Friday, December 30, 2011

Why the JLP lost–a lesson for governance

I have been seeing some of the comments by the young labourites. They range from sadness to anger and results a lot in accusing the PNP of vote buying and ballot stealing. I am almost pretty confident that both sides may have sought to engage in these nefarious activities but even if there was some of that it did not affect the results.

I think the PNP gave a solid whipping to the JLP, and there are reasons why. Primarily amongst them is that the JLP, from around two years ago, started to lose touch with the people.

When then PM Holness announced the election I said to supporters of both sides that the PNP would win the election. As far as I was concerned, the PNP was working the constituencies for far longer, there were outstanding issues in the IMF and JDIP, I think more time would be needed for the people to warm up to Holness, and an election between xmas and new year was not going to upset people’s vacations (low turnout). A low turnout is always good for the PNP because of their larger and more committed base.

It is important to remember that economies and people are primarily motivated by micro issues, and not the macro, and so the idea of the IMF programme achieving the macro targets and no consistent stimulus package being put in place, was bound to result in job losses that caused the major swing in apathy from the JLP.

As I consistently said, the IMF programme was pro-cyclical and resulted in economic contraction further than what was necessary and a big part of the contraction resulted from the tax packages.In other words too much fiscal focus.

Combined with this was public sector salary and pension issue, which created much isolation, and this combined with the economic decline / job losses from the global effects, resulted in a growing resentment of government, especially when unnecessary expenditures were reported.

The Holness factor helped but this was wiped away by the poor campaign by the JLP, especially when compared against a better one by the PNP and a PNP manifesto that communicated better despite continuing less details. Remember Jamaicans don’t read much and so the shorter pictorial PNP manifesto communicated better. The PNP also presented a younger team (even if it just perception) and the JLP focused on a younger leader, while in error focusing on attacking PSM. Add to this some slip ups during the campaign.

So in the end the people either voted against the above or didn’t vote because of it. It is important to understand that economies and people are driven by micro issues, which also means that with a more aware, and jobless, citizenry, the election would have been won by the attention of MPs and candidates in the constituency.

In the end it boiled down to the PNP having a closer connection with the people and running a better campaign, which in the end was a more positive campaign on issues than the JLP’s. So it is not that vote buying or anything like that lost the election. The answer is in the mirror.

This is also a lesson for anyone that governs Jamaica from now as Jamaicans seem to vote a lot more on representation rather than national issues.

What is necessary in 2012

AT the time of writing the polls have not opened as yet. But whoever forms the next Government will still be faced with the global and local economic challenges in 2012.

Globally we can look forward to the following:

* Much weaker Europe, and an overall weak global economy;

* Oil prices I expect to continue their upward trend;

* Inflationary pressures, as governments seek to avert economic downturn by expanding money supply; and

* Consumer spending to see some recovery but remain relatively weak when compared to pre-recession levels.

Locally, I expect that these global factors will have an impact, at least in terms of limiting our earnings potential. The truth, however, is that much of what happens to Jamaica in 2012 is going to depend on the policies we pursue.

One of the things that we must start to understand is what drives economies. In other words, as I said last week, the first question that should have been posed to the candidates in the recent debates was, what is your explanation of the problem? It is a simple question, but the truth is, unless we understand the problem then we can never find the appropriate solution, and I think that this is what has escaped us for years, if not decades.

I do not think that we have an understanding of what our real issues are. Our inability to define the real problem Jamaica faces has caused us not to grow this economy in any meaningful way since 1990.

I have long said that economies are nothing more than the behavioural interaction of people, as they go about their business of satisfying everyday needs and wants. It is important to understand the link between Mazlow's Hierarchy of Needs and economics.

As people satisfy more and more of their basic needs, they move towards economic activity that leads to self-actualisation. And the price of self-actualisation is higher than the price of basic needs. So it stands to reason that the more satisfied people are, the higher the value of expenditure, which will lead to greater economic expansion.

This is illustrated by countries like the US, where as more and more persons become wealthy they start demanding products that cost more. This means that manufacturers of goods and services can increase revenues, and also more business opportunities become available. The trick to this expansion is that it must be done from earnings and not from debt, as the US found out in 2008, and this is what contributed to our problem. Otherwise, the whole house of cards will come falling down.

It is this lack of focus on the consumer that has been at the heart of Jamaica's failure to achieve sustainable economic growth. An examination of our policies over the years will reveal that we have focused on the fiscal accounts or growth without earnings. In other words, the central focus of government policy has been either growing consumption with debt or taxing Jamaicans every year to stabilise the fiscal accounts.

The fact is that this approach will not work, and it is important that going into 2012, whoever forms the Government understands this. Moody's has indicated that the policies of the Government must continue in 2012 if we are to maintain their rating, and we could see improvement if we continue the policies. While Moody's is generally correct, there has been a missing ingredient in our policy that is working against greater economic success. This is what has always been missing from as early as independence.

We have failed to recognise the importance of the consumer to the economy and so have failed to realise the sustainable growth that we need. We have praised economies such as Singapore and the US, and have held them out as models that we need to emulate. But what we have failed to understand about what makes these countries great is that their primary development focus is centred on protecting the individual rights of citizens (from other citizens and the state) and ensuring that everyone has access to the same opportunities. This is, fundamentally, all we need to strive for, and the rest will follow.

If we ensure that (i) citizens' rights are protected, (ii) everyone has the best opportunity to succeed (which includes access to education and health), and (iii) discipline and structure are enforced, then I guarantee that the economy will see unprecedented growth and development, as persons move from the lower rung of Mazlow's Hierarchy to the top.

If this is done, then the market will drive greater innovation and value.

However, as I have long argued, in a stagnant environment just coming out of a long recession, the market needs a push. This is where Keynesian policies must be pursued, and is why the IMF agreement was pro-cyclical. This is why stimulus projects (whether you call it JDIP or JEEP) are important, and necessary. What we must ensure is that they have the necessary parliamentary oversight for transparency, but even more important, I think they must provide the maximum benefit to the economy. My preference is a focus on infrastructure and renewable energy projects, for the maximum benefit to be derived.

It is important that people have meaningful jobs. Jamaica's unemployment numbers from even in the 1960s reveal the lack of focus on full employment as a government policy.

So as we go into 2012, with a newly formed Government, we need to try a new approach. We need to put the individual rights and opportunities of the people at the centre of our policies. We must focus on employment opportunities as a part of that.

We will never achieve the development we want without this, because if people are always concerned with justice and red tape, then there is no room for innovation and they will remain at the bottom of Mazlow's Hierarchy, which is where underdeveloped economies find themselves.

After 50 years it is finally time for us to break away from the colonial structures that seek to protect state against subjects and truly make the citizen the primary focus of our democracy.

Wednesday, December 28, 2011

Go out and vote

Tomorrow is election day and I just wanted to ad some thoughts after observing what has been happening over the past few weeks. I have observed the accusations and the fanatical way in which our young persons in particular have approached our politics, and am not feeling good about our youth.

I am not speaking particularly about the candidates but rather the supporters, who when I look at the FB posts and comments I find it disheartening as the comments are really not about the issues but the attacking of personalities. When will we get away from this sort of politics. Maybe I am idealistic but I believe that Jamaica deserves better than this.

My message to everyone is that you should all go out and vote, as it is not only the most fundamental democratic right that our forefathers gave their lives for in some instances, but is also a responsibility to your country. Anyone who ignored this responsibility and either didn’t enumerate or doesn’t plan to vote I think it is a betrayal to democracy.

I would never tell anyone who they should vote for, and do not want to have a conversation on that, so if there are any comments on this post then please do not introduce any tribalistic views. They will be ignored but I would love any comments on the issues, which I will entertain that discussion going into tomorrow if I can help to clear up any thoughts anyone has.

When you have privately thought about the issues please go out and vote, as it is a responsibility we have to our country. And vote on what you think is best for you and your country.

I personally am tired of the tribalistic approach, as whichever party forms government at the end of the day it is our government if we call ourselves Jamaicans and whoever is elected government on Thursday should get the support of everyone because I do not know of any part of Jamaica that will sink while the other part stays afloat.

The competitive nature of election is good because it helps to preserve our democracy but when it is over we need to move forward as one country, and make for a better place to live for all.

Friday, December 23, 2011

Do you know where you're going to?

Do you know where you're going to?

Do you like the things that life is showing you

Where are you going to?

Do you know...?

— Diana Ross, 1975

We could ask ourselves these questions after we listened to all three debates and digested the manifestos, leading up to the election on December 29th. Indeed these questions are critical ones we need to answer before we place our "X" on Election Day.

This is one of the disappointments I had after the debates, as they seemed to be anti-climatic. True, they got progressively better, starting with the disastrous youth debate, but can anyone honestly say that after listening to the debates we know where we are going to?

What we know after the debates is what we knew before. We know that it is necessary for the country to maintain its fiscal discipline and extend the IMF agreement; public sector, tax and pension reform is going to be critical going forward; there must be a real focus on quality and access to education; there must be continued focus on governance and corruption; energy costs must be reduced; bureaucracy is a major inhibitor that must be addressed; the justice system needs to be reformed; the debt and productivity issues must be addressed.

Prime minister Andrew Holness and Opposition leader Portia Simpson-Miller during the leadership debate on Tuesday.

