Lecture Richard Gibson: "INEQUALITY AND DEMAND"
During Town Hall Meeting at the USM on Thursday, September 1st, 2016.
Photo by Bibi Shaw (SMN-News)
Thank you for coming out to listen to me to me tonight. I greatly appreciate your attendance and your interest in the topic of Inequality and Demand. Understanding the relationship between Inequality and Demand and how it affects economic development world wide is information that is invaluable to make policy decisions. The world is in turmoil! Brexit is shaking the EU economic bloc at its foundations. Greece has accumulated astronomical debts that it cannot repay causing deep misery for its citizens. Paris is under siege with one terrorist attack after the other. War is raging in the middle East. Next door to us Puerto Rico is at the verge of bankruptcy and America has a mad man named TRUMP who can become president and leader of the free world. Uncertainty reigns everywhere and sustainable economic development has become elusive.
This evening’s presentation is the result of a promise I made to inform the public of Sint Maarten about the information I gathered when I attended the ECLAC meeting in Mexico city a couple of months ago. I was incapacitated at the time with a fractured knee cap and in pain, hobbling on crutches I attended the sessions of the United Nations in Mexico city, forging on because I had swore that I would not miss one day from work and that I would not let a little knee cap injury hold me back.
The information disseminated during the ECLAC meeting in Mexico was fascinating. It was eye opening and informative. Delegations from many European, Latin America, Mexico and Caribbean countries, as well as a delegation from the U.S.A. attended the conference and it made me realize how isolated Sint Maarten really is. Important trends and developments worldwide that seriously affect our development and information that is essential to be able to plan and make informed policy decisions, pass us by like ships in the night. Sint Maarten has to be weaned off this isolation and actively participate in international conferences and discussions to stay abreast of worldwide developments
My intention this evening is to share some of these worldwide trends and developments with you and outline how these trends influence Sint Maarten’s well being and discuss with you a path that Sint Maarten should follow in my opinion to be able to achieve sustainable growth going forward. Without growth there will be less money to circulate. Without growth our life style will change for the worse. Without the necessary growth government will not be able to provide the services required by its citizens. For several years already we are in a holding pattern with little or no growth. Mr. McIntire, the leader of the IMF Art. IV visit to Sint Maarten recently described this holding pattern we are in as a “Middle Income Development Trap”, that we have difficulty extracting ourselves from.
In today’s world we face a dizzying process of change. A change of an era! The prevailing global economic and social trends are deepening the contradictions of a development pattern that has become unsustainable. Global inequality is increasing and seriously affecting the economies of developing countries. The technological revolution we are experiencing is offering opportunities to many, but just like globalization we are unable to fully take advantage of the benefits the technological revolution has to offer.
Globalization has resulted in increased cross-border trade, investments, and migration so large that many observers believe the world has entered a qualitatively new phase in its economic development.
Globalization has been driven by policies that have opened economies domestically and internationally. Governments have negotiated dramatic reductions in barriers to commerce and have established international agreements to promote trade in goods, services, and investments. Taking advantage of new opportunities in foreign markets, corporations have built foreign factories and established production and marketing arrangements with foreign partners. A defining feature of globalization is an international industrial and financial business structure that is outside of the reach of Sint Maarten.
Proponents of globalization argue that it allows poor countries and their citizens to develop economically and raise their standards of living, while opponents of globalization claim that the creation of an unfettered international free market has benefited multinational corporations in the Western world at the expense of local enterprises, local cultures, and common people.
Seen from a Sint Maarten perspective, as well as seen from a Caribbean and many Latin American countries perspective globalization has done nothing for Sint Maarten and these countries. Why? We have no multinationals that sell products to foreign markets. We have no factories that export products to foreign markets. We have no agricultural products that we produce for export, or even for local consumption.
We have no access to the international industrial and financial business structure created to accommodate globalization. We have no access to it because it is based on global trade and we have no products to export, no goods to trade, except for tourist services. Globalization has not and does not contribute to raising the standard of living on Sint Maarten, nor does it help us to develop economically. On the contrary! Globalization as well as the internet cuts into the performance of our local businesses and multinationals, such as Amazon now sell their products directly to our citizens at the expense of our local businesses. This reduces sales of local businesses, threatens our job market and our tax base. The less our businesses sell, the less they can expand, the fewer jobs they can create and the less taxes they pay.
