Friday, June 29, 2012

Jamaica's growth strategy — Part 2

THE reason that five ministries — energy, transport, tourism, security, and justice — can cause "sustainable" growth in Jamaica, is they can hit at the heart of our economic challenge. That of productivity, which results in our deteriorating balance of payments challenge. The fiscal challenge is only a distraction of the real structural issue we face. What I am heartened about with these five ministries is that the ministers have been performing well, and I think are intent on being successful. I think they are also supported by three good junior ministers: Damion Crawford, Julian Robinson, and Morais Guy.

The most important, and easiest fix is to deal with our energy costs. The high energy cost (US 40 cents) per kilowatt hour causes us to be globally uncompetitive, even in our areas of comparative advantage (tourism and bauxite). Unless we fix this problem, then even with fiscal tightening, the economic situation will only get worse. We can, I think, in the short term (even without the industrial production changes), save around US$400 to US$500 million in the short to medium term. And if Minister Paulwell continues to implement his vision, I think we can do so and see the economy being stimulated by up to that amount coming back as disposable income for consumers.

The area of transport is also very important from two aspects. First the "mega" projects, as they are referred to, are critical for our short- to medium-term economic growth. One, because they will have a short-term stimulus effect on the economy, and second, because the long-term benefits of the highway and port expansion can be significant (I don't have enough space to explain the effect). Secondly, the area of properly organising the transport sector is critical. This itself can result in oil imports savings of at least US$200 million annually, if implemented correctly. But more importantly, it can significantly increase productivity.

The third area of tourism is also critical. First tourism will benefit greatly from initiatives in energy and transport, which will see the profitability and product become more competitive. Secondly, though, the additional rooms that are on the cards to be built will also create a stimulus impact that could also increase jobs and consumption. What is going to be very important is that institutions like HEART be aligned with the development so that they can provide the skills needed.

The fourth area of security needs no discussion really, as we have talked the area of crime's impact to death (no pun intended). Suffice to say that the approach being executed by Minister Bunting of going after the money is the most logical and practical approach, and seems to be reaping success. More importantly, though, is the increased presence and work of the police on the roads as we start to bring back some law and order to the streets. We must now focus on getting rid of noise pollution, so that people can get to rest and be more productive.

The final ministry to mention is that of Justice. In particular, I think that the focus of Minister Golding on getting the legislative agenda active, and dealing with some of those archaic laws that hold back the productivity of the country is critical if we are serious about competing globally as our laws are indeed "a shackle" for economic and social development.

So the recently concluded budget did not only look at fiscal tightening but, I think, did have a growth strategy outlined, and did recognise the need for providing stimulus to the economy in order for us to grow. Stimulus, of course, does not necessarily refer to getting loans from overseas for government, but rather also putting policies in place, and reallocating funds (such as the JEEP) to ensure that the consumer lives to fight another day.

It is also clear that unless these growth strategies become reality, then we will be facing another fiscal crisis next year.

Friday, June 22, 2012

Jamaica's growth strategy — Part 1

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.


Friday, June 01, 2012

What was the alternative to the budget taxes?

AS expected, the revenue estimates seek to raise an additional $23 billion in taxes from the economy. I expected a maximum of $20 billion in new tax measures, based on my computations, and accept accountability for being wrong by $3 billion.

What I also expected was the usual suggestion that Government should roll back taxes that affect “me” but place them on everyone else. Seriously now, what did we expect when we chose to not go with fiscal stimulus and instead “deal with our debt burden”, and accept bitter medicine now. Did we not expect it to hurt us as much as it hurt Europe?

Tax on telephone calls may have been an effort to lure revenues with minimal impact on local players and the economy.

The latest unemployment numbers (released by the PIOJ) show that 23,000 more persons were added to the unemployment line in January 2012. This is the direct result of the fiscal tightening we chose when the recession hit.

Well let's not cry now over spilt milk, as we should live with the consequences of our choices. The argument that the debt-GDP ratio is too high is a non-argument, as in 1984 our debt-GDP ratio was at 212 per cent, before falling to 90 per cent at the start of the 1990s, prior to the economy growing an average of six per cent per annum in the latter half of the 1980s, which clearly supports the point that what is important about debt is the return versus the cost.

One of the main arguments against new loans is that interest rates would go up. That's true, but as Dr Davies realised in the 1990s, the trade off for lower interest rates, in a low productivity society, is higher inflation. And inflation, in a consumption society like ours, is a greater burden on the poor than high interest rates. So when the price of chicken and corn beef go up we have lower aggregate demand, which leads to less jobs, and eventually more suffering and social challenges.

