Friday, February 20, 2009

Proactivity is necessary to cope with crisis

Recently a US resident relayed two stories to me to indicate the distinction between the United States and the Caribbean region in solving challenges. In the first case he told me of a friend who accidentally dialled 911, intending to dial a 919 area code, and communicated that to the person who answered the 911 call.

Thinking that this explanation had been accepted she hung uo and started to dial the right number but before she could complete the call there was a knock at the door, which turned out to be a policeman, who politely insisted that he be allowed to enter the house to ensure she was not insisting the 911 call was a mistake under duress. She also noticed that another policeman had gone to the back door to provide cover. After being satisfied it was a mistake they left.

In the other case he relayed to me that in Trinidad a historic building, used as a police station, had burnt to the ground. The irony was that the fire station was only a few yards away, but when they connected the hose to the hydrant and turned it on, the water pressure was not enough to supply the water needed to put out the fire so the firemen all watched this historic building burn to the ground.

This latter situation could almost as easily have happened in Jamaica, and in fact even if a deliberate call was made to 119 the police may not have answered the call and if answered may not have turned up until a few hours after the criminals had done their worst.

A difference of approach

This difference in approach may also be one of our downfalls as a country when it comes to coping with the global crisis. As I indicated last year when the stimulus package was announced by PM Golding, the bureaucracy and our culture is likely to work against us and by the time we get around to really addressing the challenges it would have been over.

If we look, for example, at the urgency with which the US sought to introduce the stimulus package it is indicative of the type of action needed. In our case, however, even though we have the advantage of a lag effect of what happens in the US, as a country we have failed to properly plan for the coming storm, and have only sought to take the debate seriously as a country only when we have started to feel the effects. So even when it was obvious what was coming we were still as a country prepared to continue the rhetoric of trying to score political points and engaging in public discourse that serves as a distraction from the main challenges.

So we have now started to feel the effects, as we start to see layoffs and reduced earnings, and we have now moved to the next stage of dealing with a challenge, as psychologists will tell you, that of panic (the first stage is denial). Because as a country we did not properly prepare for it we are now seeking to manage the crisis with irrational responses that will only make the situation worse. Take for example the suggestion of the JMA that a part of the reserves, held by the BOJ, be allocated to helping local manufacturers, or even the public outcry that the high interest rates were not necessary because the rest of the world is reducing interest rates. These arguments not only indicate that people do not understand the fundamentals of the problem but also that we are making arguments out of being reactive rather than thinking proactively.

Last year I also indicated that some businesses will fail, as there is going to be a forced restructuring of the economy, and also because many businesses will not take the appropriate steps to ensure their survival. The cry that is coming from the business sector is evidence of this. Naturally we would expect that people will try everything to save what they have, as they are also in their own three-step stage of dealing with a problem, but that is the wrong approach. Even in the US, while the Congress was busy providing the first-round bailout for the auto industry, I had indicated this was a wrong move, as they would come back for more and eventually there would be at least one bankruptcy arising. Well, today we see that these companies have gone to congress for a few billion dollars more. And in the end they will be unable to avoid the inevitable.

US stimulus will not help Jamaica
Another thing that Jamaica and the Caribbean need to understand is that the additional US$787-billion stimulus package signed in the US recently may help to stabilise the US economy but it will not help ours. The problem the world faces is more of a psychological crisis than economic, and as one US commentator said recently we must understand that the world will not for a very, very long time see the standard of living returned to the levels it had become used to. We must accept that there has been a significant loss of wealth that has created a massive psychological problem, and that many had relatively high debt based on the artificial wealth they had. Therefore, the first order of business for Americans benefiting from the stimulus package is going to be to realign that debt once again. The prolonged downturn was once again addressed by the Fed last Wednesday.

At home we also see that there are projections of a prolonged downturn in the economy, and as I expected the greatest opportunity for growth will be agriculture. I have been imploring Jamaicans to support the plans that the agriculture minister has as this is our area of opportunity. And this is really a logical argument, as this sector will not only allow us to create an active local economy but also substitute a lot of the food imports.

At the end of the day we can either be proactive and make the necessary decisions to help the economy or have them forced upon us by the economics of the market. Bear in mind that the latter is always more violent as it will not lead to a smooth transition from where we are now to where we want to be. This will have to take the form of fiscal policy initiatives as monetary policy cannot solve the challenges we are facing on any sustainable basis, and has been the cause of where we are today.

At the heart of it is simple economics, as any housewife can tell you: we spend more than we earn as a country, and it is to this that fiscal policies must be targeted.

So I will again repeat some immediate steps that need to be taken. First introduce a national economic task force that will include the best thinkers to tackle the strategies needed to address the economic challenges. And secondly, on a micro level, businesses need to engage professional help to determine the best course of action, as many companies in the US have been doing. Making suggestions that Government should provide bailout funds is not the first line of defence as (1) Government does not have the reserves like the US to do this; and (2) in a world of declining demand it won't help anyway.

The recent numbers coming out of Japan and the continued fall-off of equity markets is an indication of what is still yet to come. And even though the February US unemployment numbers are not out as yet, there will be continued increased unemployment. It is therefore going to be challenging but there are still some opportunities which can only be had with rational thinking and being proactive.


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