Economic Growth. A policy prescription for the government of The Bahamas.
15 January 2009
The Nassau Institute
Almost without exception, talking heads in The Bahamas are suggesting that Government take action to stimulate the economy. It is not clear if these recommendations are based on economic principles or on the continual drone of American politicians calling on President Elect Obama to “do something” as the Bush bailout has yet to show positive results.
The Causes of Economic Growth
Economic growth in the 20th century was believed to be dependent on government central planning, but history has shown that immigration, entrepreneurial initiative with free trade in a capitalist society, produce jobs and economic growth.
As Reuven Brenner, the author of Labyrinths of Prosperity pointed out for a Cato Institute Policy Report, Armenians, Chinese, Hugenots, and Jews and other emigrants “were driven out of their homelands by politics and regulations.” yet, “the movement of the most gifted and energetic of those people led to many of the world’s economic “miracles”.”
Brenner points out the economic miracles after World War II in countries like Singapore, Hong Kong and “the almost forgotten example of Scotland” all tolerated differing religions, honoured property rights with “unhindered trade and financial innovation”.
Development economist, the late Peter Bauer, refuted “that poverty is self-perpetuating, and central planning and large-scale capital investment are prerequisites for growth. Bauer demonstrated that foreign aid, restrictive immigration and population policies, and trade barriers hinder economic growth.” ( CATO Institute )
How does The Bahamas measure up?
On the surface, most Bahamians would agree that The Bahamas meets the Brenner criteria of religous tolerance, property rights and free trade.
However, immigration policy is upside down for economic growth in that it limits entry of skilled well educated immigrants, yet has difficulty controlling immigration of unskilled poorly educated workers.
In the best of times there is a tendency for government to expand, replacing or interfering with private sector growth. Should the Bahamian government use monetary policy for job creation (stimulus), it replaces private initiative with socialist policy that undermines the capitalist arrangement.
Lawrence Reed, president of the Foundation for Economic Education (FEE) explains Laissez Faire and Economic Growth like this:
“Laissez faire, loosely translated from the French, means "to leave alone." It refers to the economic system we more commonly call "the free market," "private enterprise," or "capitalism." ……….
Mr. Reed goes on to detail the benefits of a laissez faire economic system like respect for private property, the freedom to own a business and free markets in trade without price controls and excessive government intervention.
He notes this would limit government to a "nightwatchman" function, which would ensure the police and courts function so contracts are not broken. Disputes would be settled peacefully, rights upheld, and society is defended from internal lawbreakers and aggressive enemies from abroad.
What can The Bahamas Government do about a slowing economy?
Options seem limited for The Bahamian economy in a slowing world economy, but there are initiatives that can be taken by the government that would not increase its size in relation to a declining Gross Domestic Product.
Through most of the eighties there was little growth in the Bahamian economy. By 1992 it had become negative. The new administration after 1992 introduced policies to encourage private investment. Those policies reversed the downward trend the country had been in for 10 years or longer.
The anticipated decline due to changes in the world economy should be met with a scaling back of government expenditure and controls and encouraging investment through laissez-faire principles, at the same time shoring up the rule of law, protection of property and enforcement of contracts.
Even though this strategy has proven effective over the years, immigration promoted by the government invites political retaliation. But that should not deter inititiatives to expand immigration if only in targeted areas at first.
A multifaceted approach would be to encourage investment by locals and expatriates by reducing import taxes on all products for development and cessation of all other business taxes for the next five years.
The Financial Services Consultative Forum, Immigration Sub Committee offered a reasonable approach to immigration as it relates to the Financial Services Sector in 2003. ( See here... and here... ). The recommendations outlined then are no less relevant today or to other industries.
Conclusion
But, for this to happen the political directorate must be mature enough to accept and promote their role as little more than facilitators for growth and not be directly involved in business activity.
As Brenner noted in 1998:
“We can be confident that the idea that governments can frequently do more than that (create institutions that make it possible for entrepreneurship and financial markets to flourish) is a consequence of government subsidized myth creation.”
In closing, institutions are important, and if the government implements the wrong policies in a knee jerk manner thinking they can create wealth, The Bahamas will soon relinquish its position as the economic power house of the region.
