Friday, August 16, 2013

Understanding economic transformation

“Everybody want to go to heaven, but nobody want to die”. These words were sung by Peter Tosh in “Equals Rights. In other words, how can we expect to go to heaven if we are still living?

This is no different from the many expectations of people who expect (i) improved finances, but do not want to sacrifice consumption; (ii) good health and nice body, but still eat poorly and do no exercise; or (iii) economic transformation but do not want to make the sacrifices necessary.

It is necessary for us to understand that transformation takes discipline, sacrifice, and a commitment to direction. In other words if we want to see the necessary transformation in any aspect of our lives then it is going to require changing the things we are used to and discipline to stay the course.

When we see, for example, the performance of our athletes, we fail to understand the sacrifice and hard work that goes into preparing for that one race. Or, put another way, that one event we see. Being someone myself who does endurance exercise, I know the discipline it takes to train, and eat the proper foods, even though you feel like throwing in the towel many times.

On the contrary, one can also work hard and make sacrifices, and never achieve the transformation you want, simply because the preparation is not done properly or you are heading in the wrong direction. So, for example, (i) it does not matter how fast you drive, if you are heading in the direction of St. Thomas, you will not get to Montego Bay; or (ii) overworking your muscles can lead to disastrous results instead of the desired strength you desire.

What these examples show is that transformation requires, first understanding what your goals are; secondly, identifying the most efficient path to get there; thirdly, getting rid of the obstacles to that path; fourthly, committing to the transformation; and then finally implementing the transformation plan.

My last couple articles have focused on what is needed for economic growth and development, which essentially is to first understand that growth can only come from the private sector, and if the environment does not facilitate private sector expansion, then capital will simply move to more efficient returns. This includes moving out of Jamaica, or investing in short term activities.

So if we truly want economic and social transformation in Jamaica, we need to first accept that transformation requires that changes will happen. This I think is one of the problems we have faced with our past economic programmes, and why we have not been able to benefit in any sustainable way from the sacrifices we have been called on to make repeatedly.

What we have always sought to do is tinker with economic activity, while maintaining the same political and social behaviour that many of us are invested in. Over the decades we have given lip service to economic and social transformation, but we have never truly done what is necessary to cement that transformation.

We have said that the private sector must lead the growth in the country, but we have never truly created an environment for the private sector to flourish, as we have never really reduced the negative effects of bureaucracy, deal with energy, or addressed law and order. So the private sector continues to be expected to perform in an environment that is not as competitive as many of our trading partners.

We have said that we want to transform the public sector, to be more efficient, but political expedience has not allowed this to happen. And we have also failed to understand that what we really need is not a reduction in the public sector, but rather an increase in efficiency of the public sector, whatever that entails. Even if we were to reduce the public sector, within the context of onerous rules and reward based on seniority, rather than performance, we would have the same inefficient system with less people.

We have said that what we really need to transform the society is greater innovation, but have failed to address the challenges facing the education system to ensure that we produce more literate persons who can create the needed innovation. So we have many youth who continue to sit on the corners, or we continue to set up some persons for success, and others for failure through the GSAT exams.

We have said that we are serious about improving tourism, but fail to address the infrastructural issues, the degradation of our beaches, and the harassment and indiscipline on the roads.

And this is why I have always said that irrespective of whatever economic and social policies we have in place, that unless we, in a very significant way, address the structural issues of energy, bureaucracy, tax reform, and law and order, we will not see the sustainable development we need. In other words, how can you build a house properly without ensuring that there is a solid foundation in place? Remember the man who built his house in the sand.

So if we truly want economic and social transformation, we must understand what is required. We must also understand that given the structural weaknesses in the Jamaican economic and social environment, that transformation means that if we do not plan properly to make the needed changes then it is going to cause some social dislocation. For example, a more efficient economy means that those who do not have the ability to innovate, or be more productive, will fall by the way side and government is going to find itself having to play a greater welfare role.

Development is always going to cause dislocations, but this can be minimized by understanding where the weaknesses are and start putting in place mitigating policies to minimize the dislocation.

In other words, if we want to go to heaven, we must first die. However, at the same time we must do what is necessary to ensure we get to heaven, when we die, instead of somewhere else.

