Features

Why the Caribbean is Digging its own Economic Grave

TIME TO CALL A SPADE

I want to shock you. I want to frighten you. I want to jolt you into the realization that we are in trouble; that you are in trouble; and so is your job, your home, your family, your sanity.

I want tell you that the world has changed forever; that the good old days of plenty will not soon return. Life may eventually improve, but certainly not for all of us. Those who survive these years of near-zero growth and disguised despair may see the future, but even so, it will not be back to business as usual.

I want this realization to cause you the kind of discomfort that prevents you from sleeping at night; causes you to rise up and demand better; forces you to be part of that long overdue revolution of thought and action which actually reverses St. Lucia’s quickening step to self-destruction. But before I hang you over the cliff and ask you to fly, let me explain the nature of our circumstances.

The global economic meltdown which rattled economies some eight years ago, continues to suppress global output, investment and growth. It has profoundly altered the equitable accumulation and distribution of wealth worldwide. Generally, the rich are richer and the poor are much poorer. And that goes for individuals as well as countries.

In previous recessions, oil prices sagged with lower demand and cheaper energy jumpstarted economic recovery. Not so this time. Instead, green energy has surged, surpassing fossil fuels in new investment and job creation: one sign that the world has moved on, and we have not.

TIMING
This has come at the worst possible time for us. We have mismanaged and sold off critical national assets. We are dangerously indebted. Our productive sectors are highly leveraged and overtaxed. Youth unemployment has surpassed 40%. Poverty is a persistent evil. Social infrastructures are severely under siege.

It seems after a few decades of post-independence progress, we abandoned good sense and have been undoing ourselves ever since. Where once we could wait in the shallows for some new economic wave to sweep us back to shore, this time our economies are stagnating close to rock bottom. The March 2017 IMF report on St. Lucia is very candid:

Unless structural reforms are implemented, rigidities in the labour market, high costs of doing business, and low external competitiveness will continue to weigh on growth.

This is not a temporary scenario. In St. Lucia, average growth rates have been erratic and declining for the last three decades. We have had marginal and negative growth for the last 7 years. Real wealth has shrunk. Simply put, we have been getting poorer each year. Our economy now feels like an over-exploited, under-fertilized field, yielding smaller and smaller harvests. Eventually, there simply will not be enough to go around, and we will have to fight each other for what little there is. Pessimists may well argue that the days of Malthus are already upon us.

FAMILIES AND HOUSEHOLDS
For many families, household income has shriveled. Life–cycle assets, like homes in safe middle-class neighborhoods, have been devalued by urban decay, crime and ghettofication. With less marketable wealth to collateralize or trade, personal savings are being consumed to support unemployed offspring and siblings. In some urban households, an elderly grandparent may well be supporting two generations instead of the other way around. And, there is no country garden to turn back to.

This implies that the social security pyramid is dangerously inverted. Instead of sitting firmly on a wide base of young healthy earners supporting the elderly and the sick, it is teetering precariously on its pinnacle. As such, we are losing the ability to sustain ourselves, to stay healthy, to educate our children, to maintain our homes and businesses. Social pressures, particularly in urban St. Lucia, manifest in declining civility, rising violence, crime and abuse.

BUSINESS
In the wider economy, businesses are similarly short of cash and savings. Cash reserves, where they exist, are earning 2% or less, and viable projects are hard to come by. Buildings, machinery, furniture and equipment have been allowed to depreciate. It is too expensive to replace, retool, update and upgrade. A large part of that expense is government taxes, fees, charges and levies which make business inefficient and uncompetitive.

Consequently, the country’s asset base on which to build a recovery has less value today than we might hope. It will not support a rapid return to normalcy. So apart from dirty drug money and other forms of dubious capital, we are facing very limited options.

BANKING AND FINANCE
In the financial sector, banks have lent out money that was not theirs, to people who now cannot repay because jobs and incomes have dwindled or disappeared. Households built on two steady incomes may now have just one, if they are lucky. With many loans gone sour, and others teetering on the edge of trouble, all banks have pulled back on lending. They can’t afford the risk.

The rich can still borrow but may not need to. The young, the poor, the marginal and inexperienced who really need capital, have little access to it. Government’s small business funds won’t change much. They are typically too little and too late, and are managed with no sense of urgency or practical understanding about entrepreneurial energy in the real world of risk and return.

Even more worrying, is that after 3 years of painful provisioning and negative profits, many banks are still hard-pressed to find viable borrowers with viable projects. Even government paper is no longer sacrosanct. Loans priced at 4.5% – about half of what they cost 5 years ago – are going a begging. A price war is in nobody’s interest, but there are few options into which to deploy excess cash.

Meanwhile, real estate, the underlying security for many loans, turns out to be overvalued. For that, we can thank those unscrupulous professionals who overstated property values to inflate their own fees: a crazy system at best. We can also thank our bankers. They accepted those values as the basis for bigger loans and higher interest income, risking more than those properties could ever generate by way of lease, rent or sale.

Now, prices have to come down, either in a managed slide or a resounding crash. Rents are trending down significantly and sales remain depressed. Still, many mortgages are at risk. With rising defaulters, few tenants and even fewer buyers, a lot of real estate is empty and deteriorating.

Banks ought to be able to foreclose, sell the asset, and replace depositors’ money. But alas, that is a long drawn-out process, particularly in St. Lucia where archaic laws, intended to protect borrowers, now protect defaulters. The result: toxic assets, impaired bank capital, no secondary market, and depressed lending.

