Have you ever wondered, as often I have, how many bridges to nowhere it took to convince Einstein that problems cannot be solved by the same thinking that created them, any more than endless repetition of the same procedure can produce a different outcome. Did the sobering truth hit the legendary physicist like an epiphanic fist between the eyes after long and meticulous observation of blinkered lab technicians? In all events, it would appear Caribbean politicians, with their evident unbreakable faith in Hickson’s formula, are determined to prove that if at first you don’t succeed, you need only “try, try, try again!”
In last weekend’s STAR I cited a concerned caller to Andre Paul’s What Makes Me Mad when Saint Lucia’s prime minister was the well-advertised guest du jour. In response to the question what he planned to do about our crippling public expenditure, Dr. Anthony hinted at a possible solution then quickly took it back, on the basis that cutting the cost of his government’s operations would mean having to “fire people from the public service, and what are the consequences of that cutting back?” Conceivably, he had not given much thought to the consequences of not cutting back! It seemed to me a strange answer, keeping in mind that several other options had always been open to this and previous prime ministers that did not require the immediate dismissal of workers en masse.
After all, our nation’s out-of-control indebtedness had resulted from parliamentary decisions that had little or nothing to do with public servants and nearly everything to do with failed government policies dating back to pre-Independence years. As noted by Paul Krugman, often conveniently cited by the more erudite among our government MPs: “High levels of public debt undermine economic performance and act as a tax on future investment projects.”
Public servants do not decide when to borrow; neither the sums involved. Governments do, often unknown to the people in whose name they are borrowing. Besides, the negative relationship between government debt and economic growth has long been common knowledge. Carmen Reinhart and Kenneth Rogoff, lauded authors of This Time Is Different, a well-reviewed book on the most recent world financial crisis, in a 2010 study on 44 advanced and emerging countries covering almost 200 years found that above a threshold of debt-to-GDP ratio of 90 percent, median growth rates fall one percent while average growth fails even more.
The writers also found that emerging markets have a lower threshold of external debt (60 percent) above which growth rates decrease by two percent or more. The evidence shows that for debt-to-GDP ratios above 30 percent, debt reduces growth. “When the debt-to-GDP ratio crosses the 60 percent threshold,” the experts agree, “the negative impact of debt increases.” Saint Lucia’s debt-to-GDP ratio is reportedly over 70 percent. Sister countries like Jamaica, St. Kitts-Nevis, Grenada and Barbados have debt-to-GDP ratios of over 100 percent. All of which points to the core problem confronting the region: years of mindless borrowing by our elected representatives has reduced governments to taking loans to meet both debt payments and the cost of operating their public services. Now consider the following, redacted from an IMF paper entitled Growth in the Eastern Caribbean Currency Union: What Went Wrong and Can it be Fixed: “Capital spending has been the area of largest growth in the ECCU. Capital spending hovered around six percent of GDP in the 1990s. It has since grown considerably, exceeding 10 percent of GDP in 2006.” However, capital spending levels have started to come down. Further adjustments were expected in 2010 as the region adjusted to the fiscal impact of the global economic and financial crisis.
Still quoting from the IMF paper: “The process underlying capital spending decisions has contributed significantly to expenditure growth. While some countries were hit by natural disasters (especially hurricanes), which triggered large reconstruction needs, World Bank public expenditure reviews for several countries in the region have also flagged weaknesses in the planning, execution and monitoring of public sector investment that have contributed to high and inefficient investment spending. “Dual budgeting, which refers to the practices where de jure or de facto recurrent and capital expenditure are budgeted separately, has typically led to underestimation of the recurrent cost implications of capital projects since these are normally not included in the public sector investment programs.
This also leads to serious inefficiencies, since under-budgeting of maintenance and operations spending can reduce the rate of return of capital projects.” Then there is the problem of the lack of a clear budget constraint for capital. “Entities involved in investment are not given a clear budget envelope,” observes the report. “This has resulted in an unfinanced list of projects referred to as a ‘wish list’ and does not force prioritization at the budget stage. It leads to inefficient prioritization at the execution stage where projects are arbitrarily matched with available resources. “Projects are approved and included in the budget without the necessary information to carry out feasibility studies and cost benefit analysis, without them being fully financed, or without being consistent with the relevant sectoral strategies. In addition to increasing the risk of approving projects with low or negative rate of return, it makes budgeting unrealistic and may lead to spending over-runs, forcing revisions in budget appropriations during the year.” [Emphases mine]
Notes the report: “Poor monitoring and insufficient after-the-fact project evaluation is yet another problem. Detailed project execution report requirements are not adhered to on a regular basis by the entities with reporting responsibilities. In addition, capital expenditures disbursed directly by donors are unlikely to be recorded and reported in the budget. Ex-post project evaluation is only carried out for externally funded projects where it is required by the financing institution.” In conclusion: “Fiscal consolidation efforts in the ECCU need to focus on the expenditure side of the budget. The surge in fiscal deficits and the associated increase in debt have raised concerns regarding fiscal and debt sustainability. This has also constrained the fiscal space needed to respond to shocks and expand social and poverty-reducing spending. Given extremely high revenue-to-GDP ratios in the region, expenditure rationalization efforts will be key to successful fiscal consolidation. These efforts should be guided by two principles: equity and efficiency.”
