Sunday, December 13, 2015

Foundations for prosperity





The World Bank recently released a paper called “Jamaica Economic Update Fall 2015”, in which it gave an update on the Jamaican economy and spoke to the necessity to achieve higher levels of growth. As stated in the report, “While the government has made important progress on the structural reform agenda, Jamaica will need to accelerate its growth in order to achieve lasting debt sustainability”.

This is a very important point to note by the World Bank, as it is saying what some of us have been saying for a long time that while the fiscal adjustment is necessary, it is far from sufficient.

This is because the fiscal reform programme has been more on the expenditure management side and there is a limitation to what can be done in expenditure management, as there is a point that you can get to where everything stops.

If we are not at that point yet, we are certainly nearing that point. We should also note when the World Bank says that accelerated growth is necessary for debt sustainability. In other words, if we do not get the growth we need then we could start to compromise our debt to GDP ratio progress.

This has always been very clear, but the fact that it is mentioned in a World Bank report shows that after two years of expenditure management, it is very important to shift our focus to accelerated growth rates.

The World Bank goes further to suggest that capital investment may be a good way of doing so, which is what the US, for example, uses to emerge from economic recessions. This stimulus will usually come through the public purse in the form of roads, bridges, etc. One could think of Highway 2000 as having provided much of the stimulus for the economy because without it the economic conditions would have been much worse.

The recent decrease in the primary surplus balance will certainly allow some room for increased government spending, but even that amount will not be sufficient to create the stimulus for accelerated growth by itself, although it will help. In addition, the fact is that the government does not have the money required for the capital investments needed and so we should examine other sources to achieve that growth.

The best way to do that, without causing a strain on the fiscal accounts, require focusing on a few options.

The first is utilising Public-Private Partnerships (PPP). We have seen PPPs in the form of JPS and Sangster International Airport for example. In addition to PPPs in the pure sense, we also need to be looking at privatising some government assets, not just to take the burden off the government but also to make the assets more efficient and increase employment. Examples include Jamaica Telephone Company sold to Cable and Wireless; NCB privatisation; Air Jamaica taken over by Caribbean Airlines; and Sugar companies divested to the Chinese, among others.

These had the advantages of (i) reducing the burden on the fiscal accounts as well as (ii) increasing competition and employment as many have got larger.

In this vein I would also propose the privatisation of bodies like the National Water Commission, and looking at PPPs to manage entities like the Registrar General’s Department (RGD).

This approach will have the effect of (i) increasing capital investments; (ii) increasing employment and earnings; and (iii) reducing the fiscal burden, while increasing revenues from assets.

Poverty rate troubling

One troubling statement in the World Bank report is about the poverty level. It states: “Between 1997 and 2007 Jamaica’s poverty rate fell from 19.7 to 9.9 per cent, but by 2012 the poverty rate had rebounded to 19.9 per cent”.

This is a very worrying figure, as higher poverty rates means that purchasing power is reduced, resulting in lower economic activity. If economic activity is reduced, then it primarily affects SMEs, which are the ones that create the most new jobs. It also means that innovation which comes from the influence of SMEs will be limited. This will result in lower employment and uncompetitiveness eventually.

One of the main foundations for prosperity, therefore, must be to reduce the poverty rate to the lowest possible levels. For this to happen we need perhaps to increase employment. In order to increase employment in the past, the governments increased the number of people employed in the public sector. The only problem is that that is not a sustainable model as we are seeing now.

Therefore, increased employment can only come through increased private sector activity. Increased private sector activity can only come through people making investments with private capital. And capital will only invest where the risk-return is the best it can get, or else it goes to a safer haven.

What this means is creating an environment to facilitate capital moving into investments in Jamaica. In this global village it is easy to move capital from one market to another. This means that policies must be created to attract capital to the country, as is done in Panama where investors’ terms under which they invest are protected by law, which allows for predictability and lower risk.

The real foundation for prosperity lies in policies geared at full employment (defined at five per cent or less unemployment). But for full employment to occur it requires capital investments, as the World Bank says.

Since the government does not have the necessary fiscal space, it therefore requires private capital investments through PPPs or private investments. This in turn requires policy action deliberately aimed at inviting capital to invest.

When this occurs (increased capital investment) then we will see increased employment, which will be the road to prosperity.


6 comments:

Tyrone Richards said...

One of Jamaica's biggest challenge is export base commercial activities and the income to be had from those activities to improve the nation's GDP. A Private, Public Partnership in and of itself is merely just speaking to an entity/sector framework for collaboration. What is the policy, people, and political implications required to get that particular product out of Jamaica to some place else that will pay for it as also who is to assist that process to make for the most efficient transaction that is better than anyone else in the world and what are those specific products that the world around us wants. There are a lot PPP features up for grabs, but which system PPP gets the focus required?

Colin Aleong said...

The poverty rate is troubling because there is no money for programs to raise the poor out of poverty. Most of the money goes to service the debt from the austerity program. Jamaica has the harshest austerity program than any other country in the world, and is forced to have a 7% surplus of its GDP. Even Greece is forced to only have a 3% surplus. Do the research and you may be surprised by what you find.

Last year Jamaica paid out $138 million more in debt and interest repayments than it received in loan advances.

How can the country be asked to show significant growth when it is so burdened down by debt?

A public private partnership will in all likelihood be insufficient to make much of a difference.

In order to lessen the debt burden the country has to attract much more foreign direct investment inflows than it pays out in debt payments. Some sectors may be able to attract more FDI, but the solution probably lies in negotiating a better deal and a much less severe austerity program and asking for a large debt relief.

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