Friday, December 10, 2010

Jamaica's new growth path

MY main disappointment with the IMF projections is that there is no promise of a restructured economy once the programme is over. All it does is offer money to tide us over while the global economy recovers, and then we are back to the same old economic structure that caused us to be in the problem we were long before the global recession.

So the programme is counting on (i) improved tourism, remittances, and FDI inflows; and (ii) even more frighteningly that oil prices will be at US$83.40 per barrel in 2013/14. Yesterday oil traded at US$89.02 per barrel. The IMF projections are showing that oil imports will move from 14% to 14.5% of GDP. If one were to project today's prices to 2013/14, then oil imports would be 42.7% of projected imports in 2013/14 instead of the projected 40%. All projections are that oil prices should go beyond US$90 by the end of 2010, and surpass US$100 by summer 2011.

The other consideration, as it relates to any significant uplift from tourism, remittances, and FDI, is the current state of the US and global economy. If one looks at the market that supports our tourism and remittance inflows, it is not wealthy persons, but rather middle to lowermiddle income earners. I am not saying that these inflows won't improve, but certainly not enough to change our economic fortunes.

With respect to FDI, I am hard-pressed to see where they will achieve the levels we saw before the start of the recession, as global income and demand will remain subdued. Even with high levels of FDI, we have a problem with absorptive capacity, so that much of that investment will come in, spend a little time with us, and then go back out, unless we can change our social and economic relationships quickly.

Within the context of the global environment, I believe that commodity prices will cause inflationary pressures. This will be at a time when the US, egged on by the Republicans, is promising deep spending cuts come January 2011. In fact, a bill passed in the House last Wednesday has seen fiscal cuts, as the US faces a significant fiscal deficit and high debt levels. Remember that the only reason why the world did not sink into depression in 2008/2009 was because of the US stimulus. These spending cuts include a two-year year wage freeze for nonmilitary federal workers.

Add to this (i) the fiscal cutbacks in Europe and the looming threat to their monetary system, caused by the debt crisis of the PIGS; (ii) US unemployment rate increasing from 9.6% to 9.8%; (iii) Germany and Euro-zone economic indicators showing a slower than expected growth; and (iv) a very worrying increase in US consumer credit, when a reduction was expected. This shows that the recent improvements in the US economic spending may be because consumers are back to their old habits again.

So the consumers we are depending on for tourism and remittance inflows are faced with inflationary pressures, wage freezes, fiscal cutbacks, and are borrowing more again. What this says to me is that the risk of relying on these consumers is high, and could lead to vulnerabilities in our projection. And remember the job of managers is really all about managing and eliminating risk as much as possible, in order to achieve growth.

The implication of the above (oil price increases and the global economy) is that we must cause a change to the IMF projections, which includes an economic programme that includes much-needed stimulus funds, a focus on import substitution — in particular food imports through agroprocessing, and a focus on reducing fossil fuel consumption through renewable energy projects and an organised transportation system. The four critical ministries are Agriculture, Transport and Works, Energy and Mining, and National Security — or more specifically, the police.

Minister Tufton has been for a while promoting production in the agriculture industry, and the truth is that if it wasn't for this focus then Jamaica would have been looking at a much greater significant economic decline and aggravated social conditions. He must continue on his path, and I know he faces bureaucratic hurdles that are the bane of our economic development. I will say again that unless we address our bureaucracy, then we are going nowhere.

The next steps for Tufton must be to support the growth of the agro-processing industry, and I see he has been pushing for storage of excess production which is long overdue. I really don't understand why it has taken so long for us as a country to focus on this. Instead in the past all we have done is encourage farmers to start a new crop each year and what is excess belongs to the goats, cows, and pigs (not the European ones). Tufton must also push Minister Henry to provide adequate farm roads to ensure that the cost of transportation does not inhibit competition with the imported foods, and importantly get the Scientific Research Council to start making some significant contribution to the development of the industry.

Henry, I think, is one of the more organised and hardworking ministers, and I think he has been doing the best he can with the scarce resources and what we have as a road infrastructure. He must continue on this path but also must ensure that the JDIP road development is used to fix roads that add most to the value-added of economic growth. For example, we must be able to deal with a smooth flow of traffic in the corporate area, as the lack of this impedes productivity significantly. This, of course, includes a much more efficient public transportation system, where many challenges are faced and improvements have been made, but need to be done at a much quicker pace. For example, I would want to see the quick incorporation of the small operators into a highly organised transportation system. This would also serve the purposes of positively affecting productivity, significantly lowering the oil bill, and easing off inflationary pressures.

On the matter of energy, I think that much more (and at a faster pace) needs to be done with renewable energy. I wouldn't waste time arguing with the JPS, a monopoly that doesn't seem too concerned about the public interest, despite ads to the contrary. My focus would be first on breaking down the bureaucracy surrounding the solar energy loans through the NHT, and special loans to encourage businesses to move towards renewable energy sources. This combined with a more efficient and secure transport system will save the country hundreds of millions of US$ and, if implemented correctly, by 2013/14 alone will cause the elimination of the trade deficit, which the IMF is projecting will increase.

After my column last week, I don't think I need to say much about security and the need for the police to start influencing behaviour. We cannot grow an economy where indiscipline is rife, which as far as I am concerned doesn't take much to change. Just a little will. Look for example in New Kingston — where there is a police station — at the blatant parking violations each night.

Space does not allow a detailed analysis, as done in my book, but these are just some of the more important focus areas needed to ensure that we get onto a new economic growth path.


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