Impact of rising prices

BY CLYDE MASCOLL

LAST WEEK, I stated that Barbados  is a victim of failed economic policies, not a global recession. The economic policies caused prices to rise faster than in the rest of Caribbean economies, which contributed to the tourism sector being less competitive.

They reduced the spending power  of Barbadians, thus compromising potential growth in the economy. Furthermore, the policies increased  the national debt and put the country’s fiscal position in its worst ever condition.

Barbados is known to be a country with a high cost of living, largely because of its relatively high standard of living. However, it is not known to be a country with high rates of growth of prices, otherwise called inflation.

The cost of living may be likened  to a level such as a water level in the kitchen sink. While inflation may be likened to the rate at which the water level rises in the sink. In essence, inflation is the rate of growth of prices.

Therefore as inflation increases, it takes prices to a higher level. This has negative effects on workers with fixed salaries. It has negative effects on pensioners. And it has negative effects on investors.

In an environment like 2010, it was not sensible to put policies in place that fuelled domestic inflation, simply because the latter compromised everyone’s quality of life.

Furthermore, in an economy where workers, especially those in the public sector, have not received an increase in salary since 2008, the impact of rising prices needs no further explanation. The reality is that the standard of living in Barbados has been set back by at least seven years.

Historically, the rate of the rise in local prices is strongly influenced by the rate of growth of international prices, especially oil and food prices. However in 2010, when the VAT rate was increased to 17.5 per cent, along with the 50 per cent rise in excise taxes, the recipe for domestic policies being the major cause of local price increases was created.  By 2011, the evidence was real not imagined as Barbados’ inflation rose three times as fast as the average  among regional economies.

While the taxation policies were unwise, the damage done to the Government’s financial position is the most unwise of all. The strategy of borrowing in excess of $40 million per month to pay civil servants is irreversible in less than seven years, especially in the absence of growth  in the economy.

The inability of the Barbados Government to invest in infrastructural development is precipitated by having  to finance a shortfall of over $550 million before a penny could be spent on capital projects. This is similar to the position  in which Guyana and Jamaica found themselves in the past, which stifled economic growth in both countries, with the latter having not yet recovered.

Notwithstanding the absence of government investment, Jamaica attracted high levels of private sector investment relative to national income, yet the economy grew by an average of just over 1 per cent for the last 30 years.

This partly explains the importance of public sector investment in building out infrastructure in health, education and physical infrastructure as a prerequisite for sustainable economic growth.

Both countries have seen more foreign direct investment than Barbados, however measured, and Guyana, with its agriculture and forestry, mining, and potential in oil and gas production, is experiencing high levels of foreign investment. Once this kind of investment is accompanied by its public sector counterpart, then the conditions for economic growth and development  are in place.

Alternatively, since 2009 Barbados has embarked on an economic path that compromises growth, which has exacerbated its fiscal misery, encouraged more crippling national debt and reduced the country’s standard of living.

Foreign direct investment is a much preferred way to access foreign exchange than through borrowing on the international market, especially at cost associated with junk bond status.

However, if the country’s economic fundamentals are poor, then encouraging foreign investment is not going  to be easy, particularly when the  rates of return on investment are not  the most attractive.

Notwithstanding Jamaica’s poor economic fundamentals, its exchange rate made it attractive to foreign investors. Barbados does not have  or want such a luxury. But the notion that the Government is preparing  a home-grown fiscal strategy  adjustment programme, which still  has to be approved by the international Monetary Fund, is farcical.

Barbadians had become accustomed  to decision-making governments but now have to settle for “when I ready” Government in the face of serious crisis.