Friday, January 29, 2010


THE inevitable debt rescheduling is upon us in the form of the Jamaica Debt Exchange (JDX), and is a welcome attempt to resolve the burdensome debt that would have led to Jamaica's continued suffering. While some of us may argue about the structure, and what we might or might not have done differently, one thing for sure is that the government must be commended for such a bold decision.

Let us understand, though, that the JDX is only the first in a series of steps that must be taken if we want to get to where "X" marks the spot on the treasure map of success. Like all treasure maps, there is a certain pattern and direction in which the steps are to be taken to arrive at the precise location of where the treasure is hidden.

The JDX is nothing but finding the map that will lead us to the treasure. It has added to it the fact that our path is now blocked by hostile forces that will only allow us to pass if we find the treasure. Our failure to do so will no doubt lead to an inescapable death, as we will have nothing to barter with for our lives. In short, the step that we have taken has set us on a path of no return, which we can only survive by taking the necessary steps to achieve the economic success that has eluded us for so long.

It is obvious to me what needs to be done in order for us to achieve that success. As I pointed out in my book, in April 2009, the only chance of seeing development in this country will have to come from "a much needed paradigm shift". That paradigm shift has not happened yet, and has only been started by the JDX. What policies are put in place will determine our progress along that much-needed seismic shift, which will only be truly complete and sustainable with a reform of our constitutional political system.

So now that we have turned the wheel of the car in the direction of the right path, we now have to keep the car on that path. Of utmost importance will be fiscal management. This will make or break the developmental structure we are trying to build. There can be no more "run with it" if we are to reach the Promised Land, because we have "sinned" so many times along the journey that there is no more forgiveness to come.

I reviewed the numbers in the economic programme, and if one does some projections it shows the significant challenges that face us down the road.

Based on the government projections, it is easy to compute that nominal GDP is expected to be $1.581 trillion in 2014. This means that based on the government estimate of a 120 per cent debt/GDP ratio by then the debt stock will be $1.898 trillion at that time.

The economic programme also provided the projected fiscal balance and primary balance percentages of GDP. We can compute the interest costs from that, which would see us having a fiscal balance of -$11 billion and a primary balance of $144 billion in 2014. If we assume that public sector wages are kept at the same figure for the next four years then we can also impute the following:

* While expenditure on programmes and capital expenditure will move from $129 billion in 2010 to $205 Billion in 2014, in real terms the 2014 spend will actually be less than currently, at $124 billion. This implies a much reduced state, which can be good if the state moves to the role of a facilitator of development rather than continuing to intervene. On the other hand, if it is not implemented properly we can end up with a much weaker state.
* If public sector wages are representative of the total wage bill in the economy, and wages are kept at the same figure over the next four years, and assuming we have steady employment, the real purchasing power of consumers will decline by an accumulated 34 per cent over the four years. This has a negative implication for businesses, and means that there will be less vibrancy in local business activity and an increased focus on external markets. This will mean that while the country may meet our earnings targets, we will create a greater disparity between the higher and lower income classes, which may lead to a further decline in the middle class. This will have to be guarded against as it is not good for development for this to happen.
* These numbers also show that over the next four years government will still have a need for financing, even though interest as a percentage of revenues is projected to come down from 53 percent in 2010 to 33 percent in 2014. The numbers also show that consumer purchasing power is expected to decline, which means that government funding is going to be primarily through company taxes and external funding, as consumption taxes will almost certainly underperform those. The implication is that the standard of living will decline for most.

From where I sit, and looking at this preliminary and brief analysis, it is not going to be an easy road. But government is going to be hard-pressed to ensure that the disparity in income is not too wide as this could lead to social conditions that we want to avoid. Government will also be tempted to raise taxes but must of necessity tighten its belt just like the consuming public; otherwise the extraction of more from less will result in further hardships.

One other spin-off from this is that local capital is going to be eroded and we will have to rely on foreigners to invest, if we are to see any substantial increase in economic activity. Lower interest rates will have the effect of making sectors more competitive, and will create opportunities in other sectors, but will not by itself spur investments. Investments depend more on predictability and the ease of capital to go to work. Therefore while the country embarks on the new economic programme, an essential ingredient of that is the significant reduction and control of crime and bureaucracy, in addition to maintaining low inflation levels.

