Recently, the Jamaica Productivity Centre released a productivity report on the period 1972 - 2007 in Jamaica, where it showed that over the 35-year period the labour productivity of the Jamaican worker declined by 1.3 per cent per annum. It further stated that at our current rate of growth it would take 40 years to get to Barbados' current per capita
GDP level.
What surprised me about the report weren't the findings, as anyone who is even slightly aware of what is happening in Jamaica will know that our productivity and growth levels are at the bottom of the pile. What I am surprised about is the reaction to the information, as if "Wow, I didn't know we were doing this badly". It seems as if everyone has forgotten that the last time the centre reported the results were similar.
Consistent decline
The fact is that Jamaica's productivity has always been in consistent decline since the 1970s, as I illustrated in my book, with the exception of the decade of 1980 to 1990, when the Total Factor Productivity (TFP) - productivity measurement factor - was 1.0. In the decade 1960 to 1970 the TFP was 2.4, 1970 - 1980 it was minus 3.8, and in 1990 to 2000 it was minus 1.7; all measured as annual averages.
During similar periods, this was reflected in the GDP growth numbers. These periods are 1962 to 1971, when accumulated GDP growth was 68.5 per cent (average annual of 6.9 per cent); 1972 to 1981, accumulated GDP growth of minus 9.5 per cent (average annual of minus 1 per cent); 1982 to 1991, accumulated GDP growth of 19 per cent (average annual of 1.9 per cent); 1992 to 2001, accumulated GDP growth of 8.9 per cent (average annual of 0.9 per cent); and 2002 to 2007, accumulated GDP growth of 9 per cent (average annual of 1.3 per cent.
One could ask the question why we had growth during the 1990s if TFP was negative. The answer is simply that we were able to grow because we borrowed to consume and create economic activity. So today we are faced with a situation where we have to pay back for all the money we borrowed to consume when we were not producing the means for our
own consumption.
This is at the heart of all our challenges. The question then is how we improve our productivity so that we can enjoy real economic development and all the benefits that come with it. First I think we need to get an understanding of what productivity is, as it seems obvious from the policies that our leaders have pursued that they really have no idea of what productivity really is.
So for the benefit of our leaders, productivity can be defined as "the rate at which a [country] produces goods or services, in relation to the amount of [resources] needed" - adapted from Encarta.com. In other words if someone employs $100 worth of resources and produces $200 worth of goods yesterday, and today can employ the same resource value and produce $250, then productivity would have increased by 25 per cent. What Jamaica has been doing is producing less with the same amount of resources, which means that more resources are needed to produce the same amount. But ironically our consumption has been increasing while our production has been falling. So in order to consume more we need to borrow from others who are producing more than they consume and end up with reserves. In effect Jamaica is a parasite on the world's production.
What of technological improvements?
But some may say that during the 1990s especially, we had improvements in technology, as more computers were put to use, the Internet came into being, and more persons had cellular phones. So if we saw an increase in the productive tools being used then obviously productivity must have increased. And some people have tried to argue with me in that manner, as Ripley would say "Believe it or not".
First, we need to understand that if we look at the use of technology in Jamaica, most of it is geared towards personal consumption, in my own informal analysis, rather than employed in productive use. And the reason why we are able to consume these productive tools is that we borrowed the money to consume them.
Secondly, and in my mind more importantly, we need to understand that a computer does not work by itself, nor does a new state-of-the art piece of machinery. All productive tools require a productive mind behind them in order to be the most productive they can be. So even when the police talk about the number of guns on the road, that is not what causes the crime. What causes crime is the number of criminal minds behind the guns. Similarly, when we talk about the absolute amount of debt, that is irrelevant without looking at how effectively each dollar of debt is used.
So the real challenge we have when it comes to lack of productivity is not how much foreign investment we attract, or how much agricultural land is in production, or how much money is pumped into the economy. The real problem of productivity comes back to the social issues. The problems relate fundamentally to how productive our people are. And so when we see a situation where 50 per cent of students leave secondary school without one subject, then is it any surprise that this translates into Jamaica having the lowest productivity rate in the region? Can we be surprised at our low rates of productivity when our citizens spend their days demanding justice from both the police and the criminals? How can people be productive if at a basic level they have to worry about their security? How productive can people be if their days are caught up worrying about their missing children?
And if our citizens cannot be productive, then what sense does it make to have the most efficient tools of productivity? We also need to remember, and everyone is seeing it now, that economies like Jamaica's thrive on consumer spending, and it is a known fact that most spending occurs within the lower-income classes, so that if they don't earn a decent wage the economy will stagnate. This is exactly what is happening as real purchasing power, particularly in the low-income groups has fallen significantly year over year.
So in the final analysis when we speak of productivity and growth it would do us well to understand that this is fundamentally a social problem. My own view continues to be that the failure of Jamaica's economy starts with our failure to protect and advocate for the fundamental human rights of our citizens, and unless we change this then we will persist on a path of economic and social failure.
The great USA that we look up to starts its constitution with the words "We the People of the United States, in order to form a more perfect Union, establish Justice." (You will note that Justice has a capital J). The fact is that unless we start to realise that all our economic and social challenges come from the inability to provide the Jamaican citizen with justice and a protection of his/her basic human rights, then I guarantee that next year this time, and into the foreseeable future, we will be talking about the decline of both the Jamaican economy and values and attitudes.
Friday, November 13, 2009
Friday, October 30, 2009
The economy must adjust to develop
From time to time, I talk to business people in Jamaica who tell me that with each passing day business is getting more and more difficult, as buyers are not only spending less but are taking longer to pay.
We see also where financial institutions have been reporting a fall-off in consumer loans, and targeting the small and micro business sectors.
Added to this we see where some 30,000 jobs have been lost since the start of the year, and my own expectation is that we may see another 15,000 more in job losses before the end of the fiscal year.
Money circulation
The fact is that real money in circulation has taken a beating, and more importantly the consumer purchasing power has taken a severe beating. When we speak about a vibrant economy it is important to remember that this is only possible with spending power in the hands of the average consumer, as we have seen in the US, which has had to introduce a very large stimulus package to keep their economy going.
The most recent US data has shown that the last quarter GDP has increased by 3.5 per cent but this in my view was driven by stimulus money more than any real recovery in the economy, as job losses still continue to mount.
In Jamaica's case, having spent all our future income already, we have no "savings" to create any stimulus for the economy. The fact is that the Jamaican consumer has been hit really hard over the past few months, and this trend I expect will continue for at least another few months. But this is necessary if we are to change the current economic structure of the country and reposition ourselves for development.
The following developments have caused havoc for the local consumer:
. 30,000 persons, or approximately 2.3 per cent of the labour force, have lost jobs since the start of the year;
. Real incomes have declined by about 10 to 14 per cent, as wages and salaries have been kept flat for the most part while we have seen inflation of 14 per cent in the last fiscal year; and
. There have been increases in taxes, food prices, fuel prices, and other basic items, further eroding the purchasing power of consumers.
This means that total consumer purchasing power has declined rapidly. Add to this the losses sustained by consumers in the unregulated investment schemes, and the fact that some have been paying off loans or saving more in anticipation of more difficult times, and you have a scenario where consumer spending has declined significantly. So even though the absolute amount of money in circulation may not be much different from what it was a year ago, the fact is that the real expenditure has declined significantly (even so, the BOJ has reported that the expansion in money supply was lower than projected). One could easily expect that real consumer expenditure could have declined by about 25 per cent year over year.
So what all of this means is that businesses are inevitably going to suffer and I expect that we will see business fallouts accelerating into the first quarter of 2010. In fact, when the car dealers received the recent stimulus package I was on a programme with two of them professing how happy they were with the stimulus. I told them that it would not make a difference and car sales would continue to decline. The fact is that consumer spending is driven by how many persons have jobs, expectations, and the purchasing power of consumers. So if one were to pull the stimulus money out of the US economy, there would no doubt be a decline once again.
Consumer spending necessary
Creating stimulus packages with no positive adjustment to the spending power of consumers will have little or no effect. The lesson from this is that instead of providing stimulus to the businesses, the government would be better off providing stimulus packages to the consumer. In the US, for example, the stimulus came mostly in the way of programmes such as the cash for clunkers, government employment projects, and extending unemployment benefits. This is the only way to positively impact the economy.
