Monday, September 14, 2015

Why has growth been so elusive for Jamaica?


SINCE the early 1970s, Jamaica has suffered from an anaemic growth rate of less than one per cent per annum. This despite many prescriptions and attempts by various governments, and promises by politicians, as to what needs to be done for growth to happen.

Once again we are in the season where many prescriptions will be made, and many discussions will take place on this elusive growth and how to achieve it. Once again there will be many recommendations, from both sides, that government should increase spending in order to boost growth in the economy. Much of this has been done in the past but really to no avail because we have not managed to achieve the elusive growth despite billions of taxpayers' money being spent

One reality that we must start to confront is that sustainable growth cannot be done by the public sector. In the past we have become used to a situation where we expect that government can drive sustainable growth. But that shows a lack of understanding of how to achieve sustainable growth.

Sure, government can put projects in place that can create a stimulus for growth, as most governments will do when a country is in recession -- as espoused by economist Maynard Keynes. But real sustainable growth comes from private sector development, especially when there is vibrant SME activity.

This is a significant philosophical problem we have had and in many respects continue to have. And this has guided policy in the wrong direction. So instead of encouraging competition and SME development, the policies implemented by various governments have caused greater public sector involvement, which effectively kills a competitive environment.


So we have created a bureaucratic structure to involve government in every aspect of business and personal life. And if that is not enough, we have created gridlock in the government processes by implementing a procurement process and culture that assumes that everyone is guilty until proven innocent -- which is in many respects perpetuated by a "gossip" culture.

The result is that businesses, and particularly SMEs, become inefficient. Bureaucracy is one of the major inhibitors to doing business in Jamaica, as reported by the Doing Business report for many years.

Also, because of the welfare politics that we have practised for as long as I can remember, we have also created an unproductive labour force. The result is that labour productivity has consistently declined in Jamaica since the 1970s.

It is this practice by our political system that has in my view resulted in the persistent poverty of our labour force as, instead of teaching people to fish, we continued to give them a fish. The irony is that our ability to give the fish has got less and less -- to the point where the state is not capable of doing so anymore. The result is a significant part of our labour force finds it difficult to fend for themselves in any meaningful way.

So the biggest risk we face to economic growth and development today is the state of our labour force. Even if the economy grows 100 per cent per annum, because many in the labour force are not equipped to be high-value producers and earners, they will not benefit.

Organisations like HEART must have a national mandate to retrain our labour force with much needed vocational skills for a successful logistics environment, for example. If we fail to retain the labour force, then we will only have growth without any real social development.

Fiscal policy has never really been engaged in facilitating a more friendly business environment, but rather has been primarily focused on raising revenues to feed the voracious appetite of government welfare programmes. The problem with this is that what we have been doing is transferring, through fiscal policy, productive funds to unproductive uses.

In fact since 2004, of all the tax measures put in place, only one has achieved the revenue targets. This has served to cause inflation because the fiscal policy effectively reduces productivity.

IMF programme

So far this year it seems as if the tax measures will be met. I am hopeful that they will be, and I remain optimistic about the positive changes from the economic and fiscal programme. I say this because the IMF programme we are under represents the first time I am aware that we have sought to tackle the legislative issues that have hampered a competitive business environment. And it is the first time I can remember where we are seeing all the macroeconomic indicators trending in the right direction.

One question though is, why have we not seen the exchange rate stop moving, even though the balance of payments is improving? The reason for that is because even though the legislative and fiscal changes made are positive, the fact is that some fundamental structural issues exist which we have not dealt with as yet. Because of this there is still a strain on productivity issues, as evidenced by falling exports.

The next step therefore must be to make the necessary structural shifts that will complement the legislative and fiscal reform process. That process must continue, but is not sufficient for growth.

In this regard we must address the issue of public sector transformation, not just from the point of view of the wage bill, but more importantly on how we can make bureaucracy more productive and supportive of businesses.

