by Rick Lowe
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.
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.
Cato Policy Report May/June 1998: The Causes of Economic Growth (PDF), Reuven Brenner