no longer applies. Even more problematic is the extreme uncertainty generated by crises. Since the 1980s the discipline of Economics has been dominated by the ‘free market’ fundamentalist School which propounded that free financial markets always priced financial assets correctly, were self-regulatory and always allocated capital in an optimal fashion. By the end of the 1990’s almost all mainstream economists in the US and Western Europe espoused “free market” fundamentalism. According to this theory the collapse of the financial system could not have occurred! The fact that “free market” economists did not predict the crisis, and have offered no credible corrective measures, has clearly invalidated their theory. So far Nobel Laureate Professor Paul Krugman is the only prominent mainstream economist to admit unequivocally that the Economics profession is itself in crisis. Indeed, this explains the difficulty the Americans have had in mounting a coherent and effective response to the crisis.
There is no time in this crisis for us in Barbados to come up with a new theory that explains events which we did not predict, did not even think possible, whose dynamics we do not understand, and about whose duration we are uncertain. Our economic managers must therefore be pragmatic, using what resources are to hand, and relying on their intuition and experience to do the best under the circumstances. Above all, they must act decisively, and move swiftly to correct errors they will inevitably be made.
HISTORY OF ECONOMIC CRISES IN BARBADOS
We in Barbados have been very fortunate to have suffered only one severe natural disaster in the twentieth century, i.e. hurricane “Janet” in 1954; and since 1937 there has been no civil disturbance, as in Guyana and Jamaica, nor armed uprising, as in Trinidad &Tobago, Grenada and Suriname, since their independence. However, as our late Prime Minister David Thompson acutely observed, since Independence in 1966, Barbados has experienced severe external economic shocks at intervals of ten years or so:
- 1973-4, the first Oil Shock;
- 1981-2, a short but deep US economic recession;
- 1990-1, a short but relatively mild US economic recession;
- 2001, Nine/Eleven, US recession of less than a year;
- 2008 - ? the current external shock - most severe experienced by Barbadians since World War II (1939-45)
For the US and some European countries, like Ireland, Iceland and Greece, the effects of the Wall Street financial collapse have been nothing short of catastrophic; for Barbados they rise at least to the level of crisis.
A LESSON FROM WORLD WAR II CRISIS
I am surprised that there has been no reference in the Press to our most severe economic crisis in modern times - World War II. The Barbados of 1939 imported a high proportion of its foods – rice, milk products, salt fish, animal feed, and almost all of our manufactured goods. Frequent sinkings of Allied merchant ships by German U-boats threatened Barbadians with starvation. The response of the Colonial government was to appoint as food czar Sir John Saint, a most competent colonial civil servant. He ordered the rationing of rice, kerosene, and other essential goods, but his major goal was to ensure food security. He therefore required sugar cane plantations to plant 10 per cent of their acreage in yams, sweet potatoes, eddoes, etc. We survived the war!
CURRENT BARBADIAN RESPONSE
The current Stuart administration faces a more severe economic crisis than any other in the history of an independent Barbados. In view of the inexperience of its ministers, it can be expected to misstep from time to time.
On the credit side:
They are to be commended for persuading the Trade Unions and Private Sector to minimize the level of unemployment. They have reallocated advertising resources to tourism markets like Canada, which were relatively unaffected by the global crisis, and to new emerging sources; they have paid special attention to the needs of vulnerable and disadvantaged groups – I have no trouble with free bus fares to school children - and they have supported initiatives for the development of entrepreneurship and small business enterprise.
On the debit side:
The administration underestimated the severity of the crisis, and has not been as forthright as it might have been with the public as to the likely duration of the crisis, treating it like a typical 2-3 year recession when, in fact, it could very well last 5 years or more. They chose a Medium Term Fiscal Strategy Plan, which is essentially a traditional development plan that is useful only in relative calm periods - not in turbulent times such as we now face; it covers the waterfront but does not focus on the truly strategic issues. It sets out a number of ambitious measures that Government intends to enact, but does not say very much about how it intends to execute them.
Turbulent and uncertain times call for strategic planning – not the traditional development plan. The question facing the strategic planner, writes Peter Drucker, is “What do we have to do today to be ready for an uncertain tomorrow?” The question, he reiterates, is not what will happen in the future, but “What will not get done unless we commit resources to it today?” He continues:
There are plans that lead to action today and these are true plans, true strategic decisions. And there are plans that talk about action tomorrow; these are dreams, if not pretexts for non-thinking, non-planning, non-doing.”
The purpose of the strategic planning exercise, then, is the identification of those critical areas where hard decisions must be taken today if we are to have a fighting change of attaining tomorrow’s goal; its outputs are a strategic agenda, that is, the list of hard decisions that have to be taken today. The climax of the strategic planning exercise is the commitment of resources today.
