The Challenge to Bahamian Policy Makers

First Published: 2004-04-16

Over the last decade developing countries have absorbed economic shocks originating in Mexico, Thailand, Russia, Brazil and Argentina not to mention the economic fallout from the World Trade Center bombing and a world-wide terrorist war. Every country is affected; and relative to the early 1990s developing countries are dealing with them in an era of reduced international capital flows.

However, the most important source of developing countries' woes is not their exposure to external shocks but their own unique problems involving structural economic weaknesses and the lack of political will to undertake difficult reforms. 1

The conflict.

In December 1994 at the Miami summit of the Americas the Bahamas along with 33 other countries recognized that the key to prosperity was "trade without barriers, without subsidies, without unfair trade practices, and with an increasing stream of productive investments." On paper the "34" committed themselves to construct the Free Trade Area of the Americas (FTAA). At that time it was clear that sustained economic growth occurs in an environment that embraces the rule of law, the rights of private property and freer markets. FTAA ratified the abandonment of Communist and Socialist economic dogma. Nevertheless, ten years later this hemisphere has grown a new generation of populist leaders that are distancing their countries from the US and campaigning against free-market policies.

In the case of the Bahamas, it signed the 1994 Miami accord but never embraced its principles. There is a very active conflict between the economic rationality required in global markets and politics and life as usual.

And this conflict can be seen in two examples.

Example #1, Investment.

The economic growth of 1993-2000 was substantial, 4.1 percent per annum in real terms. This was a major change from the economic stagnation of the prior ten years.

In 1992 the Hon. Hubert A. Ingraham after entering office literally got on a plane and toured the investment capitals of the world. His message was "The Bahamas is a good place to invest" and he promised a "fast track" through the "bureaucratic maze". He created a fast track for some investment proposals but did not eliminate the "bureaucratic maze" for the balance. However, foreign direct investment (FDI) triggered prosperity, a Bahamian construction boom and a sizeable redistribution of income that favored the lower 60 percent of Bahamian households.2

The Hon. Perry Christie in his successful 2002 campaign for Prime Minister portrayed the incentives offered to foreign investors in the 1990s as "giving away the country." He pledged change. Unfortunately, twelve months passed after the election before his Government seriously engaged major foreign investors about their intentions. Foreign direct investment slumped, reducing economic activity and government income and threatening the balance of payments.

The press attributes the continuing slump in FDI to the Prime Minister's management style. However, the Bahamas acts as if it would prefer to live without foreign direct investment; and, as a result it retains principles, procedures and an administrative structure that do not nurture investment.

Example #2, Telecommunications.

In response to international pressures to privatize the telephone company the government over a decade pursued a program that included the retention of a European investment adviser, the costly downsizing of staff and the long overdue development of acceptable accounting statements. It ended in a failed tendering process.

There seemed to be no clear consensus on the need to privatize although international experience clearly showed the benefits. For instance…

A 1999 IMF study of several thousand privatized firms in seven Eastern European countries3 concluded that their average annual productivity growth was five times the rate for state-owned enterprises.

When the study examined various kinds of privatization it concluded that –

* "Start-up firms are clearly the best performers, showing the greatest efficiency gains;

* Firms dominated by outsiders, especially with foreign investors involved, generally show good improvement;

* Insider-dominated firms are the least efficient among the newly privatized" and

* Labor-managed firms "grant excessive wage increases, maintain excessively high employment and undertake insufficient investment."

In its effort to privatize the telephone company the Government did not recognize the need for increased efficiency and what that means for the country's competitive position. Instead it sought to maintain its control of the enterprise, jobs and ancillary business opportunities. It interpreted privatization as the sale of a 49 percent equity interest. Under these terms no deal could be struck at a price that the Government found acceptable even though the three finalists in the tendering process were Bahamian led consortiums. It acted in "traditional ways" and in the end it failed to devise a successful privatization plan.

Change.

These two examples suggest that Bahamian society responds in ways that are now inappropriate. For what comfort that it is, all countries trying to promote sustained economic growth have this problem.

Growth requires changes in existing relationships; and these changes produce material "winners" and "losers". The losers are often prominent and politically connected; the winners are more diffused and less articulate; but generally there is a net gain to the economy.4 However, the politics of the situation, the "political dynamics", can block change from taking place.