In other words, how do we change the culture?

We must also ensure that fiscal policy is not just geared towards getting more revenue for government, but rather look at the bigger picture -- of facilitating a better business environment to encourage more economic activity and to lead to a lower tax rate with increased revenues.

Until we fix these structural issues, growth will remain elusive to us, and we will forever be surviving with an average of one per cent growth.

This takes collaboration between the private and public sector, which I must say has improved significantly and is moving in the right direction -- but much more needs to be done.

Monday, August 10, 2015

Time for economic independence


ON August 6, 1962, Jamaica gained political independence, and many people watched the Jamaican flag raised while the Union Jack was lowered for the last time. This symbolised Jamaica's new-found political independence and was indeed cause for celebration.

Over the 53 years since then, Jamaica has achieved a great deal and, personally, I have seen much development in infrastructure and other areas (although I wasn't around in 1962).

However, one thing that has eluded us is economic independence.

So although we were given the right to govern ourselves, we have never truly experienced what it is really like to be a prosperous country. And so we have changed from being told how to manage our economic affairs by our colonial masters, to now being told how to do so by the holders of our debt stock.

This is similar to a young man attaining adulthood, but still having to live under his parents' roof and abide by their rules, simply because he wasted his opportunities at school.

In my view, however, today we have a great opportunity to change that path of dependence and move towards economic independence. It has taken us 53 years to get here, but I think the opportunity exists now more than any other that I have been conscious of.

And I say this because the economic and fiscal programme we are pursuing allows us to change our fortunes.

The macroeconomic indicators are all trending in the right direction, and confidence -- both local and international -- is high. In addition, all of this is happening within the context of a recovering global economy and greater opportunities for Jamaica. Importantly, for the first time since 2004 we have recorded a surplus on our current account balance.

On the other hand, we also have the grand opportunity to once again snatch defeat from the jaws of victory, as we have done so many times in our past -- which is why we are involved in our 13th IMF agreement.

Economic stagnation

We are at a point where we can either do the right things to make the economy grow, or we can watch the economy stagnate. Stagnation of course means continuing economic dependence, and I don't think there is anyone who wants that to happen.

In order for us to realise the growth needed to lead us to economic independence, we must do certain things -- especially leading up to a constitutionally due election. That will require focused and strong leadership.

Both the prime minister and the minister of finance have stated their commitment to the economic programme.

The irony is that by making the right choices we can also improve the living conditions of most Jamaicans. I say most, as there are some people who will no longer benefit from being connected -- because the market will distribute rewards instead of connections. This process has already started with the legislative and fiscal reforms we have already undertaken, and so I expect it will continue.

The prime objective of any government must be to improve the lives of all its citizens. In order to do so, however, we must establish the framework for proper governance, finances, and behaviour -- just as is done in an organisation.

Here are a few things that must happen:

First, the government must have policies that facilitate greater opportunity and growth for both individuals and businesses. Fiscal policy, especially, must be geared towards that. In many respects fiscal policy in Jamaica still has the objective of revenue collection rather than economic facilitation. There is too much emphasis on penalising businesses and people for the slightest of errors, with no attempt being made to expedite their progress.

Secondly, if we are to move this country forward (even with the best fiscal policies) we must ensure that there is law, order, and discipline. We cannot continue with the mantra of "Jamaica No Problem", which everyone interprets as "Do whatever you want". So road discipline and respect for the peace and quiet of others must be at the top of the list.

The third thing in support of a disciplined society is that any progressive society must have a properly functioning justice system, from enforcement by the security forces all the way to the court system. Without enforcement, discipline does not work as justice delayed is justice denied.

Drought of action

But before we can see any serious improvement on the fiscal and competitive sides, the culture of the public sector must be transformed to one of efficiency. This is by far the biggest complaint in doing business. This has been on the table for far too long without action, and the irony is that unless we address this, then no meaningful economic development will come any time soon. This must include accountability for inaction, such as that which has led to the effects of another drought.

