Saturday, December 26, 2009

No new taxes: a better alternative

As usual in Jamaica we consume ourselves with arguments around the wrong alternative. So instead of discussing the real issues that will carry the country forward we end up being caught up in the political and social spins on the various issues.

The fact is that the recent discussions re the tax package, as to how much burden the rich or poor should bear, is really a redundant argument. Empirical evidence and logic show that you can't help the rich by burdening the poor and similarly you can't help the poor by crucifying the rich. The latter is supported by the rich taking up the offer of "five flights a day to Miami in the 1970s" and the former supported by the recent decimation of the US consumer in 2007/8, which caused economic declines, and a worldwide global recession.

Poor and rich suffer together
Economics does not distinguish between rich and poor, like politics, and is concerned with things like total money in circulation and the multiplier effect. I don't remember, limited as my knowledge is, looking in any economics book and reading about whether to burden the rich versus the poor. So once again politics takes the forefront in Jamaica, in the face of a worsening economy.

My argument has always been, and continues to be, that any new taxes within the context of an already declining Jamaican economy are more likely to shrink the economy and lead to lower tax revenues rather than increase it. This of course assumes that the other two arguments forwarded holds, that is (1) no new debt; and (2) reduced government expenditure.

It is only logical that if an economy is stagnant or declining (that is no real growth from production) at say $1 Billion, there is no new input in it from loans or other external funds, and in addition taxes are taken from the economy, then logically the economy must shrink. So we can verify this by assuming the following:

The table clearly shows that without any growth in the economy, if money is taken out then the size of the economy will contract and subsequently the tax collections will decrease, instead of the intended effect of increasing revenue.

This I think is borne out by Jamaica's fiscal numbers over the years. Looking at the fiscal numbers between 2003/4 to 2008/9, the government has increased taxes every year for a total tax increase over the period of $115 Billion. Over the same period the total new debt was $232 Billion, and was the only reason why the economy managed to grow, and also the only reason why the government was able to collect the increased taxes. So it stands to reason that if there is to be any increased economic activity or even a maintenance of the current economic activity, then the only way is for new loans to be introduced into the system.

Replacing higher cost debt
One way that the government is correctly doing so is by replacing the higher -cost debt with lower-cost debt. That again is another argument and I don't think it will have the effect intended for other reasons, but I will not get into that here.

On the other hand if the rate of taxation were to be reduced by 2%, at a multiplier effect of 4, then the government could in fact collect marginally more tax than is currently the case. This could be further increased if through fiscal policy, crime falls bureaucracy is addressed thus allowing the multiplier effect to increase.

The logical conclusion then is that the way to find ourselves easing out of this vicious downward spiral is to (1) withdraw the government influence on the economy in the form of taxes and the bureaucracy; and (2) improve the multiplier effect by introducing fiscal measures that will increase confidence and the economic outlook.

So the argument that we have been having over the past week on whether to tax the poor or rich is really based in politics rather than economics, as proper economic policy dictates that in times of recession less taxes and increased stimulus is needed as promoted by Maynard Keynes. This theory has been successfully used in the recent recession.

So my view is that what is needed is not new taxes but a stimulation to the economy, and a restructuring of the bureaucracy and fiscal policies to engender the much needed paradigm shift. Unless that is done then I am almost certain that we will be speaking about the same issues next year, only from a worse vantage point. A year ago I had told all who criticised me for saying we need to look at restructuring the cash flows re the debt that we would be talking from a worse position a year later.Need I say more?

Poor customer service continues
A few months ago I wrote an article about poor customer service, and this seems to be growing worse. It seems as if this has escalated with the harder economic times. Only a few months ago I had experiences with two listed companies calling me about money I did not owe them, only to apologise and say that their systems had messed up.

Just this week Scotiabank, who I have a mortgage with called me on three different occasions to say that I had missed a payment. This was after a similar incident about two months ago. One lady even insisted that I (the customer) was wrong, wasting my time for five minutes and refusing to hang up when I told her she would have to call back as I was in a meeting. Well, she didn't call back but I had to call someone and tell them to stop wasting my time. Again the excuse is that the system was not working properly. Similarly NCB wrote to me a few months ago to say I owed them for a card they had sent me, which I had not requested and I had never accepted or used. They also blamed the systems.

Poor Jamaicans. We are let down not only by our governments over the decades but also by the poor customer service from various institutions. I long to see the day when the Jamaican citizen is put first.

Friday, December 18, 2009

Jamaica's opportunity

At the time of writing this column, I, like every other Jamaican, am waiting to see what tax package the government delivers and the final outcome of the IMF negotiations. Both these issues have been on the tongues of everyone except the dead in Jamaica.

Jamaica is, I believe, at a significant crossroads, as what happens over the next six to twelve months will determine if we go down like the Titanic or rise like the phoenix from the ashes. It is, I think, the "last hurrah" for Jamaica, because if we mess up this time then there is a very low probability of turning back. And this is why all hands must be on deck and political expediency must take a back seat. It also means that the way in which we seek to crucify persons for the smallest of mistakes must stop because I guarantee you that as we seek to emerge from the mire we are in, mistakes will be made. What we need to ensure is that the mistakes are controllable and do not have a materially detrimental effect. We need to take a practical approach to it lest we find ourselves being a victim of our own criticisms.

A serious bind
There is no denying that the country is in a serious bind, and this will have a dramatic negative effect on the lives of many Jamaicans. But I really do believe that the present crisis provides us with a significant opportunity, as we are forced to face our reality as we are unable to postpone our challenges by going to the capital markets. In addition to this inability to beg or borrow our way out of the problem, there are some positive signs as shown in the significantly improved balance of payments, and more heartening for me, the way in which the police seem to have risen to the challenge of ridding the streets of indiscipline and stemming the tide of corruption within its ranks. The police leadership must be applauded for this, and I only hope that the courts can start to support them by dispensing with cases quickly.

One thing is certain: when we emerge from this present crisis we will be looking at a different Jamaica. In order for Jamaica's economy to properly adjust we will see business failures, as well as changed consumption patterns that will result in changed market behaviour. And there is nothing wrong with that if we are to move ahead, but any resistance to change will see a more painful and prolonged transition.

One of the changes will be to the government bureaucracy and in particular the fiscal accounts. Government has responded to the shortfall in revenues by announcing that new taxes will be announced, and no doubt the IMF may have had some hand in this. While the truth is that the government did not seem to have any other option, I don't think this will improve the fiscal situation much and could in fact cause it to worsen.

The fact is that taxes have been raised twice since the start of the current fiscal year, and the revenues continue to underperform. In addition the signs are evident that the retail sector is in trouble. The Bank of Jamaica has released data showing that the real value of money in circulation this Christmas is lower than last year. Real GDP is also down by 4 per cent and over 40,000 persons have lost jobs since the start of the year. There also has not been any increase in the salaries of public sector and many other workers. The fact is that purchasing power has fallen by approximately 20 to 25 per cent.

The world has learned from the 1930s recession that in a declining economy the only viable course of action is to increase government spending and reduce taxes. This course was not taken in the 1930s when we had the great depresiion.

Under performing revenues
As at October 2009 tax revenues have seen a real increase of approximately 3.68 per cent over October 2008, which means that government is already taking more money out of the economy, no doubt to primarily pay debt charges. In relation to the budget, however, tax revenues have under performed by approximately 10 per cent, indicating that the economy will not give up anymore taxes.

Increased taxes will have the effect of reducing the real purchasing power of an already fledgling consumer market. This will in turn lead to more conservatism around spending and result in lower profits for companies, which will face a stagflationary environment. This will result in lower company profits tax, which will see more businesses closing their doors resulting in lower employment or lower incomes. This in turn will lead to lower PAYE collections. Again, if more people see lower income levels (from reduced income or unemployment) then the result is lower consumption, which of course means lower GCT, SCT, and customs duty.

In addition to this, as government seeks to further reduce interest rates then a natural outcome will be lower tax collected on interest. Some have argued that government needs to increase tax on interest payments but that move itself will have a downside which could cause a more significant longer-term problem. The Prime Minister referred to this in his interview last weekend, when he said that this would result in persons seeking a higher interest rate to compensate for the increased tax. In addition to that, any taxes on interest, or profits, raises the question of uncertainty and risk for capital and therefore could see a resistance to invest risk capital, which is what is needed for economic development. So while this is an attractive offer, it could lead to a Tiger Woods-type backlash.

In the past the government was able to increase taxes successfully because it borrowed monies to support the economy and by doing so created a false sense of growth.

So the question is, if new taxes will cause the economy to compress and not improve the fiscal, and if the attractiveness of taxing interest or profits further is not recommended, then what options does the government have?

The first thing is that the public sector like businesses must accept that the environment has changed and they must adapt, or pull Jamaica down with it. A smaller and more efficient public sector is necessary if we are to move forward, but the bureaucratic and inflexible culture of the public sector does not provide me with much hope. The Prime Minister is making an attempt to make the change and I wish him well. At the same time this is happening the only real viable option for growth is to conclude the IMF agreement and allow for access to multilaterals for budgetary support. When this funding is accessed, however, it must be spent efficiently and not get caught up in the old ways of expenditure habits in an increasingly burdensome public sector.

