DC Jottings

The IMF and interest rates

2012-01-22T12:19:00.001-05:00

TWO issues that will be most critical in the current economic environment are the IMF and what will happen to interest rates. This is against the background of the weakening fiscal and trade situation that Jamaica faces, as well as the weakening global situation, with Europe still in a significant debt crisis, growth in China slowing, and the US economy still uncertain.

In fact there are two international reports that should cause some concern, both reported on Tuesday January 17, 2012.

In the first report, the World Bank lowered its growth forecast for the world economy down from 2.5 to 2.7 per cent, while at the same time warning of a possible shutdown of a major European economy and a situation similar to the Lehman collapse.

Additionally an article on www.cnbc.com, which states that more investors are going more into cash than stocks and bonds.

What these show is that there is still a lot of uncertainty and perception of risk in the markets. It is when these perceptions lead to negative consumer behaviour that Jamaica will see the effects. That is a slowdown in consumer demand that will have an adverse effect on our foreign exchange earners, and an increased perception of risk means an upward pressure on interest rates.

But even without this slowdown effect, Jamaica still has (and always had) a significant foreign exchange problem. This problem is only exacerbated now because of the lack of a capital market to run to. This means for us that there is no other option for us but to secure a favourable deal with the IMF. In fact it was reported on January 13, 2012 that UBS had warned its investors to stay away from Jamaica's debt until the issue with the IMF is sorted out. The expectation of UBS is that yields would climb, which is consistent with my view from last year that interest rates would trend up. In fact rates have already started to trend up and we have been seeing an increase in activity of government going to the market for financing.

The reason for our current situation stems from the unrealistic targets of the IMF agreement originally which caused us to worsen the fiscal situation through the further contraction of economic activity. This is a lonely position I have always maintained along with Ralston Hyman, while others espoused the need to have the structural adjustments done swiftly. Well, if you take away drugs at one go from an addict, he might go into shock and die.

But here we are with worsening fiscal and balance of payments numbers, and as far as i am concerned they will deteriorate further. So the only practical saving grace, to ensure that inflation, exchange rate and interest rates remain relatively low and stable, will be not only saving the IMF agreement but more importantly getting a more realistic agreement that will ensure sustainable growth. Even with that, there will still be upward pressure on inflation and interest rates. This is why I have always maintained that the government needs an independent team to advise them on solutions. But I am just a minion so I don't expect it will happen.

What is certain is that the challenges we face are significant, as these realities have to be balanced with the expectation from the manifesto declarations, particularly the JEEP programme.

Whatever the promises were, however, it is important to take a realistic approach to the issues. One such is the matter of the rollback of GCT on electricity charges. This, in my view, would only be of short-term (maybe for two months) benefit to consumers. Instead what we need to do is use that fund of around $2 Billion annually to reduce the dependence on electricity by providing a credit to taxcompliant individuals who install renewable energy solutions at home.

An argument was made to me recently that this will not benefit small businesses, which in my view is a very narrow way of thinking about it. If consumers have more disposable income because of lower electricity use, they will have more money to spend with businesses, resulting in greater economic activity and profits for businesses. The only thing that will help industrial use of electricity is cheaper distribution costs in the medium term, and new energy sources in the long term. My choice, of course, has always been coal.

Telecommunications landscape

From as early as April 2011 I wrote that the Digicel-Claro deal was a red herring, and I see that it is still being focused on as LIME's Waterloo. In June 2011, after reviewing LIME's financials, I indicated that although LIME had cash resources for about two years or so, the business model and regulatory environment would eventually lead to their demise. The key regulatory issues being number portability and cross-network charges. What we will be careful of when addressing particularly the latter is that government does not start setting rates and overregulating, as this will surely kill the industry also.

Today it is obvious not only that LIME is close to shutting down, which would be the prudent decision with the current environment and business model, but more importantly that Jamaicans could once again face a monopoly when the telecommunications sector is so important to productivity.

So we are almost a year after my article and nothing has been done to address the regulatory issues, which I think speaks to the uselessness of the OUR, just as they seemed impotent in the JPS situation. I am happy to hear that the Minister is going to take it into his own hands to ensure that the environment is changed to accommodate greater competition. It is important that this be done immediately, as the ones who will really suffer are the consumers.

What is important from the above is that it is critical that we find immediate solutions to (i) the IMF agreement; (ii) the fiscal challenge; and (iii) the cost of energy.

Facing the challenges ahead

2012-01-06T03:54:00.001-05:00

One certainty of the upcoming fiscal and calendar year is that it is going to be difficult and will require all hands on deck. This is why it disturbs me that when I look at some of the messages on social media, I see young persons, apparently expressing their disgust that the PNP won the election, saying that they expect that they will fail as a government. This is similar to the sentiments I saw expressed in 2007 by young persons sympathetic to the PNP.

It is interesting to note that these statements are not coming from the politicians who lost but from young persons who are supposed to be tomorrow's leaders. If this is the situation, then what hope do we have for tomorrow? Don't we have the sense to realise that if the PNP fails, no part of Jamaica will be spared? It is not that one area will do badly and the other will do well, based on the occupation by party supporters.

My message to these persons is that they should do everything in their power to make sure that the government of the day succeeds because 2012 is going to be a difficult year, and any wrong move could affect us for a very long time to come. Unless, of course, they have dual citizenship and don't plan to live here.

With that said, I want to look at some of the challenges we face as a country. Let me first say that while I believe that there will be significant challenges ahead I do not believe that they are insurmountable, and further I do not believe that there has to be a heavy dose of bitter medicine to resolve the challenges. It depends on how the situation is handled.

What is certain is that if the wrong moves are made then any slippage is going to have a significant negative effect on the country. One may say the following:

o But there is macroeconomic stability and this means that things are improving and we are on a path to growth; or

o But we have been here before, for example the financial crisis of the mid-1990s, and we managed to bring the economy back to small but consistent growth prior to the recession.

The difference this time is that we are working from a weakened position.

While I agree that there is macroeconomic stability, as I have always said, the best way to achieve stability in a patient is to kill the patient. So the reason why all our macro targets look good is because of the lack of economic activity. So everything seems stable. In fact when economies grow significantly, and start to overheat, the macro variables are never stable without monetary and fiscal policy intervention. If left unchecked, inflation and exchange rates will increase based on demand from growth.

What we have failed to remember is that the primary role of governance and economic policy is for the improvement of the standard of living of the people in the country. So managing to improve macroeconomic numbers, while the majority of the people get poorer, is bad policy. This is why I have always held the view that a Keynesian approach in a recessionary environment is not only necessary but is a responsibility of governance. We are now seeing the effects of the pro-cyclical and fiscal-oriented approach, as is being shown in the fiscal revenue targets.

This brings me to the other point, where one might say that we have been here before. Sure we have seen significant inflation and exchange rate movement in the early 1990s, and to some extent the early 1980s. We also had a significant recession in the early 1980s. We also saw many business failures in the mid-1990s. The difference is that in the 1990s and 1980s we had a very big advantage that we do not have today and that caused us to be able to find a way out of that crisis. We had access to debt through the capital markets.

There is a significant difference between today, the 1990s, and the 1980s. Without the ability to borrow money, or receive grants during those two periods, we would have seen a significant economic problem. The problem Jamaica has always faced is one of not being able to afford what we want to consume, whether it is on the government accounts or balance of payments (BOP) side.

Today what has happened is:

o We have a worsening BOP, with the first seven months of 2011 showing deterioration in the balance of payments by over US$600 million, and a current account deficit of over US$900 million. This was caused primarily by an increase in oil imports of over US$550 million and in addition associated freight costs. It is for this reason that I have always emphasised each time the need to deal with our energy situation as a priority. I am supportive of Paulwell's approach and hope that we can achieve this soon.

o Our fiscal revenues are some J$8.5 billion behind target, wile our expenditures are only J$3 billion behind target. This means that our fiscal deficit is J$5.5 billion worse than projected. I expect that given the low demand environment this situation will worsen.

But alas, there is no capital market to run to and get money unless we are willing to offer higher interest rates, and even so persons will be a lot more wary and unable (because of their own circumstances) to take up GOJ debt. What is certain is that there cannot be a JDX2 unless we want to see a serious problem in the economy. Also the FDI flows that helped us in the 1990s to 2000s are no longer there. In fact it seems more profits are being sent abroad than those coming in.

The government is also faced with the challenge of having to provide jobs, and I think has made the right decision that it is not practical to lay off public sector workers. This is something I have been saying for a while, as the redundancy cost and the negative effect on a stagnant economy would be impractical. Additionally I also agree that pension reform is not something that can materialise in the short term. I think, however, that we can start the process of tax reform in short order. We don't have to implement everything at once, but certainly it is important to pick the low-hanging fruits as soon as possible. How do you in the short term just change an embedded compensation package? Apart from equity issues it is just not an easy task.

So then what do we do? We have a worsening BOP and fiscal deficit and little ability to manoeuvre. It seems obvious to me and comes right back to the argument I have been pushing for the last few years. The only real hope is to grow our value-added debt, as was done in the mid-1980s, and ensure that what we use it for is greater than the cost. I don't know anyone with monthly income and debt payment of $50 and $100 respectively, who can reduce their debt by cutting back on expenditure.

Our only viable option right now is to get an extended fund facility with the IMF, as this is not only the avenue to IMF funds but also other multilateral funding. This means that we must save the IMF agreement, as without the IMF there is little else that can be done. And as I have always said, the targets we were pursuing were doing nothing more than contracting the economy while we were running out of options.

There are some policy moves that can be taken to make things easier ,and I am hopeful that this will be pursued by the government.

At the individual level, this is the time to get out of unproductive debt and consolidate your own expenditures.

Why the JLP lost–a lesson for governance

2011-12-30T17:42:00.001-05:00

I have been seeing some of the comments by the young labourites. They range from sadness to anger and results a lot in accusing the PNP of vote buying and ballot stealing. I am almost pretty confident that both sides may have sought to engage in these nefarious activities but even if there was some of that it did not affect the results.

I think the PNP gave a solid whipping to the JLP, and there are reasons why. Primarily amongst them is that the JLP, from around two years ago, started to lose touch with the people.

When then PM Holness announced the election I said to supporters of both sides that the PNP would win the election. As far as I was concerned, the PNP was working the constituencies for far longer, there were outstanding issues in the IMF and JDIP, I think more time would be needed for the people to warm up to Holness, and an election between xmas and new year was not going to upset people’s vacations (low turnout). A low turnout is always good for the PNP because of their larger and more committed base.

It is important to remember that economies and people are primarily motivated by micro issues, and not the macro, and so the idea of the IMF programme achieving the macro targets and no consistent stimulus package being put in place, was bound to result in job losses that caused the major swing in apathy from the JLP.

As I consistently said, the IMF programme was pro-cyclical and resulted in economic contraction further than what was necessary and a big part of the contraction resulted from the tax packages.In other words too much fiscal focus.

Combined with this was public sector salary and pension issue, which created much isolation, and this combined with the economic decline / job losses from the global effects, resulted in a growing resentment of government, especially when unnecessary expenditures were reported.

The Holness factor helped but this was wiped away by the poor campaign by the JLP, especially when compared against a better one by the PNP and a PNP manifesto that communicated better despite continuing less details. Remember Jamaicans don’t read much and so the shorter pictorial PNP manifesto communicated better. The PNP also presented a younger team (even if it just perception) and the JLP focused on a younger leader, while in error focusing on attacking PSM. Add to this some slip ups during the campaign.

So in the end the people either voted against the above or didn’t vote because of it. It is important to understand that economies and people are driven by micro issues, which also means that with a more aware, and jobless, citizenry, the election would have been won by the attention of MPs and candidates in the constituency.

In the end it boiled down to the PNP having a closer connection with the people and running a better campaign, which in the end was a more positive campaign on issues than the JLP’s. So it is not that vote buying or anything like that lost the election. The answer is in the mirror.

This is also a lesson for anyone that governs Jamaica from now as Jamaicans seem to vote a lot more on representation rather than national issues.

What is necessary in 2012

2011-12-30T07:37:00.001-05:00

AT the time of writing the polls have not opened as yet. But whoever forms the next Government will still be faced with the global and local economic challenges in 2012.

Globally we can look forward to the following:

* Much weaker Europe, and an overall weak global economy;

* Oil prices I expect to continue their upward trend;

* Inflationary pressures, as governments seek to avert economic downturn by expanding money supply; and

* Consumer spending to see some recovery but remain relatively weak when compared to pre-recession levels.

Locally, I expect that these global factors will have an impact, at least in terms of limiting our earnings potential. The truth, however, is that much of what happens to Jamaica in 2012 is going to depend on the policies we pursue.

One of the things that we must start to understand is what drives economies. In other words, as I said last week, the first question that should have been posed to the candidates in the recent debates was, what is your explanation of the problem? It is a simple question, but the truth is, unless we understand the problem then we can never find the appropriate solution, and I think that this is what has escaped us for years, if not decades.

I do not think that we have an understanding of what our real issues are. Our inability to define the real problem Jamaica faces has caused us not to grow this economy in any meaningful way since 1990.

I have long said that economies are nothing more than the behavioural interaction of people, as they go about their business of satisfying everyday needs and wants. It is important to understand the link between Mazlow's Hierarchy of Needs and economics.

As people satisfy more and more of their basic needs, they move towards economic activity that leads to self-actualisation. And the price of self-actualisation is higher than the price of basic needs. So it stands to reason that the more satisfied people are, the higher the value of expenditure, which will lead to greater economic expansion.

This is illustrated by countries like the US, where as more and more persons become wealthy they start demanding products that cost more. This means that manufacturers of goods and services can increase revenues, and also more business opportunities become available. The trick to this expansion is that it must be done from earnings and not from debt, as the US found out in 2008, and this is what contributed to our problem. Otherwise, the whole house of cards will come falling down.

It is this lack of focus on the consumer that has been at the heart of Jamaica's failure to achieve sustainable economic growth. An examination of our policies over the years will reveal that we have focused on the fiscal accounts or growth without earnings. In other words, the central focus of government policy has been either growing consumption with debt or taxing Jamaicans every year to stabilise the fiscal accounts.

The fact is that this approach will not work, and it is important that going into 2012, whoever forms the Government understands this. Moody's has indicated that the policies of the Government must continue in 2012 if we are to maintain their rating, and we could see improvement if we continue the policies. While Moody's is generally correct, there has been a missing ingredient in our policy that is working against greater economic success. This is what has always been missing from as early as independence.

We have failed to recognise the importance of the consumer to the economy and so have failed to realise the sustainable growth that we need. We have praised economies such as Singapore and the US, and have held them out as models that we need to emulate. But what we have failed to understand about what makes these countries great is that their primary development focus is centred on protecting the individual rights of citizens (from other citizens and the state) and ensuring that everyone has access to the same opportunities. This is, fundamentally, all we need to strive for, and the rest will follow.

If we ensure that (i) citizens' rights are protected, (ii) everyone has the best opportunity to succeed (which includes access to education and health), and (iii) discipline and structure are enforced, then I guarantee that the economy will see unprecedented growth and development, as persons move from the lower rung of Mazlow's Hierarchy to the top.

If this is done, then the market will drive greater innovation and value.

However, as I have long argued, in a stagnant environment just coming out of a long recession, the market needs a push. This is where Keynesian policies must be pursued, and is why the IMF agreement was pro-cyclical. This is why stimulus projects (whether you call it JDIP or JEEP) are important, and necessary. What we must ensure is that they have the necessary parliamentary oversight for transparency, but even more important, I think they must provide the maximum benefit to the economy. My preference is a focus on infrastructure and renewable energy projects, for the maximum benefit to be derived.

It is important that people have meaningful jobs. Jamaica's unemployment numbers from even in the 1960s reveal the lack of focus on full employment as a government policy.

So as we go into 2012, with a newly formed Government, we need to try a new approach. We need to put the individual rights and opportunities of the people at the centre of our policies. We must focus on employment opportunities as a part of that.

We will never achieve the development we want without this, because if people are always concerned with justice and red tape, then there is no room for innovation and they will remain at the bottom of Mazlow's Hierarchy, which is where underdeveloped economies find themselves.

After 50 years it is finally time for us to break away from the colonial structures that seek to protect state against subjects and truly make the citizen the primary focus of our democracy.

Go out and vote

2011-12-28T07:41:00.001-05:00

Tomorrow is election day and I just wanted to ad some thoughts after observing what has been happening over the past few weeks. I have observed the accusations and the fanatical way in which our young persons in particular have approached our politics, and am not feeling good about our youth.

I am not speaking particularly about the candidates but rather the supporters, who when I look at the FB posts and comments I find it disheartening as the comments are really not about the issues but the attacking of personalities. When will we get away from this sort of politics. Maybe I am idealistic but I believe that Jamaica deserves better than this.

My message to everyone is that you should all go out and vote, as it is not only the most fundamental democratic right that our forefathers gave their lives for in some instances, but is also a responsibility to your country. Anyone who ignored this responsibility and either didn’t enumerate or doesn’t plan to vote I think it is a betrayal to democracy.

I would never tell anyone who they should vote for, and do not want to have a conversation on that, so if there are any comments on this post then please do not introduce any tribalistic views. They will be ignored but I would love any comments on the issues, which I will entertain that discussion going into tomorrow if I can help to clear up any thoughts anyone has.

When you have privately thought about the issues please go out and vote, as it is a responsibility we have to our country. And vote on what you think is best for you and your country.

I personally am tired of the tribalistic approach, as whichever party forms government at the end of the day it is our government if we call ourselves Jamaicans and whoever is elected government on Thursday should get the support of everyone because I do not know of any part of Jamaica that will sink while the other part stays afloat.

The competitive nature of election is good because it helps to preserve our democracy but when it is over we need to move forward as one country, and make for a better place to live for all.

Do you know where you're going to?

2011-12-23T05:37:00.001-05:00

Do you know where you're going to?

Do you like the things that life is showing you

Where are you going to?

Do you know...?

— Diana Ross, 1975

We could ask ourselves these questions after we listened to all three debates and digested the manifestos, leading up to the election on December 29th. Indeed these questions are critical ones we need to answer before we place our "X" on Election Day.

This is one of the disappointments I had after the debates, as they seemed to be anti-climatic. True, they got progressively better, starting with the disastrous youth debate, but can anyone honestly say that after listening to the debates we know where we are going to?

What we know after the debates is what we knew before. We know that it is necessary for the country to maintain its fiscal discipline and extend the IMF agreement; public sector, tax and pension reform is going to be critical going forward; there must be a real focus on quality and access to education; there must be continued focus on governance and corruption; energy costs must be reduced; bureaucracy is a major inhibitor that must be addressed; the justice system needs to be reformed; the debt and productivity issues must be addressed.

Prime minister Andrew Holness and Opposition leader Portia Simpson-Miller during the leadership debate on Tuesday.

We knew all that before the debates and it seems as if that is all we still know after. One of the major problems is that the Debates Commission did the country a disservice with the format of the debates, which they tried to correct in the last one (which improved it somewhat). The fact, though, is that it didn't seem as if the debates were designed to unearth any additional information and direction for Jamaicans, but were designed just to appease the need for debates to be held. So I would think that more blame for the failure is at the feet of the Debates Commission than the participants. After all, the participants only answered what was asked and didn't have to worry about much follow-through because of the format.

So as a country we need to seek our answers elsewhere. Let me pause to congratulate Peter Bunting and Danville Walker for hosting their own local debate, which is a really progressive move.

I think we could get more information from the manifestos, which give a pretty comprehensive view into the thinking of both parties. And both parties must be congratulated for coming out with such comprehensive documents in such a short time, as both do show a clear understanding of what the issues are and lay a foundation for more specifics.

They do attempt to answer the question posed above, that is "do you know where you're going to?" They do include very detailed descriptions of where they want to take the country, by looking not only at general policy issues but some specifics as to what is to be done to achieve those policy objectives. I think the JLP document includes more specifics, but the PNP document communicates better and emphasises more consultation.

The JLP places greater emphasis on private sector-led growth; as opposed to the PNP that emphasises more government-led growth. Interestingly though, on the important matter of energy, the JLP seems to prefer a more involved state solution unlike the PNP that emphasises a market competition model.

Even so, I feel that neither document directly addresses the real structural issue with the economy but does so in a roundabout manner.

So if the time spent on the debates had been spent focusing on analysis and discussion of the manifestos, it would have had greater benefit to the understanding of where both parties want to take us. The truth is that there is not much policy difference between both parties, as is expected because our options are very limited, and so what is important for us to understand is who can better take us to our goal, as we have suffered in the past from an almost deceitful relationship of broken promises, much like a dejected spouse.

This takes me to the main criticism of both manifestos. They are too long and because of this length they fail to communicate an overarching vision to the electorate. Their failure to provide an executive summary has left the reader without a framework of the vision of the manifestos. They seem to be an attempt to provide something for everyone, and so have talked about everything under the sun in the attempt to satisfy everyone. But by doing so they lost the direction and emphasis of the policies.

So the manifestos do a better job of telling us where we are going to, but because of the disorganised presentation and the amount of information, we are not sure of how we will get there.

What was needed was a statement of general objectives, which the PNP document sought to do, but this should be around a central theme of development. And the documents did mention the main areas of focus at the start, but the way the rest was written veered from the stated emphases. In other words, if they were answering exam questions the body and conclusion of the answer would not connect with the introduction.

This is not difficult to correct, however, and it would be a good strategy for both parties to summarise the main points and present them to the electors, who are more concerned in this election about "what are you going to do for me?" than "what have you done for me lately?". The latter seems to be where some of the old-style politicians want to focus - including the awful youth debate, which surprisingly had more old-style politics and inaccuracies than the two latter debates.

So since the debates have failed to deliver, my suggestion is that we go to the manifestos, which provide a lot more information and only need some more attention paid to wading through much of the unnecessary and repetitive content.

To all my readers, have a happy holiday.

PNP manifesto analysis

2011-12-15T04:54:00.001-05:00

I have been asked to provide a brief analysis on the PNP manifesto by a few of my FB friends, and so will attempt to do so below. It of course requires further discussion and hopefully some of that discussion will take place on this post so that the issues will become a lot clearer. I only have 2070 friends so it may be worthwhile if everyone could share the discussion with your friends so that it can be far reaching.

Let me first start buy saying that it is encouraging that so many persons seem to have taken an interest in what is being proposed.

All in all, and given the timeframe of the election period, one could say that this document is a fair response. The fact is that there was not enough time for a more comprehensive document as elections are just around the corner, and I suspect that the PNP wanted to get this out prior to the Finance debate, as strategically it sets up the expectation of the debate and makes it easier to communicate for Dr Phillips. This is why a fixed election date is good, so that the process of consultation in campaigns can be longer and bring out more. It does show that work is happening, although I think that greater thought could have gone into the document.

There are some stronger areas, which show the strength of the spokespersons, such as Energy, Foreign Affairs, Education, Agriculture, and an understanding of the economic challenges. The policies do not seem to be inconsistent with the current administration, as expected, as there are really not many options available to whoever forms government. Will be interesting to see how the JLP’s compares, as I don’t expect much policy variation, which is why details on implementation is important. So we could end up at the same place if we do not have those details

I will also do the same synopsis of the JLP manifesto when it comes out.

