Sunday, September 28, 2008

Comparing Jamaica's 1990 crisis to the US

Recently I have been asked questions, from various persons, about what comparisons are there

between Jamaica's 1990 financial crisis and the current US financial crisis. And this is understandable, because for us in Jamaica it seems like déjà vu.

There is no doubt that the current crisis in the US is of grave concern for the world, as any mishandling of the situation could lead to devastating consequences for the global economy. It is therefore very important for this proposed bail out plan to be handled properly, as the US unlike Jamaica, cannot afford room for any mistakes, as the global consequences are too significant.

On the one hand, while the Fed and Treasury is proposing this US$700 billion “bail out”, the Congress is very carefully considering the details of the plan, as they are all about protecting the taxpayers' interest and ensuring that in the long run cost to the taxpayer is not significant, if there is any cost at all.

There is no argument that some intervention is necessary by the US government, just as intervention was necessary in the 1990s in Jamaica, but the manner in which it is executed is very important, as it could affect the long term viability of the economy and the ultimate cost to the taxpayer.

The following table provides a brief comparison of Jamaica's 1990s crisis versus the current US crisis.

These are some of the main differences between Jamaica's financial crisis and the one in the US. In both cases they are the worst economic shock as far as I can remember that has happened to both economies.

While in both cases the bail out was necessary, there is a fundamental difference in approach. It is clear that behind the philosophy in the US is the need to stabilize the markets but not to interfere by government acquisitions. In our case our philosophy was to stop the crisis by talking over the entities, but what we ended up doing is creating a greater burden on the economy, as the bail out package as a percentage of GDP was too great, and created a significant fiscal challenge. In addition the fact that government took over the productive sector and left interest rates high meant that the productive sector was effectively killed, and it was more attractive to invest in high yielding government paper.

It has been more than 10 years now that our crisis has occurred, and hindsight will show us that we could have approached some things differently. It is very important for us though to properly study the situation and provide some answers to the taxpayers who have paid dearly for the crisis, and for us to understand if the process was handled in the best interest of the taxpayers. The borrowers of course cannot wash their hands clean though as the business practices in some instances were wanting, and would have had an effect on the results.

There is no doubt that some bail out was necessary but we must try to understand what happened if we are to learn from it and silence the critics on either side. This is why a comprehensive study is necessary if we are to learn, even if more than a decade later.

Friday, September 19, 2008

Facing reality

A very appropriate introduction is the recent action by Captain Burrell to dismiss the once football saviour, Simoes, stating quite correctly that even though Simoes was a good person and a personal friend, he had a job to do and the fact is that he was not getting the expected performance.

When I heard this statement from the Captain, not really having any strong opinion on him before, my respect grew in leaps and bounds. I thought to myself this is a man who is a leader, who recognises what his responsibilities are and acts in an emotionless manner to achieve that purpose.

This is one of the central issues at the heart of Jamaica's failures, because instead of confronting issues head on, and making decisions based on objectives, we are more apt to make political or emotional decisions, and instead of holding people accountable we would rather cover up their inefficiency by creating a new position or additional structure. And this is not only in the public sector. The result is a structure of inefficiency and unproductivity, while we wonder why we are uncompetitive.

Courage to lead
Hats off to the Captain who has shown that he has the courage to lead. If that attitude continues in the JFF then I have no doubt we will return to the glory days of football, when he was also at the helm in 1998.

This courage to lead is also going to be critical in the next 6 to 9 months, as the global financial crisis seems worse than I, and many, had anticipated. On July 18th 2008 I wrote about the makings of a perfect economic storm unfolding over the next 6 to 9 months because of our fractured economic structure, built over the years, combining with the global crisis. At that time I didn't realise how difficult the global crisis would get. Our broken economy has resulted, to a large extent, because our leaders have not had the courage to lead, and instead of putting performers in place have supported friends and political appointees, even in the face of their non-performance. Another reason is that over the years we have always sought to solve a problem by bringing in a foreigner, ignoring the development and expertise of our own Jamaicans, thus exporting capital, and ensuring that the "slaves" never get to a position higher than foreman, satisfying their need for crumbs with "memorandums of understanding". But when the foreigners leave, the expertise leaves with them, and they have little obligation to Jamaica's development.

Recently again (happened in the past) people have sent me emails, and some have said that instead of talking about economic gloom I should think positively. As far as I am concerned, the only place that type of argument belongs is in the warehouse of the NSWMA. How does positive thinking replace reality? Maybe what Captain Burrell should have done was think positively in the hope that Jesus would save us from elimination in the qualifiers. Maybe what the directors of Lehman Brothers should have done was think positively that investors would stop dumping their shares, and on Monday everything would have been alright.