Leadership is of course going to be critical. Leadership will have to do the right thing for the country irrespective of the opposition or the political expediency. The country is crying out for leadership at all levels, and without it we all will continue to suffer.

All these factors are related and must be done together if we are to achieve real economic independence. Importantly, we must change the way we think and stop looking at short-term objectives while sacrificing the long-term benefits. Only then will we be truly on a path to sustainable development and prosperity.

The question is, are we committed to doing what is necessary and right to improve the long-term prospects of the Jamaican people? This is not just a responsibility of government, but for all of us to think about after 53 years of trying.

Friday, July 24, 2015

What is the correct primary surplus target?


THE primary surplus on the fiscal accounts can be defined as what is left to service debt after the government considers its revenues and expenditure on running the country. So wages, social programmes spending, and general spending on maintaining the country is taken out of revenues, and what is left is called the primary surplus.

This has been the topic of debate over the last week after five US lawmakers wrote to President Obama and asked him to lobby the IMF to ease up on the primary surplus requirement of 7.5 per cent of GDP. The purpose of lowering the target from 7.5 per cent to around 6.5 per cent would have the impact of allowing for more expenditure in the economy, which implies that there would be more money available for programmes, capital expenditure, and wages. The argument, of course, is that it would help to cushion some of the hardships being experienced by many Jamaicans.

Some people have suggested that lowering the primary surplus requirement from 7.5 per cent to around 6.5 per cent of GDP would also result in greater growth. They have pointed out that Jamaica has the largest primary surplus requirement globally, and that even Greece is not required to run such a large primary surplus, which effectively reduces the amount of government spending in the economy.

But what is the truth about the primary surplus and its effect on growth, and consequently reducing the hardship being experienced by many? Will it also allow the Government to provide greater wage increases, as some have argued? And more importantly, what is the best solution to the primary surplus that will ensure sustainable growth and development? The most important consideration is that of sustainable growth and development, and not just to think about short-term impact solely.

Letter to Obama

Last week, I was on a radio programme discussing the primary surplus level and if there was any merit in the letter sent to Obama by the legislators. The point I made is that even if the primary surplus is reduced from 7.5 per cent to zero per cent of GDP, this by itself does not guarantee growth, and, in fact, in the past we have run primary surpluses which are much lower than 7.5 per cent, and with much higher fiscal deficits. After doing that for many years we still have not seen sustainable growth rates, and since the 1960s the only respectable levels of growth we have seen occured from 1986 to 1990.

So between 1972 and 2014 (42 years), we have seen only four years of any sustained growth above say four per cent. And over those four years this was influenced primarily by a debt to GDP that climbed to 212 per cent in 1984. There is therefore no evidence that allowing greater funds for government expenditure will guarantee any sustainable levels of growth, and in fact it has worked against us as we have funded the increased government spending through debt, which has put us where we are today.

Even if we were to reduce the primary surplus requirement today, it would mean that we would have to do so either by:

1) increasing tax revenues (through compliance measures or increased economic activity). In other words, not really decrease the absolute primary surplus amount but increase the fiscal revenues; or

2) increasing debt.

Option 2 is certainly not desirable, as it would mean a reversal of what we have achieved so far and would result in a longer period of adjustment and potential hardships.

Option 1 is therefore the desirable one, and is where we need to focus.

Increasing tax revenue through compliance measures is the preferred option, especially as we see that the Greek problem is significantly caused by a low level of tax compliance; which is why what they are doing now will not work until they address the tax compliance problem. This is something that the TAJ has been working on. But the problem is that the tax policy has been more focused on targeting already compliant taxpayers and asking them to pay more -- not going after those who are not in the tax net. That policy has only served to discourage capital and new investments, which in effect has resulted in low growth levels.

The focus on squeezing more and more out of investors that are already tax-compliant ends up discouraging capital investments and causing growth stagnation.