My comments are listed as follows:

Our Mission: this gives brief overview of the manifesto contents, and this and throughout the manifesto shows that the PNP seems to have a clear understanding of the issues that face the Jamaican people. It however does not in my view represent a mission but seems more like a summary of the views contained in the document and seems more like an introduction than a mission. This sets the stage for the rest of the document as it does not clearly define a mission, which is the first problem.
Foreword: sets out the PNP’s understanding of the challenges that lie ahead, and it is obvious that they are at one with the “bitter medicine” ahead that was sated by the Prime Minister. There is therefore an actualization by both parties that 2012, and the foreseeable future is going to be difficult for Jamaica. One would therefore expect that the document will continue to define what the “bitter medicine” will be, as the JLP also needs to do, so I will look at the contents to see if this “bitter medicine” is defined, as once you set up this type of expectation it is necessary to define it for the people if they are being asked to sacrifice.
Eighteen Steps to Full People Empowerment: this section does clearly set out some of the policy options that need to be undertaken, although I do not think that these will lead to people empowerment. People empowerment in the context of Jamaica is much more than setting out these policy objectives. In fact rather than “steps” to empowerment these seem to be statements of intent. Steps imply a path, but this does not seem like a path but rather a focus on the destination of the steps. The section does provide a good summary of what needs to be done, but is missing the most important thing in relation to the “empowerment” theme, which is the assurance of justice and equity. For example, what is the assurances that the rights under the Charter of Rights will be respected and that people won’t have to go to court to fight it? The most important aspect of empowerment for people include, in addition to justice, proper health and education access and facilities, but this is not mentioned in this empowerment section.
Current Economic Position: the following are noted:

Shows understanding of the challenges that Jamaica faces, but does not mention what I think is the primary problem, that of the Balance of Payments, which is impacted by productivity and competitiveness. There is a need for a credible medium-term economic programme, as indicated by the IMF. Will see if further that programme is provided in the document since it states the necessity for one to deal with the challenges ahead.
My own view is that the debt is NOT the central problem facing the government, and is only a symptom of the underlying problem. This seems to be the same focus on the fiscal as in the current IMF agreement, and the danger of this focus is that it ignores action on the underlying problem. This therefore suggests an agreement with the current fiscal focus.
Statement about what is required for a credible macro-economic programme continues to speak to a focus on fiscal and expenditure management. I would have thought that this statement would have included importantly reference to the JEEP (government stimulus) as an important characteristic, as the other things to be taken into account are not as important for economic expansion. Tight expenditure and debt ratio focus are both contractionary effects; and increased support from partners seems a contradiction in the face of the admission of the global crisis, as grants have already been underperforming and will continue to do so. It would seem that the “self-reliance” talk of the 70s would have been more appropriate. Agree 100% about the tax system and the corruption and waste.
Following paragraphs criticizing the JLP seems like wasted space, and tends to lose the reading flow from the party’s intent. I don’t think that a manifesto should include criticisms of the opponent but just focus on what the author intends to do. Leave that other part for the political platform and ads.
The opening of the plans and strategies does recognize the need for a mix of fiscal responsibility, growth strategies, and consultation. All are very important to move forward.
Correct that a new medium term IMF agreement is needed. Would have loved to see mention of whether an extended fund facility or standby agreement is needed, and what are some of the things that will be sought in this agreement. Don’t expect specifics as it is a negotiation and therefore understand the need not to say too much on this
MOU with public sector workers did not work before and certainly is not what is needed. Consultation does need to happen but needs to be focused on productivity improvements and how to best reward productivity.
The tax reform statement shows that they are consistent with the current tax reform paper, which in my view is not adequate. The aim of tax reform must be primarily stimulating the economy. After reading this I get the impression that the focus will be on fiscal – “widening the tax base”. I might misunderstand but it needs further clarification, so I will give the benefit of the doubt and say that the intent is for economic stimulation, but it needs further details.
Agree that programmes like JDIP and JEEP needs to be on the budget, and also needs parliamentary oversight, which I would think should have a parliamentary committee that oversees massive programmes.
I don’t like government identifying sectors for growth. Sounds too much like a government controlled state, which we have always been. Don’t discriminate by providing incentives to some and not the others. The market will pick the winners if the proper environment is created. The problem has always been that because we do not have the proper market environment then government becomes a welfare programme through incentives.
They state that they will “accelerate decision-making on the choice of fuel sources” and later goes on to state that they will be committed to diversification and set up a National Energy Council. While the document does correctly recognize the need for focus on this crucial problem, it seems to be bringing the government back into decision making and is in contradiction to what Paulwell has said, which I like. Government needs to only set certain environmental and regulatory standards and allow the private sector to determine what energy sources they want to invest in within those standards. I would have preferred to see Paulwell’s position replicated in this document. I don’t get the feeling that with the National Council that we are moving away from the bureaucracy that has stifled our energy effort so far.

JEEP: much of the programme hinges on this so it requires its own analysis:

not enough detail given the hype and expectation around it.
State that funding will come from existing state resources, which is the JDIP and TEF. Does the JDIP loan contracts and the purpose of the TEF allow for this sort of allocation?
Well designed infrastructure projects – agree that focus needs to be on infrastructure projects but more detail needed here. There was so much hype about JEEP that I believe it needs to be more clearly defined, especially as 25% of JDIP funds is to go towards it, in keeping with the call for transparency. JEEP is the same as JDIP in intent, that is a stimulus package, which is good for the economy but we need to have details and transparency so that it does not go the way of JDIP.
Says the measures to encourage investments (JEEP tax incentives) will not sector discriminate but above the document states that certain sectors will be focused on. Seems to contradict. This also implies the giving up of tax revenues. What will this do to the tax revenues and where will the shortfall be made up?
Disgaree with GOJ taking equity positions in firms. We tried it through DBJ funding and it didn’t wok and we could therefore end up with government getting involved in the productive sector again, such as after FINSAC.

The following sector focus sections shows what needs to be done in the various sectors we presently hold a comparative advantage in but it seems as if government involvement will be high. The sections do recognize that innovation is needed in these sectors but does not emphasize enough what the government needs to do to ensure that the environment is favourable to encourage investment, which is what is needed. It is obvious that a lot more thought went into the Agriculture section however.
The section on encouraging innovation, competitiveness, and entrepreneurship does not provide an understanding of what is needed to do so as it broadly speaks to what is to be done and again incentives, when what is needed is to create the building blocks for competitiveness as contained in the Global Competitiveness report, which shows what Jamaica’s main challenges are.
Foreign Affairs section seems ok and I would expect that as Hylton does have a good understanding of what is needed.
Creation of an Enabling Environment: this does show a clear understanding of what is needed in an enabling environment. It speaks to infrastructure, primary education and healthcare, social welfare programme, public/private partnerships, need for constitutional and legislative reform (not enough though on this important issue and what is proposed won’t make a difference in my view), crime (would have loved to see a move to make the police force more independent and accountable, such as is being done now with success), .

I think more detail is needed and hope that this will come out in the discussion over the next few days.

What are our options?

2011-12-09T05:12:00.001-05:00

In answering the question of what are Jamaica's options, let's look at three scenarios. In both John Brown has income of $100 of which he spends $70 on necessities, $20 on discretionary items, and $10 he saves.

The following actions are taken by John:

o Scenario 1: accumulates debt of $25, which he uses to purchase a luxury item for consumption. Debt to Income ratio of 25%.

o Scenario 2: accumulates debt of $150, which is used primarily for luxury items for consumption. Debt to Income ratio of 150%.

o Scenario 3: accumulates debt of $150, which is used primarily for productive/investment purposes. Debt to Income ratio of 150%.

If John wants to reduce his debt, then he may do the following.

Scenario 1: this is a simple solution, as all John needs to do is cut back on the discretionary spending, and if his savings has a lower return than the cost of the debt then he could forego the savings and pay down the debt.

Scenarios 2 and 3: these are not as straightforward as 1, because the questions of survival and comparing return on investment versus debt are relevant decisions.

In 2 for example, John could not just cut out discretionary expenditure, savings, and necessities to pay back the loan. Even if he could use all his income to pay back the debt, he still would not have enough money available. In any event it is not possible to use all his income because a substantial part of his income goes towards keeping him alive ($70/70%). And therefore if he were to just keep cutting back on expenditure to pay the debt, then he would at best become destitute and could end up in an early grave.

In 3, what he must do depends on the return he makes on the investment he uses the debt for. So if the debt cost him $5 per annum and he makes $10 per annum (after taxes and all costs) from the investment, then it may be worthwhile to keep the debt and pay down the debt from the investment while maintaining his current lifestyle. However, another important consideration is cash flow from the investment versus that of the debt, as cash flow is the most important consideration. A company never goes out of business because of accounting losses, but because it doesn't have net cash inflow. It is important to understand this point, because this relates to Jamaica's situation.

Some analysts continue to point to the debt to GDP ratio as our major problem. However, if I had a debt to GDP ratio of 500 per cent but I didn't have to make any debt payments until 10 years in the future, and someone else had a debt to GDP ratio of 150 per cent but had to make all the payments within a year, which one is better off today? The fact is that cash flow is more important than the ratios, which should really be used as a guide for policy and action and not the reason why one acts.

So in John's case it is important to understand the debt repayment terms, and this is why in the restructuring of the debt the timing of the cash outflows is so important. But all debt restructuring does is give more time to make adjustments, and so if John gets a reprieve in terms of timing of cash payments, he must ensure that he has a plan to adjust either his expenditure or income in order to ensure that when the payments start again he is not in the same position because he has not made the necessary adjustments.

It also seems obvious that John cannot resolve his debt problem (scenario 2) by just cutting back on expenditure, and so the only real option is for him to increase his risk in a very calculated way, in order to reduce his debt in the long term. Seaga did this in the 1980s, when the debt to GDP ratio increased to 212 per cent in 1984: this additional borrowing helped to result in average growth of 6 percent per annum towards the end of the 80s and a debt to GDP ratio of 90 per cent in 1990. This is a countercyclical approach, as opposed to the current IMF agreement which is procyclical, which could not help John in solving his debt problem without landing him to penury or death.

Even if John were to reduce his debt through forgiveness, cutting back on expenditure, or returns from investment, he would not solve his long- term problem without developing the discipline to live within his means. And he will not be able to get persons to continue to support his business if his service level is not consistent (low productivity), access to his business is difficult because of crime impact, or when doing business with him you are frustrated by an inefficient automated telephone system (bureaucracy).

I am sure that you have by now drawn the parallel between John and Jamaica. Jamaica's situation is about 80 and 20 per cent of scenarios 2 and 3 respectively. What this illustrates is that the real problem with Jamaica is not the debt to GDP ratio, which is just a symptom of the underlying issues.

Like John, if we are to solve Jamaica's long-term problems we must address the root causes of:

o Discipline and productivity;

o Bureaucracy;

o Energy and food import costs (more efficient spending on necessities); and

o Cash flow - matching inflow to outflow.

The Prime Minister in a recent speech indicated that the government must adopt a mix of policies to include countercyclical approaches, which is in contrast to the IMF agreement. One such project is the JDIP, of which I am really disappointed about the current circumstances, but it is important that it continue for the health of the economy.

It is critical that when we listen to the debates we are not caught up with terms that sound nice but that we try and understand the fundamental issues and how the proposed solutions will solve the problem. There are some analysts who in the past were not prepared to do the proper analysis and were very much in support of the IMF agreement, and today I am surprised to hear them saying that the terms need to be relaxed or renegotiated. The purpose of analysis is not to predict an event after it has happened. Predictions are made before an event. It was incorrect analysis that resulted in the global financial crisis, so we must be very careful about what we digest. Apparently it is not only politicians who "flip-flop".

I may not be able to listen to the live economic debate next Thursday, because of a previous engagement, but would implore everyone to do so and take careful note of the substance of the proposals rather than the surface issues. This is especially so as I do not believe that, whoever forms the next government, there are any different policy options that will work.

Government must move out of the way

2011-11-25T05:15:00.001-05:00

LAST week, I told someone making a presentation that one of the challenges facing Caribbean businesses is that regulators act like parents rather than partners.

So regulation in Jamaica is not about working with the business community and civil society in order to assist them to develop, but rather it is more like a parent who keeps a watchful eye on a child, ready to pounce and punish at a moment's notice.

Because of this approach we have developed regulations and laws to provide welfare and punishment, rather than encouragement and teaching the populace to fish. This attitude is highlighted in two recent events. The first is the call to roll back GCT on electricity, which should never have been introduced in the first place.

In the first instance, the introduction of GCT on electricity bills was only a short-term measure to a fiscal problem and ignored the longer-term challenge of high energy costs to consumers and businesses.

Instead of trying to reduce our consumption of imported fossil fuels, the response was to add a tax to the use of it, not really to discourage persons from using it but to raise money for the government accounts.

This approach is similar to the way GCT was introduced on telephone calls, which again sought to raise taxes on something that is widely used.

The second instance I have discussed in previous articles was to state in the tax reform green paper that the most important function of tax reform is to raise money for the fiscal accounts.
It is this attitude that has contributed to much of our restrictive regulations and focus on the fiscal accounts at the expense of the economy and social infrastructure. Admittedly there seems to be an attempt to change this attitude with the public consultations on the tax reform paper, and pension and public sector reform, but this still moves too slowly.

My own view is that government must get out of the way and allow the economy to grow. If a mother is constantly protecting her children, even when they are adults, then what chance do they have to develop their own survival and developmental instincts?

It is this approach that causes businesses that do very well in Jamaica to tend to develop into monopolies or oligopolies. Sectors that readily come to mind are (i) financial; (ii) telecommunications; and (iii) energy. In all these cases it is because of government's desire to act like parents why these industries don't develop further for the benefit of economic growth and development, and, in the end, the benefit of the consumer. In other words, even though we say that we want the economy to develop, the barriers to entry and the burdensome legislation cause a lack of competitiveness.

So even within the financial sector, the long, drawn-out process to allow mutual funds and credit bureaus, for example, has no doubt robbed the country of much-needed capital.

The FSC has been trying to improve the timing of application approvals, but the problem with the “barriers to entry” is not so much the regulators but the regulation they have to work with. Some may argue that it is the strength of our financial regulations that prevented us from experiencing a significant fallout from the recession, but my view is that we could still have been prevented from having that experience even with more players, and businesses would have benefited much more.

In the telecommunications sector, I don't think much more needs to be said than the OUR has twiddled its thumbs while LIME is experiencing a slow and painful death. I have been a Digicel customer for years, and will be for the foreseeable future, but why does it take so long to introduce number portability and establish crossnetwork charges?

Maybe after LIME is dead and gone, and Digicel is the only one left standing, we will have these things introduced. By that time they will be redundant. That is when they are redundant.
The other sector is energy. Our political masters have seen it fit to create a licence that enslaves the Jamaican consumer and business at the hands of one of our new colonial masters — the JPS. Some attempt has been made to change that somewhat, by introducing net billing and power wheeling.

While these are commendable steps, they are far from sufficient to have any positive impact on energy costs to the consumers and businesses. The cost of setting up energy production far outweighs the benefits of net billing, and it is a better payback to produce and store. Also, power wheeling will not bring the economies of scale needed to change the cost landscape.

I understand the restrictions of that horrendous licence, but there are some things we can do outside of the licence that will bring much greater competition to the JPS, and force them to review their operations.

Firstly, we should not reverse the GCT on electricity bills but use it to set up a fund that will provide, say, a 50 per cent credit to “tax-compliant” persons who want to set up renewable energy solutions, with NCC-registered suppliers. Secondly, businesses should look at creating a co-operative-type company, which they all own a piece of, and set up a power generation company that they would power wheel to themselves. Unless the amendment said that you had to own 100 per cent of the power generation in order to power wheel.

These steps are necessary, as by the time LNG comes we will be “powerless”.
Finally, I believe that elections matter so much in this country because government has established itself as such a big player in the economy. When the Government has a financial problem it pressures the poor Jamaicans through taxes, and when elections are in the air we wonder who will be in charge, as it may certainly affect the business or our lives.

This should not be. Government needs to move out of the way and allow people and businesses to thrive.

Jamaica must solve her structural issues

2011-11-18T05:07:00.001-05:00

At the time of writing I am sitting and waiting on a connecting flight to Suriname, to do a presentation on the IMF impact on the region. By the time this is published it will be done, but is worth mentioning. The fact is some persons think of the IMF as wicked imperialists (primarily because of political propaganda) and others think of the current programme as a panacea. The truth is that both points of view are incorrect.

As I prepared and thought about the presentation, I thought that as a region we are too caught up with the IMF. After all it is just a bank to countries, seeking to get a return on its funds and ensure it gets repaid. The IMF does not and never will have the solution to our problems. We need to have it. So our flirting with the IMF in the 70s, 80s, 90s, and today has more to do with our own inadequacies than the "wicked IMF policies". In fact, before now, the only time that post IMF saw any significant growth was in the 80s when Seaga took the bold decision of playing hard ball until he got the terms that were best for the country. Outside of that, no one else was brave enough to face down the IMF.

So here we are again once ore in our flirtatious but unstable relationship with the IMF. This time, however, I think people are of the view that the IMF programme has more to do with us than them. The fact is that if we were prudent in managing our affairs then we wouldn't have to keep courting the IMF. It is because of our own irresponsibility, and inability to achieve true economic independence after leaving the home of colonialism in 1962, that economic independence continues to evade us, betraying the wishes of Norman Manley and Bustamante. In plain English, our leaders have turned us into adults incapable of fending for ourselves, having to hold on to the frock tail of our "old colonial mothers".

The fact also is that after the IMF programme we won't be in any better position if we do not address the fundamental structural issues of our economy. The only time that we have effectively done so was in the second half of the 80s, when we managed to reduce our debt to GDP ratio from 212 per cent to 90 per cent, and the economy started to grown an average of six per cent. The verdict is still out on the current programme, and while the policy reform directions are positive the pace is concern.

So as I wrote in my book in 2009, although for the 14 years to 2007 the economy recorded growth, the fact is that the GDP structure was showing that the only way we could continue growing on that path was by either borrowing or inflation. History shows that the former was chosen. So when the recession hit us in 2009, we had no choice but to fall down at the feet of the IMF, as we had been borrowing to create an illusion of growth, and when the credit card was no longer available we all know what happened. And Jamaica wasn't alone, as we were in the company of the US and Europe, if that is any consolation.

So the government had no choice but to go to the IMF, and was prudent in first restructuring the debt (JDX) - albeit six months late - and also accepting that reforms such as public sector rationalization, tax, pension, and divestments had to be done. The problem is that almost two years after, while some of these things have happened or started, it has not been sufficient to take advantage of the breathing space provided by the IMF programme funding and JDX. So in 2011 the economy is still as structurally weak as in 2007. I remember over the past three years I was at pains to point out that our preoccupation with scandals and such things would prevent us from focusing on the important structural issues.

Well here we are

What is needed is still as relevant as when i wrote my book in 2009. In fact the recommendations could apply today as if it was written yesterday. The economy still has significant structural issues, evident in the recently published June balance of payments (BOP) numbers. The BOP is the weather vane of the economy's direction. For the six month period the current account deteriorated by over US$500 million. The main reason being rising oil prices. Does this sound familiar? It should because we have been paying lip service to an energy solution since the 70s.

At the same time we have not only failed to implement the much needed tax reform but we have managed to produce a document that says the most important reason for tax reform is to raise money for the fiscal accounts. Does this sound like the cherry picking from the Matalon report that took place in 2005? Is it coincidental that the last time tax reform for economic reasons took place was in the mid 80s, or is there a link between tax policy objective and growth. Certainly when Ireland was growing what they did prior was to cut capital gains tax in half and reduce corporate tax rates to 15 per cent. Their fiscal and monetary irresponsibility after that undid the gains however.

My own belief is that the current reform policies are the right direction and needs to be continued. The truth is that there are not many other solutions that can be offered. The problem has been the pace of reform. That is (i) the IMF targets are too aggressive, causing social dislocation, and (ii) the much needed reforms have taken too long. In addition to this there has not been much emphasis on protecting citizens' rights and enforcing a disciplined society. The police commissioner is to be credited with dealing with corruption, but there is not enough being done to protect citizens from police abuse or enforce road discipline. The charter of rights was finally passed, but we don't want citizens to have to seek enforcement of rights, but for the rights to be respected from the start.

Nowhere is this inability to address our structural issues more prominent than in the Global Competitiveness Report, where it not only shows us falling in the rankings but clearly states that the main challenges to our competitiveness are crime, bureaucracy, and taxation. It is ironic because the reforms currently being pursued are supposed to address these issues. The problem is that we spend too long to enact change and too much time pursuing political rhetoric.

Unfortunately with election in the air, we might have more rhetoric and less issues being discussed. But maybe this is what Jamaicans want as they still hang on to buses as they go to political meetings to hear the latest personality attacks.

The result is that as we approach the end of the IMF agreement, the economy is still challenged for sustainable development, as in 2007. The difference is that over the past two years we have seen a significant global recession and there has been a move in the right direction with respect to policy. So the next time we think about the effect of IMF policies, let's look in the mirror first.

Jamaican economy vulnerable to global crisis

2011-11-11T05:40:00.001-05:00

Today I want to address two issues, which could have a negative impact on the Jamaican economy. The fact is that even though fiscal and other reform programmes have been taking place, the economy still remains very vulnerable and can easily reverse the small positive growth we have been seeing for the past three quarters. This is why it is very important that as we approach an election that we all act responsibly to ensure that the economy is not damaged.

The first issue of grave concern is what is happening in Europe, and more particularly Italy, which has an economy much bigger than Greece and can result in catastrophic consequences for the global economy.

In September 2009, I had written an article titled "Risk of a double-dip recession?", in which I raised the real possibility of the world going back into another recession. And my main reason for saying so was that even though the markets were recovering, the fact is that all the policy actions that have taken place since the recession have not been aimed at arresting the structural issues but rather at cosmetically creating an impression of growth. There was therefore little doubt that the problem would once again show its face.

The situation as it is today, with significant challenges in European sovereign debt, is even worse than I had thought it would get. I had expected a double-dip, and then a slow recovery after that. However, if the crisis in Europe is not managed properly then we could be looking at a decade or more of stagnation and a significant negative impact on currency values, higher inflation and interest rates, and no or low growth. The fact also is that any second recession as a result of challenges with sovereign debt could be worse than the 2008 recession.

Although Jamaica has fared relatively well, when compared to other countries, during and coming out of the recession, which took hold here in 2009, there are some realities that we face. The first is that Jamaica's main foreign exchange earners are discretionary and will be amongst the first expenditure cuts by foreign consumers if uncertainty sets in. On Wednesday last, for example, we saw markets fall by 3 per cent, a significant strengthening of the US dollar implying flight to quality, and all-time high Italian interest rates.

The second is that the IMF agreement is coming to an end, if there is no extension, and it means that funding support will also end. If the global reality results in greater uncertainty then capital markets could remain close to the required funding, as we still have an earnings shortfall.

Oil prices should continue to rise, even in a stagnating global economy, and in fact the International Energy Association has said that if enough investment in oil exploration does not happen in the short term, oil prices could reach to US$150 per barrel. Jamaica has not managed to reduce the 96 per cent dependency on fossil fuels.

The fiscal situation remains fragile, and the Balance of Payments shows a worsening situation because of the lower than projected global growth and the dependency on oil.

It is therefore very clear that the Jamaican economy would be very much affected if the European debt crisis is not resolved positively. The other problem is that there is nothing that any Jamaican government will be able to do about it, as any escalation in the European situation would see much of the multilateral resources being directed there, even while capital markets are closed.

Telecommunication industry threatened

The other issue which is of some concern is the competitiveness of the telecommunications industry. In June of this year I had written about this same concern, based on the then pending Claro-Digicel deal, and the continued poor results of C&W. I had pointed out at the time that the competitiveness of the industry is under threat because of the following reasons:

o Dominant position of Digicel while there was no number portability or regulation of internetwork charges;

o Continued losses by C&W, which implies that continued upgrade to the infrastructure is questionable; and

o The declining income levels of consumers means that this will affect their ability to afford the services.

The reason why this sector is so important is that apart from energy, telecommunications is one of the most important ingredients in business and consumer life today. It is not just about making a telephone call but business models now have telecommunication as a central part. Also any monopoly situation could see significant cost increases for businesses, if not properly monitored by regulation and the market.

It is for this reason that the continued losses being shown by C&W is of some concern, as this is unsustainable and already it seems apparent that Digicel's network has been having some challenges.

