Friday, December 07, 2012

Restructuring Jamaica for growth and development

I think it is patently clear to everyone that the policies for Jamaica's growth and development have not worked. Since the 1970s, the country has been generally on a downward trajectory. We have seen pockets of growth, but the general trend has been a decline in our economic and social fortunes.

Recently we have seen where the Jamaican dollar has been depreciating, and the latest fiscal numbers show that we are significantly behind on projections for revenue and the primary surplus targets. It is also important to understand that the last half of the fiscal year is always the most challenging for meeting revenue targets and for cost containment. This is because (i) the greater amounts of revenues are always targeted towards the last quarter, and (ii) the lack of accrual accounting for expenditure means that earlier commitments always show up in cash expenses towards the end of the fiscal year.

Jamaica’s balance of payments problem is dominated by the cost of food and oil, which now stands at almost US$88 a barrel.

Because of these situations, we are once again faced with the need to have an IMF agreement. Continuing our long courtship with the IMF since the late 1970s. This consistent need to be with the IMF should tell us that the policies we have pursued are just not working, and it is time for a shift. Jamaica faces structural deficiencies and until we tackle these head on, and solve them, then we will continue having to run to the IMF for macroeconomic stability support. Just like a child who runs to his parents every time he makes a bad decision and needs financial support.

So how do we address these structural deficiencies and put Jamaica on a path for growth and development. I deliberately did not say put us "back" on that path, because the truth is that even during the periods of growth since 1962, the fact is there was a failure to address these structural deficiencies, hence why we always fall back into economic and social malaise.

The first thing we need to do is understand the current challenges we face, and prioritize those risks to our development, just as any company would do. So what we must do is identify all the challenges and look at what value they can create if they are dealt with. In effect we need to perform a SWOT analysis of Jamaica. This is something I have written about and so will not get into any details.

My own view is if we were to perform that analysis then we would see that the main risk to Jamaica's economic and social development lie in three primary areas. The first is the balance of payments, which the problem is dominated by the cost of oil and food. The second is the cost of crime, which in my mind is the lack of law and order. And the third is the cost of the bureaucracy. My own analysis shows that if we were to just focus on policies to quickly eliminate these threats (risks) then we could easily add upwards of $100 billion to the GDP.

This is not to say that there are no other risks of importance, but as Jimmy Moss-Solomon said to me once, when your time or resources are limited just focus on the priority areas and execute well. If we were to focus on these three areas then we could start seeing significant economic and social positives within three to six months.

The current situation that faces us today, however is that we have a fiscal and balance of payments challenge. Today the fiscal challenge is more critical, although not what is going to solve the long term problem. The IMF programme of 2010, or any other one, as shown by the history, will not solve either the fiscal or other economic challenges. All it can do, as with the past programmes, is provide a temporary reprieve. The solution is with us.

One simple example comes to mind, and this speaks the mindset of the Jamaican people. When this administration came to power, various groups called for the removal of GCT on electricity, as it was a promise that was taking too long. My view at the time was the GCT should remain, and that the proceeds should be used to fund credits for "compliant" tax payers who chose to go with renewable energy solutions at home. The public would have none of that. Imagine if we had done that and we were able to get a 30 per cent reduction in electricity consumption as a result. We also would have had more work for people in energy solutions, and for each dollar saved it would have gone directly to consumption. Hence raising living standards.

So that single policy decision would have resulted in reducing our import bill by at least US$200 million ($18.4 billion), which would have gone into the pockets of consumers, and into the economy. It also would have increased GDP spending, as this is money in the hands of those with a greater propensity to spend. It would have increased the profits of companies and resulted in a lower demand for foreign exchange and could have spurred local production of renewable energy solutions.

There are other policy decisions that the public pressured governments into taking the wrong action, which could have resulted in GDP growth if it had gone the other way. The reality is that many times the policy actions we pressure governments to take result in our own demise, and then we end up blaming our governments for something we wanted them to do because it was in our short term interest.

One MP who I think has done good analysis and taken a practical decision on pension, and ultimately fiscal, reform is Mikael Phillips. Let's see what will play out with this.

We can still take those policy decisions and cause a paradigm shift in our economic and social fortunes if we want. It doesn't take anything more than the will to do it and the cost is negligible compared to the value added that will accrue.

With each day we do not take that action though, the options narrow. Today we are faced with a situation where we need to conclude the IMF agreement, but the fact is that we can do things that will significantly decrease our dependence on the agreement. It is only through restructuring the deficiencies in our economic and social framework that we will find a sustainable solution to economic and social development, just as Lee Quan Yew did in Singapore.

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