This makes revenue from increased economic activity difficult. We have seen that every tax package introduced since 2004, with the exception of one, has not achieved the targeted revenues. The reason is simply because policy is geared at increasing revenues from those who already pay taxes, rather than expanding the net and encouraging capital investments. The result is a largely service economy with capital outflows greater than inflows over the last 42 years.

Lack of water hitting GDP

Another example of the lack of accountability that has caused loss of GDP growth is the management of the water situation by the NWC. Everyone knew from last year that the drought would be worse this year, and even with that knowledge the NWC failed to plan to address the situation. The result is that this year the drought may cost us about one per cent of GDP, as it did last year.

Therefore increasing fiscal expenditure by reducing the primary surplus requirement can actually cause us to reverse our gains if we do not change the way we look at policy, how we spend, and accountability.

There is an argument for increasing government expenditure to provide short-term stimulus, and therefore one could argue for a relaxation of the primary surplus target. But this must be done in a controlled environment and with the understanding that sustained growth will only come through increasing productivity and changing the way we look at policy. In fact, changing the attitude to capital (with policy), public sector accountability, and value for money fiscal spending will all have a greater impact on growth, even without changing the primary surplus percentage.

At this time of the programme, however, there is an argument for relaxing the primary surplus percentage as this would provide the short-term stimulus needed to drive economic activity. The impact of this, however, will have less effect than if it had been built in at the start of the programme, as it means pulling activity up from a lower level than it was before.

Friday, June 26, 2015

Productivity at the centre of economic and social success


AFTER twelve previous IMF agreements, Jamaica is once again at a crossroads. We are once again at a place where we are having a debate about how much pain is being inflicted by the agreement, with some saying that we must stay on the path of fiscal reform and others saying we must renegotiate the agreement and allow for more fiscal space for greater expenditure. Allowing for more fiscal space is of course code for a higher fiscal deficit and an increased debt to GDP ratio.

My own view is that we have been here before. In fact, since the 1970s all we have done is to postpone prudent fiscal and economic management, so that we can play the populist game and feed the welfare addiction of our political process. By doing so, we have changed the attitude of the people from one of independence to one of being hooked on welfare through government spending -- thereby creating a political culture where the supporters of the party in power get all the benefits through their party's control of the fiscal resources.

Neo-colonial dependency

In fact, our political and social arrangements have moved us from the hopefulness of independence in 1962, to a culture of dependence on government, and the government's own dependence on foreign governments and agencies. Our irresponsible actions have moved us into a neo-colonial dependency, where our constitution is merely an illusion of independence.

All of this is because we have failed to address the root of our economic and social issues -- the continuing decline in labour productivity since around 1972 (there was a brief period of marginal improvement in the 1980s). As a result we have sought to improve our standard of living by either "begging" (through grants) or borrowing. We have never really paid back our debt but have just transferred our debt from one creditor to the next. By doing so we have created one big Ponzi scheme, where what we have done is rely on geometrically expanding those who will lend us money to pay back those we borrowed from before.

This trend is unsustainable, as we are now finding out, and we have come full circle -- borrowing in the 1970s from multilaterals, then from the capital markets, and now back to the multilaterals. Throughout this whole process we have never controlled our own economic destiny, but have always been marching to the orders of foreign creditors.

Change needed

The question we must now ask ourselves is, do we want to continue this trend -- thereby mortgaging the lives of our children the way we have done with our own lives? If the answer is yes, then we can continue to ignore the issues of productivity and needed behavioural change. If the answer is no, then we must do what is necessary to change our behaviour.

Whether it is your own personal life, a company, or a country, we can only make changes to our financial outturn by changing our behaviour patterns. This is something that as a country we have failed to do, just like many companies and individuals. We cannot change a company's fortune by working diligently at expanding the operations if the business model is no longer viable. And Jamaica's business model needs change.

