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.

Friday, August 05, 2011

Jamaica's economy and the new world order

Last week into this week the US politicians sought to create a man-made crisis, which Jamaican politicians are experts at doing. At the end of it all, it seems as if it was all just political grandstanding with little or no result to show for the pain caused. If Jamaica had thought about it we should have copyrighted that type of political behavior and earn some money from it.

The deal that was finally agreed, however, doesn't seem to either

(i) Have what it takes to properly address the deficit, as the real expenditure that matters -- entitlements — was not addressed. And all that was done is that the can was kicked down the road to some obscure committee; or

(ii) Add any hope for the economy. In fact this expenditure reduction has a high probability of causing further sluggishness in US GDP and employment growth. The recent US GDP and jobless claims numbers show an economy that is struggling.

So what was all the drama about that sparked fears of a global crisis, if the US defaulted, and caused the US so much credibility. If nothing else what it has done is ushered in a new economic order, which was already on the cards. It was always clear that the US economy, and dollar, was always going to lose some prominence, but this was supposed to have occurred over many years if the economic and fiscal structure is not addressed.

What this drama has done though is raise the debate once more between those for and against Keynesian economic theory. My own position is that I am a supporter of this theory, and this may have been obvious in my call last year for fiscal stimulus funds to promote the Jamaican economy. I think it became obvious that those funds were needed, as reflected by the accommodations in the IMF programme, as well as the JDIP and PSOJ growth inducement strategy. This was contrary to some who espoused textbook type budget cuts, which would have created more hardships for the Jamaican people. I think all in Jamaica can applaud the government for the relaxation of the hardships through these fiscal stimuli.

So the US is following the same anti-Keynesian policy that was done during the Great Depression of the 1930s. What they have done is again raised the probability of a double dip recession, as is argued by Nobel Prize winner Paul Krugman and others. The difference between Jamaica and the US is that when the latter sneezes everyone catches pneumonia. When Jamaica sneezes the IMF takes out the fly swat. So the probability is high that this anti-Keynesian type of policy adopted in the debt ceiling plan will result in lower disposable income in the pockets of the American citizen we depend on for tourism, remittances, and alumina.

But if that happens then we can't with any conscience criticize them for doing so, as we took the same approach. So we will all have to just keep quiet and soak it up, or alternatively we could ready our economy for any shocks that could result.

The question is, how can we do this, especially with our economy as fragile as it is. While we can accept that there are some structural shifts happening, such as a greater focus on agriculture production, improvement in roads and transportation (better JUTC and the limited railway service), a greater focus on entrepreneurialism, lower interest rates and a move for better support services in the public sector; there are still some significant challenges.

The two low hanging fruit, which we have failed to address for as far as I can remember, are (i) our energy use; and (ii) lack of law and order. These two issues take more will and thought to fix than resources. I have discussed these issues a lot and won't go into any detail here, but just to say that on the matter of crime, we will never fix this in any sustainable way until we address the matter of discipline on the roads. Criminals graduate to harsher crimes because there is a culture of indiscipline around them.

When one looks at the general structure of the economy, however, even though there has been some improvement, it still remains much the same it was before the recession. This is not an easy fix, but what we must do is focus on where the greatest vulnerabilities are. And this is best addressed by looking at first our Balance of Payments (BOP), and then our fiscal accounts. The Finance Ministry has been doing a good job managing the fiscal deficit, but at best this sort of management can only be a short term reprieve. The real meat of the matter (long term sustainability) lies in the BOP. If we run current account surpluses then it will mean that we become richer as a country, but if we run deficits (as we have been forever) then we only become poorer, which is our experience.

When one looks at the recent BOP numbers (March 2011) it shows a worrying sign as expected. The current account deficit worsened by US$172.6 million, driven by a worsening of (i) the trade deficit by US$165.7 million, (ii) services by US$11.1 million, and (iii) income by US$25 million. Net transfers (primarily from remittances) improved by US$29.1 million. So it shows that once again we will be counting on the non-productive income of remittances to save the day. The hope, as was mentioned above, is that the structural changes will continue and improve this situation.

When one looks closer we see that even though bauxite and alumina exports improved, oil imports negated that improvement. Again expected because we have not changed our energy mix. Of interest also is the fact that the decline in the income category is due to higher profits repatriation. This could be driven by a need for cash by the head offices or the reluctance to reinvest because of a lack of positive ROI opportunities.

In this new world order, hastened by the US last week, we must focus even more on the BOP, and seek to improve it significantly. The obvious points to address are (i) oil imports; (ii) food imports (agro-processing); and (iii) profits repatriation (through more local entrepreneurs and better institutions and investment environment). If we were to focus on these three areas then we would see a significant turnaround in our BOP and the wealth of the country.

It is generally expected that the global economy will be in a slump for a while, as the US economy has significant structural problems and Europe has its own debt crisis. We may talk about emerging economies such as China and Brazil, but these economies depend on the fortunes of the US. From our own point of view we are even more plugged into the US economy, so any downturn would affect us quicker.

Monday, August 01, 2011

Where is the US leadership?

Arianna Huffington said it best on Piers Morgan tonight..the debt ceiling plan is akin to taking the gas tank out of a stalled car (the economy) when what is needed is a jump start.

I have watched the charade in Washington unfold over the past few days and can only agree with Paul Krugman, in the NY Times column, when he said that Obama has shown considerable weakness. Obama has not provided the leadership necessary in these troubled times for the US. Even George Bush would have shown strength and character and do what he thought was best for the US in crisis, whether he was wrong or not. Just as he went to war in Iraq. Mr. President, the electorate out you there to lead,and it was expected that the transformational leadership you promised would be strongest in this trying time.

Normally I wouldn’t be concerned about what another country does, but this is the US – the world market leader and their actions affect everyone. So what they have been involved in over the past few days has been irresponsible, as they have held world markets to ransom.

Obama should have listened to Clinton and invoked the 14th amendment. The US needs a Clinton now, with all his wandering eyes, he is a strong leader and always stands for the right thing for the economy and the world.

I don’t know what they are thinking but in a stagnant economy spending cuts will continue the economic sluggishness. Bye bye jobs improvement. The argument that increasing taxes on the wealthiest Americans will slow down the economy is just ridiculous. This is not like taxes on the middle class. It is taxes on the wealthy where most of that is savings anyway, and so will not find its way back into the economy. It’s a difference between taxing expenditure and taxing savings.

So the sluggishness will continue. And by the way spending cuts is a tax on the poor and middle class, and will mean less demand in a sluggish economy. We have seen that in Jamaica with the IMF plan.

Anyway, maybe we should all stop being critical and just make some money from this…long term US dollar weakness?