Diamond in the rough
While all of this is happening it is critical that we applaud the efforts of our entrepreneurs. About two weeks ago I was given a brief tour of the development that is happening at the Wexford Hotel and was quite impressed. The new wing of suites and facilities for meetings is impressive in an environment that has not been very kind to the tourism industry. This investment shows a certain amount of confidence in the Jamaican economy and must be commended, and I would even go as far as to nominate it for Business Leader in 2010, even though I have no influence on the selection committee.

Friday, November 27, 2009


When I was growing up I always heard the phrase "Honesty is the best policy". This can be applied in many ways, as you can speak about being truthful to someone about an event or facing the reality of the situation. So even at the expense of looking bad, one should always understand that a delayed consequence in most cases is always much worse than confronting the reality as soon as it arises.

This has been the demise of Jamaica. We have simply failed to confront our reality for too many years and have suffered as a result. In my book I looked at Jamaica's economy (through numbers) since 1962, and the thread that underlies our economic demise is that for most of our 47-year history we have just failed to confront our reality and deal with it. Because of that we have continuously postponed our development by always telling ourselves a lie that all is well, not necessarily in words but by our actions.

Gloom and doom
In fact, over the past few years people have always told to me that I'm always predicting gloom and doom for the economy. And in fact just over a year ago someone said to me that I should stop being so pessimistic and "think positively". Only recently I was told that someone else said that I and three other analysts were being too negative on the economy and that we needed to talk it up.

My response to these accusations is that I have always believed that "honesty is the best policy". Because when we are honest with ourselves then we truly recognise the challenges we face and that is always the first step to deal with them. But when we continue to lie to ourselves, we continue to do things like borrow more money to afford the new car and new clothes, only postponing the day when the truth cannot be deferred. And so Jamaica finds itself in that situation today, where we can no longer postpone the truth of our reality.

There is, of course, a subtle distinction between realism and pessimism. Encarta defines them as (1) Pessimism - "tendency to see only negative or worst aspects.and to expect only bad or unpleasant things to happen"; and (2) Realism - "a practical understanding and acceptance of the actual.rather than an ideal or romantic view."

So people tend to confuse pessimism with realism because of their own lack of understanding of the circumstances. In other words, if a train is coming directly at you, then being optimistic that it will not hit you without action is stupid. So if you do not understand that the train is going to hit you and dismiss the warning as pessimism then it will of course hit and kill you. On the other hand, if you accept the reality that the train is coming, then you can act and move out of the way to avoid being killed. This is the purpose behind plans and budgets.

And this distinction, in my view, is one reason why the global financial crisis has caused so much stress for so many, and even closer at home why many individuals find themselves in difficulty after the collapse of the unregistered investment schemes.
In March 2007 when it was obvious to Greenspan and even two local analysts (Ralston Hyman and I) that the US economy would enter recession, the great Bernanke and Paulson were confident that the US would not enter recession and the bias was still towards monetary policies geared towards tightening. Similarly, many local persons were unwilling to accept the reality that the unregistered schemes were in fact unsustainable and thought many who warned to "check before you invest" were pessimistic.

The consequences of both are on record for everyone to see.

Benefit of realism
If, on the other hand, both situations were looked at from a realistic and analytical point of view, then much of the pain that the world and individuals go through today could have been avoided. The world may still have fallen into recession but policies could have been put in place earlier to make it less painful. And if persons were more realistic about the investment schemes, much individual pain could have been avoided.

The problem is that people always find greater comfort in going with the crowd and so would rather believe what the crowd is saying rather than the minority. This is why markets crash, for example, because people usually follow the herd mentality and flock to investments along with the crowd, which inevitably leads to bubbles and eventual market crashes. There is nothing that replaces good and solid analysis.

So if you think about it, if Jamaica had faced the reality of our structural economic challenges decades ago then we would be in a much better position than we are today, and therefore "honesty is always the best policy". But we get there not by calling down "fire" on all those we deem to be pessimistic but by carefully analysing why they are pessimistic and comparing it against our own well-researched findings.
So when the National Anthem says "give us vision lest we perish", I think we need to add to that: "and allow us to properly analyse and interpret lest we be blinded".
When I listen to some of the analyses relating to the present challenges we face I only see a repeat of the same mistakes made, as a lot of the analysis and solutions are misguided. The one thing you want to do when faced with a challenge is first and foremost maintain a clear head and do not rush to judgement and solutions, as this is just as dangerous as taking the line of optimism without foundation.

Last year (2008) I had indicated that companies and individuals should have started to put their house in order for what was coming this year. Those who did are better today than those who did not; even though survival is never guaranteed, at least you get to live longer than those who did not.

As we go into 2010 the probability is that the economy will decline further, which will be exacerbated by the fact that many companies and individuals did not prepare adequately. But we can see a better 2010 if the correct choices are made at the country, company, and individual levels. The question is, will we continue to be optimistic without foundation or face the reality and allow for well-founded optimism?

Friday, November 13, 2009

The business of productivity

Recently, the Jamaica Productivity Centre released a productivity report on the period 1972 - 2007 in Jamaica, where it showed that over the 35-year period the labour productivity of the Jamaican worker declined by 1.3 per cent per annum. It further stated that at our current rate of growth it would take 40 years to get to Barbados' current per capita
GDP level.

What surprised me about the report weren't the findings, as anyone who is even slightly aware of what is happening in Jamaica will know that our productivity and growth levels are at the bottom of the pile. What I am surprised about is the reaction to the information, as if "Wow, I didn't know we were doing this badly". It seems as if everyone has forgotten that the last time the centre reported the results were similar.

Consistent decline
The fact is that Jamaica's productivity has always been in consistent decline since the 1970s, as I illustrated in my book, with the exception of the decade of 1980 to 1990, when the Total Factor Productivity (TFP) - productivity measurement factor - was 1.0. In the decade 1960 to 1970 the TFP was 2.4, 1970 - 1980 it was minus 3.8, and in 1990 to 2000 it was minus 1.7; all measured as annual averages.

During similar periods, this was reflected in the GDP growth numbers. These periods are 1962 to 1971, when accumulated GDP growth was 68.5 per cent (average annual of 6.9 per cent); 1972 to 1981, accumulated GDP growth of minus 9.5 per cent (average annual of minus 1 per cent); 1982 to 1991, accumulated GDP growth of 19 per cent (average annual of 1.9 per cent); 1992 to 2001, accumulated GDP growth of 8.9 per cent (average annual of 0.9 per cent); and 2002 to 2007, accumulated GDP growth of 9 per cent (average annual of 1.3 per cent.

One could ask the question why we had growth during the 1990s if TFP was negative. The answer is simply that we were able to grow because we borrowed to consume and create economic activity. So today we are faced with a situation where we have to pay back for all the money we borrowed to consume when we were not producing the means for our
own consumption.

This is at the heart of all our challenges. The question then is how we improve our productivity so that we can enjoy real economic development and all the benefits that come with it. First I think we need to get an understanding of what productivity is, as it seems obvious from the policies that our leaders have pursued that they really have no idea of what productivity really is.

So for the benefit of our leaders, productivity can be defined as "the rate at which a [country] produces goods or services, in relation to the amount of [resources] needed" - adapted from In other words if someone employs $100 worth of resources and produces $200 worth of goods yesterday, and today can employ the same resource value and produce $250, then productivity would have increased by 25 per cent. What Jamaica has been doing is producing less with the same amount of resources, which means that more resources are needed to produce the same amount. But ironically our consumption has been increasing while our production has been falling. So in order to consume more we need to borrow from others who are producing more than they consume and end up with reserves. In effect Jamaica is a parasite on the world's production.

What of technological improvements?
But some may say that during the 1990s especially, we had improvements in technology, as more computers were put to use, the Internet came into being, and more persons had cellular phones. So if we saw an increase in the productive tools being used then obviously productivity must have increased. And some people have tried to argue with me in that manner, as Ripley would say "Believe it or not".

First, we need to understand that if we look at the use of technology in Jamaica, most of it is geared towards personal consumption, in my own informal analysis, rather than employed in productive use. And the reason why we are able to consume these productive tools is that we borrowed the money to consume them.

Secondly, and in my mind more importantly, we need to understand that a computer does not work by itself, nor does a new state-of-the art piece of machinery. All productive tools require a productive mind behind them in order to be the most productive they can be. So even when the police talk about the number of guns on the road, that is not what causes the crime. What causes crime is the number of criminal minds behind the guns. Similarly, when we talk about the absolute amount of debt, that is irrelevant without looking at how effectively each dollar of debt is used.

So the real challenge we have when it comes to lack of productivity is not how much foreign investment we attract, or how much agricultural land is in production, or how much money is pumped into the economy. The real problem of productivity comes back to the social issues. The problems relate fundamentally to how productive our people are. And so when we see a situation where 50 per cent of students leave secondary school without one subject, then is it any surprise that this translates into Jamaica having the lowest productivity rate in the region? Can we be surprised at our low rates of productivity when our citizens spend their days demanding justice from both the police and the criminals? How can people be productive if at a basic level they have to worry about their security? How productive can people be if their days are caught up worrying about their missing children?

And if our citizens cannot be productive, then what sense does it make to have the most efficient tools of productivity? We also need to remember, and everyone is seeing it now, that economies like Jamaica's thrive on consumer spending, and it is a known fact that most spending occurs within the lower-income classes, so that if they don't earn a decent wage the economy will stagnate. This is exactly what is happening as real purchasing power, particularly in the low-income groups has fallen significantly year over year.