This is the reasoning behind the fiscal and legislative reforms under the current economic programme, and why I personally an hopeful that it will work this time. Because in the past there has been fiscal and economic reform without legislative reform. This is the first time we are seeking to change economic and social behaviour through legislation such as the Insolvency Act, Tax Harmonisation Act, Fiscal Rule, and other criminal legislation such as DNA and Plea Bargain legislation.

This will ensure that as we apply fiscal reforms to bring about more responsible financial management, we will be ensuring behavioural change for greater competitiveness. If done properly, this will have the effect of increasing productivity for labour and capital, and will result in improving our external accounts, which is at the heart of our problems.

This adjustment is not going to be easy, primarily because we have delayed it for so long and built up a lot of "adjustment pressures". But if not done, then it is gong to cause much greater dislocation in the very near future. But the adjustment is not restricted to labour and capital, as government bureaucracy also needs to make the adjustment in how they think.

I refer specifically to government's addiction to taxes, and its current struggle to change its addiction habit. This is seen in the way taxes are introduced, which focuses on earning fiscal revenue rather than encouraging private sector and economic expansion. So, we have seen, and continue to see, new tax policy that is devoid of the link between economic activity and fiscal expansion, rather than focusing on fiscal expansion at the expense of economic activity. This type of behaviour will result in continuing the downward spiral and cause the sacrifices already made to be in vain.

We must remember that we live in a global village and capital has no obligation to one territory.

So while we ask labour and capital to change their behaviour, the change must also take place in policy. To the credit of the policy makers though, I have found that this attitude is changing and they have opened the door of dialogue to a greater degree than I have ever seen before, and this dialogue is taking place not just at the level of the policy makers but the executors also.

This needed change, however, is not only at the policy level but in the way we socially interact. So things like indiscipline on the roads and persistent night noise have deleterious effects on productivity. As an example, if we had proper order and control of crime, people would find it more palatable to use public transportation, or ride bicycles, which would cut into the more than US$2 billion spent on oil each year, and increase the spending power of labour to improve their standard of living. Or if we were to dispose of our garbage properly it would improve our health environment and reduce the money we spend on health care.

This is a conversation that we need to continue, as anything we do that does not include increasing labour and capital productivity (Total Productivity Factor) will only cause pain without benefit.

Friday, June 05, 2015

Public sector wages — what are the real options?


ONCE again the public sector wage negotiation is the main topic of the day. This was also the case in 2004, when the first round of wage freezes was agreed. Then, just like today, I didn't see a public sector wage freeze as a long-term solution. In fact, the 2004 agreement never saw it as that either, as it proposed actions that included retraining public sector workers and preparing them to transition, voluntarily, to start their own businesses or seek employment in the private sector.

So what we are seeing today is not a new problem. It is just worse because we have delayed solving the underlying problems. And even if we were to get another wage freeze, or lay off workers, it still would not solve the underlying problem by itself and we would be back in this same situation within another two to three years.

What is really needed is proper public sector reform that results in performance related-pay measurements and labour market reform. It is our failure to do this, and just talk, that has led to where we are today. And if we do not carry out this reform effectively, we will still find ourselves back where we are today, because at the heart of the problem is the matter of productivity.

The approach to public sector reform in 2010 (through the centralised PSTU at the OPM) was never going to work. When I indicated that in 2010 I was told that I didn't know what I was talking about. The approach today is somewhat better, based on what I have seen, but the centralised approach is still too bureaucratic and will not have any short-term impact. The best solution is to decentralise the reform process. But that is for another article, as I want to look at the immediate options to resolve the current impasse.

Emotional responses

The response from many on the public sector wage dispute is emotional. I have heard many people say that the government should pay the public sector workers significant increases, or more than 25 per cent. When I ask them to put forward their immediate solution, bearing in mind that new taxes won't work and debt is not possible, they speak to medium-term solutions such as tax reform, public sector reform, and reducing wasteful expenditure.