I say that C&W has challenges, as they have more than doubled their losses for the quarter, from $549 million in September 2010 to $1.323 billion in September 2011. One could argue that this includes depreciation charges (non-cash) of J$1 billion, but importantly the operating profit over the same period fell by 50 per cent, from $802 million to $435 million. Total revenues also fell slightly. More importantly the cash flow statement shows that the company had negative cash balance at the end of the quarter.

My own view is that the business model is such that irrespective of what they do within that business model they will continue to lose money.

Whether C&W survives or not is not important to me. What is important is that the regulators take the steps necessary to protect the consumers and the cost structure of the telecoms market. This should be done by regulation and competition. This is why it is important to address the matters of number portability and cross network charges with some amount of urgency, and not deal with it in the same way we have allowed our energy crisis to fester since the 1970s. Telecommunications is too important a component of business and individual life to allow it to go the way of the energy sector.

If the economy is to grow

2011-10-28T05:09:00.001-05:00

I constantly hear commentators talk about the lack of growth in the Jamaican economy since the 2008 "great recession", as if this is something new. In fact, of the approximately 94 per cent growth between 1962 and 2010, about 68 per cent was between 1962 and 1971, and 15 per cent between 1982 and 1991. So for the rest of the 29 years accumulated growth was only around 11 per cent.

This shows a lack of understanding of what our real challenges are and the structural issues. I am amazed at how persons speak in a vacuum, as if the only thing needed to achieve growth is to apply the IMF pressure, stabilise interest and exchange rates, and eliminate poverty. These are all outcomes and it is the lack of our inability to focus on the real structural problems that keeps us chasing our tails, and ending up going around in circles.

Dennis Chung

Of all economic commentators out there, there are a few that I think really get the issues we face. Let me start first with Gene Leon, who I think really understands the cultural and social linkages with economic development in Jamaica. The others are Ralston Hyman (who we do have disagreements with but at least this leads to a rational discussion), Dennis Morrison, Damien King, Denzil Williams, Al Edwards, and although I haven't heard her for a while, Anne Shirley. There may be one or two more I have not named.

So if the economy is to grow it is necessary that we understand the fundamental environmental and cultural concerns that must be addressed. Interest rates, exchange rates, and inflation levels are only just symptoms of the outcome, and are not a panacea to our solutions.

What we also need to understand is that it is not the point in time measurements that determine growth and development, but rather the expected trend and solution of the underlying issues. So we should never believe that because we are experiencing high poverty levels or high inflation at a point in time that this means that the future is bleak. Similarly, not because we are experiencing lowering debt to GDP or an improved primary balance does it mean that the economy will improve in a sustained manner, or that because murders are reduced that crime will decline in a sustained manner. In fact, I believe the current policies will allow for a stronger economy to emerge, as the real problem for me is really the pace.

In 1984, the debt to GDP ratio was 212 per cent, before declining to 90 per cent in 1990, and the economy growing by average six per cent in the last half of the 1980s. Similarly, we saw some growth in the 1990s to 2000s, but debt was increasing along with crime and indiscipline, which I think indiscipline caused more damage to the economy than anything else. So we can also say that while lower interest rates and a stable exchange rate is necessary for planning and growth, it is not sufficient, as is seen by the lack of take up of productive loans. This is primarily because confidence of the future (human behaviour) is always going to be more important than symptomatic macroeconomic numbers.

If I were in charge of policy, I would focus on the following three areas, (i) energy cost -- just imagine what it would do for productivity if the industrial sector saw a 30 per cent reduction in energy cost and consumers had more disposable income; (ii) bureaucracy -- public sector workers can be as productive, and are as talented, as the private sector but lack the environment and compensation system to innovate and show initiative; and (iii) crime -- this can only be solved by addressing disciplinary issues in the society.

The government has made some good moves towards that restructuring, but there are some deep-rooted cultural issues that need to be addressed, such as understanding that government is there to serve the people and not the other way around. If this was understood then the tax reform green paper would not say that the most important objective of the reform is to raise revenue for the fiscal accounts. And this has been the philosophy of taxation for as far as I can remember, and is the reason why only certain things were cherry-picked from the Matalon report in 2005.

I say all this to really lead up to what I want to address, which is the IMF programme. When the programme was revealed in 2010, I remember saying along with Ralston Hyman that the targets were not realistic, given the social and other issues in Jamaica, and that there would need to be a relaxation of the targets. This was done.

We are now at a point of negotiation with the IMF to resolve the current economic projections, and it is good that both the IMF and government is discussing this, as it shows a commitment on both sides to come up with a credible economic programme going forward, and this intent is very important. I also hear the argument coming from government, opposition, IMF, and some parts of the private sector (so everyone is at one on this) that what we need is (i) maintaining fiscal discipline, (ii) economic growth, (iii) stable exchange rate and reduced interest rates, and (iv) reduced debt to GDP ratio. My own view is that all these cannot happen at once, and this is why we have not been able to iron out a credible economic programme going forward.

And this has nothing to do with economics; it is a straight mathematical formula. That is if X + Y = Z, then it is not possible for (X-1) + Y to equal Z. In other words, if X represents GDP growth (global and domestic), Y represents reducing the debt to GDP ratio, and Z represents the previous fiscal targets, then if GDP growth expectations (globally and domestically) changes then one of the other variables must change. My own feeling is that the one that must change is Y, which means that a short-term higher debt to GDP ratio is inevitable to achieve the fiscal and growth development targets, just as Seaga did in the 1980s

This is already the case, as even though we have achieved our fiscal targets to August, the debt is $33 billion higher than projected. If on the other hand we had stuck to the debt target then maybe we would have had a social situation, which would have frustrated revenues and the target.

Debt is not bad as long as the marginal revenue exceeds the marginal cost, which means we need to borrow money to develop capital and infrastructural projects, not to pay recurrent expenditure as we have done in the past. But I am just an accountant so I stand to be corrected.

Economic impact of culture

2011-10-21T05:36:00.001-05:00

At a recent meeting of the Jamaica College board, it was reported that the discipline had significantly improved, even over the improvement that we had seen before. Today at board meetings the major talk around indiscipline has more to do with dress code than the violent conflicts that existed at the school as recently as two years ago.

The improved discipline has led to continuing academic and sporting improvement. This is a prime example of how the change in culture of an organisation or country can positively affect the desired outcome.

It is this relationship between social behaviour and economics that we have never seemed to understand in this country. And the irony is that if we paid more attention to changing behaviour patterns through policy measures, then we would be more able to achieve our economic objectives of growth and development. It is as if all the persons who learned about economics have forgotten that it is a social science, and is really nothing more than the study of how people in a society interact in their pursuit of prosperity.

This is why I have always said that the approach by tax administration is commendable, as they have been trying to change culture/behaviour through their education programmes and the way taxes can be filed (technology). This will no doubt have a positive impact on compliance going forward and has already started to show.

It would seem logical to me that if we truly want to see economic development, then we need to try and understand what causes the behaviour we desire and put measures in place to influence that. It is this lack of understanding that has resulted in our inability to create sustainable improvement in our fiscal and trade deficit positions. As far as I can remember, government policy (fiscal and monetary) has been geared not towards influencing behaviour patterns to encourage sustainable local investment and growth, but rather has encouraged corruption, inefficiency, and short-term profit approach.

Some examples of these include the following:

1. Tax policy over the years has not been aimed towards creating an enabling economic climate for businesses, but rather towards raising money for the fiscal accounts. This incorrect approach is found in the current green paper on tax reform, and stated explicitly in paragraph 1.2, where it says that most importantly the measures are intended to raise money for the fiscal accounts. This communicates to stakeholders that the interest of businesses and people is secondary to government raising the required revenue and this leads to compromise from stakeholders in securing tax measures that first satisfy government revenue and then the business environment. The result is that stakeholders settle for less than what is required to create a competitive country environment. Is it any wonder that taxation remains the third most inhibiting factor in the global competitiveness report?

2. We say that we are serious about solving crime, but as I have always maintained, our success with reducing murders will be short-lived if we do not take the necessary steps to change behaviour towards indiscipline. So while we celebrate reducing murders we have not successfully dealt with road indiscipline, night noise, littering, and zoning laws. The result is that we might have short-term successes only in fighting major crimes as our society is still extremely very undisciplined.

3. Heavy-handed bureaucracy leads to inefficiencies because it does not encourage innovate thinking in the public sector. So I have seen where because of the procurement rules, one government company gave up more revenues than the cost of rectifying a problem because of the delay in approval while another entity was spending more than $120,000 per month to monitor a cost of $120,000. We also remember the situation where the Accountant General's Department reported that because the purchase of a telephone system was not approved, the payment was withheld, even when the AG and FS directed it be paid, resulting in a two-year delay and the cost of the system doubling because of the delay.

These are just a few examples of the ways in which policy has negatively affected culture/behaviour and ultimately has had a negative effect on sustainable economic development and productivity. So the truth is that unless we introduce policy directions that are geared towards influencing behaviour in the direction that will result in increased productivity and business and consumer confidence, then sustained economic and social development will only be things that we read about. And by development I don't mean where we measure against ourselves, but relative to other countries.

It is because of this failure to introduce policies with this intention (to the contrary we have always maintained policies that do the opposite) that we have not been able to create the environment needed to increase our competitiveness and create sustainable development. In short, the policies that we have pursued as a country have caused a culture of mistrust, low productivity, corruption, and the preference of short-term over long-term objectives. It makes no sense to about economic targets and policies within the context of this type of culture.

This is the main reason, in my view, why the IMF programme was not achievable in the time projected. When setting out an economic programme for a country like Jamaica, we cannot assume that the changes will take place as quickly as in a country like even Barbados. It is important when projecting for a company or country to consider the culture. So the emphasis on say the wages to GDP coming down to 9 percent is really not a practical target, given Jamaica's environment, and I am also trying to understand what is the magic about 9 per cent.

Similarly, it is not possible to achieve the original fiscal targets set out and maintain the same debt to GDP target, which in my mind is not important as an absolute anyway. This is borne out in the August 2011 fiscal outturn, which shows that in achieving the fiscal targets we have had to borrow $33 Billion more than projected.

Impact of Jamaica's leadership change

2011-10-21T05:29:00.001-05:00

When Bruce Golding announced his intention to resign as Prime Minister and leader of the JLP, there were some who said that this would cause a significant negative impact on the economy. In fact this was the line also when there was delay surrounding the announcement of the IMF tests, when my own line was that (in August) there would not have been any significant negative consequence until around September if nothing was said.

Similarly I indicated that the mere announcement of the intention to resign would not have any negative economic consequence.

I should pause here to say that respect is due to Golding for the reasons given for his decision, which is the consideration of country and party above self. Despite what one may want to believe was the real reason, this is certainly a new standard for politics that Jamaicans will continue to demand.

It is important to understand my reason as to why the mere announcement of a leadership change would not have impacted the economic fortunes of the country. The main reason is that Jamaica's governance structure is not perceived as one where only one person is responsible for the economic or other programmes. In fact that is the reasoning behind "collective responsibility" of the cabinet. On the other hand, if Jamaica's governance structure was perceived to be like Apple when Jobs was CEO (may his soul rest in peace), and the PM resigned, then there may be an initial negative reaction to the announcement.

But in the end investors will always look at the fundamentals of the economy and the underlying value of the opportunity. So even after that initial reaction in most cases the previous trend will continue. Investors do not make decisions based solely on political reasons, but more so on value reasons.

When one looks at the economic programme being pursued, it seems obvious that there is a positive structural change taking place. One can argue that the administration was late in acknowledging the impact of the global crisis, going to the IMF, and did not have the appropriate IMF programme in place; however, my own view is that the general policy direction is positive and I think that fundamental lessons have been learned from the slips.

When one looks at the GDP growth areas, for example, growth is occurring primarily in the export areas of tourism, bauxite, and non-traditional exports. This is unlike the 14 years to 2007 when 72per cent of our economy was geared towards production for consumption, and these areas were performing best, thus leading to the need for greater debt. An examination of the macroeconomic environment also shows that all the measurements are showing some amount of stability. This is unlike up to 2009, when the trade-off was always between exchange rate and interest rate primarily. More importantly for me, however, were the moves to restructure tax administration, introduce tax reform (and the surrounding discussions), rationalisation of the public sector, and the fiscal and governance regime being introduced. I believe that some of these could have been done much more efficiently, but the general direction must be applauded. The main blot on the performance has been the inability to deal with the cost of energy, but this has been a problem of administrations since the 1970s.

Therefore investors will not look at personnel changes, if they believe that the programmes being pursued is as a result of a structural nature rather than personal.

Public hospitals underrated

Two weeks ago I had an experience with a private hospital where a patient was checked in and on the way to the floor a porter was pushing a wheel chair, and was asked by the admissions person to carry the patient. The porter continued to push the wheelchair and announced that he had just come off duty so he couldn't do it. The patient walked to the floor. Two days after the patient did an ultrasound at the hospital, and the written report of the ultrasound was the exact opposite of the real situation (thanks to the questions asked by the patient, this was discovered). Still two days later when the patient came in on an emergency, and given the nature of the ailment it was known that the patient might have to have surgery, the patient was given something to eat. Anyone who knows about anesthesia will understand that this is dangerous to do.

Contrast that to when the patient was transferred to UHWI because the private hospital was not able to handle the type of emergency: immediate attention was given and the patient immediately went into surgery. The doctors and nurses on reading the report realised that the surgery was high-risk because food had been given and took immediate steps to prevent any fatality. Additionally the nurses at UHWI are very attentive and professional and the amount of information that you are provided with is of a high standard. What's more, there was no talk about payment until everything was done to stabilise and treat the patient.

It seems to me that the only missing thing from UHWI (a public hospital) is funding. And even with low funding the professionalism and the available equipment seemed of a higher standard than the private hospital. So what do you pay for at a private hospital? Décor. If I am in an emergency, please carry me to UHWI, as the service is more important than the look of the place.

What I will say about the private hospital is that even with that experience the nurses were also very pleasant and helpful and the administration did apologise, but there are certain services that need to be vastly improved.

Restructuring Jamaica's economy

2011-09-23T04:28:00.001-05:00

Over the past two weeks there has been much debate about jobs and Jamaica's competitiveness, thanks to the Global Competitiveness Report and the JEEP proposal. Last week I addressed competitiveness, and JEEP is a good follow-up discussion. Debate on both issues is welcome, and is the reason I have always called for national debate on all issues in the media and parliament. Whether it is a global report or a proposal from government or opposition, I am in support of as much debate as possible so that the people of Jamaica can be more aware of the details of what is affecting their daily lives.

I believe (thanks to the many commentaries, talk show discussions, and lobby groups) Jamaicans have become a lot more aware and suspicious of what politicians espouse, and are demanding more and more information, whether it be proposals like JEEP, extraditions, or deals with foreign companies. No longer can a politician just make an announcement and all Jamaica just cheers and goes along with it. Interestingly also, more party supporters are demanding more information when their respective party they support makes general announcements. This is a sign of emerging political maturity.

The flavour of the day has shifted from the request for brownings to JEEP, and more generally a discussion on what is good for Jamaica's economy. It is within this context that I want to look at what is needed to restructure the economy. It is important to understand, as many commentators have said, that what Jamaica's economy needs is not another promise of jobs or growth which will not lead to sustainable economic and social development.

Over the years we have had crash programmes (1970s), the free zone and Spring Plains (1980s), high interest rates and ICT stimulus (1990s), and promises of jobs (last election and recent JEEP). All these initiatives have come from our politicians, and that is the primary problem. When will we realise, as Tufton rightly said, that government cannot sustainably create jobs and growth without fixing the structural problems? Obama recently tried this in the US with his US$700 billion stimulus, but it was never enough to change the general economic direction of the US. The difference between the US and Jamaica is that they have money to fund such short-term programmes, or can print it. In Jamaica any attempt to create money without an increase in productivity will only lead to greater inflation or interest rates.

I am the first to agree that in a recessionary environment, government intervention is necessary to ensure that the economy does not sink further. For this reason I have always maintained that the IMF programme and tax increases were pro-cyclical and would have caused further contraction and hardship in the economy. The fact is that they did, and this in part caused some of the decline the economy saw since 2008. The major part of the decline, of course, resulted from the difficult global environment.

What we have seen, however, is that even though there has been some decline from these policies, there have been some positive structural changes, a few of which I mentioned last week. More importantly, though, is that we have seen some positive structural shifts to the GDP components, and a reduction in crime and some improvement in the culture of compliance and discipline. The most successful have been in the areas of tax administration and dealing with corruption in the police force. These are the structural issues that government should focus on and must stop trying to pick winners, which is the job of the market.

Government must therefore create an enabling environment and allow the market to work. A big part of this is of course doing away with the system of waivers, incentives, and the burden of taxes and other bureaucracy. If these remain in place, then business persons will continue to seek waivers, incentives, and try to go around the system because they can. There will be no motivation to operate in a true market environment. It is for this reason that the tax reform and administration currently being pursued by the government is a step in the right direction, and long overdue. Previously government would cherry-pick what was good for fiscal revenue, the last real attempt at progressive tax reform being in the 1980s.

So while I support the concept of stimulus, recently outlined by the opposition, the programme as crafted is flawed for the following reasons:

1. The argument of renegotiating the IMF agreement is redundant, as the agreement comes to an end in May 2012, and by the time election comes around would have either ended or already been renegotiated.

2. I disagree with the proposal that start -up businesses should get a five-year tax holiday. Every business in Jamaica would forever be a start-up. Why create a problem we will have to find a solution for? What we need is a flat tax for businesses in the first five years, which if they prove losses they can get a tax credit for. This would relieve the cost and burden also of tax administration having to go after these micro businesses.

3. Government cannot continue to seek to create private sector jobs by giving incentives. If an incentive is required to start a business or create jobs, then it means otherwise it is not competitive and does not make good economic sense, so why incentivise it (for example the recent stimulus to car dealerships)? Government needs to stop trying to create welfare programmes, which do not result in long-term economic benefits. While I agree that some form of stimulus is needed to create jobs, it must come in the form of infrastructural works, such as the JDIP, as Roosevelt did in the US after the Great Depression. What we must do is remove the politics and bureaucracy from the JDIP and allow it to work for the benefit of Jamaicans.

4. Providing a fund for small businesses is really a regurgitation of what is happening now. This government had provided $1 billion to the DBJ for small businesses. How much has been taken up? At the time I indicated it would not have made a difference because it is obvious that businesses are not motivated primarily by high interest rates or access to financing, but more importantly aggregate demand, which was already cut by the IMF programme. So even if I can get money to borrow at zero per cent, if there is no demand for my product/service it doesn't matter.

5. The suggestion to provide banks with a tax incentive to make small business loans should not even be considered. Why would we want to incentivise risky loans? If the loan is good then the only incentive the bank needs is profit. This can lead to financial sector risk and increased interest rates.

There is more I could say but space does not permit. The argument, however, is that while some form of stimulus is necessary it must be in infrastructural projects. This already is in place in the form of the JDIP, which we need to make work. The problem we face is not 12 months from now, so if we don't allow the current programmes to work and wait until election we won't just need a JEEP but a whole car dealership.

The important thing for the economy is for government to focus on fixing the structural issues of crime/discipline, bureaucracy, energy and productivity in particular. This will improve our competitiveness and economic and social well-being. Jamaica has for too long been a welfare state, and this is what is keeping people in poverty.

Examining Jamaica’s competitiveness

2011-09-16T06:17:00.001-05:00

Recently the World Economic Forum released the 2011-12 Global Competitiveness Report, and Jamaica showed the worst ranking ever at 107 of 142 countries, coming from 95 of 139 countries in the previous report.

This really is no surprise as the seeds for this were sown from around the mid-1990s when the debt/GDP ratio started to worsen as a result of the macroeconomic policies practised during that time, more notably the prolonged high interest rate policy that led to a logical market choice to sit at the beach and earn rather than do so through productivity. The seeds of indiscipline that led to the lack of reward from productivity started in the 1970s, when the much needed social changes were taken to mean that everyone had the right to property and income even if not worked for. The result at the time was a real GDP decline of approximately 20 per cent during that decade.That period also marked our first fling with the IMF, as a result of near decimation of our economy.

The 1980s saw a return to a focus on economic growth, which resulted in an average annual growth rate of approximately 6 per cent, and by 1990 the debt/GDP ratio, had moved to 90 per cent from 212 per cent in 1984. The challenges faced by the economy in the first half of the 1980s resulted from the near collapse of the economy in the 1970s and the global recession at the start of the 1980s. The problem with the 1980s, however, was that the social side was neglected and therefore there was no emphasis on improvement of the individual but rather a hope that macroeconomic growth would lead to microeconomic benefits.

The problem with Jamaica is that the workforce consists largely of low-skilled labour, and a relatively low literacy level. Like it or not, it was the free education policy of the 1970s that caused many to be able to access higher learning and change the landscape of the workforce, but the result of a poorly implemented free education policy led to a degradation of the school system.

By the time the 1990s came around there was again an ill-conceived approach to the liberalisation of the economy resulting in an increasing trade deficit, as uncompetitive local industries, which were accustomed to protectionist policies, could not compete with the cheaper and more attractive foreign goods. So the exchange rate started to decline and inflation was rampant. In order to put a stop to runaway inflation, the government at the time employed a high interest rate regime that not only served to halt inflation but also put the nail in the coffin of most productive businesses. This was the main push that caused Jamaica to become a service-driven rather than the goods-producing economy that it was.

That period saw the continuous breakdown of our institutions which led to a decline in productivity and discipline. The slump had started in the 1970s, with a brief break in the trend during the last half of the 1980s. Since then productivity has consistently declined and our institutions and infrastructure have generally deteriorated. The only significant positive development in our infrastructure was the building of the highways during the early 2000s, which in my view was somewhat negated by the demise of the railway during that time.

In 2007 we experienced a significant global recession, which did not do us any good, as the economy was structured to be dependent on foreign loans, remittances, and foreign consumers, rather than on our own productivity and local economy.

So here we are today looking at a competitiveness report that shows us as ranking 107 from 142 countries, and within that global ranking even more dismal numbers are represented. Some of these are fundamental pillars on which economies are built as follows (rankings shown at right):

o Public trust of politicians - 112

o Favouritism in decisions of government officials - 121

o Burden of government regulations - 123

o Business costs of crime and violence - 140

o Organised crime - 135

o Reliability of the police service - 101

o Quality of railroad infrastructure - 113

o Macroeconomic environment factors - between 106 and 140 (overall ranking of 142)

o Quality of primary education and enrolment - 108 and 126

o Total tax rate, % of profits - 108

o Redundancy costs, weeks of salary - 99

o Pay and productivity - 114

o Ease of access to loans and Venture capital availability - 124 and 127

When one examines these individual factors, and not just the global rating it is obvious, that where we are today and how we are perceived is a direct result of the decades of neglect. The result is that we celebrate 50 years with this perception of how we have progressed. So all those who have been involved in governing Jamaica since the 1970s, take a bow, you have reaped what you have sown.

On the other hand, we must remember that this rating is a review primarily of the year 2010/2011, when we would have been seeing a significant lingering effect from (i) the global environment; and (ii) our slowness to react because of policy and the politics we have played while the country was burning. So our preoccupation since 2008 has been with politics rather than economic fixes. Much like what happened recently in the US.

But if one takes a look at what has been happening (outside of the politics), there are some positive trends taking place. The economy is still very fragile but there are some positive structural changes happening that will bode well for the economy, if continued. There are also some positive social initiatives taking place. And so even while people like me continue to point out the areas that need improving (because I think if we eliminate weaknesses then all that will be left are strengths), the fact is that some of the structural fixes we need to correct the years of structural abuse are taking place. One other thing to remember is that when structural changes are taking place, as with the global economy, things are going to seem worse than they are.

