Wednesday, September 05, 2007

A new economic order

At the time of writing it is clear that the JLP has not only won but seems to be picking up more seats in the recount and could possibly end up with 35 to the PNP’s 25. The PNP has said that they will take certain elected persons to court based on the citizenship issue and that outcome remains to be seen. Whatever happens it must be clearly understood that the right of choice of the people must not be compromised. In any event congratulations to the JLP for the hard fought and strategic campaign.

There is no room for any honeymoon period and the Finance Minister (who I expect to be Audley Shaw) must immediately get on with the business of managing the economy. The situation currently is that economic growth continues to elude us (will only grow at around 1.5% this year); in recent weeks the dollar has been slowly weakening; there is a high mountain of debt; the fiscal deficit is a problem; and no doubt inflation may be higher than originally projected because of the hurricane. It is therefore clear that the Finance Minister will be faced with many immediate challenges that the international community will be keenly watching.

The right person?
There are some persons who have questioned whether Audley Shaw is the right person for the finance job simply because he is not seen as an economic expert. From my perspective I think that he is well suited to the job and is quite capable of delivering the confidence needed and properly managing the affairs of the economy. While an understanding of economic and financial matters is needed in a Finance Minister, I think more importantly that what is needed is the ability to lead and properly utilize good advice. Both these qualities I think Audley Shaw has and based on that I would suggest to the doubters that Mr. Shaw is quite capable of the finance job. Even more dangerous is someone who thinks that because they are an expert in an area they do not take proper advice. So too much knowledge can indeed be bad also if the right personality is not present.

The challenge facing Mr. Shaw is that he will have to bring a new economic order to Jamaica. One where growth runs at upwards of 5% per year; where bureaucracy is reduced; where a business friendly environment is encouraged; where tax is used as a tool to encourage growth rather than just feed the revenue; and where organic growth in business is encouraged. All these things are necessary ingredients to create an environment where economic activity and growth prevails.

At the same time he will have the high debt level to contend with, while also meeting certain social services, and certainly this must be a main priority as it is this debt that is stifling the economy. It is this debt that has given some of us the perception that things are getting better. The fact is that we have been engaged in borrowing to support a life style that we can ill afford. Because of this borrowing to support a life style we find that we are strapped with debt that causes us to spend 60 cents out of each dollar servicing thus depriving the people of Jamaica of essential social services. The only way that we will be able to deal with this is to grow the economy at rates above 5%, which the last time we were able to do so was in 1990. We must realize however that achieving 5% growth may not happen in the next two or three years as the fact is that the economy just does not have the capacity to grow at those rates, especially with a projected slow down in the global economy, and more importantly the US economy where we send 25% of our exports and get over 50% of our tourists. So I don’t expect that 5% growth will happen in the next two fiscal years but what is going to be important for me is that the measures are put in place to ensure that the capacity to grow at those rates exist so that we can consistently see 5% growth instead of hitting 2.5% every five years or so.

Prudent fiscal management
In achieving this growth one of the things that must be ensured is prudent fiscal management. It is clear that with the liquidity issue in the global markets that any new debt is going to cost us more. If we continue to borrow then it will obviously place a greater upward pressure on interest rates, which will no doubt cause stagnation in the economy. This especially in light of a less healthy global economy and the possibility of recession in the US in 2008. This has led some to question the commitments made by the JLP and if they can deliver on these without worsening the fiscal deficit. Frankly I do not know where this argument came from as I have always thought that what was said is that they would be reallocating funds to ensure maximum returns, and certainly we would have to include an educated and healthy population among that. If it were the intention of the JLP to spend additional funds to deliver the commitments then I would also agree that this would be the wrong thing for the country. It will be important to ensure that the fiscal targets are met if not improved on as the longer it takes to get to a balanced budget then the greater the need for debt.

If we are going to build this capacity for growth it is important that some of the things in the JLP manifesto are implemented in good time. These include (1) a business friendly bureaucracy; (2) tax reform; (3) special attention to SMEs; (4) offshore financial centre; (5) develop the electricity generation capacity; (6) improving productivity in agriculture; (7) high end tourism and easy access to the east; (8) improve education and health access (a productive workforce); and (9) reduce crime. There are many other initiatives outlined in the JLP’s manifesto but these I think are most critical for developing the capacity for growth.

What is obvious to me though is that it is going to take time to implement many of the commitments and there is nothing wrong with this as we must be careful that the capacity is built carefully. I would expect that the new government will have a timeline for implementation. Consequently it would be good to outline the targets we expect to achieve as a country as these various initiatives are implemented and present this to the country.

As Mr. Golding has said, at the end of the day it is going to be very important for all Jamaicans to be involved in the process and pull in the same direction. It is not going to be an easy road but if we put the measures in place that will provide the capacity for growth then we certainly have the potential to achieve this and establish a new economic order for Jamaica where per capita income surpasses international standards and people can take advantage of this because of higher educational standards.

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