The Observer's Fashion Night Out is an innovative way of providing a stimulus to consumers as it provides them with greater purchasing power through lower prices. My own prediction is that the overall night will be relatively better for the merchants, but the downward trend in business will continue after the night is over. Businesses in clothing and other basic necessities should fare better. This one night will not develop any long-term loyalty, as loyalty in today's economy only comes through much lower prices.
But the fact is that this adjustment in the economy, through business fall-outs and lower consumer purchasing power, is necessary if the economy is going to develop. Jamaicans have for a long time lived above our means, thereby running up a significant trade deficit. The only way that we have been able to keep our heads above water, and avoid drowning, is to put on the debt "life jacket". Continuing the course of borrowing our way out of the problem will only make the adjustment more violent when it comes, as it is not possible to borrow forever. So the sooner we make the adjustment, the better it will be for us. Because we have taken too long to make this adjustment I think the next few months will be an experience in pain for many.
The role of the government in all of this must be to (1) encourage investment and (2) more importantly to ensure that the adjustment is as painless as possible. And this latter role is critical if we are to ensure the economy's adjustment in as rapid a timeframe and painless a manner as possible. Any prolonged adjustment period and too much pain will be bad for the country, and so careful policy implementation is going to be critical. Even if we were to select the appropriate policies and implement them, we could still have more challenges than we want.
What we will see is that businesses that rely on luxury items and imports are going to be the first to fail. Outside of that, businesses that fail to employ the necessary professional expertise to help them through this time will run into problems also. There are some that were more proactive than others and sought the assistance from last year and were able to adjust way in advance of the economic onslaught. Those less prepared will either see their capital depleted or will fade away into the sunset.
So even though the US economy is showing signs of improvement this is not going to have any short -term positive impact for Jamaica. We will continue to see the economy being weighted down by our past decisions. This adjustment, however, is necessary in order for us to put a halt to the stagnation we have found ourselves in since the 1970s (with a small moment of hope during the end of the 1980s) and start on the path of development.
As usual, however, the road we take is going to depend on the policy choices we make.
We see also where financial institutions have been reporting a fall-off in consumer loans, and targeting the small and micro business sectors.
Added to this we see where some 30,000 jobs have been lost since the start of the year, and my own expectation is that we may see another 15,000 more in job losses before the end of the fiscal year.
Money circulation
The fact is that real money in circulation has taken a beating, and more importantly the consumer purchasing power has taken a severe beating. When we speak about a vibrant economy it is important to remember that this is only possible with spending power in the hands of the average consumer, as we have seen in the US, which has had to introduce a very large stimulus package to keep their economy going.
The most recent US data has shown that the last quarter GDP has increased by 3.5 per cent but this in my view was driven by stimulus money more than any real recovery in the economy, as job losses still continue to mount.
In Jamaica's case, having spent all our future income already, we have no "savings" to create any stimulus for the economy. The fact is that the Jamaican consumer has been hit really hard over the past few months, and this trend I expect will continue for at least another few months. But this is necessary if we are to change the current economic structure of the country and reposition ourselves for development.
The following developments have caused havoc for the local consumer:
. 30,000 persons, or approximately 2.3 per cent of the labour force, have lost jobs since the start of the year;
. Real incomes have declined by about 10 to 14 per cent, as wages and salaries have been kept flat for the most part while we have seen inflation of 14 per cent in the last fiscal year; and
. There have been increases in taxes, food prices, fuel prices, and other basic items, further eroding the purchasing power of consumers.
This means that total consumer purchasing power has declined rapidly. Add to this the losses sustained by consumers in the unregulated investment schemes, and the fact that some have been paying off loans or saving more in anticipation of more difficult times, and you have a scenario where consumer spending has declined significantly. So even though the absolute amount of money in circulation may not be much different from what it was a year ago, the fact is that the real expenditure has declined significantly (even so, the BOJ has reported that the expansion in money supply was lower than projected). One could easily expect that real consumer expenditure could have declined by about 25 per cent year over year.
So what all of this means is that businesses are inevitably going to suffer and I expect that we will see business fallouts accelerating into the first quarter of 2010. In fact, when the car dealers received the recent stimulus package I was on a programme with two of them professing how happy they were with the stimulus. I told them that it would not make a difference and car sales would continue to decline. The fact is that consumer spending is driven by how many persons have jobs, expectations, and the purchasing power of consumers. So if one were to pull the stimulus money out of the US economy, there would no doubt be a decline once again.
Consumer spending necessary
Creating stimulus packages with no positive adjustment to the spending power of consumers will have little or no effect. The lesson from this is that instead of providing stimulus to the businesses, the government would be better off providing stimulus packages to the consumer. In the US, for example, the stimulus came mostly in the way of programmes such as the cash for clunkers, government employment projects, and extending unemployment benefits. This is the only way to positively impact the economy.
The Observer's Fashion Night Out is an innovative way of providing a stimulus to consumers as it provides them with greater purchasing power through lower prices. My own prediction is that the overall night will be relatively better for the merchants, but the downward trend in business will continue after the night is over. Businesses in clothing and other basic necessities should fare better. This one night will not develop any long-term loyalty, as loyalty in today's economy only comes through much lower prices.
But the fact is that this adjustment in the economy, through business fall-outs and lower consumer purchasing power, is necessary if the economy is going to develop. Jamaicans have for a long time lived above our means, thereby running up a significant trade deficit. The only way that we have been able to keep our heads above water, and avoid drowning, is to put on the debt "life jacket". Continuing the course of borrowing our way out of the problem will only make the adjustment more violent when it comes, as it is not possible to borrow forever. So the sooner we make the adjustment, the better it will be for us. Because we have taken too long to make this adjustment I think the next few months will be an experience in pain for many.
The role of the government in all of this must be to (1) encourage investment and (2) more importantly to ensure that the adjustment is as painless as possible. And this latter role is critical if we are to ensure the economy's adjustment in as rapid a timeframe and painless a manner as possible. Any prolonged adjustment period and too much pain will be bad for the country, and so careful policy implementation is going to be critical. Even if we were to select the appropriate policies and implement them, we could still have more challenges than we want.
What we will see is that businesses that rely on luxury items and imports are going to be the first to fail. Outside of that, businesses that fail to employ the necessary professional expertise to help them through this time will run into problems also. There are some that were more proactive than others and sought the assistance from last year and were able to adjust way in advance of the economic onslaught. Those less prepared will either see their capital depleted or will fade away into the sunset.
So even though the US economy is showing signs of improvement this is not going to have any short -term positive impact for Jamaica. We will continue to see the economy being weighted down by our past decisions. This adjustment, however, is necessary in order for us to put a halt to the stagnation we have found ourselves in since the 1970s (with a small moment of hope during the end of the 1980s) and start on the path of development.
As usual, however, the road we take is going to depend on the policy choices we make.
Friday, October 23, 2009
BETWEEN A ROCK AND A HARDER PLACE
n July 2008, I wrote an article entitled "A perfect economic storm", where I indicated that 2009 would be the worst economic time since independence.
Since then the winds preceding the storm have been blowing but have not made landfall yet because of the slowing economies, which resulted in the significant fall-off in oil prices. If oil prices had remained even at current prices then I think we would have felt the effects earlier.
That storm is now about to make landfall in Jamaica, and those who were thinking would have started to make preparations from last year. This, particularly since this storm is going to be for a protracted period and a new thinking is needed in business and nationally to deal with it.
Signs of the times
The signs are showing every day that the storm is coming onto our shores. The Government first announced the need to go back to the IMF, and this was followed by reports of a private sector proposed liability management programme. Then came the downgrade by S&P, the very upfront speech by the prime minister, the presentations by Professor Harris and Mr Livshits, and finally the report from the Economist Intelligence Unit (EIU).
All these revelations come as no surprise to us locals who have been saying for a while (some from in the 1990s) that Jamaica has a very serious fiscal situation and that the only thing that has been holding the pieces together was the fact that we were willing to mortgage away the wealth of not only our children, but even further generations by borrowing money to satisfy a lifestyle we cannot afford.
It could very well reach a stage where pregnancy terms in Jamaica move to twelve months as babies may not want to be born to face the approximately $482,000 debt they are saddled with at birth. But the fact that these reports are coming from foreigners makes it more real to many of us who have not been ardent followers of Bob Marley and managed to "emancipate ourselves from mental slavery", always hanging on to the word when delivered with an accent other than Jamaican.
So here we are in October 2009, looking helplessly at the oncoming economic tsunami, as it starts to ravage our shores. Our only hope being that it will not stay with us for long but deliver a swift blow and destroy what it must quickly, so that the excruciating pain will not last. We are indeed caught between a rock and the harder choices we have to make with each passing day.
