Looking carefully at the “Estimates” of the Budget 2004-05, a number of distinctive characteristics and policy issues are quite noticeable. These distinctive characteristics and weaknesses are far from new, and are briefly discussed in this article.
First, the continuous growth of government spending usually without the corresponding increase in tax revenues, coupled with efforts to finance fiscal deficits, has shifted the emphasis of policy towards financial control and away from state expenditure planning. However, budgetary policy can make an important contribution to economic growth and employment, and can help through reorienting tax receipts and expenditure functions towards support of government and private investment and other spending conducive to endogenous growth and competency. The government has a range of different policy instruments for achieving these objectives, and the main stimulus must come from fiscal policy and targeted investment.
Faced by the difficult realities of budgetary “stress”, a proactive fiscal policy would emphasise a prudent government expenditure management and planning instead of superficial macroeconomic accounting (i.e., more fiscal spending on the “accelerators” of national development and less spending on unnecessary or non-essential types of fiscal expenditure). On the other hand, stabilisation need no longer depend on the application of neoclassical/neoliberal policies in The Bahamas, because stabilisation objectives can be achieved within given volumes of government revenue and expenditure by altering the structure of taxation and the structure of spending. Indeed, the economic effects of the country’s budgetary policy depend upon the structure of taxation and the composition of government expenditure (which poses a great difficulty for the country’s endogenous development), the relationship between the type of tax revenue and the direction of fiscal spending, as well as the power which social classes, interest groups and powerful interests exert on various state activities.
Second, around three quarters of the Recurrent Expenditure of the Bahamian Budget has been dedicated to “Personal Emoluments and Allowances” plus debt repayments, while the levels and the shares of both Government Capital Expenditure and Social Expenditure are low. In other words, there are inadequate funds left for Social Policy and Welfare as well as for significant government investment. As an explanation, it has been argued that politicians frequently use jobs in the public sector and government enterprises to reward political friends, so payrolls swell with people whose qualifications for employment are mainly political connections. In a small society like The Bahamas, the state is a large institution as an employer and dispenser of resources -hence the intense desire by various groups, not just special interests, to capture it.
Furthermore, there are ups and downs with the capital expenditure figures, especially with the figures of “key” ministries for the country’s endogenous development like the Ministry of Works & Utilities (HEAD 33, CE-15), Ministry of Education (HEAD 38, CE-20), and Ministry of Agriculture, Fisheries & Local Government (HEAD 56, CE-33). If we look at the figures on page CE-33 in particular, we will see that there is a provision of B$ 50,000 for a “Pilot Food Processing Plant”, whereas there is less B$ 300,000 for “Promotion of Agro Enterprises” over the period 2004/2005 (these funds are clearly inadequate to boost local agro-industrial production). More than this, no technically proficient, thorough strategic plans for agricultural growth and industrial development have been formulated so far. Moreover, it would be interesting to know how many scholarships were given to young Bahamians to study areas such as food science, food technology, production engineering and the like during the last years or whether the relevant programmes for advanced training have been put in place.
Although the further development and expansion of services (mainly financial services and tourism) in addition to correcting macroeconomic framework conditions are being emphasised, the construction of a production-based approach to endogenous development and a much sharper focus on strategic industrial policy, which are absolutely necessary to resolve the country’s deeper development problems, are still being neglected. Indeed, this issue is particularly important especially when considering the Bahamian trade balance deficit (see the Central Bank of the Bahamas, “Quarterly Statistical Digest”, February 2004, Table 9.2). The trade balance deficit was B$ 782,355,000 in 1991 and went up to B$ 1,520,961,000 by 2000, which means an increase of almost 100% during the 1990s. In other words, there is a merchandise trade deficit CRISIS. The economy produces too little and, therefore, the country cannot trade much.
Third,Government Ministries & Departments, BAIC, and banks prefer using financial incentives and/or financial assistance schemes -usually with a short-term orientation- as a means of promoting local agro-industrial production. But the empirical evidence and available statistics clearly illustrate that these policy measures have not only been unsuccessful and inadequate to boost local production growth but have also encouraged clientelism, rent-seeking and squandering. Thus, common sense dictates that we must change both logic and policy instruments. Instead, planned productive investments should be emphasised.
In reality, the state as a direct player has a key role to play in order to boost capital accumulation in service of development given that planned investments have much to do with production capability: extension and improvement of physical, business and social infrastructure; expenditure on industrial plant, machinery and equipment; a high level of education and knowledge, learning-by-doing, upgrading the qualifications and skills of the labour force; the promotion of innovation and research; and strategic management and development of entrepreneurship. Instead of subsidising particular firms, the state can finance and, especially, direct the development and transfer of new technology and innovatory activities that can be used by specific dynamic industries in order to improve their efficiency, profitability, and competitiveness.
Thus, such a framework seeks to link endogenous technological capabilities and technical progress occurring in the targeted sectors, to growth and change in the Bahamian economy as a whole. These prioritised industries can utilise the modern knowledge -such as new ideas for raw materials, product designs, manufacturing processes and, ultimately, commercial products- and transforming this modern knowledge into new technologies and products. In addition to funding R&D, Developmental State action should include government support of technical knowledge and new manufacturing techniques, especially to the small firms, which often lag behind in technological development.
In short, this local production growth, supported by suitable institutional and political initiatives and based on a long-term vision of development, is the best solution to the government’s development policy “deficit”. And perhaps, this is the worst “deficit” that the government has to come to grips with. The Bahamian economy could have a better future, should these urgent developmental issues be tackled soon and successfully.
Nikolaos Karagiannis, The Bahama Journal
