Other Issues in the “FTAA” Report

First Published: 2002-09-01

In a recent article “The ‘New Socialism’ in the FTAA Report” the author examined the Report made by Trevor Hamilton and Associates to the Chamber of Commerce. That article contrasted the politically correct economic development prescriptions of the Report with insights garnered from the past half-century of experience with growth.

This article examines three ideas.

Worker productivity.

The Report measures worker productivity in a way that appears highly flawed. The steps in this analysis are as follows:

1. The national productivity of Bahamian workers is measured by taking the Gross Domestic Product (GDP) of the total economy and dividing that number by the number of workers. According to the Report the national GDP per worker is $22,000.

2. Then the productivity of each sector in the economy is measured in a similar fashion, namely the GDP produced by that sector divided by the number of workers in that sector. This produces some interesting results:

o Electricity, gas and water $30,000

o Communications, storage and transport $29,800

o Wholesale and retail $20,700

o Other services (mostly government) $14,500

o Hotel and restaurant $13,400

The Report concludes that this shows “where the catching up [in productivity] is necessary and by how much.” The author does not cite any formal studies on productivity showing that the use of GDP data in this matter is valid nor how he got the basic numbers.

This analysis appears flawed because it does not take into consideration the differences in the use of capital equipment and labour in different industries. For instance, comparing worker productivity in capital-intensive electricity generation to the more labour-intensive hotels and restaurants seems like a real analytical “stretch”.

Furthermore, in this specific case hotels and restaurants are privately owned and must compete for both Bahamian customers and foreign tourists. The latter have the option to patronize tourist locations like Orlando, Las Vegas and New York City. BEC in contrast is a Government operated monopoly that has no competition, prices its product at three times Florida rates and has the right to give poor service without consequences.

The Report can lead the reader to the conclusion that Atlantis should be trying to catch up to BEC in worker productivity. That doesn’t sound reasonable.

Economic vulnerability.

The Report patiently describes the country’s economic vulnerability, its dependence on tourism, financial services and foreign capital inflows. It is true; the Bahamas is an extremely small country that has a narrow economic base. Its poor soils make agricultural self-sufficiency an undesirable policy objective and there is limited exportable mineral wealth…there is no oil, no liquid gold, under its pristine waters.

But it has “sun, sand and sea” located close to the most prosperous large country in the world. It has been positioned well to capitalize on one of the growth industries of the last half-century, international tourism. And…it has done so.

The problem is that the Bahamas appears to be a high cost competitor in the global marketplace. This is evidenced in many ways; the Report should display such data in order to give this problem a sense of national urgency and help create support for achievable remedial measures.

For instance, the privatization of BEC and a market-orientated regulatory framework could produce consistent and lower cost power. Such candor is absolutely necessary in order to overcome the apparent present consensus that “Good or Bad, BEC is Our Monopoly.” In this case a “We/Them” mindset trumps “Economic Self-Interest”.

Furthermore, this high cost character makes the country’s balance of payments position more vulnerable since it gives the country the aura of having an over-valued currency subject to devaluation. A country facing reality and systematically doing something about it is the surest way to change such a perception.

Joining a free trade regime.

The discussion of free trade is “tilted”. The Report contends that the range of products to import will increase when it joins a trading block and the Bahamas will become “a good target market for finished products”.

In fact, The Bahamas is a good target market right now. With relatively few exceptions its import duties are non-discriminatory so the consumer can buy the best product at the lowest price from anywhere in the world.

The questions not asked are –

“In a trading bloc will this ability to buy the best product at the lowest price diminish as the Bahamas trades concessions with its partners?” “Will The Bahamas now be forced to import higher cost poorer quality merchandise from a trading bloc in return for a concession on immigration or on the protection of local Bahamian services?”

The Report contends that the demand for reciprocity leaves the Bahamas without any option other than “to become a member of some of the free trade regimes.” The author should list the options including not joining a bloc and yet realizing the benefits without the administrative and compliance costs of joining.

The Nassau Institute

September 1, 2002

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