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.

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