Friday, October 29, 2010

Making the case for stimulus

When we are faced with a slowdown in earnings, it is always natural to seek to reduce spending and hunker down for more difficult times. This reaction is logical when we are faced with uncertainty and is the principle behind business and consumer confidence measures. Naturally if you have tremendous earning power then you will go out and spend today what you expect to earn in the future.This is what the world did, particularly the US and Jamaica, which ended up in the financial crisis we saw emerging in 2007. If, on the other hand, you are uncertain about your future income, you will feel the need to cut back and spend only on essentials as you want to preserve your lifestyle as long as possible.

So too it is with a country's fiscal accounts. When times are good there will be the urge to spend, spend, spend. Jamaica did this when we had bauxite money and so too did Trinidad with their financial wealth from oil.

But is this the best approach to ensure economic or personal development, or is it a sure way to continue on a downward spiral? After all, you can never improve if what you are doing is simply saving the income you already have, as you will still have to eat and soon your income will be depleted if there are no new financial.

In the 1920s there was a soft drink called Moxie, which was more popular than Coca Cola and Pepsi, and in fact was the most popular soft drink in the US at the time. It is still produced today, and is in fact the longest continuously produced soft drink in the US, but is only a strong regional brand today. In the depression of the 1930s, Moxie Company decided to cut back on its advertising spending, and instead focused on building sugar reserves. Coca Cola on the other hand, through Robert Woodruff's leadership, took the decision to expand its advertising during the depression, and in fact marketed the brand globally during that time.

Today the results are there to see, as I am sure that not many of you reading this column knew about the Moxie soft drink and its history.

This flies in the face of the natural motive of wanting to cut back on expenditure in the lean years, and in fact supports the case for stimulus funds. In other words how can you sustain a company, economy, or person if the solution to lean times is to cut back on spending continuously? A strategy focused around continuously chopping expenses, without seeking more revenues will inevitably lead to one consequence.

This is why I believe that the recent action taken by the UK to slash fiscal expenditures in the face of a declining economy will only further weaken that economy. This is especially so in the light of the stagnant global climate.

The concept of the need for government spending in times of a retreat of private sector spending is the argument behind Maynard Keynes' economic arguments. And this I think is what saved the US, and by extension the world, from economic collapse. If the US had gone the route of the UK we would all be literally "sucking salt through a wooden spoon".

This is why I have always made the case for carefully calculated stimulus funds to be injected into the economy by the government, and why I welcome the concept of the JDIP and the recent acquisition of a US$20 million loan to the SLB. I welcome this type of spending in particular because of what the funds are targeted for. In the case of the JDIP the spending is targeted at improving the country's infrastructure, and we have recently seen how fragile and underdeveloped our infrastructure is. And in the case of the SLB loan, it is always welcome to see increased funding for access to higher learning.

After all, it is this type of spending on infrastructure and education that is needed to drive this country forward. They will not only have the short-term effect of immediately providing short term stimulus to the economy but will have the more beneficial longer-term effect of creating value added in the economy, which will in turn contribute to productivity and investments.

I am happy to see these initiatives in the face of the contractionary effects of the IMF programme.

It is important to understand, however, that not all increases in expenditure are good, whether in times of excess or scarcity. It is very important that we understand this concept, and not focus on cutting back on expenditure when times are bad but spending unwisely on all sorts of consumption when times are good. I am sure that many OLINT and Cash Plus victims today wish that they had saved some of the excess they received during the days of prosperity, instead of the lavish spending of monies they expected.

Similarly when the world was expanding rapidly, and everyone was willing to lend us money, we borrowed as much as we could and spent primarily on consumption,using borrowed funds. In fact in 2004 our fiscal budget saw less than 5 per cent being allocated to capital expenditure. After all, times were good and we thought that Jamaica could always get money to borrow. In fact one thing that always surprised me, as an accountant, was our seemingly stupid celebration of the fact that we were able to always go to the market and get loans This was hailed as a success,but I could never understand the wisdom behind that viewpoint.

