Friday, September 03, 2010

Consumer demand essential for growth

In September 2008, I wrote an article titled "Risk of a double dip recession?" where I pointed to the fact that there was a very real risk of a double dip recession despite "green shoots" at the time. Even though many were professing that the global economy was recovering, I still did not see the fundamental structural changes required to ensure sustainable economic recovery. The only thing happening at the time was the injection of stimulus money and the continued reliance on expanding credit facilities without any impetus to greater production.

Today we see where the gradual withdrawal of the stimulus funds from the US economy has caused increasing concerns of the economy falling back into recession. In fact, as I pointed out at the time, the US and UK economies were still facing high unemployment and delinquency levels.

Similarly in Jamaica, the recent green shoots we have been seeing resulted from the very rational moves to approach the IMF and the JDX. These two factors by themselves provided the economy with the necessary breathing space to allow for the systematic implementation of policies required to ensure that the economy emerges stronger after the recession. The fact is the economy has been in decline for the past two to three years, and it was these two moves that eased the pain that would inevitably have come with the fall of the global economy.

Our own local economy has been seeing some green shoots. Some of these include (1) the relatively successful fiscal management programme, (2) the divestment of certain loss-making assets, (3) the improvement in the balance of payments, (4) the increasing activity in agricultural production, and (5) the focused efforts on restructuring the education infrastructure (I didn't mention the JDX and IMF, as these are actions within a policy direction).

My own view is that these policy actions are in the right direction. My reason for saying this is that the way to achieve sustainable economic development is to ensure the foundation is secure, and so while the direction of these policy actions might bring some discomfort, the deflation of the economy was always going to be necessary in order to build a sustainable base.

However, while these policies are necessary for development, they are definitely not sufficient. And the pursuit of these policies, without other initiatives, can prove to do more damage than good to the economy. My reason for saying this is that the policy actions have mostly been deflationary, that is, they have all resulted in decreased economic activity.

Prudent fiscal management in a declining economy can only come from reduced real expenditure, as real fiscal revenues would have been declining also. Divestment of loss-making entities, while positively impacting the fiscal accounts, also has a negative effect on immediate economic expenditure. The improved balance of payments has come from a greater reduction in imports than a growth in exports, which again negatively impacts economic expenditure. While agriculture is improving, and there is greater focus on improved education quality and planning, the fact is that these will have longer-term effects. We also see that income levels have fallen, as a result of increased unemployment and decreased income levels.

So while it was necessary to deflate the economy in order to properly restructure the base, if we are to avoid the significant negative risk of ravaging deflationary effects, we must ensure that consumer demand does not fall too much. If consumer demand is not addressed, then we face the very real risk of disinvestments and further economic decline. It is therefore imperative that policy must focus on growing consumer demand as an essential ingredient for economic growth.

The only alternative to that is to grow our foreign exchange earnings, or foreign direct investments, but with the risk of declines in the global economy (or continued stagnation), the probability of this happening is decreasing.

Stop the mudslinging
One issue I want to discuss is what I see as a very real distraction to that necessary economic progress. This is what I call the "mudslinging" approach that we have taken on as a society. Because while our economies falter, all we have been doing is saying who is corrupt, who has breached policy or protocol, and the mudslinging goes on and on. It seems as if we are more concerned with decrying everyone else's actions rather than focusing on what we can do to help each other improve, or for that matter the country.

While it is necessary for our democracy that constructive criticism takes place on all issues, we must avoid the name calling and constant battering of everyone that wears a different colour shirt from the one we prefer, as it does not help the country. And what sort of example do we set for the children we claim to love so much? Or do we really care about our children who we abandon to beg on the streets or wipe car glasses for a living.

I for one do not judge someone based on the colour shirt they wear, as it seems to me that the character of the person is more essential. I went to school and grew up with persons in all the political parties; green, orange and blue shirts (I would mention the NNC but don't know what their colour is). And as far as I am concerned their character is substantially the same as I knew them before, so why should they immediately become an adversary because of the colour of their shirts. And this attitude I think is more prevalent in the supporters of the parties than the politicians themselves.

For example, even though I disagreed with the monetary policies pursued by Omar Davies, I have a healthy respect for him as an individual because of interactions I have had with him. In addition, his involvement in his constituency tells me a great deal about his character. Another example is while at the UWI, I was maybe one of the only capitalist-minded persons in Trevor Munroe's politics lectures, and knew his own views, but even so I thought that his contribution to debate and the knowledge he imparted were invaluable.

The point is that if we close our minds to people because of what their own preferences are then we lose the value of their contributions. I also feel good to know that I have been invited to do presentations for small groupings of the G2K, NDM, and PNP; because my own view is that the only way to convince those around me of my own belief is to talk to them. Not stay away. I therefore plead with the leaders, media, and every Jamaican to be more tolerant of each other, as this is the only way that we can move forward as a "nation".

This unity is necessary if we are to grow this economy, as economics cannot succeed without proper social interaction. And the way we have been behaving as a society is dysfunctional. We don't have to agree with everything that someone says to respect them as a person. This type of behavior is the essence of civilisation and intelligence.

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