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AmericasNovember 7 2005

In defence of unorthodox economic strategies

Barbados premier Owen Arthur tells James Eedes what lies behind his economic policies, which he continues to follow against the advice of the IMF.
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Owen Arthur, the prime minister of Barbados, has mounted a staunch defence of his government’s economic policies in the face of IMF concern and signs of waning political support at home.

In an interview, Mr Arthur says that unique circumstances demanded an “unorthodox” solution, taking into account external forces – such as trade liberalisation, mandated by the World Trade Organization (WTO), and regional economic integration – that are compelling the government to take a flexible and innovative approach.

Barbados enjoys the lowest rate of poverty in the Caribbean and one of the highest per capita gross domestic products (GDP) (on a purchasing price parity basis) of $17,169.

It is also, at number 30, the highest ranked Caribbean and Latin American country on the United Nations Human Development Index. But solid economic performance throughout the 1990s has given way to macroeconomic imbalances since 2001. The 9/11 terror attacks on the US had a particularly strong impact, severely denting the island’s mainstay tourism and financial services sectors.

In response to this, the government implemented an expansionary public investment programme designed to revive economic activity. This led to a sharp deterioration in the fiscal deficit from 2% of GDP in 2000/01 to about 13% in 2002/03. As a result, the public sector debt/GDP ratio rose from 74% in March 2001 to about 87%, a factor that prompted the country’s external credit rating to be downgraded in 2004.

Double trouble

Mr Arthur says that Barbados has taken a double hit. In addition to 9/11, the country has been obliged to meet its WTO commitments on trade liberalisation. This has hurt the country’s small export sector and triggered a surge in imports, which has also been fuelled by strong household demand. The country’s current account has slipped further into deficit, he said.

After flattening post 9/11, the economy has bounced back, growing by 4.4% in 2004. Economic expansion is expected to be more modest in 2005 but it is still expected to grow by about 3%. Mr Arthur says this rate is sustainable in the long term, given his country’s level of development.

However, the IMF wants the government to cut back, citing current expenditure estimates that predict the fiscal deficit will widen in the current fiscal year and the debt/GDP ratio will increase to 88%. This far exceeds the Caribbean average.

Need for spending

Mr Arthur argues that government spending is still necessary to transform the economy. “In a WTO-organised world and a likely open hemispheric economy, Barbados has very limited scope to expand its manufactured export base. We have to be an exporter of high quality services,” says the prime minister.

“But in a small country like ours, where the private sector is made up of a collection of small companies that are generally under-capitalised, private companies will not take on risk without government concessions or guarantees. They want the government to be with them in public-private partnerships because that is the only way they can reasonably achieve a satisfactory return on capital for the given risk. The orthodoxy that the private sector is the only engine of growth is untrue.”

Profitable niches

Mr Arthur says that Barbados must seek new, profitable niches in the service sector. One such area is health tourism, providing Caribbean residents with sophisticated, high quality medical services that are not available in their home countries, he says. Also, Barbados has long invested in education, giving it an advantage in terms of skills.

The prime minister also points to retirement housing as an area for potential growth, enabling Barbados to compete with Florida. Ongoing investment in traditional sectors such as tourism and international financial services is also needed to keep these industries at the cutting edge.

“Increased public spending has gone to investment rather than consumption,” says Mr Arthur. “We are realigning the productive base.”

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