We knew all that before the debates and it seems as if that is all we still know after. One of the major problems is that the Debates Commission did the country a disservice with the format of the debates, which they tried to correct in the last one (which improved it somewhat). The fact, though, is that it didn't seem as if the debates were designed to unearth any additional information and direction for Jamaicans, but were designed just to appease the need for debates to be held. So I would think that more blame for the failure is at the feet of the Debates Commission than the participants. After all, the participants only answered what was asked and didn't have to worry about much follow-through because of the format.

So as a country we need to seek our answers elsewhere. Let me pause to congratulate Peter Bunting and Danville Walker for hosting their own local debate, which is a really progressive move.

I think we could get more information from the manifestos, which give a pretty comprehensive view into the thinking of both parties. And both parties must be congratulated for coming out with such comprehensive documents in such a short time, as both do show a clear understanding of what the issues are and lay a foundation for more specifics.

They do attempt to answer the question posed above, that is "do you know where you're going to?" They do include very detailed descriptions of where they want to take the country, by looking not only at general policy issues but some specifics as to what is to be done to achieve those policy objectives. I think the JLP document includes more specifics, but the PNP document communicates better and emphasises more consultation.

The JLP places greater emphasis on private sector-led growth; as opposed to the PNP that emphasises more government-led growth. Interestingly though, on the important matter of energy, the JLP seems to prefer a more involved state solution unlike the PNP that emphasises a market competition model.

Even so, I feel that neither document directly addresses the real structural issue with the economy but does so in a roundabout manner.

So if the time spent on the debates had been spent focusing on analysis and discussion of the manifestos, it would have had greater benefit to the understanding of where both parties want to take us. The truth is that there is not much policy difference between both parties, as is expected because our options are very limited, and so what is important for us to understand is who can better take us to our goal, as we have suffered in the past from an almost deceitful relationship of broken promises, much like a dejected spouse.

This takes me to the main criticism of both manifestos. They are too long and because of this length they fail to communicate an overarching vision to the electorate. Their failure to provide an executive summary has left the reader without a framework of the vision of the manifestos. They seem to be an attempt to provide something for everyone, and so have talked about everything under the sun in the attempt to satisfy everyone. But by doing so they lost the direction and emphasis of the policies.

So the manifestos do a better job of telling us where we are going to, but because of the disorganised presentation and the amount of information, we are not sure of how we will get there.

What was needed was a statement of general objectives, which the PNP document sought to do, but this should be around a central theme of development. And the documents did mention the main areas of focus at the start, but the way the rest was written veered from the stated emphases. In other words, if they were answering exam questions the body and conclusion of the answer would not connect with the introduction.

This is not difficult to correct, however, and it would be a good strategy for both parties to summarise the main points and present them to the electors, who are more concerned in this election about "what are you going to do for me?" than "what have you done for me lately?". The latter seems to be where some of the old-style politicians want to focus - including the awful youth debate, which surprisingly had more old-style politics and inaccuracies than the two latter debates.

So since the debates have failed to deliver, my suggestion is that we go to the manifestos, which provide a lot more information and only need some more attention paid to wading through much of the unnecessary and repetitive content.

To all my readers, have a happy holiday.

Thursday, December 15, 2011

PNP manifesto analysis

I have been asked to provide a brief analysis on the PNP manifesto by a few of my FB friends, and so will attempt to do so below. It of course requires further discussion and hopefully some of that discussion will take place on this post so that the issues will become a lot clearer. I only have 2070 friends so it may be worthwhile if everyone could share the discussion with your friends so that it can be far reaching.

Let me first start buy saying that it is encouraging that so many persons seem to have taken an interest in what is being proposed.

All in all, and given the timeframe of the election period, one could say that this document is a fair response. The fact is that there was not enough time for a more comprehensive document as elections are just around the corner, and I suspect that the PNP wanted to get this out prior to the Finance debate, as strategically it sets up the expectation of the debate and makes it easier to communicate for Dr Phillips. This is why a fixed election date is good, so that the process of consultation in campaigns can be longer and bring out more. It does show that work is happening, although I think that greater thought could have gone into the document.

There are some stronger areas, which show the strength of the spokespersons, such as Energy, Foreign Affairs, Education, Agriculture, and an understanding of the economic challenges. The policies do not seem to be inconsistent with the current administration, as expected, as there are really not many options available to whoever forms government. Will be interesting to see how the JLP’s compares, as I don’t expect much policy variation, which is why details on implementation is important. So we could end up at the same place if we do not have those details

I will also do the same synopsis of the JLP manifesto when it comes out.

My comments are listed as follows:

  1. Our Mission: this gives  brief overview of the manifesto contents, and this and throughout the manifesto shows that the PNP seems to have a clear understanding of the issues that face the Jamaican people. It however does not in my view represent a mission but seems more like a summary of the views contained in the document and seems more like an introduction than a mission. This sets the stage for the rest of the document as it does not clearly define a mission, which is the first problem.
  2. Foreword: sets out the PNP’s understanding of the challenges that lie ahead, and it is obvious that they are at one with the “bitter medicine” ahead that was sated by the Prime Minister. There is therefore an actualization by both parties that 2012, and the foreseeable future is going to be difficult for Jamaica. One would therefore expect that the document will continue to define what the “bitter medicine” will be, as the JLP also needs to do, so I will look at the contents to see if this “bitter medicine” is defined, as once you set up this type of expectation it is necessary to define it for the people if they are being asked to sacrifice.
  3. Eighteen Steps to Full People Empowerment: this section does clearly set out some of the policy options that need to be undertaken, although I do not think that these will lead to people empowerment. People empowerment in the context of Jamaica is much more than setting out these policy objectives. In fact rather than “steps” to empowerment these seem to be statements of intent. Steps imply a path, but this does not seem like a path but rather a focus on the destination of the steps. The section does provide a good summary of what needs to be done, but is missing the most important thing in relation to the “empowerment” theme, which is the assurance of justice and equity. For example, what is the assurances that the rights under the Charter of Rights will be respected and that people won’t have to go to court to fight it? The most important aspect of empowerment for people include, in addition to justice, proper health and education access and facilities, but this is not mentioned in this empowerment section.
  4. Current Economic Position: the following are noted:
    1. Shows understanding of the challenges that Jamaica faces, but does not mention what I think is the primary problem, that of the Balance of Payments, which is impacted by productivity and competitiveness. There is a need for a credible medium-term economic programme, as indicated by the IMF. Will see if further that programme is provided in the document since it states the necessity for one to deal with the challenges ahead.
    2. My own view is that the debt is NOT the central problem facing the government, and is only a symptom of the underlying problem. This seems to be the same focus on the fiscal as in the current IMF agreement, and the danger of this focus is that it ignores action on the underlying problem. This therefore suggests an agreement with the current fiscal focus.
    3. Statement about what is required for a credible macro-economic programme continues to speak to a focus on fiscal and expenditure management. I would have thought that this statement would have included importantly reference to the JEEP (government stimulus) as an important characteristic, as the other things to be taken into account are not as important for economic expansion. Tight expenditure and debt ratio focus are both contractionary effects; and increased support from partners seems a contradiction in the face of the admission of the global crisis, as grants have already been underperforming and will continue to do so. It would seem that the “self-reliance” talk of the 70s would have been more appropriate. Agree 100% about the tax system and the corruption and waste.
    4. Following paragraphs criticizing the JLP seems like wasted space, and tends to lose the reading flow from the party’s intent. I don’t think that a manifesto should include criticisms of the opponent but just focus on what the author intends to do. Leave that other part for the political platform and ads.
    5. The opening of the plans and strategies does recognize the need for a mix of fiscal responsibility, growth strategies, and consultation. All are very important to move forward.
    6. Correct that a new medium term IMF agreement is needed. Would have loved to see mention of whether an extended fund facility or standby agreement is needed, and what are some of the things that will be sought in this agreement. Don’t expect specifics as it is a negotiation and therefore understand the need not to say too much on this
    7. MOU with public sector workers did not work before and certainly is not what is needed. Consultation does need to happen but needs to be focused on productivity improvements and how to best reward productivity.
    8. The tax reform statement shows that they are consistent with the current tax reform paper, which in my view is not adequate. The aim of tax reform must be primarily stimulating the economy. After reading this I get the impression that the focus will be on fiscal – “widening the tax base”. I might misunderstand but it needs further clarification, so I will give the benefit of the doubt and say that the intent is for economic stimulation, but it needs further details.
    9. Agree that programmes like JDIP and JEEP needs to be on the budget, and also needs parliamentary oversight, which I would think should have a parliamentary committee that oversees massive programmes.
    10. I don’t like government identifying sectors for growth. Sounds too much like a government controlled state, which we have always been. Don’t discriminate by providing incentives to some and not the others. The market will pick the winners if the proper environment is created. The problem has always been that because we do not have the proper market environment then government becomes a welfare programme through incentives.
    11. They state that they will “accelerate decision-making on the choice of fuel sources” and later goes on to state that they will be committed to diversification and set up a National Energy Council. While the document does correctly recognize the need for focus on this crucial problem, it seems to be bringing the government back into decision making and is in contradiction to what Paulwell has said, which I like. Government needs to only set certain environmental and regulatory standards and allow the private sector to determine what energy sources they want to invest in within those standards. I would have preferred to see Paulwell’s position replicated in this document. I don’t get the feeling that with the National Council that we are moving away from the bureaucracy that has stifled our energy effort so far.
  5. JEEP: much of the programme hinges on this so it requires its own analysis:
    1. not enough detail given the hype and expectation around it.
    2. State that funding will come from existing state resources, which is the JDIP and TEF. Does the JDIP loan contracts and the purpose of the TEF allow for this sort of allocation?
    3. Well designed infrastructure projects – agree that focus needs to be on infrastructure projects but more detail needed here. There was so much hype about JEEP that I believe it needs to be more clearly defined, especially as 25% of JDIP funds is to go towards it, in keeping with the call for transparency. JEEP is the same as JDIP in intent, that is a stimulus package, which is good for the economy but we need to have details and transparency so that it does not go the way of JDIP.
    4. Says the measures to encourage investments (JEEP tax incentives) will not sector discriminate but above the document states that certain sectors will be focused on. Seems to contradict. This also implies the giving up of tax revenues. What will this do to the tax revenues and where will the shortfall be made up?
    5. Disgaree with GOJ taking equity positions in firms. We tried it through DBJ funding and it didn’t wok and we could therefore end up with government getting involved in the productive sector again, such as after FINSAC.
  6. The following sector focus sections shows what needs to be done in the various sectors we presently hold a comparative advantage in but it seems as if government involvement will be high. The sections do recognize that innovation is needed in these sectors but does not emphasize enough what the government needs to do to ensure that the environment is favourable to encourage investment, which is what is needed. It is obvious that a lot more thought went into the Agriculture section however.
  7. The section on encouraging innovation, competitiveness, and entrepreneurship does not provide an understanding of what is needed to do so as it broadly speaks to what is to be done and again incentives, when what is needed is to create the building blocks for competitiveness as contained in the Global Competitiveness report, which shows what Jamaica’s main challenges are.
  8. Foreign Affairs section seems ok and I would expect that as Hylton does have a good understanding of what is needed.
  9. Creation of an Enabling Environment: this does show a clear understanding of what is needed in an enabling environment. It speaks to infrastructure, primary education and healthcare, social welfare programme, public/private partnerships, need for constitutional and legislative reform (not enough though on this important issue and what is proposed won’t make a difference in my view), crime (would have loved to see a move to make the police force more independent and accountable, such as is being done now with success), .

