Friday, September 24, 2010

What The Bahamas could have done!

Everywhere I turn, persons are asking me: "what has The Bahamas done during this economic downturn?" People from all sides, all spectrum's and all colours feel as if more could have been done to assist people during this economic downturn. Some have said that we have done enough. Perhaps it both could be right. Then again, it could be wishful thinking on all sides.

There is no question that conventional wisdom on recessionary relief was used for Bahamian economic policy making during this downturn, that is; 1. Welfare support to the poor and new poor and, 2. Tariff/Tax cuts to the private sector- even if both had to be revoked, as if the government was the Indian giver of last resort.

For the first part, welfare spending in The Bahamas went in 2008 and promoted as a way to help people to sustain the damages of the worsening economy. Two problems I have with this. One is that the governmental systems, particularly within the Social Services Department, is a little frayed and to some extent, outdated to handle the influx of persons they had received. Not only that the numerous reports from the Social Services Department showed this, but also the means testing apparatus to assess persons who may need assistance, is also a considerable challenge and even more a challenge when bearing in mind the personality issues that come about as a result of a lack of policy coherence and standard means testing for assessment.

The idea that certain persons didn't truly need the support, or would rather have spent their discretionary income on other non-essential items and in turn sought social support to subsidize their income and lifestyle, was something that was noted by The Minister of State for Social Services. In addition, in the beginning of the increase of funds to the social services department and prior to the Minister's acknowledgement, the Director of the Department went on record in stating that Bahamians, generally, do not take advantage of the resources made available. So, along with a lack of policy coherence, we have a pitfall with regard to economic relevance.

The fact that we need public sector reform, could not have been underscored any better than it has been with what we have experienced with this admitted, in-efficiently ran program, which did more to subsidize supermarkets rather than stimulate growth with creating jobs and investment.

The second issue is that tax cuts and exemptions were given to businesses at large in 2008/09. It was something that would keep business open and able to import cheaply and make goods less expensive, helping families with keeping cash in their pocket.

The problem is that it widened the fiscal deficit and deepened the public debt. The same has happened in America pre-economic crisis and post financial crisis; in that tax and tariff cuts were used to spur economic activity through the free market to keep investors and consumers confident, but the consistent recessionary pressure did more damage to the government's fiscal credibility as economic activity did not rise as a result and employment conditions worsened, which lessened economic transaction in which to tax.

This in turn, particularly in the case for The Bahamas, led the government- as with other governments world wide but for differing, prioritized reasons- to sacrifice economic growth and relief to businesses and the consumers who was intended to benefit, for fiscal austerity and even more so, as an attempt to salvage it's macro-economic credibility to investors in The Bahamas and abroad by increasing and stabilizing government revenue.

This has put The Bahamas back at square one; the social support has been downscaled after the recent 2010-2011 budget and on a small scale the year before, or negated due to the higher taxes and also the higher taxes/tariffs within the same time frame. This, while the economy is still slightly depressed, would more than likely dampen investor appetite while not solving the macro-economic issues with regard to long term and short term growth- with the government's fiscal issues still not yet fully clarified, during this unconventional and extraordinary economic downturn.

One thing that can be used as an anodyne to this situation, is if construction related activity is spurred either through state action (with appropriate targets set and reappropriations of rents set at key cyclical drivers), or at the cost of large scale developments that can employ mass scales of persons, or with private home buildings, private infrastructural renovations tied to a program geared to stimulate activity first, rather than provide tax breaks in the hopes it spurs activity, first. Every Bahamian construction affiliate, whether they are prime contractor or apprentice with hammer in hand, need to have a chance to work at a decent price and The Bahamas as a collective needs to benefit from that incentive.

A second thing is that an import tariff reduction program to the private sector, should be considered and tied to private sector employment; i.e., a program designed to create private sector employment, with subsidized salaries- if need be- by the government, through the reduction of tariffs for companies that wish to participate on the basis that they will employ a certain amount of individuals.

A third place to look, and with a more controversial issue, is with the cutting of the prime Central Bank rate; and the cutting of that rate, to supplement supported, commercial bank lending programs to businesses and consumers. While it [cutting the prime rate] may be less effective than it would have been had it been done at the onset of the crisis, with liquidity levels in the country now more than adequate, the government should be in a position to micro-monitor and give strong support to this segment of the market system and say firmly that it is in a position to stand behind the financial system in case the situation worsens, or in the event that new loan repayments may be affected and at risk of non-performing in the short term.

Banks are in the best position to pick the winners in this instance more than the state. But the state must be in a position to back economic activity and its inherent risk, and to some extent short term failure, at any cost, as a way to assure the public and as a provision to wash away the negative effects of action as it tries to support a greater good.
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