Thursday, May 29, 2008

Déjà vu

In recent weeks Jamaica has been seeing significantly increased number of murders. And it seems as if those responsible are getting more brazen. I mean assassinating two policemen in a group carrying high powered rifles in brought daylight, is an indication that the gunmen are fearless. Shooting children and senior citizens also show heartlessness. Assassinating a young lady in the middle of the day in York Plaza, a busy intersection, illustrates their confidence that they will not be caught by the police.

The reaction on the airwaves the day after the murder of the policemen was predictable. The talk show hosts discussed what they thought were the underlying factors, and pointed out to the police that their past actions were partially to blame for what we experience today. And the policemen rejected any blame and vowed to get the cop killers, calling on the community for support.

Leadership inaction
This round of events seems like déjà vu. I am sure that I have heard these sentiments being aired before, and the same reaction from the police. But after a few days we always continue to do the same thing that we have always been doing, so no doubt we will always get the same results, and in the case of crime get worse results as the societal impact gets worse. The question is, in the decades that we have been talking about the rising crime levels, and more so within the last 10 to 15 years, have we done anything different.

The popular response, from the eighties, has been to create special police squads that always seem to have escalated the abuse on our citizens. This no doubt has alienated the citizenry and ended up with them feeling they have no alternative but to protect the gunmen from the police, as they are the sole protectors of their communities. Over the years when we have always complained about rising crime we have seen the corruption in the police force and by public officials increase. We have seen numerous political scandals involved billions of dollars with no solution. We have seen a financial crisis that has cost this country dearly and at the end of it no one has been held accountable. We have seen where children have been left to grow up on the streets without any state intervention to hold parents accountable.

So it is this inaction by our leaders that has resulted in the vicious crimes we see today that not only cost us at least 4% per annum in GDP growth but is the main reason for the deterioration in the quality of life of Jamaicans. Even children have to be careful traveling on the roads, as we never know when they will be killed for a cellular phone or no reason at all. And the commissioner (Lewin) is correct; this monster of crime is not going to go away over night. We have spent years of neglect and poor governance encouraging the sowing of the crime seeds, and now it is beginning to bear fruit. In fact Jamaica has become known as world leaders in the production of crime, as we have killed the manufacture of goods and services.

The high incidences of crime today was predictable and only leads me to conclude that our leaders lack the ability to see the consequences of their actions or just plain do not care about Jamaica. I have always held the view that Jamaica is seen as a place to be plundered, and that this view has been carried on in the tradition of Henry Morgan and his pirates. Today the pirates do not travel in ships but comfortably in expensive cars. I believe that this is the view of our leaders as I do not believe that even the most ignorant of us could be stupid enough not to see the societal effects of ineffective leadership.

Three generations lost
So the actions of our leaders and lack of development as a consequence has resulted in the neglect of around three generation of youngsters that have been educated in various methods of committing crime. This is at the heart of the problem. For years we have been speaking about the marginalization of our young men. We have seen where females form around 70% of the university enrollment. Doesn’t that raise questions about what was happening to our young men and wasn’t it enough to spur our leaders into action. It seems not. Instead the focus of our politicians has been on winning elections at all costs.

I really do feel it for the poor Jamaicans of this country that have suffered under the inadequate leadership offered by power hungry politicians. Jamaicans have always been known world wide as a warm and friendly people and poor leadership has turned the image of Jamaicans into a vicious bunch of murderers. It is time for us to really start to put people and Jamaica first. It is time for us to start acting responsibly in our governance, and when appointing people to positions or taking decisions, to do so in the best interest of Jamaica, not because someone is a political supporter. But even if we want a political supporter make it one that is capable of doing the job. We must ensure that everyone is treated the same and that no one is above the law while the rest of us mortals have to abide by it. It is time for a new dawn in Jamaica, and this is a passion I have. I long to see the day when Jamaica takes its rightful place in the world, as we have so many talents and competitive advantage.

And this is the reason why I said last week that I am relying on the characteristics displayed by Bruce Golding. I am encouraged by some of his actions and comments about equality for all. I am encouraged by his resoluteness for a better Jamaica and I hope that he continues on this path as I really do believe that this is one of the last chances we have as a country. Past leadership has failed us and some should never see it fit to offer themselves for public office again and act as if now that they are no longer in governance (and I speak not only of the last administration) that they now have the answer to what over decades they have not been able to resolve. I can never understand why Jamaicans believe these utterances.