The technological revolution that we are in offer a myriad of opportunities. However, the question has to be asked “FOR WHOM”! It only serves those who have prepared and acquired the skills to take advantage of the new technological changes. We, and many Caribbean and Latin American countries have or could not prepare for this and it will be impossible to create sufficient quality better paying jobs to replace the very low-tech jobs we have that fuels inequality in the region and in many countries in Latin America. This is holding back development and growth and with it comes a decrease or stagnation of per capita income and an increase in inequality.
There is excess liquidity in the international economy. Financial institutions world wide are swimming in money. Money that is not being invested in the real economy. One would think that because of the existence of this excess liquidity as well as the prevailing historical low interest rates on borrowing, that entrepreneurs and investors would be storming down financial institutions doors to borrow money for new investments. But this is not the case. The world has not recovered from financial crisis of 2009 and in spite of quantitative easing world wide. Investments are lagging. Investments are necessary to fuel economic growth. Economic growth on its turn fuels investments. Notwithstanding the excess liquidity GDP growth worldwide is on the decline. While the climate for borrowing is at its most attractive level, investments in the real economy are declining. Why is this? And how is this possible?
For the first time in the history of the world financial assets and financial derivatives are being accumulated and hoarded instead of being reinvested in the real economy. New financial strategies and approaches are deflecting investment in the real economy and depressing demand. Morgan Stanley a multi billion financial conglomerate, now spends trillions in speculative practices that do not spur economic growth. For instance they spend billion of dollars in buying up oil at very low prices and then stores this oil for years, waiting for the price of oil to rebound and then dumps the oil on the market and makes astronomical profits for itself. In 2014 according to the Economic Commission for Latin America and the Caribbean (ECLAC) on the basis of figures provided by the Bank for International Settlements and the World Bank indicators of 2015, show that 600 trillion dollars was accumulated in financial derivatives and 200 trillion dollars in financial assets. Approximately 800 trillion dollars did not go back into the real economy in investments, to create new jobs and increase economic activity. For years prior to 1990 mostly all financial assets and derivatives were reinvested in the real economy and the real economy grew in tandem with financial assets and derivatives. GDP growth of countries in those years were 6, 7, 8% per year. China achieved GDP growth of 10% for years This year GDP growth in the USA is projected at 1%, meaning that Americans will have less money to spend on travel. Sint Maarten used to enjoy an annual GDP growth of 4%. Last year GDP grew by 0.5% and the growth for this year is projected by the Central Bank at 0.9%. In Europe GDP growth has been flat or negative for years. Several European countries are struggling with huge budget deficits and loans that they have difficulty to repay.
The world is in financial turmoil and has to change its pattern of development, because the present development pattern is not sustainable. Countries with deficits in their budget are cutting back on imports and spending and are slowing down their economies, whilst surplus countries do nothing to boost growth or wages in order to maintain their present import levels. Latin America and Caribbean countries are drowning in debt. Debt to GDP ratios have skyrocketed to levels that are hardly manageable. Interest rates are burdening budgets and denying these countries the fiscal space to unleash counteracting measures to keep there fiscal ships upright. The world economy is on the decline. International trade has plummeted. Container shipments are expected to drop 7% during this this container season as the world prepares for this year’s holiday season sales. This represents billions of dollars in manufactured goods that will not be shipped because of a lack of demand world wide. This is leading to a lower rate of economic growth, increased unemployment, decrease in trade and more poverty.
Demand will not grow unless inequality is reduced. According to Credit Suisse (2015) the richest 1% of the population of the Western Europe owns 31% of all wealth, while the poorest 40% owns just 1%.
This has lead to a conundrum. The majority of people in the world are now unable to buy all the products that the world manufactures. Demand for these manufactured products are declining because people have less money to spend. This in turn impacts the production of goods worldwide and results in unemployment worldwide. This trend spells serious economic and social problems in the world.
