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The essential middle class & Virgin Islands Tourism

Dickson Igwe. Photo: VINO
By Dickson Igwe

The IMF has stated that a healthy and prosperous middle class is the key to a strong economy. Jack and Jill Average are the critical cogs in the global economic wheel. Their spending drives both the domestic internal economy, and international trade. The middle classes are also essential to global tourism.

For the [British] Virgin Islands the lesson is to not just cater for the global wealthy- the 1%- to grow tourism. The growth of Virgin Islands tourism - and these paradise islands have much to offer the tourist- means catering for western consumers earning between 25,000-75,000 USD per annum: blue collar whites, small business owners, clerical workers, public workers, midlevel administrators, and middle managers.

In fact, there is evidence that the middle classes are greater spenders than the frugal rich. This derives from the simple fact that there are hundreds of millions more poor and middle class people than wealthy people. There is a multiplier effect when the middle class feel prosperous, and that leads to strong economic growth.

The discerning traveler visiting regional cities such as Las Vegas, Orlando, and Bournemouth; and the great capitals: such as London and Paris will swiftly learn if they choose to observe, that tourism in these cities, a critical industry, is driven by middle class visitors. The majority of jobs in the hotel, leisure, and tourism market globally are maintained by middle class spending.

Tourism in the Virgin Islands remains the biggest employer, but jobs in tourism are not secure. This is due to two factors: the seasonal nature of the industry and the limited access the North American and Northern European traveler has to these islands.

That is one key reason why this Old Boy called for extending the runway at Terrence B Lettsome International Airport and integrating the USVI tourism economy with VI tourism in years past. Direct access into the territory from the world’s largest cities via airline is crucial to growing VI tourism, with over 4 resorts lying idle in the territory this August 2016. Then add the conundrum that financial services remains under negative global administrative pressure.

There can be no valid reason why many thousands more USA mainland travelers into the USVI and Puerto Rico cannot be further directed into the VI and cleared at VI front desks in these places first. There should be a VI immigration, customs, and police presence at Cyril E. King and Luis Munoz Marin- and then guests could enjoy a seamless journey on to Road Town, Spanish Town, Virgin Gorda, and Great Harbour, Jost Van Dyke. This is an option that requires aggressive investigation by a “super committee,” set up by the powers that be. It is not impossible to implement as many “in the know” have stated.  

Now, Shane Wright is Economics Editor of the West Australian. On June 30, 2015, in a story titled “Pressures on the middle class,” Wright wrote on how the International Monetary Fund was asserting that trickle down was dead. The IMF was concerned about, “the squeeze on the global middle class.” The organisation viewed the middle class as crucial to the “economic health of the globe since the end of World War 2.”

The IMF asserted that “without the middle class the development of a range of sectors from education to tourism and consumer retailing would be unimaginable.”

Today, “a series of changes in technology and policy is squeezing middle income earners.” Inequality is causing real economic damage and “the notion that boosting the top means more for all, the classic trickledown effect does not really exist.” In fact, research shows that when the income share of those at the top increases GDP growth actually declines. On the other hand, an increase in the income share of the bottom is associated with higher GDP growth.

The IMF has further discovered that “the poor and middle class matter the most for economic growth. Raising the income share of the poor and ensuring the health of the middle class is good for economic growth.” Paradoxically, the IMF pinpointed technology as one of the biggest factors in the decline of the middle class. There is a wealth effect from having great skills. However, if a worker lacks specific skills such as IT skills that individual misses out on wage growth or on a job altogether.

Economic rents, including incomes paid to company chief executives, are accruing to the top end of the income distribution. Another matter of interest is the fact that research released by the OECD warned that further growth in the financial sector would actually hurt economies. It was economically defective when wage growth in the financial sector was ahead of wage growth in other areas of the economy.

In fact better economic outcomes are achieved with tax cuts to those with middle and low incomes. The stimulus effects of income tax cuts are largely driven by tax cuts for the bottom 90%. On the other hand the link between job growth and tax changes for upper income earners is weak to negligible. Findings show that business groups back cuts to the top marginal tax rates. On the other hand these groups rarely dwell on those at the bottom. That is very shortsighted.

There is greater productivity gained by cutting the tax rate of a person in the middle or bottom of the income pyramid that a person earning 180.000 USD who is in the 2% wealth percentile. That person is not going to be incentivised into working harder or more productively. Those backing cuts for the 1% argue the need because of international competition. But they are wrong. And there is more on inequality. A look at individual savings shows that the disparity between the haves and have nots is even stark. The best paid 20% of the country have average savings of 1.3 million USD each, which includes superannuation; the bottom 20% just 6000 USD.

The richest 20% possess a third of all income and hold three quarters of total savings. The rich are very smart at using the tax system. High income savers got to that point in the wealth metric by holding assets in tax advantaged trusts and similar vehicles. Inequality is mainly capital driven, not wages driven. These capital type assets grew by 87% between 2005 and 2015. This was the fastest asset growing class.

Between 2005 and 2015 money placed in tax advantaged trusts grew better than cash sunk into a business, by as much as 80%, and much better than shares, which grew by 63%. That is a major reason why the world is experiencing slow economic growth. The miserly wealthy are sucking up the cash the poor and middle classes spend.

Austerity and trickledown destroy consumer confidence in an economy, as both economic cultures lead to fear and uncertainty, especially in the middle class. This is a perverse dynamic that leads to weak spending, further leading to sluggish economic growth. Austerity impacts businesses worldwide for the worse. When Jack Average stops spending, the economic consequences are frequently dire. The fall out may be part of the reason for sluggish growth in Caribbean tourism this August 2016.

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