Some people have written to say that I should pronounce that I am an advisor to the government, to put my comments in perspective. This view is nothing but a continuation of the tribal way in which we view things, as because someone may wear a certain colour, at a point in time, we shoot the messenger rather than look at the message objectively. Then again many do not have that ability, but I do understand the request in the context of the environment we live in. Irrespective of our views I think we can all agree that if nothing is done about this crime monster it is going to consume everything positive about Jamaica, and no practical economic projections or development can take place in this environment. But the change to dealing with this must start with leadership.

Passport office
On another note, I visited the passport office recently to renew my passport and was pleasantly surprised. The system of service was very efficient and the people there were very helpful. It was not like many other government offices where you could be falling down and no one comes to your rescue. These people were very attentive to their “customers” and always had a smile. The process was seamless and painless. In fact when the automated system called my number (322) a lady came up at the same time and said she had 317 and that her number came before mine. I withdrew to the side as the cashier said to her that “in here 322 comes before 317”, which reinforced in my mind that they were committed to following the system that was in place. This is indeed refreshing in a country where there is no respect for rules. Respect to the passport office, whose administrators should help some other places that are excellent at PR but very poor in service.

Sunday, May 25, 2008

Understanding inflation concerns

Last year, when oil was close to US$90 per barrel, I indicated that it would go to US$100. In an article I wrote in March, when oil was US$105 per barrel, I indicated that by April/May 2008 oil would hit between US$110 to US$120 per barrel. There were persons who publicly, and privately, said that I did not know what I was saying and that oil would soon go back down to US$85 per barrel. I even remember someone saying to me that I was talking up the price of oil, even though I am a mere accountant in a country that is responsible for a very insignificant amount of global consumption. But such is the emotion called illogic that so many of us seem to possess.

When one looks at the daily oil chart it still shows a very bullish trend, and on that basis some had said that they expect oil to still continue rising unabated. At the same time we are facing rapid increases in global food prices, as evidenced by a very basic staple, rice, which already this year has increased by 117 per cent. There are reports also that Costco and SAM's club, in the US, have been restricting the sale of rice. There are reports that in over 33 countries across the globe there have been food riots this year already.

Again, I believe that emotion is taking over, and people are not correctly analysing the situation and now the talk is that this trend will continue indefinitely. So people have transformed from telling me that I don't know what I am saying about oil prices going to US$120 per barrel, to the point now where they are saying that these rises are going to continue indefinitely and predicting indefinite doom and gloom. Now anyone who understands how markets work will realise how irrational these arguments are, and will also appreciate that what is driving these comments is nothing more than emotions.

Food inflation
I do admit that food inflation will be the greatest concern for Jamaica, and the world, in 2008. As a matter of fact it is a greater crisis today than the price of oil, which was a greater crisis last year. So today it is more important to deal with the threat of food inflation than the price of oil, whereas last year oil prices were more of a threat to the economy. This is the dynamic nature of the markets, and even more so in this electronic age, where policies must be nimble enough to deal with the crisis of the day as they will continue to keep changing, especially in times of great uncertainty and market instability.

Both food and oil will on average be higher than last year, but the fact is that the rate of inflation will slow down. So when the critics say that inflation will continue to be high, at around the same rates as last fiscal year (20%) then it really speaks to a lack of understanding of the concept of inflation. Let us take an example; oil rose from US$70 per barrel last year to US$120 per barrel this week, which is a US$50 absolute increase or 71.4% over last year. The same US$50 increase over US$120, however, is only a 41.7% increase, which is 30% less than the prior percentage.

This is the concept of inflation. It is not that prices may not increase but that the rate (% change) of increase is going to slow down. The slow down will result because of two reasons. The first is that the base on which the inflation rate is computed will be larger, thus the rate of increase will be lower, and the second, in my view, is that towards the third to fourth quarter of this year, oil and commodity prices will start to back off.

The greatest threat to higher local inflation is in fact something that no one has been speaking of, that is the threat to our local food supply from a natural disaster such as a hurricane.