In Jamaica, I have come to realise that it is not only death and taxes that are certain but also prolonged economic hardship. And because of this many people have said to me that Jamaicans are used to suffering and so this will be no different. This time, though, it will be different as there is no capital market to freely access, foreign-exchange earnings are significantly down, oil prices are trending back up, crime continues to destroy the country's stability, and the workforce has been decimated by the failed education policies over the decades, which is responsible for over 50 per cent of secondary school leavers not attaining even one subject at CSEC level. I wonder if these people were not listening to the presentation made by the Prime Minister re the state of the country's fiscal accounts, or maybe they did not understand what he was saying.
Short-term fiscal challenge
So while Jamaica faces a fundamental economic challenge (which can be seen as the Balance of Payments issue), this is preceded in urgency by the short-term fiscal problem, which must of necessity be addressed. If we do not adequately address the short-term fiscal challenge then any economic policies we put in place will be useless from my perspective.
The next three to six months should be challenging for the fiscal accounts, as the economic challenges start to set in even further. And we see indications of these. In an article, carried in last Wednesday's Business Observer, it reports that retail merchants have been seeing a fall in sales and are hoping that the Observer's Fashion Night Out will improve sales. On the same day another article correctly states that rising oil prices will reverse the trade gap.
Both these articles point to what is on the economic horizon, and dare I say that the merchants will be sorely disappointed, as even if they were to see some improvement in sales over that night, the probability is that sales are going to fall back right after, leading into a very blue Christmas. Even the banks are reporting a fall-off in automobile loans year over year.
The fact is that real incomes and aggregate demand is much lower than it was one year ago. We have seen where there has been a freeze on public sector wages, and even in the private sector wages have been frozen.
Faced with an increasing fiscal challenge, the Government had no immediate alternative but to increase taxes a total of $24 billion for the fiscal year, reducing GDP (after considering the multiplier effect albeit some of finds its way back into the economy but the majority will not). In addition to this, the $18-billion expenditure cut by the government will negatively impact GDP by approximately $72 billion. To deal with the short-term fiscal challenge, the Government did not have much alternative.
We also see where over 30,000 jobs have been lost, with more to come. And if all of that was not enough, the country will have to grapple with higher oil prices in 2010, which I expect to be at least US$90 per barrel by the middle of 2010. At the very least also the global economy is going to see very sluggish growth, even while the risks to another decline is possible with the debt crisis that countries such as the US and Japan face, as they rack up significant fiscal deficits.
Jamaican-made challenges
The greatest concerns I have for the Jamaican economy, however, are things that we have created ourselves. Firstly, the situation with crime still continues to be a noose around our necks. Even if the economy were to attempt to make an acceptable adjustment, the crime situation would hamper its progress, as the report from the EIU correctly states. The second situation is the low literacy level of our
working population. Recent data suggests that over 50 per cent of school leavers have not achieved proficiency in even one subject. The problem we face therefore is that compounded by the Government's inability to provide a suitable social safety net; the labour force does not possess the skills necessary to fend for themselves during this difficult period. So the only thing they know how to do is find employment, which is decreasing, as many of the businesses they were working with depends on imports to survive.
But the problem is that with less expenditure in the economy (measured by a reducing GDP) and the limited ability of the government to access debt, then some of them will be forced to close down, or at best scale back their operations, leaving many without any immediate job prospects.
The prime minister indicated that Jamaica could be successful in obtaining some budgetary support from the IMF, and that would be welcome as it means that there would be monies available to support social safety and capital expenditure programmes, which are necessary to keep the economy buoyant.
Two-phased solutions
But the solutions must be seen in two phases. First, we must of necessity address the GDP situation, and this must be done through increased expenditure provided by fiscal initiatives. This can be done by either reduced taxes or increased targeted expenditure. This is what has worked to keep the developed economies afloat. The problem is where Jamaica gets the money to do so, as this sort of initiative is needed to resolve the challenges of the next three to six months if we want to maintain some buoyancy in the economy.
There are only two areas of fiscal expenditure that have enough critical mass to provide that sort of boost. The first is debt expenditure, but the Government has rejected any notion of a liability management programme, and wages and salaries. But based on what needs to be done to assess the wages and salaries situation, the redundancy payments that would have to be made, and the fact that most of the civil servants are teachers, nurses or police, then there is not much short-term benefit here.
I don't see increased taxes as an option as this will only serve to further reduce the GDP value and negatively affect businesses and jobs.
The only real short-term option we face is to borrow more money. And there is nothing wrong with that if the borrowed money is going to be surgically implanted in the economy to ensure the best return from those funds. If, on the other hand, the increased debt is spent on consumption then we fall back into the vicious debt cycle we have become so accustomed to.
What is needed is creating jobs through specifically targeting SMEs engaged in export-driven activities and also in the area of capital spending that will enhance foreign exchange-earning industries such as tourism and agro-processing.
In the medium to longer term, fundamental economic policy shifts will be needed to address Jamaica's development challenge and ensure that the increased debt to GDP ratio can be worked down. The economy will have to decline before it can start to develop. But the right policies are going to be necessary to ensure that when it declines it does in fact start to develop again.
As we are today caught between a rock and a harder place, as every day that passes the tsunami comes ashore the choices will get harder.
Since then the winds preceding the storm have been blowing but have not made landfall yet because of the slowing economies, which resulted in the significant fall-off in oil prices. If oil prices had remained even at current prices then I think we would have felt the effects earlier.
That storm is now about to make landfall in Jamaica, and those who were thinking would have started to make preparations from last year. This, particularly since this storm is going to be for a protracted period and a new thinking is needed in business and nationally to deal with it.
Signs of the times
The signs are showing every day that the storm is coming onto our shores. The Government first announced the need to go back to the IMF, and this was followed by reports of a private sector proposed liability management programme. Then came the downgrade by S&P, the very upfront speech by the prime minister, the presentations by Professor Harris and Mr Livshits, and finally the report from the Economist Intelligence Unit (EIU).
All these revelations come as no surprise to us locals who have been saying for a while (some from in the 1990s) that Jamaica has a very serious fiscal situation and that the only thing that has been holding the pieces together was the fact that we were willing to mortgage away the wealth of not only our children, but even further generations by borrowing money to satisfy a lifestyle we cannot afford.
It could very well reach a stage where pregnancy terms in Jamaica move to twelve months as babies may not want to be born to face the approximately $482,000 debt they are saddled with at birth. But the fact that these reports are coming from foreigners makes it more real to many of us who have not been ardent followers of Bob Marley and managed to "emancipate ourselves from mental slavery", always hanging on to the word when delivered with an accent other than Jamaican.
So here we are in October 2009, looking helplessly at the oncoming economic tsunami, as it starts to ravage our shores. Our only hope being that it will not stay with us for long but deliver a swift blow and destroy what it must quickly, so that the excruciating pain will not last. We are indeed caught between a rock and the harder choices we have to make with each passing day.
In Jamaica, I have come to realise that it is not only death and taxes that are certain but also prolonged economic hardship. And because of this many people have said to me that Jamaicans are used to suffering and so this will be no different. This time, though, it will be different as there is no capital market to freely access, foreign-exchange earnings are significantly down, oil prices are trending back up, crime continues to destroy the country's stability, and the workforce has been decimated by the failed education policies over the decades, which is responsible for over 50 per cent of secondary school leavers not attaining even one subject at CSEC level. I wonder if these people were not listening to the presentation made by the Prime Minister re the state of the country's fiscal accounts, or maybe they did not understand what he was saying.
Short-term fiscal challenge
So while Jamaica faces a fundamental economic challenge (which can be seen as the Balance of Payments issue), this is preceded in urgency by the short-term fiscal problem, which must of necessity be addressed. If we do not adequately address the short-term fiscal challenge then any economic policies we put in place will be useless from my perspective.
The next three to six months should be challenging for the fiscal accounts, as the economic challenges start to set in even further. And we see indications of these. In an article, carried in last Wednesday's Business Observer, it reports that retail merchants have been seeing a fall in sales and are hoping that the Observer's Fashion Night Out will improve sales. On the same day another article correctly states that rising oil prices will reverse the trade gap.
Both these articles point to what is on the economic horizon, and dare I say that the merchants will be sorely disappointed, as even if they were to see some improvement in sales over that night, the probability is that sales are going to fall back right after, leading into a very blue Christmas. Even the banks are reporting a fall-off in automobile loans year over year.