For example, when one gets a cut and the disinfectant is applied, it is initially uncomfortable and hurts. But then it means that it is preventing any further infection. So it goes with economic adjustment, which is why it is important for governments to smooth out the effect of painful adjustments, as promoted by Maynard Keynes and more recently Christine Laggard (note the international references as promotion of this idea by locals is not credible because of our "browning and foreign" culture). However, because of the decades of neglect of our economic and social environment, we have built institutions around inefficiencies, and it will take some time to see the fruits fully grown.

Some of these structural reforms we have seen include:

o Charter of rights - finally passed after almost 20 years of debate

o Decrease in the murder rate and greater accountability in the police force - more needs to be done in terms of road discipline, though. Can't understand the inability to deal with this

o Enforcement of the building code by the KSAC - don't see much happening in the other parishes. Previously people were allowed to build whatever and wherever they wanted

o Greater vigilance by the OCG, Public Defender, INDECOM - even though sometimes there is loss of credibility from the perception and the final rulings

o Tax reform green paper - good move but still mentions that primary objective is tax revenues and not economic development

o Road improvement works through the JDIP - we need to get past the political rhetoric, though

o Moves by the new Justice Minister to address the court administration

o Divestment of loss-making public sector entities and public sector rationalisation

o Fiscal responsibility framework

The biggest bugbears remain (i) indiscipline and crime; (ii) energy costs; and (iii) bureaucracy. If we were to speed up the initiatives that are geared towards addressing these, then I believe there would be significant improvement in our economic and social variables.

So even though the report has rated us at 107 of 142 countries, a closer look shows that some of the initiatives on the table will address some of these issues and therefore when compared to say Greece, Jamaica is not such a bad investment climate for future growth. However this is dependent on a continuation and strengthening of some of these initiatives aimed at fixing the structural challenges faced, not so much a focus on the macroeconomic indicators that are symptoms of the underlying problem.

A practical approach to Jamaica's challenges

2011-09-02T06:27:00.001-05:00

One of the questions that I get a lot when discussing how to solve Jamaica's challenges is, if we all know the answers then why can't we solve the problems? This is a very important question, as it focuses attention on the real issue that Jamaica faces in resolving the challenges before us. It is no different from the challenge faced by companies, and why some companies, with an apparently similar business model, succeed while others don't.

After all, Jamaica, of all Caribbean countries (with the exception of Guyana, which is not really in the Caribbean) has the most diverse mix of natural resources and opportunities available. Even though Trinidad may have oil, we have tourism, bauxite, agricultural products, sports, and music. Our music and sports are probably our greatest assets because of the future value created in the brand of which we have not even scratched the surface.

Why, then, in rankings such as the Human Development Index are we only ahead of Haiti, and even in the growth projections put out by the World Bank, why do we fall behind Haiti? The solutions put forward in political campaigns and commentaries seem logical, so why can't we resolve the challenges we face and become the country we can be? The answer I believe, lies in my mind in the way we approach our challenges. Quite simply put, we get too involved with the emotions of the challenge rather than what is the most practical long-term solution.

Some examples include the following:

o The argument made by some, including myself, to (i) widen the tax base; (ii) reduce the rate of GCT; and (iii) target the tax to be received on previously zero-rated items to the less fortunate, has been shot down as oppressive and not caring for the poor. This is an entirely emotional response for the following reason : if tax foregone on cornmeal was say $100 and if 50% of cornmeal is bought by the rich to feed their dogs, then it means that $50 of the tax benefit goes to the rich man and his dog. Wouldn't it be better to charge the $100 tax on the cornmeal and use $75 to target funds paid directly to the poor? Everyone wins as the poor would get $75 (instead of $50 tax credit); and the government would get $25 tax (instead of the $0 before). And the rich man pays the $50 if he still wants to feed cornmeal to his dog.

o The recent demonstration against JPS (by wearing black or turning off electricity for a day) was really impractical. So what happened after the demonstration? Did the bill go down? It has come to this because the OUR is a useless organisation and also government policy over the years has procrastinated too long on this very important issue of energy. But the more practical thing to do is to wean ourselves individually off JPS power. I always find it amazing how persons find it easier to argue that borrowing the money to purchase a car (loans have gone up) is more acceptable than borrowing money to add renewable energy solutions to their homes. The argument is always that the cost of the system is too high. But if you think about it, if one can get a loan (say from NHT or the bank) to invest in a solar system, and the monthly payment on the loan is less than the savings on the JPS bill, doesn't it make practical sense?

o Another impractical call is that GCT on electricity should be removed as it is oppressive to the poor, when in fact most poor persons do not consume the 200 KWH where GCT starts to accrue. Apart from the fact that the low- income earners do not pay GCT on bills it would be much more practical to call on the government to maintain the GCT on the 30 per cent who pay it and that it should be "ring-fenced" and given as a credit to compliant taxpayers who invest in renewable energy solutions. This way consumers would not only avoid GCT but would also reduce their JPS consumption.

o The final thing I want to mention is the emotional response to relatively higher salaries paid to public sector workers, which started with the "Fat Cat Scandal" and which continues today. At the same time that we raise hell over any salary levels deemed to be too high, we also ask for the productivity levels to be increased in the public sector and are mystified that we do not attract the brightest minds, resulting in waste and sometimes even corruption. We talk about Singapore but do not realise that one of the things Singapore did was to hire the best persons in the public sector and compensate them accordingly. How do we expect to increase our value added and productivity if we do not pay persons based on their delivery?

These are just a few recent examples of the impractical way that we have approached our challenges over the years. It is therefore our approach to resolving issues that have kept us back, not that we do not know what to do, but by the time the political and emotional sentiments are placed in the equation, what we do is take the road that is most popular rather than the one that is in the best long-term interest of the country, as emotions trumps good sense.

This would be similar to acceding to your child's crying not to go to school, not thinking about the long-term consequences.

Problem of road indiscipline

As the murder statistics fall it seems that we are now trying to kill people with cars instead of guns. I really can't understand the inability of the police to deal with the road indiscipline problem that we face. There is no real effort being put into dealing with the carnage on the roads. And we fail to understand that a priority for choosing Jamaica as the place to "live and raise families" is feeling safe when driving, walking, or cycling on the roads.

What this requires is enforcement and not the PR campaign that the National Road safety Council has launched. I fail to understand why (i) I am driving and a taximan stops in the middle of the road and a police car drives by as if it is acceptable; (ii) there are persons out there (including people licensed to transport the public) who have multiple tickets outstanding; (iii) the police do not employ creative strategies to deal with persons who drink and drive, such as waiting on the outside of parties and night clubs and arresting persons who go behind the wheel after consuming alcohol.

And all the Road Safety Council can say is that they are hoping that the number of persons killed in motor vehicle accidents will fall below the 300 mark. Is this another OUR in the making?

Dealing with a second recession

2011-08-12T05:28:00.001-05:00

IN September 2009 my article was titled "Risk of a double-dip recession?" in which I stated that despite the fact that many persons believed that the global market was recovering, "the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies."

This seems more likely than ever, and in large part is due to the lack of effective leadership from politicians, which was exacerbated by the circus in the US capital some two weeks ago. The fact is that the US does not have a credit problem, what it has is a political problem. That is a crisis of confidence in governments. One positive sign coming out of this is the call by our own finance minister for all hands to come on deck, and all ideas to contend, irrespective of the source. He must be applauded, as this is the type of maturity that is needed in leadership. After all, wherever a good idea comes from it does benefit all Jamaicans.

We must now follow through and create a committee of the best minds to address the economic issues we face, which we failed to do in the 2008 recession, instead choosing to up the ante in the political arena.

What is evident, though, is that if we were to have another recession confront us it would be devastating. When, for example, a boxer starts a fight his legs are good and he can easily take a few punches. But after ten rounds of fighting it takes a lesser blow to knock him out. So is the similarity with the Jamaican economy, as after the recent recession our economy is that much more fragile. What this means is that even if the world does not slip back into the deep recession of 2008, even a slight dip could be devastating to the US consumer, and consequently Jamaica.

So how do we prepare for the possibility of a second recession?

Firstly, we must embrace and hold to account the call by Shaw for everyone to work together and all ideas to contend. It is important, however, that the best ideas come to the fore, as implementing a bad idea can be just as bad as not taking any action. In the 2008 recession there were a lot of ideas that were being put out there that did not turn out to make sense. There were others, however, that turned out to be the most appropriate even though they were shot down at the time. Need I say more?

Secondly, we must take seriously the need to put together a committee of the best ideas that can help the government to implement the best solution. I have always maintained since 2008 that this was necessary just as the US did at the start of the recession, which did prevent further damage to the US and global economy.

Thirdly, one of the first things that we need to do immediately is a SWOT analysis of the Jamaican economy, in light of the possible double-dip recession. Between January and February this year, I did a three-part piece outlining the approach needed in a SWOT analysis of the Jamaican economy. This is important for us to understand the challenges and the strengths and formulate our policies and strategies on this basis. My own analysis, which can be viewed at my blog, is just a sample of what needs to be done. This would be the first assignment that I would give to the committee.

It is obvious that any stagnation or slowdown in the global economy will affect our revenue flows. Remittances, tourism, and bauxite earnings primarily will be negatively affected. This is because any global slowdown will first affect the middle to lower income class of the US economy,for example, which are the persons from whom our revenues come. This means that we have to recognise the possible revenue impact and see how we can mitigate this and also substitute imported inputs with local inputs. In other words, we need to create greater vibrancy in the local economy.

We cannot, however, force businesses or consumers to buy local inputs if they are more expensive, especially as their own revenues will be negatively impacted. What we must do is take the steps to ensure that we become more productive and our costs cheaper. A case in point is the recent settlement of the public sector wage bill, which resulted in a greater fiscal crisis for the country, and will negatively impact everyone, including the public sector workers even more than the monies received. I am firmly of the view that they should be paid what is due to them but I think greater creativity was needed in how we satisfied that debt.

It means that we have to move expeditiously to deal with our energy and indiscipline crises. It is important also to address our institutional structures, such as our bureaucratic process as well as our courts. These two institutional issues are necessary for new and continuing investments to take place, and are necessary if we are to compete for a larger share of the world FDI flows.

Very importantly also is the need to address the declining labour productivity issues. Labour must be rewarded based on productivity and outcome, and not just time spent at the workplace. My own experience at Jamaica Ultimate Tyre Company Limited is that workers at the lowest level will embrace compensation based on productivity as long as it is transparent and fair. While other public sector workers were clamouring for increases, these workers were busy improving their productivity to which their compensation is linked, resulting in a tripling of the profits last fiscal year.

The last thing I want to mention, but by no means least or the final thing we must do, is that it is prudent for us to restructure the IMF agreement, in order to get the needed extension and relaxation of the targets. Going into a second slowdown of the global economy it would also mean that our fiscal revenues will slow down and economic pressures will increase. It is not going to be enough to go after numerical targets without considering the people and lives behind those targets.

So as the risk of the recession has increased, it is necessary for us as the finance minister has said, "to wheel and come again". This recalibration of our policy strokes should be entered within the context of the new and mature approach being taken by the minister.

Jamaica's economy and the new world order

2011-08-05T05:27:00.001-05:00

Last week into this week the US politicians sought to create a man-made crisis, which Jamaican politicians are experts at doing. At the end of it all, it seems as if it was all just political grandstanding with little or no result to show for the pain caused. If Jamaica had thought about it we should have copyrighted that type of political behavior and earn some money from it.

The deal that was finally agreed, however, doesn't seem to either

(i) Have what it takes to properly address the deficit, as the real expenditure that matters -- entitlements — was not addressed. And all that was done is that the can was kicked down the road to some obscure committee; or

(ii) Add any hope for the economy. In fact this expenditure reduction has a high probability of causing further sluggishness in US GDP and employment growth. The recent US GDP and jobless claims numbers show an economy that is struggling.

So what was all the drama about that sparked fears of a global crisis, if the US defaulted, and caused the US so much credibility. If nothing else what it has done is ushered in a new economic order, which was already on the cards. It was always clear that the US economy, and dollar, was always going to lose some prominence, but this was supposed to have occurred over many years if the economic and fiscal structure is not addressed.

What this drama has done though is raise the debate once more between those for and against Keynesian economic theory. My own position is that I am a supporter of this theory, and this may have been obvious in my call last year for fiscal stimulus funds to promote the Jamaican economy. I think it became obvious that those funds were needed, as reflected by the accommodations in the IMF programme, as well as the JDIP and PSOJ growth inducement strategy. This was contrary to some who espoused textbook type budget cuts, which would have created more hardships for the Jamaican people. I think all in Jamaica can applaud the government for the relaxation of the hardships through these fiscal stimuli.

So the US is following the same anti-Keynesian policy that was done during the Great Depression of the 1930s. What they have done is again raised the probability of a double dip recession, as is argued by Nobel Prize winner Paul Krugman and others. The difference between Jamaica and the US is that when the latter sneezes everyone catches pneumonia. When Jamaica sneezes the IMF takes out the fly swat. So the probability is high that this anti-Keynesian type of policy adopted in the debt ceiling plan will result in lower disposable income in the pockets of the American citizen we depend on for tourism, remittances, and alumina.

But if that happens then we can't with any conscience criticize them for doing so, as we took the same approach. So we will all have to just keep quiet and soak it up, or alternatively we could ready our economy for any shocks that could result.

The question is, how can we do this, especially with our economy as fragile as it is. While we can accept that there are some structural shifts happening, such as a greater focus on agriculture production, improvement in roads and transportation (better JUTC and the limited railway service), a greater focus on entrepreneurialism, lower interest rates and a move for better support services in the public sector; there are still some significant challenges.

The two low hanging fruit, which we have failed to address for as far as I can remember, are (i) our energy use; and (ii) lack of law and order. These two issues take more will and thought to fix than resources. I have discussed these issues a lot and won't go into any detail here, but just to say that on the matter of crime, we will never fix this in any sustainable way until we address the matter of discipline on the roads. Criminals graduate to harsher crimes because there is a culture of indiscipline around them.

When one looks at the general structure of the economy, however, even though there has been some improvement, it still remains much the same it was before the recession. This is not an easy fix, but what we must do is focus on where the greatest vulnerabilities are. And this is best addressed by looking at first our Balance of Payments (BOP), and then our fiscal accounts. The Finance Ministry has been doing a good job managing the fiscal deficit, but at best this sort of management can only be a short term reprieve. The real meat of the matter (long term sustainability) lies in the BOP. If we run current account surpluses then it will mean that we become richer as a country, but if we run deficits (as we have been forever) then we only become poorer, which is our experience.

When one looks at the recent BOP numbers (March 2011) it shows a worrying sign as expected. The current account deficit worsened by US$172.6 million, driven by a worsening of (i) the trade deficit by US$165.7 million, (ii) services by US$11.1 million, and (iii) income by US$25 million. Net transfers (primarily from remittances) improved by US$29.1 million. So it shows that once again we will be counting on the non-productive income of remittances to save the day. The hope, as was mentioned above, is that the structural changes will continue and improve this situation.

When one looks closer we see that even though bauxite and alumina exports improved, oil imports negated that improvement. Again expected because we have not changed our energy mix. Of interest also is the fact that the decline in the income category is due to higher profits repatriation. This could be driven by a need for cash by the head offices or the reluctance to reinvest because of a lack of positive ROI opportunities.

In this new world order, hastened by the US last week, we must focus even more on the BOP, and seek to improve it significantly. The obvious points to address are (i) oil imports; (ii) food imports (agro-processing); and (iii) profits repatriation (through more local entrepreneurs and better institutions and investment environment). If we were to focus on these three areas then we would see a significant turnaround in our BOP and the wealth of the country.

It is generally expected that the global economy will be in a slump for a while, as the US economy has significant structural problems and Europe has its own debt crisis. We may talk about emerging economies such as China and Brazil, but these economies depend on the fortunes of the US. From our own point of view we are even more plugged into the US economy, so any downturn would affect us quicker.

Where is the US leadership?

2011-08-01T22:11:00.001-05:00

Arianna Huffington said it best on Piers Morgan tonight..the debt ceiling plan is akin to taking the gas tank out of a stalled car (the economy) when what is needed is a jump start.

I have watched the charade in Washington unfold over the past few days and can only agree with Paul Krugman, in the NY Times column, when he said that Obama has shown considerable weakness. Obama has not provided the leadership necessary in these troubled times for the US. Even George Bush would have shown strength and character and do what he thought was best for the US in crisis, whether he was wrong or not. Just as he went to war in Iraq. Mr. President, the electorate out you there to lead,and it was expected that the transformational leadership you promised would be strongest in this trying time.

Normally I wouldn’t be concerned about what another country does, but this is the US – the world market leader and their actions affect everyone. So what they have been involved in over the past few days has been irresponsible, as they have held world markets to ransom.

Obama should have listened to Clinton and invoked the 14th amendment. The US needs a Clinton now, with all his wandering eyes, he is a strong leader and always stands for the right thing for the economy and the world.

I don’t know what they are thinking but in a stagnant economy spending cuts will continue the economic sluggishness. Bye bye jobs improvement. The argument that increasing taxes on the wealthiest Americans will slow down the economy is just ridiculous. This is not like taxes on the middle class. It is taxes on the wealthy where most of that is savings anyway, and so will not find its way back into the economy. It’s a difference between taxing expenditure and taxing savings.

So the sluggishness will continue. And by the way spending cuts is a tax on the poor and middle class, and will mean less demand in a sluggish economy. We have seen that in Jamaica with the IMF plan.

Anyway, maybe we should all stop being critical and just make some money from this…long term US dollar weakness?

Jamaica's continuing energy crisis

2011-07-29T03:31:00.001-05:00

In July 2006, I wrote an article titled "Oil - Jamaica's main external threat". At the time our use of fossil fuels (oil) was 96 per cent of our energy needs, and the oil price was US$78 per barrel. In February 2008, I wrote another article titled "Oil - still Jamaica's main external threat". At that time oil was trading at US$100 per barrel, and fossil fuels were still just about 96 per cent of our energy usage. Today oil is trading at just under US$100 per barrel and our energy usage is just about 96 per cent per barrel.

Does anyone see anything wrong with this picture? This energy crisis started from the 1970s, and as a country we have been talking since then about the need to rationalise our energy usage, and move towards cheaper forms of energy. After almost 40 years of talk, I think we can safely say that this is the longest-running talk show in the history of the country. Recently, even the City of New York announced an initiative to introduce significant numbers of solar panels, as a solution to high energy costs and future supply.

I find it very difficult to understand why it has taken so long for us to address this issue, as today energy is the biggest threat to production and industry in this country. Running close behind is the scrap metal industry and for the record I support the move to indefinitely ban the industry until a solution can be found. Hopefully a solution can come before next year, but any announcement of a temporary ban will only cause the hoodlums to continue to stockpile.

For the past two years approximately, we have seen the Balance of Payments (BOP) perform better than prior year comparative periods, as a result of the weak global demand, and hence the fall-off in oil prices. Still oil imports were approximately 25 to 30 percent of imports during that period. I had indicated at the time that this was just a respite and sooner or later oil prices would start to climb again, especially as global demand starts to pick up. Add to that now the crisis in the US, which is causing a quicker than expected depreciation of the US dollar, and a run to commodities, particularly gold.

The effect on Jamaica's BOP has been that the current account deficit has started to worsen again, and businesses and individuals will continue to be under immense pressure from rising energy prices. So we once again have not taken advantage of the lull in oil prices. But as I had indicated when oil prices were on the way down, we would forget about the urgency needed to address this, added to the bureaucracy involved, and it would only come to the fore again when prices started to go back up.

So here we are once more, fighting with the JPS and a worsening current account, which will no doubt affect our future demand of US dollars if not addressed expeditiously.

What is happening currently? I saw an ad on television this week where the NHT seems to have expanded its offering of solar panel loans. And this is a good move and one I have been pushing for a while. I hope that the level of bureaucracy that existed a few months ago has been improved, as it was way too onerous for someone to access a loan. No doubt this bureaucracy existed because of the need to protect government funds, but we should have found a way to protect the funds and at the same time disburse the loans, as the cost of high energy bills for Jamaica far outweighs any loss that could occur from increased risk in the lending practices for this purpose. In fact I still maintain that the GCT on the electricity bills should be used to credit compliant taxpayers who introduce renewable energy solutions at their homes and businesses.

I also see that the argument surrounding the JPS distribution monopoly has shifted to being impractical to break up because of the size of the country and cost of doing so. I think what is needed here is some out-of-the-box thinking. I totally agree with the position of the Energy Minister, when he says that the control of the distribution would have to remain with the JPS. The fact is that it would be much too costly and difficult to monitor otherwise, as JPS has the infrastructure to do so.

This, however, does not prevent competition in the market. And vibrant competition at that. This can be done in the following ways.

1. Competition will occur by persons generating their own energy needs, as this will reduce the demand for the electricity produced by JPS. I have been using solar panels at home for over one and a half years, and it is still going strong. My average cost of energy has been significantly reduced, and I expect a four-to- five year payback timeline. I also am not impacted in a significant way by JPS rate hikes, and power cuts don't affect me. In addition, at this payback period this amounts to a 15 to 20 per cent return on investment (if one considers depreciation), with no withholding tax.

2. We need to move immediately to net metering, as net billing is still not cost-effective for greater investments to take place.

3. We should allow independent electricity generators to establish themselves, and be charged by JPS a regulated distribution fee. These independents would then sell the power they generate directly to the customer, and not have to sell it to JPS for them to on-sell. This is where the OUR would be valuable in regulating the cost of the distribution (to ensure a standard and reasonable charge) and also to assist in monitoring how many credits each distributor puts on the system and can sell. The more cost-effective one would obviously sell their supply first. This way JPS also collects for the distribution, but competition will be introduced.

The other solution to significantly reduce demand is to invest in a much more efficient and safe public transportation system. Right here we have to commend the efforts of Mike Henry in getting the limited train service going. This will not only reduce the demand for energy but also ensure that competition forces the other operators into greater discipline and efficiency.

Note that none of these initiatives involve any significant project like the LNG, which is required for industrial production, but these alone could save 30 to 40 per cent in energy cost. If this happens it means greater disposable income and revenues for businesses.

Jamaicanisation of the US

The debt crisis debacle happening in the US is pointing towards the Jamaicanisation of that country. I never thought the day would come when I would see US politicians behaving like Jamaican politicians, where politics and party come before country. It is a sad day for the world when the world's leading economy starts to behave in that way, and we are seeing how destructive politics can be. In Jamaica we have long known about the destructive nature of politics as evidenced by our low growth rates, relatively worsening productivity and human development index, and increasing poverty.

I think after the irresponsible behaviour of US companies that led to the 2008 financial crisis, and the current debt impasse, the US is showing the whole world why it no longer deserves to be the world's reserve currency or benchmark for financial transactions. It is still the greatest country in the world for me right now, but is fast self-destructing.

Development can only occur if there is law and order

2011-07-22T04:58:00.001-05:00

WHENEVER we discuss the various models for development (Ireland, Singapore, and Russia), we tend to focus on economic stability, interest rates, stock exchanges etc. We always speak about economics as if it is an exact science, not realising that economics, as a social science, depends on human behaviour. Perhaps more important than interest and exchange rates is consumer confidence. After all, economic development is driven by consumer demand and markets, not macroeconomic stability or low inflation.

For this reason one can always predict whether an economy is going to do well or not, because unless consumer confidence and spending is on the rise then an economy cannot develop. We only have to look at the largest economies in the world, led by the US and China. It is the rise in consumer spending and confidence that has allowed those markets to develop, not a few technocrats sitting in a room determining how to achieve stable exchange rates, low interest rates, and low inflation. In fact, a focus on macroeconomic stability, without developing consumer confidence, is only a short-term fix, and will lead to what we have seen for the most part in Jamaica — spurts of growth followed by longer periods of slump.