I think some of us have taken the power of positive thinking theory too far. Maybe because I am an accountant I was taught to be cautious and conservative, but the only way to truly deal with a problem is not to think it away but to first and foremost face the reality. If we fail to face the reality, then we will think that the light at the end of the tunnel is daylight and before we realise it we'll be run over by a freight train, instead of understanding that it was a train coming and step off the tracks.

But I have no confidence that those with this philosophy will change any time soon, while I and other pessimistic thinkers will continue to be seen as the prophets of doom. But as long as I am proved to be right, then I have no problem with that label.

Global turmoil
I don't think I have to mention the implications of the global financial crisis. It is very bad in my view, certainly the worst financial crisis since 1929 and has the potential to be geometrically worse than the Great Depression, simply because financial and economic systems are so intertwined in today's global environment that a failure in one market will inevitably cause significant harm in others.

We have seen where the US market has seen the fallout of giants such as Bear Stearns, Merrill Lynch, Lehman Brothers, AIG, and Washington Mutual. In addition the UK has seen its share in Northern Rock and now the acquisition of HBOS by Lloyds TSB. I have no doubt that other financial institutions on other continents will be affected. As a matter of fact, there is a fear now that Asian banks may soon be affected. These situations no doubt will lead to a global recession. Already Europe, UK, and the US are in a recession, and we are seeing a slowing down in other markets such as Canada, Australia, Japan etc. Jobless claims and unemployment are rising worldwide, with the US recording multi year high unemployment of over 6% and the UK recording unemployment of 5.5%. In the meantime, housing starts and mortgage applications are down worldwide (US, Canada, UK, and Australia).

As if that pressure is not enough we also see where inflation was still a global concern. When oil was going down recently I wrote that it was not time to celebrate as oil is still in a long-term up trend, and only yesterday oil bounced back from the strong technical support level of $90 to over $99 at the time of writing. Two days ago gold also had its biggest one-day increase. These moves are just a symptom of the credit crisis, as investors, fearing that money and companies will lose their value, flee to commodities that can retain the value of their investment. This will of course play out more in gold as it is a better way to retain value than other commodities such as oil. For an oil price downturn to be maintained then it will have to close below $90 per barrel, and even then it may not be sustained.

What is clear is that this "accounting" crisis will more than likely continue for a while. This problem started because of weak accounting rules, and has turned into a true global problem. The accounting issue still remains, as companies are still not able to say what the true value of the compromised assets are. In fact Fannie Mae and Freddie Mac admitted that the accounting for their assets was overstated, and even AIG's fall was caused because when Lehman wrote down similar assets significantly AIG's balance sheet became a problem. The only company in March 2008 which said it always marks its securities to market, Goldman Sachs, is the most resilient. Even so Goldman is seeking fresh capital from the Chinese in order to avoid any pounding from short sellers.

It is clear that the global crisis will negatively affect Jamaica's economy, as it will at best slow down the growth in tourism and remittances. There will also be a slowdown in construction, with the only possible saviour being agriculture, as we grow foods for export and more importantly to feed our people, as food security is going to be very important. In any event growth this and next year is going to be restricted, and economic defensive strategies must be adopted.

Technically also a recession is defined as two consecutive quarters of negative growth, and already we have had one. If there is another, then we would technically be in a recession. And there is nothing wrong with saying that, as it is the reality, and we must face if we are to deal with the challenge, as Captain Burrell did.

Friday, September 12, 2008

Impoverishment of a nation

Last week I received emails asking that I write on the issue of the American Airlines (AA) deal. Although there is something to be said, I believe it has been debated enough and there are so many more important issues to discuss. What I have heard being discussed, however, seems very limited, and the only person I have heard who has got the arguments right, in my view, is Wilmot Perkins who said that if we neglect our infrastructure, then both AA and Air Jamaica will be flying empty as no one will want to come to Jamaica. Anyway, enough said on that.

I believe that there is a more important issue that will really affect Jamaica's long-term future. While over the years we have been arguing about Air Jamaica and other issues, what we have been doing slowly is ensuring the impoverishment of the country. For while we are distracted by these arguments, we have been pursuing policies that have created illusions of prosperity while the fabric of the country has been rotting away.