The fact is that real incomes and aggregate demand is much lower than it was one year ago. We have seen where there has been a freeze on public sector wages, and even in the private sector wages have been frozen.
Faced with an increasing fiscal challenge, the Government had no immediate alternative but to increase taxes a total of $24 billion for the fiscal year, reducing GDP (after considering the multiplier effect albeit some of finds its way back into the economy but the majority will not). In addition to this, the $18-billion expenditure cut by the government will negatively impact GDP by approximately $72 billion. To deal with the short-term fiscal challenge, the Government did not have much alternative.
We also see where over 30,000 jobs have been lost, with more to come. And if all of that was not enough, the country will have to grapple with higher oil prices in 2010, which I expect to be at least US$90 per barrel by the middle of 2010. At the very least also the global economy is going to see very sluggish growth, even while the risks to another decline is possible with the debt crisis that countries such as the US and Japan face, as they rack up significant fiscal deficits.
Jamaican-made challenges
The greatest concerns I have for the Jamaican economy, however, are things that we have created ourselves. Firstly, the situation with crime still continues to be a noose around our necks. Even if the economy were to attempt to make an acceptable adjustment, the crime situation would hamper its progress, as the report from the EIU correctly states. The second situation is the low literacy level of our
working population. Recent data suggests that over 50 per cent of school leavers have not achieved proficiency in even one subject. The problem we face therefore is that compounded by the Government's inability to provide a suitable social safety net; the labour force does not possess the skills necessary to fend for themselves during this difficult period. So the only thing they know how to do is find employment, which is decreasing, as many of the businesses they were working with depends on imports to survive.
But the problem is that with less expenditure in the economy (measured by a reducing GDP) and the limited ability of the government to access debt, then some of them will be forced to close down, or at best scale back their operations, leaving many without any immediate job prospects.
The prime minister indicated that Jamaica could be successful in obtaining some budgetary support from the IMF, and that would be welcome as it means that there would be monies available to support social safety and capital expenditure programmes, which are necessary to keep the economy buoyant.
Two-phased solutions
But the solutions must be seen in two phases. First, we must of necessity address the GDP situation, and this must be done through increased expenditure provided by fiscal initiatives. This can be done by either reduced taxes or increased targeted expenditure. This is what has worked to keep the developed economies afloat. The problem is where Jamaica gets the money to do so, as this sort of initiative is needed to resolve the challenges of the next three to six months if we want to maintain some buoyancy in the economy.
There are only two areas of fiscal expenditure that have enough critical mass to provide that sort of boost. The first is debt expenditure, but the Government has rejected any notion of a liability management programme, and wages and salaries. But based on what needs to be done to assess the wages and salaries situation, the redundancy payments that would have to be made, and the fact that most of the civil servants are teachers, nurses or police, then there is not much short-term benefit here.
I don't see increased taxes as an option as this will only serve to further reduce the GDP value and negatively affect businesses and jobs.
The only real short-term option we face is to borrow more money. And there is nothing wrong with that if the borrowed money is going to be surgically implanted in the economy to ensure the best return from those funds. If, on the other hand, the increased debt is spent on consumption then we fall back into the vicious debt cycle we have become so accustomed to.
What is needed is creating jobs through specifically targeting SMEs engaged in export-driven activities and also in the area of capital spending that will enhance foreign exchange-earning industries such as tourism and agro-processing.
In the medium to longer term, fundamental economic policy shifts will be needed to address Jamaica's development challenge and ensure that the increased debt to GDP ratio can be worked down. The economy will have to decline before it can start to develop. But the right policies are going to be necessary to ensure that when it declines it does in fact start to develop again.
As we are today caught between a rock and a harder place, as every day that passes the tsunami comes ashore the choices will get harder.
Sunday, October 11, 2009
CRABS IN A BARREL
If one has ever seen crabs in a barrel, you will realise that they all try to come out of the barrel at the same time. So they climb on each other, in futility, as they can never individually come out of the barrel. Soon all the crabs die and none will be successful. If, on the other hand, they all realised their individual deficiency then they would join "claws" and assist each other in making their way out of the barrel.
This is also the way of the market economy. What a true market economy does, however, is ensure that the strongest and most efficient crabs will always survive by virtue of the invisible hand that guides the market. This doesn't happen in Jamaica though, as through political interference we have managed to replace the invisible hand with a very visible one that rewards political tribalism over the stronger and more efficient players. The result of this interference over the years has been a very inefficient market structure and the eventual death of all the crabs, rather than ensuring that the strong and efficient ones live to once again grow the population of crabs.
Fiscal Accounts
We, are of course, seeing the result of that in our fiscal accounts today, which has always been known to us, but has been so well outlined by the prime minister two weeks ago. The fact is, everyone who has done mathematics knows that the only way to prove our fiscal equation that one and one equals three is to add debt to it, as is illustrated in a chart on page 22 of my book. I pointed out that 1996 is when we started on this downward path in our debt to GDP ratio, when the debt started to accelerate at a faster pace than GDP. Immediately before that the debt to GDP ratio had declined to around 90 per cent, from 212 per cent in 1984, and since then has climbed to where it is.
This small illustration confirms that the size of the debt to GDP ratio is not important but what we do with the debt is. In the early 1980s, we were coming out of what was then the worst recession since the 1930s, and borrowed up to 212 per cent of GDP, much of that borrowing went into policies aimed at the country's development, rather than consumption as we have done since the mid 1990s. The result is that Jamaica was able to generate growth rates averaging around six per cent towards the end of the 1980s and substantially bring down our debt to GDP ratio.
The prime minister correctly states what the fiscal challenge is, and what we need to do now is look behind the fiscal numbers to understand what the real development challenge is for Jamaica lest the crabs keep killing each other again as they try to emerge from the barrel.
For the first in a very long time a politician (the prime minister) has come to us and laid out exactly what the challenges are that face the country, and this frankness is good as it serves as a wake-up call to all those who have been avoiding the reality of our situation. People have asked me, for example, why I am so pessimistic in calls on the economy, not understanding that if the car is heading off the cliff there is only one way to interpret that. And that it is that, the car is heading off the cliff, with all of us in it. So I am heartened by the honesty of the prime minister, because hiding from the facts never help.
What we need to do now that the message is out is to clearly outline a detailed plan of implementation as to how the challenges are to be confronted. I believe that in that plan there not only needs to be some deliberate actions by the Government, but we also need to remove the tentacles of Government from the operation of the market. That is reducing the bureaucracy and interference the prime minister referred to. It cannot be that government expenditure constitutes 47 per cent of our GDP. By any measure this means that we are operating in a state-run economy, and not a true market-determined economy.
When this reduction of government involvement happens, I expect that quite a few businesses will fail and jobs will be compromised, and not only in the public sector. What is therefore very necessary is for the Government to lay out a transition plan that will ensure that lost jobs and failed businesses can be replaced with as little pain as possible. Because of our failure to adhere to market economy rules over the years, any implementation without a proper transition plan will cause a drastic adjustment that will cause much pain, and so a carefully laid out transition plan is going to be extremely critical.
Jamaica is once again faced with an opportunity to make the much-needed paradigm shift in our economy, and based on the numbers and social influences, I believe that this could be our last such opportunity. The prime minister has made the step in the right direction but the road is going to be long and painful, however, I have seen through numbers what the alternative is like and trust me, if we continue on the same path, all the crabs in the barrel we call Jamaica will perish.
This is also the way of the market economy. What a true market economy does, however, is ensure that the strongest and most efficient crabs will always survive by virtue of the invisible hand that guides the market. This doesn't happen in Jamaica though, as through political interference we have managed to replace the invisible hand with a very visible one that rewards political tribalism over the stronger and more efficient players. The result of this interference over the years has been a very inefficient market structure and the eventual death of all the crabs, rather than ensuring that the strong and efficient ones live to once again grow the population of crabs.
Fiscal Accounts
We, are of course, seeing the result of that in our fiscal accounts today, which has always been known to us, but has been so well outlined by the prime minister two weeks ago. The fact is, everyone who has done mathematics knows that the only way to prove our fiscal equation that one and one equals three is to add debt to it, as is illustrated in a chart on page 22 of my book. I pointed out that 1996 is when we started on this downward path in our debt to GDP ratio, when the debt started to accelerate at a faster pace than GDP. Immediately before that the debt to GDP ratio had declined to around 90 per cent, from 212 per cent in 1984, and since then has climbed to where it is.
