Thursday, April 17, 2003

The Economy’s Performance: An Accountant’s Perspective

Jamaica’s economic performance has been the most hotly debated topic over the past few years. Measurement of economic performance is similar to the way we approach analyzing our own company’s prospects, as many indicators can be compared to the ones utilized by businesses.

Economic Indicators Equivalent Company Indicators
Balance of Payments (BOP) & Trade Financial Statements
Money Cash Flow
GDP and Income Sales
CPI Cost Structure
Labour Human Resources
Debt Ratio Debt/Equity

It is necessary to find objective measurements to arrive at consensus re the underlying problems, which is the first step to finding solutions. Over the years there have been too many emotive analyses of our economic situation and what needs to be done.

I will attempt to do an analysis from an accountant’s perspective. I am not able to reason based on the complicated models our economic commentators use frequently, as the only higher economics learning I have had is from my sixth form teacher, Mark Figueroa (UWI) and Richard G. Lipsey.

The web sites of the PIOJ ( and STATIN ( carries statistics of various aspects of the economy (1997 – 2001), which can be used to examine historical trends and give an indication of where we are heading.

Trade and Revenue
A look at our Trade account shows that between 1997 and 2001 total imports increased by 7.6%, of which consumer goods increased 10.5%, raw materials increased 15.1% and capital imports declined 14.2%. On the other side traditional exports declined 5.1% and non-traditional exports declined 26.3%. The fiscal side shows total revenues increasing by 13.6% (recurrent by 5.9%) and total expenditure increases of 11.2% (recurrent up 21.6%, capital down 3.6% and debt servicing up 76.6%). During this same period increases occurred in the CPI by 38.7%, current prices GDP by 39.1% (constant prices by 1.6%) and GNP by 32.4%.

The above statistics reveal that production and growth increases are fueled by debt. It is also worrying that the increase in GDP, caused by increasing production, does not have at least a corresponding increase in recurrent revenues. One implication of this is that although earnings are higher, there may be no corresponding increases in recurrent revenues as companies are much less profitable. This results in lower tax collections. Additionally, higher revenues are being driven by inflation and not increased productivity or consumption. The country is experiencing what companies saw in the mid 1990s, that is the cost of debt exceeds returns. The declining capital imports imply that retooling is not taking place thus making us even more uncompetitive. The increased raw material import suggests an increasing make up of imported raw materials in production. It would be very interesting to see what portion of exports comes from local value added.

Money Supply and Inflation
The money supply indicators shows increases (1997 – 2001) in M1 by 58.4% (1999 -39.5%) and M2 by 52.7% (1999 – 20.4%). There is, however, no higher productivity to back these increases. In fact money supply increase has surpassed inflation. A look at the numbers reveals that this may have been one of the fundamental drivers of inflation as is shown in the following table.

The table shows that money supply increase always exceeds the inflation rate, with the exception of 2000, when this was preceded in 1999 by significant increases in money supply. Additionally, the 11.48% increase in the exchange rate in 2000 was preceded by the 39.5% and 20.4% increases in M1 and M2 in 1999 and coincided with a sizeable increase in the NIR. What’s more, money supply has increased by rates way in excess of real GDP growth. The implication is that we have created money, with no productive backing, and in fact the exchange rate and inflation changes are caused primarily by increases in money supply. This increase in money supply has been affected by the high interest rates that we have entertained, which in itself creates money, without any corresponding increases in goods and services. The question then is, is inflation and exchange rate movements not caused primarily by money supply increases and not inflation caused by exchange rate movements?

As a country we have had a preoccupation with inflation, coming out of the regime in the 80’s and early 90’s. Inflation is not necessarily an indication that the economy is deteriorating, but may also indicate that the economy is growing rapidly. What we need to determine is the type of inflation we are having. If inflation is caused by productive earnings increases outpacing the availability of goods then it may mean that we are having significant growth, which needs to be controlled. On the other hand, we have inflation caused by increased money chasing lower output. In fact, we could even have deflation caused by reducing income levels (productivity), which would be a bad thing. What is of great importance is stability, wherever that level resides.

Labour and Population
Over the same period, constant prices per capita income has been stable. This means that there has been no real increase in income levels earned by people, and in fact is somewhat consistent with our relative stability in GDP. The education statistics show that between 1997 and 2001, enrolment in primary institutions increased 9% and secondary institutions increased 4%. Over the same period, enrolment in tertiary ones increased 195%. This means that fewer people are able to access secondary education, even though more persons leaving secondary levels are entering tertiary education. This is supported by the increase in training output at the technical and managerial level and decreases in the skilled and semi-skilled categories. This will negatively affected labour productivity, as secondary education is crucial to productivity of our labour force. It is important to factor these numbers into any industrial plan we develop.

Any company in our economic position would not have favourable prospects. Serious analysis and planning would be imperative to address the underlying problems. Businesses, faced with inflationary pressures, have had to increase prices so as not to be overwhelmed by an increasing cost structure. This has resulted in more expensive produce, without any value-added increase.

The reality is that even if we are to experience real growth in all sectors over the next five years, we may find ourselves in the position we were five years ago. This while our international competitors have been experiencing real growth. Before we can solve the problems we first have to agree what they are. I am not sure what the best solutions to our economic problems are, as I am not a trained economist, but from a layman’s perspective I know that we cannot continue to spend more than we earn. Maybe we need to ask the real economists to stand up and not be detracted by the village economists. For too long we have treated symptoms and ignored the illness. Our first priority then remains the need to admit the problems before we can agree on a strategy to address them.


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