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.

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