China has become a foremost economic and geopolitical power and has regained the status it held until the end of the eighteenth century. Its capacity to absorb technical progress and to change its production structure has allowed China to narrow its per capita GDP gap with respect to the most advanced economies. In 2014, the Chinese and United States economies each accounted for 16.6% of global GDP, with China responsible for the bulk of emerging and developing economies increased contribution to global output. China’s new role in the world economy is a consequence of its exceptional growth. For almost three decades, since its economic reforms in 1979, China has maintained real GDP growth rate of about 10% per year on average, something no other country has achieved in economic history. The contribution of the Chinese economy to global growth surged from 5% in the 1980’s to 25% in the period between 2000 and 2014, when it surpassed the United States (21.2%) as a contributor to global growth. Economic growth in China benefited greatly from multinational corporations’ strategy of offshoring production and jobs to regions offering lower production costs (read: cheaper wages) across a broad spectrum of industries and services. This process also benefited countries such as India, Mexico and other Asian, Central American, Caribbean and Eastern European countries and lead to expanded international markets and made worldwide production and distribution chains much more important.
From these foundations, China began to play a major role in international trade and transformed itself into one of the main trading partners for developed and some developing countries, particularly those of Latin America and the Caribbean. It is the second largest trading partner and the third largest export market of both the European Union and the United States. As the world’s leading exporter and its second largest importer of goods and services, China has also become a significant consumer and importer of raw materials, causing intense speculation and record high prices between 2000 and 2013.
China’s progress is affecting the international political economy in areas with major ramifications for Latin America and the Caribbean, such as international relations, United States-China relations and the regional integration process.
China’s more proactive approach to international relations has triggered a response by the United States in an effort to prevent the erosion of its global influence. A recent example of this is the Trans-Pacific Partnership, concluded in October 2015, which includes the United States and 11 other Pacific Rim economies, including three from Latin America (Chile, Mexico and Peru). This will set new rules for trade and investment that will govern economies responsible for 36% of Global GDP and one quarter of world trade. The Trans-Pacific Partnership represents a response by the United States to China’s growing influence in Asia, as reflected by its leadership of the Asian Infrastructure Investment Bank (whose members include traditional United States allies in the Pacific region) and China’s New Silk Road initiative.
China is also making its presence felt in Latin America. While the country does not want to be seen as a threat to the United States’ standing in the region, the surge in Chinese trade, investment and lending has created a new configuration of influence and power. This is not only because China has financed numerous projects and has become an alternative source of funding and technology for several countries with current account difficulties, but because the commodities boom gave the South American economies extra scope for autonomous decision-making. Different trade strategies have risen from this increased leeway: while Mexico, Central America and the Pacific Rim countries have drawn closer to the United States and have signed free trade agreements with that country, the countries of the Atlantic seaboard have been more reluctant to tighten links with the United States, leading to a degree of fragmentation in hemispheric and regional relations.
What all this means is that in the international arena a battle is raging between China and the United States for the heart and souls of and for alliances with and commercial ties with peoples of different countries on the globe by entering into massive trade agreements. Sint Maarten is not included in any of these trade agreements and even if we were we would have nothing to offer, because we have nothing to trade, except sun, sea and sand. Tourist services is what we have to offer.
If all we have to offer is tourist services and our economic survival is totally dependent on tourist services, then our tourist product has to be second to none. Our tourist product has deteriorated over the years. There has been a lack of attention and lack of care to make our tourist product the best in the region. Each man, woman and child on Sint Maarten, should know this and we have to create and have access to quality hospitality education and training right here on Sint Maarten with the aim of producing hotel managers and other hospitality experts to support the hospitality industry. Without a serious overhaul of our tourist product and without producing the human resources to support our industry, we will continue deteriorate. We have been lucky so far. But the survival of the economy of a nation cannot be left up to luck. It has to be planned, nurtured and guided to attain the goals we are seeking.
As outlined above we are confronted with economic development patterns of the past, which are unsustainable; the ever increasing inequality in the world is stifling demand; the wonders of globalization which is based on trade has passed us by like two ships in the night; the technological revolution the world is going through is threatening jobs in the labor market; These are all reasons for a call to arms. We cannot sit back and wait as if it is business as usual. We cannot go back to solutions and methods of the past; We have to find new, innovative and effective ways to sustain and broaden our economy and create new and better paying jobs. When seen from this point of view the future of Sint Maarten looks quite bleak. Sint Maarten is a little speck on the world’s map, with a small population and a tiny economy. It’s ability to influence trends on the world stage is nihil.