I think more detail is needed and hope that this will come out in the discussion over the next few days.

Friday, December 09, 2011

What are our options?

In answering the question of what are Jamaica's options, let's look at three scenarios. In both John Brown has income of $100 of which he spends $70 on necessities, $20 on discretionary items, and $10 he saves.

The following actions are taken by John:

o Scenario 1: accumulates debt of $25, which he uses to purchase a luxury item for consumption. Debt to Income ratio of 25%.

o Scenario 2: accumulates debt of $150, which is used primarily for luxury items for consumption. Debt to Income ratio of 150%.

o Scenario 3: accumulates debt of $150, which is used primarily for productive/investment purposes. Debt to Income ratio of 150%.

If John wants to reduce his debt, then he may do the following.

Scenario 1: this is a simple solution, as all John needs to do is cut back on the discretionary spending, and if his savings has a lower return than the cost of the debt then he could forego the savings and pay down the debt.

Scenarios 2 and 3: these are not as straightforward as 1, because the questions of survival and comparing return on investment versus debt are relevant decisions.

In 2 for example, John could not just cut out discretionary expenditure, savings, and necessities to pay back the loan. Even if he could use all his income to pay back the debt, he still would not have enough money available. In any event it is not possible to use all his income because a substantial part of his income goes towards keeping him alive ($70/70%). And therefore if he were to just keep cutting back on expenditure to pay the debt, then he would at best become destitute and could end up in an early grave.

In 3, what he must do depends on the return he makes on the investment he uses the debt for. So if the debt cost him $5 per annum and he makes $10 per annum (after taxes and all costs) from the investment, then it may be worthwhile to keep the debt and pay down the debt from the investment while maintaining his current lifestyle. However, another important consideration is cash flow from the investment versus that of the debt, as cash flow is the most important consideration. A company never goes out of business because of accounting losses, but because it doesn't have net cash inflow. It is important to understand this point, because this relates to Jamaica's situation.

Some analysts continue to point to the debt to GDP ratio as our major problem. However, if I had a debt to GDP ratio of 500 per cent but I didn't have to make any debt payments until 10 years in the future, and someone else had a debt to GDP ratio of 150 per cent but had to make all the payments within a year, which one is better off today? The fact is that cash flow is more important than the ratios, which should really be used as a guide for policy and action and not the reason why one acts.

So in John's case it is important to understand the debt repayment terms, and this is why in the restructuring of the debt the timing of the cash outflows is so important. But all debt restructuring does is give more time to make adjustments, and so if John gets a reprieve in terms of timing of cash payments, he must ensure that he has a plan to adjust either his expenditure or income in order to ensure that when the payments start again he is not in the same position because he has not made the necessary adjustments.

It also seems obvious that John cannot resolve his debt problem (scenario 2) by just cutting back on expenditure, and so the only real option is for him to increase his risk in a very calculated way, in order to reduce his debt in the long term. Seaga did this in the 1980s, when the debt to GDP ratio increased to 212 per cent in 1984: this additional borrowing helped to result in average growth of 6 percent per annum towards the end of the 80s and a debt to GDP ratio of 90 per cent in 1990. This is a countercyclical approach, as opposed to the current IMF agreement which is procyclical, which could not help John in solving his debt problem without landing him to penury or death.

Even if John were to reduce his debt through forgiveness, cutting back on expenditure, or returns from investment, he would not solve his long- term problem without developing the discipline to live within his means. And he will not be able to get persons to continue to support his business if his service level is not consistent (low productivity), access to his business is difficult because of crime impact, or when doing business with him you are frustrated by an inefficient automated telephone system (bureaucracy).

I am sure that you have by now drawn the parallel between John and Jamaica. Jamaica's situation is about 80 and 20 per cent of scenarios 2 and 3 respectively. What this illustrates is that the real problem with Jamaica is not the debt to GDP ratio, which is just a symptom of the underlying issues.

Like John, if we are to solve Jamaica's long-term problems we must address the root causes of:

o Discipline and productivity;

o Bureaucracy;

o Energy and food import costs (more efficient spending on necessities); and

o Cash flow - matching inflow to outflow.

The Prime Minister in a recent speech indicated that the government must adopt a mix of policies to include countercyclical approaches, which is in contrast to the IMF agreement. One such project is the JDIP, of which I am really disappointed about the current circumstances, but it is important that it continue for the health of the economy.

It is critical that when we listen to the debates we are not caught up with terms that sound nice but that we try and understand the fundamental issues and how the proposed solutions will solve the problem. There are some analysts who in the past were not prepared to do the proper analysis and were very much in support of the IMF agreement, and today I am surprised to hear them saying that the terms need to be relaxed or renegotiated. The purpose of analysis is not to predict an event after it has happened. Predictions are made before an event. It was incorrect analysis that resulted in the global financial crisis, so we must be very careful about what we digest. Apparently it is not only politicians who "flip-flop".

I may not be able to listen to the live economic debate next Thursday, because of a previous engagement, but would implore everyone to do so and take careful note of the substance of the proposals rather than the surface issues. This is especially so as I do not believe that, whoever forms the next government, there are any different policy options that will work.

Friday, November 25, 2011

Government must move out of the way

LAST week, I told someone making a presentation that one of the challenges facing Caribbean businesses is that regulators act like parents rather than partners.

So regulation in Jamaica is not about working with the business community and civil society in order to assist them to develop, but rather it is more like a parent who keeps a watchful eye on a child, ready to pounce and punish at a moment's notice.

Because of this approach we have developed regulations and laws to provide welfare and punishment, rather than encouragement and teaching the populace to fish. This attitude is highlighted in two recent events. The first is the call to roll back GCT on electricity, which should never have been introduced in the first place.

In the first instance, the introduction of GCT on electricity bills was only a short-term measure to a fiscal problem and ignored the longer-term challenge of high energy costs to consumers and businesses.

Instead of trying to reduce our consumption of imported fossil fuels, the response was to add a tax to the use of it, not really to discourage persons from using it but to raise money for the government accounts.

This approach is similar to the way GCT was introduced on telephone calls, which again sought to raise taxes on something that is widely used.

The second instance I have discussed in previous articles was to state in the tax reform green paper that the most important function of tax reform is to raise money for the fiscal accounts.
It is this attitude that has contributed to much of our restrictive regulations and focus on the fiscal accounts at the expense of the economy and social infrastructure. Admittedly there seems to be an attempt to change this attitude with the public consultations on the tax reform paper, and pension and public sector reform, but this still moves too slowly.

My own view is that government must get out of the way and allow the economy to grow. If a mother is constantly protecting her children, even when they are adults, then what chance do they have to develop their own survival and developmental instincts?

It is this approach that causes businesses that do very well in Jamaica to tend to develop into monopolies or oligopolies. Sectors that readily come to mind are (i) financial; (ii) telecommunications; and (iii) energy. In all these cases it is because of government's desire to act like parents why these industries don't develop further for the benefit of economic growth and development, and, in the end, the benefit of the consumer. In other words, even though we say that we want the economy to develop, the barriers to entry and the burdensome legislation cause a lack of competitiveness.

