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.


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