So in the final analysis when we speak of productivity and growth it would do us well to understand that this is fundamentally a social problem. My own view continues to be that the failure of Jamaica's economy starts with our failure to protect and advocate for the fundamental human rights of our citizens, and unless we change this then we will persist on a path of economic and social failure.

The great USA that we look up to starts its constitution with the words "We the People of the United States, in order to form a more perfect Union, establish Justice." (You will note that Justice has a capital J). The fact is that unless we start to realise that all our economic and social challenges come from the inability to provide the Jamaican citizen with justice and a protection of his/her basic human rights, then I guarantee that next year this time, and into the foreseeable future, we will be talking about the decline of both the Jamaican economy and values and attitudes.

Friday, October 30, 2009

The economy must adjust to develop

From time to time, I talk to business people in Jamaica who tell me that with each passing day business is getting more and more difficult, as buyers are not only spending less but are taking longer to pay.

We see also where financial institutions have been reporting a fall-off in consumer loans, and targeting the small and micro business sectors.

Added to this we see where some 30,000 jobs have been lost since the start of the year, and my own expectation is that we may see another 15,000 more in job losses before the end of the fiscal year.

Money circulation
The fact is that real money in circulation has taken a beating, and more importantly the consumer purchasing power has taken a severe beating. When we speak about a vibrant economy it is important to remember that this is only possible with spending power in the hands of the average consumer, as we have seen in the US, which has had to introduce a very large stimulus package to keep their economy going.

The most recent US data has shown that the last quarter GDP has increased by 3.5 per cent but this in my view was driven by stimulus money more than any real recovery in the economy, as job losses still continue to mount.

In Jamaica's case, having spent all our future income already, we have no "savings" to create any stimulus for the economy. The fact is that the Jamaican consumer has been hit really hard over the past few months, and this trend I expect will continue for at least another few months. But this is necessary if we are to change the current economic structure of the country and reposition ourselves for development.
The following developments have caused havoc for the local consumer:

. 30,000 persons, or approximately 2.3 per cent of the labour force, have lost jobs since the start of the year;

. Real incomes have declined by about 10 to 14 per cent, as wages and salaries have been kept flat for the most part while we have seen inflation of 14 per cent in the last fiscal year; and

. There have been increases in taxes, food prices, fuel prices, and other basic items, further eroding the purchasing power of consumers.

This means that total consumer purchasing power has declined rapidly. Add to this the losses sustained by consumers in the unregulated investment schemes, and the fact that some have been paying off loans or saving more in anticipation of more difficult times, and you have a scenario where consumer spending has declined significantly. So even though the absolute amount of money in circulation may not be much different from what it was a year ago, the fact is that the real expenditure has declined significantly (even so, the BOJ has reported that the expansion in money supply was lower than projected). One could easily expect that real consumer expenditure could have declined by about 25 per cent year over year.

So what all of this means is that businesses are inevitably going to suffer and I expect that we will see business fallouts accelerating into the first quarter of 2010. In fact, when the car dealers received the recent stimulus package I was on a programme with two of them professing how happy they were with the stimulus. I told them that it would not make a difference and car sales would continue to decline. The fact is that consumer spending is driven by how many persons have jobs, expectations, and the purchasing power of consumers. So if one were to pull the stimulus money out of the US economy, there would no doubt be a decline once again.

Consumer spending necessary
Creating stimulus packages with no positive adjustment to the spending power of consumers will have little or no effect. The lesson from this is that instead of providing stimulus to the businesses, the government would be better off providing stimulus packages to the consumer. In the US, for example, the stimulus came mostly in the way of programmes such as the cash for clunkers, government employment projects, and extending unemployment benefits. This is the only way to positively impact the economy.

The Observer's Fashion Night Out is an innovative way of providing a stimulus to consumers as it provides them with greater purchasing power through lower prices. My own prediction is that the overall night will be relatively better for the merchants, but the downward trend in business will continue after the night is over. Businesses in clothing and other basic necessities should fare better. This one night will not develop any long-term loyalty, as loyalty in today's economy only comes through much lower prices.

But the fact is that this adjustment in the economy, through business fall-outs and lower consumer purchasing power, is necessary if the economy is going to develop. Jamaicans have for a long time lived above our means, thereby running up a significant trade deficit. The only way that we have been able to keep our heads above water, and avoid drowning, is to put on the debt "life jacket". Continuing the course of borrowing our way out of the problem will only make the adjustment more violent when it comes, as it is not possible to borrow forever. So the sooner we make the adjustment, the better it will be for us. Because we have taken too long to make this adjustment I think the next few months will be an experience in pain for many.

The role of the government in all of this must be to (1) encourage investment and (2) more importantly to ensure that the adjustment is as painless as possible. And this latter role is critical if we are to ensure the economy's adjustment in as rapid a timeframe and painless a manner as possible. Any prolonged adjustment period and too much pain will be bad for the country, and so careful policy implementation is going to be critical. Even if we were to select the appropriate policies and implement them, we could still have more challenges than we want.

What we will see is that businesses that rely on luxury items and imports are going to be the first to fail. Outside of that, businesses that fail to employ the necessary professional expertise to help them through this time will run into problems also. There are some that were more proactive than others and sought the assistance from last year and were able to adjust way in advance of the economic onslaught. Those less prepared will either see their capital depleted or will fade away into the sunset.

So even though the US economy is showing signs of improvement this is not going to have any short -term positive impact for Jamaica. We will continue to see the economy being weighted down by our past decisions. This adjustment, however, is necessary in order for us to put a halt to the stagnation we have found ourselves in since the 1970s (with a small moment of hope during the end of the 1980s) and start on the path of development.

As usual, however, the road we take is going to depend on the policy choices we make.

Friday, October 23, 2009


n July 2008, I wrote an article entitled "A perfect economic storm", where I indicated that 2009 would be the worst economic time since independence.

Since then the winds preceding the storm have been blowing but have not made landfall yet because of the slowing economies, which resulted in the significant fall-off in oil prices. If oil prices had remained even at current prices then I think we would have felt the effects earlier.

That storm is now about to make landfall in Jamaica, and those who were thinking would have started to make preparations from last year. This, particularly since this storm is going to be for a protracted period and a new thinking is needed in business and nationally to deal with it.

Signs of the times
The signs are showing every day that the storm is coming onto our shores. The Government first announced the need to go back to the IMF, and this was followed by reports of a private sector proposed liability management programme. Then came the downgrade by S&P, the very upfront speech by the prime minister, the presentations by Professor Harris and Mr Livshits, and finally the report from the Economist Intelligence Unit (EIU).

All these revelations come as no surprise to us locals who have been saying for a while (some from in the 1990s) that Jamaica has a very serious fiscal situation and that the only thing that has been holding the pieces together was the fact that we were willing to mortgage away the wealth of not only our children, but even further generations by borrowing money to satisfy a lifestyle we cannot afford.

It could very well reach a stage where pregnancy terms in Jamaica move to twelve months as babies may not want to be born to face the approximately $482,000 debt they are saddled with at birth. But the fact that these reports are coming from foreigners makes it more real to many of us who have not been ardent followers of Bob Marley and managed to "emancipate ourselves from mental slavery", always hanging on to the word when delivered with an accent other than Jamaican.

So here we are in October 2009, looking helplessly at the oncoming economic tsunami, as it starts to ravage our shores. Our only hope being that it will not stay with us for long but deliver a swift blow and destroy what it must quickly, so that the excruciating pain will not last. We are indeed caught between a rock and the harder choices we have to make with each passing day.

In Jamaica, I have come to realise that it is not only death and taxes that are certain but also prolonged economic hardship. And because of this many people have said to me that Jamaicans are used to suffering and so this will be no different. This time, though, it will be different as there is no capital market to freely access, foreign-exchange earnings are significantly down, oil prices are trending back up, crime continues to destroy the country's stability, and the workforce has been decimated by the failed education policies over the decades, which is responsible for over 50 per cent of secondary school leavers not attaining even one subject at CSEC level. I wonder if these people were not listening to the presentation made by the Prime Minister re the state of the country's fiscal accounts, or maybe they did not understand what he was saying.

Short-term fiscal challenge
So while Jamaica faces a fundamental economic challenge (which can be seen as the Balance of Payments issue), this is preceded in urgency by the short-term fiscal problem, which must of necessity be addressed. If we do not adequately address the short-term fiscal challenge then any economic policies we put in place will be useless from my perspective.

The next three to six months should be challenging for the fiscal accounts, as the economic challenges start to set in even further. And we see indications of these. In an article, carried in last Wednesday's Business Observer, it reports that retail merchants have been seeing a fall in sales and are hoping that the Observer's Fashion Night Out will improve sales. On the same day another article correctly states that rising oil prices will reverse the trade gap.

Both these articles point to what is on the economic horizon, and dare I say that the merchants will be sorely disappointed, as even if they were to see some improvement in sales over that night, the probability is that sales are going to fall back right after, leading into a very blue Christmas. Even the banks are reporting a fall-off in automobile loans year over year.

The fact is that real incomes and aggregate demand is much lower than it was one year ago. We have seen where there has been a freeze on public sector wages, and even in the private sector wages have been frozen.

