Economic Freedom in The Bahamas

First Published: 2010-02-18

Ms. Charlyne E. Sealy, in a thoughtful letter to the Tribune Jan 25th responds to the Heritage Foundation report showing decline of economic freedom in the Bahamas. Her remarks were directed to Rick Lowe, Vice President of The Nassau Institute.   

The key ingredients of economic freedom are:

1.    personal choice
2.    voluntary exchange coordinated by markets
3.    freedom to enter and compete in markets
4.    protection of persons and their property from aggression by others. 

Where public policy interferes with, or fails to support these four “ingredients” economic and other freedoms are at stake. Rick Lowe and the Nassau Institute are unrelenting advocates for a free economy.    

Ms. Sealy cites areas in the Bahamian economy that lower the overall rating in the Heritage Index. She does not believe most Bahamians would willingly agree to change the following policies: 

1.   reserving sectors of the economy for Bahamians,

2.   permission required to sell property over 5 acres,

3.   tariffs

4.   monetary policy and exchange controls   

Reserving particular sectors of the economy is protectionist policy restricting retail, and wholesale businesses to Bahamians. Licensing of the professions is also protectionist policy.     

Ms Sealy should understand that “every form of protectionism builds on raw political force which is strengthened by advocates of political power”.

Those benefitting from government protection of their industry or profession are big business and politicians counting votes. It is an unholy alliance of business and government in a common cause against consumers and foreigners. It is “crony capitalism” and not free market. 

Ms. Sealy asks “Would Mr. Lowe sanction a campaign to get Bahamian lawyers, accountants and luxury store owners to agree that foreign nationals be permitted to come to the Bahamas and hang their shingles with no review or approval”? 

Implied in the question is should we campaign for free and voluntary exchange in goods and services considering that lawyers, accountants and luxury store owners prefer the current system of protection for their professions and businesses.    

She may be right in the preference for protection by certain groups, but if so then Mr. Lowe’s comment that the Bahamas is “heading in the wrong direction” is irrefutable.   

Consumers are not concerned with the nationality of the seller.   They want a wide choice of products at the lowest prices.   The Bahamianization policy requiring permission from government to decide who can sell and serve is therefore anti consumer. It is anti free market and negative for economic growth.

A shrinking economy and drop in consumer spending should cause rethinking policies that protect special interests.    

Competition tends to maintain prices at levels that maximize exchange. A walk down shabby Bay Street illuminates the sad story of decline in the retail sector. If Bahamians wish to recapture lost business and encourage new enterprise they will have to open up to new participants not based on nationality but on whoever and whatever will attract business and promote economic activity. 

Patriotism as paternalism is often confused with protectionism. Rick Lowe would say that protectionism is unpatriotic because it supports high prices and slows economic growth.  

The existing interventionist policy of restricting areas to the discretion of politicians is a declaration that business is free to act as long as what it does complies exactly with the plans and intentions of the government. 

Government interference is asking ultimately for more compulsion and less freedom.

If action in the market place is subject to political approval then we have to believe in an omniscient all-knowing government with all the knowledge required to know what is best for everyone else; an absurd notion that few would support in 2010.

The permission required to sell more than five acres – is policy that interferes with voluntary exchange required to co-ordinate markets.

Property rights have evolved from the earlier practice of minimum intervention to government approval to sell over five acres. Population and environmental conditions affect property use. Declarations of intended use of property for development may protect the property rights of others.   However, restrictions on the use of one’s property if they are arbitrary decisions by bureaucrats are limits on a cherished freedom.

Tariffs as protection for chosen industries are counterproductive to economic freedom and economic growth. 

In the Bahamas they replace an income tax. The current tariff rate is so high as to reduce competitive advantage. The Duty Free policy of the early nineties is empirical evidence that retailers were unable to compete in the “luxury goods” market with vendors in other countries. 

Duty Free was a kind of deception where the “tariff” was renamed a “stamp tax”.

“A rose by any other name is still a rose”. Whilst duty was lowered on some items, the revenue lost was compensated by increasing the rate in other sectors.

A flat consumption stamp tax of 17% universally applied would encourage more economic exchanges without deceptive marketing strategies. Dr. Arthur Laffer an economist in the Reagan years has shown that when taxes drop revenue increases; The Laffer Curve.     

Ms Sealy overlooks the low tariffs of the 50’s and 60’s. The rate on most imports was 15% on the C.I.F value plus 2 ½% stamp tax. Other taxes were low, and there were no deficit budgets. The economy grew at 8 – 10%. In 1972 the Economic Freedom of the World Index ranked the Bahamas 7th of 121 countries. In 2007 the Bahamas is ranked 43rd of 143 countries.    

Monetary policy and exchange controls.  The Bahamas gets a consistently low rating in the Freedom Index for monetary and fiscal policy due to foreign exchange controls. Ms Sealy is correct to note a relaxation of the controls. Until there is total free exchange the rating in this category will not improve.

The limit on foreign currency exchange is related to the foreign reserves required to support the value of the B$ at par with the US$.  

Dr. Alvin Rabushka in studying the Bahamian economy stated in 2004: “Unless foreign reserves rise to, and remain at, a higher level in the near future, the financial structure of the Bahamian economy, which resembles an inverted pyramid, will continue to get heavier and larger at the top. At some point, the whole structure will topple. Either devaluation or new restrictions on current account transactions, which means import control, must follow”. 

Economic freedom and free trade are polarizing issues between those who understand the benefits of free exchange and the protectionists whose opposition is visceral and passionate. Those of us who favor free trade believe in the ethical principle that people should be free to buy from whomever they choose, and in the economic truth that wealth and efficiency increase as prices fall.

Mr. Lowe, an advocate for economic freedom is a true patriot and a courageous defender of the rights of individuals to pursue their interests so long as they do not interfere with the right of others to do the same. 

Ms Sealy raises policy issues for public discussion that mostly occurs behind closed doors. Her response and questions open them to public scrutiny. We invite her to join the Nassau Institute in identifying public policy and government actions that take away our precious freedoms.

THE NASSAU INSTITUTE
 

Joan Thompson
President

February 2nd 2010

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