Saturday, July 31, 2010

If I had my way

LAST week I tried to convey my thoughts on the current state of the economy, and my belief that the economy has been deflated enough (whether intentionally or not) to now take the opportunity to breathe new, unpolluted air into it. I still do not believe that all the structural flaws are removed, which still act as impediments to properly aligning the economy, but the fact is that if we wait too long to restart the engine then the economic locomotive could see its engine going into a state of paralysis. Hence, what we have to do is address the remaining structural impediments while we reposition the economy for real development.

The positive structural adjustments that have taken place include (1) the successful debt restructure; (2) IMF programme; and (3) reduction of the trade deficit. It is important to note that the success of the debt restructure hinged on the IMF programme, as without the IMF funds the debt restructure would not have been sustainable for so long, as we would have long seen a return to high interest rates and even more pronounced fiscal deficits. Note I do not mention the reduced interest rates and revalued exchange rate, as these are merely outcomes of policies and by themselves should not be celebrated.

Seismic shift
The reduction of the trade deficit occurred as a result of the seismic shift in the economy that decreased aggregate demand, as the debt restructure removed discretionary capital and disposable income; and forced a change in the returns seen by companies. This is similar to what happened in the US in 2008, as any significant restructure of the financial system will always have an impact on disposable income and capital, which affect aggregate demand (for example, the unregulated financial organisations). One of the undesired consequences is the increase in unemployment, which could not be avoided as many jobs depended on the continuation of the debt bubble we found ourselves in. Therefore, a consequence of deflating that bubble meant that there were going to be some dislocation to jobs and businesses as we have seen, and this is why it was important to increase the social intervention programmes.

There is one more structural adjustment that needs to happen quickly, and is being pursued by the Government, and that is a rationalisation of the public sector and the reduction of the state's role in the economy. This by itself will cause further deflation in the economy, and so must be coupled with policies geared towards filling that gap. Some of this is happening, for example, the recent announcement of tax incentives to the tourism industry for capital refurbishment. This is the way tax policy must be used to influence development, not just as a tool to maintain the status quo of the public sector.

Another policy move, which I think will enhance the business operating environment, is the move by the tax administration to provide efficient tax payment services, including online payment and payroll tax consolidation. Kudos to the director general and her team for the direction in which they are taking tax administration. If I had my way, though, I would do away with the TCC process as is and move more towards consumption taxes, as both these structures are penalties to business efficiency and economic growth.

The recent pronouncement by the finance minister that the focus this year would be on growth needs to go further, I think. If I had my way, my focus would be on development, from which sustainable growth would come. I would continue to focus on restructuring the economic foundation and implementing facilitative policies to reduce which include bureaucracies that add to inefficiencies. One such entity that readily comes to mind is the RGD. For the life of me, I cannot understand why across administrations we have been unable to deal with the oppressive practices of this institution. We have, to some extent after all, been able to reduce violent crimes, but cannot deal with the inefficiencies at the RGD.

Positive crime- reduction effect
One other thing I have been speaking about for a while is the positive effect that crime reduction will have on the business and investment environment. This has been seen in recent weeks and the security forces must continue their efforts to attack this monster, State of Emergency or not. In fact, I wish that the politicians would retreat to some private enclave and discuss the "whodunit" of the State of Emergency saga last week, and, when they have arrived at a conclusion, present the findings to Jamaica. I, for one, am tired of the bickering about this episode and wish that both parties could just find it within themselves to have a civilised and constructive discussion on it. The public bickering is not helping our security forces.

Last year I had indicated that if I had my way I would have extended the IMF facility to allow more breathing space for the economy to adjust. While I still believe that some of that is necessary, I had indicated that belief within the context of our crime situation then, and in fact had stated that with the crime level then that the economy could not adjust fast enough to deal with the structures of the IMF programme. With the recent successes at dealing with crime, I think that the IMF programme has become more palatable but I still think that some relaxation of the straight-jacket is prudent.

I still believe, however, that our focus on fighting crime needs to be widened. Not through any military assault but through greater efforts to observe the rights of the citizen, a much more friendly and respectful approach by the police (the soldiers have received a lot of compliments), and by dealing with what I call the pillars of indiscipline -- the traffic and noise indiscipline. Crime reduction will be more permanent if these are done.

If I had my way, I would use the public sector resources to focus more on developing the local linkages in our economy. So I would place great emphasis on R&D, and put the sleeping Scientific Research Council in the spotlight, while encouraging scientific studies through scholarships and grants. For example, why shouldn't the Students' Loan Bureau be encouraged to offer scholarships and reduced interest rates to students in areas that could help build our comparative advantage?

The last thing I will mention (but by no means the end) is energy. If I had my way, I would focus much of the public sector resources on (1) eliminating the monopoly of the JPS, and (2) developing renewable energy capacity for retail and transportation consumption. Included in this would be greater investments in public transportation, even far beyond what the minister speaks about. The value-added benefit from focusing on the energy and transportation is significant, both in financial and productivity terms.

If I had my way, I would implement these and other policies to ensure that Jamaica is put on a path for economic and social development, and not restrict my focus to economic growth as we have been so consumed with in the past. Governments should never think of themselves as responsible for economic growth, because the truth is they suck at it. Governments should be the facilitators by creating the environment and push for the private sector to do what they do best.

If I had my way, I would reduce government and the public sector to the role of spectator in the game of economic development, always cheering along their team while staying away from participating in the play. If only I had my way.

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