Thursday, November 15, 2007

The effect of productivity

The past few weeks have seen oil and commodity prices rising internationally. These incidences, along with the sub-prime crisis, have marked the predicted decline of global growth levels after peaking in 2006. During the times of solid global growth, Jamaica failed to take advantage, instead being satisfied with occasionally achieving 2.5% per annum, averaging less than 1% over the last 18 years.

Contrary to the various commentaries of the need to take advantage of this global growth boom, when even our regional partners were growing in excess of 5% and 6%, the authorities seemed to have been very happy with the accomplishments of 2% per annum. So now the chickens have come home to roost. Everyone knows that economies go through cycles, and not only do you have periods of exceptional growth but there are similarly always periods of depression.

So while other economies have been prepared to deal with the slow times, Jamaica failed to prepare ourselves.

International price increases
We are now faced with a situation where prices internationally are increasing, our largest trading partner (US) seems to be headed for recession, and global growth is slowing. For a few years I have been saying that Jamaica does not have the capacity to grow above 3%, and the authorities have been content to continue projecting growth levels that we did not have the capacity to achieve.

The current administration has realized that in order to grow the economy at the targeted 6% per annum, there has to be a fundamental shift in our productive arrangements. There has to be significant tax reform, a change in our energy policy, and improved productivity levels among other things. And this change in thinking is to be commended because it is at the heart of our problems.

There are some in the US who have stated that oil prices at US$96 per barrel is not such a big problem as relative prices, when compared to a few years ago, is in fact still lower. The reasoning behind this is that inflation and a higher productivity makes today’s price relatively cheaper. In other words inflation over the years would adjust the constant price down and the fact is that the US is using less oil to produce one dollar of GDP than a few years ago.

In Jamaica’s case, however, although we have had much higher inflation, oil prices are denominated in US$, and so has not been affected by inflation, and our productivity levels have declined by about 0.5% per year. So we are using more oil to produce one dollar of GDP over the similar period.

It is this inability to prepare ourselves for these times by improving productivity and thus creating high growth and increased constant income levels that is causing the heightened panic of high prices today. Even though this period will pass also because the economy has been so unprepared to absorb these shocks, even a temporary bout of instability seems unbearable. So one again there is a call by all, including those that have failed to prepare us, to address a problem that should have been anticipated, based on economic cycles, placing greater pressure on our already scarce resources.

This is the real effect of unproductivity. And unless we can improve our productivity as a country then we will continue to see aneamic growth rates at best, while our trading partners surge ahead. As a country we have been too content to measure growth by how many cell phones, cars and women one has. Not understanding that these can be either trappings of wealth or debt, and for us the latter is the case.

Factors affecting productivity
If we are to affect productivity we must understand what are the factors that cause increased productivity? We must first understand what these are and then seek to ensure that the inhibitions to these are removed. In a knowledge based world, it is important, for example, that we increase our literacy rate from the current 80% level while our trading partners are over 95%. The first thing we need to understand is that productivity is driven primarily by human resources, and this is the main reason why I disagree with the contentment over the years of trying to control expenses by paying relatively low wages in the public sector not recognizing that value added is more important than absolute cost. If we really want to attract the best minds then why do we pay the worst salaries?

What is necessary is not the absolute sums we pay but the ROI on the monies invested in our human resources. What we must do is move towards is an effective performance based pay system. It is such a measurement that will drive productivity, not the traditional book keeper approach of scrutinizing each dollar spent irrespective of return.

There are other factors which affect productivity such as our bureaucracy, lack of proper order, and a general malaise to implementation. We are great at studying and preparing reports, but don’t ask us to implement. After all if we implement we may make an error, so the way not to have any responsibility is not to do anything. So no one ends up doing anything because of the fear of being held responsible for errors that other countries, and companies, would be satisfied with incurring because unless we make mistakes along the way we won’t be able to recognize what does not work. The important thing is to ensure that the proper steps are taken to minimize the risk of failure, but isn’t failure a part of success.

This fear of failure has resulted in the Jamaican economy not being able to transform over the years. So our production frontier remains the same, or in fact has been shrinking over the years. Remaining stagnant is the same as declining. If one examines what we were producing 20 years ago to today we would see that we continue to rely on the same production arrangements even though the world has changed. Even more important we have not even improved the way we produce those same things. This is at the heart of our problems.

Dealing with higher prices
In relation to the higher prices, the question is how we ease the pain on the poorer people. They continue to be faced with higher prices. Our traditional approach has been to provide direct support through programmes such as PATH and JSIF. But what we need to do is not just provide food stamps, for example, but seek to lessen the effect on prices, as when prices increase it is very hard for them to come back down even when costs reduce. Price increases also cause pressures for wage increases and reduce economic activity. If we recognize that price increases are temporary, because of increases in world oil prices, then the objective should be to control the temporary anomaly, or smooth out the effect just as the BOJ does when it intervenes in the foreign exchange market. A possible solution would be to (after careful projections) provide a temporary subsidy to the retailers on key cost components, not with new funds, but reallocating capital from places such as PATH, thus controlling prices to the final consumer.

In the medium to long term of course we need to develop our own local industries with less dependence on imported supplies.


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