Friday, July 18, 2008

A perfect economic storm

The next six to nine months will be one of, if not the most challenging, in the economic history of independent Jamaica. And I say independent Jamaica merely because I am not aware of what the economic circumstances were before. In fact what is brewing I would call a Perfect Economic Storm.

I say this not just because bad management of the economy over the years is finally coming home to roost, but also because the vicious global environment will play havoc on vulnerable economies such as ours. The reason for our vulnerability is because we have allowed ourselves to be destroyed by the virtues of consumerism, corruption, crime, and political rather than economic decisions. In fact the infrastructure that would make our economy able to weather the current global shocks does not exist because we have failed to educate our people and insist on productivity.

The makings of a storm
So what we have is an economy where productivity is declining each year, or is flat at best; the people are uneducated compared to our trading partners; capital infrastructure is low compared to our trading partners; economic growth is highly dependent on imports; and the cost of business is artificially inflated because of crimes such as extortion. Combine all of this lack of proper infrastructure with the lack of proper leadership in both the private and public sectors and what you have is an economy that is not able to protect itself from any unfavourable external shocks.

But what are some of the shocks we face that will make for this perfect economic storm, against this background of a vulnerable economy. They are:
- The rising oil prices have caused us to shell out more than an additional US$1 billion per year, when exports are not growing near fast enough to close the increasing trade gap. And because we have destroyed the mass transit infrastructure then people have no choice but to drive their personal cars, and so we cannot adapt to rising oil prices as quickly as developed countries such as the US. With all of this even if oil pulls back in the short term, the long term prospects is indicating it will continue to rise;
- Rising food prices is causing havoc on consumer spending and may start to impact general nutritional levels. If this happens we could then see a negative impact on health costs in the near future. Food prices should continue to rise in the foreseeable future. Add to this the fact that our agriculture is plagued by unproductivity, praedial larceny, and a high import content and it makes the situation seem grim;
- The government does not have the fiscal space this year to divert resources into much needed social programmes. It is going to be very important this year that the fiscal target is met, not just because we have been missing it for years, but also as a result of the changed international financial environment which means that we will be punished if we miss it;
- Crime, and lawlessness, continues to plague the country. Because of the social degradation and the lack of proper enforcement of discipline in the society over the years corruption and lawlessness have become ingrained. This single factor has been the main reason for the underperformance we have seen in tourism and domestic investment when compared to the rest of the region;
- Probably one of the most important turn of events over the last 2 months has been the significant downturn in business confidence. What this means is that we can expect to see stagnated economic activity in the near future, if conditions remain the same;
-The worsening economic situations in the US, Canada, UK, and Europe (our main trading partners internationally) will impact negatively on tourism, remittances, and other export earnings. We may see some growth in some of these areas but the growth will not be enough to counter the inflationary effects of our imports. Europe and the US also seems to already be in a recession; and
- The failure of the “alternative investment schemes” will have a negative impact on consumer spending and personal loan portfolios of the banks, thus affecting their profitability, as they have spent the last three years pushing consumer credit. The impact on the financial system overall will be minimal if any though. This could in turn negatively impact the motor vehicle and housing industries and is the result of not having dealt with these schemes three years ago when at the time I was emphasizing the importance of regulating them and I was being told that I was marketing for them. The fact is that pushing for them to be regulated would have shaken out the illegitimate ones very early and prevented the potential impact it will have now. Instead we chose to get public opinion against us with the big stick approach.

All these factors had the seeds planted years ago, even the global events. What is happening now is that all these seeds have developed into trees ready to bear fruit. The fact that when global economic conditions were excellent we failed to take advantage of it adds to our woes today. When all these events come together in the very near future, as they will, you will have the making of a perfect economic storm. And if we were to even have flooding this hurricane season it will compound the effect.

Competence needed
But like all storms the ship can be guided through, even in one as furious as this one. What it is going to require is competent and fair leadership. Most importantly it is going to require superb leadership by the Prime Minister, as he is the captain and the ship is fully in his control. But it does not stop there; it is going to be very important to have in place competent, and not just name brand, persons strategically placed to lead important areas. If this is compromised then the ship can easily sink. I would even go as far as to recommend that an economic council of some sorts be established to help guide us through what is on the horizon, made up of “competent” persons from the opposition, private sector, public sector, and government. These persons should be paid, and so held responsible, but more importantly should be competent.

What I am saying is that there is hope, as the inefficiencies in (i) oil consumption patterns; (ii) agricultural production methods; (iii) consumerism; and (iv) bureaucracy, all leave us with significant space for improvement, and is therefore an opportunity. But it is important that we act decisively on improving these areas, in addition to enforcing discipline, if we are to sail through these troubled economic waters.

As an example, when oil was at near US$80/bbl last year I remember blowing the trumpet with Ralston Hyman about the necessity of dealing with the short term demand as a matter of urgency. When such a situation occurs it is necessary that the slow wheels of government bureaucracy do not stand in the way, as our inability to be proactive is part of the reason for where we are today. In the US for example, as large as their bureaucracy is they are able to make quick decisions when it comes to the economy.

In conclusion although the future looks tough, we do have the ability to go through it with minimal damage. This, however, is going to require strong leadership to do what is necessary to carry us through. I have said in the past, and will say again, that I am of the firm view that the Prime Minister is capable of doing that, and it is important that whatever space we occupy that we support him in doing so.


Anonymous said...

What do you think of the IMF? I agree, Jamaica should not owe so much money when no attempt to improve our live has been made. Is it possible to turn the gullies into a transportation system! Even Roosevelt created an infracstructe for his people. And he can be called the George Bush of the 1940s.

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