There is a lot more detail that can come from this analysis but space does not allow it. Suffice it to say that the path of no return we have just started will not be

Saturday, January 23, 2010


THOSE of us aware of the way some universities name their courses will be familiar with the use of the term 101 to refer to beginner courses such as 'Economics 101' etc. Similarly in Jamaica we could easily create another course and sell to the globe (if anyone wanted it). That is 'How to destroy a country and brand 101.'

This is evident in light of the recent report in the Sunday Herald that the decade 2000 to 2009 was the bloodiest on record, with over 13,400 citizens over the period, and 2009 being the bloodiest year on record with 1,680 murders committed.

This is a stark contrast to the country that gained independence in 1962, that grew at an average of over six per cent per annum in the first decade of new nationhood, and that Lee Kuan Yew came to visit in the 1960s as an inspiration for the development of Singapore. So I think that we are more than qualified as a country to teach this course.

The ingredients
To start with, you need to have a country that is considered the jewel of the Caribbean, with a lot of hope and promise, and a lot of natural resources that would be the envy of any other island. The country would need to be capable of achieving great heights and brand recognition not achieved by many countries many times its size and population. Some of these attributes include some of the best beaches in the world, bauxite, some of the best agricultural products, the world's best athletes, inventor of reggae music, and world- renowned artistes such as Bob Marley. The country also includes a people who are amongst the most talented and warmest in the world, and a resilience unmatched by any other.

Next you want to be able to wrest that gem of a country away from the wicked imperialists and give it to those who served at the feet of our former great house masters as the house servants. Allow them to write a constitution, and create a political system that is more in favour of power for the political party than for the people.

Of necessity, also, we must have a people with a relatively high illiteracy rate, who are willing to murder their own for a box of beer and a plate of curry goat at election time, every five years. This is easy if they are kept poor enough, and cordoned like cattle in places called garrisons. You also have to ensure that the health and education systems are inadequate so that the masses are kept unhealthy and uneducated, thus ensuring their loyalty to the providers of the curry goat they are fed every five years.

And there are some other necessary ingredients that cannot be left out. These can be listed as:
1. A police force that is built on political interference and up until recently has never been allowed to do what is necessary to clean up itself. The police force must also be allowed to oppress the rights of the citizens who live in the garrison communities, mainly so that they recognise that they remain nothing but pawns in the greater purpose of the country's destruction;
2. Maintaining a political system that ensures that the representatives elected by the people are more loyal to the political party than the people who elected them, thus ensuring that democracy is really a sham; and
3. A middle class and private sector that are not interested in the country's development. Where there may be a few who are really interested, make sure that their efforts are stifled by the many.

When all these ingredients are present, one will have the perfect recipe for destroying a country and brand. What you will have to do, though, is ensure that these ingredients are blended together correctly and consistently applied, for example, over a 47-year period. If this is done correctly then I guarantee that even with the abundance of natural resources, the close proximity to the world's largest market, the excellent individual achievements of the athletes and artistes, and the resilience of the people, the country and brand will be close to annihilation.
You are guaranteed to create an atmosphere where differences between the people are not created by intellectual discourse but by where you were born, or the colour of your party. I guarantee that you will have a country that will be seen as a basket case by the rest of the world, and one where the people will not be allowed to travel freely, as they will need to have permits called visas.

To top it off and make it seem legitimate, you would have to bestow titles of honourable on those responsible for killing the country and its brand.

Other noteworthy mentions
I must applaud the efforts of the police, and in particular Acting Commissioner Ellington, for the sustained efforts on the road and the push to clean up the police force. This is the first step in trying to tame the crime monster, and the high level of murder in 2009 must not be seen as a failure of these policies. The country's law and order has been compromised for a long time and it will take some sustained effort to recover it.

What the police must be careful of, though, is not to confuse effort with success. The police recently published a list of the number of guns recovered, operations carried out etc, and claimed success. I am sorry to inform them that that is not success. It reminds me of a statement by a friendof mine that a particular financial institution was doing well because the asset base had grown considerably, and I had to point out that success is profitability and equity. Similarly, success for the police will only arrive when public law and order is restored and the number of murders has been significantly. In fact the police would be more successful if there were no operations carried out and crime reduced. That would speak to greater efficiency.

The police must be encouraged to continue their efforts and ensure that the rights of citizens are maintained.

The other point is the practice by a major retail outlet, Pricesmart, to have the security give/collect the parking ticket and also manually lift the heavy metal barrier for each vehicle, which must amount to hundreds of times per day. Apart from holding up traffic this practice seems almost inhumane to the security guards, although it must serve as a weight-training exercise for them. It would seem to me that a better way is to adopt what is done at MegaMart where the security post is covered and they have a remote-controlled gate. It really can't cost that much to follow MegaMart's example.