Faced with an increasing fiscal challenge, the Government had no immediate alternative but to increase taxes a total of $24 billion for the fiscal year, reducing GDP (after considering the multiplier effect albeit some of finds its way back into the economy but the majority will not). In addition to this, the $18-billion expenditure cut by the government will negatively impact GDP by approximately $72 billion. To deal with the short-term fiscal challenge, the Government did not have much alternative.

We also see where over 30,000 jobs have been lost, with more to come. And if all of that was not enough, the country will have to grapple with higher oil prices in 2010, which I expect to be at least US$90 per barrel by the middle of 2010. At the very least also the global economy is going to see very sluggish growth, even while the risks to another decline is possible with the debt crisis that countries such as the US and Japan face, as they rack up significant fiscal deficits.

Jamaican-made challenges
The greatest concerns I have for the Jamaican economy, however, are things that we have created ourselves. Firstly, the situation with crime still continues to be a noose around our necks. Even if the economy were to attempt to make an acceptable adjustment, the crime situation would hamper its progress, as the report from the EIU correctly states. The second situation is the low literacy level of our
working population. Recent data suggests that over 50 per cent of school leavers have not achieved proficiency in even one subject. The problem we face therefore is that compounded by the Government's inability to provide a suitable social safety net; the labour force does not possess the skills necessary to fend for themselves during this difficult period. So the only thing they know how to do is find employment, which is decreasing, as many of the businesses they were working with depends on imports to survive.

But the problem is that with less expenditure in the economy (measured by a reducing GDP) and the limited ability of the government to access debt, then some of them will be forced to close down, or at best scale back their operations, leaving many without any immediate job prospects.

The prime minister indicated that Jamaica could be successful in obtaining some budgetary support from the IMF, and that would be welcome as it means that there would be monies available to support social safety and capital expenditure programmes, which are necessary to keep the economy buoyant.

Two-phased solutions
But the solutions must be seen in two phases. First, we must of necessity address the GDP situation, and this must be done through increased expenditure provided by fiscal initiatives. This can be done by either reduced taxes or increased targeted expenditure. This is what has worked to keep the developed economies afloat. The problem is where Jamaica gets the money to do so, as this sort of initiative is needed to resolve the challenges of the next three to six months if we want to maintain some buoyancy in the economy.

There are only two areas of fiscal expenditure that have enough critical mass to provide that sort of boost. The first is debt expenditure, but the Government has rejected any notion of a liability management programme, and wages and salaries. But based on what needs to be done to assess the wages and salaries situation, the redundancy payments that would have to be made, and the fact that most of the civil servants are teachers, nurses or police, then there is not much short-term benefit here.

I don't see increased taxes as an option as this will only serve to further reduce the GDP value and negatively affect businesses and jobs.

The only real short-term option we face is to borrow more money. And there is nothing wrong with that if the borrowed money is going to be surgically implanted in the economy to ensure the best return from those funds. If, on the other hand, the increased debt is spent on consumption then we fall back into the vicious debt cycle we have become so accustomed to.

What is needed is creating jobs through specifically targeting SMEs engaged in export-driven activities and also in the area of capital spending that will enhance foreign exchange-earning industries such as tourism and agro-processing.
In the medium to longer term, fundamental economic policy shifts will be needed to address Jamaica's development challenge and ensure that the increased debt to GDP ratio can be worked down. The economy will have to decline before it can start to develop. But the right policies are going to be necessary to ensure that when it declines it does in fact start to develop again.

As we are today caught between a rock and a harder place, as every day that passes the tsunami comes ashore the choices will get harder.

Sunday, October 11, 2009


If one has ever seen crabs in a barrel, you will realise that they all try to come out of the barrel at the same time. So they climb on each other, in futility, as they can never individually come out of the barrel. Soon all the crabs die and none will be successful. If, on the other hand, they all realised their individual deficiency then they would join "claws" and assist each other in making their way out of the barrel.

This is also the way of the market economy. What a true market economy does, however, is ensure that the strongest and most efficient crabs will always survive by virtue of the invisible hand that guides the market. This doesn't happen in Jamaica though, as through political interference we have managed to replace the invisible hand with a very visible one that rewards political tribalism over the stronger and more efficient players. The result of this interference over the years has been a very inefficient market structure and the eventual death of all the crabs, rather than ensuring that the strong and efficient ones live to once again grow the population of crabs.

Fiscal Accounts
We, are of course, seeing the result of that in our fiscal accounts today, which has always been known to us, but has been so well outlined by the prime minister two weeks ago. The fact is, everyone who has done mathematics knows that the only way to prove our fiscal equation that one and one equals three is to add debt to it, as is illustrated in a chart on page 22 of my book. I pointed out that 1996 is when we started on this downward path in our debt to GDP ratio, when the debt started to accelerate at a faster pace than GDP. Immediately before that the debt to GDP ratio had declined to around 90 per cent, from 212 per cent in 1984, and since then has climbed to where it is.

This small illustration confirms that the size of the debt to GDP ratio is not important but what we do with the debt is. In the early 1980s, we were coming out of what was then the worst recession since the 1930s, and borrowed up to 212 per cent of GDP, much of that borrowing went into policies aimed at the country's development, rather than consumption as we have done since the mid 1990s. The result is that Jamaica was able to generate growth rates averaging around six per cent towards the end of the 1980s and substantially bring down our debt to GDP ratio.

The prime minister correctly states what the fiscal challenge is, and what we need to do now is look behind the fiscal numbers to understand what the real development challenge is for Jamaica lest the crabs keep killing each other again as they try to emerge from the barrel.

For the first in a very long time a politician (the prime minister) has come to us and laid out exactly what the challenges are that face the country, and this frankness is good as it serves as a wake-up call to all those who have been avoiding the reality of our situation. People have asked me, for example, why I am so pessimistic in calls on the economy, not understanding that if the car is heading off the cliff there is only one way to interpret that. And that it is that, the car is heading off the cliff, with all of us in it. So I am heartened by the honesty of the prime minister, because hiding from the facts never help.

What we need to do now that the message is out is to clearly outline a detailed plan of implementation as to how the challenges are to be confronted. I believe that in that plan there not only needs to be some deliberate actions by the Government, but we also need to remove the tentacles of Government from the operation of the market. That is reducing the bureaucracy and interference the prime minister referred to. It cannot be that government expenditure constitutes 47 per cent of our GDP. By any measure this means that we are operating in a state-run economy, and not a true market-determined economy.

When this reduction of government involvement happens, I expect that quite a few businesses will fail and jobs will be compromised, and not only in the public sector. What is therefore very necessary is for the Government to lay out a transition plan that will ensure that lost jobs and failed businesses can be replaced with as little pain as possible. Because of our failure to adhere to market economy rules over the years, any implementation without a proper transition plan will cause a drastic adjustment that will cause much pain, and so a carefully laid out transition plan is going to be extremely critical.

Jamaica is once again faced with an opportunity to make the much-needed paradigm shift in our economy, and based on the numbers and social influences, I believe that this could be our last such opportunity. The prime minister has made the step in the right direction but the road is going to be long and painful, however, I have seen through numbers what the alternative is like and trust me, if we continue on the same path, all the crabs in the barrel we call Jamaica will perish.

Monday, September 28, 2009

Risk of a double-dip recession?

The opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined in the term "green shoots". Markets have been responding positively to this feeling, as seen in the world equity markets, oil prices, and commodity prices.

One of the arguments which has not received similar attention is the very real risk of a double-dip recession, which is also referred to as W-shaped recovery. In other words, the economies would recover somewhat and then dip again into a recessionary environment before making a full recovery. At the very least, the market has been talking about a U-shaped recovery, which is a very long recovery period.

Real possibility
In my view, the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies.

These economies, such as the USA and UK, are still facing significant job losses, tight credit, and increasing credit card delinquencies. In addition to this, we are seeing where financial institutions are again starting to re-package loan securities and selling them to investors, albeit with less risk, but the fact is that the productive value is still not there to support these new derivatives.

Undoubtedly, recent data (this week) shows that there are indeed some signs of recovery. Out of the US, August 2009 industrial production has shown both month-over-month and year-over-year increases and retail sales have shown significant month-over-month and yearly increases in the same period. On the other hand, business inventories month over month have shown a decline of 1.0 per cent, which indicates that there are no robust projections of better times ahead from the point of view of Main Street.

These positive signs, however, could be the middle of the W-shape and we could still see another dip before the full recovery takes hold. This is especially as the positive indicators we have been seeing recently have, to a large degree, to do with the stimulus packages being implemented by the major economies, and not with any real growth in income levels, at the company and individual levels on a sustained basis. The fact also is that total wealth in the US has fallen off by about 35 per cent since last year and debt levels still remain very high.

In order for us to be sure of a sustained recovery we need to see a trend of at least three to four months of positive data coupled with net jobs being created. It must be remembered that 75 per cent of the US economy depends on consumer spending, and stimulating this spending with debt or government expenditure is not a sustainable solution.

The only way that sustainable recovery can return to the global economy is to increase production of goods rather than services. It still seems apparent that the US, in particular, is still trying to rely on services and credit as a way to grow the economy. This lack of real production in the world's largest economy still makes for a very fragile global economy, as even though there is production happening in markets such as China, the US still contributes around 25 per cent to world output. The greater risk in the US, in my view, is that the financial institutions return to increased risk too soon in a market where the consumer is still very vulnerable and debt levels are still too high. It also seems that much emphasis for increased financial activity is being placed on the increases in the equity markets that could see a pull-back in the very near future.