So even within the financial sector, the long, drawn-out process to allow mutual funds and credit bureaus, for example, has no doubt robbed the country of much-needed capital.

The FSC has been trying to improve the timing of application approvals, but the problem with the “barriers to entry” is not so much the regulators but the regulation they have to work with. Some may argue that it is the strength of our financial regulations that prevented us from experiencing a significant fallout from the recession, but my view is that we could still have been prevented from having that experience even with more players, and businesses would have benefited much more.

In the telecommunications sector, I don't think much more needs to be said than the OUR has twiddled its thumbs while LIME is experiencing a slow and painful death. I have been a Digicel customer for years, and will be for the foreseeable future, but why does it take so long to introduce number portability and establish crossnetwork charges?

Maybe after LIME is dead and gone, and Digicel is the only one left standing, we will have these things introduced. By that time they will be redundant. That is when they are redundant.
The other sector is energy. Our political masters have seen it fit to create a licence that enslaves the Jamaican consumer and business at the hands of one of our new colonial masters — the JPS. Some attempt has been made to change that somewhat, by introducing net billing and power wheeling.

While these are commendable steps, they are far from sufficient to have any positive impact on energy costs to the consumers and businesses. The cost of setting up energy production far outweighs the benefits of net billing, and it is a better payback to produce and store. Also, power wheeling will not bring the economies of scale needed to change the cost landscape.

I understand the restrictions of that horrendous licence, but there are some things we can do outside of the licence that will bring much greater competition to the JPS, and force them to review their operations.

Firstly, we should not reverse the GCT on electricity bills but use it to set up a fund that will provide, say, a 50 per cent credit to “tax-compliant” persons who want to set up renewable energy solutions, with NCC-registered suppliers. Secondly, businesses should look at creating a co-operative-type company, which they all own a piece of, and set up a power generation company that they would power wheel to themselves. Unless the amendment said that you had to own 100 per cent of the power generation in order to power wheel.

These steps are necessary, as by the time LNG comes we will be “powerless”.
Finally, I believe that elections matter so much in this country because government has established itself as such a big player in the economy. When the Government has a financial problem it pressures the poor Jamaicans through taxes, and when elections are in the air we wonder who will be in charge, as it may certainly affect the business or our lives.

This should not be. Government needs to move out of the way and allow people and businesses to thrive.

Friday, November 18, 2011

Jamaica must solve her structural issues

At the time of writing I am sitting and waiting on a connecting flight to Suriname, to do a presentation on the IMF impact on the region. By the time this is published it will be done, but is worth mentioning. The fact is some persons think of the IMF as wicked imperialists (primarily because of political propaganda) and others think of the current programme as a panacea. The truth is that both points of view are incorrect.

As I prepared and thought about the presentation, I thought that as a region we are too caught up with the IMF. After all it is just a bank to countries, seeking to get a return on its funds and ensure it gets repaid. The IMF does not and never will have the solution to our problems. We need to have it. So our flirting with the IMF in the 70s, 80s, 90s, and today has more to do with our own inadequacies than the "wicked IMF policies". In fact, before now, the only time that post IMF saw any significant growth was in the 80s when Seaga took the bold decision of playing hard ball until he got the terms that were best for the country. Outside of that, no one else was brave enough to face down the IMF.

So here we are again once ore in our flirtatious but unstable relationship with the IMF. This time, however, I think people are of the view that the IMF programme has more to do with us than them. The fact is that if we were prudent in managing our affairs then we wouldn't have to keep courting the IMF. It is because of our own irresponsibility, and inability to achieve true economic independence after leaving the home of colonialism in 1962, that economic independence continues to evade us, betraying the wishes of Norman Manley and Bustamante. In plain English, our leaders have turned us into adults incapable of fending for ourselves, having to hold on to the frock tail of our "old colonial mothers".

The fact also is that after the IMF programme we won't be in any better position if we do not address the fundamental structural issues of our economy. The only time that we have effectively done so was in the second half of the 80s, when we managed to reduce our debt to GDP ratio from 212 per cent to 90 per cent, and the economy started to grown an average of six per cent. The verdict is still out on the current programme, and while the policy reform directions are positive the pace is concern.

So as I wrote in my book in 2009, although for the 14 years to 2007 the economy recorded growth, the fact is that the GDP structure was showing that the only way we could continue growing on that path was by either borrowing or inflation. History shows that the former was chosen. So when the recession hit us in 2009, we had no choice but to fall down at the feet of the IMF, as we had been borrowing to create an illusion of growth, and when the credit card was no longer available we all know what happened. And Jamaica wasn't alone, as we were in the company of the US and Europe, if that is any consolation.

So the government had no choice but to go to the IMF, and was prudent in first restructuring the debt (JDX) - albeit six months late - and also accepting that reforms such as public sector rationalization, tax, pension, and divestments had to be done. The problem is that almost two years after, while some of these things have happened or started, it has not been sufficient to take advantage of the breathing space provided by the IMF programme funding and JDX. So in 2011 the economy is still as structurally weak as in 2007. I remember over the past three years I was at pains to point out that our preoccupation with scandals and such things would prevent us from focusing on the important structural issues.

Well here we are

What is needed is still as relevant as when i wrote my book in 2009. In fact the recommendations could apply today as if it was written yesterday. The economy still has significant structural issues, evident in the recently published June balance of payments (BOP) numbers. The BOP is the weather vane of the economy's direction. For the six month period the current account deteriorated by over US$500 million. The main reason being rising oil prices. Does this sound familiar? It should because we have been paying lip service to an energy solution since the 70s.

At the same time we have not only failed to implement the much needed tax reform but we have managed to produce a document that says the most important reason for tax reform is to raise money for the fiscal accounts. Does this sound like the cherry picking from the Matalon report that took place in 2005? Is it coincidental that the last time tax reform for economic reasons took place was in the mid 80s, or is there a link between tax policy objective and growth. Certainly when Ireland was growing what they did prior was to cut capital gains tax in half and reduce corporate tax rates to 15 per cent. Their fiscal and monetary irresponsibility after that undid the gains however.

My own belief is that the current reform policies are the right direction and needs to be continued. The truth is that there are not many other solutions that can be offered. The problem has been the pace of reform. That is (i) the IMF targets are too aggressive, causing social dislocation, and (ii) the much needed reforms have taken too long. In addition to this there has not been much emphasis on protecting citizens' rights and enforcing a disciplined society. The police commissioner is to be credited with dealing with corruption, but there is not enough being done to protect citizens from police abuse or enforce road discipline. The charter of rights was finally passed, but we don't want citizens to have to seek enforcement of rights, but for the rights to be respected from the start.

Nowhere is this inability to address our structural issues more prominent than in the Global Competitiveness Report, where it not only shows us falling in the rankings but clearly states that the main challenges to our competitiveness are crime, bureaucracy, and taxation. It is ironic because the reforms currently being pursued are supposed to address these issues. The problem is that we spend too long to enact change and too much time pursuing political rhetoric.

Unfortunately with election in the air, we might have more rhetoric and less issues being discussed. But maybe this is what Jamaicans want as they still hang on to buses as they go to political meetings to hear the latest personality attacks.

The result is that as we approach the end of the IMF agreement, the economy is still challenged for sustainable development, as in 2007. The difference is that over the past two years we have seen a significant global recession and there has been a move in the right direction with respect to policy. So the next time we think about the effect of IMF policies, let's look in the mirror first.

Friday, November 11, 2011

Jamaican economy vulnerable to global crisis

Today I want to address two issues, which could have a negative impact on the Jamaican economy. The fact is that even though fiscal and other reform programmes have been taking place, the economy still remains very vulnerable and can easily reverse the small positive growth we have been seeing for the past three quarters. This is why it is very important that as we approach an election that we all act responsibly to ensure that the economy is not damaged.

The first issue of grave concern is what is happening in Europe, and more particularly Italy, which has an economy much bigger than Greece and can result in catastrophic consequences for the global economy.

In September 2009, I had written an article titled "Risk of a double-dip recession?", in which I raised the real possibility of the world going back into another recession. And my main reason for saying so was that even though the markets were recovering, the fact is that all the policy actions that have taken place since the recession have not been aimed at arresting the structural issues but rather at cosmetically creating an impression of growth. There was therefore little doubt that the problem would once again show its face.

The situation as it is today, with significant challenges in European sovereign debt, is even worse than I had thought it would get. I had expected a double-dip, and then a slow recovery after that. However, if the crisis in Europe is not managed properly then we could be looking at a decade or more of stagnation and a significant negative impact on currency values, higher inflation and interest rates, and no or low growth. The fact also is that any second recession as a result of challenges with sovereign debt could be worse than the 2008 recession.

Although Jamaica has fared relatively well, when compared to other countries, during and coming out of the recession, which took hold here in 2009, there are some realities that we face. The first is that Jamaica's main foreign exchange earners are discretionary and will be amongst the first expenditure cuts by foreign consumers if uncertainty sets in. On Wednesday last, for example, we saw markets fall by 3 per cent, a significant strengthening of the US dollar implying flight to quality, and all-time high Italian interest rates.

