The imperative of an economic growth and transformation plan for St Lucia: Part 2

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Dr Claudius Preville

 – Feature Address on Economic Growth and the Thinking of Sir Arthur Lewis Delivered at the Wreath Laying Ceremony, Nobel Laureate Week Morne Fortune, Saint Lucia, January 21, 2022.

By Dr Claudius Preville

I will now focus on the most current macroeconomic situation as in 2020. GDP in current prices decreased from EC $5,720.7 million in 2019 to EC$4,365.3 million in 2020, or by -23.7 percent. GDP in 2018 constant prices decreased from EC $5,572.3 million in 2019 to EC $4,437.0 million in 2020, or by -20.4 percent. Gross Value Added in Constant 2018 Basic Prices decreased from EC$4,900.2 million in 2019 to $3,905.2 million EC in 2020, or by -20.3 percent.

Of course, the onset of the pandemic has been the death knell for the economy, plunging it into deep negative territory, more than 20 percent contraction in real economic terms, which was the worst that Saint Lucia has seen for several generations and indeed the worst performance among all Eastern Caribbean Currency Union members. More disheartening is the absolute loss in wealth of every Saint Lucian, as GDP per capita in US dollars decreased from $11,771.40 in 2019 to $8,923.0 in 2020, or by – 24.2 percent. Put in layman’s terms, the average Saint Lucian’s spending power collapsed by approximately one quarter between 2019 and 2020. But the GDP story is only the beginning.

Unemployment also skyrocketed and we continue to see major inflationary pressures given our over reliance on imports for consumption. The official unemployment rate also showed a negative development, increasing from 16.8 percent in 2019 to 21.7 percent in 2020. This corresponds to an increase from 16,998 unemployed in 2019 to 20,774, in 2020. So, in relative terms, Saint Lucia actually has surplus labor that is idle, and without deliberate plans to cause a targeted level of growth this situation will worsen. As we heard of the massive interventions that were being made in the developed countries to bail out their citizens and firms from the COVID-19 pandemic, the question that was asked in Saint Lucia was what is our government doing?

Well, the second part of the story has to do with the central government’s fiscal operations for the fiscal year 2019 to 2020. Total Revenue & Grants declined from $1,187.9 million EC in 2019 to $923.3 million EC in 2020, or by -22.3 percent. Within total revenue and grants, current revenue declined from $1,144.7 million EC in 2019 to $890.7 million EC in 2020, or by -22.2 percent. However, total expenditure increased from $1,378.7 million in 2019 to $1,403.2 million in 2020, or by 1.8 percent. Within total expenditure, the current expenditure component declined from $1,177.9 million in 2019 to $1,161.7 million in 2020 or by -1.4 percent; whilst capital expenditure increased significantly, from $200.8 million in 2019 to $241.5 million in 2020, or by 20.3 percent. The deficit on the current account worsened stupendously from $-33.2 million in 2019 to $-271.0 million in 2020, or by 716.6 percent.

Notably, the deficit on the primary balance of the current account deteriorated the most, going from $-20.0 million in 2019 to $-314.9 million in 2020, or by 1,477.4 percent. The overall balance deteriorated significantly, from $-190.8 million in 2019 to $-479.9 in 2020, or by 151.6 percent. With such poor performance of central government’s fiscal operations, there is little wonder why government was unable to provide the largesse that we saw other Caribbean neighbors and developed countries like the United States extending to their citizens. The government’s current account balance found itself in one of the worst positions ever, with a deficit growing more than 1,000 percentage points in 2020 relative to 2019.

The third part of the story is the public debt. Public debt (EC$) grew from $3,417.6 million in 2019 to $3,773.8 million in 2020, or by 10.4 percent, the external debt component of which increased from $1,689.7 million in 2019 to $1,947.2 million in 2020, or by 15.2 percent. Consequently, debt service ratios deteriorated significantly. The ratio of central government debt service to current revenue increased from 26.4 percent in 2019 to 28.9 percent in 2020 and the ratio of public debt to GDP increased from 59.7 percent in 2019 to 86.5 percent in 2020, of which the external debt to GDP increased from 29.5 to 44.6 percent.

The fourth part of the story is the performance of merchandise foreign trade. Imports of goods decreased significantly from EC $1,615.58 million in 2019 to EC $1,362.2 million in 2020, or by -15.7 percent. However, total exports decreased even more significantly, falling from EC $221.5 million in 2019 to EC $149.1 million in 2020, or by -32.7 percent. Accordingly, the balance of trade deficit widened considerably over that period. Within total exports, domestic exports declined considerably, but at a slower rate, from EC $104.2 million in 2019 to EC$88.9 million in 2020, or by -14.7 percent.

