Andre Iton Former head of the Cayman Islands Development Bank and a regular commentator on economic trends	Dr Frank McField Independent George Town candidate	Paul Byles Economist and consultant

 

By Tad Stoner
tad@caymannetnews.com

Government’s economic stimulus may prove less effective and take longer than officials hope, although the so-called ‘multiplier effect’ of infrastructure spending remains vital to avoid the worst effects of a global slowdown.

Private sector economists, while lauding government’s $135 million in capital spending, caution that the ‘knock-on’ effect as the outlays ripple through the economy is likely to prove modest, and have called for policy changes to supplement fiscal measures.

“There are non-financial ways to stimulate the economy, by looking at ways to change the policy framework in which business operates,” said local economist and consultant Paul Byles, who has worked for several governments since 1998, and has carried out a series of private-sector impact studies.

Leader of the Opposition, Hon McKeeva Bush, for example, has recently cited immigration policies as one possibility, suggesting that financial services and tourism should not have to depend on the same rules as the construction industry.

Last week, Leader of Government Business, the Hon Kurt Tibbetts, and Chief Immigration Officer Franz Manderson announced wholesale policy shifts that promise not only to streamline the grant of work permits, but which will also offer the financial and tourist industries dedicated permit-review teams to look after their interests.

“The multiplier effect is when you spend a dollar, you want it to circulate as much as possible,” said Andre Iton, former head of the Cayman Islands Development Bank and a regular commentator on economic trends.

“But if you import capital and labour and goods, your multiplier effect is going to be very low because so much goes right back out, and that’s the problem in the Cayman Islands,” he said calling for improved “retention” of funds in the local economy.

“I have some ideas about what to do,” he said, “but you can’t just pick out one or two things or look at, say, immigration in isolation. Retention means you have to look at the bottom of society and how to bring them up.”

Mr Iton called for policies to “reorient” the emphasis on offshore economics, suggesting, for example, measures to encourage “small hotels owned by Caymanians, using lower-level workers. Small enterprises increase retention, hotels of say 40 rooms or 50 rooms, owned by locals; they increase participation in the economy.”

Independent George Town candidate Dr Frank McField has suggested similar policies for the tourism sector as part of his economic policies platform for 20 May national elections.

Mr Byles pegged the local private-sector multiplier between 1.3 and 1.6, explaining that, at the top end of the range, “for every dollar spent, it generates another 60¢, but this is generated over time, perhaps over a period of years, not weeks or even months. It is not an immediate impact.”

“You would have to do other studies to quantify other things, like the impact on employment,” he said, citing one survey indicating that “for every job that is created, you create another 20 percent of a person, meaning, basically that every five jobs that are created, that creates one more job – that’s roughly what is supposed to happen.”

More importantly, however, he said, “the government-spending multiplier is generally regarded as lower than the private-sector spending multiplier because, in general, government projects are not as efficient as those carried out by the private sector.”

In his budget-forecast Strategic Policy Statement to the Legislative Assembly in December, Mr Tibbetts described approximately $135 million in 2009-2010 capital expenditure, invested in the Government Administration Building, Frank Sound’s Clifton Hunter and George Town’s John Gray high schools, the George Town Public Library Annex and the new boxing gym.

The continuation of these, he said, would have “a multiplier effect”, while government would reduce hiring and suspend funding for such projects as West Bay’s new Beulah Smith High School, a new George Town Primary School, the Bodden Town Emergency Response Centre, the Savannah seawall and expansion of the Esterley Tibbetts Highway.

He projected 1.7 per cent economic growth for 2009-2010, steady employment and equally steady 3.9 per cent unemployment in a workforce of nearly 36,500.

Director of the government’s Economic and Statistics Office Maria Zingapan, said retention wasn’t as important as local spending, both wholesale and retail.

“People have to live and have to spend for food and housing”, she said, as well as for transport, telecommunications and even entertainment. “There could be some leakage, but expatriate labour is not crowding out local employment. Local jobs are not suffering for the reason that so many expatriates are here because of some specific skill that is [locally] lacking.

“The Cayman Islands is part of the global economy. You cannot open up to investment and business from abroad, yet be closed to outsourcing,” Ms Zingapan said. “A lot of Cayman Islands business comes from outside; it’s a centre for business and tourism.”

Regrettably, government had few econometric studies, she said, forcing officials to rely on a 1991 survey suggesting the multiplier ranged as high as 5, although acknowledging she was “not too confident” about the figure.

“That also assumes the public sector is not crowding out the private sector on borrowing, which, right now, yes, there is no liquidity problem,” she said, explaining that public investment often spurred private spending, pointing to property development along the newly opened East-West Arterial Highway.

Mr Byles disagreed with the ESO director, however, echoing Mr Iton.

“The multiplier effect is influenced by leakages from the economy. An example of leakage is when income is spent on imports, which obviously sends money abroad. Another example is when people save a portion of their income rather than spending it. In the case of Cayman, we import most of our goods and therefore our multiplier is relatively smaller than in some other countries,” he said.

Mr Iton dissented, however when Mr Byles called the multiplier synonymous with “trickle down” economic theory, made famous in the US by president Ronald Reagan.

“Multiplier effect is not trickle down,” he said. “It needs to give a guy some concessions for, say, a small hotel. If most of his labour is going to be from Jamaica, then what is the point? We need to go directly to engage local people in the process. We need to continue the [government] programmes – they must continue – because the multiplier effect is important, but we must devise strategies to increase retention.”

Nonetheless, Mr Byles cautioned against short-term expectations.

“There will be an initial impact, but it will take a while for the additional incomes to spread throughout the economy. The key thing is to find other creative ways to stimulate the economy,” he said, explaining that government needed a consistent recovery policy for 12 to 18 months.

“Given that there is roughly a 12-month lag between the Cayman and US economy, we should probably expect the very worse of the economic fallout to impact the Cayman Islands in the second half of 2009,” he said.