Wednesday, January 06, 2010


FINANCIAL analyst Dennis Chung says that Jamaicans have been taxed an additional $115 billion over six years to grow the debt and not the economy.

He told the Observer's Monday Exchange that these new taxes only fuel government's ability to borrow for succeeding fiscal years.

"The budget imposed an additional $115 billion in new taxation cumulatively over six years (between fiscal years 2003/4 to 2008/9). Has that generated any growth or development? No. What it has done, however, is ensure that we borrowed an additional $234 billion in debt," he told journalists and economists at the Observer's Kingston head office on Monday. "And I put it to you that the only reason we were able to collect that $115 billion was because we borrowed that money to put in the economy."
The cumulative taxes represent a similar amount, which the government hopes to borrow from the International Monetary Fund (IMF) this year.

Chung's argument is that new taxes within an already declining Jamaican economy are more likely to shrink the economy and lead to lower tax revenues rather than increase it.

"Everyone knows I am against additional taxation. The very nature of tax is non-productive, I can't imagine anywhere else in the world where you're trying to develop the economy, a shrinking economy, and you throw more money out of it."
His analogy was a half-empty glass that leaks from the bottom but is also skimmed from the top "and you expect it to be full. It cannot work".

Empirically, the evidence does not support a taxation model, he reasoned.
"Certainly when the US tried this approach in the 1930s it led to the Great Depression. Other countries which have come out of the recession have not come out through increased taxation, but reduced taxation," adding that governments have increased public spending and deficits.

Chung who is the author of Charting Jamaica's Economic and Social Development -- A much needed paradigm shift wrote in his column that the economy needs to be stimulated rather than taxed.

"Unless that is done then I am almost certain that we will be speaking about the same issues next year, only from a worse vantage point. A year ago I had told all who criticised me for saying we need to look at restructuring the cash flows re the debt that we would be talking from a worse position a year later," he said.

Chung who is also an Observer columnist, added in his Christmas day article that "if the rate of taxation were to be reduced by two per cent, at a multiplier effect of four, then the government could in fact collect marginally more tax than is currently the case".

The logical solution, he wrote, was to withdraw the government's influence on the economy in the form of taxes and the bureaucracy; and second, improve the multiplier effect by introducing fiscal measures that will increase confidence and the economic outlook.

Prime Minister Bruce Golding announced his fourth tax package for the year on December 23rd. Government is seeking to raise $21.8 billion -- annualised -- to close the gap in the budget as a result of the economic downturn affecting small and large economies worldwide. Budgetary support of US$1.3 billion is also being sought from the IMF, and the Opposition has suggested that the new tax measures were part of the IMF conditions.

Included in the new tax package is increased GCT from 16.5 to 17.5 per cent, but for goods and services supplied by the tourism sector GCT will increase from 8.25 to 10 per cent effective April 1, 2010.

Golding said that individuals earning incomes above $5 million annually will be charged increased rates of income tax from January 1, 2010, to March 31, 2011. The new rates include: no tax on salaries under $441,168; 25 per cent on salaries up to $5 million and 35 per cent over $10 million.

Also Jamaica Public Service (JPS) residential customers, effective January 1, were to pay 17.5 per cent GCT on electricity usage that exceeds 200 kilowatt hours per month. The measure was expected to earn the Government revenues of $1.2 billion.
A reviewed package was announced days later requiring the JPS customers to pay a special 10 per cent GCT on whatever electricity they use in excess of 200 kWh each month. The adjustment is now expected to yield $1.45 billion.

Subsequently, JPS notified the public that it would not be able to collect the tax until its billing system could accommodate it. They are targeting a start-up date in March to implement the tax.

Friday, January 01, 2010

What power, what glory?

AS we go into 2010 it would suit us to remember a song from one of Jamaica's greatest singers, Ernie Smith. He released "We de people/the power and the glory" in 1976, and these words ring true today more than any other time, as if he had some prophetic vision of what Jamaica would become under our political system. Or is it that the same culture existed then? I remember the state of emergency at the time but was too young to really appreciate all that was happening.

