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.


NegusRick said...

Very well written, DC you iterate the old points from 2007 with even more clarity.
I agree the IMF is not imperialistic, but disagree that it was not setup for profit. We do need to manage our financial sovereignty and find a way to instill civil 'discipline'

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