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#BTColumn – PM’S response to budget concerns inadequate – Economist

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By Anthony Wood

Some persons, including myself, commented that the Budget presented by Prime Minister Mia Mottley did not focus on growth (among other limitations). In wrapping up the Budget debate, the Prime Minister attempted to respond to the “critics”.

An article in the Nation News on Friday, 17th March, entitled Mottley: Details on Path to Growth in Budget  provides information on what the Prime Minister thinks are triggers of growth.

The information set includes an increase in the country’s fleet of electric buses, training of over 1,000 temporary workers, a loan facility for public service vehicle operators to engage Fund Access, a tissue culture laboratory, and an environmental fund.

Another identified driver relates to housing opportunities. Specific mention was made of ongoing projects at Lancaster, Chancery Lane, and Whitepark Road. The Prime Minister also mentioned the proposed establishment of a Unit Trust Corporation to provide greater access to business financing and capital works in the private sector (Royalton Hotel, Hyatt Hotel) and the public sector (new Geriatric hospital, dorm construction for the Barbados Youth Corps, expansion of Newton Industrial Park).

The final triggers of growth are the reduced fees for regional travel and the increased financial allocation to the Barbados Tourism Marketing Inc. (BTMI).

In the Prime Minister’s usual style, a list of potential drivers of growth is provided, but without any quantification of their possible impacts on growth. With regard to the capital projects, very little information is given on the timelines for the projects, the sums to be invested, the sources of financing and the number of persons to be employed.

Investment is the primary driver of growth. During the Budget presentation, the Prime Minister repeated that in addition to the planned capital works programme of the Government, private sector investment needs to increase from just under $1 billion dollars to $2 billion dollars annually in order for the country to achieve its growth objectives. Also, foreign direct investment needs to increase to 6 or 7 percent of gross domestic product.

Therefore, Barbadians need to be informed whether a definitive plan for the additional $1 billion dollars in private sector investment exists. Just listing a few private sector projects without timelines and sums to be invested is not good enough. Also, quantitative information is required on the stream of foreign direct investment.

Economic growth is a value-added concept. It refers to the annual change (expressed in percentage terms) in the gross domestic output of an economy. A distinction must be made between activities and investments that are growth-inducing and others that might allow an economy to maintain its level of annual output.

Building greater capacity in the productive sectors, for example, additional hotel plants, new factories and new farming operations, which result in higher levels of output, are growth-enhancing. Similarly, increased spending on marketing by the BTMI, which results in increased tourist arrivals and greater spending, will translate into growth.

Training displaced employees is socially desirable, but such investment is not a guaranteed driver or growth. Training is growth-inducing when the beneficiaries of training are required to fill vacancies in key areas of the economy. That is, when manpower shortages exist in the economy. Training also induces growth when it helps existing workers reach higher levels of production and productivity.

Conversely, training persons who are not directed at employment opportunities and, hence, may remain unemployed for a lengthy period can be seen as an expense rather than an investment.

Theoretically, the establishment of a Unit Trust Corporation can give businesses greater access to financing. However, we must ask whether such an institution is necessary and how effective it will be. The financial system in Barbados is characterised by a high level of liquidity. There is no shortage of loanable funds in the financial system.

However, the transformation rate (rate at which domestic savings are transformed into investment activities) remains fairly low because of the conservative lending policies of the commercial banks, the dominant institutions in the financial system. Typically, the banks are risk-averse. The bankers’ counter to this assertion will be the paucity of bankable projects.

For a new institution like a Unit Trust Corporation to be successful, it requires scale, proper regulation, and sound management. Incentives will be required to encourage deposits in the Unit Trust Corporation.

The importation of electric buses for the Transport Board and public service vehicle operators to replace existing fleets is not growth-inducing. Such purchases will enhance the production of foreign manufacturers, utilise foreign exchange, and add very little value to the domestic economy, especially if the maintenance of the electric buses is handled by existing dealers. Also, given that the pool of commuters taking public transportation is unlikely to increase, there will be no revenue gain for the providers of the service.

The establishment of a new tissue culture laboratory is a good initiative but does not guarantee meaningful growth in non-sugar agricultural production. A properly functioning laboratory will help with the storage of germ plasm and seeds and boost the production of planting material. However, its success depends on the availability of technical and scientific expertise, large tracts of farm lands for crops, and access to export markets for the potential increase in agricultural production. In this connection, an export competitiveness study and a detailed business plan should be undertaken to determine the feasibility of the tissue culture laboratory before the $15.3 million dollars investment is made.

Neither the Budget nor the article provides any details of the promised housing revolution to absorb the almost 3,000 workers in the two Government crash programmes who will be retrenched at the end of March. Mention was made of three ongoing projects at varying stages of completion. New housing projects will be growth-inducing.

The retrenchment of almost 3,000 employees plus an undetermined number from the state-owned enterprises (SOEs) in short order will have a depressing impact on growth. The impact of the removal of the spending contribution of these workers will be felt quickly by the private sector, especially those entities in the distributive trades. The most heavily impacted businesses may respond by trimming their employment numbers, thereby exacerbating the growth-depressing situation.

The suggestion that the small reduction in fees for regional travel will spur intra-regional travel and, hence, growth is overly optimistic. The cost of intra-regional travel remains prohibitive for many aspiring travellers despite the welcomed reduction in the fees.

Though the achievement of growth is vital for the Barbadian economy, the Government needs to temper its expectations given that there are constraints to the functioning of the economy. The present international environment of inflation and uncertainty demands moderation and belt tightening in the current International Monetary Fund Programme, which includes some austerity.

We should also note that the combined deficit from the Estimates and the Budget is in the neighbourhood of $1 billion dollars. Such a large deficit means too rapid an increase in Government investment could crowd out social welfare spending, leading to even more borrowing and exacerbating the debt situation.

We thank the Prime Minister for her effort in responding to the “critics” about the lack of focus on growth in the Budget presentation. However, the response is vague and leaves important questions unanswered. Also, the absence of quantitative information renders the response very inadequate. 

Anthony Wood is a senior economist, former lecturer in Economics, Banking and Finance at the University of the West Indies, Cave Hill Campus. He is also a former Cabinet minister. This column was offered as a letter to the Editor.

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