I also remember the 1980 election and the celebratory sounds of gunshots that rang out throughout Kingston when the sun started to go down. It was indeed a period of change in Jamaica that we never seemed to capitalise on, as many other countries have done, as we find ourselves back in the same quagmire of tribalism as in 1980. So for Jamaica it always seems like an everlasting state of deja vu.

Words ring true
Lines from Ernie Smith's song include the following:

* "As we fight one another fi the power and the glory, Jah kingdom goes to waste and every drop of blood we waste a fi wi own disgrace"

* "We the people want to know where we going...we have too far to go not to

really know just how we getting there and if we getting anywhere"

* "We have too much to change not to know the range of possibilities and changeabilities"

* "Can't build no foundation pon a if nor a but. Are we building a nation or are we building a hut? Can't build no dream on a fuss nor a fight"

These lines aptly describe how Jamaica has progressed over the years and the fight between the two political tribes, who seek the power and glory of a sinking ship, quite content with being the captain when it is at the bottom of the ocean.

Realising that the ship (Jamaica) will eventually sink to the depths of poverty and the point of no return if we continue, I have to ask, what power and glory is there in a damaged nation? What power and glory is there in seeing our people continually suffer? As far as I am concerned there is none, and we need to realise that when the Jamaican ship goes down the half with PNP or JLP won't stay afloat while the other half sinks. This is physics, as my son would say.

A lot of the blame must rest with our citizens, however, who would rather discuss their disgust on verandahs while showing hypocrisy in public. So one reader writes to chastise me for "insulting" the Jamaican people in my last column when I said that as usual they focus on the wrong issue regarding whether to tax the rich or the poor, when what really needs to be discussed is the effect of taxation on the country.

This is nothing but an escape from reality, which as a people we have perfected as illustrated by our ability to profile in the latest cars, clothes, and attending the most expensive events even while we are overdue on our credit cards or other loan payments. As I said to Bev Manley in November 2008, as a country we would not deal with the effects of the global financial crisis because politics would take precedence over the needed debate on how to move the country forward. So instead of planning how to chart the country's progress in 2009, our discussions focused on elections, nailing corrupt individuals, arguments about sexual orientations, and whether the government was meeting its timetables or not. Even now we refuse to focus on the real issues before us. It seems we have lost the capacity to do so, or could it be a deliberate strategy?

Inevitably, in our quest to victimise each other we end up hurting everyone who lives in Jamaica. There is no way the rich can get richer if poverty increases and there is no way the poor can improve if the rich are targeted.

Facing reality
So in response to the reader, the argument is not whether Jamaicans felt insulted or not; it is whether it is true or not, and on that I think I stand vindicated. In order to solve a problem we first need to admit we have one. And we are a country that prefers "suss" over facts.

This article really has nothing to do with economics, or numbers, with which people relate my columns. This is because, as I concluded in my book, the real problems Jamaica faces are social, as it is the accumulation of behaviour that determines what happens in an economy. We cannot debate the balance of payments or fiscal accounts without understanding the behaviour that causes the deficit in these numbers. Economics is about behaviour, and economic theory assumes that social behaviour is not in contradiction to development.

So as we go into 2010 we must realise that it is irrelevant what policies or taxes are put in place if we cannot address the issue of disunity. If anyone can identify a country that is as tribalistic in their politics as we are and has achieved economic and social development, then I am willing to learn, but frankly I can't recall any. What I see on CNN of these countries, on the contrary, is constant warfare between their citizens.

As an example, it is my view that what drives our high interest rates is the risk to investment that arises from our crime rate and bureaucracy. That is, investors are more concerned about uncertainty and risk in an economic environment when determining whether to invest, rather than the level of interest rates. Return on investments will always adjust to the cost of money in a predictable investment climate, and interest rates will eventually come down if this risk is removed.

So as a country we need to determine where we want to go, not where we want our political party to be in relation to the other political party. We need to fully understand that when the PNP side of the ship goes down the JLP side goes down with it also. When we understand this, then that will be the point at which we start to develop as a nation. The IMF agreement will not help if we fail to understand this basic concept of community and nationalism. And more importantly, we will never see economic or social development without it.

For 2009 my personality of the year is the Jamaican people for enduring the ravages of the global financial crisis and our own self-imposed destruction through our tribal politics, practised more by the followers than by the politicians.

I think I am getting to the point where I have to assess whether or not it makes sense to continue to contribute to economic commentary in Jamaica, as it does not seem to make a difference in the ever downward spiral Jamaica continues to face. Until then I have to ask, what power and what glory are we fighting for?