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.


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