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.