Friday, March 30, 2007

Consumerism is good for growth

I spend quite a bit of time keeping pace with what happens in international capital markets. I believe this is necessary because, operating as we are in a global environment, we must know what is happening in major markets in order to be able to predict future effects on our economy. As an example, Dr Davies explained that the decision to raise the US$350 million now was because of problems being experienced on China's equity market, and the fear of a crash of global equity markets. So raising the money now was appropriate because a later date could see investors shying away from emerging market instruments, making raising that sum that more difficult.

While I agree with that rationale, if one were following the international markets then it would be clear that this blip in the Chinese and other international equity markets was not the beginning of the end, which might come later in the year. The fact is that global equity markets have been on a prolonged bull run and any negative event can easily cause a much prophesied correction, as was what happened. Since then the China equity market has seen new highs, and the US and European markets have continued their upward trend. The fear for the dollar now is that the US economy is weakening, and this could see a reduction of interest rates. This, however, will have a positive impact on equity markets and could be beneficial for emerging market debt, which is usually at higher rates.

Less means more
One of the main issues with the US economy is the weakening consumer spending, which is its mainstay. The fact is that economic activity is based on the strength of consumer spending, as consumers are the ones who purchase homes and buy goods to support companies. Thus the argument is that the more money consumers have to spend then the more beneficial it will be for the economy. For this reason, when there are signs that the US economy is weakening, the Fed will reduce rates to encourage greater spending (through increased credit) and the government will sometimes reduce taxes to put more disposable income in the hands of consumers. In a recent interview on CNBC, Rudy Giuliani stated that when he was Mayor of New York he actually reduced taxes over 20 times in order to close the deficit they had, and it worked.

The fears of a weakening US economy are driven by a lack of consumer spending in the housing market, and this has spilled over in lower consumer confidence and retail sales. There is no doubt that strong consumerism is good for economic growth. In Jamaica's case, however, we do not subscribe to this logic, as we don't with many other rational arguments. I have long pondered whether this is an action based on ignorance or incompetence, and the conclusion I have come up with is that it is neither. It is an action based on lack of will.

It is obvious that our annual budget is not geared towards supporting the development of either the economy or the country, but rather a futile exercise to support the insatiable appetite of politicians who seek to support their constituents and hold on to state power. The problem is that the pie is constantly shrinking, and will continue to do so as we acquire greater amounts of debt, giving the mirage of greater expenditures each year, but the reality is that an increasing amount of revenue goes to satisfying debt servicing rather than the Jamaican public. Only if we have events like Cricket World Cup do we bother to seek to spend any money on Jamaica, and in that eventuality it is not primarily for Jamaicans, who are nevertheless thankful for the visitors because of the indirect benefits we get when they come to the island. So we find that while we may have emancipated ourselves from physical slavery, mentally we are still stuck in a time warp of satisfying the new master (foreigner) while the local (slave) continues to vie for the scraps left by our new masters.

We do not realise that if we were to reduce taxes then this would place more money in the hands of consumers, which would in turn generate more spending and boost economic activity. Instead taxation is used as a means to plug any hole government has in its fiscal accounts rather than as a tool to foster economic development. We also create systems to frustrate, rather than encourage, investments.

Unfavourable systems
A recent example is that I was sent a package through FedEx, who also cleared the package for me. This was educational material, on DVD, and when it came to me the duty was overstated by over 100%. Well, FedEx did not pick up on this, but I did, and when I investigated, it was discovered that the customs officer had made an error and entered the wrong code. This was after a ridiculous explanation that educational material on DVD attracted a higher rate than that in a book. So much for the technology efforts of the government. The long and short is that FedEx told me that I had to pay the full amount charged and then wait two weeks for a refund. The amount was over 100 per cent more than what should have been charged. Now I had nothing to do with the error, as it was being handled by FedEx and Customs, but I am the one who is being asked to suffer the consequences of their error. This would never happen in the US, but FedEx comes to the backward island of Jamaica where they can give less than adequate service, supported by the Jamaican government who believes that their monopoly on the wharf is licence to abuse the rights of Jamaicans. My sin, of course, is that I am Jamaican. I can solve the courier problem by never using FedEx again, but I cannot use a different Customs department. Thankfully there are well-intentioned persons in Customs, and a Mr Ewan Harvey is trying to resolve this for me so that I can try to get on with some productivity. But what of the many other Jamaicans who do not have the fortitude to call and express disgust about it?

Is it any wonder then that if our own government sets up systems to prevent the progress of the "dishonest" Jamaicans, while encouraging the "squeaky clean" foreigners, Jamaicans will find it difficult to invest in our own country? Is it any wonder that based on this attitude monopolies such as Cable and Wireless and JPS have come to Jamaica and sought to extract their pound of flesh from these Caribbean locals who have "EXPLOIT ME" written all over our foreheads?

Even the private sector has a problem understanding the power of encouraging consumerism and goes in many cases for short-term profits. Recently I bought a monitor from a computer company, and was not happy with the performance so I took it back. They informed me that if they did not find anything wrong with it that they could not replace it, even with the more expensive brand I requested and was willing to pay for. On the other hand, last year I bought something at Best Buy (in Florida) and the next day went back and changed it for another brand, without having to give a reason. The only requirement was that it was in the same condition. The moral of this is that it is best to buy as much as possible from American companies over the Internet, rather than purchase the same item for more locally. On the other hand, Customs and FedEx may make this an unpleasant experience anyway, so anywhere you turn you are screwed. So much for being a Jamaican in Jamaica. I think I might go for the CARICOM passport to see if I can get some reprieve.

If we are serious about maximising economic development then we have to realise, as developed countries do, the power of consumer spending. Consumers, of course, must include taxpayers from the government's point of view.

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