The second is that the IMF agreement is coming to an end, if there is no extension, and it means that funding support will also end. If the global reality results in greater uncertainty then capital markets could remain close to the required funding, as we still have an earnings shortfall.

Oil prices should continue to rise, even in a stagnating global economy, and in fact the International Energy Association has said that if enough investment in oil exploration does not happen in the short term, oil prices could reach to US$150 per barrel. Jamaica has not managed to reduce the 96 per cent dependency on fossil fuels.

The fiscal situation remains fragile, and the Balance of Payments shows a worsening situation because of the lower than projected global growth and the dependency on oil.

It is therefore very clear that the Jamaican economy would be very much affected if the European debt crisis is not resolved positively. The other problem is that there is nothing that any Jamaican government will be able to do about it, as any escalation in the European situation would see much of the multilateral resources being directed there, even while capital markets are closed.

Telecommunication industry threatened

The other issue which is of some concern is the competitiveness of the telecommunications industry. In June of this year I had written about this same concern, based on the then pending Claro-Digicel deal, and the continued poor results of C&W. I had pointed out at the time that the competitiveness of the industry is under threat because of the following reasons:

o Dominant position of Digicel while there was no number portability or regulation of internetwork charges;

o Continued losses by C&W, which implies that continued upgrade to the infrastructure is questionable; and

o The declining income levels of consumers means that this will affect their ability to afford the services.

The reason why this sector is so important is that apart from energy, telecommunications is one of the most important ingredients in business and consumer life today. It is not just about making a telephone call but business models now have telecommunication as a central part. Also any monopoly situation could see significant cost increases for businesses, if not properly monitored by regulation and the market.

It is for this reason that the continued losses being shown by C&W is of some concern, as this is unsustainable and already it seems apparent that Digicel's network has been having some challenges.

I say that C&W has challenges, as they have more than doubled their losses for the quarter, from $549 million in September 2010 to $1.323 billion in September 2011. One could argue that this includes depreciation charges (non-cash) of J$1 billion, but importantly the operating profit over the same period fell by 50 per cent, from $802 million to $435 million. Total revenues also fell slightly. More importantly the cash flow statement shows that the company had negative cash balance at the end of the quarter.

My own view is that the business model is such that irrespective of what they do within that business model they will continue to lose money.

Whether C&W survives or not is not important to me. What is important is that the regulators take the steps necessary to protect the consumers and the cost structure of the telecoms market. This should be done by regulation and competition. This is why it is important to address the matters of number portability and cross network charges with some amount of urgency, and not deal with it in the same way we have allowed our energy crisis to fester since the 1970s. Telecommunications is too important a component of business and individual life to allow it to go the way of the energy sector.

Friday, October 28, 2011

If the economy is to grow

I constantly hear commentators talk about the lack of growth in the Jamaican economy since the 2008 "great recession", as if this is something new. In fact, of the approximately 94 per cent growth between 1962 and 2010, about 68 per cent was between 1962 and 1971, and 15 per cent between 1982 and 1991. So for the rest of the 29 years accumulated growth was only around 11 per cent.

This shows a lack of understanding of what our real challenges are and the structural issues. I am amazed at how persons speak in a vacuum, as if the only thing needed to achieve growth is to apply the IMF pressure, stabilise interest and exchange rates, and eliminate poverty. These are all outcomes and it is the lack of our inability to focus on the real structural problems that keeps us chasing our tails, and ending up going around in circles.

Dennis Chung

Of all economic commentators out there, there are a few that I think really get the issues we face. Let me start first with Gene Leon, who I think really understands the cultural and social linkages with economic development in Jamaica. The others are Ralston Hyman (who we do have disagreements with but at least this leads to a rational discussion), Dennis Morrison, Damien King, Denzil Williams, Al Edwards, and although I haven't heard her for a while, Anne Shirley. There may be one or two more I have not named.

So if the economy is to grow it is necessary that we understand the fundamental environmental and cultural concerns that must be addressed. Interest rates, exchange rates, and inflation levels are only just symptoms of the outcome, and are not a panacea to our solutions.

What we also need to understand is that it is not the point in time measurements that determine growth and development, but rather the expected trend and solution of the underlying issues. So we should never believe that because we are experiencing high poverty levels or high inflation at a point in time that this means that the future is bleak. Similarly, not because we are experiencing lowering debt to GDP or an improved primary balance does it mean that the economy will improve in a sustained manner, or that because murders are reduced that crime will decline in a sustained manner. In fact, I believe the current policies will allow for a stronger economy to emerge, as the real problem for me is really the pace.

In 1984, the debt to GDP ratio was 212 per cent, before declining to 90 per cent in 1990, and the economy growing by average six per cent in the last half of the 1980s. Similarly, we saw some growth in the 1990s to 2000s, but debt was increasing along with crime and indiscipline, which I think indiscipline caused more damage to the economy than anything else. So we can also say that while lower interest rates and a stable exchange rate is necessary for planning and growth, it is not sufficient, as is seen by the lack of take up of productive loans. This is primarily because confidence of the future (human behaviour) is always going to be more important than symptomatic macroeconomic numbers.

If I were in charge of policy, I would focus on the following three areas, (i) energy cost -- just imagine what it would do for productivity if the industrial sector saw a 30 per cent reduction in energy cost and consumers had more disposable income; (ii) bureaucracy -- public sector workers can be as productive, and are as talented, as the private sector but lack the environment and compensation system to innovate and show initiative; and (iii) crime -- this can only be solved by addressing disciplinary issues in the society.

The government has made some good moves towards that restructuring, but there are some deep-rooted cultural issues that need to be addressed, such as understanding that government is there to serve the people and not the other way around. If this was understood then the tax reform green paper would not say that the most important objective of the reform is to raise revenue for the fiscal accounts. And this has been the philosophy of taxation for as far as I can remember, and is the reason why only certain things were cherry-picked from the Matalon report in 2005.

I say all this to really lead up to what I want to address, which is the IMF programme. When the programme was revealed in 2010, I remember saying along with Ralston Hyman that the targets were not realistic, given the social and other issues in Jamaica, and that there would need to be a relaxation of the targets. This was done.

We are now at a point of negotiation with the IMF to resolve the current economic projections, and it is good that both the IMF and government is discussing this, as it shows a commitment on both sides to come up with a credible economic programme going forward, and this intent is very important. I also hear the argument coming from government, opposition, IMF, and some parts of the private sector (so everyone is at one on this) that what we need is (i) maintaining fiscal discipline, (ii) economic growth, (iii) stable exchange rate and reduced interest rates, and (iv) reduced debt to GDP ratio. My own view is that all these cannot happen at once, and this is why we have not been able to iron out a credible economic programme going forward.

And this has nothing to do with economics; it is a straight mathematical formula. That is if X + Y = Z, then it is not possible for (X-1) + Y to equal Z. In other words, if X represents GDP growth (global and domestic), Y represents reducing the debt to GDP ratio, and Z represents the previous fiscal targets, then if GDP growth expectations (globally and domestically) changes then one of the other variables must change. My own feeling is that the one that must change is Y, which means that a short-term higher debt to GDP ratio is inevitable to achieve the fiscal and growth development targets, just as Seaga did in the 1980s

This is already the case, as even though we have achieved our fiscal targets to August, the debt is $33 billion higher than projected. If on the other hand we had stuck to the debt target then maybe we would have had a social situation, which would have frustrated revenues and the target.

Debt is not bad as long as the marginal revenue exceeds the marginal cost, which means we need to borrow money to develop capital and infrastructural projects, not to pay recurrent expenditure as we have done in the past. But I am just an accountant so I stand to be corrected.

Friday, October 21, 2011

Economic impact of culture

At a recent meeting of the Jamaica College board, it was reported that the discipline had significantly improved, even over the improvement that we had seen before. Today at board meetings the major talk around indiscipline has more to do with dress code than the violent conflicts that existed at the school as recently as two years ago.

The improved discipline has led to continuing academic and sporting improvement. This is a prime example of how the change in culture of an organisation or country can positively affect the desired outcome.

It is this relationship between social behaviour and economics that we have never seemed to understand in this country. And the irony is that if we paid more attention to changing behaviour patterns through policy measures, then we would be more able to achieve our economic objectives of growth and development. It is as if all the persons who learned about economics have forgotten that it is a social science, and is really nothing more than the study of how people in a society interact in their pursuit of prosperity.

This is why I have always said that the approach by tax administration is commendable, as they have been trying to change culture/behaviour through their education programmes and the way taxes can be filed (technology). This will no doubt have a positive impact on compliance going forward and has already started to show.

It would seem logical to me that if we truly want to see economic development, then we need to try and understand what causes the behaviour we desire and put measures in place to influence that. It is this lack of understanding that has resulted in our inability to create sustainable improvement in our fiscal and trade deficit positions. As far as I can remember, government policy (fiscal and monetary) has been geared not towards influencing behaviour patterns to encourage sustainable local investment and growth, but rather has encouraged corruption, inefficiency, and short-term profit approach.