Friday, August 02, 2013

Productivity remains Jamaica's main problem

ON Wednesday I attended the presentation of a report by Professor Vanus James that examined the foreign exchange policy, and what is most appropriate. The study was initiated by Edward Seaga, and is a very good piece of work that seeks to bring some conclusion to the recent dialogue about which exchange rate regime is best for Jamaica.

The study concluded that the best regime is a managed floating rate, which is an argument that was put forward by myself and others, in the face of the opposing argument for a pegged, or fixed, regime. Mr Seaga and his team must be commended for this work, which is what we should expect to come from academic institutions, he being also the Chancellor of the University of Technology.

SEAGA... his team must be commended for their work, which is what we should expect to come from academic institutions

It is important for us to understand why a managed floating rate is best for Jamaica, as opposed to, say ,an unmanaged floating rate. The fact is that the exchange rate is very significant in Jamaica, where approximately 70 per cent of our consumption is imported, and we have always had a significant balance of payments (BOP) deficit. Left unmanaged, the exchange rate would depreciate at a much faster rate, resulting in significant hardships for the consumer and businesses, as long as our BOP deficit remains a challenge.

For those who say that the exchange rate should be left to find its true level, the fact is that the true level approaches infinity, if left unmanaged, as a result of our continuing BOP deficits. Therefore, it is necessary for us to manage our exchange rate, as long as we are unable to resolve our BOP problem. This means that the NIR and monetary policy will continue to be critical tools, and why we cannot fix the exchange rate. The result of doing so would be social challenges.

It follows, therefore, that if we are to resolve our long- term exchange rate problem, thereby causing a rise in income levels, relative to cost of living, then we must address the problem of the BOP. Resolution of the BOP issue means earning more foreign exchange than we spend, or at the very least, enough to cover our expenditure.

Some say to do so, what we need to do is live within our means, and what should be done is to reduce our imports to the level of what our foreign exchange earnings can support. This is a very simplistic argument that is based more on theory than practical application. In other words, if you need to spend $100 just to survive, and you earn $50, then it is practical to say that you can reduce your spend to bring your expenditure in line, if doing so means you are not able to survive.

Similarly, Jamaica's imports are 35 per cent fuel and 10 per cent food. And both are greater than our exports. So reducing our imports to match our exports will lead to food shortages, resulting in higher prices, and also reduced production, as there will be electricity and/or transport disruptions.

It would logically seem then that what we must do is increase our earnings. That is, reverse our BOP deficit. But in order for us to do so, we need to first understand what causes us to import more than we export, which at the base of it, I submit, is the inability to compete globally on a sufficient scale. There are some companies, like Grace Kennedy and Jamaica Producers, that have been making great strides internationally, but the problem is that many smaller companies are unable to make the transition.

This is caused, in my estimation, by our low productivity levels, which have continued to decline since the 1970s. And if we cannot improve productivity, then it is always going to be cheaper to import, and consume than produce locally and export, or consume.

Again the question is what makes it more rewarding for companies to import, or produce locally, for local consumption. In other words, why the preference to use imported content, or sell locally, rather than export.

Again, others argue that the policy should be to make it difficult for companies to survive by just selling locally, through exchange rate depreciation, reducing local income and forcing companies to export. The problem with that argument is that if you reduce local income without addressing the productivity issues, then all that will happen is that companies will close down, as we would not have addressed the productivity issue, and they will be unable to compete internationally and, therefore, have to close their doors as they will be unable to expand.

This shows that the underlying problem we face is one of productivity, and not that people necessarily want to consume imports. But what choice is there? Are we saying that while players in other economies act rationally, and their choice is based on returns, our private sector and consumers should act irrationally and buy local inputs. even though they are more expensive? While this is a short-term fix; it is not sustainable, and is a primary reason why our economy has struggled.

Therefore, if we want to solve our foreign exchange, inflation, cost of living, NIR, BOP, and other issues, then we must focus on solving our productivity issues. And to solve our productivity issues, we must focus on what makes business uncompetitive.

Thus, the emphasis on energy cost, bureaucracy, tax reform, and law and order.