In fact, the Dow Jones Index (DJIA) chart shows that the market is in a critical place and it is very possible that we could see a significant pull-back (see chart). In order to see the continuation of the uptrend in the equity markets, the DJIA will have to close above 10,000 and should ideally close above the one-year 72 per cent retracement level of over 10,400. In any event, one can expect a pull-back from the current levels and if this occurs before the DJIA closes above the 10,000 to 10,320 range we could be looking at a significant pull-back.

The implication of the DJIA effect on the market of course, is that, if the pull-back is severe, then we could once again see a contraction in spending and the US economy would face contraction again and further job losses.

On the other hand, if the DJIA expands above 10,400 too quickly, then the market could face a sharp correction if real production does not keep pace with this rise in wealth. The fact is that a big factor causing the credit crisis was that spending grew at a much faster rate than the supporting real output value.

THE opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined by the term "green shoots". It is going to be very important then to watch the personal income, employment, and production data more than the retail spending going forward, to look for signs of a real recovery. It is also important that spending and financial market growth do not continue at a pace that far exceeds real output growth. One way of measuring this, of course, is to look at the companies that are reporting profits; that is real production versus services; and also, what price earnings ratios are trending to.

As the US economy stands now, there is still the high risk of a double-dip recession occurring and the signs of recovery that everyone is warming to could be a misplaced feeling of relief.

The other factor that could cause some amount of inflationary pressure is the fact that a lot of stimulus money has been pumped into these economies, which are not based on any real output increase, but rather on Keynesian economics. Keynesian economics says that when an economy is in recession, one should expand fiscal spending in order to reduce the negative effects of the economy.

This has worked to stimulate some demand and stability in the major economies but is a double- edged sword, as, if not properly monitored, it could cause significant inflationary pressures as there would be too much money chasing the goods in the economy.

Because of this fear, it is very important for the Federal Reserve, for example, to ensure that the money does not stay in the economy too long, and hence their intention to start pulling the stimulus money out of the economy come October 2009.

The downside to this, of course, is that if real output does not start to increase by the time the money is being pulled out, then demand will again contract and again raise the possibility of a double-dip recession. It is therefore a very delicate situation that must be carefully managed.

In any event, the increased fiscal deficit in the US could lead to a need for future tax increases, which could serve to further dampen consumption, and this is why a return to increases in real production is necessary to lessen that effect.

The increasing oil prices also run the risk of slowing down output and demand. From all indications, as long as people believe that the economic recovery is underway, then oil prices will continue to climb and could reach US$90 per barrel by the middle of 2010. If the DJIA contracts sharply, however, we could see oil prices heading back down to the U$40 to US$50 per barrel.

The other factor that could cause contracting demand in the US economy is the weakening value of the US$. The weakness of the US$ is expected to continue into 2010 and would result in a reduction in the real income levels of the US consumer. The implication of this is that in real terms the US consumer would be spending less, thus causing a contraction in real spending in the US economy.

These are some of the real possibilities facing the US economy, and by extension the world economy, which could lead to a double-dip recession in the US. The main indicator to look at will be the employment and production data, without the stimulus impact.

The careful management of the US economy is going to be critical to what the final outcome is, and it is necessary not to be too quick to make announcements contrary to the trend until one is certain, just as the Fed and treasury said the US economy was in good shape while it was headed to recession in 2007.

This risk of a double-dip recession, of course, has far-reaching implications for countries such as Jamaica.

Jamaica has the US as its main trading partner and so, any devaluation of the US$, in relation to other major currencies, means that the real spending power of Jamaica when purchasing goods from other countries, such as China, will decline.

Any return to a decline in the US economy also means that the US consumer will be negatively impacted and that in itself would have a negative impact on our main foreign exchange earners.

The best bet for Jamaica then is to see, first, a return to net employment in the US; and, secondly, the US$ starting to appreciate against the other major currencies. Both these scenarios, however, are not expected to occur before 2010.

Until then, Jamaica has no choice but to manage the fiscal situation effectively and to manage the fallout in business activity that will inevitably occur in the country through policies aimed at encouraging small business development, and reducing crime and bureaucracy.

Friday, September 04, 2009

Demanding more of a shrinking pie

Over the past few weeks the fiscal accounts have taken centre stage in economic news, whether it is because of the ratings from credit agencies, the need to reduce fiscal expenditure, or the industrial environment as a result of greater wage demands on the fiscal accounts.

What we need to be careful of is that we do not focus all our energies on finding solutions to the fiscal at the expense of the longer-term viability of the country, as the fact is that the fiscal accounts are nothing but a symptom of the underlying problem. The fact is that, even if we fix the fiscal accounts this year, and ignore the other fundamentals of the economy, we will sooner or later be caught in a much worse fiscal and economic situation.

This is the approach we have always taken for most of our independence and is why we are in the current predicament today. Instead of fixing the fundamental structural faults in the economy, we have always sought to borrow money to postpone the inevitable collapse of the economy.

At a crossroads

So once again we are at a crossroads, and based on utterances, it seems as if some are pressing for the same solutions to be implemented that have resulted in us being where we are today. This is no surprise to me, however, for many Jamaicans have always had a "big fish in a small pond" mentally. That is, they would much rather own 100 per cent of $10 rather than 10% of $1,000. Underlying this sort of philosophy I think is the "Great House" way of thinking, as well as the need to be the big fish, even while the water is being drained from the pond. So we would rather that every one dies, but in the end at least be the biggest dead fish.

So when decisions need to be made about cutting expenditures to fit the lifestyle or making decisions for a more efficient way of doing things, we tend to shy away from the practical approach. Instead, we seek to borrow funds to support a lifestyle that our income cannot afford. And not many of us can point to the government alone about this type of behaviour, as it is a daily part of the lives of many Jamaicans.

Two such examples that come to mind are (1) someone I know was going through a very difficult financial period but refused to sell his Land Rover because it would affect his profile; and (2) someone I heard of who rented a very expensive house and paid a big car loan (in order to drive a BMW) and in the process placed his family's financial future in doubt. And both cases occurred before the economic downturn started to take its toll. There are many other examples.

What we do not understand is that the accumulation of these individual behaviours is what results in the total debt levels in the country. But what governments must do is ensure that this fever is not replicated in government and put policies in place to prevent this. Well, we have failed to do so for a very long time and have now found ourselves in the situation where the prime minister has had to (and rightly so) announce significant expenditure cuts.

But while these necessary cuts are being announced, some of us still do not realise that the only way for us to see future development is to live within our means. There is no other way. The problem is that we have grown fat for so long on debt that we have forgotten about how to produce and earn for ourselves. So this has resulted in a situation where we were satisfied with becoming international beggars, through remittances.

The fact is that the tide has changed, and we are in a situation now where we must understand that no more can the country go along borrowing money to support consumption expenditure. It is not enough to have two cell phones and a car. We need to be placing emphasis on more agricultural lands in production and more factories.

Bail-out mentality

This paradigm shift in our thinking is proving very difficult for us to adapt to, and I think primarily because we have got accustomed to being bailed out. When the EU was going to cut the subsidies for sugar and banana we demonstrated against it and told them how to give away their money. Each year we budget income for grants. And finally, we are satisfied with training 80 per cent of our University graduates to seek employment overseas and send back what they will in the form of remittances.

Similarly, the government is facing a cash crunch and the economy is facing significant decline this year, and our efforts are consumed with dealing with industrial relations issues. I have no inside knowledge of the negotiations and cannot say what the arguments are for either side, but what I know, is that the country will suffer and at the end of the day we will be like the participants in the Iran-Iraq war. That is, what we are fighting for will have deteriorated so much that what the victor gets in the end will be much less than they had before the war started.

Just as the by-elections came and went and the country did not benefit, so this industrial climate will come and go eventually and the country will not benefit. I am certain that the teachers, police, and nurses deserve every cent of the money they are clamouring for, and I am also sure that the Government does not have the money. So what do we do in this situation? I would like to propose that the more logical solution is for both parties to sit down and try to create a win-win situation, so that it could be that the Government says to the teachers, for example, that if the pass rates can be improved in a measured way then instead of getting $8 billion you will get $12 billion (adjusted for inflation). The reasoning behind this is that the output of teachers, nurses, and the police do have an impact on GDP and government revenues indirectly.

Whatever is agreed to finally, it is clear that (1) the teachers, nurses, and police do deserve more money, but also have a responsibility to deliver quality service; (2) the Government has no money and the economic situation will worsen; (3) students must go to school, patients must be treated, and crime must be controlled. So being aware of all these facts, it must be within all of us as Jamaicans to find a win-win situation and this is going to mean that we have to sit down and talk to each other as Jamaicans, not as though we all live in a different country.

As far as I can remember we have always had industrial action for better wages, which has caused many disruptions, in our productivity and progress as a country. After all those disruptions can we truly say that, individually and as a country we have all improved? If the answer is yes, then we should continue in the same vein, but if the answer is no, then it makes no sense trying to get more out of a pie that is shrinking every day. What we need to do is sit down and recognise the limitations we have and find a way to increase the pie so that even if we end up with a lower percentage, it is more than what we had before.

Friday, August 21, 2009

Creating a reward system for economic progress

Over the past few weeks, Jamaica has been grappling with the issues of a credit rating downgrade, a fragile fiscal situation, and a reported 3.9 per cent decline in the economy. The GDP numbers show that the only sector that has shown any positive signs of worth is agriculture.