Some examples of these include the following:

1. Tax policy over the years has not been aimed towards creating an enabling economic climate for businesses, but rather towards raising money for the fiscal accounts. This incorrect approach is found in the current green paper on tax reform, and stated explicitly in paragraph 1.2, where it says that most importantly the measures are intended to raise money for the fiscal accounts. This communicates to stakeholders that the interest of businesses and people is secondary to government raising the required revenue and this leads to compromise from stakeholders in securing tax measures that first satisfy government revenue and then the business environment. The result is that stakeholders settle for less than what is required to create a competitive country environment. Is it any wonder that taxation remains the third most inhibiting factor in the global competitiveness report?

2. We say that we are serious about solving crime, but as I have always maintained, our success with reducing murders will be short-lived if we do not take the necessary steps to change behaviour towards indiscipline. So while we celebrate reducing murders we have not successfully dealt with road indiscipline, night noise, littering, and zoning laws. The result is that we might have short-term successes only in fighting major crimes as our society is still extremely very undisciplined.

3. Heavy-handed bureaucracy leads to inefficiencies because it does not encourage innovate thinking in the public sector. So I have seen where because of the procurement rules, one government company gave up more revenues than the cost of rectifying a problem because of the delay in approval while another entity was spending more than $120,000 per month to monitor a cost of $120,000. We also remember the situation where the Accountant General's Department reported that because the purchase of a telephone system was not approved, the payment was withheld, even when the AG and FS directed it be paid, resulting in a two-year delay and the cost of the system doubling because of the delay.

These are just a few examples of the ways in which policy has negatively affected culture/behaviour and ultimately has had a negative effect on sustainable economic development and productivity. So the truth is that unless we introduce policy directions that are geared towards influencing behaviour in the direction that will result in increased productivity and business and consumer confidence, then sustained economic and social development will only be things that we read about. And by development I don't mean where we measure against ourselves, but relative to other countries.

It is because of this failure to introduce policies with this intention (to the contrary we have always maintained policies that do the opposite) that we have not been able to create the environment needed to increase our competitiveness and create sustainable development. In short, the policies that we have pursued as a country have caused a culture of mistrust, low productivity, corruption, and the preference of short-term over long-term objectives. It makes no sense to about economic targets and policies within the context of this type of culture.

This is the main reason, in my view, why the IMF programme was not achievable in the time projected. When setting out an economic programme for a country like Jamaica, we cannot assume that the changes will take place as quickly as in a country like even Barbados. It is important when projecting for a company or country to consider the culture. So the emphasis on say the wages to GDP coming down to 9 percent is really not a practical target, given Jamaica's environment, and I am also trying to understand what is the magic about 9 per cent.

Similarly, it is not possible to achieve the original fiscal targets set out and maintain the same debt to GDP target, which in my mind is not important as an absolute anyway. This is borne out in the August 2011 fiscal outturn, which shows that in achieving the fiscal targets we have had to borrow $33 Billion more than projected.

Impact of Jamaica's leadership change

When Bruce Golding announced his intention to resign as Prime Minister and leader of the JLP, there were some who said that this would cause a significant negative impact on the economy. In fact this was the line also when there was delay surrounding the announcement of the IMF tests, when my own line was that (in August) there would not have been any significant negative consequence until around September if nothing was said.

Similarly I indicated that the mere announcement of the intention to resign would not have any negative economic consequence.

I should pause here to say that respect is due to Golding for the reasons given for his decision, which is the consideration of country and party above self. Despite what one may want to believe was the real reason, this is certainly a new standard for politics that Jamaicans will continue to demand.

It is important to understand my reason as to why the mere announcement of a leadership change would not have impacted the economic fortunes of the country. The main reason is that Jamaica's governance structure is not perceived as one where only one person is responsible for the economic or other programmes. In fact that is the reasoning behind "collective responsibility" of the cabinet. On the other hand, if Jamaica's governance structure was perceived to be like Apple when Jobs was CEO (may his soul rest in peace), and the PM resigned, then there may be an initial negative reaction to the announcement.

But in the end investors will always look at the fundamentals of the economy and the underlying value of the opportunity. So even after that initial reaction in most cases the previous trend will continue. Investors do not make decisions based solely on political reasons, but more so on value reasons.

When one looks at the economic programme being pursued, it seems obvious that there is a positive structural change taking place. One can argue that the administration was late in acknowledging the impact of the global crisis, going to the IMF, and did not have the appropriate IMF programme in place; however, my own view is that the general policy direction is positive and I think that fundamental lessons have been learned from the slips.

When one looks at the GDP growth areas, for example, growth is occurring primarily in the export areas of tourism, bauxite, and non-traditional exports. This is unlike the 14 years to 2007 when 72per cent of our economy was geared towards production for consumption, and these areas were performing best, thus leading to the need for greater debt. An examination of the macroeconomic environment also shows that all the measurements are showing some amount of stability. This is unlike up to 2009, when the trade-off was always between exchange rate and interest rate primarily. More importantly for me, however, were the moves to restructure tax administration, introduce tax reform (and the surrounding discussions), rationalisation of the public sector, and the fiscal and governance regime being introduced. I believe that some of these could have been done much more efficiently, but the general direction must be applauded. The main blot on the performance has been the inability to deal with the cost of energy, but this has been a problem of administrations since the 1970s.

Therefore investors will not look at personnel changes, if they believe that the programmes being pursued is as a result of a structural nature rather than personal.

Public hospitals underrated

Two weeks ago I had an experience with a private hospital where a patient was checked in and on the way to the floor a porter was pushing a wheel chair, and was asked by the admissions person to carry the patient. The porter continued to push the wheelchair and announced that he had just come off duty so he couldn't do it. The patient walked to the floor. Two days after the patient did an ultrasound at the hospital, and the written report of the ultrasound was the exact opposite of the real situation (thanks to the questions asked by the patient, this was discovered). Still two days later when the patient came in on an emergency, and given the nature of the ailment it was known that the patient might have to have surgery, the patient was given something to eat. Anyone who knows about anesthesia will understand that this is dangerous to do.

Contrast that to when the patient was transferred to UHWI because the private hospital was not able to handle the type of emergency: immediate attention was given and the patient immediately went into surgery. The doctors and nurses on reading the report realised that the surgery was high-risk because food had been given and took immediate steps to prevent any fatality. Additionally the nurses at UHWI are very attentive and professional and the amount of information that you are provided with is of a high standard. What's more, there was no talk about payment until everything was done to stabilise and treat the patient.

It seems to me that the only missing thing from UHWI (a public hospital) is funding. And even with low funding the professionalism and the available equipment seemed of a higher standard than the private hospital. So what do you pay for at a private hospital? D├ęcor. If I am in an emergency, please carry me to UHWI, as the service is more important than the look of the place.

What I will say about the private hospital is that even with that experience the nurses were also very pleasant and helpful and the administration did apologise, but there are certain services that need to be vastly improved.

Friday, September 23, 2011

Restructuring Jamaica's economy

Over the past two weeks there has been much debate about jobs and Jamaica's competitiveness, thanks to the Global Competitiveness Report and the JEEP proposal. Last week I addressed competitiveness, and JEEP is a good follow-up discussion. Debate on both issues is welcome, and is the reason I have always called for national debate on all issues in the media and parliament. Whether it is a global report or a proposal from government or opposition, I am in support of as much debate as possible so that the people of Jamaica can be more aware of the details of what is affecting their daily lives.

I believe (thanks to the many commentaries, talk show discussions, and lobby groups) Jamaicans have become a lot more aware and suspicious of what politicians espouse, and are demanding more and more information, whether it be proposals like JEEP, extraditions, or deals with foreign companies. No longer can a politician just make an announcement and all Jamaica just cheers and goes along with it. Interestingly also, more party supporters are demanding more information when their respective party they support makes general announcements. This is a sign of emerging political maturity.

The flavour of the day has shifted from the request for brownings to JEEP, and more generally a discussion on what is good for Jamaica's economy. It is within this context that I want to look at what is needed to restructure the economy. It is important to understand, as many commentators have said, that what Jamaica's economy needs is not another promise of jobs or growth which will not lead to sustainable economic and social development.

Over the years we have had crash programmes (1970s), the free zone and Spring Plains (1980s), high interest rates and ICT stimulus (1990s), and promises of jobs (last election and recent JEEP). All these initiatives have come from our politicians, and that is the primary problem. When will we realise, as Tufton rightly said, that government cannot sustainably create jobs and growth without fixing the structural problems? Obama recently tried this in the US with his US$700 billion stimulus, but it was never enough to change the general economic direction of the US. The difference between the US and Jamaica is that they have money to fund such short-term programmes, or can print it. In Jamaica any attempt to create money without an increase in productivity will only lead to greater inflation or interest rates.

I am the first to agree that in a recessionary environment, government intervention is necessary to ensure that the economy does not sink further. For this reason I have always maintained that the IMF programme and tax increases were pro-cyclical and would have caused further contraction and hardship in the economy. The fact is that they did, and this in part caused some of the decline the economy saw since 2008. The major part of the decline, of course, resulted from the difficult global environment.

What we have seen, however, is that even though there has been some decline from these policies, there have been some positive structural changes, a few of which I mentioned last week. More importantly, though, is that we have seen some positive structural shifts to the GDP components, and a reduction in crime and some improvement in the culture of compliance and discipline. The most successful have been in the areas of tax administration and dealing with corruption in the police force. These are the structural issues that government should focus on and must stop trying to pick winners, which is the job of the market.