One person, when pressed, even went as far as to say that people over 55 should be forced to retire and the other workers should be given an increase of at least 25 per cent. In other words, lay off other workers as long as it does not affect me. But there's no mention of keeping the most productive, or of paying based on performance.

What these responses show is that they are not supported by any thought-out solutions. One man I heard on the radio, when asked for a solution, said that the government can raise taxes -- which betrays a lack of understanding of how the economy works. That solution would cause even further hardship, not only on businesses, and SMEs in particular, but for the same public sector workers.

Let us be clear that I empathise with public sector workers, and in particular the police, nurses, and teachers. Even though these groups have demonstrated their willingness to go the extra mile, in general, the fact is that both productive and non-productive people have been grouped together, in relation to the negotiations. The result is that you apply the same compensation amounts to people with varying degrees of productivity, and the productivity level as a whole will fall.

So, because of our failure to properly address public sector reform, we are in the same place, or worse, than we were 11 years ago when the first wage freeze agreement was inked. Resolving this, however, is a longer-term solution and the chickens have now come home to roost.

The fact is that the options available to the government today are very limited. There are only two options (i) accept the government's offer, within its ability to pay, or (ii) as Minister Dalley said, if the demands are met then it means 10,000 to 15,000 jobs will be lost. Or else there will be an inability to pay.

The private sector seems to be profitable today, and the truth is that they are improving, but they are still far from where they were pre-recession. This success, however, came after much pain in the private sector, as they suffered from two debt swaps and also lost a significant amount of jobs, when the unemployment rate went close to 20 per cent. Many businesses also closed, and even today many are struggling. Every week, I get many requests from people seeking employment -- even for a job way below their training.

So what has happened in the private sector is that the market has adjusted, and as a result organisations are becoming more profitable. This is just as it happened in the US market, where job losses and business closures were rampant, and after a few years of pain the market is recovering.

This adjustment never happened in the public sector, however, resulting in the difficult situation we are in today. The fact, however, is that sooner or later the market will demand that the adjustment either be made, through public sector reform, or the suffering will continue for a much longer time. And it would have happened earlier had we not gone out and borrowed money to cover up for our inefficiencies.

Just as in 2009 myself and Ralston Hyman said (i) the debt needed to be restructured and (ii) the government would have to turn to the IMF, and we were told that we didn't know what we were saying. Approximately three months later, however, we signed an agreement with the IMF and the debt was restructured. The point being that the way to deal with the fiscal problem must be looked at practically, and not from an emotive position.

So while public sector and policy reform, is necessary for a long-term sustainable solution, the fact is that an immediate solution is necessary. In my view, the best solution for the country now, is for the government's offer to be accepted. I don't subscribe to the selfish view that we should retire the older people so that the younger ones can benefit. I know that people are having a difficult time, but trust me when I say that any significant increase, without the accompanying productivity increase, will only lead to increases in inflation and the depreciation of the exchange rate, and make it even much worse for everyone.

However, while accepting the offer, it is important for both parties to sit down and arrive at a win-win long-term solution for all. This will of course require an improvement of the trust factor between both parties, as the lack of trust for me is the most divisive factor in these negotiations.

Friday, May 15, 2015

Long-term view to solutions necessary


Recently, I said to someone that one of the challenges we have as a country is that we are too focused on immediate gratification, and not on the long-term effects of our actions. As a consequence we react to what people, or the media say, and throw out our long-term, well-thought-out plan in order to conform with the popular opinion of the moment, or to prevent the public saying anything negative about us.

This is not only a fault with our politics, but in many instances occurs in private companies also. Managers will often listen to the office talk and act based on that, rather than properly investigating and applying an objective process to finding a solution.

So, as I said to the person, it is not the best thing to manage your affairs based on what is being said, but rather manage based on whatever well-thought-out plan and long term objective you have, and ensure that you apply the right principles. You might not be "popular" in the immediate term, but that is only important if you are in a beauty contest. One of the primary responsibilities of being a leader or professional, is to always do what is right even in the face of being unpopular.

