Friday, September 07, 2012

Good governance is essential for economic recovery

SINCE 2008, the global economy has been going through a tumultuous time. However, the challenges faced, the global economy will one day recover. We will all forget the 2008 recession, and relegate it to the history books, only to be taught in economics and finance classes. In another 20 years, the children of today will become adults, and the cycle will begin again, eventually leading to other recessions and depressions. The 2008 recession will only be remembered when we fall into another recession or depression and at that time people will compare that future recession with what happened in 2008.

In fact, we may find at that time Europe may once again talk about austerity measures as a tool to end economic stagnation, only to find out again that it does not work.

Factors affecting economic growth have more to do with how we construct our social relationships.

So, irrespective of how we may feel today, the world economy will once again rise and there will be prosperity, waste and even greater consumerism. Even here in Jamaica, we can see that motor vehicle, and other personal loans, are once again on the rise and we haven't even turned the corner as yet. But this is the natural progression of economies. The smart person will, of course, realise this and start acquiring the undervalued assets in anticipation of that rise once more.

Every time there is a global crisis, however, there is always some power and economic shift. Some economies will take greater economic prominence, such as what we have seen with the shift to the BRICs. And some economies, and societies, will face greater challenges and may not recover. For example, coming out of the ‘80s and ‘90s boom, we saw Japan's economy being stagnant for a decade. Now it’s Europe's turn, and luckily for the world, the US escaped a similar fate by stimulating the economy rather than applying austerity.

The bigger fear, however, is that the economy will not recover from the downturn but result in social degradation. Countries that come to mind include some in Africa, and even closer to home Haiti. So even though markets and economies will naturally go through cycles (captured in the theory of the Fibonacci Sequence), there is always the fear to guard against factors that will prevent them from coming out of a slump in the cycle.

This is why socioeconomic relationships, and structures, in a society are so important. In other words, this is why a focus on macroeconomics to the detriment of the social side is very dangerous, as what it does is lead to deterioration if not properly managed. For this reason I support the policies being pursued by Barack Obama, and not the “shock and awe” that the Republican policies would once again bring to the US economy. In fact, Bill Clinton, in his speech at the convention this week, correctly said in saying that those policies would only lead to economic challenges again, as they were the very same policies that caused the problem in the first place.

But what are some of the factors that make a society stay in the economic slump cycle? We could look at our own situation and ask that question also, as we have been in an economic slump since the 1970s. Some may argue that they have seen development. True. But as an accountant, my view of development is when it is done with equity, rather than debt. If you have to rely on debt to achieve development then you are in a slump.

The factors that prevent an economy from emerging from a slump are societal in nature. The factors have more to do with how we construct our societal relationships, which also filter into our economic relationships. Fundamentally though, it has to do with governance and our political system more than anything else.

It’s how we govern that determines our crime levels, law and order, bureaucracy, and priorities. This was the primary principle that Clinton addressed in his speech. Governance is the main factor that continues to drive the US economy to be the longest dominant superpower, and also why so many people flock to their embassy. Because with whatever imperfections they may have, in my view, it is the best of an imperfect world. And if I get any messages from any Jamaican, who has migrated to the US, disagreeing with me on this point then…

Another very important factor that comes directly out of governance is the issue of law and order. This is the most damaging factor that can ensure that an economy does not emerge from a slump. If there is no law and order, then there will be indiscipline. And if there is indiscipline then there will be crime. That is such a simple equation that if it formed the main part of the math curriculum, we would have had excellent results at CXC.

Because people are more impacted by major crimes, we tend to focus on them rather than the underlying cause of lawlessness. This is what the US has mastered. Irrespective of whatever else is happening there, they have established a system of law and order in their country where everyone is treated the same.

So even while the global economy is moving ahead on all engines once more, we have to understand that if we don’t solve the problem of law and order, there will be no improvement in our justice system. There will be no improvement in productivity. There will be no improvement in income levels. There will be no improvement in the fiscal accounts. There will no improvement in our debt situation.

And law and order does not just mean that citizens be held accountable under the law, but more importantly, that those responsible for upholding the law are being seen to do so in the interest of the citizen.

So as we move forward to take advantage of the coming economic recovery — that will see a new economic balance between countries — which side will we be on?

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