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.

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