Friday, October 30, 2009

The economy must adjust to develop

From time to time, I talk to business people in Jamaica who tell me that with each passing day business is getting more and more difficult, as buyers are not only spending less but are taking longer to pay.

We see also where financial institutions have been reporting a fall-off in consumer loans, and targeting the small and micro business sectors.

Added to this we see where some 30,000 jobs have been lost since the start of the year, and my own expectation is that we may see another 15,000 more in job losses before the end of the fiscal year.

Money circulation
The fact is that real money in circulation has taken a beating, and more importantly the consumer purchasing power has taken a severe beating. When we speak about a vibrant economy it is important to remember that this is only possible with spending power in the hands of the average consumer, as we have seen in the US, which has had to introduce a very large stimulus package to keep their economy going.

The most recent US data has shown that the last quarter GDP has increased by 3.5 per cent but this in my view was driven by stimulus money more than any real recovery in the economy, as job losses still continue to mount.

In Jamaica's case, having spent all our future income already, we have no "savings" to create any stimulus for the economy. The fact is that the Jamaican consumer has been hit really hard over the past few months, and this trend I expect will continue for at least another few months. But this is necessary if we are to change the current economic structure of the country and reposition ourselves for development.
The following developments have caused havoc for the local consumer:

. 30,000 persons, or approximately 2.3 per cent of the labour force, have lost jobs since the start of the year;

. Real incomes have declined by about 10 to 14 per cent, as wages and salaries have been kept flat for the most part while we have seen inflation of 14 per cent in the last fiscal year; and

. There have been increases in taxes, food prices, fuel prices, and other basic items, further eroding the purchasing power of consumers.

This means that total consumer purchasing power has declined rapidly. Add to this the losses sustained by consumers in the unregulated investment schemes, and the fact that some have been paying off loans or saving more in anticipation of more difficult times, and you have a scenario where consumer spending has declined significantly. So even though the absolute amount of money in circulation may not be much different from what it was a year ago, the fact is that the real expenditure has declined significantly (even so, the BOJ has reported that the expansion in money supply was lower than projected). One could easily expect that real consumer expenditure could have declined by about 25 per cent year over year.

So what all of this means is that businesses are inevitably going to suffer and I expect that we will see business fallouts accelerating into the first quarter of 2010. In fact, when the car dealers received the recent stimulus package I was on a programme with two of them professing how happy they were with the stimulus. I told them that it would not make a difference and car sales would continue to decline. The fact is that consumer spending is driven by how many persons have jobs, expectations, and the purchasing power of consumers. So if one were to pull the stimulus money out of the US economy, there would no doubt be a decline once again.

Consumer spending necessary
Creating stimulus packages with no positive adjustment to the spending power of consumers will have little or no effect. The lesson from this is that instead of providing stimulus to the businesses, the government would be better off providing stimulus packages to the consumer. In the US, for example, the stimulus came mostly in the way of programmes such as the cash for clunkers, government employment projects, and extending unemployment benefits. This is the only way to positively impact the economy.

The Observer's Fashion Night Out is an innovative way of providing a stimulus to consumers as it provides them with greater purchasing power through lower prices. My own prediction is that the overall night will be relatively better for the merchants, but the downward trend in business will continue after the night is over. Businesses in clothing and other basic necessities should fare better. This one night will not develop any long-term loyalty, as loyalty in today's economy only comes through much lower prices.

But the fact is that this adjustment in the economy, through business fall-outs and lower consumer purchasing power, is necessary if the economy is going to develop. Jamaicans have for a long time lived above our means, thereby running up a significant trade deficit. The only way that we have been able to keep our heads above water, and avoid drowning, is to put on the debt "life jacket". Continuing the course of borrowing our way out of the problem will only make the adjustment more violent when it comes, as it is not possible to borrow forever. So the sooner we make the adjustment, the better it will be for us. Because we have taken too long to make this adjustment I think the next few months will be an experience in pain for many.

The role of the government in all of this must be to (1) encourage investment and (2) more importantly to ensure that the adjustment is as painless as possible. And this latter role is critical if we are to ensure the economy's adjustment in as rapid a timeframe and painless a manner as possible. Any prolonged adjustment period and too much pain will be bad for the country, and so careful policy implementation is going to be critical. Even if we were to select the appropriate policies and implement them, we could still have more challenges than we want.

What we will see is that businesses that rely on luxury items and imports are going to be the first to fail. Outside of that, businesses that fail to employ the necessary professional expertise to help them through this time will run into problems also. There are some that were more proactive than others and sought the assistance from last year and were able to adjust way in advance of the economic onslaught. Those less prepared will either see their capital depleted or will fade away into the sunset.

So even though the US economy is showing signs of improvement this is not going to have any short -term positive impact for Jamaica. We will continue to see the economy being weighted down by our past decisions. This adjustment, however, is necessary in order for us to put a halt to the stagnation we have found ourselves in since the 1970s (with a small moment of hope during the end of the 1980s) and start on the path of development.

As usual, however, the road we take is going to depend on the policy choices we make.

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