Friday, July 23, 2010

Is the economy improving?

Over the past few weeks there has been much debate about whether the macro-economic measurements are any indication of improvements taking place in the economy, and by extension whether we are witnessing the start of an economic turnaround. Those who support this idea point to (i) a revaluing Jamaican dollar; (ii) lower inflation numbers; (iii) improvements in agriculture; (iv) significant improvements in the trade deficit; (v) declining interest rates; (vi) increased confidence numbers; and (vii) reduced crime levels.

On the other hand those who oppose the idea of improvements in the economy point mainly to (i) increased unemployment; (ii) negative effects of revaluation on exports; (iii) stagnant and declining income levels; (iv) increased business difficulties; and (v) reducing exports and future effect of oil price increases on imports.

Both arguments have validity
The question that must rest on the minds of non-technical Jamaicans is, who is right? Is the economy in fact improving, or is it that the declining economy is causing the macro-economic measurements to portray improvements in the economy?

The answer is that both arguments have validity, as one could successfully argue either position, especially if you are preaching to an audience sympathetic to your own leanings. What is needed, though, is an objective analysis of the economy to determine what the true position is. I will attempt to provide a synopsis as I see it, but the truth is that much more space than this column would be needed to go into the detailed analysis required.

In making any assessment, one should always start with the objective. For example, if one is assessing the economy in relation to the motor car versus thew agricultural industry then you would need to state different objectives. This is because both industries can oppose each other in terms of what is good for each. Agriculture earns foreign exchange while motor cars require it, and so within the context of our current economic circumstances the interest of one is opposed to the other. In different economic circumstances they could be aligned. But any proper analysis needs to be done in relation to present circumstances.

In the case of the Jamaican economy the objective must be to see the improvement in the standard of living of all Jamaicans and the general improvement in the economy. The way to measure that is at a macro level looking at overall GDP growth, but to also drill down to look at income levels, job creation, and which sectors are improving. The reason for this is that the country can achieve growth while the economic foundation is getting worse. For example, in the fourteen years to 2007 although Jamaica saw growth in every year, deeper analysis showed that in all fourteen years the non-exporting sectors grew while in only three of those years the export sectors grew (Chung, 2009). So while the overall economy was growing, this was being done by the growth in debt rather than production. In other words we were growing based on other people's money.

So the economic challenges we are seeing over the past two years are due in part to the global recession, but more importantly because of our economic management for decades before that.

Recent data from STATIN shows that Jamaica's imports have been growing at an increasing rate versus exports since the 1980s. Surprisingly, the numbers reveal that in the 1970s, exports increased by 136 per cent while imports increased by 97 per cent. On the other hand, the period of the 1970s was the worst growth period on record. The years after that did see some growth, but imports surpassed exports at an ever increasing rate up to 2009. The direct correlation with the increase in debt leads to the conclusion that we were improving our lifestyle based on borrowing.

1970s similarity
The problem we faced in the 1970s, however ,is similar to the challenge we face today, in that we are experiencing GDP decline but at the same time we are seeing improvements in the trade deficit. One difference between the 1970s and today is that we have recently been seeing a revaluation in the Jamaican dollar, but this can be explained in four ways (i) a reduction in demand for US dollars, as a result of declining economic activity and financial transactions; (ii) a liberal foreign exchange system today that reacts more to demand and supply than before; (iii) a shorter assessment period, so that sustainability has to be questioned; and (iv) the inflow of loans from the IMF and multilaterals. The truth, though, is that the improvement in the exchange rate today is not due to productivity improvements but rather a decline in economic activity, as supported by the productivity data. This is not a good thing, as it means that income levels will eventually fall on this premise.

The same argument holds true for lower inflation numbers and to some extent interest rates. The main argument for reduced interest rates is of course the game-changing JDX programme, as this alone caused a steep fall-off in the average rates of interest rates offered by the government, which was the main competitor to private loans. The appetite of government for debt did not change, and what happened was that with the inflow of external loans, the demand for local debt and higher interest rate pressures decreased. The lower economic activity assisted by ensuring that demand for US dollars decreased.

What one realises from all of this, however, is that the improvements in the economic numbers are not as a result of improved productivity or exports, but are caused by other factors that give a sense of well-being. It is for this reason that the confidence indices have therefore increased. Because as the numbers show, even though consumers are more confident they also have low expectations for any job prospects or increased spending. The confidence increase is therefore more psychological than based on any real improvement. In fact confidence numbers were at their highest in Q3 2007, just before the recessionary decline.

With all this said, though, this adjustment in the economy is necessary if we are to see the much needed revaluation, as the economy was similar to an addict. Only in this case the drug was debt and declining productivity. In order for the rehabiliatation to occur it was therefore necessary to deflate the economy and create a new foundation that can lead to sustainable development.

It is my belief that the current state of the economy provides a good platform for creating a sustainable development path. This, however, will require carefully crafted policies geared towards development rather than short-term consumption.

So in my own view, while there are positive macro indicators, these are not because of real development but as a result of the necessary economic contraction. I don't know of anyone who paints a car without first removing the old coat.


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