Two Barbadian economists say Government has no alternative but to cut its public service wage bill to rightsize the economy.
The position of Michael Howard, a professor of economics at the University of the West Indies, Cave Hill, is backed by Travis Mitchell, an economic advisor to the Commonwealth Secretariat.
At the same time, both agree, this will have a ripple effect and lead to job losses in the private sector that will have to fight to stay afloat due to a decline in spending.
“They [the Democratic Labour Party] had argued that they wouldn’t do that before the last election, but I think they no longer have any choice,” Professor Howard said, adding that the cuts needed to be done sooner rather than later.
“It is a sad moment for the country, but if they go to the IMF, the IMF will probably tell them the same thing; and I believe that is going to influence the talks with the IMF at this point in time.”
Representatives of the International Monetary Fund are on island conducting consultations.
“When you put all those people out there, it means that the demand is going to decline. There will be a loss of income for the people and the economy might even contract a bit further, and there’s no end in sight, because the projects which we foresee, in terms of increasing unemployment and so forth, are projects which are a year and a half from now –– such as tourism projects like Sandals and construction of the old Paradise Hotel,” Professor Howard said.
Mitchell, who once served as a senior economist at the Central Bank of Barbados, said job cuts could occur as early as the first quarter of 2014 since time is running out on the country’s declining foreign reserves, which, in November stood at the medium level.
He pointed out that the performance of the tourism sector –– key to the economy –– was only expected to improve marginally, not nearly what was required.
Job cuts in the private sector, he said, would mean that “the aggregate demand of the economy will reduce further”.
“The ripple effect goes on and on until we reach the highest level of unemployment, until there is some level of intervention or growth in the economy,” Mitchell said.
He said there were lessons other Caribbean states could learn from the Barbados situation, including the need to implement fiscal rules to limit Government spending.
“Many of the policymakers in the region are not inclined to [implement] fiscal rules because it limits their discretion in terms of what they can spend in public finance; but what we recognize is that those countries in the region that have fiscal rules have performed better than those that have not, for example Suriname. [It has] one of the lowest public debt levels in the Caribbean,” he said.
“The issue of Barbados and the wider Caribbean is that our debt levels are too high. Debt levels being high reduces the flexibility at which you can borrow.”
This situation, according to Professor Howard, shows a massive policy failure by the Freundel Stuart administration, which ignored warnings from local economists.
“I think that it could have been avoided if we had done things differently from 2009 to 2011. Right then the economy was better off; we had high levels of reserves, but the state kept on increasing current account expenditure; and if the Government had made a serious adjustment then, we could have avoided this,” the professor added.
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