It would seem logical, therefore, that if we want a market to show innovation and develop, then we must encourage consumer confidence and spending. This means that market policy should always focus on more jobs, greater real income levels, and greater competition. There is justification for why the Caribbean GDP growth (less Trinidad) rate lags behind the rest of the world, as our markets are less developed. In particular, there is a reason why 2007 real GDP per capita and productivity in Jamaica was less than in 1972. The problem is that as a country we have for the most part focused on the outcome rather than the underlying problem, which our governors have failed to properly understand.

If, therefore, market development depends on consumer confidence and spending, then it's logical that we should pursue policies that will ensure consumers feel confident and have enough money to drive higher expenditures. And if this is accepted as the logical thing to do, shouldn't we then be identifying what is needed to drive that behaviour (remember economics is a social science)? The next logical set of questions then would include, how we expect consumers (or businesses) to feel confident about spending if there is rampant indiscipline and a general lack of law and order, and our institutions such as our courts and police force seem deficient. Even if the institutions are not deficient, a perception that they are is enough to stymie confidence.

For example, the way the police handled the Mais killing is an example of how not to communicate (even though, in my opinion, it was handled properly). The argument that social media is an inhibitor to policing and that ways must be found to curtail the use of social media is showing a bankruptcy of ideas. Shortly after hearing this comment locally, I heard an international report where it was being said by the police that with the growth of social media, the police now had to find more innovative methods to work alongside the new order, not to say it should be limited as we chose to do.

When will we realise also that the first thing to do in solving crime is to create a culture of discipline and law and order, as was done in Singapore? So if we truly want to see a sustained reduction in murders and other crimes then we must first address the general perception of law, order, and discipline. If this is not done then we may not see a sustained reduction. We only have to look at the recent killings. And it is this breakdown of law, order, and discipline that has been the biggest failure of governance in this country since the 1970s, which deteriorated at a much more rapid rate in the 1990s and 2000s.

So neither pedestrians, cyclists, nor motorists are safe on the road from reckless drivers. Only last week a cyclist was riding out at the Harbour View roundabout, for his morning exercise, and was mowed down by a speeding motorist, leaving a wife and a 15-month-old son. When that driver leaves prison he should be forced to support the child until age 18. But will that ever happen in Jamaica? More than likely not. And what about the persons who continuously ignore the Noise Abatement Act, and prevent persons from getting the rest they need to be productive the following day? I also continuously see cases where taxis stop in the middle of the road to let out someone, and a police car just drives past as if it is nothing.

It is not enough for the police to just set up a speed trap and expect to solve traffic violations that way. There needs to be more out-of-the-box thinking. For example, why aren't the police seizing the equipment and gate proceeds from persons who violate the Noise Abatement Act (which this Act already supports indiscipline as crafted)? Why don't they wait outside of clubs and parties to see who is staggering to the driver's seat and administer a breathalyser test on the spot? This would also certainly improve the revenue intake.

If one looks at the development of the US, Singapore, and Ireland (countries we love to look at as models), they have been based on a culture of discipline and the enforcement of law and order, that rewards productivity rather than in our case where we reward connections and strength. So in Jamaica we don't know how many Usain Bolts or Bob Marleys we could have produced because we either kill them when they are young or never allow them the opportunity to develop.

So, as I have always maintained, in no economics book I have read is there an assumption of the lack of law and order. On the contrary, economic development assumes a certain structure and culture of discipline. The Global Competitiveness report, for example, points out that before development can occur in a country, the institutions have to be functioning properly and there has to be access to good health care and primary education. Otherwise, any effort at development is only a lesson in futility.

So as we approach 50 years of independence as a country we need to understand that without discipline on our roads and an enforcement of law and order, we will never get around to achieving sustainable economic development, let alone get to being the country of choice to live and work. All we will do is create one big ghetto called Jamaica.

PS: I want to commend the direction being taken by the new minister of justice of focusing on the courts and backlog of cases, which the DPP has been saying for a while is a reason for the poor delivery of justice. I also want to commend the minister of national security for the introduction of the electronic monitoring for non-violent offenders, as all our prisons have done is create more hardened criminals.

Make the roads safe please

2011-07-16T13:33:00.001-05:00

Just this morning a recreational cyclist was reportedly mowed down by driver, who apparently was drunk, and was reportedly racing another driver near the harbour view round about. The impact was so great that the car was badly damaged. He leaves a two year old child without a father.

A few months ago another recreational cyclist was mowed down by a car at port royal, where it was reported that the driver fell asleep. He also left fatherless a young child.

These drivers were coming from a night out on the town, where more than likely they were drinking.

This rubbish must stop, as motorists drive without any order, and also cyclists and pedestrians use the road without any order. Because of the lawlessness on the roads, neither pedestrians, cyclists, or motorists are safe. Approximately two weeks ago this lawlessness reached a new high when 17 year old Mais was killed by a lunatic. His actions are similar to the motorist who uses his car, because of irresponsible driving because of DUI or even being distracted because they are texting, talking on the phone, or even eating. And while doing all of that they are speeding.

When will the police realize that if they really want to assist in making Jamaica the place of choice to live and work, that discipline on the roads, and safety of all users on the road, is essential. Are reckless motorists any different from the murderers who in cold blood kill people. In both cases they have no regard for human life.

If this is contained then Jamaica will definitely be a better place to live, and crime overall will come down once there is a semblance of discipline. The lack of law and order is slowly killing us. How do we want to encourage a more healthy lifestyle but then persons who ride, run, or walk on the road are under siege. It seems logical that we have to arrest the perception of law and order if we truly want law and order.

My own recommendation is that those caught driving under the influence, or texting etc. should be charged, fined heavily, and have their licence immediately revoked. If they cause the death of a person or destroy property they should be arrested and put in jail immediately. The police have to get serious about this. It is very important.

If the police can’t deal with this then we must once again force them through the voiceof civil society, as it seems that this is the only way we get action.

Lessons from the ICAC conference part 2

2011-07-08T04:55:00.001-05:00

Last week I looked at the presentation on the Singapore model, done by Professor Ghesquiere at the annual conference of Caribbean accountants. I want to now focus on the other two themes of the conference. Those of (i) Energy as a tool for success; and (ii) the role of competition in market development.

Energy

By energy I don't mean oil, gas, and electricity, but rather the effort that goes into productivity. This was the focus of a presentation done by Andrew Deutscher of the "Energy project" group. The main theme around the presentation is that it is not how long you work that is important but rather how you work. In other words, productivity does not mean long hours of work, and the fact is that the longer your hours of work is the greater the risk that you become less productive. He went on to say that not balancing your life to include exercise, time to think, and spend with family actually leads to less productivity.

I have always maintained that when you see someone working long hours then more often than not those are the more unproductive persons. If someone has to be working ten to fourteen hours a day to achieve a task then it either means that (i) the technology or human resources are insufficient for production; or (ii) the person is unproductive and not innovative. It actually costs the company more to have persons working longer than regular hours, because it means more utility bills; greater risk of errors, as people tire and productivity falls; greater risk of fraud, as the person working long hours becomes frustrated and too in control of the systems; increased risk of higher health premiums for the company; higher risk of absenteeism from fatigue and health-related issues; and other such indirect factors. The problem is that many managers are not able to see the opportunity cost of an action, and love to see persons spending all sort of hours at work.

Isn't it more efficient to have a worker who gets tasks A and B done in four hours, than one who spends eight hours doing the same tasks? If we think even further then couldn't we also see the benefit to the company of having persons work from home rather than go to the office? The company would have more productive time available to it, as the worker would always have their computer and work environment with them (as BlackBerrys have done); there would be less use of stationery and utilities for the company, so expenses would decline; the worker would be more productive, as they don't have to deal with traffic and spend time getting ready for work; and there would be less demand for employee benefits long term as worker expenses would decline. This is actually a growing trend in the US, but in Jamaica we love to physically see someone drag themselves to the office, even though when they get there they go sit around a computer and never have a conversation with anyone until they are saying goodbye when they depart for home.

So the presentation says that what we need to focus on is not the amount of time someone spends at work but rather how much value they produce. We could also extend this to the national debt, and as I have always maintained, it is not the amount of debt the country has, or the debt to GDP ratio, that is important but what value do we get from the debt.

It seems to me, therefore, that one of the main problems we have with productivity in this country (at the national and company level) is not the fact that Jamaicans don't work long hours, as some espouse, but rather that our managers and leaders do not set objectives and outcomes. The result is that people end up working long hours but really do not have a value-added outcome to match it against. So an accountant who spends seriously long hours working in many instances, do not produce the financial statements in a timely manner anyway, and more importantly the accountant does not understand the link between what he/she does and the value added for the company. So if there is a change in the value added he/she does not know what to alter to produce information that can bring it back in line.

So the energy project says create an environment that will allow greater productivity (as opposed to long hours) and have a way of measuring that productivity, because what really matters is how much energy is put into the outcome.

If we had applied this concept of "energy" and outcome to compensation for public sector workers then we would have (i) a more productive and better paid public sector; and (ii) we would not have had the recent opportunity cost of the protracted wage stand off. This is because we would have had a measurable outcome to reward persons based on and the more productive would naturally earn more, rather than everyone getting the same outcome irrespective of productivity level.

So the real take away for me was that one of our main problems with productivity is that there is not a great focus on outcomes and value added in Jamaica. This is the main reason why our productivity, and ultimately GDP per capita lags behind other countries.

Competition

The other theme is that of competition. The presenters were Michael Fairbanks, who looked at some of the benefits of competition, and yours truly, who looked at a competitive analysis of the region.

The essence of the presentations was that it is the lack of competition that has held back market development in Jamaica and the region. The fact is that there is no country that has seen sustained high levels of growth without a competitive environment. Governments cannot efficiently pick winners or drive markets efficiently. This we saw coming out of the FINSAC era, where many private companies were under the control of the government. Although some may argue that we had growth after that era, the fact is that growth was driven by increased national debt and was relatively weak compared to the region.

We saw a very good example of what competition has done for the consumer and market development when the telecommunications industry became competitive, when Digicel entered. This is a microcosm of what can happen if we encourage competition in our markets, rather than continue with protectionist policies. The Caribbean is amongst the least competitive regions worldwide, and when one removes Trinidad and Tobago from the equation is probably the least competitive.

Is it any wonder then that as a region we have lagged behind most regions of the world in terms of economic growth and GDP per capita?

There were some good lessons coming out of the conference and the accountants have managed to show their readiness to provide the leadership necessary for regional development. The hope is that they will continue to implement some of these recommendations.

Lessons for Jamaica from the ICAC conference

2011-07-01T05:38:00.001-05:00

LAST week the Institute of Chartered Accountants of Jamaica (ICAJ) hosted the annual conference of Caribbean accountants. This was the most successful one to date, with over 900 delegates registered, and more importantly for me, the theme, "Third to First [World] — going the distance", was superbly handled.

The conference did not focus on traditional accounting topics, but rather illustrated the fact that accountants are now a lot more than just the perceived book-keepers, representing in fact the most rounded professionals in a country. The theme we used as the basis of a presentation made by Professor Ghesquiere, from the Lee Quan Yew School, which focused on the Singapore success story. In addition to this presentation, Andrew Deutscher made a very informative presentation on "The Energy Project", which focuses on the role of energy rather than just attempts to get things done; while Michael Fairbanks and yours truly did a presentation on competitiveness in the region.

There were also many other enlightening presentations, but I think that these themes of (i) The Singapore experience; (ii) Energy as a tool for success; and (iii) the role of competition in market development captured the essence of the theme.

There were numerous lessons for Jamaica coming out of the conference, and those not in attendance really missed out on a very educational experience. It's not that what was presented was anything novel, as many other commentators have been proposing these solutions over time, but the interconnectivity of all that was said placed a special perspective on the recommendations.

Professor Ghesquiere did a fantastic job explaining the main factors that led to Singapore's success. The first thing he mentioned was that Singapore had exceptional leadership that focused primarily on economic development and growth, rather than the constant political power plays that we are used to in this region.

In fact, he was at pains to point out that Singapore and Jamaica had the same GDP per capita and level of development in the 1960s. The major difference was in the choices made by both countries. While Jamaica chose to focus more on social and political issues, Singapore, under the exceptional guidance of Lee Quan Yew, made economic growth and development their primary objective. So while we fought among ourselves for political and social supremacy, all of Singapore's policies and actions were geared towards economic development for the entire country.

He also pointed out, as many of us have been saying, that a very important part of Singapore's success was the fact that there was respect for law, order, and authority. He did point out that Singapore benefited from being a one-party state. In my view, in Jamaica sometimes we confuse indiscipline for liberty. For example, the argument that persons need freedom of expression so they must be allowed to play music at any volume, at any time, ignores the fact that the liberty of those being disturbed and offended by the noise is being disrespected. So we tolerate indiscipline and call it liberty. What we don't recognise is that for companies, countries, or even people to grow successfully, there must be rules and structure, otherwise it becomes a "free for all".

In Singapore labour and capital worked together for the development of the country. So during the recent recession, labour understood the need to take a pay cut in order to minimise job losses and to ensure that the country weathered the recessionary storms well. So while Singapore saw a harmonious working relationship between labour and capital during the short-lived recession there, in Jamaica we continue to see the stand-off between the government and public sector workers. And as a result of the inability of politicians, labour, and capital to work together, we have experienced thirteen consecutive quarters of GDP decline. So who wins in our case? Nobody.

What was also evident from the presentation was that an essential ingredient of Singapore's success continues to be trust between leaders and the people. What we find from the recent study about trust in Jamaica, however, is that amongst the least trusted are the police and the politicians. What is ironic about this is that these are the persons who are supposed to provide everyday leadership. The fact is that if there is no trust, then irrespective of how good your intentions are, no one will follow willingly. On the other hand, if the trust level is high then even when you have bad intentions people will follow until they wise up. It would therefore seem to me that repairing the breach of trust between our leaders and citizens should be a top priority.

Singapore also focused on economic growth rather than pursuing political objectives. This is critical to understand, and while many of us talk about economic growth and development, it is somewhat different to actually make it your primary objective. The fact is that much of the talk about economic growth and development in Jamaica is shrouded in the greater priority of politics and individual reward. Economic development for Jamaica will always be good for politicians as long as it helps them to remain in power. So even though we may realise that certain types of expenditure can derail an economy's development, we do it anyway because it is necessary to keep the party in power. Even though we know that duty waivers are not in the best interest of the country, we will support the policy only as long as it doesn't affect "me". This is where it is necessary for exceptional leadership to do what is good for the country and not any special interest group.

The last thing I will mention from the professor's address is that of the need to live within our means. For too long Jamaicans have consumed 90 per cent of the money we have borrowed. We have actually been borrowing to support a lifestyle that we cannot afford. There is no way that we can continue on that path, as countries like Greece have seen. Those who argue that while we were borrowing in order to consume, the economy was actually getting better, fail to realise that we were actually getting better, fail to realise that we were actually digging our own graves. What we must do is cut our suit to match the cloth we have. On the other hand, though, I don't think this means that we must stop borrowing or spending, and I somewhat disagree with the notion that debt is bad. As long as the marginal return of debt exceeds the marginal cost, then debt is good. What we must change is the way we spend money: we must ensure that we spend it in such a way that we receive a value added in excess of the cost. This would include, for example, infrastructure spending to support industries such as tourism and agriculture. A country where the tourist capital is separated from the national capital by a single-lane bridge over a river that is impassable when rains fall, while having a debt to GDP ratio of 129 per cent, cannot be serious about development.

Next week I am going to look at the other two themes I found very interesting at the conference, those of energy and competition. Until then I urge us all to think about these things that the professor has brought from his experience and reflect on why Jamaica is in its current position, after having been the model Singapore looked at favourably in the 1960s.

Competition's essential role in development

2011-06-24T05:41:00.001-05:00

Two weeks ago I spent a weekend at Jamaica Grande with my son. I forgot to take my camera with me and therefore asked one of the roving photographers to take a picture of us, so that we could have a record of our time there. When leaving I went to the photo shop (not operated by Jamaica Grande) and asked for two copies of the pictures to be placed on a compact disc (CD), so that I could have a digital copy. To my surprise the attendant informed me that that could not be done, and I would have to purchase printed copies, as the policy is that only if you purchase five or more copies could it be placed on CD.

I wondered to myself who in this day and age keeps printed copies of pictures, and secondly if the problem is the cost of the CD why not just tell me that I would have to pay for the CD, which surely costs under J$100 and I think would cost less than the printing and paper cost. Instead the attendant was adamant that it could not be done. I therefore left without purchasing the copies, and the photo shop ended up with digital copies that they didn't recover any cost for.

This is reminiscent of the way Cable and Wireless behaved when they were the sole mobile provider. Those old enough will remember the days when to call another cell phone was like taking out a mortgage on a house: what is more, the person receiving the call would pay also. Even before that time, for those even older, I remember when one applied for landline service a woman could have two children before the phone service was connected.

When Digicel entered the market in the 1990s it changed the whole landscape. Finally there was competition and there was no need for any regulations for consumer protection, as competition and the drive for market share and profitability ensured that the consumer became king. It is therefore logical that if the market is open to even further competition, through number portability for example, the consumer will benefit even more. Additionally the market will grow as more money will be spent on advertising and infrastructure development.

We have similar situations where (1) the JPS is the monopoly distributor for electricity; (2) NWC is a monopoly; and (3) the banking sector is effectively closed and does not allow for more flexibility in fees and interest charges. The result of the lack of adequate competition in these areas means less benefit for the consumer, or in the case of the JPS or NWC, you either pay for the service or do without.

What we have failed to realise as a country, however, is that the way to solve the plight of the consumer, when it comes to monopolies, is not to regulate, regulate, and regulate, but rather to open up the market to competition. So in the 1930s the great USA realised the problem with monopolies and they passed the Sherman Act, which controlled monopolistic tendencies. Or across Europe and the USA when two large entities seek to merge they first have to get the blessing of the authorities, who will not approve the merger if they believe it will lead to monopolistic tendencies .

In Jamaica, however, we never seem to try to solve market distortions by creating more efficient markets through competition. Rather what we do is seek to regulate it. So instead of trying to assist consumers suffering from high electricity or telephone rates we talk about giving more power to the OUR, rather than spending our energies discussing how to create a more competitive market and greater market efficiency. It seems that even though we talk about the benefits consumers have gained from the liberalisation of the telecommunications market, we don't seek to emulate it. Is it any wonder then that we have suffered from economic stagnation since the 1970s or significant fiscal and trade deficits?

The only way for economies to develop is through competition. Even communist China has realised this, and is the fastest-growing economy in the world and one of the most competitive.

Competition, of course, should never be unbridled but should have oversight. If left unchecked we could end up with another global economic crisis, but it is important that as many players as possible be allowed to participate. The regulators should act as referees in a football match who do not interfere with the free flow of play but who ensure fairness.

This need for market efficiency through competition is one of the primary reasons why Jamaica has failed to realise its full market potential. During the 1960s we had a lot of development, not because government picked winners (as we have sought to do since the 1970s) but rather because the enabling environment was created and we watched the private sector expand the economy. It seems, though, that since the 1970s our governments have had a socialistic tendency towards economic management.

When I spoke about the need for a paradigm shift in my book, it wasn't only a shift in government policy, but rather the need for a cultural shift and the way that we approach market development. Jamaica will never truly develop until we allow for an environment where greater competition is allowed and the best companies are allowed to survive and the worst ones to fail, as they should. Otherwise what we have is market distortion, which leads to a stagnant economy and finds its way into fiscal and trade deficits.

So at the end of the day, to go back to the example I started with: if there were two photo shops beside each other, what would have been the possible outcome of the interaction I had with them? In my view the story would have had the following outcome.

Both would first ensure that they had well trained photographers with the best cameras, taking pictures of all the guests. They might then go further in marketing the pictures to the guests by creating some link to display the pictures to the television sets in the guest rooms and offering some kind of package actively. They might even offer that the payment could be made through the internet and the pictures delivered electronically. One thing is sure: is they would never set a minimum purchase before one could get digital copies on CD.

So at the end of the day we would have (i) a better trained work force; (ii) a better paid workforce; (iii) greater market activity and efficiency; (iv) greater infrastructure investment; (v) more market information; (vi) increased corporate profits; and (vii) higher standard of living and consumer satisfaction. All from a little competition.

Jamaica’s telecommunications industry

2011-06-04T04:22:00.001-05:00

THIS week CNN reported on an article titled "WHO: Cellphone use can increase possible cancer risk". I think that this is something that many persons suspected, before but coming from the World Health Organisation this cements the belief in people's minds. I wonder how this will affect cellphone usage going forward.

This got me thinking about Jamaica's telecommunication sector, which has made a valiant attempt to keep pace with what is happening in a developed market such as the US, but with the coming merger between Claro and Digicel and the consistent losses being shown by Cable and Wireless (trading as LIME), it seems as if this sector could fall back into one where competition is all but absent.

I had long thought that this day was coming, and remember advising someone a few years ago that C&W shares at J$1.60 at the time was a bad buy, even though that price was a 52-week low, because I felt that the share price would fall considerably. It is now trading at approximately 20 cents. I also expect that the share price will fall further as when I look at the way the company is presently structured I don't see how it will emerge from the black hole it finds itself in. There are a few reasons for my thinking this way, which I will briefly outline. Before I do so, I think that given this situation it is important for the regulators to look at the situation and see how best the consumer can be protected going forward.

The truth is that given the nature of the business and the market, I wouldn't be surprised if Digicel is having a difficult time also, which cannot be assessed because of the lack of financial information.

The industry itself is one where significant capital infrastructure investment is consistently required, and with the decline in disposable income across Jamaica, it should be extremely difficult to recover. So like the airline industry, the greatest amounts of money are not made by the service providers, by the agents, or those that do business with the service provider. The main issue of course is the capital investment cost. The Jamaican market is just too poor for maintaining a sustainable competitive environment in telecommunications development.

As a result the regulators will have to be proactive in protecting the consumer.

C&W financials

The recently published audited statements for C&W show a company that has significant challenges, and I think the mistake that management has consistently made in that company is not recognising the need for a paradigm shift. Maybe the current management will make that change given their ability.

The group continued to show significant losses, and losses attributable to stockholders increased from J$3.3 billion to a whopping J$6.1 billion in fiscal year ended 2011. Further analysis on the Group Income Statement showed that the gross margin declined year over year (YoY) from 65 per cent to 57.6 per cent, reflecting the deteriorating market conditions and competition from Digicel. Although the group managed to reduce operating expenses by over $2 billion, a careful look showed that the reduction was due to a non-cash item, depreciation and amortisation, which does not add cash flow and also suggests that the equipment is ageing and will need to be replaced soon, especially if it is to keep up with Digicel, which already has over 70 per cent of the market. The group shows an improvement in the operating loss before net finance cost line, from $3.0 billion to $2.6 billion, but when one removes the depreciation consideration, it shows that the cash-generating activities worsened, as is reflected in the cash flow statement, which shows that net cash provided by operating activities declined YoY from $4.9 billion to $1.2 billion. This suggests that the group is facing a tighter liquidity situation and is supported by a cash injection from group companies of $5.6 billion.

It is important to note, though, that the group is still very liquid and is still generating cash from operations. The main concern is that going forward it will need cash resources to upgrade infrastructure.

LIME at the crossroads

One of the things that the group may have to look at in restructuring the operations is the charge of the interest to C&W from advances from other group companies. If this debt is taken into consideration ($19.9 billion), the group has a debt to equity ratio of 3.7, but if the internal debt is removed the debt to equity is 0.12. The majority of the interest paid is also within the group. The suggestion is that one way the group could significantly turn around the fortunes of the company is to capitalise the debt. This would significantly reduce the burden on the company and improve the operating position.

The challenge they will continue to face, however, is capital replacement going forward and competition from Digicel. As I had stated in an article a few weeks ago, this big bother about the Digicel-Claro merger is really a red herring. Even if the merger does not take place C&W is in danger of extinction without any significant restructuring, or unless the regulators introduce portability of numbers.