A TWO-PRONGED STRATEGY
The economic strategy I propose is two-pronged: a strategy for the short run and one for the post-crisis era.
Short-run Economic Strategy
Our immediate economic goal in this time of crisis must be to get the nation through these dark days until the sun comes out again – as it always has – with minimal discomfort to our citizens and with our current peg to the US dollar still intact. This requires that we maintain both an adequate inventory of foreign exchange, and ready access to loans on the international financial markets. That is why we cannot disregard our falling credit ratings, and why Government must pay Mr Barack the $60 million that are legally due him! And since barrack is a non-Barbadian the nation is in default – an unusual experience for us.
In small open economies like Barbados, with limited natural resources, and where seventy cents of every dollar are spent on the purchase of imports, foreign exchange must by far be our greatest concern. It represents what economists call our “operational constraint”: without it everything falls apart, as the examples of Guyana and Jamaica have so painfully demonstrated.
It would be humiliating if we had to cede our economic sovereignty to international creditors or financial institutions through failure to husband our foreign exchange reserves - as indeed nearly befell us in 1991 when the IMF was demanding an 8 % cut in public Service wages and the layoff of 2000 civil servants. The civil servants accepted a cut in salary, and we were spared the currency devaluation. If our foreign exchange reserve position remains sound, we need not worry about the fiscal deficit, the domestic debt nor the foreign debt.
Economic Strategy for the Post-Crisis Era
But even as we wrestle with the pressing problems posed by the current crisis, we must prepare for the future. It is instructive that the famous Beveridge Report, which provided the blueprint for Britain’s post-World War II welfare state, was commissioned in 1942 – long before victory over the Axis powers was assured. Such a preparatory exercise is essentially intellectual, and costly in terms of neither human nor financial resources; however, by identifying and correcting weakness in our institutions and social and economic systems, it could give us a huge competitive advantage in the years to come.
The goal of management for the post-crisis era must be to strengthen the institutional capacity of Government to deal effectively with impending challenges in our external environment as well as with future recurrent crises. This requires far-reaching reform of the Civil Service administration, and of the management of statutory corporations. In my essay, Towards a National Strategic Plan, 2001-2010, I argued that management was the critical, though neglected, factor in economic development, citing Peter Drucker’s incisive dictum, “There are no underdeveloped countries, only undermanaged ones” – Alas, to no avail!
Management in the Private Sector has come a long way, reflecting the efforts of the Barbados Institute of Management and Productivity, the Cave Hill School of Business, and the influence of the influx of foreign corporations. But much remains to be done if Barbados is to shed its reputation as a difficult place in which to do business.
The National Strategic Plan of Barbados 2005-2025 conceded that “the Barbados Public Sector is operating within the same modalities as it has for the last thirty years.” If so, how can we expect to compete against countries which are using operational modalities of the 21st century? Early in his term of office, the late Prime Minster Thompson commented on the excessive sluggishness of the Public Service; and Finance Minister Sinckler has complained of the inefficiency of statutory corporations. Successive administrations have been talking about public sector reform for over forty years but, as the French put it, “Plus ca change, plus c’est le meme chose.” (The more it changes, the more it remains the same.”)
I propose the launch of a true strategic plan to support the aims of the medium-term fiscal strategy. I have identified five critical areas where significant productivity gains may be achieved, leading to economies in the management of our foreign exchange reserves within two to three years.
- Energy conservation;
- Food production;
- Crime prevention;
- Technical support for statutory corporations;
- Unravelling of red tape.
I can only outline my proposal at this stage:
A Task Force should be established to deal with each strategic area. Each task force should be headed by a seasoned administrator or executive drawn from either the Public Sector or the Private Sector. However, it should operate apart from the Civil Service, since dynamic and pressing tasks are not easily accomplished within a bureaucratic framework. However its secretariat could be staffed by civil servants of proven initiative, and should not exceed a dozen people. It should be mandated to come up with a programme for increasing productivity in its respective area, and should possess both the legal authority and financial resources to make things happen.
The task force would not be desk-bound, but would go into the field and come up with practical solutions. It should report directly to Cabinet and have ready access to the Prime Minister
For example, the Task Force for removing bureaucratic Red Tape might conduct widespread discussions with businessmen so as to identify sources of business delays, and push the Civil Service to have road blocks removed.
I trust that I have not left the impression that I am pessimistic about the prospects of our emergence from this crisis. I often say, and only partly in jest, that there are two countries in the world one should never bet against: one is the United States of America and the other is Barbados. I am betting on us.