On the other hand the benefits of the economic contraction we are facing are manifest in a stable foreign exchange rate, low inflation, and the ability to reduce interest rates given the contracting demand in the economy. In other words, the economic contraction has provided the country with a clean slate on which to draw a new design for the economy.

In order to create this new design though, we are going to have to sit down and carefully determine where we want to go and what the best options are to get there. We also have to remember that an economy is made up of individual players, who contribute to the macroeconomic numbers we love to bandy about, and create a system of reward that will encourage the type of economic behaviour we need to drive the economy forward.

This need to chart a new course for Jamaica is the most important task facing the country's policymakers now. The global crisis has provided us with that opportunity and if we mess it up this time, the consequences will be dire. It is therefore very important that we not only have all hands on deck, but that a team is constructed that will have nothing else to do, but chart the economic course for Jamaica. This must be the only job of the team, with no distractions of any other office.

SWOT analysis

In order to determine what plans are needed for Jamaica's progress, we have to approach it like any company that is involved in a strategic retreat. We first have to take a hard look at what Jamaica's long term objectives are and what is the vision we want to achieve, like the 2030 mission statement of making Jamaica the choice place to live and raise families.

After we have very carefully determined what our strategic objectives are, we should go about looking at a 'SWOT analysis' for the country, that is the Strengths, Weaknesses, Opportunities, and Threats that must be considered to achieve the defined vision.

We would, of course, seek to exploit the strengths and opportunities and put policies in place to eliminate the weaknesses and threats. As an example, how do we benefit from the opportunities in the fields of music and sports and how do we eliminate the threats presented by low literacy, onerous bureaucracy, and the abuse of our citizens? In the case of the Armadale inquiry for example, one logical outcome must be that those who were responsible for the horrific treatment meted out to the wards are held accountable for their actions as would be done in any self-respecting country.

This SWOT analysis would allow us to then plan the specific strategies we need to implement in the short, medium, and long terms. It would also allow us to determine which resources we will need to meet those strategic objectives and how best to spend those resources. Without this clear plan as to how we need to move forward as a country, we will continue to grope in the dark, shooting aimlessly at any obstacle that comes in our way without being sure whether it is a real target or a decoy.

For example, the biggest long-term problem we face as a country is production and productivity, which manifests itself in the balance of payments. The immediate short-term problem we face, however, is the fiscal problem, and the fact remains if we do not address this short-term problem we will not have the wherewithal to deal with the longer-term one. It is therefore very important that we understand what needs to be done in the short term and what the dependencies are. Without a proper understanding of this relationship we will only continue the downward spiral the country has found itself in since the 1970s.

Incentivising economic progress

But how do we ensure that the individual behaviour we seek to encourage finds its way into positive economic development-type behaviour patterns? At the heart of this is determining what the role of government is from the role of the market economy. I have always publicly stated my preference for the market economy as the main allocation method for economic resources.

The public sector bureaucracy has been too involved in determining the allocation of our scarce economic resources, which is one of the reasons for our lack of economic development. Examples include the takeover of private companies during the FINSAC era, the allocation of some of our best farmlands to sugar, and the allocation of scarce tax resources to prop up unprofitable public sector entities. All these experiences helped create a situation where we have to bear the high cost of inefficient resource allocation in the high interest rates we have been paying since the 1990s.

The question many would have is, that being the case, why wouldn't we have experienced high interest rates before the 1990s, when the government was always trying to allocate resources based on political and other non-economic considerations? The answer to that question is that prior to the 1990s Jamaica had a closed economy and was therefore protected from global competition. One consequence of this was foreign exchange restrictions. It is therefore more important now than ever that the market be used as the primary means of allocating resources.

The role of government therefore must be to create the incentives to push the market in the direction where we want it to move. The design of these incentives cannot be managed by bureaucrats and special interest groups sitting in a room by themselves to determine what is best for the country. It must be a very deliberate planning approach by a team of professionals, with no special interest employed by the government, and must be carefully looked over by the government and aligned with the country's strategic objectives based on the SWOT analysis.

This will of course mean understanding what sectors we truly have a comparative advantage in, rather than those we get aid from like sugar, and being aware of the main challenges facing the country. Coming out of this process, the government should then objectively create the incentives needed to encourage market behaviour towards economic progress. A failure to do so will mean a continuation along the path we have taken for the past three decades.

Friday, August 14, 2009

Are Jamaica's economic problems also social

The Bank of Jamaica governor recently held his quarterly press briefing and pointed to developments in the economy, which, although not promising, are vulnerabilities that we can take advantage of. The governor stated, as expected, that the economy declined by 3.5 per cent to 4.5 per cent for the last quarter and that the exchange rate is stable, inflation remains relatively low, and interest rates have declined.

These factors are not unexpected, and in fact is what I believed would happen in the economy. This is a natural effect of capacity leaving the economy. The fact is that Jamaica's economy, since the 1970s, has been propped up by debt. The increasing dependence on debt began in the 1970s and continued to the mid-1980s when the debt/GDP ratio rose to as high as 212 per cent. It then declined, as a result of the much higher growth levels being experienced, to 90 per cent in 1990. Since that time the debt/GDP ratio has been on an uptrend.

What has happened is that, since last year, we have not been able to borrow to supplement our inadequate income. This has caused a reduction in the country's capacity, resulting in a slowdown of economic activity, as 72 per cent of our economy relies on imports. The reduced foreign exchange and reduced demand have subsequently resulted in a scale-back of business/economic activity. Because of this scale-back in activity the demand for foreign exchange has dwindled (resulting in a stable exchange rate), and inflation is low because there is a lot less money chasing the goods in the economy.

The positive signals we are seeing in the economy are not because of growth, but more so because of (i) a contraction in the economy; and (ii) stagflationary pressures.

The positive effect, though, is that this provides us with the perfect opportunity to realign our economic structure and start to move forward on the right footing. Caribbean Cement has made the appropriate adjustments and is now focusing more on the export market where the real growth opportunities are. There are many companies, however, that do not have the export opportunities available and by now should have gone into retreat and made decisions.

Given where we are now, what the country needs to do is take advantage of opportunities by putting into place policies that will encourage export-led growth rather than building back the structure as it was before. This means that policies must encourage agriculture, tourism, and small business more than any other sectors. Some businesses will die and this is a fact we must accept if we are going to make that fundamental paradigm shift. The advice to businesses that I have always given is to get a professional who understands projections and the economic realities to guide you through your deliberations. One person told me that they had a retreat with their management and staff to discuss the prospects and it didn't help. Well, if you strategise with the same people that helped you get to the situation you are in, what do you expect?

This brings me to what I think the fundamental problem with Jamaica is, and why our economic behaviour is not geared more towards productive activity. The fact is that macroeconomic outcomes are nothing more than the accumulation of individual effort at the micro level. Therefore, if the micro activities are not encouraged to act for the best economic outcome, then what do we expect at the macro level? The fact is that Jamaica's debt problem is represented by the number of persons who themselves seek debt for things like car and furniture purchases rather than business activity.

The problem that Jamaica has is therefore fundamentally social. We must always remember that economics is a social science, so that if the social behaviour is not geared towards productivity, then we cannot expect the macroeconomics to be okay. We need to address the social problems effectively, if we are going to deal with the fundamental economic problems.

The way we have always sought to deal with our economic problems is to either borrow money or tax people more. The result of borrowing, of course, is obvious, and when more and more taxes are piled on people this encourages counterproductive economic behaviour. By imposing more taxes, we find that the only way to keep the economy going is by borrowing money.

A few years ago, as an example, I was elected chairman of a strata, which at the time had an overdraft at the bank. When I looked at the challenges facing the strata it was mainly because (1) there were unnecessary costs; and (2) persons were not paying their maintenance fees. Increasing the fees would not have made a difference, under the same behaviour, as it would merely mean spending more money irresponsibly and, secondly, it would not fix the problem of delinquency. So what was needed was to change the behaviour of expenditure and delinquency. Over the three years of average inflation of 12 per cent per annum we increased the maintenance fees around 15 per cent. More importantly, we set about changing the behaviour. At the end of the day we were not well -liked but, three years later, I left the strata with over $1 million in the bank for capital development. Today, it is one of the best-maintained properties without question.

Similarly, in Jamaica we do not seek to change behaviour, but we expect different results. Over the years we have expected that there will be an improvement in crime, but fail to control even the traffic on the roads or even the noise at nights. I see the Commissioner trying to deal with it, but the many years of neglect and the ingrained social behaviour present a serious challenge.

Again, we lament the poor relationship between the police and citizens, but the police are always being accused of brutality. What is an even more frightening situation is that the police are being accused of preventing journalists from carrying out their jobs, and seeking to arrest them if they resist. This is a very dangerous development that we must stop, and if untrue then must be clearly proven not to be so by the police.

The way we organise our social relationships will determine our economic future. We cannot have a truly productive society if our social relationships do not encourage a focus on the type of behaviour that will develop into production and productive relationships. At the heart of this is the way we treat and develop our human resources, as any well-run company will tell you. If the people within an organisation or country are not respected, outcome will be dire.

