Sunday, November 28, 2010

Where does the economy go from here?

Last Saturday both newspapers carried reports that the IMF not only revised the growth target for Jamaica but pointed to worrisome signs of increased poverty levels and high unemployment. The IMF is reported as calling this a "worrisome trend". Now I find it incredible that only nine to ten months after the IMF programme is in place - not even the halfway mark — the IMF is expressing dissatisfaction with the way the economy has progressed. And yes, I understand about the Tivoli incident and Nicole, but these merely hastened the inevitable, in my view.

And here I was, hoping that all that I had said earlier about the contractionary effects of the IMF programme was wrong, for Jamaica's sake. I really had no problem being incorrect about my forecast if Jamaica would benefit, because I really have no desire to see Jamaica worse off just to prove a point.

But I really find it incredible for the IMF to come in, impose a programme on us, and then after 86,000 job losses and over 100,000 more persons dropping into poverty, to say in a very casual manner that something is worrisome. Anyway, maybe I am just overreacting as one who really cares about the Jamaicans who have to endure.

I do believe that a tight fiscal management programme is necessary, and everyone knows - after the lambasting received - that I support the debt restructure through the JDX. I also am very supportive of the policy direction that the Minister envisions for the fiscal programme and the macroeconomic indicators, because I believe that where he wants to go with the market is the right direction, and one which we have not seen in a very long time. He must be applauded. The problem is the technical implementation, and in particular the IMF programme, and its ignoring of the real economy and myopic focus on the fiscal side.

In a way we as a country deserve the IMF straight jacket, having for so long been borrowing to feed our stomachs rather than trying to nourish the whole body. So we are today paying the price of lavish living with other people's money.

However, an analysis of the IMF programme showed that there was not going to be any real structural change to the economy after the 27-month period ends. In fact the biggest positive for the fiscal accounts would have been done by the government prior to the programme, which includes the JDX, divestment strategies, and planned public sector rationalisation. Outside of those, the programme really brings no added benefits other than allowing us to get some money to "stop a gap". The irony is that even with the government having made the fundamental fiscal changes needed, it was still very obvious that we needed the money that would flow from the IMF programme. So I guess he who pays the piper calls the tune.

The programme relies on reducing the fiscal deficit from increased taxes, and containment of expenses. The problem is that the increased taxes come from anaemic growth of the economy, which I always indicated was going to be difficult, as I thought the global recovery would be sluggish; and from containment of expenses. The problem with the containment of the expenses is that it has a contractionary effect on the economy when the private sector is in retreat.

The other point about the programme is that while it projects a reduction in the current account deficit, the trade deficit is expected to worsen. An integral part of this worsening is that it projects that oil imports, as a percentage of GDP, will move from 14 per cent to 14.5 per cent at the end of the programme. The reliance, of course, is on tourism, FDI, and remittances. So it really does not appear to project any needed structural changes to the economy. So after we have finished paying back the IMF we will have the same economic structure that caused the underlying problems we had with the economy just prior to the recession.

Well, not really, as the latest economic numbers released by the PIOJ show that there have been some positive structural shifts, as follows, which hopefully will bear some fruit if the social and bureaucratic changes are made:

o The areas of growth - agriculture, tourism, and mining and quarrying - are all either exports or import substitution. It is good that the export sectors are starting to grow before the rest of the economy, as hopefully we will start to take the lead from exports rather than consumption as we grow;

o Although agriculture has been growing consistently, the number of persons employed in the sector has been declining. This suggests, on the face of it, that labour productivity in the sector is increasing; and

o The free education and health policies have had a positive impact on household expenditure.

A close examination of the Human Development Report also shows that there was no significant improvement in Jamaica's HDI conditions, despite the PIOJ's press release that Jamaica improved as it moved from a ranking of 100 to 80. The fact is that six regional countries that usually rank above Jamaica were not measured; the total countries ranked fell by eight; and more importantly Jamaica's ranking did not improve because of HDI advances but because the other countries declined. So it's the case of the best worst.

One of the positives from this, however, is that despite the global recession, the government managed not to be as bad as other countries and seemed to do a relatively better job at containment.

So where does the economy go from here? I don't expect the local economy to improve in any significant way in the near term, and it still faces significant structural risks. I believe that there will be an improvement in our exports, and while consumption will remain subdued I expect that the trade deficit will worsen. This will be caused by increasing oil prices as the global recovery chugs along, which will also bring inflationary pressures.

Any recovery will not see the jobs coming back to where they were before, unless we make some bold decisions about our policy initiatives. I am not going to be specific about what policies I think can be implemented to cause this employment uplift (because of space constraints), but they include renewable energy, agro-processing, and a change in tax policy.

In writing this I really don't expect that anyone will take note, as I have been saying much of this for a while. But they say a prophet is never recognized in his own country, to use a metaphor, never in any way suggesting that I am a prophet. Far from it.

But at the end of the day my satisfaction is that I get to vent through writing.


Parag said...

Its the responsibility of the government here to support monetary policies to start any sort of improvement in the economy.
Did the recession end

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