Economic climate

At the current time there is much debate about what are the right economic and fiscal policies to pursue, as there is no doubt that the economic climate is difficult for many in the labour force and some businesses. It seems paradoxical that many in the business community, buoyed by the business and consumer confidence numbers, are saying that the programme is going well and they see improvements, expecting a better economy. While there are others, and rightly so, who question the path we are on because it has become very difficult for them. Included amongst them are many well-qualified professionals.

I don't doubt that, as I have seen and heard about such situations. And I empathise with them, as there has been a significant change in the economic environment.

What we must not do, however, is bring about any radical change that will affect the long-term viability of our plan. I have seen many times in the past where at the first sign of criticism we falter and throw out all the accomplishments we have achieved. This is what leads to the view by many that new governments abandon all the good programmes and policies that are in place because of politics.

But, as I said, this is not unique to the country's governance, but also private sector companies which may have the wrong leadership; because I have found that when it comes to success, leadership is first, second, and third.

Great business leaders

And I know what it is like to come under severe criticism by people who either can't see the long-term vision, or those with different agendas. I have also had the experience of working with some great leaders, who have always looked at the bigger picture and don't worry too much about the immediate criticism.

Two such people, whom I worked very closely with on the Air Jamaica divestment, were Dennis Lalor and Don Wehby. I remember during that process that there was severe criticism from many, including comments also that we were securing financial reward for ourselves from the transaction. The irony of it is that none of the directors even received the normal stipend, and in many instances the bills were taken care of by Lalor.

In the face of the criticisms, however, these gentlemen would say to me that we have a job to do and we have to think about the long-term objective. Is it any wonder that both GraceKennedy and ICWI are very successful companies that have been around for a very long time.

I remember also when I was on the board on the Betting, Gaming and Lotteries Commission, and being much younger then I received a very important lesson from the chairman at the time, Gordon Robinson, who said to us that irrespective of what people say out there we will do the right thing -- even if it means that we will eat bun and cheese for the rest of our lives.

The fact is that credibility does not come from being popular. It comes from doing the right thing all the time.

This doesn't mean that as you go along the journey you don't make adjustments. In fact, having the flexibility to make adjustments is very important. Richard Byles always says that the economic programme is like driving to MoBay. You may change your speed or may get a flat along the way and have to fix it, but you should never forget that you are still driving to MoBay.

So we are at a critical juncture of the economic programme, and the change in the economic competitiveness, and reduction in government programmes is taking a toll. And I think we need to make adjustments where necessary but we should not make any decision that will cause us to be thrown off the long-term objectives. Any action that causes that will only lead to even greater hardship, as has happened in this country over the past 40 years.

What it will require is strong and visionary leadership. Leadership that must be able to communicate effectively -- not only what we are doing -- but the long-term objective and path to get there. Leadership that can sell this vision to the country so that they also are fully engaged.

One of the things I have always warned against, which we must not be tempted to do, is to install taxes as a short-term gap for the fiscal accounts while hurting the long-term objectives. I have seen us do that too many times, which ends up causing even greater fiscal challenges.

As citizens we also have a responsibility to engage constructively with the government. Criticism and disagreement is good but it must be done in a constructive and respectful manner, while in the long run doing what's necessary to achieve our objectives.

Friday, May 08, 2015

Public sector wage dilemma


One of the issues that has to be resolved, as we move forward with our economic programme, is the matter of public sector wages. Over the past three years, the workers have accepted a wage freeze.

Over this period the exchange rate has moved from approximately J$88:US$1 to over J$115:US$1. Also, inflation would have totaled approximately 30 per cent, which means that public sector wages would have been significantly reduced in real terms. What this means is that public sector workers would have seen a decline in living standards. This is not exclusive to the public sector, as private sector workers have not only faced wage freezes, but also job losses.