While the country faces vulnerabilities, this is not necessarily bad as the structures that have broken down were not very secure in the first place. The economy must, by necessity, contract before it can start to grow properly, just as you have to demolish an old building before a new one can be built.
What is necessary now is to put in place policies that will fundamentally change our productive relationships. It starts with how our society is organised.

Friday, August 07, 2009

What are Jamaica's options?

While the country prepares for the IMF, another blow has been delivered in the form of an Independence Day (birthday) gift. Namely, Standard and Poor's (S&P) has downgraded us to CCC+, which it indicated earlier in the year it would have done if conditions did not improve.

So now that both the IMF and the S&P downgrade are here, what next for the country?

It is quite clear we face severe challenges as a result of the onslaught of the global crisis. These are illustrated in what I consider to be the country's "financial statements", the Balance of Payments (BOP) and the Fiscal Accounts. For anyone who was paying attention to the trend of these accounts it would have been clear that both the IMF and the S&P downgrade were inevitable, as any basic financial analysis would have shown the country trending to this position.

There are three indicators that would have been cause for concern, namely:

1. Since tracking the fiscal accounts the first three to six months of the fiscal year always show positive cash flows over budget;

2. Since the last published BOP numbers, oil prices have moved from just over US$30 per barrel to over US$71 per barrel. The implication of this of course is that our import bill will increase, while at the same time our exports have been declining; and

3. While there is a fall in imports (outside of oil), this is against the background of an economy where 72 per cent of our GDP output is based on imports for local consumption. The inevitable result of that as it shows in the GCT and SCT on imports (from the fiscal accounts) is a contraction in the economy.

So it is obvious that the 2009/2010 fiscal year is going to be a very challenging one, and for more reasons than just the fiscal out-turn. While many continue to espouse the "green shoots" in the global economy, they forget some very important factors as they relate to Jamaica. While I have always believed that the global economy will start to see a bottoming and a slow start to recovery come the last quarter of 2009, the fact is that the Jamaican economy will still continue to feel negative consequences for the following reasons:

. Initially the global recovery will be a jobless recovery. In fact the recent US earnings results and consumer confidence numbers are not as good as expected. Jamaica's main foreign exchange earner depends on jobs in the US and UK mainly. This means that even after recovery starts, alumina/bauxite and remittances in particular, and tourism to some extent, will still see a negative impact;

. Oil continues to be in an uptrend and as the US economy in particular starts to show increased recovery. There will be an increased demand for oil and the US dollar will continue to lose value internationally, sending up the price of oil (based on a cursory look at the charts oil could end up between US$90 and US$100 per barrel by the first quarter of 2010). The implication for Jamaica is increased imports in dollar terms;

. A declining US dollar will be bad for Jamaica, as our main foreign exchange earnings are in US dollars, so prices from places like China, Europe and Canada will increase; and

. The more fundamental factors are crime and bureaucracy. The fact is that the cost of crime and bureaucracy on Jamaican businesses is greater than even the cost of high interest rates and will negatively affect investments in the areas that will lead us out of the slump - agriculture and small businesses. The greatest benefit for future growth comes from solving these factors that are under our own control.

Two main areas of focus

The two main areas that we need to focus on are: (1) the Balance of Payments (BOP); and (2) the fiscal accounts. These require different actions, but if both areas can be brought under control then the fundamental paradigm shift required in the economy can be achieved with the least pain possible. It entails, however, taking the correct policy decisions that will drive the appropriate economic behaviour to favour reductions in both.

One of the calls that many seem to be saying today is "export or die". While that is commendable, it is a longer-term target, as if we wait on exports to pick up to save the economy then we will be in for a long, painful ride, as it takes time for businesses to get up to speed with exports. For example, although we have been seeing growth in the agriculture sector, this will not result in the increase in exports we need in the short term to deal effectively with the BOP challenge.

In order for the economy to realise the paradigm shift needed, it must first contract. The reason for this is because 72 per cent of our GDP output is based on imports for local consumption, while only 28 per cent is based on exports. This means that we need to see around 50 per cent of GDP value change from production for local consumption to exports in order for foreign exchange inflows to equal outflows, given our current level of imports for production. If not managed correctly this can be a very painful exercise.

The fact is that on an annualised basis Jamaica will lose between US$1.4 billion to US$1.8 billion out of total foreign exchange earnings of approximately US$6.6 billion, a loss of at least 20 per cent. This will no doubt result in a slowdown of economic activity, even with IMF support, which will result in the painful experience of many businesses either significantly reducing profits or making losses. If not managed correctly, one of the painful consequences will be that many businesses will close their doors, leading to negative social and economic consequences. The natural extension of this is less tax revenues for the fiscal accounts, and this in itself will force the reduction in government spending, further contracting the economy.

It is therefore critical that policies are put in place to make this necessary transition as painless as possible, and while a part of that solution must be some borrowing from multi-laterals (after receiving the IMF stamp of approval), it cannot be seen as the panacea. The only real solutions must come from the fiscal policies implemented to deal with first reducing the imports of oil and food, an easier short-term solution than "export or die".

So while we fall at the feet of the IMF, let us remember that it is nothing more than a bank intent on being repaid, and just like a bridging loan for personal use, is no cure for a relative shortage of income. If we do not implement the necessary policies to transition during the period of IMF support we will only end up with more debt and the same problems.

Small business

Apart from the need to implement policies to (i) reduce crime and bureaucracy (the biggest problems we can control directly), (ii) reduce dependence on oil, and (iii) reduce dependence on imported food; the real growth in the economy will come from an increase in small business activity. It is therefore very important that the improvement in the environment to encourage small businesses continues. The main inhibitors to small businesses are crime and bureaucracy.

There is, of course, a need for cheaper financing. Even if present, in a difficult environment to operate the chance of success is reduced. So as I have always said, even if we have cheaper funds available for small businesses, if the small entrepreneur sees business risk from crime and bureaucracy, then why would he borrow? Business is all about risk management and entrepreneurs will always assess the risk in relation to payback on their investment.

It is going to be a difficult adjustment in the economy and will be painful for some businesses. How painful it is going to be will depend significantly on how much we embrace the change and what policies are put in place to make the transition easier, just as the US realised the need for stimulus funds to ease its own economic crunch.

Unlike the US, however, Jamaica does not have the money needed to create a fiscal stimulus programme sufficient to significantly halt the slide in the economy. It is therefore necessary that the limited funds available be used in a targeted manner, not to try to create a surplus of funds to replace the dying economic activity, but rather as a targeted stimulus for new businesses to emerge. My vote therefore has always been, and continues to be, the spending of stimulus primarily to support the emergence of small businesses.

The logic is simply that if funds are limited, then you have to look to spend those limited resources in the area(s) that provide the greatest growth opportunities. In a declining economy, it is going to be very difficult for large businesses to expand and create jobs, so the creation of jobs must come from the emergence of small businesses. In addition, the market economy is always going to be able to grow much quicker than the bureaucracy of government.

So as I wrote in July 2008, 2009 will be the most difficult economic time for independent Jamaica. At the time I wrote it many shrugged off what I was saying as pessimism about the Jamaican economy, but that was what all the numbers were showing. Let me hasten to say that it is strictly as a result of financial analysis, based on my training as an accountant, and not any form of "card" reading, lest I be thought of as some sort of sorcerer and condemned to be burnt at the stake.

The question now therefore is, what do the numbers show about the economy for 2010? While I have an opinion on that, I will continue to reserve it for now, and say that it depends on what policy actions are taken. If we take the appropriate steps now, then 2010 could be a better year, but not without some amount of pain first. If, on the other hand, the wrong steps are taken, 2010 could very well end up being worse than 2009.

Just like when we gained independence in 1962, we are again faced with choices to make about our future. These are not choices to be faced by the government alone. The choices have to be made by all of us about what sort of 2010 and beyond we will face as a country. Which road will we choose?

Friday, July 03, 2009

The Caribbean Cement dilemma - to manufacture or not

I have been following with some interest the recent tribulations of Caribbean Cement (CCCL), as they seek to justify imposing CET on imported cement. In contrast there are others against the CET, arguing that the 2006 experience of bad cement from CCCL almost shut down the construction industry and should never be allowed to happen again.

This argument is compelling, remembering the reports of the negative effect on the local economy and lost growth opportunities at a time when the world was booming.

CCCL argues that since 2006 they have invested heavily in productive, storage, and quality control capacity resulting in a very small chance of any recurrence. They also posit that they are capable of supplying 100 percent of market needs and further that the imported cement is nothing but dumped product, which we can remember had a debilitating effect on the dairy industry, eventually causing it to basically shut down resulting in lost production and employment.

The experience of the dairy industry should not happen again. Even more recently Goodyear made a decision to close its manufacturing operations and concentrate on imports, as much cheaper tyres were being imported. One of the questions therefore is when it is necessary to protect an industry, and the answer lies in looking at the net effect on the economy.

In considering this I spoke with the persons at CCCL, to get some numbers to do some analysis on CCCL's benefits to the Jamaican economy. So for transparency's sake I am declaring that the numbers are from CCCL and that I hold a small amount of shares. But what is important is the logic of the arguments, and numbers can always be verified.

My interest in this issue is because of the apparent interest in removing the CCCL blemish we have on our record of declining manufacturing in this country. I see for example in the Gleaner (June 25, 2009) where the president of the JMA, Omar Azan, is quoted as defending Jamaican patties against imported patties because of its positive contribution to the Jamaican economy. Based on this argument I would expect therefore that is in favour of the protection of CCCL also, which would mean he is working not only on behalf of his members but in the interest of the Jamaican economy.

