Friday, November 27, 2009

HONESTY IS THE BEST POLICY

When I was growing up I always heard the phrase "Honesty is the best policy". This can be applied in many ways, as you can speak about being truthful to someone about an event or facing the reality of the situation. So even at the expense of looking bad, one should always understand that a delayed consequence in most cases is always much worse than confronting the reality as soon as it arises.

This has been the demise of Jamaica. We have simply failed to confront our reality for too many years and have suffered as a result. In my book I looked at Jamaica's economy (through numbers) since 1962, and the thread that underlies our economic demise is that for most of our 47-year history we have just failed to confront our reality and deal with it. Because of that we have continuously postponed our development by always telling ourselves a lie that all is well, not necessarily in words but by our actions.

Gloom and doom
In fact, over the past few years people have always told to me that I'm always predicting gloom and doom for the economy. And in fact just over a year ago someone said to me that I should stop being so pessimistic and "think positively". Only recently I was told that someone else said that I and three other analysts were being too negative on the economy and that we needed to talk it up.

My response to these accusations is that I have always believed that "honesty is the best policy". Because when we are honest with ourselves then we truly recognise the challenges we face and that is always the first step to deal with them. But when we continue to lie to ourselves, we continue to do things like borrow more money to afford the new car and new clothes, only postponing the day when the truth cannot be deferred. And so Jamaica finds itself in that situation today, where we can no longer postpone the truth of our reality.

There is, of course, a subtle distinction between realism and pessimism. Encarta defines them as (1) Pessimism - "tendency to see only negative or worst aspects.and to expect only bad or unpleasant things to happen"; and (2) Realism - "a practical understanding and acceptance of the actual.rather than an ideal or romantic view."

So people tend to confuse pessimism with realism because of their own lack of understanding of the circumstances. In other words, if a train is coming directly at you, then being optimistic that it will not hit you without action is stupid. So if you do not understand that the train is going to hit you and dismiss the warning as pessimism then it will of course hit and kill you. On the other hand, if you accept the reality that the train is coming, then you can act and move out of the way to avoid being killed. This is the purpose behind plans and budgets.

And this distinction, in my view, is one reason why the global financial crisis has caused so much stress for so many, and even closer at home why many individuals find themselves in difficulty after the collapse of the unregistered investment schemes.
In March 2007 when it was obvious to Greenspan and even two local analysts (Ralston Hyman and I) that the US economy would enter recession, the great Bernanke and Paulson were confident that the US would not enter recession and the bias was still towards monetary policies geared towards tightening. Similarly, many local persons were unwilling to accept the reality that the unregistered schemes were in fact unsustainable and thought many who warned to "check before you invest" were pessimistic.

The consequences of both are on record for everyone to see.

Benefit of realism
If, on the other hand, both situations were looked at from a realistic and analytical point of view, then much of the pain that the world and individuals go through today could have been avoided. The world may still have fallen into recession but policies could have been put in place earlier to make it less painful. And if persons were more realistic about the investment schemes, much individual pain could have been avoided.

The problem is that people always find greater comfort in going with the crowd and so would rather believe what the crowd is saying rather than the minority. This is why markets crash, for example, because people usually follow the herd mentality and flock to investments along with the crowd, which inevitably leads to bubbles and eventual market crashes. There is nothing that replaces good and solid analysis.

So if you think about it, if Jamaica had faced the reality of our structural economic challenges decades ago then we would be in a much better position than we are today, and therefore "honesty is always the best policy". But we get there not by calling down "fire" on all those we deem to be pessimistic but by carefully analysing why they are pessimistic and comparing it against our own well-researched findings.
So when the National Anthem says "give us vision lest we perish", I think we need to add to that: "and allow us to properly analyse and interpret lest we be blinded".
When I listen to some of the analyses relating to the present challenges we face I only see a repeat of the same mistakes made, as a lot of the analysis and solutions are misguided. The one thing you want to do when faced with a challenge is first and foremost maintain a clear head and do not rush to judgement and solutions, as this is just as dangerous as taking the line of optimism without foundation.

Last year (2008) I had indicated that companies and individuals should have started to put their house in order for what was coming this year. Those who did are better today than those who did not; even though survival is never guaranteed, at least you get to live longer than those who did not.

As we go into 2010 the probability is that the economy will decline further, which will be exacerbated by the fact that many companies and individuals did not prepare adequately. But we can see a better 2010 if the correct choices are made at the country, company, and individual levels. The question is, will we continue to be optimistic without foundation or face the reality and allow for well-founded optimism?

Friday, November 13, 2009

The business of productivity

Recently, the Jamaica Productivity Centre released a productivity report on the period 1972 - 2007 in Jamaica, where it showed that over the 35-year period the labour productivity of the Jamaican worker declined by 1.3 per cent per annum. It further stated that at our current rate of growth it would take 40 years to get to Barbados' current per capita
GDP level.