This operating challenge is also evident in the current ratio, which stood at 0.72 on March 31, 2011, and where the Trade and accounts payable is twice the Accounts receivable balance.

The numbers do tell a lot more about the group, but lack of of space and time does not permit a much more comprehensive report. Suffice it to say that C&W is at the crossroads and must make a fundamental shift in order to preserve the competition in the local marketplace. There is of course a logical action I think either Digicel or C&W can take to increase profitability, which I am sure they have thought about already. The group still has significant liquidity, despite the decline, and I am hopeful that with the management team that is there it will overcome this obstacle for the benefit of Jamaica's telecommunication industry.

That FINSAC issue

2011-05-20T05:19:00.001-05:00

IT seems as if the Finsac issue will never settle down, as it has been debated by both sides of the political divide and civil society since the 1990s. This is why I strongly supported the need for some study/ commission, as it is necessary to understand the causes of the greatest financial collapse in Jamaica. After all, this was the era that reversed Jamaica's economic improvement, as all data shows that up to the mid-1990s, the economic indicators were looking good and entrepreneurialism was strong.

In my view, it was therefore very important to do a proper study of the period and understand what went wrong, not to cast any blame but to understand fully an era that resulted in the beginning of our economic stagnation and debt crisis. And so I welcomed the commission of enquiry, but have always felt an objective, academic study of the period was necessary before any testimonies were taken.

This approach is essential in order to avoid what is happening now — a lot of crosstalk and blame being thrown around. For at the end of the day, what do we really achieve apart from political and other point scoring? Will we truly find out what went wrong, and even if we do come up with the truth, the whole truth, and nothing but the truth, will it be believed by most people? The sad truth is no. As we are seeing today, this Finsac issue is going to be argued along party, business, and banking lines.

It is therefore going to be even more difficult for us to arrive at the truth of what happened, and my prediction is that whatever report the enquiry comes up with will be believed by 50 per cent of the country, while the other 50 per cent will disagree. So at the end of the day we will have ended where we started.

There is, in my view, some truth in what is being said by all sides to the story, but there are also half-truths and lies. The only way for us to salvage some objectivity and arrive at an answer, at this juncture, would be to set up a group to do an objective study, made up of the members that are acceptable by government, opposition, business community and civil society. And this group must not include anyone who was affected by the meltdown, as it is too emotional a subject.

I will attempt to provide a synopsis of what went wrong, based on the research I did while writing my book.

The platform for the financial meltdown was created with the premature move to liberalise the Jamaican economy, as stated by Ralston Hyman. The fact is that the economy and our resources were not ready for the onslaught of global competition. One reason we were able to achieve growth towards the end of the 1980s was the protection provided to the economy. It is not that our economy was much more efficient than today, but we were at the time restricting foreign exchange movement and therefore local producers were protected. This is why a fixed exchange rate regime could work then but couldn't work today.

With the coming of the 1990s and freer world trade, there was a push by organisations like the WTO and the IMF for countries to liberalise their trade policies and foreign exchange movement. In fact, one can remember that the mantra of the IMF was always to get competitive through currency devaluation. This, however, was never going to be easy for a country like Jamaica that had a broken market economy and an internationally uncompetitive private sector. Our labour force was also relatively unskilled and unproductive. So in the 1980s, for example, the only way to attract the garment industry to Jamaica was through cost incentives.

The liberalisation policies in the early 1990s, therefore, resulted in significant exchange rate depreciation followed by high inflation. Faced with high inflation, businesses, including banks, would invest in assets such as real estate and land that rose significantly in value each year, and when these assets were revalued on their balance sheets, the equity would always increase even without doing anything else but just holding them. Business owners borrowed money from banks at rates in the high-teens to low-twenties, and purchased real estate and US dollars, or if put into the business they would just increase prices every year and recoup from the poor consumer.

This, of course, was unsustainable and would have come to a stop either from government policy or deflation, as disposable incomes would have fallen in real terms sooner or later.

Faced with this situation, the government correctly used monetary policy, through high interest rates, to halt inflation and bring the exchange rate under control. The problem the government faced was that if it reduced interest rates, then the inflationary cycle would take hold again. So what should it do? And so it continued with the policy of high interest rates. This was against a background of inadequate foreign exchange supply and reserves, low productivity, and an uncompetitive private sector. The correct move would be to reduce money supply, reform the public sector bureaucracy, and in the interim attract foreign exchange (borrow or FDIs) to stabilise the economy. The choice was to continue with the high interest rate policy, and the following were the resulting factors:

* Persons who borrowed at around 20% now saw loan rates of up to 90% and there was no way that businesses could support that interest cost, and it was therefore just a matter of time before the businesses started to collapse; and

* Asset values started to stagnate or decline, resulting in much tighter liquidity and declining capital reserves on the balance sheet of banks. Banks also faced much higher interest cost on overdraft facilities at the BOJ, which they needed to support the worsening liquidity situation.

There was a liquidity crisis and so the government had no option but to step in, through an entity such as Finsac, to provide liquidity support for the banks. So the truth is that it was the continued high interest rate policy that resulted in the liquidity drain, but there were other factors that set the platform for this, such as (i) poor financial regulations; and (ii) bad business practice, in terms of balance sheet, and more specifically debt and risk management both at the level of the business and banks.

But what happened after Finsac exacerbated the problem. Finsac should never have taken control of the assets and businesses in the way that it did. What should have happened is what occurred in the US, after the recent financial crisis, which is that the government through Finsac should certainly have provided the liquidity support for the banks but should have (i) allowed control of the operations to remain with the private sector, if even a new management team was hired, which would deal with the assets instead of Finsac; and (ii) if the government was going to sell the debt it should have been offered to local entrepreneurs at that price, through an objective body.

There is a lot more that could be said, but space does not permit and any more details require financial analysis. What is clear, though, is that without an objective study we will never have significant acceptance of any findings, and that things not only went wrong with government policy but there was bad management practice in both the businesses and banks.

The role of fiscal policy

2011-05-13T22:32:00.001-05:00

FISCAL policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy.

Coming out of Jamaica's recent budget presentations, and globally since the recession, some have asked the question, what is the role of fiscal policy? In fact, there has been a sharp division between those who support the Keynesian model and those who oppose it, particularly in the US, where the Republicans, Tea Party members in particular, have questioned Obama's use of fiscal spending in creating hundreds of jobs instead of allowing the free flow of the market.

The downside of fiscal spending is of course an increase in public debt, and the upside, it is argued, is the need to stabilise the economy, especially in a recession, to ensure that the decline is not so significant that it leads to poverty and possible social unrest. The results of this fiscal spending in the US have been (1) significant increases in the fiscal deficit and public debt; and (2) a reprieve for many households and a halt in the slide of the global economy.

Because history does not reveal its alternatives, one cannot with certainty argue what would happen if this fiscal spending did not take place. My own view is that the US economy would have declined further, like in the 1930s, thereby exacerbating the global crisis, and we would have seen much greater global suffering. In fact, we see what has happened in countries such as Greece, UK, and the Middle East, where the lack of fiscal spending has resulted in social unrest.

What is evident is that two similar forces cannot repel each other. So it is general consensus that in order to stop a recession then what is needed is an opposing force, such as private investments, job creation, or fiscal spending. In a declining economy, it seems logical to me that when private sector or consumer spending is in retreat, then one has to have fiscal spending in order to repel the force of recession. There is no doubt that economies cannot free-fall or rise forever, and will always adjust from strong growth or decline, as the survival instinct of people will always cause an adjustment. The challenge that governments face is how to smooth out these adjustments, so one does not have excessive overheating of an economy that causes inflation and rapid pull-back, or there is not prolonged decline.

This effort by governments is done through fiscal policy. It seems logical therefore that when an economy is growing fiscal policy should be mildly applied, and should be geared towards encouraging the continuation of an environment that prolongs the growth period and very importantly ensures that the wealth created is not concentrated in the hands of a few. This can be done through policies such as subsidised health and education, or tax incentives. When an economy is in growth mode the use of monetary policy is always more effective at smoothing out growth periods.

When an economy is in decline, however, monetary policy should take a back seat to fiscal policy. In other words, fiscal policy should be the counter-cyclical force to the recessionary environment. If this does not happen, then the economy will decline much further than if fiscal intervention is used to halt that decline, as business and consumer spending and investments will naturally be in retreat. This is because the natural behaviour of private individuals is to retreat when there is economic danger.

This has been the failing of the IMF programme and the previous budgets to this current one. This is also the reason why the economy went through 14 quarters of consecutive decline. The fact is that if an economy is in decline and all sectors retreat, including government (and government should be the savings account for the country), then obviously it will decline further unless some opposing force causes a sudden stop. In the Middle East, for example, that sudden stop was social unrest. In democracies like Jamaica, that sudden stop would have come after much prolonged suffering, when new injection comes in the form of aid, loans, or at a much slower pace, private investments and economic activity.

This is why the recent budget's direction, along with the PIOJ growth-inducement strategy, has been a significant positive change in the fortunes of the economy, as it shows that fiscal policy is now being used to create that enabling environment and inducement for economic growth. If this was done up to a year ago then we would have started to see growth already, as the global economic conditions had improved some time ago.

On the other hand, fiscal policy should not be used to facilitate welfare spending, which was the problem of the budget and economy prior to even the 2008 recession. This is why I have kept saying that Jamaica has always been a welfare state, and is the reason why the economy has struggled to grow. Our use of fiscal policy over the years has not allowed for the market to be efficient, and we have been no different from the archaic and inefficient economies created by the former socialist states.

It is for this reason that the recent budget presented by the government has been correctly welcomed by private sector groups, and understandably so. Government must now go further and eliminate all incentives and allow the entire private sector to play the game on a level playing field. If this is done then the more efficient companies will survive and the economy will grow. If we seek to protect inefficient companies then the economy will continue to experience stagnation or relatively slow growth.

Even while this change in the budget direction is welcome and necessary, including the upcoming tax measures, it is not sufficient. What will be needed is for a sustained move in this direction. We need to ensure that the government is held to account to continue moving fiscal policy in this direction, as it is the only way to get the market efficient and confident enough to maximise the value from private investments and spending, and ensure high levels of growth in the future.

What I am fearful of is that because of elections this trend might be reversed, just as we have in the past reversed positives in order to “run with it” for an election. If the government sticks to its commitment of preferring policies for economic growth over political expediency then we will get to the “promised land”. If, however, political expediency raises its ugly head again then we will be back on the track to nowhere.

It is therefore critical that when we are analysing the budget presentations, and policy proposals being put forward by the government, opposition, and other parties or independents going into election, we pay careful attention to the effect of the policy proposals and not be distracted by the hype and fever around election platform speeches. This is the role of those in civil society that have the capacity to understand the true effect of the policy proposals, and those persons should facilitate the education of the masses in this respect.

After the courtship leading up to the election, or even the wedding on election night, we have to live with the government for at least five years.

Achieving Vision 2030

2011-04-29T05:08:00.003-05:00

"JAMAICA, the place of choice to live, work, raise families and do business" — Vision 2030 National Development Plan. If Jamaica becomes this place then we would have truly transformed from being a third-world country where we kill, cheat, and slander each other, to a truly first-world nation not to be outdone by even the most developed countries.

It is this vision I always dream of Jamaica becoming, and what drives me to criticize society's ills and misguided policy actions that have led to our economic stagnation for 35 years. Jamaica has excelled in every area except for politics. There are, of course, a few politicians that one can hold up as having been "a few good men", but overall politics has led this country on a downward spiral of destruction, as the aim of achieving state power always supersedes the good of the country.

The question therefore is whether, with 18 years before 2030, we can realistically achieve Vision 2030, as stated in the plan. If in 50 years of independence we have been unable to truly mature into a nation, then can we do so in 18 years and what do the indicators tell us? After 50 years we remain two tribes at war with each other, reminiscent of the African tribes, our forefathers who fought and sold each other to the Europeans as slaves. Isn't the divisiveness we have practised over the past 50 years tantamount to keeping Jamaicans in slavery also? The fact that every year Jamaicans have to await the presentation of the budget to see what new taxes we will be forced to pay is similar to the feudal master extracting money from his subjects for his estate.

So here's the real question once again: is there any hope for us and will we see that change occurring by 2030?

From my own perspective I think there is a ray of hope, given developments over the past couple of years. Some of these are listed below. I would start out by saying that in order to achieve Vision 2030 we have to recognise that primacy in that Vision must be the respect for our people and justice and the promotion of unity amongst Jamaicans. This is what Vision 2030 is about, and what will make Jamaica the place of choice to live, grow families, and do business. Because today what we have is a country where people will come for sunshine, beach, fun, and jerk chicken, but would rather go back to cold North America to raise their families and work, so as not to be subject to the vagaries of our society.

In order to achieve Vision 2030 this attitude must change. And if we do achieve this change, then I guarantee that Jamaica will be one of the most prosperous places on the planet. The only drawback is that our feudal... I mean political masters will see power ceded from them to the people. This is why in my book, I started out analyzing economic data and concluded by saying that the real problem with Jamaica is our constitutional political system.

I believe, however, there are some things happening that give hope that Jamaica can achieve Vision 2030, but require consistent application in order for it to be achieved. These are:

1. Tax reform: the Finance Minister has been at pains to indicate that the tax system is going to be reformed to encourage greater productivity and production. At the time of writing the revenue numbers have not yet been presented, but based on things I have been hearing I am hopeful that the necessary tax reform will come that will provide a boost to the productive sector. I am also confident about the Minister's determination to do so, and commend efforts already in place, like the Tax Administration reform.

2. Public Sector Transformation: a lot of work is being done here, and I am hopeful that it will be properly implemented. My own view is that a lot of time has been wasted, however, trying to transform a system that cannot be centrally done (as this was always the problem) and that could easily have been done in a year or two with simpler steps.

3. Charter of Rights: after taking almost 20 years to pass this bill, my understanding is that we are still waiting on the Governor General to sign it into law. This should be immediately done, as the people have waited long enough for fundamental rights to be enshrined in the constitution. Jamaica owes a debt of gratitude to Edward Seaga, who piloted the bill, and we must also commend the politicians for recently passing it in both houses. Personally I do not see the merit in the arguments that the government can be sued for not paying for education for the poor, because it is included as a right, and seems to be politicising the charter already. I mean, I have the right to breathe fresh air, so if I choose to live near a dump, do I have the right to sue the government, or can I sue the government for depriving me of sleep because of night noise?

4. INDECOM, DPP, OCG, and Public Defender: In spite of the public spats that have occurred between these offices, I think the holders and the way they have approached their work is to be commended. Each office can be cited for their efforts to uphold justice or stamp out corruption in one way or the other, and as a country we are fortunate to have had all these offices seemingly working for justice and ethics. I actually believe the public disputes between the offices are good for our democracy. It happens in the great USA, and is healthy as it shows that each office is prepared to defend what it believes is right against other sections of the justice system, which is good control.

5. Police Commissioner: we have a maturing police force under Commissioner Ellington. Over a year ago I indicated that what Ellington does would be what determines the future of this country. I think he has brought a level of discipline and ethical standards to the police force that has been lacking for as far back as I can remember. For the very first time in memory, policemen and women can proudly say they are a part of the JCF. My own view of the police prior to this was a rogue element. In the next survey of trust, we may very well see the police force significantly better than our politicians. Two other officers doing an excellent job are Radcliffe Lewis and Dathan Henry.

6. Civil Society: Lastly, but by no means least, I want to mention the role that civil society has played over the past few years. There is no doubt that there has been a very active and determined civil society keeping our politicians pressured to ensure they get back on the right track when they falter, as they so often do. This is good for our democracy and is the reason why Jamaica will not go the path of the Middle East, as some think. I note that the cries for justice have come from individuals who have formed organisations to fight the corrupt system. These include JFJ, FAST, JUSD, environmental organisations, Columnists, and the list goes on. What is evident is that this change has been carried by individuals while the private sector leaders have apparently caught on, which is not unusual.

Notice I have not mentioned any growth-inducement strategies or macroeconomic numbers as the means to help us achieve Vision 2030, as these are mere symptoms of the underlying problem. If we have social justice and make Jamaica the choice to live and raise families, businesses will certainly follow and economic growth will result. While the signs for social justice are positive, we must ensure we remain consistent, as like a train progress is easy to derail.

Finally I want to add that the biggest failing has been the inability to address our high energy costs. I think there are initiatives that can be taken to ensure a reduction in our energy bill, but until then energy costs are the greatest threat to businesses and disposable incomes today. More on this another time.

Fervet — a model for national development

2011-04-08T05:41:00.001-05:00

"FERVET" is the first word of the Jamaica College (JC) motto — Fervet opus in campis. Translated, it means "Work is burning in the fields", and the JC alumni, in talking about the school will just say "Fervet". Indeed, over the past six years, work has certainly been burning in the fields, as the board, foundation, administration old boys and students have all been working to ensure that JC is number one. We have achieved that goal. JC today is number one for total development of the student.

There are some who will argue that JC cannot be number one when we are not the best academically. This is true. But does someone go to school for academics only, or is it necessary to leave secondary school as a well-rounded person -- good academics, sports, and discipline? I would bet most would want the latter for their children.

The just-concluded fiscal year has also seen a public sector company I chair, Jamaica Ultimate Tyre Company (JUTC2), triple our 2009/10 profits (unaudited financials). This in an economic decline from increased productivity.

Both these organisations, and in particular the Fervet story, can be used as models for national development. What makes both these cases even more rewarding is that they both emerged from the ashes.

In the case of JC, we emerged from being a school with a bad reputation to one where parents want to send their children. In the past year the achievements have been Champs, schoolboy football, under-14 and under-19 hockey, placed in the Robotics competition, won the English and Literary competition, significant academic improvement, and others too numerous to mention. At JUTC2 we recorded profits for the first time in 2009/10.

There is a lot Jamaica can learn from both cases, about what is essential for moving forward. Some of these include the following:

* Entire team rallied around common objectives. JC — at the start of the six-year period, the principal and the board agreed we were number one and the school of champions. A sign was erected, even in the early days, to this effect. At JUTC2 the common objectives from day one were profits and productivity. Is there a common objective for national development that all stakeholders have accepted?

* Each person's role was defined and they were charged with meeting certain deliverables and given the authority to do so. At JUTC2 the general manager was clearly told he was to deliver a profitable and productive organisation through a motivated workforce and he was given the authority to do so, with the only interference from the board being policy input and operational support where required. At JC the principal was clear about his role, and defined it himself. The board offered support, but he always had authority over operations. In the public sector there is still not a clear distinction between policy and operations.

* JC and the JUTC2 clearly defined strengths, weaknesses, opportunities and threats. Maybe not as textbook SWOT analysis, but these were clearly recognised and we built on our strengths and eliminated weaknesses, while taking advantage of opportunities and eliminating threats. In JC's case, we built on the school's tradition and history and utilised the support of the old boys. Indiscipline was curbed, and today, when you go to the school, the students address you in a very courteous manner. At JUTC we recognised that in our business the recessionary environment was an advantage, and that we could offer better support to JUTC. Has Jamaica maximised our areas of comparative advantage — tourism, coffee, sports, and agriculture -- or eliminated our areas of weaknesses or threats -- energy, crime, and indiscipline?

* Set goals with specific timelines. In both cases specific targets were set that all related to achieving the ultimate objectives, so that we created a road map to achieve the objective with specific milestones along the way, which were all measurable, which a specific individual had responsibility for. Is there any clear timetable with milestones to achieve Vision 2030, for example?

* The right persons were in the appropriate functions. At JC we have the appropriate skills in the principal, chairman, board, foundation, administration, sports administrators, old boys, and PTA. At JUTC2, a part of our change was to ensure that we had the right skills at the board, in management, and on the factory floor; and we also have a very supportive minister. In both cases, if someone was not capable of delivering, they were replaced.

* Technology played a vital role in improving efficiencies. Technology does not only mean computers are a new and more efficient way of doing things, because one could have a computer but be ineffective without the appropriate skills. At JC, we ensured the school management system, computer technology, and task management tools were all up to scratch and persons were appropriately trained. At JUTC2, we invested our capital in new and more efficient machinery, and ensured our workforce was properly trained in using it. In the public sector we see Tax Administration has improved by doing this, but there is still a general lack throughout. The RGD, for example, has good technology.

* Staff is appropriately rewarded for improved performance. In both cases there is a link between performance and reward, and the staff clearly recognises this link. This recognition of the link between reward and performance is important. I have seen organisations in which the incentive programme is very good but the problem is that there is no clear link between reward and performance, so that the incentive is perceived as a part of salary, whether they perform or not. Similarly, if someone is being punished, then we must be certain about the evidence before accusing them of being in violation, otherwise morale suffers.

* Every milestone is celebrated and the staff is applauded.

These are some of the major factors that have contributed to the success of both organisations, and which can serve as a model for our country's development. The first inhibitor to Jamaica's development is our divisiveness, and unless we unite on common objectives, then everything else is a non-starter. I can never understand why a country of 2.7 million persons, with so much potential, is so divided along political lines. Is this any different from apartheid, when people were discriminated against by skin colour? In Jamaica discrimination is based on ideology.

Strength of customer service

All this fuss about the Digicel-Claro deal, I think, is misguided energy, as it will not hurt LIME directly, and therefore I wonder why anyone would want to focus on resisting the merger. The fact is that Claro's closure is a benefit for LIME if the energy is placed on the right objective rather than on the merger. If we want true competition in the mobile market, then we must address number portability and cross-network charges.

This also reminds me of the importance of customer service. For example, even though others offer better rates, I remain with BNS, FGB, Digicel, and FLOW because of good customer service. At the first three, for example, I know persons in customer service and call or BBM them at any time of night if I have a problem. And that is the primary reason why I have remained with them despite more attractive rates being advertised. In the case of FLOW their service has been superior, although, of late, the way they implement increases is cause for concern, as if they are feeling like a monopoly.

Long-term growth-inducement strategies

2011-04-01T05:28:00.001-05:00

THE Planning Institute of Jamaica (PIOJ), in its growth strategy document, readily admits it was not called upon for long-term development. While some of the projects will impact long-term development, it does not appear to be enough, and as it rightly says, will only serve as a "short-term growth strategy" if a nexus is not created to long-term development.

While I say this, I believe that there are other things happening that will have positive impact on longer-term development, rather than just growth. And what we need is development and not just growth, which we have always focused on since Independence.

I will comment on some of these, and critical areas we need to focus on if we want development and not just short-term growth. Because this focus is lacking in the PIOJ document, this is why I believe that the money could have been better spent.

I start with the statement I often repeat that "economics is a social science and therefore has more to do with human behaviour more than macroeconomic numbers or investments". In other words, it is human behaviour and consumers that drive markets and economies forward rather than economic indicators or incentives. If we were to focus on driving human behaviour in the right direction, then businesses, fiscal accounts, and investments would all benefit. This is the most important thing in achieving the current illusion of the 2030 vision, the place of choice to live and work. People do not first choose to live somewhere because it is a thriving economic mecca, but rather because of the social quality of life. This is why, despite the economic prosperity of the Middle East, many would not choose to live and retire there but rather may go on a one- or two-year contract to make some money and retire to a place where the social quality of life is much better.

It is therefore imperative that any economic planning begins with this end of social justice and happiness in mind. For all those who feel differently, you are certainly welcome to go live in Saudi Arabia, Syria, or Iraq, where you can find financially rewarding contracts. It is this lack of focus on the social objective that has caused Jamaica to see dismal growth performances over the years.

The fact is that markets are driven by consumer spending (not investments and businesses, which are a result of consumer spending). And consumer spending is driven by consumer sentiment and behaviour. Therefore, it makes perfect sense to develop policies that will cause consumers to feel good about spending. In the US, for example, the growth out of the recession did not start to take hold when initially the government pumped TARP funds into businesses, but rather when money was placed in the hands of the consumer through micro business and home-purchase support.