But this is where we are, so it makes no sense exploring what could have been, as we have already spread our bed. Now we must lie in it.

The question therefore is, was there an alternative to the $23-billion tax package. In other words, could it have been done in another way so that so many persons do not “bawl”? Let's explore what the possibilities were, bearing in mind that any tax package was always going to be contractionary, as taxes always hurt the consumer in the long run.

If one examines the tax lines on the budget, you will see that there are not many areas that one can get many taxes from. These are (i) PAYE and Statutory Deductions; (ii) Customs Duty; (iii) GCT/SCT; (iv) Company taxes; and (v) Tax on Interest.

We can, I think, rule out PAYE, as this would mean a greater burden on consumers leading to even further contraction in aggregate demand and the economy. Similarly, the WTO rules, and the possibility of reduced demand rules out increasing custom duties further. Company taxes come mainly from financial institutions, which still pay the old tax rate (as the rate was not reduced for them) and in any event increased taxes on them would find its way into higher interest rates. And tax on interest would result in increased demand for higher rates and could result in capital flight.

So the only real option we are left with is GCT / SCT rates, and the fact is that at 17.5 per cent we couldn't increase that rate as again it would have a much greater effect on reducing aggregate demand. The only choice left therefore was to reduce the rate marginally while at the same time broadening the base. What is missing is a proper social welfare distribution mechanism, but there was no alternative but to get some money from GCT.

But the GCT money would not have been enough, and therefore one would have to look at other areas that have a high enough volume of activity to guarantee revenue flows. Alas, the good old telephone calls. After all, Jamaicans love to chat and the low Internet penetration rates, means that we talk on the phone more than the free Internet connection. So there was no doubt that money would come from there.

Secondly, in terms of other areas of the economy that have the volume the fiscal revenues can rely on, they were remittances, tourism, and bauxite/alumina. Taxing remittances would see, I think, a slowdown in remittances, as more cash would be sent in the post, and also it would be a burden on the poor who get most of the remittance flows. Also one could not tax bauxite, which is a struggling industry. The only other available option was tourism, which is a shame as we are pressuring an industry that already is seeing a declining comparative advantage.

In deciding to tax telephone calls and tourism, the minister may have reasoned like this, how can I tax these so that it has a minimal impact on the players and the local economy. The way to do that, of course, is to tax the overseas consumers, so this is how the tax would have been placed on the rooms and the incoming calls.

For the above reasons, my view still stands that the tax package presented was very close to the best that could be done, given the fact that we decided to abandon the fiscal stimulus route and go with fiscal tightening. My objections would be to the tax on books, and also that it didn't appear that there was much consultation with the tourism industry re the timing of the taxes, given their contractual obligations.

I have heard suggestions that we should increase property taxes, to fall in line with what exists overseas. Sounds good, but how can we increase property taxes when the collection mechanism doesn't work properly, and in fact is horrendously inefficient. This means that we will still not collect the tax we want unless we fix the system first. Secondly, all it is going to do is increase rental rates, as any well-thinking property owner would pass it on to their tenant.

The next time that someone gets up and says, take the tax off this and that, please provide an alternative.

Monopoly in telecommunications

I wrote an article in early June 2011, pointing out that Cable and Wireless Jamaica was in danger, as their losses were unsustainable, and that there would be no reprieve for them because the regulatory environment at the time did not allow for greater competitiveness, but also because their business model was wrong.

Well Paulwell has ensured greater regulatory competitiveness but I think there business model is still wrong and their ads are really not attractive enough to cause any switch. In any event, even if they were to get many of the Digicel customers with the current business model they would more than likely still lose money.

My concern though is that we need a competitive telecommunications industry, especially in mobile phones, as one player will certainly mean higher cost for consumers. Maybe one of the things that C&W needs to do is spin off the mobile company and make it stand on its own and by doing so maybe they could write back the impairment on the mobile company assets, as future cash flows may not be so threatened.

What is more concerning than the $20-billion revenue statement loss however, is the negative cash being generated from operations, as the $15-billion write off is really a noncash item based on the expected viability of the company, but the negative cash from operations is more threatening to everyday business.

For the sake of the consumer I really hope that C&W makes the appropriate strategic decisions, and saves the company, as competitiveness in the sector is critical for Jamaica.