As an accountant I am always wary of debt, and manage it carefully within what we refer to as the debt to equity ratio. Or in economic terms, the debt to GDP ratio.

One may feel tempted to argue that based on this argument we should not borrow anymore, but that also is a nonsensical argument, as debt as an absolute is never bad, no matter how much it is. What is bad about debt is how it is used. In other words ,as long as the marginal revenue of debt is greater than the marginal cost of debt, then debt is theoretically always good. There are of course other factors that enter into the equation but these require much more discussion which can be undertaken at a future date.

The point I am trying to make is that even though we do not have the reserves or power of the US, we still need to provide stimulus to move the economy forward. It is because of the slowdown in government and private sector spending that led to the increase in poverty levels. And a country, company, or person that seeks to continuously cut back on spending in order to avoid crisis, actually only shifts the crisis to a point where it starts to feed on itself for survival until there is nothing left. That is the law of nature.

I therefore welcome the JDIP and SLB loan, and look forward to similar well thought-out projects of that nature. This is not the time for the timid. We need to be bold like Coca-Cola but we must do so guardedly and ensure that the expenditure is made wisely, by using the right minds to implement the policy, otherwise we will end up much worse than where we are today.

We must avoid the arguments like the one I read in the article reporting on the SLB loan, which hailed it as increasing the access for poor people. It is not about poor and rich people, but rather about where the expenditure adds the greatest value.

Friday, October 22, 2010

The objective of economic development

If you don't know where you are going then any road will take you there. This is obvious, as without a destination in mind then there is clearly no incorrect strategy, as wherever you end up will be appropriate for the strategy employed. So there are two choices from this analogy - (1) let the strategy determine your destination; or (2) let the destination determine your strategy.

As I listen to various commentators on Jamaica's economy, most fall within two categories, namely those who believe that the government is on the right path and those who believe they are the wrong path. Logically only one group can be correct, unless of course the objectives of the arguments are different. That is if the objective is simply that either the JLP or PNP hold state power, then seemingly logical arguments can be made to support both sides. If, however, the objective is for economic development then it is more difficult for both sides to be correct. Or can they both make valid arguments? Clearly they both can make valid arguments if the objective of one side is macroeconomic and fiscal stability while the other is improvement in the standard of living of the population.

This is why it seems so paradoxical to accept the arguments that (1) the fiscal accounts are improving but the economy is declining; (2) interest rates are down but loans are down; or (3) increase in the debt to GDP ratio can be good for the economy.

The answer as I indicated lies in the objective of the argument or strategy.

So this is why I have said that even though the IMF is pleased with our performance under the programme, this is not necessarily an indication that the economy is improving. It is simply an indication that the fiscal accounts are improving, and that the IMF feels the programme is working within the context of the objectives outlined in the programme. Also the fact that the economy has declined for twelve consecutive quarters does not mean that the fiscal management programme is not the right policy, and that the team at the Ministry of Finance (MOF) is not doing a good job.

Again what this depends on is the responsibility of the MOF team and their objective. I have always maintained that the objective of the MOF is not to generate economic growth but rather to manage the fiscal accounts and macroeconomic indicators, so that the former is not unbearable (as we have had since the 1990s) and the latter is stable. If they achieve these two objectives, in my view they would have done well to deliver on their responsibilities.

I believe the MOF has been able to deliver both relatively well, and therefore the emphasis on their performance to explain a declining economy will only lead us further down a path we have been on for a long time: an unknown destination.

I think that in order for us to be able to start solving our economic challenges, and move towards real economic and social development, it is important for us to first define what we want to gain from economic development. If the objective of economic development is macroeconomic stability and improving fiscal numbers, then we have achieved it and we can all rest easy. If, on the other hand, economic development means economic growth and improved income levels and standards of living, then we have a very far way to go.

If we accept the latter definition, then it means that there are some other things we must accept. First is that proper fiscal management and economic development are not mutually exclusive, and in fact both usually go together, which is why in the 1990s when we had declining fiscal numbers, what we had was not development but some growth. On the contrary, in the latter part of the 1980s we had a stable exchange rate, relatively lower interest rates, declining debt to GDP ratio, economic growth, and productivity improvement. That, in my view, was development as opposed to growth.