US dollar recovery
The slow down in prices will result also from a stronger US dollar as well as equilibrium being achieved between demand and supply for food. The fact is that there is a speculative relationship between US dollar weakness and the higher prices in oil and other commodities, which accounts for approximately US$20 to US$30 on current oil prices. This results because traders, and investors, seek to protect the real value of their holdings by bidding up the price of commodities to compensate for the weakness in the US dollar. The US dollar, however, will strengthen in the third and fourth quarter for the following reasons:

. The economic data out of the US is showing signs of stability. While there are still some negative signs in the housing market, there are signs of a slight recovery in jobs and company profits over the expectation of economists.

In fact, even though the most recent jobs data shows a slight decline, the sector of small businesses showed a strong 55,000 addition. This is a sign that the economy has started to reach a bottom and could start to recover soon;

. The Fed is expected to cut rates by just 25 basis points at its next meeting and then be finished with rate cuts. The present threat of inflation means also that as the economy shows signs of stability the pressure to decrease interest rates will subside and in fact if prices continue to rise then rates may even go back up slightly;

. Other economies have already started to show signs of weakness, and in fact countries like the UK have already started to reduce interest rates. As the expectation of rate decreases falls in the US and increases in other countries then the interest differential between the US dollar and other currencies will decrease thus causing strength in the US dollar; and

. As the US shows signs of recovery then the equity market will start to recover. This will lead to investors putting risk on the table again and selling the Japanese yen against the US dollar thus causing strength in the dollar.

As food prices increase you will find more food planted globally. This will in turn increase supply and as countries, such as Jamaica, seek to increase local food production and also move to greater self- sufficiency, then demand will also be tempered.

These two factors will combine to reduce food prices towards the end of the year. This will result in a lower rate of inflation over last year, as when you are close to the plateau of prices it is difficult to have the same rates of increase. This is logical.As I have always said though, I think ethanol is over-rated as a fuel source, and in fact it has been one of the reasons for the higher food prices. The US, through Congress, has mandated that 25 per cent of corn production should go to biofuel production. What this has done is reduced the supply of corn for food consumption, placing pressure on the price. Now all my logical senses tell me that faced with food shortages or higher energy prices this mandate will be lifted, as eating is always going to be more important than driving. With the expected fall in oil prices also we will see less emphasis on using our food sources for energy. In any event I have always believed that coal is a better option.

Although we have seen that the prices of rice and corn commodities have increased, we have also seen that the prices of live cattle and milk, for example, have decreased this year. So the picture is in fact mixed.

The fact though is that markets always behave in this manner when trying to find equilibrium. So it will spike up and go down until it finds the equilibrium price, and this is influenced by market forces such as changes in supply and demand. So will prices be higher than last year on average? Certainly. But the rate of increase will be lower than last year, which is what inflation is.

Wednesday, May 14, 2008

Change is hard but necessary

“Everyone wants to go to heaven but no one wants to die”. These are well known words and were even belted out by Peter Tosh in one of his hit songs. How does one go to heaven if death is not involved, as death is a necessary ingredient of making it to heaven? And this is the dilemma we face as a country.

From when Omar Davies was Finance Minister he used to point out that the only way we can achieve significantly lower Debt/GDP ratio, and make more money available for social spending, is to first balance the budget. This was recently repeated by Don Wehby at a recent Mayberry Investor Forum. Any sensible argument from analysts will also confirm that this is in fact so. The question then is if we all know that the only way to reduce the strain on the fiscal accounts, and make more money available for social programmes, is to balance the budget then why have we not been able to achieve it for so many years.

Wanting fiscal results
In fact of the 45 years between 1962 and 2007, we have managed to balance the budget approximately 6 times. And this is at the heart of our high Debt/GDP ratio and lack of money available for spending on Jamaica, as we have to continuously borrow money to fund the budget. The fact is that we have just been living above our means for too long. If one continues to spend more than is earned then eventually your assets will be seized, and you will end up with nothing.

