A call for a national economic plan
By David Frazer
In the 1960s, Germany experienced one of the world’s most impressive examples of economic growth and development that raised the standard of living for the Germans exponentially. Its success was due to a number of factors, not least of which was its ability to organize its industries, plan for the future and engage stakeholders at all levels in the work of economic growth. If one posed the question today where is the economy of The Bahamas headed in the next five to 25 years, it would be difficult to provide a viable answer partly because of the lack of direction in state policy.
The recently published budget and budgets of past governments confirm this notion. The 2012-2013 budget proposes short-term bandages on an economic wound that runs deep through society, addressing symptoms of a much larger structural problem. It is now time to focus our energies and resources on a cure to our economic illness. It is time for a national economic plan.
Highlights of the government’s 2012-2013 budget
• Expanding the role of the Bahamas Development Bank and the Bahamas Agricultural and Industrial Corporation to go beyond lending money to provide equity, credit guarantees and marketing/accounting support is a promising move to support small business and Bahamian entrepreneurship.
• Tax reform was four pronged. The government will establish a central tax agency to improve its ability to collect taxes. It will reform the property tax system including a cap on property taxes. It will look to reducing leakages in the tax system and to charge international fees for aircraft passing through the country’s airspace. This effort to raise government revenue is commendable but insufficient; the expected revenue which incorporates these ideas would still leave the country with a massive expenditure-revenue gap of nearly $300 million.
• A debt management committee will be developed to implement a debt management strategy.
• A plan to rescue Grand Bahama includes tax reduction and a Ministry of Grand Bahama.
• The jobs program of the previous government has not been continued. Described by the current government as “lacking focus”, the jobs program attempted to alleviate the unemployment situation particularly for youth. The problem is that the new government has not proposed an alternative to reducing youth unemployment.
• A mortgage relief effort aimed at reducing loan payments for distressed mortgage holders has received scathing international criticism. Standard & Poor’s, a reputable rating agency, responded to the government’s promise to help mortgage holders by suggesting that the government may face lower credit ratings if it continues to spend more than it earns.
• Tax concessions laced the budget and there was an explicit promise not to raise taxes for Bahamians. This combination of tax reduction and mortgage relief spending has cast doubt on the “government priority” to reduce national debt.
Let’s be smart about debt reduction: Focus on growth
Given the extent of the global economic recession, the government has been forced to play a greater role in economic activity. As in the United States, government spending grew to supplant the lost economic activity after the recession. While we must reduce the level of government debt, we must be careful not to damage the economy while doing so. One can look to Europe for an example of how austerity soon after a recession can be detrimental to economic growth.
At the same time, government must not be frivolous in its spending. Promises in the budget to help individuals make home repairs on top of aforementioned mortgage relief may be politically successful but do not spur further economic growth.
We hope that political leaders will go through the budget, line by line, and re-allocate/reduce unnecessary expenditure. As much as is possible, government spending should be guided by the principle that every dollar spent directly increases the Bahamian GDP by more than a dollar and/or increases productivity. Under this principle, unnecessary spending may be brought to light.
Hypothetically speaking, if the Bahamian economy were to grow at a level of six to eight percent, we would not be talking about government debt. The reason why we should prioritize economic growth over debt reduction is because greater economic activity generates greater revenue for government. Greater revenue reduces reliance on borrowing and so, debt would fall over time. Further, higher levels of growth usually lead to lower levels of unemployment, more opportunities for individuals to make money in order to pay their mortgages, to pay for college, or to start new businesses. But, in order to achieve such levels of growth, we need a plan.
The need for a national economic plan
Just over 26,000 Bahamians searching for work are unable to find it; thousands more have given up and left the labor force; unimpressive growth levels in the U.S. may dampen growth of tourist arrivals in the foreseeable future, and our own growth projection is stifled at less than three percent for the next few years. These facts underscore a structural issue in the economy. In essence, overreliance on tourism has limited the scope of economic growth. We have failed to use the resources tourism has afforded us to develop other industries as a means to secure future growth.
We should get the largest stakeholders and experts in one room – business leaders, academics, government officials and local/international investors – to search for and implement a national economic plan with an aim to secure high levels of growth into the future. Such a plan should be medium to long-term in focus and grounded in rigorous research on the potential for local business expansion, export of Bahamian franchises, products and services, and diversification within and across industries.
A plan of such magnitude is important because it provides an industrial framework for growth and will provide a sense of security for local business owners who would be able to plan the development of their own enterprises as a result. A plan could create a momentum for the growth of certain projects and industries. Finally, it would enable government to plan other areas of society such as new education and training initiatives, infrastructural projects and immigration policies that correspond with the national plan.
Our current economic realities call on us to make big decisions to secure a prosperous future. Let us plan our way to economic vitality and growth.
• David Geraldo Frazer is a master’s degree candidate at Johns Hopkins University studying international economics and international relations with a bachelor’s degree in economics and business. He is also a free lance consultant and can be contacted at: dfrazer1@johnhopkins.edu
Jun 13, 2012