Devastated infrastructure
Nowhere is this more apparent than the devastation caused to our infrastructure by Tropical Storm Gustav. Mayor McKenzie has been addressing this as he spoke of the fragile state of our country's infrastructure, which has been caused by decades of neglect. The pictures of devastation seen on the news indicate that over the years we have failed to properly maintain our capital infrastructure, while giving the impression that we are meeting targets and performing reasonably well.

Over the years, while debating the fiscal budget, I have been constantly making the points that (1) there is nothing wrong with debt as long as the marginal revenue is greater than the marginal cost, and (2) I was always very concerned that we have been trying to meet the fiscal targets by cutting back on capital expenditure. This myopic approach to managing the budget is one reason why we are in the situation today with a very vulnerable capital infrastructure. One example of the long- term cost caused by the lack of maintenance of our capital stock is the cost to productivity of the bridge at Hope River being washed away.

So what we have been witnessing over the years is the impoverishment of the country without understanding it. Instead we have tried to give the impression that all is well and prosperity abounds, by spending money on things such as Cricket World Cup and loss-making entities such as sugar and soaring to new heights as we do so. The management of our public funds was not based on any cost-benefit analysis and what would give us the greatest return on investments. But rather what would give us the greatest "votes on investments". One blatant example of this is the continuing MOU, which instead of helping our productivity and budget, is becoming a greater burden each year.

And so our leaders have presided over the process of impoverishing Jamaica. Let us understand that countries like Haiti did not reach their pitiful state overnight. Haiti got there by a continuous process of irresponsible and corrupt spending practices that eventually gave way to an underdeveloped infrastructure, where today they face disaster each time rain falls, and with each raindrop they plunge deeper and deeper into poverty.

But it is not only our leaders who have contributed to our demise; the population must take some of the blame. The fact is that politicians play to the tune of public opinion and votes, and will do anything that pleases the people to stay in power. So even though we say that we are concerned about the future of the country, make no bones about it, we will trade our votes for J$500 and a plate of curry goat, or a tax break, even if in the long run it means the policies pursued will destroy the country.

Wasted human capital
There is no doubt in my mind that the main impediment to Jamaica's development is the high illiteracy rate of our people. The fact is that over the decades we have neglected our most valuable resource, our human capital. The recent performance by our athletes at the Beijing Olympics and past contributions of others show how much value our people can add to this country. Nothing else has added as much value to Jamaica as our people, yet over the years we have abused their rights and kept them oppressed. And then we talk about development as if it can happen without the people being at the centre.When I look, for example, at the way in which the JPS has placed the burden of an inefficient billing system on Jamaicans, and there is no swift action from the OUR, then I have to ask if as a country we are serious about development. People should not have to be wasting productive time to demonstrate, when we have a regulatory agency in place. But then again, JPS seems to have joined ranks with some of the police who drive into communities and cause pain on the people. Only they have a more efficient way of doing it, as they don't even leave their offices.

But in all seriousness, what we have been witnessing in Jamaica over the last two decades or so is nothing more than the process of impoverishment of the country. The failure to maintain our national capital stock is similar to living in a community where the houses are not maintained. What happens eventually is that the houses are run down and eventually the community becomes a slum. Similarly, because of years of neglect, our capital infrastructure is in such a state that if not addressed all Jamaica will look like a slum. No doubt the government will have to find a lot of unbudgeted funds to address this, as the long-term cost of not doing so will be greater to the country.

There are some immediate actions that can be taken to ease the pain of the journey forward. At the heart of it, however, is the need to ensure that any money spent has a higher marginal return than cost. It is obvious that the planning at the parish level has also been lacking and the question must be asked, was there any planning being done, or any action being taken, at the level of the parish council before Mayor McKenzie? It seems as if everything was just left to be run down.

So as we move forward, while we discuss issues such as the AA deal, let us understand that there are bigger issues such as the fragile state of our capital infrastructure. In the long run if we neglect our infrastructure, then both AA and Air Jamaica will be flying empty as no one will want to come here, and merely having available seats or hotel rooms is not enough to entice people to visit Jamaica.

The government is faced with the unenviable task of maintaining the fiscal target, which is critical, and also assessing our capital infrastructure and other issues. It is going to be important, therefore, now more than ever, that the return on each dollar spent, and how best it is spent, ,is examined carefully. We cannot make the mistake, like we did in the past, of consistently sinking money into unprofitable entities, hosting two-week cricket festivals (where we don't perform well anyway), or wasting money in scandals or for political reasons.

It is going to seem like a long journey to place the country back on the path of development, and will require not only correct policies but restructuring of the whole public sector. It is something we must do if we are to save this country from the path of impoverishment we have been placed on.