I think the experiences of the US and Europe has shown us that the only way for us to get out of this global meltdown is to create greater growth in the economy. In fact, European central bank governors, such as Mervyn King, now realise that the austerity programme they had embarked on two years ago will not work, and that what is needed also is to mix that fiscal austerity with some form of stimulus in order to ensure that their economies do not fall back into recession. Countries such as the UK and Spain have already seen their economies fall back into recession as a result. This argument is one that was always supported by Christine Lagard, the International Monetary Fund chief.
My own view on the global economy, is that things more than likely will get worse because I still do not think that Europe gets it enough. I think Germany may end up having its way, in a bid to keep the euro currency together, but that the strategy will end up hurting Europe even more. This is in light of the fact that the US economy has also started to show more signs of weakness, and the emerging economies have started to slow. If these situations get worse then I believe that we could be looking at a global recession, which could possibly become a depression.
Spanish trade union members demonstrate against the government economic measures. Countries such as the UK and Spain have already seen their economies fall back into recession due to the lack of a stimulus programme. (Photo: AP)
If that worst case scenario happens then it could have dire consequences on Jamaica because of our dependency on tourism, bauxite, and remittances. The other implication is that the world may have to see some recession to recover, as government's scamper to save the fiscal situations with more taxes and the money printing presses.
But what can we do, in this year of our 50th year since independence, to ensure that our economy is protected as much as possible, and that we actually see some growth.
After 50 years, my own view is that Jamaica has suffered enough, as we have failed to govern ourselves properly to ensure economic independence, and since early in our independence have always gone cap in hand to other countries rather than seek to stand on our own two feet.
The way the recently concluded budget is crafted may have been the best that we could have done. It is no secret that the tax package was always going to be inflationary and cause a contractionary effect on the economy. Left on its own the tax package would have caused further economic agony, as taxes always filter down to the consumer and cause a contraction in aggregate demand while having an inflationary impact, which means a reduction in living standards. This is compounded by the fact that even with the tax package we will still be borrowing more than we will be paying back.
We can, however, still see a reduction in the debt to GDP ratio, if even we have only one per cent growth and see enough inflation on the nominal GDP to pull the ratio down slightly. The problem with that is that it will only kick the can down the road, as the medium to longer term effect will be a loss of even more productivity, primarily because any resulting depreciation in the exchange rate will not improve our balance of payments by itself, as our structural issues will not allow us to take advantage of exchange rate depreciation.
Therefore in order to recognise the growth possibilities (and strategy) coming out of the budget we have to look beyond the tax package, including any tax reform that will come. Certainly the public sector and pension reform that is being worked on will also create some amount of fiscal space, if implemented properly. The most positive outcome of that will be to give us an IMF agreement, but that again by itself will only be kicking the can down the road, as this sort of fiscal space will only be temporary, just as the JDX was, and will only give us breathing space to do the other things necessary.
In order to understand where the growth is then we must look beyond the fiscal accounts, and look towards five other ministries. These are (in order of importance to growth immediately) -- energy, transport, tourism, security, and justice. These are the ministries that have the potential to reverse the productivity problem in Jamaica, and set us on a path of real sustainable development.
It is therefore imperative I think that we start to have the conversations publicly around these and leave the technocrats to look at the tax package, and reform, as they cannot help our immediate growth situation.
CONTINUED IN PART 2 NEXT WEEK