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.

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