The problem in Jamaica is that we have always placed emphasis on incentives for investments and the fiscal accounts while allowing abuse of the consumer by the police, the public bureaucracy, and others through road indiscipline and night noise. So if we abuse the root (consumer) of the tree (economy), then how do we expect growth? The only time that there was an attempt at social justice was in the 1970s, but the problem with that was its focus on political rather than social objectives.

There are, however, initiatives that have been taking place that will help to create a better society but this is being countered by a stronger focus on things that will depreciate the focus on a better social outcome. These include:

1. The Charter of Rights: this is probably one of the most significant initiatives that can lead to positive economic and social development. And to show how interested we are in ensuring social and economic development, it took us 20 years to pass it in the Lower House.

2. INDECOM, Police Reform, Public Defender, and the DPP: the introduction of INDECOM has been an excellent move as it now establishes an independent body that can bring rogue cops to justice. Similarly the zeal of the current Public Defender. The work being done by Commissioner Ellington and his team of top cops such as Henry (Clarendon) and Lewis (Traffic), and the careful way with which the DPP approaches her job. We need to put even more resources behind these offices and charge them with more precise objectives.

3. Tax Administration reform and Public Sector transformation: these two initiatives are critical because bureaucracy is a significant inhibitor to an enabling environment. My only criticism is that these need to move ahead faster, and in the case of public sector transformation, that it could have been done quicker and at a lower cost.

4. Infrastructure development: these include road improvements, Falmouth Pier, and the MoBay Convention Centre. These are things that drive productivity and a focus on the areas where we have a comparative advantage.

The other areas where we need to focus on are:

1. Energy: Accounts for 35 per cent of imports and probably the largest cost item for companies and individuals. While the longer-term LNG/Coal/Nuclear initiatives are critical, the fact is that we could save 40 per cent of our energy bill by taking short-term measures, with significantly lower relative costs. These include:

a. Public transportation: Developing an efficient public transportation system, such as what Minister Henry is pursuing. We need to provide initially at least $3 billion per annum towards this and incorporate the private operators in the system.

b. Retail consumption: Encouraging renewable energy (such as solar) use at homes. This could be assisted by using the GCT on JPS bills to provide a credit to consumers on the purchase and implementation of solar equipment at home, similar to the hand-out of the energy-saving bulbs.

2. Food: Accounts for 10 per cent of imports. We need to ensure that the Scientific Research Council is involved in local food alternative development; agro-processing ventures are supported by places such as DBJ; and places such as the JAS help with farmer organisation.

3. Tax reform: There needs to be a shift from our always-present focus on the fiscal to the real economy. Tax policy has always been driven by a need to sustain the fiscal programme, and so has always ended up stifling the real economy. Today, our effective tax rate is approximately 50 per cent, which is a big turn-off for sustainable formal investments. In the upcoming budget, tax reform must focus on providing a platform for businesses to flourish. Any attempt to do otherwise will have the same contractionary effect as recent tax packages.

After almost 50 years of Independence it is time we stop acting like a socialist welfare state and focus on social justice and the real economy. No other path will take us to the long-term development and vision 2030 objectives we desire.

Energy again

2011-03-25T06:00:00.001-05:00

FROM early last year I pointed out that Jamaican businesses were feeling inflationary pressures and that as soon as the economic recovery started we would begin to see price increases. Additionally I indicated that oil and food prices would see increases come 2011. Because of what I expected, when oil was around US$50 per barrel I invested in solar equipment and have never regretted it. I believe the time to do such investments is before the crisis, and at the time I encouraged everyone to do the same.

Oil is now trading above US$105 per barrel and JPS will be hiking rates by 10 per cent. The NWC has hinted at a rate increase. My only regret is that I did not fully replace JPS. However, I didn't expect the Middle East uprising which has caused oil prices to increase so quickly.

So here we are once again, having been in this position in 2008, but forgetting about that period as a result of oil prices plummeting in 2009. The "9 day wonder" psyche of Jamaicans. Similarly, when we had drought conditions last year everyone was complaining about the need to improve the water supply infrastructure. The government announces the two-month closure of the Bog Walk Gorge to improve the water supply and receives many complaints. So we may once again complain about the water supply infrastructure at the next drought.

While the immediate crisis we face is energy, we must look beyond that, as graver implications are yet to come. The increase at the pumps and light bills is just the tip of the iceberg if oil prices continue to remain over US$100 per barrel. The real problem lies in the threat to global economies, which could lead to further social unrest around the globe, as higher energy costs translate into higher commodity and food prices also. This is at a time when unemployment levels are still relatively high and disposable incomes have declined considerably.

The Jamaican economy will no doubt have to be propped up by government spending, for example the JDIP and PIOJ Growth Inducement Strategy. While I advocated this for a while, as it was clear as day it would be needed, my only caution is that monies be spent wisely to ensure maximum sustainability or else we find ourselves chasing our tails again.

2011 is shaping up to be a difficult year for consumers, businesses, and the government. Already we are seeing that government will have to support the economy, as private capital will be very cautious in this environment. The fact is that businesses follow consumer expenditure and all indicators are that disposable income levels will be hit even further this year. The signs include increases in flour and baked products; increases by JPS, NWC, and the knock-on effect on other products; increases at the gas pumps; and a struggling global economy.

If you look at the recent major spending in the economy, and expenditure to come, they include (i) Falmouth Pier; (ii) JDIP work; and (iii) PIOJ Inducement Strategy. These are all government expenditure and are what the economy will have to continue to rely on in the short term. The main challenge with this is going to be the bureaucracy and the time it will take for the funds to be rolled out, and therefore it may not provide the greatest value added because of that.

It is clear therefore clear that the country and government are going to face challenges. The government in particular will be faced with the dilemma of soft revenue (because of a decline in disposable income), unemployment, and reduced company profits, and the fact that it has to be the primary driver of expenditure in the economy. So while the prudent thing seems to be to reduce the tax burden to drive economic expenditure, they are going to be faced with increased spending demands and weak revenue. So the million-dollar question is how to successfully juggle these demands versus what is needed, as it is going to be very difficult.

My own view is that there is no alternative but to programme further value-added loans in order to accomplish some form of vibrancy in the economy while keeping the wheels of government moving. Because I had expected this would happen I was calling from last year for greater stimulus spending from the government, as today there would be a reduced need for government spending.

I don't think, however, that anyone expected such a rapid rise in oil prices, which has also hastened the need for government expenditure. The immediate challenges we face continue to be energy and food, and should be the target of much of the expenditure to reduce costs to the country.

Ineffective Strata Commission

Since my article last week I have received much feedback to say that although my general thoughts about the strata commission are correct, it is actually much worse. An example was used that if someone owed maintenance fees of $250,000 for two years (assuming monthly maintenance of $12,500 ) and refuses to pay, then to access the recovery provision under the strata act through sale, you not only have to pay the $5,000 before the commission will talk to you but have to get two valuations on the property (approximately $100,000), advertise (approximately $50,000) and then wait at least three months before any action can be taken. So at the end of the period the corporation would have paid $155,000 to collect a $250,000 debt and would have to wait at least six months before they could recover (between the three-month waiting period and period to close the sale).

So my question then is, what value do Strata plans get from registering with the commission, as by the time one collects the debt the corporation is bankrupt and the property is run-down anyway. The Act is therefore a bigger burden to the corporation than it is to the delinquent owner. But as the often quoted saying goes: "The man who plays by the rules gets shafted". Welcome to Jamaica.

And understand this: the Strata corporation has no choice but to register with the commission, as it will be in breach and fined if it does not. Further, if it does not abide by the Act then it can be fined significant sums, which it will be unable to pay as it cannot collect maintenance.

My recommendation is that the government should suspend any requirement for Strata plans to register with the Commission and change the Act to conform more with the objective of protecting Strata properties. The fees paid already would be carried forward until the first year after the appropriate amendments. Otherwise this is nothing more than an unjust tax.

So the motto for the Strata Commission should be, "Contributing to the demise of strata properties....for a fee, of course".

Inducing growth

2011-03-18T05:39:00.001-05:00

THIS week the PIOJ launched its plan for growth, titled "A GROWTH-INDUCEMENT STRATEGY FOR JAMAICA IN THE SHORT AND MEDIUM TERM". This is welcome, as a stimulus package from the government has been long overdue as a result of the strictures imposed on us by the IMF programme. We also see that the PIOJ in September 2010 stated that the IMF programme was contractionary, which is consistent with a belief held by others for a while.

While I welcome the strategy outlined by the PIOJ, I have a few concerns, the first of which is my hope that the bureaucracy does not prevent us from maximising the benefits from the programmes. We have in the past seen many such strategies developed, but we never derive the full benefits as our problem has always been in implementation, yet we are great conceptualisers.

The second concern comes from what is stated in the PIOJ document itself, where on page eight it says in bold type: "We were not called upon to construct a plan for long-term development of the economy". This is a big turn-off for me, as before even telling us about the programmes that are to be put in place to move the economy forward, the authors are putting forth a disclaimer about any link to long-term development. My own view is that the "Planning" Institute of Jamaica is supposed to be involved in long-term development planning, and so to produce a document where their primary role is denied seems contradictory.This is significant especially as they have a responsibility for Vision 2030.

On page 17 it then seeks to increase employment by growing the "labour-intensive industries", which to me is not necessarily the way to go as we should be trying to mechanise these industries for productivity improvement. What we should do is create employment by increasing the capacity in the areas where we have a comparative advantage, and that is one of the shortcomings of the document as it does not focus on international competitiveness to take advantage of exports or import substitution.

Overall, though, I agree that many of the projects included are necessary, particularly the infrastructure projects, and I want to support the government on establishing this initiative. I believe, however, that the limited resources could have been better utilised (greater ROI) by the PIOJ, and should undoubtedly be a part of the long-term development plans. The responsibility for this not happening I will have to place at the feet of the PIOJ, as they are the technical experts, and are the ones who propose this to the government, and not the other way around. While the government may say that they want to achieve growth in the economy, I expect that the technical implementation must rest with the body charged to drive the policy directive.

For example, I do not think that the document places enough emphasis on long-term productivity improvement (or even short-term), sustainable crime reduction, and what I like to call (as an accountant) "balance sheet improvement". The latter, of course, refers to the Balance of Payments.

I will not go into any further details on my analysis of the document, except to say that I hope that this is still a work in progress and can be adjusted to ensure that it is brought in line with the long-term development we need and not just focus on short-term growth. Having no doubt that the strategy will lead to short-term growth I applaud the efforts to provide this stimulus, but is this all we want from the PIOJ?

Public health strengths and weaknesses

Two weeks ago I had knee surgery done. It was a complicated procedure, as it involved meniscus repair, ACL reconstruction, drilling, and insertion of an implant.

When it was determined last year that the operation was necessary, I was advised to have it done overseas, at which point I started the investigations. After a few months of looking into it, I discussed the situation with Dr. Derrick McDowell, who was the head of the MAJ mission to Haiti and former head of the Orthopaedic Association, and apart from all of that his greatest attribute is that he is a Jamaica College Old Boy. He immediately explained to me that he does many of these surgeries and could easily do it.

He also advised me of the team he would be using (Jackie Minott - anaesthetist, Michelle Depass - physiotherapist), whom I also checked out, in keeping with my accounting training. I also checked with persons overseas to see what their experience with similar surgeries was, and they indicated that they experienced pain for a few days after the operation. I also did extensive reading on the procedure and anaesthesia methods.

After much reading and analysis of the information given to me by both Derrick and Jackie, in addition to my checks with persons overseas, I decided that there was no benefit to doing the surgery abroad. In fact I felt that one of the advantages of doing it in Jamaica was the ability to be in touch with the local team as needed.

I opted for spinal anaesthesia, and was enjoying watching the surgery being done while listening to my iPod. The next thing I remember is the bandage being put on and being wheeled back to the hospital room. On seeing Derrick later I asked why they had put me to sleep knowing that I wanted to see the operation, to which he responded that I was fully conscious but that the sedative I got causes amnesia, so I wouldn't remember what happened. That I found amazing. In addition, by the next day I had no pain at all, in contradiction to the experience of the persons overseas.

I say all that to point out our tendency not to recognise the competence of our local experts, and this is why we seem to always prefer to go for external consultants, who in many cases mess up a project and leave the Jamaicans to clean it up. One of the reasons for this choice is because we fail to do proper analysis up front. The result is that much of our talent (e.g. Bob Marley) is recognised abroad long before it is recognised in Jamaica.

It seems to me that the real problem with public health in Jamaica is a lack of good administration rather than the capacity of the workers, and I hope that the work being done by the Ministry of Health will soon resolve this long outstanding problem. The recent Observer story that shows specimens being stored in unsatisfactory conditions at the KPH illustrates the poor administration and controls.

Strata board

Recently I was having a conversation with the manager of a strata plan who was telling me that some of the owners still owed significant amounts for maintenance. When I enquired as to why she didn't go to the Strata Board and seek to enforce payment she indicated that she had, but before any action could be taken she would have to pay a fee of $5,000 per unit. I would have preferred to hear that action was taken and then the offending parties (owners in arrears) were asked to pay the $5,000, but not that the victim (strata), who has had to suffer because of the non-payment of what is due, is being asked to pay to access something to which they are entitled. This gives the impression that the main concern of the Strata Board is to raise funds rather than to improve compliance, as many strata properties still continue to suffer from what the Strata Board was set up to fix.

Oil and food price threats

2011-03-04T05:21:00.001-05:00

Last week I spoke to economic challenges in 2011 and businesses in particular. There are two primary reasons for this, one of which is the threat of oil and food prices increasing in 2011 beyond the reach of income levels of consumers and businesses. As a matter of fact, oil prices at US$100 to US$110/bbl today is more of a threat to the global and local economy than when oil prices reached US$147/bbl in 2008. The reason is because relative prices today would be greater than 2008.

The fact is that since 2008, economies and income levels in real terms have seen significant declines, and unemployment has increased. Despite growth seen in the global environment there has not been commensurate growth in employment. Spending has therefore not returned to 2007 levels. In Jamaica, for example, we have seen significant job losses and in the last quarter of 2010 job losses amounted to 21,000.

Added to the slow global economic recovery, the following factors will also negatively affect global growth:

1. Oil and food price hikes will have a negative impact on consumer spending and business costs. Although I anticipated increases in these two areas, I never expected it to occur so quickly. It was always expected that there would have been social unrest caused by declining costs of living, but the turmoil seen in the Middle East has come earlier and with a greater force than expected.

2. The expected pull-back in economic stimulus in the US will result in a slowdown in consumer spending.

3. The inflationary pressures globally will no doubt lead to increased interest rates, which will pull liquidity from the system and put the brakes on consumer spending and growth. In fact we have seen interest rate increases in China, which has been leading global growth.

4. There is still a lot of debt in the system that will have to be pared back with expenditure cuts.

So although growth is expected I believe food and oil prices will cause a slow-down.

The charts show oil and food price movements over the past year. In both cases we see significant increases, and if coupled with the fact that there has been a real decline in consumer disposable incomes then one can see the dilemma economies face. The oil chart shows that volumes are greater when prices are going up than when coming down, implying there are more buyers than sellers.

In Jamaica, we see the challenges of (i) job losses since 2007; (ii) business profits declining; (iii) high cost of energy and crime; (iv) relative inefficient agricultural production costs; (v) fiscal deficit; and (vi) very high dependency on imported oil.

These challenges are compounded by the fact that food and oil account for 46 percent of imports, and this is before the impact of the rising costs. This simple analysis shows the significant impact to be felt in Jamaica from oil and food price increases.

It is therefore evident that the greatest possible return is from a focus on dealing with the impact of food and oil on the economy. The impact of high energy costs on businesses in Jamaica, for example, makes our produce uncompetitive, whether it is from manufacturing or the tourism product. And tourism gets a double hit here, as food is also a significant cost component. This is important when we remember that tourism is our number one productive foreign exchange earner. So even though the number of tourist arrivals has increased (thanks in part to the efforts of the Tourism Ministry), the fact is that this has been achieved with (i) significantly discounted room prices; and (ii) increased costs, resulting in a lower retention of earnings in the country. One could therefore say the tourism industry has been facing its own stagflation.

So how do we deal with these global price increases? Clearly they will affect local demand as it means real disposable incomes will decline even further, if left unchecked. One can already see that reported business profits have declined, and anyone monitoring the real estate market can also see that prices have been getting lower.

The fact is that the most effective way of dealing with this situation is to focus on the domestic economy. This is not to say that there will not be opportunities for exports, but that the greater return on investment will come from focusing on the domestic economy infrastructure. As a start we if we focus on reducing our imports of oil and food, this will not only help our foreign exchange situation but will also create jobs and income income in the process. The problem is that it is important to find short-term solutions, which is possible, but necessitates the support of the bureaucracy.

One of the things I would like to add is how important it is for businesses at this time to engage the assistance of professionals; and among them importantly is a chartered accountant. And I use the term chartered accountant very carefully, because one of the things we recognised at the ICAJ is the need to ensure that our members are current with their knowledge and that the highest ethical standards are maintained amongst our membership, as in these difficult times employers need this assurance.

One of the initiatives we have therefore taken is to provide for employers a list of all ICAJ members on the website (www.icaj.org), which tells whether they are compliant with continuing professional development or not. This is not to be glossed over, as it is going to be very important for businesses to have good analysis in charting the economic climate.

2011 will be a challenging year

2011-02-25T05:37:00.001-05:00

Last year I indicated that in 2011 we could look forward to some recovery in the global and local economy. This will be more evident in the global economy, as I believe that the Jamaican economy will still continue to struggle because of the structural issues it continues to face. It is my view also that the contractionary effect of the IMF policies will cause the recovery to be more of an uphill task than if the contraction was not as deep.

There are some positives that have happened during the recession. These include (1) Tax administration; (2) Divestment programme; (3) Attention to the Public Sector Transformation Programme; (4) Reduction in interest rates; (5) Emphasis on local agricultural production; (5) Completion of the Falmouth Pier and Montego Bay Conference Centre; and (7) Focus on reducing corruption in the police force and crime generally.

Despite these positives, however, the economy will continue to see significant challenges in 2011, in my view. Indications of this can be seen in the following areas:

o Global inflationary pressures from oil and food price increases, which I had indicated would take hold in 2011. Even before these global pressures, Jamaican businesses were already seeing inflationary pressures but could not increase prices because of falling demand;

o Interest rates globally will increase to deal with inflation and excess liquidity resulting from fiscal interventions in countries such as the US;

o The PSOJ has, through its National Security Advisory committee, pointed out that security is a major cost because of crime. They estimate that a whopping 20% of small business revenues go into security-related costs. The implication is that we may not see the upswing, in small business ventures, needed to drive job creation and growth;

o Commercial bank loans are trending down, and more importantly the loans to the productive sector, such as agriculture, have decreased;

o The majority of funds under the IMF programme have already been received. The positive side is that government has been able to successfully raise funds on the capital market, and should attempt to replace the expensive debt; and

o The trade deficit is worsening year over year.

The fact that the global recovery is slowly continuing this year represents an even greater disadvantage for Jamaica than the recessionary effect experienced last year. This may seem perplexing to some, but the reason for this is very simple. Between 2009 and 2010 when the Jamaican economy was in decline, I believe that while it proved difficult for individuals, it was good for the Jamaican economy. The reason for that is because of the way the Jamaican economy is structured. Prior to the recession, the Jamaican economy was growing, although at small rates. The contradiction, however, is that while the economy was growing, so was the debt and fiscal deficit. Simply put, what we were doing was growing by consumption, based on borrowed money. Therefore for every $1 we produced we consumed 72 cents of it, and exported 28 cents. At the same time we were importing between 70 and 80 cents to produce that $1. Mathematically, therefore, we were importing 80 cents and only exporting the equivalent of 36 cents (assuming we mark up the production by 50%).

Therefore when the economy was contracting, we were actually reducing the need for borrowed funds, and therefore cutting our suit to fit us.

Now that the global economy is recovering, we still have the same basic infrastructural problems that have been with us since the 1990s. If you factor in the negative effect of market demand, you will find that there is going to be a tug of war between fiscal and private sector demands. It will therefore be imperative for the public and private sector to find a happy medium, and this I think will be driven by government policy. There are some good initiatives undertaken (as mentioned above), but we will have to be a lot more decisive in our policies if we want to ensure that we stop the train before the track runs out.

Initiatives I support the government on - and wonder about what the IMF is thinking - are the JDIP, purchase of buses, and similar projects. If we are going to ensure that the economy does not go through any further contraction, government must take the lead in infrastructural projects that will not only provide much needed infrastructure and employment, but will also contribute to future savings in foreign exchange. The two most important sectors to focus on are agriculture and transport.

I can recall the opposition expressed when I supported the need for more money to be spent by the government on infrastructural projects. Suppose government had not continued to spend on road improvement and projects such as Falmouth Pier. Apart from the greater loss of jobs and crime we would have experienced, what sort of infrastructure would we have in this country? It is important that we not ignore our infrastructural support, or else we will be even less competitive.

A critical look at the balance of payments tells us about the challenges that lie ahead. A cursory look seems to indicate that things are going well, as we see the current account deficit improving by US$137.7M for the January to September period in 2010. The areas of improvement were (i) Services - US$56.2 million; (ii) Income - US$93.7 million; and (iii) Current Transfers - US$82.5 million. This overall performance is good, as any line we get the money from to turn around our fortunes is good. We have to be careful about how we develop these areas, however, so that we do not revert to the structural challenges coming out of the 1990s, as this will lead to a need for high interest rates in order to have macroeconomic stability.

The challenges from the BOP can be seen in:

(1) Declining trade deficit. Specifically we see a reduction in exports and an increase in imports;

(2) Services, although improved, show one of the reasons as a decline in expenditure of Jamaicans travelling abroad. This is good as it means lower consumption of overseas items but not because of increased expenditure locally, which means that it is a weakness of consumer demand;

(3) Income has improved because of reductions in official interest payments and reduction in profits remittances. The former is what we want to achieve, and is a move in the right direction, but the latter means there is less incentive for foreign investments; and

(4) Current transfers, which have come primarily from remittances, and an indication that the country is heading back to reliance on non-productive income.

The BOP and economic stagnation tells me that the market is trying to make the necessary adjustment to become more efficient. This is the way markets work. We continue to be dogged, however by societal, political, and bureaucratic challenges that inhibit this necessary market adjustment. If these challenges are not addressed effectively, then we will find ourselves with the same structural problems we have had since the 1990s.

Overall this means that although we see the global recovery, because of Jamaica's inherent structural problems we will continue to face challenges in 2011. Hopefully some of the policies being pursued by the government will bear fruit and alleviate some of these challenges.

A SWOT analysis of Jamaica's economy Part 3

2011-02-18T06:30:00.001-05:00

OVER the past two articles I tried to develop a simplistic SWOT analysis and demonstrate the method that should be used to target the development objective of the country in the most efficient manner. There is no one solution that is right and the others wrong, but there is always going to be one that is the most efficient use of resources and greatest value-added return, which is what this analysis is trying to do.

Coming out of the last article, I identified three possible areas that would provide maximum return, in relation to the resources that need to be invested. The three specific areas I identified were (1) dealing with indiscipline to create order and fairness in the society; (2) breaking up the JPS monopoly hold on the energy distribution lines and creating an efficient transportation system; and (3) reforming the tax system (already we have seen where just improving tax administration has resulted in significant compliance improvement. Can you imagine if this was coupled with real productivity-oriented tax reform?).

This week I want to take a simplistic look at the possible effect of focusing on these three areas by imputing financial numbers from the initiatives, and hence completing another step in looking at the SWOT approach.