So we must start to understand that economic development does not rest entirely or even significantly at Heroes Circle. In fact, my own belief is that the Heroes Circle team is properly executing their responsibility, and would be welcome in any organisation in the position they represent : the Finance department.

If not at that address, where does responsibility for economic development lie? In my view economic development depends on the policies that encourage the expected social and economic behaviour that leads to vibrant economic activity, productivity, and wealth. Encouraging this behaviour pattern does not reside with the MOF but rather relies more on ministries such as Labour, National Security, Health, Education, Local Government, Transport, and the Office of the Prime Minister. It is these ministries that control the organisations that can affect social and economic behaviour.

As an example, if over the years the proper planning and quality control had gone into building our road infrastructure and the planning of residential and commercial zones, then that would have made a significant difference to the approach and cost of investments. Wouldn't it have made a significant difference to the cost of production, as the cost of transport and planning for things like telecommunication infrastructure would have been less? If we had a security force, which over the years took the approach that is being hinted at by the present police commissioner, then wouldn't we have a much less violent society to enjoy, and wouldn't that translate into more productive people? If we had a proper education system in place, and means of funding it, then wouldn't that result in more productive resources and greater opportunity for everyone?

The fact is that one of Jamaica's biggest problems is our objection to rules and regulations. So even though we are prepared to live in the well ordered and highly rules-based US, we are not prepared to accept the same for our country. Therefore when the authorities decide to move against illegal squatting, there are some politicians or citizens who will cry oppression. Never mind the long-term effect on infrastructure and the economy. We have long known what it is to be the "now" generation from even before the internet, as we have always sought short-term satisfaction over long -term gain.

Are we prepared to embrace economic and social development? I don't think so. because we have not made that paradigm shift in our thinking and approach that is required to take us from complaining to action.

Our focus on criticising the authorities, or whoever stands in our way, continues to be unproductive because it does not comply with our objectives. If we want to move towards successful economic development then we must have a clear definition of what that development is, and that view must be shared by all stakeholders. Everyone will not get everything they want, but everyone may get most things they want.

Until then we will continue on the path we are on, without knowing our final destination.

Friday, October 15, 2010

Jamaica after the global recession

MOST persons agree that the worst of the global recession seems to be over for now. There was a heightened risk of a double dip occurring, which is still possible, but this has been reduced with the return of growth to emerging economies. The US and Europe, while still seeing growth, have certain inherent risks present, as much of what caused the crisis has still not been rectified. What is obvious, though, is that it will be a very long road to recovery, measured in years.

So now that the worst of the recession has passed, how does Jamaica find itself? There was much discussion at the start of the recession that Jamaica must find a way to derive benefits from the downturn, so that when the recession ends we will be in a much better position to capitalise on the recovery. The question must therefore be asked, what has been the result?

No fundamental change
In short, can we say that in 2010 we are more ready to take advantage of the global recovery - as slow as it will be - than we were in 2007? The short answer to this is, we are no more ready to take advantage of it than we were then, and in many respects we are even less ready to do so. I will examine why I say so, but first want to point out that one of the significant reasons we are unable to do so is because of our mentality as a welfare state, where we blame the authorities (government and public sector) for everything. This has resulted in us casting the blame where the problem does not originate and therefore we end up chasing the wrong solution.

This misdirected blame is a fundamental cause of our inability to successfully tackle our problems. I have always maintained, for example, that the finance ministry cannot resolve the economic challenges on its own, as its remit encompasses only the fiscal situation, and through the BOJ it can only try to influence short-term monetary policy. The longer-term economic development depends more on the social and environmental issues affected by non-financial policies.

So while the finance ministry has seen successes in the fiscal and macroeconomic areas, the social and environmental conditions do not allow for the benefits of those successes to filter through. This will create the impression that the policies out of that ministry do not work, when in fact they do work within the confines of our social and environmental conditions. The same is true of the policies pursued by the agriculture ministry.