This sacrifice by the public sector workers has contributed positively to the the fiscal accounts. Over that period we have successfully completed eight quarterly IMF tests and, more importantly, the fiscal deficit balance has been significantly reduced to near balance. This has resulted in lower inflation rates, lower interest rates, increased business confidence, reducing debt to GDP ratio, and significant slowdown in the depreciation of the exchange rate.

Indicators point up

These numbers are significant, because for the first time that I can recall all indicators are moving in the right direction all at the same time. Previously we would have a combination of either (1) stable exchange rate, high inflation, high interest rates, and deteriorating debt to GDP ratio; (2) devaluation, high inflation, lower interest rates, and deteriorating debt to GDP ratio; or (3) all indicators worsening.

Another positive effect of reducing real wages has been the improvement in the balance of payments, as a result of reduced imports, caused by reduced demand.

One can therefore sympathise with the public sector workers, as significant sacrifice has been made resulting in lower living standards. The other challenge that public sector workers would face is that because of a lack of emphasis on performance compensation, persons who add greater value and go the extra mile still get the same compensation as someone in a similar pay grade who is much less productive. In the private sector this productivity is considered in compensation, for example incentive payments.

The March 2015 fiscal quarter shows that although the more important primary surplus percent target has been met, the amount was some $4 billion less than target. The implication being compressed expenditure, especially on infrastructure, in order to meet targets. This also means that in order to meet our targets at this time, the greater reliance is on expenditure management rather than revenues.

This news comes at a time when the public sector is negotiating for a wage increase and is demanding up to 15 per cent each year for the next two fiscal years. At the same time, the Government is correctly advising that this would threaten the fiscal targets and could result in us jeopardising future IMF tests.

The dilemna

The dilemma is: Do the workers have an argument for double digit increases, or is the Government correct in saying that more than 5.0 per cent would jeopardise the future targets? In the past, for example, when faced with pressure from the public sector unions, the Government would provide the increases demanded and then we'd start the whole process all over again, which is why 53 years after independence we are still in an economic quagmire.

My own view when the budget was presented is that an increase of between four and eight per cent was to be expected. This is simply because any amounts above that would jeopardise the fiscal and economic programme. Too high an increase would (i) eliminate any capital expenditure on infrastructure; and/or (ii) cause a lower primary surplus and higher deficit.

It is for this reason that the best option may be for public sector workers to compromise with the Government's position this fiscal year. This is because any increase that causes us to regress in the fiscal accounts will result in only very short-term benefits, but within a year that would be followed by higher inflation, increased debt, and greater devaluation. In very short order purchasing power would quickly be eroded. In fact, I think any misalignment now may cause even greater hardships than before.

This doesn't mean that public sector workers should continue to sacrifice indefinitely, and what I would do, if I were the union, is get a commitment from the Government that accepting the proposed increase in this fiscal year means that certain things will be put in place to ensure growth, and hence improved tax revenues.

One of the things that has resulted in this impasse, as well as the difficulty faced by public sector workers, is the failure of administrations over the years to adequately address public sector transformation. The focus of course is not on job cuts, but rather transforming the public sector into a much more productive unit, which will facilitate private sector productivity. This will of course result in greater revenues for the fiscal accounts. Bear in mind that a part of this also is to ensure that there is greater emphasis on tax compliance by persons outside of the net.

It is clear to me that any sustainable solution to public sector wages, for the benefit of both the workers and the fiscal accounts, can only happen if there is greater public sector productivity and workers are compensated based on their value added, rather than just seniority.

So I will end with what I also said when the first set of wage freezes started (I think in 2007). Wage freezes are not a sustainable solution to the fiscal accounts and will only delay the inevitable and during that time cause unnecessary suffering. If we want to see better circumstances for public sector workers and the fiscal accounts then public sector transformation must happen.

It is our failure to do this that has once again resulted in the public sector workers seeing declining real wages without any permanent solution to the fiscal accounts.