This small illustration confirms that the size of the debt to GDP ratio is not important but what we do with the debt is. In the early 1980s, we were coming out of what was then the worst recession since the 1930s, and borrowed up to 212 per cent of GDP, much of that borrowing went into policies aimed at the country's development, rather than consumption as we have done since the mid 1990s. The result is that Jamaica was able to generate growth rates averaging around six per cent towards the end of the 1980s and substantially bring down our debt to GDP ratio.
The prime minister correctly states what the fiscal challenge is, and what we need to do now is look behind the fiscal numbers to understand what the real development challenge is for Jamaica lest the crabs keep killing each other again as they try to emerge from the barrel.
For the first in a very long time a politician (the prime minister) has come to us and laid out exactly what the challenges are that face the country, and this frankness is good as it serves as a wake-up call to all those who have been avoiding the reality of our situation. People have asked me, for example, why I am so pessimistic in calls on the economy, not understanding that if the car is heading off the cliff there is only one way to interpret that. And that it is that, the car is heading off the cliff, with all of us in it. So I am heartened by the honesty of the prime minister, because hiding from the facts never help.
What we need to do now that the message is out is to clearly outline a detailed plan of implementation as to how the challenges are to be confronted. I believe that in that plan there not only needs to be some deliberate actions by the Government, but we also need to remove the tentacles of Government from the operation of the market. That is reducing the bureaucracy and interference the prime minister referred to. It cannot be that government expenditure constitutes 47 per cent of our GDP. By any measure this means that we are operating in a state-run economy, and not a true market-determined economy.
When this reduction of government involvement happens, I expect that quite a few businesses will fail and jobs will be compromised, and not only in the public sector. What is therefore very necessary is for the Government to lay out a transition plan that will ensure that lost jobs and failed businesses can be replaced with as little pain as possible. Because of our failure to adhere to market economy rules over the years, any implementation without a proper transition plan will cause a drastic adjustment that will cause much pain, and so a carefully laid out transition plan is going to be extremely critical.
Jamaica is once again faced with an opportunity to make the much-needed paradigm shift in our economy, and based on the numbers and social influences, I believe that this could be our last such opportunity. The prime minister has made the step in the right direction but the road is going to be long and painful, however, I have seen through numbers what the alternative is like and trust me, if we continue on the same path, all the crabs in the barrel we call Jamaica will perish.
Monday, September 28, 2009
Risk of a double-dip recession?
The opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined in the term "green shoots". Markets have been responding positively to this feeling, as seen in the world equity markets, oil prices, and commodity prices.
One of the arguments which has not received similar attention is the very real risk of a double-dip recession, which is also referred to as W-shaped recovery. In other words, the economies would recover somewhat and then dip again into a recessionary environment before making a full recovery. At the very least, the market has been talking about a U-shaped recovery, which is a very long recovery period.
Real possibility
In my view, the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies.
These economies, such as the USA and UK, are still facing significant job losses, tight credit, and increasing credit card delinquencies. In addition to this, we are seeing where financial institutions are again starting to re-package loan securities and selling them to investors, albeit with less risk, but the fact is that the productive value is still not there to support these new derivatives.
Undoubtedly, recent data (this week) shows that there are indeed some signs of recovery. Out of the US, August 2009 industrial production has shown both month-over-month and year-over-year increases and retail sales have shown significant month-over-month and yearly increases in the same period. On the other hand, business inventories month over month have shown a decline of 1.0 per cent, which indicates that there are no robust projections of better times ahead from the point of view of Main Street.
These positive signs, however, could be the middle of the W-shape and we could still see another dip before the full recovery takes hold. This is especially as the positive indicators we have been seeing recently have, to a large degree, to do with the stimulus packages being implemented by the major economies, and not with any real growth in income levels, at the company and individual levels on a sustained basis. The fact also is that total wealth in the US has fallen off by about 35 per cent since last year and debt levels still remain very high.
In order for us to be sure of a sustained recovery we need to see a trend of at least three to four months of positive data coupled with net jobs being created. It must be remembered that 75 per cent of the US economy depends on consumer spending, and stimulating this spending with debt or government expenditure is not a sustainable solution.
The only way that sustainable recovery can return to the global economy is to increase production of goods rather than services. It still seems apparent that the US, in particular, is still trying to rely on services and credit as a way to grow the economy. This lack of real production in the world's largest economy still makes for a very fragile global economy, as even though there is production happening in markets such as China, the US still contributes around 25 per cent to world output. The greater risk in the US, in my view, is that the financial institutions return to increased risk too soon in a market where the consumer is still very vulnerable and debt levels are still too high. It also seems that much emphasis for increased financial activity is being placed on the increases in the equity markets that could see a pull-back in the very near future.
DJIA
In fact, the Dow Jones Index (DJIA) chart shows that the market is in a critical place and it is very possible that we could see a significant pull-back (see chart). In order to see the continuation of the uptrend in the equity markets, the DJIA will have to close above 10,000 and should ideally close above the one-year 72 per cent retracement level of over 10,400. In any event, one can expect a pull-back from the current levels and if this occurs before the DJIA closes above the 10,000 to 10,320 range we could be looking at a significant pull-back.
The implication of the DJIA effect on the market of course, is that, if the pull-back is severe, then we could once again see a contraction in spending and the US economy would face contraction again and further job losses.
On the other hand, if the DJIA expands above 10,400 too quickly, then the market could face a sharp correction if real production does not keep pace with this rise in wealth. The fact is that a big factor causing the credit crisis was that spending grew at a much faster rate than the supporting real output value.
THE opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined by the term "green shoots". It is going to be very important then to watch the personal income, employment, and production data more than the retail spending going forward, to look for signs of a real recovery. It is also important that spending and financial market growth do not continue at a pace that far exceeds real output growth. One way of measuring this, of course, is to look at the companies that are reporting profits; that is real production versus services; and also, what price earnings ratios are trending to.
As the US economy stands now, there is still the high risk of a double-dip recession occurring and the signs of recovery that everyone is warming to could be a misplaced feeling of relief.
The other factor that could cause some amount of inflationary pressure is the fact that a lot of stimulus money has been pumped into these economies, which are not based on any real output increase, but rather on Keynesian economics. Keynesian economics says that when an economy is in recession, one should expand fiscal spending in order to reduce the negative effects of the economy.
This has worked to stimulate some demand and stability in the major economies but is a double- edged sword, as, if not properly monitored, it could cause significant inflationary pressures as there would be too much money chasing the goods in the economy.
Because of this fear, it is very important for the Federal Reserve, for example, to ensure that the money does not stay in the economy too long, and hence their intention to start pulling the stimulus money out of the economy come October 2009.
The downside to this, of course, is that if real output does not start to increase by the time the money is being pulled out, then demand will again contract and again raise the possibility of a double-dip recession. It is therefore a very delicate situation that must be carefully managed.
In any event, the increased fiscal deficit in the US could lead to a need for future tax increases, which could serve to further dampen consumption, and this is why a return to increases in real production is necessary to lessen that effect.
The increasing oil prices also run the risk of slowing down output and demand. From all indications, as long as people believe that the economic recovery is underway, then oil prices will continue to climb and could reach US$90 per barrel by the middle of 2010. If the DJIA contracts sharply, however, we could see oil prices heading back down to the U$40 to US$50 per barrel.
The other factor that could cause contracting demand in the US economy is the weakening value of the US$. The weakness of the US$ is expected to continue into 2010 and would result in a reduction in the real income levels of the US consumer. The implication of this is that in real terms the US consumer would be spending less, thus causing a contraction in real spending in the US economy.
These are some of the real possibilities facing the US economy, and by extension the world economy, which could lead to a double-dip recession in the US. The main indicator to look at will be the employment and production data, without the stimulus impact.
The careful management of the US economy is going to be critical to what the final outcome is, and it is necessary not to be too quick to make announcements contrary to the trend until one is certain, just as the Fed and treasury said the US economy was in good shape while it was headed to recession in 2007.
This risk of a double-dip recession, of course, has far-reaching implications for countries such as Jamaica.
Jamaica has the US as its main trading partner and so, any devaluation of the US$, in relation to other major currencies, means that the real spending power of Jamaica when purchasing goods from other countries, such as China, will decline.
Any return to a decline in the US economy also means that the US consumer will be negatively impacted and that in itself would have a negative impact on our main foreign exchange earners.