Government must therefore create an enabling environment and allow the market to work. A big part of this is of course doing away with the system of waivers, incentives, and the burden of taxes and other bureaucracy. If these remain in place, then business persons will continue to seek waivers, incentives, and try to go around the system because they can. There will be no motivation to operate in a true market environment. It is for this reason that the tax reform and administration currently being pursued by the government is a step in the right direction, and long overdue. Previously government would cherry-pick what was good for fiscal revenue, the last real attempt at progressive tax reform being in the 1980s.

So while I support the concept of stimulus, recently outlined by the opposition, the programme as crafted is flawed for the following reasons:

1. The argument of renegotiating the IMF agreement is redundant, as the agreement comes to an end in May 2012, and by the time election comes around would have either ended or already been renegotiated.

2. I disagree with the proposal that start -up businesses should get a five-year tax holiday. Every business in Jamaica would forever be a start-up. Why create a problem we will have to find a solution for? What we need is a flat tax for businesses in the first five years, which if they prove losses they can get a tax credit for. This would relieve the cost and burden also of tax administration having to go after these micro businesses.

3. Government cannot continue to seek to create private sector jobs by giving incentives. If an incentive is required to start a business or create jobs, then it means otherwise it is not competitive and does not make good economic sense, so why incentivise it (for example the recent stimulus to car dealerships)? Government needs to stop trying to create welfare programmes, which do not result in long-term economic benefits. While I agree that some form of stimulus is needed to create jobs, it must come in the form of infrastructural works, such as the JDIP, as Roosevelt did in the US after the Great Depression. What we must do is remove the politics and bureaucracy from the JDIP and allow it to work for the benefit of Jamaicans.

4. Providing a fund for small businesses is really a regurgitation of what is happening now. This government had provided $1 billion to the DBJ for small businesses. How much has been taken up? At the time I indicated it would not have made a difference because it is obvious that businesses are not motivated primarily by high interest rates or access to financing, but more importantly aggregate demand, which was already cut by the IMF programme. So even if I can get money to borrow at zero per cent, if there is no demand for my product/service it doesn't matter.

5. The suggestion to provide banks with a tax incentive to make small business loans should not even be considered. Why would we want to incentivise risky loans? If the loan is good then the only incentive the bank needs is profit. This can lead to financial sector risk and increased interest rates.

There is more I could say but space does not permit. The argument, however, is that while some form of stimulus is necessary it must be in infrastructural projects. This already is in place in the form of the JDIP, which we need to make work. The problem we face is not 12 months from now, so if we don't allow the current programmes to work and wait until election we won't just need a JEEP but a whole car dealership.

The important thing for the economy is for government to focus on fixing the structural issues of crime/discipline, bureaucracy, energy and productivity in particular. This will improve our competitiveness and economic and social well-being. Jamaica has for too long been a welfare state, and this is what is keeping people in poverty.

Friday, September 16, 2011

Examining Jamaica’s competitiveness

Recently the World Economic Forum released the 2011-12 Global Competitiveness Report, and Jamaica showed the worst ranking ever at 107 of 142 countries, coming from 95 of 139 countries in the previous report.

This really is no surprise as the seeds for this were sown from around the mid-1990s when the debt/GDP ratio started to worsen as a result of the macroeconomic policies practised during that time, more notably the prolonged high interest rate policy that led to a logical market choice to sit at the beach and earn rather than do so through productivity. The seeds of indiscipline that led to the lack of reward from productivity started in the 1970s, when the much needed social changes were taken to mean that everyone had the right to property and income even if not worked for. The result at the time was a real GDP decline of approximately 20 per cent during that decade.That period also marked our first fling with the IMF, as a result of near decimation of our economy.

The 1980s saw a return to a focus on economic growth, which resulted in an average annual growth rate of approximately 6 per cent, and by 1990 the debt/GDP ratio, had moved to 90 per cent from 212 per cent in 1984. The challenges faced by the economy in the first half of the 1980s resulted from the near collapse of the economy in the 1970s and the global recession at the start of the 1980s. The problem with the 1980s, however, was that the social side was neglected and therefore there was no emphasis on improvement of the individual but rather a hope that macroeconomic growth would lead to microeconomic benefits.

The problem with Jamaica is that the workforce consists largely of low-skilled labour, and a relatively low literacy level. Like it or not, it was the free education policy of the 1970s that caused many to be able to access higher learning and change the landscape of the workforce, but the result of a poorly implemented free education policy led to a degradation of the school system.

By the time the 1990s came around there was again an ill-conceived approach to the liberalisation of the economy resulting in an increasing trade deficit, as uncompetitive local industries, which were accustomed to protectionist policies, could not compete with the cheaper and more attractive foreign goods. So the exchange rate started to decline and inflation was rampant. In order to put a stop to runaway inflation, the government at the time employed a high interest rate regime that not only served to halt inflation but also put the nail in the coffin of most productive businesses. This was the main push that caused Jamaica to become a service-driven rather than the goods-producing economy that it was.

That period saw the continuous breakdown of our institutions which led to a decline in productivity and discipline. The slump had started in the 1970s, with a brief break in the trend during the last half of the 1980s. Since then productivity has consistently declined and our institutions and infrastructure have generally deteriorated. The only significant positive development in our infrastructure was the building of the highways during the early 2000s, which in my view was somewhat negated by the demise of the railway during that time.

In 2007 we experienced a significant global recession, which did not do us any good, as the economy was structured to be dependent on foreign loans, remittances, and foreign consumers, rather than on our own productivity and local economy.

So here we are today looking at a competitiveness report that shows us as ranking 107 from 142 countries, and within that global ranking even more dismal numbers are represented. Some of these are fundamental pillars on which economies are built as follows (rankings shown at right):

o Public trust of politicians - 112

o Favouritism in decisions of government officials - 121

o Burden of government regulations - 123

o Business costs of crime and violence - 140

o Organised crime - 135

o Reliability of the police service - 101

o Quality of railroad infrastructure - 113

o Macroeconomic environment factors - between 106 and 140 (overall ranking of 142)

o Quality of primary education and enrolment - 108 and 126

o Total tax rate, % of profits - 108

o Redundancy costs, weeks of salary - 99

o Pay and productivity - 114

o Ease of access to loans and Venture capital availability - 124 and 127

When one examines these individual factors, and not just the global rating it is obvious, that where we are today and how we are perceived is a direct result of the decades of neglect. The result is that we celebrate 50 years with this perception of how we have progressed. So all those who have been involved in governing Jamaica since the 1970s, take a bow, you have reaped what you have sown.

On the other hand, we must remember that this rating is a review primarily of the year 2010/2011, when we would have been seeing a significant lingering effect from (i) the global environment; and (ii) our slowness to react because of policy and the politics we have played while the country was burning. So our preoccupation since 2008 has been with politics rather than economic fixes. Much like what happened recently in the US.

But if one takes a look at what has been happening (outside of the politics), there are some positive trends taking place. The economy is still very fragile but there are some positive structural changes happening that will bode well for the economy, if continued. There are also some positive social initiatives taking place. And so even while people like me continue to point out the areas that need improving (because I think if we eliminate weaknesses then all that will be left are strengths), the fact is that some of the structural fixes we need to correct the years of structural abuse are taking place. One other thing to remember is that when structural changes are taking place, as with the global economy, things are going to seem worse than they are.

For example, when one gets a cut and the disinfectant is applied, it is initially uncomfortable and hurts. But then it means that it is preventing any further infection. So it goes with economic adjustment, which is why it is important for governments to smooth out the effect of painful adjustments, as promoted by Maynard Keynes and more recently Christine Laggard (note the international references as promotion of this idea by locals is not credible because of our "browning and foreign" culture). However, because of the decades of neglect of our economic and social environment, we have built institutions around inefficiencies, and it will take some time to see the fruits fully grown.

Some of these structural reforms we have seen include:

o Charter of rights - finally passed after almost 20 years of debate

o Decrease in the murder rate and greater accountability in the police force - more needs to be done in terms of road discipline, though. Can't understand the inability to deal with this

o Enforcement of the building code by the KSAC - don't see much happening in the other parishes. Previously people were allowed to build whatever and wherever they wanted

o Greater vigilance by the OCG, Public Defender, INDECOM - even though sometimes there is loss of credibility from the perception and the final rulings

o Tax reform green paper - good move but still mentions that primary objective is tax revenues and not economic development

o Road improvement works through the JDIP - we need to get past the political rhetoric, though

o Moves by the new Justice Minister to address the court administration

o Divestment of loss-making public sector entities and public sector rationalisation

o Fiscal responsibility framework

The biggest bugbears remain (i) indiscipline and crime; (ii) energy costs; and (iii) bureaucracy. If we were to speed up the initiatives that are geared towards addressing these, then I believe there would be significant improvement in our economic and social variables.

So even though the report has rated us at 107 of 142 countries, a closer look shows that some of the initiatives on the table will address some of these issues and therefore when compared to say Greece, Jamaica is not such a bad investment climate for future growth. However this is dependent on a continuation and strengthening of some of these initiatives aimed at fixing the structural challenges faced, not so much a focus on the macroeconomic indicators that are symptoms of the underlying problem.

