Thursday, January 11, 2007

Maximizing growth

Any objective assessment of the Jamaican economy will show that there has been improvement in our growth prospects. These signs include (1) growth in the agricultural sector, and particularly non-traditional exports; (2) record tourist arrivals, and the expansion of rooms; (3) revitalization of the construction industry, following the unnecessary cement crisis; (4) reducing interest rates, spurring interest in small business; (5) increased business confidence; and (6) the fact that, behind mineral and fuels, the machinery/equipment category is the second highest import, implying new investments.

Despite these signs, however, we have to bear in mind that the growth is still in a very fragile state, and can easily be reversed in the blink of an eye. So while we recognize these positive signs, we must still put careful management is in place to ensure that (a) the positive trend is not disrupted; and (b) growth is maximized.

I have been saying since last year that the main threats to this fragile growth remain political actions, crime and corruption. It is against this background that I say that Jamaica does not have an economic problem but rather a social one. The fact is that if we were to positively address our leadership and political issues, corruption in the police force, enforce discipline, and improve training opportunities, then we could seriously address the economics.

Improved confidence
My opinion is that the only real difference between the current upbeat perception and a few months ago is primarily one of improved confidence. There has been no substantial change in infrastructural support; there has been no change in the goods and services we have a competitive advantage in; and there has been no change in literacy standards. The main changes have been (1) improved business confidence; (2) a reduction in reported crimes towards the end of last year (positively affecting perception); (3) improved consumer confidence, as a result of Sista P becoming Prime Minister; and (4) a gradual reduction in interest rates and continued stability in the exchange rate. In short it is the perceived improvement in the will of the leadership to address issues such as high interest rates and crime that is driving confidence and a willingness to invest.

This is what many of us have been arguing for a while, that is, government should not be involved in determining economic policy and investments, but rather should just create a positive environment and leave it to the private sector to grow the economy. If we had an economic problem then even with a positive environment it would be difficult to show economic improvement. What we must do is keep on top of the social issues of responsible governance, crime, corruption and education, thereby reducing the cost of delivering the final products and services. If we are able to deal with crime and governance then we could almost immediately improve the growth in agriculture and tourism. The point is that we have latent potential in these sectors that is being stymied by the social issues, and once the social factors are fixed we can see effortless growth.

What we must do is therefore ensure that we maximize the growth prospects. No doubt Jamaica is benefiting from the improved global environment, and no doubt based on economic cycles this global growth will eventually come to an end. It is therefore very important that we maximize the benefits from global growth and therefore prepare for any downturn that may come in the future. As an example, last year we did not have any significant natural disaster, but we managed to create our own, the cement crisis. Can you imagine if the cement debacle did not occur what sort of economic expansion we would have seen? This again speaks to the issue of governance, which again is a social/political, not economic issue.

It is also against this background that the surprise postponement of the increased income tax threshold is damaging to the economy. Such a move not only damages confidence but is a short sighted approach to managing the fiscal accounts. The Finance Minister has in the past responded to concerns of the public and I am confident that he will again correct this situation, as he has shown a commitment to doing what is necessary to improve the fiscal situation. The cost of the threshold increase is approximately J$5 Billion, but the effect from the loss in confidence and economic activity could be more over a longer period. We must be careful that situations like these do not recur as it could upset our fragile growth.

Trade numbers
The trade numbers also show exports increasing 31% over the first nine months of 2005. However, the trade deficit widened by 14%. This was primarily because of the bill for minerals and fuels (oil), but also the import of machinery/equipment was over 20% of the import bill. Thus both categories accounted for over 50% of imports. The positives from this is that there has recently been a reduction in oil prices, and the pundits are expecting it to decrease further, and importing machinery means an expansion of investments and future exports. If this trend continues then we should see a positive effect on the trade deficit in 2007.

Even so we cannot have a hands off approach to managing this. We must maximize this potential by ensuring that incentives go to ventures producing for export and food for local consumption, which can replace imports. Import substitution is important as a part of our problem is that we have such a high import content that even when exports and tourism grows we see a corresponding increase in imports. If we strategize around ways to substitute local production for imports in certain areas this will be a big positive.

This is the type of management needed to maximize benefits from growth. It is not enough to be satisfied with growth of 2.5% to 3%, as we have a greater potential. In order for us to realize that potential, however, we must ensure that we take the necessary actions to improve the social and physical infrastructure to ramp up the capacity for greater growth.

This is similar to a company seeming prosperous when inefficiencies are masked by favourable market conditions. In other words, growth occurs because everyone around is growing (global economy), not recognizing that growth is occurring primarily because of the market rather than internal efficiencies. So when market conditions become unfavourable the operational and human resource capacity is insufficient to cope. It is therefore important not to be misled into believing that everything is going great guns and not work on the inefficiencies, for example the public sector.

We therefore cannot become complacent about the positive signs. Now more than ever we must ensure that we (1) address the inefficiencies in the system; and (2) not fall into complacency and too much “chest beating”, as any slip can result in a fall and a concussion.

Again I would like to remind everyone that we have been in this position before and because of political decisions, taken a few steps backward. Only last year we saw where crime statistics were improving only to be hit with a startling increase in the murder rate this year. This is illustrative of the need to remain on top of the issues.

9 comments:

Euthydemos in Athens said...

Dennis,
I have enjoyed your articles at JO. I am glad you have started a blog as well. Looking forward to more of your economic insights.

I fully agree with your assertion that the role of government is to ensure the proper environment in which growth can occur. It is the private sector that can best create the growth in jobs and incomes, but government is a completely necessary part of that formula.

In order for business to flourish, there must be a climate of trust, fairness and stability. Reducing crime, corruption and waste are essential components to any long-term sustainable growth.

How do you think other Caribbean nations perceive Jamaica and its role in a future economic or monetary unification?

Dennis Chung said...

Euthydemos, I think they see us as important because og our size and influence, within the context of the CSME. It definitely could not happen without us. They also see our economic situation as a setback to currency integration. With that said though not many of them are doing that well.

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