The success lies in the fact that if those policies were not pursued the country would have been in a much worse position than in 2007. But this is not easily measured or appreciated, as success for most is not measured by dangers avoided, but rather by income growth, as most people will not have the ability to look at the opportunity cost or benefit.

As an example, the increase in the number of persons below the poverty line was always going to be expected, as the last two to three-year period has been the worst economic time we have faced in independent Jamaica. One could argue about the rate of increase, or the extent of the poverty within the poverty group, but any argument without significant analysis of policy choices during the period would at best be superficial. But I guess on both sides the arguments make for good politics, and that as we know is more important for not only politicians but for Jamaicans to be able to debate.

Reduction in crime commendable
I say that because since around 2008, as a country we have been more interested in debating scandals and various other politically motivated issues than having any real discussions about how we as a country will ensure that at the end of the global recession we are more equipped to take advantage of any recovery.

So in 2010, after having many scandals and other political issues argued, we still do not find ourselves with any greater comparative advantage. We find that we have a much worse infrastructure, which means that our tourism product has not improved in any way to compete with places like Cancun; our road networks have been devastated by a little rain resulting in our farm roads being destroyed; and there are no greater incentives for small businesses to flourish. In fact, I remember my call in 2008 for loans to deal with infrastructural development being dismissed by other commentators who thought the way to go was to reduce debt in a recessionary environment.

On the other hand we have seen where crime has declined — which is to be commended, and is a positive sign for investments. And we have seen stability in our macroeconomic measurements and reduction in interest rates. We have also seen a renewed attitude in the police force that I believe will cause the transformation that is needed to permanently cause the improvement in public order and discipline if continued. This must be encouraged.

When we look at the real economy, however, we see that the structure is still the same as it was in 2007. The fact is that we haven't seen any fundamental shifts in how our economy is structured, and this is reflected not only in the GDP numbers but also the Balance of Payments (BOP).

The table shows the export, import, and oil import numbers over the last one year. It further shows the ratios of imports/exports and oil/imports. What the table shows is that over the past year we have seen the ratios of imports to exports and oil to imports basically remaining in the same average. The implication of this is that there has been no change in the relationship between the economic factors, and hence productivity of inputs.

Similarly, an examination of the GDP numbers shows that there is the same basic relationship between our export producing versus our consumption producing sectors. One positive that has occurred is that there has been an improvement in our food and beverage and tobacco categories of imports, both declining by 9 per cent and 11 per cent respectively, in the January to May 2010 versus 2009 period. This no doubt has resulted from the policy actions of the ministry of agriculture. The manufactured and miscellaneous manufactured goods categories showed a 0.8 per cent decline and 15.15 increases respectively in the same period, however, reinforcing the point that the relationship between the GDP sectors has not shifted.

So while we have seen successes on the fiscal management side and in the agriculture sector, we cannot say that there has been any positive fundamental shift in the economic structure that will allow us to create a greater comparative advantage. The reasons for this, however, will not be found in the usual suspects we pursue, as the chronic social, political, and cultural nuances of the country have caused much of our challenges.

There are still of course options that we can take to ensure that we hasten the path to economic and social development but are we as a people ready to embrace this? I am not sure.

Friday, October 01, 2010

Improving our infrastructure

The recent effects of Tropical Storm Nicole showed us once again that Jamaica is a poor and underdeveloped country. It seems as if every time the rains fall the infrastructure damage is always greater than the time before. I can't imagine what would happen to us if we were to get a really serious category 4 hurricane.

This as far as I am concerned is a test run, and should alert us to the state of disrepair of our infrastructure. This problem is one that has been lamented for years, and has been in the making for a very long time. The fact is that there has been no serious upgrading of our infrastructure, apart from the north and south coast highways built in the early part of this decade. When I used to comment on the need to put money into our capital infrastructure, this is the sort of debacle that I envisioned would happen if (1) enough funds were not allocated for development, and (2) the funds were not properly spent.

The fact is that there has been no serious upgrading of our infrastructure, apart from the north and south coast highways built in the early part of this decade.

