BUSINESS-friendly strategies that encourage growth combined with increased taxes and spending cuts are the best initiatives for achieving growth and emerging from debt according to Dr Linda Tesar, a professor of Economics at the University of Michigan.

Tesar was speaking with veteran Barbadian journalist and managing director of the Jamaica Observer, Julian Rogers, during the the Central Bank of Barbados’ 6th Caribbean Economic Forum held recently at the Courtney Blackman Grande Salle in Barbados.

The forum, which was broadcast live both locally and regionally, sought to answer the question, ‘In a World of Rising Debt, how can Caribbean Countries Stay Afloat?’.

The challenge was explored through a question-and-answer format in which Tesar answered questions from Rogers, guests in the audience and callers to the programme.

The conference took place against the backdrop of austerity measures and an IMF programme upon which the Government of Barbados has embarked to tackle debt that had reached in the vicinity of 150 per cent of GDP accompanied by a fiscal deficit of approximately six per cent.

“More often the way out seems to be combining business-friendly strategies that promote growth along with having to raise taxes and having to cut back on spending,” Tesar stated.

In discussing the current situation in Barbados, the American economist also endorsed consumption taxes such as the country’s VAT, which is unpopular in the island nation, as the best taxation model to follow in the pursuit of growth.

“A strategy that moves away from taxing capital and labour and shifting more to taxing things like consumption, land and wealth, that kind of a tax reform which I understand is underway, I think is going to be beneficial and lead to more revenues,” she said.

“At the margin, as an economist would say, it’s less efficient to be taxing the stuff that goes into the process of producing the good, taxing your labour,” she added later in the conversation. “In an efficiency sense you want to tax the outputs, not the inputs.”

On the topic of foreign direct investment she again emphasised strategies that promoted growth pointing out that, “when it’s investment in people, when it’s investment in infrastructure, in a productive capacity that is going to make it possible for the payoff to happen because it is going to lead to greater resources down the line, greater payoffs down the line, then that makes sense.”

She cautioned that if borrowing, “is simply rearranging the deck chairs and taking money to give from one party to another, there is a role for that, there is a role for government to make sure that the income distribution doesn’t get too wide, but if it really is just programmes that are taking from one political party and handing it to another political party, for example, this is not going to lead to greater economic growth”.

On the question of the exchange rate, Tesar suggested that while an exchange rate can act as a signal to communicate the “relative conditions at home and abroad” it can also be a source of uncertainty and she therefore suggests a fixed rate.

“So having a fixed exchange rate gives you a lot of predictability and the ability to maintain a peg is also, when successfully done, a good signal that the Government has things under control,” the University of Michigan economist stated.

Tesar said she was impressed by the strategies undertaken by the Barbadian government in a short space of time simultaneously “addressing tax reform, addressing some austerity” and “addressing reforms in the business sector to try and bring out greater efficiencies”. She estimates, however, that it could take Barbados “multiple years” to work their way out of the current debt situation.

“When you look across a large number of countries, when you ask how long does it take to get from these very scary, high levels of public debt down into a territory where running the surpluses that are needed to service the debt is manageable and credit ratings come down and private investment kicks up, that’s a range of on average seven plus years, but I think you can already see the tangible improvements well before that,” she explained.

“So the word then is patience?” Rogers asked following her explanation.

“I think the word is patience,” Tesar nodded in response. “The word is patience.”

The Caribbean Economic Forum, which began in 2014, is part of the Central Bank’s Distinguished Visiting Fellow programme which gives Barbadians and people across the region access to some of the world’s leading economists. Previous fellows include Dr C Fred Bergsten, founding director of the Peterson Institute for International Economics; Dr Patrick Honohan, former governor of the Central Bank of Ireland, who helped shepherd his country through its worst financial crisis in a generation; and most recently, Professor Andrew Rose, the BT Rocca Professor of Economic Analysis and Policy at the Haas School of Business, University of California, Berkeley.