Friday, April 17, 2009

Jamaica at a crossroads

In the months leading up to the 1980 election, Jamaica was at a defining moment on its history. At the time I was just about 14 years old, and I remember well the fireworks sound of gunshots that rang out across the city. Four years earlier (1976) the citizens faced a state of emergency, and at that time I remember everyone having to ensure they were at home by 7 pm, or else face the possibility of prosecution. There were cries of political victimization, and it was no surprise that four years later, exacerbated by the long election campaign, Jamaica fell into a long period of violence leading up to the dipping of the finger in the red ink to make a choice between ideologies.

Ideological and economic crossroads

Jamaica at the time was at an ideological crossroads, whether real or perceived. Coming on the heels of the economically prosperous 1960s, the people of Jamaica no doubt wanted a greater distribution of economic and social opportunity and sought it through "democratic socialism", offered by the PNP. This was in stark contrast to the capitalist model offered by the JLP, and in which one would have to earn economic opportunities through productivity. By the time 1980 came around, the ideologically charged atmosphere of the global cold war was being played out in Jamaica.
Jamaicans spoke and "democratic socialism" was rejected in favour of capitalism. This was indeed a defining period in Jamaica's history and one no one can forget.

Today Jamaica is at another crossroads, but unlike that of 1980, this one is economic. There is no real difference in the apparent ideology of both political parties. And I don't believe that there is any real difference in the way both parties view the current economic situation. The reality is that Jamaica is now in a position where it must make certain hard decisions, which we have been postponing for years in order to avoid the short-term political and economic consequences. These choices have been forced upon us because unlike the past 15 years or so, we are no longer able to postpone the inevitable through debt.
On Friday, July 18, 2008, I wrote an article called "A perfect economic storm" in which I indicated that the following six to nine months would be the worst economic period for independent Jamaica. Since then I have revised that projection to say that it would actually be for a further period of maybe another 12 months, as I did not see the impact from the failure of Lehman Brothers, which was the main turning point in the global crisis.

Jamaica is now at an economic crossroads. In my own view the policy choices, and actions we take this year will determine our future, both socially and economically. There is no remaining flat, or moving sideways as traders say. We either will be successful or suffer significant economic and social damage. Some people will say that I do not know what I am saying, as they did when I said in March 2007 that the US would go into recession in 2008, and also when I wrote the July 18, 2008 article. Or when in the second quarter of the last fiscal year, when annualised inflation was running over 20 per cent, I indicated that inflation for the fiscal year would be between 11 and 14 per cent.

What I will say to that is that I never have a problem with being thought of as wrong, as long as I am right. This is a 'do or die' year for Jamaica as the chickens have finally come home to roost on top of the burdensome debt we have consumed in cars and other consumption items.

Budget implications

So we have a situation where, without even considering the funding for the budget, we already see the economy will be contracting, as the budget expenditure is approximately four percentage points less in real terms. This means that there will be less expenditure in the economy. The result therefore is that economic activity both from the public and private sectors will be less, which means a contraction in the economy.
A lower real expenditure was expected. However, given the expected downturn in economic activity, layoffs, and lower profits in this fiscal year, I expect that tax revenues are going to see a significant decline. In addition to this the capital markets remain tight. This means that revenues overall will be negatively affected and we can't spend what we don't have.

There is of course some tax dollars than can be generated from compliance enforcement, but we will have to see if it will result in a net gain in tax revenue. The fact is that, just as in the US, the top five or ten per cent of the persons/companies earn the great majority of profit/revenue. The question then is whether this top five per cent is already captured in the tax net, which means that most of the tax revenues would have been captured already and therefore one could not assume an equal dollar of tax for the persons/companies not in compliance. The tax dollar would get less with each additional person brought into the net. In addition, two other factors may mean that those revenues may not have a positive impact, at least this year - (1) the cost of going after that additional tax dollar will reduce the net retention; and (2) the effect will come after the time lag of an audit and court cases. Despite this it must be done in order to have a more structured society.

In addition to this I believe that inflation in this fiscal year will be greater than last year. Many expect that the global recession may see an end by 2010. The downside of this is that as analyst/investors expect demand to return we will see a depreciation of the US dollar and commodity prices will increase. On the domestic side, if the gas tax and other user fees are increased and also other prices such as bus fare and electricity costs, then we will also see domestically generated inflation.

So we could very well experience stagflation, which is something we must try to minimise as much as possible. Stagflation is a combination of economic decline and inflation. The implication is that businesses will be faced with rising costs and lower demand, so that profits will shrink.

Based on the structure of Jamaica's economy I do not believe that this situation can be avoided if we are to properly restructure the economy. What we can try to do is minimise the impact. I believe that one significant way in which this can be done is for greater economic activity to be spurred through government spending, particularly on infrastructural projects, especially in light of our low skilled labour force.

The only way for Jamaica to chart its way through these rough seas is to create the necessary fiscal space, as there will be lower if any private sector led growth this year. Hence the necessity of the expenditure cuts in the budget. The question leading up to the conclusion of the budget, however, is "Is that enough?"

What is certain is that we are now faced with a defining period in Jamaica's history, where we are faced with two roads, and the actions we take as a country will determine which one we take.