Insufficient capital expenditure
It is clear that the fiscal programmes have failed in both areas. The fiscal budget from 2004/5 (the earliest information on the MOFPS website) shows that in that year only 4% of total expenditure went into capital expenditure, and not all of that went into infrastructure spending. Over the years that amount has marginally increased, and in this year's budget the amount allocated to capital expenditure is 16% of total expenditure.

Secondly, the damage done to our roads after a little rain, or even just from regular use, shows that the quality of the road work has been deplorable. We have simply been laying down asphalt without any concern for proper road construction. Consequently, the little money that we have spent on our infrastructure has been frittered away, because the drainage and the durability of the roads were not considered. Bouygues has had to come to show us how to build roads.

Currently there is some controversy about the JDIP, which is to be funded by a US$340 million loan from the Chinese and an injection of US$60 million from the GOJ. I can't believe that at this time when (1) some stimulus is needed for the economy because of the economic downturn, and (2) the need for a proper road infrastructure which the poor taxpayers have paid for time and time again, we are indulging in a war of words which could lead to a delay in the spending. I can understand the need to ensure that the money is properly spent, and the NWA should be held to account for the quality of the spending, but we must ensure that these funds get into the economy.

The fact is that infrastructure spending is necessary in order to counter some of the negative effects of the economic downturn, as many people have lost jobs, particularly in the construction sector, and we need this spending in order to bring back some amount of consumer demand. My view would be that the decision as to where the funds are spent should be ultimately decided by the responsible organisation, the NWA, based on the infrastructure needs. The NWA must be held to account to deliver work of high quality. Slipshod work is taking us back to an almost primitive state. We must as taxpayers, represented by the GOJ and the Opposition, demand that our tax dollar is spent in an efficient manner.

I am in support of the Minister of Transport in his bid to ensure that this programme is undertaken and that a proper multi-modal transportation system is developed. The JDIP will obviously form a critical part of that transportation system. For too long the people of Jamaica have been transported like cattle, instead of enjoying a decent and efficient way of moving around, starting from the disbanding of the JOS. This has been a failing of governments from the 1980s through to the present, with some amount of improvement coming during Peter Phillips' tenure as Transport Minister. Moving people around is essential for a vibrant economy, and Minister Henry's intentions must be supported for the good of the country.

Two JDIP arguments
There are two other points that have been made about the JDIP:
1. That the Road maintenance fund will not be enough to repay the loan. This is an essential point noted by the Auditor General, and needs to be addressed. I believe, however, that it shouldn't be addressed by slowing down the programme but rather consider the loan from a value added return perspective. The question is, will the programme allow for value-added to the economy that will justify finding the additional funds to pay back the loan? If the answer is yes, then as I always say, debt is always good up to the point where the marginal return equals the marginal cost; and
2. That there is an amount of approximately US$30 million to US$40 million to be allocated to management fees. Some have even suggested that this means that less money will be available for spending on the roads themselves as money will have to be paid for management fees. Well, I think that proper management of the project is essential, and if there is not proper management in place then the project should not go ahead. Without proper management we may end up with the same low quality of output we have seen in the past. What we must ensure is that appropriate, management is put in place and an assessment is done to ensure that the management fees are appropriate but it is better to have fewer well managed projects than more projects with a lack of proper management skills.

What is clear from the rains that we have experienced is that Jamaica's capital infrastructure is woefully lacking. If we are serious about achieving the mission of the 2030 vision, which includes the place of choice to live for families, then of necessity we must have a proper capital infrastructure. We cannot continue to have infrastructure where one has to be avoiding potholes, flooded roadways, roads without proper sidewalks for pedestrians, or the risk of a bridge collapsing while you crossit, or being cut off from civilasation because a bridge has collapsed and there is no alternative route.

My advice to those sparring about the politics of the JDIP is that the programme is necessary for the current economic state and Jamaicans generally. Let's not cause both to suffer because we see this as another political football. Please sit down and iron out the differences, and let us ensure that the programme goes forward in an efficient manner.