The fifth part of the story is the performance of money supply and credit. Total deposits into the financial system increased from EC $4,348.9 million in 2019 to EC $ 4,516.9 million in 2020, or by 3.9 percent. However, the money supply decreased, as measured by both the narrow and broad definitions of money supply. Money supply (M1) decreased from EC $1,054.9 million in 2019 to EC $983.5 million in 2020, or by -6.8 percent. Money supply (M2) also decreased from EC$3,343.0 million in 2019 to EC $3,122.1 million in 2020, or by -6.6 percent.

Net credit to central government increased significantly, from EC $255.5 million in 2019 to EC$300.8 million in 2020, or by 17.7 percent. However, credit to private sector increased only slightly, from EC $3,098.2 million in 2019 to EC $ 3,182.1 million in 2020, or by 2.7 percent.

Why did all of this happen? When we analyze the root cause, it is seen that we have created an economy that has become reliant almost exclusively on tourism for the growth and prosperity of Saint Lucia. If I were to apply the Lewisian model to Saint Lucia, it would seem that we do have a two-sector economy, the one driven by capitalists of today is the tourism sector, which draws cheap labor from the rest of the economy and manages to keep real wages down, given there is a surplus labor pool of a not very specialized quality that is suitable for hotel work, whilst making profits at the expense of the rest of the economy. The general neglect of Agriculture, which had been the sector of working-class capitalists has relegated its workers and farmers to a labor reserve, which is paid only a minimum reservation wage or a price that just equals marginal cost.

The COVID-19 pandemic forced borders to close and our tourism arrival numbers dwindled, falling by about two thirds in 2020 relative to 2019 arrivals. Specifically, total visitor arrivals decreased significantly from 1,297,163 in 2019 to 458,943 in 2020, or by -64.6 percent. Notably, stay-over arrivals declined from 423,736 in 2019 to 130,695 in 2020, or by -69.2 percent. Cruise ship arrivals decreased significantly as well, from 798,176 in 2019 to 297,885 in 2020, or by -62.7 percent. Yacht passenger arrivals also significantly decreased from 66,272 in 2019 to 26,407 in 2020 or by -60.2 percent. Excursionists also decreased significantly from 8,979 in 2019 to 3,956 in 2020, or by -55.9 percent.

But, even then, the policy response of government to COVID-19 in 2020 left a lot of be desired. In the face of the pandemic, one would have thought the policy response would be to invest in the sectors that are not as exposed and vulnerable to external shocks.

Agriculture should have taken a lead role towards economic recovery and so should also be Fisheries and in general, the production of goods through the sustainable management and development of natural capital. Certainly, this was the policy focus of several Caribbean countries that are not known for major production of, and reliance on, agricultural produce. Included in these are Antigua and Barbuda, Barbados and Saint Kitts and Nevis. However, the data show that there was severe contraction in these sectors. For example, total banana exports decreased significantly from 11,622.6 metric tons in 2019 to 8,401.3 metric tons in 2020, or by -27.7 percent, with accompanying reduction in export revenue from $18.2 million in 2019 to $13.7 million in 2020, or by -24.7 percent.

Manufacturing has increased somewhat, but its base is so small that even significant growth levels in that sector are not sufficient to significantly impact the GDP. Services, other than tourism, constitute the bulk of the remainder of the economy and it would seem prudent that more attention be given to these activities as the way out for Saint Lucia. We must always be mindful of the fact that our GDP is positively correlated to our consumption, but negatively correlated to our imports.

Therefore, to the extent that we have a massive distribution sector that relies so heavily on imports of finished goods to fuel it, the net growth effect of these sectors could well be negative. So, what is the way forward for our Saint Lucian economy? We have to go back to basics and understand there is a need for economic growth and transformation and that such growth has to be sustainable and must come from diverse sources. Economic growth should proceed in a manner that will result in the increase of real wages as demand for goods and services increase. Such growth calls for a vision of multiple sectors, each making important contributions to the economy and not the current de facto dual sector economy in which the capitalist sector exploits labor, whilst keeping real wages down, since there is surplus labor.

Policymakers must understand this. We cannot wait for a Lewisian turning point in the economy before undertaking the required transformation. We must not continue to build an economy almost exclusively on tourism, even though that sector will continue to be important for growth, foreign exchange and employment going forwards, there is now, more than ever, a pressing need to transform and diversify.

