By: Brian M. Francis (Ph.D)
What if I told you the following story? Within the financial industry, long-term interest rates are higher than short-term rates. That based on the manufacturing survey, the manufacturing index levels have fallen but still well above the 100 reading. Consumer confidence is still on the up-and-up. Jobless claims continue to improve and currently stand at the lowest level since the global financial and economic crisis of 2008/2009. Building contractors are the most pessimistic about the construction industry since 2008/2009.
Despite all the economic woes facing the region that luxury car sales have been at their highest levels in over a decade. Every country has managed to grow its economy by no less than 2% in real terms in the past five years. Fiscal and debt problems remain among the top areas of concerns to most citizens of the region. Inflation is generally under control with average prices increases below 5% annually in most countries. Cuts in social programmes are eminent in some countries while others remain fully committed to protecting and assisting the poor and vulnerable among them.
That story is based on a fictitious set of countries in a particular region of the globe. But what if the story was actually real? How would you have characterized the state of those economies? Are they countries doing well economically or suffering? What if you concluded that the situations described above amount in totality to countries facing severe economic difficulties? What then do you do by way of recommendations to the various governments for solving the economic problems identified?
You see, finding solutions to economic problems should be an art or even a science. Solutions must be consistent with the actual reality facing the countries and not based on some ideal that remains buried in one’s mind. Like the typical medical doctor, a full diagnosis must be done before medicine can be recommended. In short, the cure must fit the medical condition from which the patient is suffering. Would you as a medical expert give a patient suffering from a minor headache an injection designed to treat a bacterial infection?
You see, much has been said about the current economic environment plaguing the Caribbean since the 2008/2009 worldwide recession. Top among the list of items is the inability of most of the countries to generate, much less sustain, any significant rates of real economic growth. What that failure means is that it has become virtually impossible for those countries to increase tax revenues without having to resort to higher marginal tax rates on personal income, corporate earnings and properties, among others.
Furthermore, most of the solutions we hear about are higher governments’ spending and initiatives to attract foreign investors. Isn’t that interesting? Why? While the need to attract more foreign investors is no doubt a noble gesture on the part of our governments and the impact if successful on our economies could be quite strong, there is an easier solution that is within our reach. Is that so?
Join me and scan through the balance sheets of many of the local banks and credit unions operating in the region and you will find a hidden treasure. The banks are sitting on liquidity far and beyond what is required to maintain a strong financial system. Unleash the liquidity to businesses and you create a stimulus which has never been seen before in our region! Do you doubt me?
Imagine you are a small manufacturer and have the opportunity to export your products. You get orders but need cash to buy the input materials. Getting a line of credit or a loan today from a bank is almost impossible. But if you were able to get one, you would then hire workers, produce more output, export, and create economic activity and employment opportunities for many. As people generate income from employment, they are able to purchase goods, improve their standard of living, acquire new skills and invest in their future.
So why are we not doing that here and across the Caribbean region? To begin with, many of the banks doing business in the region have to change their attitudes completely. They have to understand that financial returns cannot be realised without some elements of risk. In fact, several models have suggested a way that financial institutions can benefit by way of higher returns on their investments when exposed to greater risks. Too many of our banks are risk averse or risks’ haters and that stance define quite often the kinds of lending policies adopted. The net result is that seemingly good investment opportunities go a begging and economic activity suffers as a consequence.
Further, regulators have to create an enabling environment to promote commercial loans and not just jumbo loans for hotels and other considered “safe investments”. What about increased lending to our agricultural sectors? What about making more loans available for those interested in serious manufacturing especially for the export market? What about greater access to credit to entrepreneurs with brilliant ideas for the creating and building of small businesses?
The more this writer reflects on the economic challenges facing our country and many Caribbean countries, the more convinced he becomes that our economic problems are not insurmountable. They can be resolved amicably if the right thinking prevails and the right things are done by commercial banks and other key players in our economies.
Put differently, the solutions to the economic problems facing the region are unmistakably not beyond our reach. It is just the will!
Brian M. Francis (Ph.D) is a Senior Lecturer in the Department of Economics at the University of the West Indies, Cave Hill Campus, Bridgetown, Barbados. EMAIL: firstname.lastname@example.org