Friday, September 02, 2011

A practical approach to Jamaica's challenges

One of the questions that I get a lot when discussing how to solve Jamaica's challenges is, if we all know the answers then why can't we solve the problems? This is a very important question, as it focuses attention on the real issue that Jamaica faces in resolving the challenges before us. It is no different from the challenge faced by companies, and why some companies, with an apparently similar business model, succeed while others don't.

After all, Jamaica, of all Caribbean countries (with the exception of Guyana, which is not really in the Caribbean) has the most diverse mix of natural resources and opportunities available. Even though Trinidad may have oil, we have tourism, bauxite, agricultural products, sports, and music. Our music and sports are probably our greatest assets because of the future value created in the brand of which we have not even scratched the surface.

Why, then, in rankings such as the Human Development Index are we only ahead of Haiti, and even in the growth projections put out by the World Bank, why do we fall behind Haiti? The solutions put forward in political campaigns and commentaries seem logical, so why can't we resolve the challenges we face and become the country we can be? The answer I believe, lies in my mind in the way we approach our challenges. Quite simply put, we get too involved with the emotions of the challenge rather than what is the most practical long-term solution.

Some examples include the following:

o The argument made by some, including myself, to (i) widen the tax base; (ii) reduce the rate of GCT; and (iii) target the tax to be received on previously zero-rated items to the less fortunate, has been shot down as oppressive and not caring for the poor. This is an entirely emotional response for the following reason : if tax foregone on cornmeal was say $100 and if 50% of cornmeal is bought by the rich to feed their dogs, then it means that $50 of the tax benefit goes to the rich man and his dog. Wouldn't it be better to charge the $100 tax on the cornmeal and use $75 to target funds paid directly to the poor? Everyone wins as the poor would get $75 (instead of $50 tax credit); and the government would get $25 tax (instead of the $0 before). And the rich man pays the $50 if he still wants to feed cornmeal to his dog.

o The recent demonstration against JPS (by wearing black or turning off electricity for a day) was really impractical. So what happened after the demonstration? Did the bill go down? It has come to this because the OUR is a useless organisation and also government policy over the years has procrastinated too long on this very important issue of energy. But the more practical thing to do is to wean ourselves individually off JPS power. I always find it amazing how persons find it easier to argue that borrowing the money to purchase a car (loans have gone up) is more acceptable than borrowing money to add renewable energy solutions to their homes. The argument is always that the cost of the system is too high. But if you think about it, if one can get a loan (say from NHT or the bank) to invest in a solar system, and the monthly payment on the loan is less than the savings on the JPS bill, doesn't it make practical sense?

o Another impractical call is that GCT on electricity should be removed as it is oppressive to the poor, when in fact most poor persons do not consume the 200 KWH where GCT starts to accrue. Apart from the fact that the low- income earners do not pay GCT on bills it would be much more practical to call on the government to maintain the GCT on the 30 per cent who pay it and that it should be "ring-fenced" and given as a credit to compliant taxpayers who invest in renewable energy solutions. This way consumers would not only avoid GCT but would also reduce their JPS consumption.

o The final thing I want to mention is the emotional response to relatively higher salaries paid to public sector workers, which started with the "Fat Cat Scandal" and which continues today. At the same time that we raise hell over any salary levels deemed to be too high, we also ask for the productivity levels to be increased in the public sector and are mystified that we do not attract the brightest minds, resulting in waste and sometimes even corruption. We talk about Singapore but do not realise that one of the things Singapore did was to hire the best persons in the public sector and compensate them accordingly. How do we expect to increase our value added and productivity if we do not pay persons based on their delivery?

These are just a few recent examples of the impractical way that we have approached our challenges over the years. It is therefore our approach to resolving issues that have kept us back, not that we do not know what to do, but by the time the political and emotional sentiments are placed in the equation, what we do is take the road that is most popular rather than the one that is in the best long-term interest of the country, as emotions trumps good sense.

This would be similar to acceding to your child's crying not to go to school, not thinking about the long-term consequences.

Problem of road indiscipline

As the murder statistics fall it seems that we are now trying to kill people with cars instead of guns. I really can't understand the inability of the police to deal with the road indiscipline problem that we face. There is no real effort being put into dealing with the carnage on the roads. And we fail to understand that a priority for choosing Jamaica as the place to "live and raise families" is feeling safe when driving, walking, or cycling on the roads.

What this requires is enforcement and not the PR campaign that the National Road safety Council has launched. I fail to understand why (i) I am driving and a taximan stops in the middle of the road and a police car drives by as if it is acceptable; (ii) there are persons out there (including people licensed to transport the public) who have multiple tickets outstanding; (iii) the police do not employ creative strategies to deal with persons who drink and drive, such as waiting on the outside of parties and night clubs and arresting persons who go behind the wheel after consuming alcohol.

And all the Road Safety Council can say is that they are hoping that the number of persons killed in motor vehicle accidents will fall below the 300 mark. Is this another OUR in the making?

Friday, August 12, 2011

Dealing with a second recession

IN September 2009 my article was titled "Risk of a double-dip recession?" in which I stated that despite the fact that many persons believed that the global market was recovering, "the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies."

This seems more likely than ever, and in large part is due to the lack of effective leadership from politicians, which was exacerbated by the circus in the US capital some two weeks ago. The fact is that the US does not have a credit problem, what it has is a political problem. That is a crisis of confidence in governments. One positive sign coming out of this is the call by our own finance minister for all hands to come on deck, and all ideas to contend, irrespective of the source. He must be applauded, as this is the type of maturity that is needed in leadership. After all, wherever a good idea comes from it does benefit all Jamaicans.

We must now follow through and create a committee of the best minds to address the economic issues we face, which we failed to do in the 2008 recession, instead choosing to up the ante in the political arena.

What is evident, though, is that if we were to have another recession confront us it would be devastating. When, for example, a boxer starts a fight his legs are good and he can easily take a few punches. But after ten rounds of fighting it takes a lesser blow to knock him out. So is the similarity with the Jamaican economy, as after the recent recession our economy is that much more fragile. What this means is that even if the world does not slip back into the deep recession of 2008, even a slight dip could be devastating to the US consumer, and consequently Jamaica.

So how do we prepare for the possibility of a second recession?

Firstly, we must embrace and hold to account the call by Shaw for everyone to work together and all ideas to contend. It is important, however, that the best ideas come to the fore, as implementing a bad idea can be just as bad as not taking any action. In the 2008 recession there were a lot of ideas that were being put out there that did not turn out to make sense. There were others, however, that turned out to be the most appropriate even though they were shot down at the time. Need I say more?

Secondly, we must take seriously the need to put together a committee of the best ideas that can help the government to implement the best solution. I have always maintained since 2008 that this was necessary just as the US did at the start of the recession, which did prevent further damage to the US and global economy.

Thirdly, one of the first things that we need to do immediately is a SWOT analysis of the Jamaican economy, in light of the possible double-dip recession. Between January and February this year, I did a three-part piece outlining the approach needed in a SWOT analysis of the Jamaican economy. This is important for us to understand the challenges and the strengths and formulate our policies and strategies on this basis. My own analysis, which can be viewed at my blog, is just a sample of what needs to be done. This would be the first assignment that I would give to the committee.

It is obvious that any stagnation or slowdown in the global economy will affect our revenue flows. Remittances, tourism, and bauxite earnings primarily will be negatively affected. This is because any global slowdown will first affect the middle to lower income class of the US economy,for example, which are the persons from whom our revenues come. This means that we have to recognise the possible revenue impact and see how we can mitigate this and also substitute imported inputs with local inputs. In other words, we need to create greater vibrancy in the local economy.

We cannot, however, force businesses or consumers to buy local inputs if they are more expensive, especially as their own revenues will be negatively impacted. What we must do is take the steps to ensure that we become more productive and our costs cheaper. A case in point is the recent settlement of the public sector wage bill, which resulted in a greater fiscal crisis for the country, and will negatively impact everyone, including the public sector workers even more than the monies received. I am firmly of the view that they should be paid what is due to them but I think greater creativity was needed in how we satisfied that debt.

It means that we have to move expeditiously to deal with our energy and indiscipline crises. It is important also to address our institutional structures, such as our bureaucratic process as well as our courts. These two institutional issues are necessary for new and continuing investments to take place, and are necessary if we are to compete for a larger share of the world FDI flows.

Very importantly also is the need to address the declining labour productivity issues. Labour must be rewarded based on productivity and outcome, and not just time spent at the workplace. My own experience at Jamaica Ultimate Tyre Company Limited is that workers at the lowest level will embrace compensation based on productivity as long as it is transparent and fair. While other public sector workers were clamouring for increases, these workers were busy improving their productivity to which their compensation is linked, resulting in a tripling of the profits last fiscal year.

The last thing I want to mention, but by no means least or the final thing we must do, is that it is prudent for us to restructure the IMF agreement, in order to get the needed extension and relaxation of the targets. Going into a second slowdown of the global economy it would also mean that our fiscal revenues will slow down and economic pressures will increase. It is not going to be enough to go after numerical targets without considering the people and lives behind those targets.

So as the risk of the recession has increased, it is necessary for us as the finance minister has said, "to wheel and come again". This recalibration of our policy strokes should be entered within the context of the new and mature approach being taken by the minister.