For years our finance ministers, often with no related experience, have been nonchalantly sowing their dragons teeth. The results of their uncontested decisions have been rendered unbearably worse by the world economic crisis, it’s true, but also true is that despite the day’s circumstances our leaders carry on as before, as ever unconcerned about the impact of their reckless spending on we the people. Hardly a day dawns without the announcement of yet another “consultant” on a negotiated five-year government contract, more often than not a previously unemployed front-line party activist with a track record altogether unrelated to his new position.
No surprise that in the budgets of ECCU countries the wages bill constitutes the largest expenditure item. Expenditure on wages and salaries accounts for a significant share of total revenue. When other elements of the compensation package—pensions, employer contributions, benefits and allowances—are included the total compensation costs of civil servants approaches, according to one report, “almost two-thirds of budgetary revenue in some countries, raising questions about affordability and sustainability.” High government wage bills in these countries also reflect the fact that with high unemployment in the region governments have acted as employer-of-last-resort. This has led to overstaffing typically reflected in a high ratio of government employment as a share of the population and duplications in functions across several government entities.
The cited report underscores the finding of a World Bank study that “concluded there was evidence of a positive public sector wage premium over the private sector in most countries.” There are two types of government employees in ECCU countries: established and non-established. Those appointed by the Public Service Commissions are referred to as established employees and cover all types of government employees, including teachers, health workers, police. Non-established employees constitute a significant share of total central government employment in ECCU countries, exceeding in some cases fifty percent.
The conditions of employment in these positions are determined in contracts negotiated separately with each individual worker and do not necessarily follow established civil service rules. Notes the paper on Growth in the ECCU: What went Wrong: “This has led 1) to important inequities in pay and benefits between established and non-established workers; 2) increased politicization in the appointment of civil servants; and 3) difficulties in keeping track of the number of non-established employees and their compensation arrangements.” We come now to what are referred to as “parastatal entities,” government units that operate separately from the budget. Many of these units perform non-commercial functions that are normally carried out by government departments. In Saint Lucia parastatals—e.g. the National Development Corporation and SLASPA—account for almost two percent of GDP. While in some ECCU countries established legislation specifies governance arrangement and reporting requirements for parastatal entities, compliance is often nonexistent. In most countries, observes the report, there is no dedicated unit or body monitoring the operations of these entities. “Even in countries where there is one, such as Saint Lucia, capacity constraints make monitoring weak.”
The proliferation of parastatal entities, combined with insufficient oversight and limited information on their financial operations, is a source of concern. This can lead to a multiplicity of institutions with related responsibilities but no mechanism to prioritize and avoid duplications, resulting in high overhead costs and waste of limited resources. Bearing in mind the current finance minister had served as special advisor to several government leaders before taking the reins in his own hands, considering he had spent the last twenty years or so leading either the government or the House opposition, how revealing that he has never sought to curtail public expenditure by blocking the avenues via which millions and millions of dollars annually disappear without explanation down the toilet. How ingenuous that he would create the impression that the one and only way of cutting government expenditure is to “fire people from the public service.”
Not that there aren’t too many in the public service who deliver no service to the public . . . but that’s for another show! There is undeniably the disturbing matter of our overseas embassies (better to call them retirement homes for the better appreciated hacks on both sides of the political divide) that never made much sense, not in the early sixties and certainly not in this previously unimagined age of the Internet. I cannot think of a single project that arrived in Saint Lucia thanks to the efforts of our overseas ambassadors and their ever-enlarging retinue. The recent Canadian-visa controversy underscores yet again the otiosity of our costly overseas embassies. Will the governments of the Caribbean, ours in particular, even consider cost-cutting measures for their tax-funded overseas resorts?
Bottom line: What’s done is done. The milk has been spilt. At any rate, as far as our multi-billion-dollar national debt is concerned. The least we can do is try to slow down its growth rate. Those who landed us in this quicksand might at the very least take responsibility for their actions and acknowledge, as Einstein reminds us, that the problems confronting us cannot be solved by the same thinking that created them—a truth that we the people can either embrace or continue to deny at our own peril!