The transformation that I have in mind is not like the diversification we have heard so much talk about before without taking any action. In the first place, our development effort must place exports of goods and services at the center of the development strategy. The focus must shift to production of services that can be exported via e-commerce, as well as goods. There are initiatives being discussed in the region on e-commerce at this time and this needs to gain traction in Saint Lucia. E-commerce platforms can make it possible for seamless exports of services online to any country in the world, almost cost-less.

There are some challenges in doing this though and much of it comes from unreliable internet services and the high cost of online banking services, including payment gateway services. Reform can, and should be undertaken, to positively redirect e-commerce development for economic growth. Products also require new standards and quality that meet the demand requirements of target markets. This calls for resources that could be obtained locally or via foreign investment.

Saint Lucia also needs to take advantage of the opportunities that are presented in several economic integration arrangements, including the Economic Union of the OECS, CARICOM, and other Free Trade Agreements, like the CARIFORUM-EU Economic Partnership Agreement, the CARICOM-Costa Rica FTA, several other bilateral trade agreements between CARICOM and the other countries, and importantly, the final two major non-reciprocal preferential trade agreements with the United States and Canada. With the Economic Union of the OECS, trading within a single currency area confers the advantage of certainty and will reduce the deficit on the balance of payments relative to countries outside the Union.

Sir Arthur Lewis is credited for having developed and articulated the dual-sector economy model, which explains why in any such economy, real wages tend to persist at low levels in the labor-intensive sector whilst profits tend to increase in the capitalist sector. In many ways, the Saint Lucian economy can be seen as a Lewisian model economy in which the labor reserve supply pool (unemployment) is large enough (relative to demand) that real wages can be maintained quite low to facilitate the growth of the capitalist tourism sector, at the expense of the remainder of the economy. But this is happening only because the quality of the labor supply is weak, it does not have the required sophistication and is reduced to doing menial tasks.

Therefore, we need to go beyond this in the proposed economic transformation to set target sizes of the key sectors of the economy and levels of growth to achieve that by a certain timeframe. A very practical starting point is investment in agriculture, making farming a business that would attract the youth, thereby increasing our agricultural output per capita, through the application of advanced technologies. Agriculture’s share of GDP should increase to a target level of at least 5 percent by 2030. Taiwanese Technical Cooperation is already very strong in this area and needs to be harnessed strategically to reorient the economy. Value added in the production and manufacturing of some products and services can become a major source of economic growth and rapid increase in per capita income.

Government must choose the sectors for this growth and transformation strategically and provide the environment – both regulatory and incentives – to result in economic transformation on a large scale. Manufacturing’s share of GDP should be targeted at 10 percent by 2030. We need not concern ourselves with producing entire products or services in Saint Lucia. We only need concern ourselves with identifying where in the value chain for any product that we already consume, can we participate by either producing a small component of that product in Saint Lucia, or specific services that transform that product.

Services are all about the quality of our knowledge base, intellect, and talent. This is therefore, the area where we can triumph as a nation by merely acquiring the relevant specialized knowledge to render required services in creating value added, locally, regionally, and globally. We are not restricted by capital anymore. The knowledge is everywhere on the internet, and it can be readily acquired, organized into targeted plans, and generate value added and income for Saint Lucians. Services’ share of GDP should be targeted at 85 percent by 2050.

In closing, government also needs to articulate a clear vision and set target levels of growth deliberately, plans by which such growth can be realized, and actively pursue such growth rates, if we are truly desirous of bringing about growth and transformation of the Saint Lucian economy. Economic growth will not be in line with any specific number unless Government first decides on it, formulates the plans by which it could be realized and implement the plans on a regular and consistent basis in collaboration with the private sector.

Sadly, we have become a nation where the international financial institutions simply come in, spend a few weeks with our technocrats and then tell us what our growth rates will be, the portion we deserve, based of course, on their careful observation of the absence of deliberate plans and strategies to result in a target level of economic growth. Our nation can, and must do better, than this.

Personally, I would like to see a Saint Lucia that grows by 10 percent annually, and there is no reason why it cannot be done if we deliberately decide to do so. Saint Lucia has a lot of catching up to do, having lost more than one-fifth of its wealth in 2020 alone. In the words of the West Indian Commission, “It is time for action”.

Related: Part 1

Reference – Feature Address – Wreath Laying Ceremony – Need for Economic Growth and Transformation – Dr. C. Preville (1)

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