This appetite for spending more than we earn is driven by first of all the Jamaican culture, but more importantly is supported by political rather than economic expedience. As the saying goes “Good politics does not make for good economics” because in many instances politicians have to promise short term fiscal irresponsibility and sacrifice long term gains. This tendency is even more pronounced in countries such as Jamaica where we suffer from such a relatively high illiteracy rate where 70% of our high school student population leaves without one subject. An unbelievable statistic in a country that is based on 70% services, which requires human input to create competitive services.

Based on the literacy levels we would be better suited to a manufacturing economy. But of course as usual we fail to properly plan our development based on the resources available and go with where the political wind blows. The political directorate of course does not behave like visionary leaders but rather a businessman who seeks to maximize gains by promising high short term gains knowing fully well that the long term stability is compromised. But the fact that politicians are able to do this successfully over the years is more an indictment of our own ignorance as a people rather than the actions of politicians. I mean politicians do the same wrongs to us every year and who continues to vote for them. So who is more stupid, the fool or the one who continues to follow the fool?

If we really want change in this country then we must understand that it requires a fundamental difference in the way we do things. So that when the Prime minister makes decisions, that are unpopular, but is made with the prospect of making conditions better in Jamaica, we should analyze it on its merit for improving the country rather than who we think may be offended. And in some cases no one feels offended but the politics is always more important than the economics for many archaic minded politicians. When decisions are made to properly restructure loss making companies, or dispense with them, we have to understand that the short term sacrifices that may be necessary is good for the long term gains. Instead of thinking long term, however, we tend to oppose the good decisions because over the short term they are not politically correct, as Jamaicans at every level of society, are more concerned about curry goat politics rather than good economics.

Selfish motives
The selfishness of Jamaicans leads us to want change for everyone else except ourselves. So everyone, except me, must make the sacrifice for a better Jamaica, which I will of course partake of. That is the thinking that has helped to destroy this country. So when a politician is faced with a choice of political fallout or making a decision in the best interest of the country, history has shown us that most of our politicians have made the choice ensuring that there is no political fallout. As far as they are concerned the ignorant poor people of this country are not educated enough to understand that their long term future is at risk so they won’t notice that we are sending them like lamb to the slaughter. It is for this reason that I believe that there are many who should never think about offering themselves for office in this country again. But that is if they have a conscience.

In Barbados the economy was falling apart, and a Prime Minister came to office called Erskine Sandiford in 1987. He made the ultimate political sacrifice to ensure that the economy was put back on the right track by making the decisions that was certain political suicide but in the best interest of the country. It is to the detriment of the Barbados people that they voted him out, and I believe that they are still benefiting from his policies but recently has shown some signs of vulnerability.

In our case, however, we have had Prime Ministers that have always made decisions in the interest of the political party and to hell with Jamaica, as the party and party members are always more important than the ordinary Jamaicans. So while slavery ended in 1834 feudalism continues unabated with the advent of the political party.

If we really desire change, and want to see this country develop, then we must change our behaviour. If we want to balance the budget then we must accept that tax reform is necessary, and should not mislead the people that the additional $2.9 Billion in taxes is any real burden, when $2.9 Billion of new taxes is coming from cigarette smoking. Are we trying to encourage cigarette smoking by criticizing that tax? If we really want change we have to understand that when a decision is made to change personnel in a political administration we must look at the benefit to be gained, or the loss from such a move, rather then focus on how large the cabinet is. Are we saying that we are okay with the high levels of crime and fuel bill? If we really desire change we cannot continue to say that public transportation is only for the less fortunate amongst us rather than see how we can make it acceptable to all, as it is ludicrous to continue current consumption levels of oil when the only gas we produce is from the mouths of some of our politicians and bodily functions. If we really desire change then we must accept that it is unacceptable to continue government support of our loss making public sector bodies that add little economic support, while we debate whether we can afford $2 Billion for health care and another $2 Billion for education.

My own view is that Bruce Golding is of the ilk of Erskine Sandiford, as he is proactive in the decisions he has made in support of making for a better Jamaica. No doubt the perception that he has ruffled the feathers of some of his supporters may have some merit. But isn’t the development of the country more important. We have to be very careful that we don’t throw the baby out with the bath water, as I really believe that this is the last stand before we plummet into a Haiti like situation.

As I said at the start if we want to go to heaven there is a precondition to that. Let’s make sure that we end up not going to heaven but still die.