Avishai Margalit, the contemporary Israeli philosopher, provides a simple framework for thinking about this process. 5 He contends the following —

1. Every culture or community has a shared memory or "knowledge from the past" that includes "not only the memory of what happened but also [a vicarious] participation in it." This memory includes tradition, the line transmitting an interpretation of the past that is "sanctified, authorized, or even canonized in such a way that it is immune to challenges based on alternative historical lines." Memory, in fact, becomes myth not an accurate account of facts and events.

2. Furthermore, all humans secure their sanity and meaning in life in large part by their relations with others. Margalit breaks these relations into two categories: "thick", those that are "near and dear", and "thin", those that are more remote. Both of these are "anchored in a shared past or moored in shared memory." 3. Each society develops an ethical standard for how members relate in thick relations and a moral standard for thin relations. Every country has its own institutional setting that reflects its shared memory, ethics and morals and an operating political dynamic that is critical in creating, sustaining or frustrating economic growth. Describing this process in an authoritative and definitive way is beyond the scope of this presentation.

The Bahamas.

Nevertheless in the case of the Bahamas there are certain beliefs and practices that have determined where the country is economically and politically.

The following is a short and incomplete list:

1. Race is a ready reference point in defining relations, morals and ethics.

2. The political majority have a shared memory rooted in slavery, colonialism and since the early 1950s a visibly "dominating" white business community. This shared memory provides a personal identity, comfort and inspiration that can move a people to do great things. It also can be manipulated for narrow private gain; and it can become more disabling rather than enabling with respect to attitudes and values.

3. The economy until the 1950s was marginal to the world…agriculture, mining or manufacturing did not sustain a growing population; and at times the economy flourished on pirating, wrecking and the "illegal" transshipment of arms, alcohol and drugs…activities requiring a different set of values than agriculture, mining and manufacturing.

4. Government has become the controller of relations and there is the belief that the only "fair" relationship or transaction is a regulated one; a free market is inherently "unfair" because one party is "powerless".

5. Stealing from an employer is acceptable behavior because the employer can afford it; everyone can be a "Robin Hood" and produce a measure of "equality".

6. Centralized control is easy to achieve because it is a small island country.

7. Government employment for life is a right and the ultimate welfare benefit.

This does not purport to be a complete list and it overlooks many positives. For instance, the Bahamas has a democratic process that works. This is a significant asset that enhances political and social stability. Also Bahamian tourism assets are significant and can sustain investment.

The world is driven forward by the desire to produce sustained economic growth and this entails the ability to increase exports of goods and services in international markets.

The Path.

But this road is difficult because shared memories, morals, ethics and institutions can set the stage for both success and failure; dramatic examples of both have occurred in other countries and are well documented. I will not cover this rich body of evidence other than to quote a contemporary Chinese scholar…

"The real challenge of reform facing transition and developing countries is not so much about knowing where to end up, but about searching for a feasible path toward the goal." 6

The Bahamas is in a critical period as it tries to recreate the prosperity of the 1990s. The reality is that –

* Bahamian prosperity has been based on the country's ability to compete in international markets.

* The Bahamas must find ways to continue to compete successfully.

* Its shared memory, morals and ethics and its institutional setting periodically frustrate and short-circuit progress.

* Needed changes more often than not are made only after a severe economic crisis.

* Knowledgeable and forceful leadership may soften or even prevent such crises from occurring.

The challenge to Bahamian policy makers is to discover the path and follow it.

End Notes

1 For a more extensive commentary refer to the website "www.stratfor.biz", "Net Assessment: Latin America – Benign Neglect and Persistent Weakness", March 12, 2004.

2 The Tourism Taskforce, Report on Trade Liberalization, Nassau, Bahamas, April 2003.

3 Havrylshyn, Oleh and Donal McGettigan, "Privatization in Transition Countries: Lessons of the First Decade", International Monetary Fund, August 1999.

4 The Tourism Taskforce, pages 19 – 21.

5 Margalit, Avishai, The Ethics of Memory, Harvard University, 2002.

6 Marvin Zonis et al, The Kimchi Matters: Global Business and Local Politics in a Crisis-Driven World, Agate, Chicago, 2003.

Help support The Nassau Institute