What surprised me about the report weren't the findings, as anyone who is even slightly aware of what is happening in Jamaica will know that our productivity and growth levels are at the bottom of the pile. What I am surprised about is the reaction to the information, as if "Wow, I didn't know we were doing this badly". It seems as if everyone has forgotten that the last time the centre reported the results were similar.

Consistent decline
The fact is that Jamaica's productivity has always been in consistent decline since the 1970s, as I illustrated in my book, with the exception of the decade of 1980 to 1990, when the Total Factor Productivity (TFP) - productivity measurement factor - was 1.0. In the decade 1960 to 1970 the TFP was 2.4, 1970 - 1980 it was minus 3.8, and in 1990 to 2000 it was minus 1.7; all measured as annual averages.

During similar periods, this was reflected in the GDP growth numbers. These periods are 1962 to 1971, when accumulated GDP growth was 68.5 per cent (average annual of 6.9 per cent); 1972 to 1981, accumulated GDP growth of minus 9.5 per cent (average annual of minus 1 per cent); 1982 to 1991, accumulated GDP growth of 19 per cent (average annual of 1.9 per cent); 1992 to 2001, accumulated GDP growth of 8.9 per cent (average annual of 0.9 per cent); and 2002 to 2007, accumulated GDP growth of 9 per cent (average annual of 1.3 per cent.

One could ask the question why we had growth during the 1990s if TFP was negative. The answer is simply that we were able to grow because we borrowed to consume and create economic activity. So today we are faced with a situation where we have to pay back for all the money we borrowed to consume when we were not producing the means for our
own consumption.

This is at the heart of all our challenges. The question then is how we improve our productivity so that we can enjoy real economic development and all the benefits that come with it. First I think we need to get an understanding of what productivity is, as it seems obvious from the policies that our leaders have pursued that they really have no idea of what productivity really is.

So for the benefit of our leaders, productivity can be defined as "the rate at which a [country] produces goods or services, in relation to the amount of [resources] needed" - adapted from Encarta.com. In other words if someone employs $100 worth of resources and produces $200 worth of goods yesterday, and today can employ the same resource value and produce $250, then productivity would have increased by 25 per cent. What Jamaica has been doing is producing less with the same amount of resources, which means that more resources are needed to produce the same amount. But ironically our consumption has been increasing while our production has been falling. So in order to consume more we need to borrow from others who are producing more than they consume and end up with reserves. In effect Jamaica is a parasite on the world's production.

What of technological improvements?
But some may say that during the 1990s especially, we had improvements in technology, as more computers were put to use, the Internet came into being, and more persons had cellular phones. So if we saw an increase in the productive tools being used then obviously productivity must have increased. And some people have tried to argue with me in that manner, as Ripley would say "Believe it or not".

First, we need to understand that if we look at the use of technology in Jamaica, most of it is geared towards personal consumption, in my own informal analysis, rather than employed in productive use. And the reason why we are able to consume these productive tools is that we borrowed the money to consume them.

Secondly, and in my mind more importantly, we need to understand that a computer does not work by itself, nor does a new state-of-the art piece of machinery. All productive tools require a productive mind behind them in order to be the most productive they can be. So even when the police talk about the number of guns on the road, that is not what causes the crime. What causes crime is the number of criminal minds behind the guns. Similarly, when we talk about the absolute amount of debt, that is irrelevant without looking at how effectively each dollar of debt is used.

So the real challenge we have when it comes to lack of productivity is not how much foreign investment we attract, or how much agricultural land is in production, or how much money is pumped into the economy. The real problem of productivity comes back to the social issues. The problems relate fundamentally to how productive our people are. And so when we see a situation where 50 per cent of students leave secondary school without one subject, then is it any surprise that this translates into Jamaica having the lowest productivity rate in the region? Can we be surprised at our low rates of productivity when our citizens spend their days demanding justice from both the police and the criminals? How can people be productive if at a basic level they have to worry about their security? How productive can people be if their days are caught up worrying about their missing children?

And if our citizens cannot be productive, then what sense does it make to have the most efficient tools of productivity? We also need to remember, and everyone is seeing it now, that economies like Jamaica's thrive on consumer spending, and it is a known fact that most spending occurs within the lower-income classes, so that if they don't earn a decent wage the economy will stagnate. This is exactly what is happening as real purchasing power, particularly in the low-income groups has fallen significantly year over year.

So in the final analysis when we speak of productivity and growth it would do us well to understand that this is fundamentally a social problem. My own view continues to be that the failure of Jamaica's economy starts with our failure to protect and advocate for the fundamental human rights of our citizens, and unless we change this then we will persist on a path of economic and social failure.

The great USA that we look up to starts its constitution with the words "We the People of the United States, in order to form a more perfect Union, establish Justice." (You will note that Justice has a capital J). The fact is that unless we start to realise that all our economic and social challenges come from the inability to provide the Jamaican citizen with justice and a protection of his/her basic human rights, then I guarantee that next year this time, and into the foreseeable future, we will be talking about the decline of both the Jamaican economy and values and attitudes.