I have read very carefully a report by a team of economists at the International Monetary Fund (IMF) on the economic challenges facing Caribbean countries in relation to their current fiscal and debt situations.
The more I read the report, the more I question myself about the extent to which we in the Caribbean continue to behave as if we do not understand the economic reality confronting us as small, open economies.
The report entitled, “The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean,” was prepared in November 2012 and distributed as IMF Working Paper, number WP/12/276.
One of the amazing aspects of the report is that virtually all that has to be said and understood in relation to the plight of Caribbean countries was very decently captured in the abstract.
For example, “The analysis shows that major debt reductions are associated with strong growth and decisive and lasting fiscal consolidation efforts. Since growth in the current environment is virtually nonexistent, significant fiscal consolidation is inevitable in the region. Better control of the public wage bill, increasing public sector efficiency and tackling transfers are the obvious targets to reduce spending. On the revenue side, there is ample room to reduce tax expenditures, eliminate distortions while broadening the tax base. Fiscal consolidation needs to be complemented by a comprehensive debt reduction strategy including tax policy reforms and structural reforms to boost competiveness.”
After all, is it not true that the opinions expressed in the preceding sentences is a true reflection of the economic reality in the Caribbean? What is new?
The debt problems in the Caribbean are undoubtedly the result of massive build up of expenditure under circumstances where revenue collection could not keep pace. Hence, over time, fiscal deficits soared and governments resorted to borrowings to finance their ever expanding activities.
Logically, therefore, the debt problems can only be resolved if fiscal deficits are brought under control and our economies begin to register sustained levels of growth and development accompanied by larger revenue generation without higher taxes.
Clearly, therein lies the challenge. Huge fiscal deficits are unmistakably a drag on economic growth. Hence, one may conclude that generating higher rates of economic growth in Caribbean economies also requires some degree of control over our fiscal deficits.
As the report makes clear, reducing our fiscal deficits require action on both the expenditure and revenue sides. But reducing expenditure and increasing taxes are both contractionary fiscal policies with the potential to slow economic growth even further.
Hence, the economic reality facing the Caribbean at this crucial juncture is clear: To return our ailing economies to a sustained growth and development path that would provide a platform for reducing our existing debt burdens, we have to be prepared to accept some pain in the short term.
The more we delay reforms (on the fiscal side, in relation to debt consolidation, or even in relation to the structure and competitiveness of our economies) the more damage will be done to our economies and the remedies would be more costly overtime.
What about that simple message we seem not to understand?
(Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)