There is however light at the end of the tunnel! We believe that we have found a path to turn all this around for Sint Maarten.
China has changed its strategy of being the manufacturer of the world and is concentrating on creating a consumer economy. China over the years embarked on import substitution programs and has lowered its import needs. China has embarked on an urbanization program aimed at attracting its citizens to urban areas in China and increasing its middle class. Income is rising in China and with it comes the ability and desire of Chinese to travel. China presently has 100 million chinese who travel annually and rapidly growing. Only 0.3% Chinese travel to the Caribbean.
Sint Maarten has no goods to trade. It has no exploitable natural resources, nor does it manufacture any product. All we have to offer are tourist services. If we can attract 1 million of the 100 million Chinese who travel annually, we will be able to almost double our tourist industry. Doubling the number of tourists to Sint Maarten would trigger an economic boom for Sint Maarten that would significantly increase economic activities on Sint Maarten and significantly improve the standard of living of every man, woman and child on Sint Maarten. It would bring us to full employment and provide the means to satisfy our social demands and infrastructure requirements. It would increase our GDP significantly.
For several months now the Prime Minister and myself have been negotiating intensively with representatives of the private sector of China and representatives of the Chinese government. A company has been formed on Sint Maarten owned 50% by private sector representatives of China and the other 50% owned by the government of China. This company purchased a parcel of land next to Belair Beach Hotel on Sint Maarten, hired engineers and architects to prepare construction plans for a 326 room hotel and show room on the property as well as another 450 apartment units. These plans have been submitted to VROMI and groundbreaking ceremonies for this project is scheduled for September 17th, 2016. The 450 apartment units that will be built, will be sold to Chinese companies to be used by their executives and staff as a hub for commercial activities that these companies intend to pursue in the rest of the Caribbean and in Latin America. Sint Maarten will be the hub and center for these activities. The hotel and showroom are intended to accommodate businessmen and other interested parties from the Caribbean and Latin America to come to Sint Maarten to view the products and services on display in the showroom and to pursue other business opportunities that meet their needs.
The Chinese delegation that will be traveling to Sint Maarten for the ground breaking ceremonies on September 17th, will consists of a delegation of 30 persons, including Chinese executives from China, Singapore, Malaysia, and Canada, as well as a reporter from China to cover the ceremonies on behalf of the Chinese government and Chinese government consular personnel.
During the discussions held between the Prime Minister, myself and the Chinese representatives they committed to take the necessary steps to generate tourism from China to Sint Maarten. In fact they have promised to see to it that at least 1 million of the 100 million annual tourists that China produces will travel as tourists to Sint Maarten.
They have also committed as a gift to the people of Sint Maarten, with the technology they have, to seek and find a water source on Sint Maarten that will make it possible for Sint Maarten to start growing agricultural products as an import substitution measure…. And as you know China is the leader in the production of solar energy and other alternative energy technology. They have offered to work with the government on significantly reducing the cost of electricity to our citizens and reduce our dependency on fossil fuel.
They have also expressed an interest in building an eco-city on Sint Maarten and assist Sint Maarten with its ecological needs and ambitions. To this end during their visit for the groundbreaking ceremonies on September 17th a forum will be organized with the government of Sint Maarten to discuss all of Sint Maarten needs and ambitions.
Ladies and Gentlemen, we have struck the jackpot and I believe congratulations in order. Hard work and remaining focused is paying off big time. We have found the answer to allow us to deal with all of the social and economic challenges that Sint Maarten is faced with and I wish to congratulate you and each and every citizen on Sint Maarten with this achievement. I especially want to thank the Prime-Minister with this achievement. The future looks extremely bright. All we have to do is stay the course, remain focused, continue to work hard and diligently pursue the steps to take advantage of the opportunities that are now in our reach and take Sint Maarten to the next level. We cannot go back to the methods of the past. We have to move forward.
Thank you very much!
Photo by StMaartenNews.net