First I want to look at the arguments against the duties on imported cement:

1. CCCL is perceived to cause the shutdown of the construction sector in 2006. The fear is that this situation could recur. We need to consider, however, if this is still justified. CCCL has invested US$177 million in its production facilities, which has the capacity to produce more than the market demand. In fact the increase in inventory in 2008 over 2007 on CCCL's audited accounts supports this argument. CCCL has increased its export of cement, demonstrating excess capacity.

2. Another argument is protection of fair competition. This was the same argument forwarded publicly for the dairy industry, and may have been the case for tyre imports. The result is that we now have no dairy industry and no manufacture of tyres, and no doubt would have lost much employment and are at the mercy of the producers overseas who can export inflation to Jamaica, causing further pressure on the foreign exchange rate. We see also the massive import food bill because of our lacklustre performance in agricultural production.

3. Some argue that the profits are paid out to the overseas parent company. In fact the last dividend payout made by CCCL was in 2005 (as reflected on the audited accounts), which means that the money would either be reinvested in the company or is in the cash reserves.

There are also some compelling arguments for supporting CCCL's position. These can be summarised as follows:

1. When I looked at the audited financials it is obvious that in order for the plant to keep open it has to produce a minimum amount, else it may not make sense keeping it open. This I surmised from the rising inventory even when sales are falling, which means that below a certain level of production adds greater per unit costs. If sales continue to decline then the plant may reach a point where it has to scale down considerably, leading to the following:

a. Unemployment, as layoffs would of course be the prudent decision (the unemployment would not only be at the plant but throughout the island at various distribution channels etc); and

b. Increased costs of cement to the market

2. Information I received from CCCL showed that they pay out annually $2.8 billion in salaries, $3.4 billion in purchases, collect and pay $1.3 billion in GCT, and $500 million in statutory payments. Any significant disruption in operations could see these economic benefits being cut significantly, which could add to the economic and fiscal challenges we face. CCCL employs some 439 persons of which 242, or over half, are in production. The logical decision for a company like CCCL is if production falls below covering variable costs then it would obviously want to shut down its production facility and concentrate on importations alone, similar to Goodyear and Nestle. This would mean a minimum job loss of 242 persons in addition to the significant reduction in demand for electricity, thus negatively affecting GDP.

3. One other option available to CCCL of course is to increase exports, and dedicate most of its production to exports. What will happen, though, if something goes wrong with the imported cement, which is also a real possibility as we do not know about the reliability and quality standards of the overseas facilities? The fact is that CCCL could not easily re-channel its goods back to the Jamaican market and even when done it may be at a premium.

4. My understanding (CCCL information) is that every tonne of imported cement demands US$100 to be sent abroad, while every tonne of CCCL cement produced results in US$25 being sent abroad. This means that if the 720,000 tonnes CCCL sold into the market were imported it would mean an additional US$54 million being sent abroad per annum.

I think the arguments on both sides have merit and again must say I have only got information from CCCL and not the other side. The arguments for maintaining our manufacturing sector are compelling, as the head of the JMA has argued. The Minister has correctly stated that one cannot, without merit, impose restrictions on imports, as the world moves towards freer trade (although at times it seems it's just Jamaica).

What we must do, however, is ensure that imports are at a justifiable price and not just a price to close down CCCL or any other manufacturer and then we suffer future price rises, as with the dairy industry. We have to also ensure, particularly in this case, that the quality of the imports and the production facilities meet certain minimum standards. I also am wary of us losing a local industry in a product such as cement, as when China and the other emerging economies start to grow at rapid rates again we might find ourselves in a very long line waiting for cement.

The minister has his work cut out for him, as CCCL also needs to justify the claim that the 2006 problem will not recur. Once this is satisfied, however, I would support the JMA head's argument to protect the local industry as in the case of patties. I welcome arguments from the other side as debate is necessary to arrive at the best solution for Jamaica.

Friday, June 26, 2009

The IMF is a necessary stop gap

Much debate has taken place on whether or not Jamaica should approach the IMF for some facility to support the Balance of Payments challenge we face. Some have gone as far as to document their feeling for and against the IMF, including emotional responses to the past record of the IMF.

Being an accountant, my vision is dominated by numbers, and so I fail to see how any reference to the IMF's past indiscretions affects (1) its current situation; and (2) the fact that there is really no other source of funds. The fact is that Jamaica is even in a needier situation than other countries that were growing at better rates, but still needed to go to the IMF. Let us be clear about that. It makes no sense to die for lack of treatment because you don't like the doctor.

The choices we make

This emotional response to such matters is one reason why we are now being asked to write off US$4.2 million (J$374 million) in Cricket World Cup (CWC) losses. In fact, I remember the lack of foresight my friends used to say I had because I did not see the benefit that CWC would have to Jamaica. Based on their arguments it was supposed to have had monetary benefits for years to come and in fact the Trelawny multi-purpose stadium was going to be the launching pad of sports tourism.

In an article, I wrote in March 2007, titled "Cricket, aeroplanes, and poverty", I stated."On the day of the opening ceremony, at the expensive Trelawny multi-purpose stadium... In true Jamaican style, we showed the world that we know how to party. Two stories later, I saw an elderly teary-eyed lady saying that she fell down carrying water in a bucket to her home, because there was no running water. Still another report showed a man saying that his car had been damaged by the police whom he had to lend to chase thieves on many occasions, as they had no vehicle, and he was having difficulty being compensated."

What this indicates is that it is the choices that we make that determine what lies in our future. The probability is that if that lady is still alive she still may not have running water and the police force still has less than adequate capital equipment to fight crime. But we had a great party for two weeks.
Maybe if we had even gone with the stringent measures imposed by the IMF up to the 1990s we would have been better off today, as the truth is that we have really made a mess of our country without the IMF to blame anyway.

So we are at a decision point again and for some persons reason gives way to emotions, as it is easy for those who are not really feeling the economic pinch yet to say "let's suffer through it together".

What they need to understand is that some are already suffering badly, as illustrated by the thousands that converged for the 100 jobs offered by the fire services. And we shouldn't fool ourselves that the economic recovery is around the corner, as we were reminded by the recent World Bank report, which stated that the world economy will decline by 2.9 per cent instead of 1.7 per cent. That is 100 per cent worse than previously estimated, and really comes as no surprise to me as I had indicated that the recent hopeful signs we were seeing was probably nothing more than a short pause in a downward trend. I am not convinced, for example, that the US equity markets is in a longer-term up trend until the Dow Jones closes above 9,000.

But while we may go to the IMF, let us also not move from the emotion of extreme hate to extreme love, as we need to understand that the IMF is nothing more than a stop gap on our path of economic stagnation and decline. Borrowing money has never on its own, and never will, fix our economy.

It seemed as if this was the answer to all our problems because in the 1990s to 2007 we could have got money to borrow. So as long as one is able to borrow money at a faster rate than you have to pay it back then you will always be able to increase your consumption.

Debt's hypnotic quality

And this is the hypnotic quality of debt, until the reality of not being able to borrow anymore hits us.

Just as participants in the various unregulated investment schemes (UFOs), or even the regulated ones like Madoff, were in the heavenly bliss of high returns and chose to increase their consumption of luxury items rather than save the additional income they were so fortunate to have. I myself was hoping that the Jamaican schemes would have complied with the FSC and we would have created an investment edge just as we do with our athletics and music. This was not to be, and in the end the IMF estimates that they took some 12.5 per cent to 25 per cent of GDP out of the economy.

Just like that money from the UFOs, the IMF funds will only be a stop gap measure and will not address the fundamental problem of the inadequate economic structure - in simple terms, we spend way more than we earn. While we are benefiting from the IMF flows, it is necessary to continue the fundamental reform of our economic structure, as failure to do this will only see us in a more desperate situation at the end of the three to five-year period that we may get the IMF facility for. Unless we make a paradigm shift in our fundamental production and consumption relationships, we will face more suffering at the end of the IMF facility, and then the emotional ones amongst us will say, "see, I told you the IMF was the wrong way to go", not fully understanding that it would have been our own actions (or inactions) that would continue to cause our suffering.

As we go forward and the decision of the government unfolds about the IMF, we need to debate the issues in a very practical manner, and need to understand that the IMF will be nothing more than a stop gap measure and by itself will not be a solution to our problems.

The only things that can make a difference are the fiscal policies that are implemented, as without these we will only delay the onslaught of the infection of economic stagnation that has plagued this country since 1990.

We need to make a determination as to how we measure development. Do we measure development by the number of cars, phones, or foreign goods on the shelves? Or do we measure development by trade surpluses, higher literacy rates, lower crime levels, and improved productivity? The decisions we take will determine the path we set for ourselves and the outcome we eventually achieve.

And if, as persons have commented to me, we hang our hopes on the desired improvement in the global economy, that would be a mistake. The fact is that job losses continue in the developed economies we depend on, and even if the situation starts to stabilise, the road to recovery is going to be very long, implying much reduced consumer expenditure. It could be a five-year recovery period for the developed world.

I do believe, however, that a country like Jamaica has the capacity to significantly lessen the effect of the global crisis, as I have always maintained. But this depends on our fiscal policy actions, not new debt, whether through the IMF or capital markets. And it depends on all of us as Jamaicans.