Friday, May 29, 2009

Jamaica's economy playing out as expected

When I listened to some of the reactions of surprise to the PIOJ's report on the January to March 2009 economic performance, I wonder if we are really serious. As far as I am concerned the economy is playing out as expected. Whenever I am asked about the 2.8 per cent downturn in the economy, during that period, as if it is unexpected, I refer to the article I wrote on July 18, 2009 titled "A perfect economic storm". At the time I started saying that "The next six to nine months will be one of, if not the most challenging, in the economic history of independent Jamaica".

For me it was obvious that if things continued the way they did and if leadership did not come together, we would be experiencing all we are today. In fact, it is worse than I expected, as the Lehman collapse made things much worse but the trend I expected is playing out. The extent to which we are feeling it today could have been avoided but too much time was spent in political diatribe and side arguments that distracted us from what we needed to do as a country.

Identifying the fundamental challenge
So the consequence of the country not adequately projecting and preparing for the economic downturn has landed us in a situation that I believe will be hard to avoid now. I never expected such a sharp decline in the first quarter, which is going to be better than the second quarter in my estimation. What is happening also is that the economy is already like a runaway car, which is harder to stop once it gets going, and would have been easier to slow down prior to it starting to pick up speed. It is now going to take much more effort, and financial resources, to slow down the decline.

With all of this said, though, it is still possible to lessen the effects on the country, and I had written in my book about the real cause of the problem and gave an example of a five-year plan that could place us on the path to economic development. Some will not take what I say seriously, though, as I am just an accountant trying to talk about economic matters, but I will continue to be comforted by my own voice.

In order to determine how we can deal with the challenges we face, and which are worsening, we must first understand what the underlying problem is. This again I outlined in my book, which in summary is the fact that the country spends more foreign exchange than it earns. Unless this equation is changed we will always be caught in the downward spiral of economic stagnation/decline and debt. If we accept that this is the fundamental problem then it makes no sense addressing symptoms, which we have always been doing. Because of where we are today the measures to address the problem get more and more difficult the longer we wait.

What do the first-quarter results tell us about the state of the economy? If we properly assess this then we can make an assessment of what needs to be done. And if this is properly addressed then we won't even have to talk about high interest and exchange rates, as they will be automatically improved. We won't have to talk of crime, as economic prosperity will come to our citizens. In effect, if you address the cause of the illness then usually the patient gets better.

Inflation as projected by the BOJ is expected to be between 11 to 14 per cent this year, driven mainly by the new taxes introduced in the budget. This was expected and we must now pray for no inclement weather during the hurricane season that will cause any agricultural damage, as this would push inflation further.

As expected agriculture is the only real growth area, and the sector I have been pushing aggressively since 2007 as Jamaica's gold mine, instead of looking for it in the hills. The goods- producing sector has declined as expected, and in particular construction and mining. These will continue to decline in the second and third quarter, and agriculture will continue to be the main growth area.

The services sector has declined by 1.6 percent, and I expect that it will decline further given the decline in the goods-producing sector as fewer services will be demanded.

Proposed quick fixes
The fact that the process of decline has started we will then have to manoeuvre through the economy's adjustment and it will be painful as many more will lose jobs, or become unemployable in the changing economic environment. This changing economic environment means that different skill sets will be required, which many of us have not prepared for.
There are some short-term solutions that I think can be taken to lessen the effect and make for a quicker economic recovery, as follows:

. The most important, I think is, to create a much more facilitative environment to encourage small business development. This is the sector that has been saving developed economies like the US, as the large companies are unable to react quickly to changing circumstances and most will see decline. The bureaucracy, however, is stifling small business growth. Even so I have seen evidence of many people trying to get into new businesses, especially amongst the younger generation.

. An aggressive move must be made to build out agro-processing plants and greater investments in agriculture. Agro-processing will allow us to reduce the risk from weather as well as add greater value to our exports using the same resources. I know of at least one person who has wanted to make an investment in agriculture but has faced some hurdles.

. Public transportation - this is a quick fix, as if we were to immediately start a park-and-ride system from highly populated cities and towns such as Portmore and Spanish Town we could reduce traffic congestion and oil use. My idea for park-and-ride systems and direct shuttles to major work areas is also in response to the lack of security on public transportation. This could reduce significantly the oil bill in a time when as I said at the start of the year oil could end the year at US$70 per barrel.

. Infrastructure spending should take place around tourism areas and agro-processing. This would have the double effect of increasing employment and preparing our main sectors where we have a comparative advantage for global economic recovery.

. Income tax and GCT incentive should be provided to companies that add foreign exchange to the country through exports or reverse exports.

. Vocational training - this is the quickest way to improve the skill set of the many who sit idly by at street corners waiting for an opportunity. The last time I said this I was accused of promoting illiteracy, even though this is an improvement for many.

What is needed to address the economic challenges is a fundamental shift in the paradigm, which no doubt is difficult for the government to do because of the fundamental flaws that exist in the infrastructure.
Also the need to balance the social with the economics is always a challenge.

In the short term there are some quick fixes which must be implemented if we are to lessen the effects of the inevitable economic decline.

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