The best bet for Jamaica then is to see, first, a return to net employment in the US; and, secondly, the US$ starting to appreciate against the other major currencies. Both these scenarios, however, are not expected to occur before 2010.
Until then, Jamaica has no choice but to manage the fiscal situation effectively and to manage the fallout in business activity that will inevitably occur in the country through policies aimed at encouraging small business development, and reducing crime and bureaucracy.
One of the arguments which has not received similar attention is the very real risk of a double-dip recession, which is also referred to as W-shaped recovery. In other words, the economies would recover somewhat and then dip again into a recessionary environment before making a full recovery. At the very least, the market has been talking about a U-shaped recovery, which is a very long recovery period.
Real possibility
In my view, the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies.
These economies, such as the USA and UK, are still facing significant job losses, tight credit, and increasing credit card delinquencies. In addition to this, we are seeing where financial institutions are again starting to re-package loan securities and selling them to investors, albeit with less risk, but the fact is that the productive value is still not there to support these new derivatives.
Undoubtedly, recent data (this week) shows that there are indeed some signs of recovery. Out of the US, August 2009 industrial production has shown both month-over-month and year-over-year increases and retail sales have shown significant month-over-month and yearly increases in the same period. On the other hand, business inventories month over month have shown a decline of 1.0 per cent, which indicates that there are no robust projections of better times ahead from the point of view of Main Street.
These positive signs, however, could be the middle of the W-shape and we could still see another dip before the full recovery takes hold. This is especially as the positive indicators we have been seeing recently have, to a large degree, to do with the stimulus packages being implemented by the major economies, and not with any real growth in income levels, at the company and individual levels on a sustained basis. The fact also is that total wealth in the US has fallen off by about 35 per cent since last year and debt levels still remain very high.
In order for us to be sure of a sustained recovery we need to see a trend of at least three to four months of positive data coupled with net jobs being created. It must be remembered that 75 per cent of the US economy depends on consumer spending, and stimulating this spending with debt or government expenditure is not a sustainable solution.
The only way that sustainable recovery can return to the global economy is to increase production of goods rather than services. It still seems apparent that the US, in particular, is still trying to rely on services and credit as a way to grow the economy. This lack of real production in the world's largest economy still makes for a very fragile global economy, as even though there is production happening in markets such as China, the US still contributes around 25 per cent to world output. The greater risk in the US, in my view, is that the financial institutions return to increased risk too soon in a market where the consumer is still very vulnerable and debt levels are still too high. It also seems that much emphasis for increased financial activity is being placed on the increases in the equity markets that could see a pull-back in the very near future.
DJIA
In fact, the Dow Jones Index (DJIA) chart shows that the market is in a critical place and it is very possible that we could see a significant pull-back (see chart). In order to see the continuation of the uptrend in the equity markets, the DJIA will have to close above 10,000 and should ideally close above the one-year 72 per cent retracement level of over 10,400. In any event, one can expect a pull-back from the current levels and if this occurs before the DJIA closes above the 10,000 to 10,320 range we could be looking at a significant pull-back.
The implication of the DJIA effect on the market of course, is that, if the pull-back is severe, then we could once again see a contraction in spending and the US economy would face contraction again and further job losses.
On the other hand, if the DJIA expands above 10,400 too quickly, then the market could face a sharp correction if real production does not keep pace with this rise in wealth. The fact is that a big factor causing the credit crisis was that spending grew at a much faster rate than the supporting real output value.
THE opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined by the term "green shoots". It is going to be very important then to watch the personal income, employment, and production data more than the retail spending going forward, to look for signs of a real recovery. It is also important that spending and financial market growth do not continue at a pace that far exceeds real output growth. One way of measuring this, of course, is to look at the companies that are reporting profits; that is real production versus services; and also, what price earnings ratios are trending to.
As the US economy stands now, there is still the high risk of a double-dip recession occurring and the signs of recovery that everyone is warming to could be a misplaced feeling of relief.
The other factor that could cause some amount of inflationary pressure is the fact that a lot of stimulus money has been pumped into these economies, which are not based on any real output increase, but rather on Keynesian economics. Keynesian economics says that when an economy is in recession, one should expand fiscal spending in order to reduce the negative effects of the economy.
This has worked to stimulate some demand and stability in the major economies but is a double- edged sword, as, if not properly monitored, it could cause significant inflationary pressures as there would be too much money chasing the goods in the economy.
Because of this fear, it is very important for the Federal Reserve, for example, to ensure that the money does not stay in the economy too long, and hence their intention to start pulling the stimulus money out of the economy come October 2009.
The downside to this, of course, is that if real output does not start to increase by the time the money is being pulled out, then demand will again contract and again raise the possibility of a double-dip recession. It is therefore a very delicate situation that must be carefully managed.
In any event, the increased fiscal deficit in the US could lead to a need for future tax increases, which could serve to further dampen consumption, and this is why a return to increases in real production is necessary to lessen that effect.
The increasing oil prices also run the risk of slowing down output and demand. From all indications, as long as people believe that the economic recovery is underway, then oil prices will continue to climb and could reach US$90 per barrel by the middle of 2010. If the DJIA contracts sharply, however, we could see oil prices heading back down to the U$40 to US$50 per barrel.
The other factor that could cause contracting demand in the US economy is the weakening value of the US$. The weakness of the US$ is expected to continue into 2010 and would result in a reduction in the real income levels of the US consumer. The implication of this is that in real terms the US consumer would be spending less, thus causing a contraction in real spending in the US economy.
These are some of the real possibilities facing the US economy, and by extension the world economy, which could lead to a double-dip recession in the US. The main indicator to look at will be the employment and production data, without the stimulus impact.
The careful management of the US economy is going to be critical to what the final outcome is, and it is necessary not to be too quick to make announcements contrary to the trend until one is certain, just as the Fed and treasury said the US economy was in good shape while it was headed to recession in 2007.
This risk of a double-dip recession, of course, has far-reaching implications for countries such as Jamaica.
Jamaica has the US as its main trading partner and so, any devaluation of the US$, in relation to other major currencies, means that the real spending power of Jamaica when purchasing goods from other countries, such as China, will decline.
Any return to a decline in the US economy also means that the US consumer will be negatively impacted and that in itself would have a negative impact on our main foreign exchange earners.
The best bet for Jamaica then is to see, first, a return to net employment in the US; and, secondly, the US$ starting to appreciate against the other major currencies. Both these scenarios, however, are not expected to occur before 2010.
Until then, Jamaica has no choice but to manage the fiscal situation effectively and to manage the fallout in business activity that will inevitably occur in the country through policies aimed at encouraging small business development, and reducing crime and bureaucracy.
Friday, September 04, 2009
Demanding more of a shrinking pie
Over the past few weeks the fiscal accounts have taken centre stage in economic news, whether it is because of the ratings from credit agencies, the need to reduce fiscal expenditure, or the industrial environment as a result of greater wage demands on the fiscal accounts.
What we need to be careful of is that we do not focus all our energies on finding solutions to the fiscal at the expense of the longer-term viability of the country, as the fact is that the fiscal accounts are nothing but a symptom of the underlying problem. The fact is that, even if we fix the fiscal accounts this year, and ignore the other fundamentals of the economy, we will sooner or later be caught in a much worse fiscal and economic situation.
This is the approach we have always taken for most of our independence and is why we are in the current predicament today. Instead of fixing the fundamental structural faults in the economy, we have always sought to borrow money to postpone the inevitable collapse of the economy.
At a crossroads
So once again we are at a crossroads, and based on utterances, it seems as if some are pressing for the same solutions to be implemented that have resulted in us being where we are today. This is no surprise to me, however, for many Jamaicans have always had a "big fish in a small pond" mentally. That is, they would much rather own 100 per cent of $10 rather than 10% of $1,000. Underlying this sort of philosophy I think is the "Great House" way of thinking, as well as the need to be the big fish, even while the water is being drained from the pond. So we would rather that every one dies, but in the end at least be the biggest dead fish.
So when decisions need to be made about cutting expenditures to fit the lifestyle or making decisions for a more efficient way of doing things, we tend to shy away from the practical approach. Instead, we seek to borrow funds to support a lifestyle that our income cannot afford. And not many of us can point to the government alone about this type of behaviour, as it is a daily part of the lives of many Jamaicans.
Two such examples that come to mind are (1) someone I know was going through a very difficult financial period but refused to sell his Land Rover because it would affect his profile; and (2) someone I heard of who rented a very expensive house and paid a big car loan (in order to drive a BMW) and in the process placed his family's financial future in doubt. And both cases occurred before the economic downturn started to take its toll. There are many other examples.