Reference Material:
Cato Policy Report May/June 1998: The Causes of Economic Growth (PDF), Reuven Brenner
Comments
Lester R. Cox - 24 January 2009 13:01- Politics & Policy
- Rick, happy to. There is a tendency to confuse cause and effect. Countries do not grow because of immigration or respect for property rights (China is a perfect example, there is no respect for property rights or immigration). The only difference between China and Zimbabwe is the Chinese have local businesses that have a strategic manufacturing advantage and efficient ports vis-a-vis other local businesses from other countries. If Zimbabwe had strategic advantages their political situation would not matter. Countries grow for three reasons as identified by Adam Smith in 'The Wealth Of Nations', division of labor, efficient capital and free trade. America never practiced free trade. They practice targeted free trade which simply means you do whatever is necessary to make sure you create and protect strategic local businesses until they become world class. This has been the practice of every developed country in the world. Pure free trade is a myth. History does not support the notion. So, when CATO writes good pieces and then arrives at nonsensical conclusions, it makes you wonder if their ideology clouds their scholarship.
Rick, an important Institute like yours ought to be careful that your free market ideology is historically accurate because Governments are charged with making sure the environment is conducive to local world class organizations. Why? Countries do not compete against each other unless they go to war. Businesses do. So, the competition is with BMW, Toyota and Ford, Becks, Heineken and Bud light, Citibank, UBS and CIBC etc. What the Bahamas needs is not some ideological free trade nonsense. We need a targeted country strategy to develop world class local businesses and homegrown expertise. In the Bahamas like in America, India, China, England etc, there is no policy without politics and politicians. Let's get busy influencing the politicians on either side and stop fighting the 1960s battles to minimize the political directorate.
I believe your Institute can help set the basic framework to help us think world class if you can get beyond the ideology. For most countries politics and policy come from the same stream. Free trade ideology or relaxed immigration policy are not what we need to reduce Government influence. We need to help Government become smarter at long-term policy making and sharing power with groups like yours in the private sector. By-the-way, the Bahamas is not a powerhouse, it is more like a 'doll house'. Any country that is dependent on foreign expertise and capital is not really a country at all. In the Bahamas we have a name for fake development: it's called 'profiling'. Let's stop 'profiling' and build a real country.
Randolph A. Williams - 22 January 2009 05:27- Economic growth in the Bahamas
- The downturn in the US economy in particular should awaken The Bahamas from its dependency on services as the major source of growth. Both the government and people need to build a diversified economy that would withstand economic shocks. First The Bahamas is relatively underpopulated, but research is needed to determine the skills, financing and new sectors of growth. Second, the acquisition of know-how(technological capability) is not a costless excercise. It requires investment as well as protection to nurture the new capability. There is no need to fear protection once the protected sectors are progressively exposed to trade. To start the process the government can invest in scientific and technological skills that private enterprise would not normally find attractive. I cannot think of any reason why the Bahamas cannot develop a manufacturing sector as Singapore did and is doing. It may need to develop an environmentally sustainable manufacturing sector.
Rick - 19 January 2009 17:51- Econiomic Growth: Policy Prescription
- Thanks Lester.
Free Trade, immigration and respect for private property are policies that are proven to help economies grow.
Take Zimbabwe for example. None of these policies exist and what do we have? Abject poverty and failure of the state.
Government policy is important. It is the wrong policy that hurts as we point out.
We also point to a targeted immigration policy. Something you also suggest.
Your points about know how are good but suspect we would get there in different ways. You wanting government to lead the way, and me wanting the private sector to do what it needs to do.
Would you mind elaborating on the "made up facts" please?
On one hand you seem to agree with the article, yet dismiss its premise because of the CATO Institute?
All the best,
Rick.
Lester R. Cox - 19 January 2009 07:48- Economic Growth & Made Up Facts
- Good piece. The problem is with your conclusion and places like the Cato Institute is their arguments always fall in on themselves. Places don't become great because of free trade, immigration or respect for property rights per se. They become great because of direct Government policy or strategy as in cases of Singapore and China or laissez faire economics and luck as in the case of America and parts of Europe. America is an environment where you can do anything and oftentimes by luck, immigration or careful regionally planning like in cases of Hollywood and Silicon Valley in California, financial services in New York or Universities in the Boston area, the locals develop deep know-how that can be exported. The know-how was not developed for export. The know-how was developed to serve the local environment in most cases. The implication for third world countries like the Bahamas is to develop deep know-how around certain key areas like financial services, tourism, specialized farming and fisheries that'll put us in position where we can be world class while serving the local environment. The trick is to let that know-how develop in an autonomous way without too much Government and through a targeted immigration policy. And if the world wants our stuff, we'll sell it to them. Don't make up facts to support ideology.
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