Impaired bank capital is very, very bad for all of us: especially rank and file depositors whose savings are ultimately at stake: all those big and little people who scrimp and save their pennies and entrust them to banks in the expectation of getting them back again, with interest.

The preferable alternative would be to turn over toxic assets at a discounted price. This would make property affordable again and jump-start a cycle of resale and re-investment. That one adjustment could rekindle some growth, if only ministers of finance would take heed and act logically. What we now have is a muddle of antiquated policies tying up the economy in red tape and protracted litigation.

INVESTMENT, EDUCATION & PRODUCTIVITY
Our ability to bail ourselves out of recession is dwindling instead of improving. Typically, we hope and pray that foreign investment will bail us out. But whether it’s a buy-in or a buy-out, we go to the table with limited options. Indebted and cash-strapped, it’s hard to negotiate any good deal with your back against that wall.

One reason for low investment is that risks are too high and yields are too low. These are macro-economic issues: the direct result of inefficiency, low productivity and disincentives in an economy crippled by punitive policies and a regressive tax system. Translation: it is just too hard to grow a dollar into something more, given the infertile field that our economic landscape has become. Says the 2017 IMF report on St. Lucia:

Rigidities in the labour market, a costly business environment, and low external competitiveness severely limit growth prospects.

Labour is just too expensive for what it produces. Not that we want our people to earn less, but that we need them to produce more. That speaks to our work ethic as much as our international competitiveness, both of which are abysmal.

We need to enhance core skills: literacy, numeracy, comprehension, and communication; the ability to receive and convey instructions; to understand a manual; to absorb training; to process written and verbal information; a certain dexterity in problem solving; the aptitude for creative thinking in the classroom, in the field and on the job.

These are woefully inadequate in many school leavers less than 5% of whom will attend a tertiary institution of any kind. No surprise then, that hordes of young boys, done with learning, have little prospect but to become minimum-wagers, heading to construction sites without a discernable skill. They will be carriers of blocks and haulers of lumber; their book-bags now empty, except for the dry bread and sugary drink that keeps them going for eight hours.

These bright, talented, but untrained minds will earn too little to support themselves; much less to contribute to a household, or support the 1.5 children they are inevitably going to produce. This is where the downward spiral into endemic poverty begins.

One solution: open up all those classrooms sitting idle after 3:00PM each day, and retrain that entire demographic. In just over three years, we could teach them skills that the economy really needs and rekindle their interest in life-long learning. That would take them off the block and create a new cadre of certified artisans and trades people, hopefully with a world view of their own future.

More fundamentally, our highly egalitarian education system needs radical reform. It is now an expensive, unambitious machine with an inbred aversion to excellence. Its conversion into a network of modern, dynamic learning centres is the single most urgent and profitable investment our nation can undertake.

Failure to invest in our people will perpetuate outcomes already observed in our lead sector, Tourism. Government statistics confirm that while Tourism has been growing, it is not producing the expected increases in employment or growth. Ergo: there is a mismatch of objectives, policies, skills and incentives. The result: Tourism is growing by itself, for itself. Benefits may be accruing to capital, but not to labour.

INVESTMENT BY EXCLUSION
We maintain considerable government machinery for ensuring that our most lucrative investment opportunities are promoted overseas. Agencies, ministries, embassies, consulates and a host of ministers with unfurled wings and outstretched hands are in constant motion trying to sell off national opportunity to foreign entities.

The way it now works, bona fide but unconnected St. Lucian investors will never catch wind of business opportunities before they are traded – either in light of day or dead of night – to our betters overseas. Meanwhile, entreaties to engage the domestic private sector in growth-generating strategies fall on deaf ears.

We need to create more vehicles for broad-based local investment. Mutual funds, investment groups, credit unions, and pension plans are all potential sources of local capital. Instead of giving it all away, Government can take shares in ventures and hold these in trust for the nation. These can be divested to the general public in subsequent years. The assumption that we will not invest in our own strategic assets is wrong.

PUBLIC DEBT
Governments across the region, including our own, are up to their eyeballs in debt. St. Lucia’s current stock of debt is over EC$3.5 billion. Some EC$850 million falls due this year. With government expenditure racing ahead of revenue, it is difficult to see where such an amount will come from. Current options include roll-over, refinancing, renegotiation or default. At any rate, we will not be credit worthy for more borrowing any time soon. The IMF predicts:

Rising interest payments will add to expenditure pressures, leading public debt to an unsustainable path.

This comes in the wake of conspicuous investment in social rather than economic infrastructure. Several well-intentioned but unsustainable investments have produced no returns; only higher debt and higher recurrent expenditure. Says the IMF on St. Lucia’s public debt:

In the absence of corrective measures, financing difficulties will increase and force inefficient fiscal adjustment – typically by reducing already low capital spending – with negative effects on growth.
Part 2 in The Weekend Issue
[Adrian Augier is a development economist and St. Lucia’s 2010 Entrepreneur of the Year. A former Economic Assistant at the World Bank and Chief Economist in St. Lucia’s Ministry of Finance & Planning, he also served as Economic Policy Advisor in the Office of the Prime Minister and established the Office of Private Sector Relations and St. Lucia’s first Private Sector Development Strategy. He is also an award-winning writer and producer, and the ANSA

Foundation’s Caribbean Laureate of Arts and Letters, 2010. In October 2012, he received an honorary doctorate from the University of the West Indies recognizing his contribution to regional development and culture.]

For more information on this writer and his work, visit adrianaugier.blogspot.com

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