What we do not understand is that the accumulation of these individual behaviours is what results in the total debt levels in the country. But what governments must do is ensure that this fever is not replicated in government and put policies in place to prevent this. Well, we have failed to do so for a very long time and have now found ourselves in the situation where the prime minister has had to (and rightly so) announce significant expenditure cuts.
But while these necessary cuts are being announced, some of us still do not realise that the only way for us to see future development is to live within our means. There is no other way. The problem is that we have grown fat for so long on debt that we have forgotten about how to produce and earn for ourselves. So this has resulted in a situation where we were satisfied with becoming international beggars, through remittances.
The fact is that the tide has changed, and we are in a situation now where we must understand that no more can the country go along borrowing money to support consumption expenditure. It is not enough to have two cell phones and a car. We need to be placing emphasis on more agricultural lands in production and more factories.
Bail-out mentality
This paradigm shift in our thinking is proving very difficult for us to adapt to, and I think primarily because we have got accustomed to being bailed out. When the EU was going to cut the subsidies for sugar and banana we demonstrated against it and told them how to give away their money. Each year we budget income for grants. And finally, we are satisfied with training 80 per cent of our University graduates to seek employment overseas and send back what they will in the form of remittances.
Similarly, the government is facing a cash crunch and the economy is facing significant decline this year, and our efforts are consumed with dealing with industrial relations issues. I have no inside knowledge of the negotiations and cannot say what the arguments are for either side, but what I know, is that the country will suffer and at the end of the day we will be like the participants in the Iran-Iraq war. That is, what we are fighting for will have deteriorated so much that what the victor gets in the end will be much less than they had before the war started.
Just as the by-elections came and went and the country did not benefit, so this industrial climate will come and go eventually and the country will not benefit. I am certain that the teachers, police, and nurses deserve every cent of the money they are clamouring for, and I am also sure that the Government does not have the money. So what do we do in this situation? I would like to propose that the more logical solution is for both parties to sit down and try to create a win-win situation, so that it could be that the Government says to the teachers, for example, that if the pass rates can be improved in a measured way then instead of getting $8 billion you will get $12 billion (adjusted for inflation). The reasoning behind this is that the output of teachers, nurses, and the police do have an impact on GDP and government revenues indirectly.
Whatever is agreed to finally, it is clear that (1) the teachers, nurses, and police do deserve more money, but also have a responsibility to deliver quality service; (2) the Government has no money and the economic situation will worsen; (3) students must go to school, patients must be treated, and crime must be controlled. So being aware of all these facts, it must be within all of us as Jamaicans to find a win-win situation and this is going to mean that we have to sit down and talk to each other as Jamaicans, not as though we all live in a different country.
As far as I can remember we have always had industrial action for better wages, which has caused many disruptions, in our productivity and progress as a country. After all those disruptions can we truly say that, individually and as a country we have all improved? If the answer is yes, then we should continue in the same vein, but if the answer is no, then it makes no sense trying to get more out of a pie that is shrinking every day. What we need to do is sit down and recognise the limitations we have and find a way to increase the pie so that even if we end up with a lower percentage, it is more than what we had before.
What we need to be careful of is that we do not focus all our energies on finding solutions to the fiscal at the expense of the longer-term viability of the country, as the fact is that the fiscal accounts are nothing but a symptom of the underlying problem. The fact is that, even if we fix the fiscal accounts this year, and ignore the other fundamentals of the economy, we will sooner or later be caught in a much worse fiscal and economic situation.
This is the approach we have always taken for most of our independence and is why we are in the current predicament today. Instead of fixing the fundamental structural faults in the economy, we have always sought to borrow money to postpone the inevitable collapse of the economy.
At a crossroads
So once again we are at a crossroads, and based on utterances, it seems as if some are pressing for the same solutions to be implemented that have resulted in us being where we are today. This is no surprise to me, however, for many Jamaicans have always had a "big fish in a small pond" mentally. That is, they would much rather own 100 per cent of $10 rather than 10% of $1,000. Underlying this sort of philosophy I think is the "Great House" way of thinking, as well as the need to be the big fish, even while the water is being drained from the pond. So we would rather that every one dies, but in the end at least be the biggest dead fish.
So when decisions need to be made about cutting expenditures to fit the lifestyle or making decisions for a more efficient way of doing things, we tend to shy away from the practical approach. Instead, we seek to borrow funds to support a lifestyle that our income cannot afford. And not many of us can point to the government alone about this type of behaviour, as it is a daily part of the lives of many Jamaicans.
Two such examples that come to mind are (1) someone I know was going through a very difficult financial period but refused to sell his Land Rover because it would affect his profile; and (2) someone I heard of who rented a very expensive house and paid a big car loan (in order to drive a BMW) and in the process placed his family's financial future in doubt. And both cases occurred before the economic downturn started to take its toll. There are many other examples.
What we do not understand is that the accumulation of these individual behaviours is what results in the total debt levels in the country. But what governments must do is ensure that this fever is not replicated in government and put policies in place to prevent this. Well, we have failed to do so for a very long time and have now found ourselves in the situation where the prime minister has had to (and rightly so) announce significant expenditure cuts.
But while these necessary cuts are being announced, some of us still do not realise that the only way for us to see future development is to live within our means. There is no other way. The problem is that we have grown fat for so long on debt that we have forgotten about how to produce and earn for ourselves. So this has resulted in a situation where we were satisfied with becoming international beggars, through remittances.
The fact is that the tide has changed, and we are in a situation now where we must understand that no more can the country go along borrowing money to support consumption expenditure. It is not enough to have two cell phones and a car. We need to be placing emphasis on more agricultural lands in production and more factories.
Bail-out mentality
This paradigm shift in our thinking is proving very difficult for us to adapt to, and I think primarily because we have got accustomed to being bailed out. When the EU was going to cut the subsidies for sugar and banana we demonstrated against it and told them how to give away their money. Each year we budget income for grants. And finally, we are satisfied with training 80 per cent of our University graduates to seek employment overseas and send back what they will in the form of remittances.
Similarly, the government is facing a cash crunch and the economy is facing significant decline this year, and our efforts are consumed with dealing with industrial relations issues. I have no inside knowledge of the negotiations and cannot say what the arguments are for either side, but what I know, is that the country will suffer and at the end of the day we will be like the participants in the Iran-Iraq war. That is, what we are fighting for will have deteriorated so much that what the victor gets in the end will be much less than they had before the war started.
Just as the by-elections came and went and the country did not benefit, so this industrial climate will come and go eventually and the country will not benefit. I am certain that the teachers, police, and nurses deserve every cent of the money they are clamouring for, and I am also sure that the Government does not have the money. So what do we do in this situation? I would like to propose that the more logical solution is for both parties to sit down and try to create a win-win situation, so that it could be that the Government says to the teachers, for example, that if the pass rates can be improved in a measured way then instead of getting $8 billion you will get $12 billion (adjusted for inflation). The reasoning behind this is that the output of teachers, nurses, and the police do have an impact on GDP and government revenues indirectly.
Whatever is agreed to finally, it is clear that (1) the teachers, nurses, and police do deserve more money, but also have a responsibility to deliver quality service; (2) the Government has no money and the economic situation will worsen; (3) students must go to school, patients must be treated, and crime must be controlled. So being aware of all these facts, it must be within all of us as Jamaicans to find a win-win situation and this is going to mean that we have to sit down and talk to each other as Jamaicans, not as though we all live in a different country.
As far as I can remember we have always had industrial action for better wages, which has caused many disruptions, in our productivity and progress as a country. After all those disruptions can we truly say that, individually and as a country we have all improved? If the answer is yes, then we should continue in the same vein, but if the answer is no, then it makes no sense trying to get more out of a pie that is shrinking every day. What we need to do is sit down and recognise the limitations we have and find a way to increase the pie so that even if we end up with a lower percentage, it is more than what we had before.
Friday, August 21, 2009
Creating a reward system for economic progress
Over the past few weeks, Jamaica has been grappling with the issues of a credit rating downgrade, a fragile fiscal situation, and a reported 3.9 per cent decline in the economy. The GDP numbers show that the only sector that has shown any positive signs of worth is agriculture.
On the other hand the benefits of the economic contraction we are facing are manifest in a stable foreign exchange rate, low inflation, and the ability to reduce interest rates given the contracting demand in the economy. In other words, the economic contraction has provided the country with a clean slate on which to draw a new design for the economy.
In order to create this new design though, we are going to have to sit down and carefully determine where we want to go and what the best options are to get there. We also have to remember that an economy is made up of individual players, who contribute to the macroeconomic numbers we love to bandy about, and create a system of reward that will encourage the type of economic behaviour we need to drive the economy forward.
This need to chart a new course for Jamaica is the most important task facing the country's policymakers now. The global crisis has provided us with that opportunity and if we mess it up this time, the consequences will be dire. It is therefore very important that we not only have all hands on deck, but that a team is constructed that will have nothing else to do, but chart the economic course for Jamaica. This must be the only job of the team, with no distractions of any other office.
SWOT analysis
In order to determine what plans are needed for Jamaica's progress, we have to approach it like any company that is involved in a strategic retreat. We first have to take a hard look at what Jamaica's long term objectives are and what is the vision we want to achieve, like the 2030 mission statement of making Jamaica the choice place to live and raise families.
After we have very carefully determined what our strategic objectives are, we should go about looking at a 'SWOT analysis' for the country, that is the Strengths, Weaknesses, Opportunities, and Threats that must be considered to achieve the defined vision.
We would, of course, seek to exploit the strengths and opportunities and put policies in place to eliminate the weaknesses and threats. As an example, how do we benefit from the opportunities in the fields of music and sports and how do we eliminate the threats presented by low literacy, onerous bureaucracy, and the abuse of our citizens? In the case of the Armadale inquiry for example, one logical outcome must be that those who were responsible for the horrific treatment meted out to the wards are held accountable for their actions as would be done in any self-respecting country.
This SWOT analysis would allow us to then plan the specific strategies we need to implement in the short, medium, and long terms. It would also allow us to determine which resources we will need to meet those strategic objectives and how best to spend those resources. Without this clear plan as to how we need to move forward as a country, we will continue to grope in the dark, shooting aimlessly at any obstacle that comes in our way without being sure whether it is a real target or a decoy.
For example, the biggest long-term problem we face as a country is production and productivity, which manifests itself in the balance of payments. The immediate short-term problem we face, however, is the fiscal problem, and the fact remains if we do not address this short-term problem we will not have the wherewithal to deal with the longer-term one. It is therefore very important that we understand what needs to be done in the short term and what the dependencies are. Without a proper understanding of this relationship we will only continue the downward spiral the country has found itself in since the 1970s.
Incentivising economic progress
But how do we ensure that the individual behaviour we seek to encourage finds its way into positive economic development-type behaviour patterns? At the heart of this is determining what the role of government is from the role of the market economy. I have always publicly stated my preference for the market economy as the main allocation method for economic resources.
The public sector bureaucracy has been too involved in determining the allocation of our scarce economic resources, which is one of the reasons for our lack of economic development. Examples include the takeover of private companies during the FINSAC era, the allocation of some of our best farmlands to sugar, and the allocation of scarce tax resources to prop up unprofitable public sector entities. All these experiences helped create a situation where we have to bear the high cost of inefficient resource allocation in the high interest rates we have been paying since the 1990s.
The question many would have is, that being the case, why wouldn't we have experienced high interest rates before the 1990s, when the government was always trying to allocate resources based on political and other non-economic considerations? The answer to that question is that prior to the 1990s Jamaica had a closed economy and was therefore protected from global competition. One consequence of this was foreign exchange restrictions. It is therefore more important now than ever that the market be used as the primary means of allocating resources.
The role of government therefore must be to create the incentives to push the market in the direction where we want it to move. The design of these incentives cannot be managed by bureaucrats and special interest groups sitting in a room by themselves to determine what is best for the country. It must be a very deliberate planning approach by a team of professionals, with no special interest employed by the government, and must be carefully looked over by the government and aligned with the country's strategic objectives based on the SWOT analysis.
This will of course mean understanding what sectors we truly have a comparative advantage in, rather than those we get aid from like sugar, and being aware of the main challenges facing the country. Coming out of this process, the government should then objectively create the incentives needed to encourage market behaviour towards economic progress. A failure to do so will mean a continuation along the path we have taken for the past three decades.
On the other hand the benefits of the economic contraction we are facing are manifest in a stable foreign exchange rate, low inflation, and the ability to reduce interest rates given the contracting demand in the economy. In other words, the economic contraction has provided the country with a clean slate on which to draw a new design for the economy.
In order to create this new design though, we are going to have to sit down and carefully determine where we want to go and what the best options are to get there. We also have to remember that an economy is made up of individual players, who contribute to the macroeconomic numbers we love to bandy about, and create a system of reward that will encourage the type of economic behaviour we need to drive the economy forward.
This need to chart a new course for Jamaica is the most important task facing the country's policymakers now. The global crisis has provided us with that opportunity and if we mess it up this time, the consequences will be dire. It is therefore very important that we not only have all hands on deck, but that a team is constructed that will have nothing else to do, but chart the economic course for Jamaica. This must be the only job of the team, with no distractions of any other office.
SWOT analysis
In order to determine what plans are needed for Jamaica's progress, we have to approach it like any company that is involved in a strategic retreat. We first have to take a hard look at what Jamaica's long term objectives are and what is the vision we want to achieve, like the 2030 mission statement of making Jamaica the choice place to live and raise families.
After we have very carefully determined what our strategic objectives are, we should go about looking at a 'SWOT analysis' for the country, that is the Strengths, Weaknesses, Opportunities, and Threats that must be considered to achieve the defined vision.
We would, of course, seek to exploit the strengths and opportunities and put policies in place to eliminate the weaknesses and threats. As an example, how do we benefit from the opportunities in the fields of music and sports and how do we eliminate the threats presented by low literacy, onerous bureaucracy, and the abuse of our citizens? In the case of the Armadale inquiry for example, one logical outcome must be that those who were responsible for the horrific treatment meted out to the wards are held accountable for their actions as would be done in any self-respecting country.
This SWOT analysis would allow us to then plan the specific strategies we need to implement in the short, medium, and long terms. It would also allow us to determine which resources we will need to meet those strategic objectives and how best to spend those resources. Without this clear plan as to how we need to move forward as a country, we will continue to grope in the dark, shooting aimlessly at any obstacle that comes in our way without being sure whether it is a real target or a decoy.
For example, the biggest long-term problem we face as a country is production and productivity, which manifests itself in the balance of payments. The immediate short-term problem we face, however, is the fiscal problem, and the fact remains if we do not address this short-term problem we will not have the wherewithal to deal with the longer-term one. It is therefore very important that we understand what needs to be done in the short term and what the dependencies are. Without a proper understanding of this relationship we will only continue the downward spiral the country has found itself in since the 1970s.
Incentivising economic progress
But how do we ensure that the individual behaviour we seek to encourage finds its way into positive economic development-type behaviour patterns? At the heart of this is determining what the role of government is from the role of the market economy. I have always publicly stated my preference for the market economy as the main allocation method for economic resources.
The public sector bureaucracy has been too involved in determining the allocation of our scarce economic resources, which is one of the reasons for our lack of economic development. Examples include the takeover of private companies during the FINSAC era, the allocation of some of our best farmlands to sugar, and the allocation of scarce tax resources to prop up unprofitable public sector entities. All these experiences helped create a situation where we have to bear the high cost of inefficient resource allocation in the high interest rates we have been paying since the 1990s.
The question many would have is, that being the case, why wouldn't we have experienced high interest rates before the 1990s, when the government was always trying to allocate resources based on political and other non-economic considerations? The answer to that question is that prior to the 1990s Jamaica had a closed economy and was therefore protected from global competition. One consequence of this was foreign exchange restrictions. It is therefore more important now than ever that the market be used as the primary means of allocating resources.
The role of government therefore must be to create the incentives to push the market in the direction where we want it to move. The design of these incentives cannot be managed by bureaucrats and special interest groups sitting in a room by themselves to determine what is best for the country. It must be a very deliberate planning approach by a team of professionals, with no special interest employed by the government, and must be carefully looked over by the government and aligned with the country's strategic objectives based on the SWOT analysis.
This will of course mean understanding what sectors we truly have a comparative advantage in, rather than those we get aid from like sugar, and being aware of the main challenges facing the country. Coming out of this process, the government should then objectively create the incentives needed to encourage market behaviour towards economic progress. A failure to do so will mean a continuation along the path we have taken for the past three decades.
Subscribe to:
Posts (Atom)