	GDP Effect ($M)
	Yr 1	Yr 2	Yr 3	Yr 4	Total
Productivity plus from improved justice	34,048	34,048	34,048	34,048	136,190

Import substitution / agro-processing	7,695	15,390	23,085	26,933	73,103

Energy savings - retail	25,650	12,825	7,695	7,695	53,865
Energy savings - transport

Tax reform effect	16,314	16,314	16,314	16,314	65,256

	83,707	78,577	81,142	84,989	328,414

US$ equivalent	979	919	949	994	3,841

	BOP Effect ($M)
	Yr 1	Yr 2	Yr 3	Yr 4	Total
Productivity plus from improved justice

Import substitution / agro-processing	7,695	15,390	23,085	26,933	73,103

Energy savings - retail	25,650	25,650	25,650	25,650	102,600
Energy savings - transport	25,650	25,650	25,650	25,650	102,600

Tax reform effect

	58,995	66,690	74,385	78,233	278,303

US$ equivalent	690	780	870	915	3,255

The table (Figure 1) shows imputed values from the initiatives outlined. It shows a total four-year positive effect of J$328.4 billion on GDP and J$278.3 billion (US$3.2 billion) on the Balance of Payments (BOP). The actual outcome could be more or less, so what I am trying to do here is show an approach to selecting the best value-added initiatives and how to do an analysis on the financial projection. It is important to focus on the effect on GDP and BOP, as these should be the real objective of economic policy.

With respect to productivity improvement from improved justice and discipline, this assumes an improvement of one productive hour per week per person in the labour force multiplied by the average labour output dollar amount. The assumption is that if we were to improve justice and order in the society then we could see people being at work longer and producing more productively as a result of (1) persons not spending time focusing on issues of justice; (2) fewer resources being spent in the courts dealing with justice and indiscipline problems; (3) greater availability to the human and real estate resources in the inner-city communities; (4) less traffic congestion and more productive time as a result of improved road conditions; and (5) productivity increase from lower crime levels, including extortion and praedial larceny. What is obvious is that the initiative of creating a more ordered society and improved justice will always have the largest positive impact on GDP because it creates greater efficiencies in the market economy.

Another initiative mentioned in the table is the focus on food import substitution from increased agricultural productivity and agro-processing. The table assumes that food import substitution is done to 10 per cent in year one, 20 per cent in year 2, 30 per cent in year three, and 35 per cent in year four. This initiative will have a positive effect on both GDP and the BOP to the same extent, and is assumed to have a positive four-year effect of J$73.1 billion.

The energy initiative that focuses on retail consumption (through renewables) and transportation (through an efficient public transport system) is assumed to have the effect of reducing the energy consumption of these two sectors by 50%. This is not hard to believe given the significant positives that can flow from these initiatives, and is assumed to have a positive impact on GDP and BOP of J$53.9 billion and J$205.2 billion respectively. The effect on GDP comes from the creation of energy jobs. The attractiveness aspect of it is that they are short-term initiatives, yet they have the largest positive impact on the BOP.

The final initiative of productivity-oriented tax reform, I assume will cause a positive GDP impact of 5% of tax revenues budgeted for the current year. This I think is very conservative, but you know us accountants. Never count our chickens even after they hatch, as they could still die. In addition to the good work being done by the Tax Administration to reduce bureaucracy, we should be looking at tax reform aimed at improving productivity and keeping monies longer in the economy to have a greater multiplier effect. These include moving more towards indirect from direct taxation. This will allow for greater spending and hence a higher multiplier effect. Incentives also need to be geared more towards production and productivity in foreign exchange-earning industries.

This is by no means an exhaustive list of value-added initiatives and requires much deeper and dedicated analysis, especially to arrive at the financial possibilities. What I have tried to do over these three articles, however, is show one method for arriving at the greatest value-added initiative given the limited resources we have.

The debate will no doubt continue, but what is obvious is that we need to define our SWOT and systematically choose the best initiatives based on return on investment and difficulty to achieve.

A SWOT analysis of Jamaica's economy Part 2

2011-02-04T05:35:00.000-05:00

THE article last week generated quite a bit of interest from persons in and outside of Jamaica, with many wanting a deeper breakdown of the SWOT analysis. While I am not able to provide a complete analysis because of space constraints, although needed, it was always my intention to go into more specifics.

A SWOT analysis is nothing more than a snapshot that tells at a point in time what the various areas of the analysis are. This would be the same approach one takes to a business plan, and is a very logical and objective way of properly assessing the current situation of a company or country. My own view is that fixing the economy and society is not a difficult task. What we have always lacked is the will to place the interest of the country above that of the party. I will try to outline below some of the initiatives that can have the greatest positive impact on the country's development.

In looking at what was produced by the SWOT analysis, what you want to do is strengthen (or maintain) the strengths, fix the weaknesses, develop the opportunities, and minimise (or eliminate) the threats. If you can successfully do this, within the context of your agreed objectives, then it will lead to greater development.

But you will never have enough resources to do all the things that need to be done. So a government, for example, has a limited amount of funds available to it but has a multitude of challenges to address and calls for help to answer. How do you then decide which one to address, and when? The when is important because timing is of course critical. The way to do this is to determine what the most efficient use of your resources are.

As an example, if you have $1,000 and can either pay off debt that costs 20 per cent per annum, or put away the money at 10 per cent per annum, then it seems more prudent to pay off the debt, and save 10 per cent of $1,000. On the other hand, you may be running a business and therefore may need cash resources of $200 to ensure that the business will not be threatened. You may therefore choose to pay off $800 in debt and maintain $200 in debt and $200 in cash. The direct cost of that decision is $200 times 10 per cent but there may be an opportunity benefit, as if you were cashless the cost to the business might have been much more.

Similarly, as a country we should do the things that add the greatest value in the shortest possible time. That is if a decision adds value of $1,000 in five years, it may not be as valuable as one that adds $300 in one year. This is the sort of analysis that needs to take place if we are to maximise our resources.

What then are some of the major initiatives that I think will add the greatest benefit to Jamaica? If our objective is economic and social development, and in particular, the best improvement in per capita income and social interaction, then we must focus on those things that cause these to happen. This for me means improving the quality and standard of living. The way to improve the quality and standard of living is to ensure (i) a basic respect for the human rights of every Jamaican citizen; (ii) universal access to a minimum standard of education and health care; (iii) increased opportunity for greater income levels; (iv) structure and discipline in the society, so that everyone can enjoy quiet and civility when interacting with others, for example when driving; and (v) a prosperous private sector, which in turn can create jobs. I do not, and never will, believe in the government trying to pick winners or providing massive amount of welfare for communities. This merely discourages an efficient market, undermines productivity, and in the end causes corruption and disorder in society. Another spin-off, which we know all too well, is that this results in significant debt.

Therefore we need to focus on the things that will increase private sector productivity and competitiveness; and also improve the quality of life of people. The latter is necessary, as even if you are wealthy and live in a society with high levels of indiscipline, your quality of life is still substandard.

So for me therefore, it is a no-brainer. I want to improve my strengths but realise that that does not necessarily mean focusing on the strengths. If I were to focus on the weaknesses then that would serve the purpose of removing the weaknesses and improving the strengths. So the first order of business for me would be to deal with the culture of indiscipline. In doing this I would strengthen tourism, improve productivity and production, and improve tax compliance. The other positive of focusing on this is that it does not require any resources really, what it needs is greater accountability. So if the police and public sector were held more accountable, then they would implement the regulations already on the books. So just imagine the police did the simple job of strictly enforcing discipline on the road and the Noise Abatement Act. Just imagine if the KSAC enforced the zoning laws. Just imagine, if instead of a bureaucratic public transformation process we put accountable people in charge of public bodies, and schools, and give them the authority and held them accountable when they failed to meet agreed objectives. These things don't take any additional resources but have far-reaching effects in strengthening the quality of life, improving productivity, and reducing crime.

Secondly, I would break up the JPS monopoly and encourage persons to invest in renewable energy and put a few billion dollars into the JUTC to create an efficient and secure public transportation system. These two initiatives could result in approximately US$600 million per year in import savings, and eliminate the trade deficit in four years.

My third focus would be to reform the tax system to encourage private sector development, and export in particular, rather than the narrow focus on the fiscal that we have practiced for decades. This would include moving away from direct towards indirect taxation, and removing the incentives from industries to rewarding foreign currency earnings. The government has recognised the need for reform, and the $6-billion investment is welcome. What we must ensure is that the reform is not just about collecting more for government but more importantly will focus on tax reform to encourage private sector development and exports.

If these three areas are focused on then it will take care of most of the items identified on the SWOT. So, contrary to the content of some of the responses I received, it does not matter if the list of weaknesses is longer than the strengths, as the value added from focusing on just a few of the weaknesses will significantly reduce the list of weaknesses and threats.

The result of focusing on these three areas will definitely mean development, and real growth for Jamaica. So I don’t consider it difficult, but it must be a deliberate strategy with specific and measurable objectives. The real solution would be to introduce the separation of powers, but that may be a lot more difficult to achieve in the current environment.

Much more analysis is needed on this, but again space does not permit.

A SWOT analysis of Jamaica's economy

2011-01-28T06:20:00.000-05:00

SINCE the start of the year I have received many questions (both locally and internationally) about the prospects for Jamaica's economy in 2011 and beyond. Perhaps more so today than in previous years, persons are understandably more curious about Jamaica's prospects for growth. This is understandable because with the world coming out of a very significant global recession, there are many realignments of investment portfolios taking place, and investors are more cautious, after being ravaged by the global events since 2007.

Investors also are becoming a lot more conscious of global investments, and understand that true diversification is not just among asset classes but more importantly between economies. This is an underlying philosophy that Jamaican policymakers need to understand as we craft policies around the economy. As a result of improvements in technology and investor awareness, there are greater choices across economies when choosing where to put money to work. So that even an individual investor can open an online brokerage account and invest overseas in what they consider a more attractive and predictable environment. This, I believe, will be the scene for investors from 2011 going forward, and will be to the disadvantage of countries that do not get their investment environment right.

One particular question being asked is, what are the prospects for the Jamaican economy and investments in particular? I don't believe that this question can be answered in a "one size fits all" sort of way, as it depends a lot on the type of investment one is involved in. For example, while I believe that there are significant growth prospects for small businesses, it depends on the type of business one is in and the approach to that business development.

What I would therefore like to do in this article is look at a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of the Jamaican economy. This requires much further discourse for anyone looking at an investment or business opportunity.

The table outlines generally the SWOT of the Jamaican economy as I see it, and provides an indication (based on interpretation) of where businesses and investors should be looking for 2011 and beyond.

This table represents a synopsis of some of the strengths, weaknesses, opportunities, and threats. Of course, it requires a whole lot more analysis and with a little more thought we could arrive at a much more comprehensive list. This I believe is the first thing we need to understand if we are to seriously assess and tackle the challenges facing Jamaica. In short, what is needed is a wholesome approach to dealing with Jamaica's economy.

I say, this because over the years governments have taken very good policy decisions on specific issues, without fully understanding the impact it has on other issues. Therefore the net result is that we end up with a net worse situation, as one sector improves by "x" but another worsens by "x + y". This is also the flaw I find in much of the analysis that I have heard over the years. So while persons speak of special interests that sound excellent, there is always the knock-on effect that is not considered.

Strengths

* Tourism product

* Agricultural opportunities (particularly import substitution opportunities)

* Culture, music, sports

* Geographic location

* Bauxite and alumina

* Renewable energy sources supply

* Focus on prudent fiscal management

* Tax administration development

Weaknesses

* Crime and culture of indiscipline and lawlessness

* Poor human rights system

* Poor representation of electors

* Low literacy and poor school governance

* Poverty -- economic dependence

* Inefficient court system

* High cost of energy

* Poor organisation of small businesses

* Unfriendly tax policies

* Political system

* Inefficient bureaucracy

* Poorly structured economic foundation

* Poor infrastructure

* Inaccessible garrison communities

Opportunities

* Global recovery -- increased markets

* Import substitution opportunities

* Renewable energy opportunities

* Poor structure and import dependency means greater opportunities to grow

* Public sector rationalisation

* Tax reform and simplification

Threats

* Global recovery -- inflation, higher interest rates, etc

* Rising oil and commodity prices

* Focus on more investor-friendly emerging economies

* Upcoming election

* Fiscal appetite for revenue

* Inadequate health care

This is the sort of approach I would expect policymakers to take. So if this approach is taken, then why don't we see the results? I am sure that many of the initiatives taken by our politicians and bureaucrats over the years have been good. The problem, I believe, is that many of these initiatives have been taken within the context of the same inefficient structure that created the problem in the first place. So in effect what we end up doing is fixing the symptoms rather than the underlying problem.

This is similar to an organisation trying to improve productivity by giving incentives to workers and preaching teamwork etc. All of this, however, is being done in an environment without effective leadership, management, or rules. The result is that the workers get more of the profits, but productivity and profits, eventually decline.

Although I digressed into the policy holders at the state level, this sort of approach in assessing an economy for investment and business decisions is also very important. So that, to all those who ask the question, if you were considering the economic environment then you would perform first a SWOT analysis of the economy generally. Secondly, you would look at the areas of that analysis that impact you the greatest, and then quantify the effect on your decisions.

When one looks generally at this SWOT for Jamaica over the coming year, it tells me that 2011 is going to be a challenging year for Jamaica, but will also provide significant opportunities for us to move forward as a country. That, however, will depend on the policy decisions that are taken to enhance the strengths, reduce the weaknesses, take advantage of the opportunities, and hedge against the threats.

I have not written a column over the last three weeks, but have taken the time out to listen to much of the commentary and analysis since the start of the year. And after listening, I see a lot of this analysis wanting and see us falling back into the same habits that existed before the great recession.

2011: The year of what?

2010-12-31T05:22:00.001-05:00

WE come to the end of another year, when it is accepted that we reflect on what happened in 2010, and make resolutions and forecasts about what we want for 2011. From my own perspective I don't see anything special about a new year, as going from one year to another is really just like going from one day to the next. The only difference is that instead of measuring in days or months, the measurement is done in years. For if we were to look at how much of the new year resolutions we have achieved as a country or individual, what would be the success rate, 10 per cent, 40 per cent, zero per cent, or even negative.

The truth, however, is that the world is made up of cycles, whether it is in our daily living or even patterns one can find on the stock market. So our world is always predictable, and human beings feel comfortable with it being that way. We cannot deal with the unknown and so are usually slaves of our own fear, and therefore continue to practice what we are used to. Stepping outside of our norm, into the unknown, is something that psychologically we find uncomfortable. This is why most people need leaders, and this is why we never truly recognise our heroes until they are dead. Most people cannot deal with the thought of change, and so don't like to entertain out-of-the- box thinking.

But change we must have if we are to move forward. After all, what is being touted as the greatest "game-changer" for 2010 — the JDX — was a break from the downward cycle of debt, which if not done would have surely led to debt default. We also remember however that persons did not accept at first the need for this change, proving my point that generally people are not comfortable with change, even when it is clear that the current path is unsustainable.

Heroes like Martin Luther King, Nelson Mandela, Marcus Garvey, Mahatma Gandhi, and other such, also preached change. But the reaction of the society was that these individuals were outcasts and everything was done to shut them down. Today, however, those persons are revered in the same society that sought to silence them, primarily because most persons in the society now feel comfortable because their teachings are the accepted culture.

And this need for comfort and acceptance will continue as long as people are alive, because most people are followers, and will always be comfortable only with what they know. And in many instances it is because they lack the ability to do the proper analysis to understand what the future holds. Whether you call it financial analysis, prophecy, or being psychic, it all boils down to an attempt to project what is in store for the future.

The Chinese, for example, try to predict generally what will happen in the coming year through their calendar, which is based on the lunar cycle. They assign twelve animals to each year over a twelve-year cycle. So next year will be the year of the rabbit, as we step out of the year of the tiger. The rabbit is supposed to be affiliated with success. So will we see success in 2011 according to the Chinese calendar, or is a better explanation that in every year there is always success and failure, and so these projections shape our perception rather than being accurate explanations? In other words, is it that what happens to us in our future is determined by our belief of what will happen rather than the accuracy of any prediction? Put another way, are we the creators of our own destiny? And if this is so then isn't the fact that we do nothing about reshaping our future, because of fear of the unknown, what causes us to remain stagnant. This is a lesson for the country and us individually.

Therefore, if even some of that logic is correct, then Jamaica needs to define what type of year 2011 will be. The year of growth, development, more debt, or better education. What will 2011 be the year of? It is only through properly analysing what is possible, and wanting that to happen why something will happen. This is why accountants do budget forecasts, and it is usually the company that sticks to the fundamentals of the projections that achieves the plan. So the CEO who sets out on his own path, thinking that he can make up for the plan later, will only find himself and the company in difficulty come the end of the year, and have to make more resolutions for the next year.

One reason, of course, for plans not being realised is that they are too unrealistic, such as a smoker of 20 years, saying on December 31 that he/she will stop smoking on January 1. Similarly in the past as a country we make grand predictions about GDP growth of four per cent or six per cent, which in the context of the Jamaican economy is totally unrealistic. But guess what, it sounds good and most people are willing to just accept that feel-good prediction rather than face the reality of what the real outcome will be. And so when there are some among us that make more accurate and realistic, but less feel-good predictions, they are seen as negative and labelled outcasts. Sort of reminds us of the Marcus Garveys of the world. And when their predictions come up correct in the most part it is ignored because ego does not allow us to accept, when we are incorrect.

All of the above was said to show that progress depends on human behaviour, and what we do and do not accept. The growth of companies depends on how employees behave, and the growth of countries depends on how the citizens behave. Investments depend on how markets behave, or how society behaves (crime).

And so as we move into 2011, it is important for us to understand that economic and social development is not a factor of being able to only attract overseas investors or creating a macroeconomic environment that is stable. This has been our mantra from as far as I can remember, with what result. An average growth of one per cent per annum. If we look at societies that have achieved any semblance of development, even the much-touted Singapore or Ireland — or are the Irish touts still sure about it — at the root of their development have been consensus and a deep respect for human development.

It therefore means that 2011 must be the year of a focus on a better society. This simply means a society where the Jamaican citizen is put at the heart of development, as I can assure you that there will be no economic development without proper social development. We must move away from our rich history of human rights abuses, a societal indiscipline, and culture of tearing down each other, if we are to move forward. I always find it amazing that the same people who went to school, or grew up together, are always so willing to tear down each other because of ideology.

It is only through consensus and respect that we will develop as a country. I always maintain that economics is nothing more than the result of human behaviour. Therefore if we want to encourage the economy in the right direction, we must first encourage the right behaviour.

So for me, the personality of 2010 was the average Jamaican for all he had to endure, and 2011 should be the year of the Jamaican.

Time to step up our game

2010-12-24T07:34:00.003-05:00

One of the contradictions of Jamaica is our ability to show how great we are as a country, but still continue to suffer from low economic growth and issues such as human rights abuses. We are known to have one of the warmest set of persons in the world; received the title of happiest country in the world; consistently we are rewarded as one of the best tourist destinations; we continue to outclass other sporting giants; and our music and people continue to make an impact not consistent with our size.

Despite all of this however, we have not been able to achieve any significant economic and social development since independence and continue to see the suffering our people have to bear at the hands of those who are supposed to protect them.

What accounts for this contradiction in a country that can consistently produce the best in music, sports, business, and science? What is it that prevents us from making the leap from that demonstrated global excellence to the needed economic and social development?

My own view is that the only thing that has failed Jamaica is political leadership. Everything, and everyone else, has been successful. Politicians have held back this country from the greatness that we should be seeing in our country and people. If we look at all the excellence that Jamaica has achieved, it has been through individual achievement, despite the governance of our political and economic affairs. And this excellence has been achieved without the country providing any opportunity or support to these persons. We always recognize our own people only after they have achieved acknowledgement outside of the country, they are dead, or if they are affiliated to a political party. Apart from this there is no structure that allows for us to recognize the ability of our citizens. This type of behaviour we could describe as acting like "wagonists".

One of the reasons for this is the lack of proper accountability of our leaders, including those at every level of society. One such situation is the leadership of the education system. It is in light of this that I support the recent assessment done by the Ministry of Education, and the minister's policy announcement that teachers will be held accountable to a performance standard. This I think is one of the more significant policy developments, if implemented - many policies in Jamaica are nothing more than an announcement.

The reason for this is because we will never see a general improvement in our education system, and eventually productivity development, if we do not ensure that the persons in leadership positions in the educational institutions are held accountable. This is the whole purpose of performance pay, for example, which the JTA had rejected, just as they are now not accepting responsibility for what they need to do to ensure that this accountability is implemented. And I say JTA leadership because I know that there are some excellent teachers out there who would like to see the whole system step up to their level. I also believe that teachers (and other public sector workers) need to be compensated better based on performance levels.

I have seen the benefit of this type of approach (which I wrote about a few weeks ago) at Jamaica College. It is only logical that if you want to see an improvement in the behaviour and academic performance of students that it requires proper leadership and performance from our teachers, and principals. How can students perform in an environment where teachers do not turn up for classes, or turn up late? How can students perform in an environment where the physical infrastructure is dilapidated, such as non-functioning toilets? How can students perform if the people teaching them are not properly trained themselves?

So isn't it logical that if we are to improve the performance of students that the first things to do are to (i) create an enabling environment; and (ii) to hold the guardians of that environment - school management and teachers accountable. Isn't that the same thing we need for businesses to succeed - create an enabling environment? Isn't this the same thing we say of police-citizen relations, that in order for people to respect and work with the police, the police needs to respect them and set proper examples? So if we are clear about the need for this for businesses and policemen, then what do we expect of our vulnerable children.

On this point I support the minister and the ministry in its efforts, and urge them to prod on with the implementation, as this I believe is the most significant policy decision made in transforming education as far as I can remember. It is not enough to just create a more difficult exam - GSAT - and separate the performers from non-performers. What we need is a GSAT for teachers and principals.

It is time that we face the realities of our underachievement and step up our game.

Economic vulnerabilities
As I indicated a few weeks ago, while the economy will start to benefit from the recovery in the global economy, I do not believe that we have made the structural changes necessary to lead us to a new development path. The head of the IMF mission in Jamaica stated (Observer) that "the IMF couldn't impose growth targets but could only facilitate growth". I don't see how one can impose growth, as if it is a dictate to be followed, but secondly isn't all we need a programme that facilitates growth.

What is clear is that once again the economy will be vulnerable to the current oil prices levels, at over US$90 /bbl and heading to over US$100 next year. This will negatively impact the balance of payments, spending power, and business costs. The result is inflation pressures. What we must do now is focus on renewable energy sources in retail consumption and transportation improvement - 60% of our oil bill. Business costs cannot escape the short term impact of higher oil prices, as it is much more expensive to deal with that problem, as the highest costs come from air conditioning and manufacturing.

The other vulnerability we will suffer from is rising prices from food based commodities such as corn. The agriculture ministry has been doing a good job of improving domestic agriculture production, but as I indicated months ago, they have reached their capacity of what they can efficiently do. The only way to see a significant upswing in agriculture, and adequately replace food imports, is to significantly increase agro-processing of local products. This, however, is negatively impacted by the bureaucracy and social factors.

There are of course other areas of vulnerability, but space does not permit them to be mentioned. I am also clear that we can avoid much of the negative impact from the slow recovering global economy, but there are some structural problems that will make it difficult to achieve. These vulnerabilities could begin to show January/February.

I would like to take this opportunity to wish everyone happy holidays.

Read more: http://www.jamaicaobserver.com/business/Time-to-step-up-our-game_8252453#ixzz1923BnA7F

Jamaica's new growth path

2010-12-10T10:05:00.000-05:00

MY main disappointment with the IMF projections is that there is no promise of a restructured economy once the programme is over. All it does is offer money to tide us over while the global economy recovers, and then we are back to the same old economic structure that caused us to be in the problem we were long before the global recession.

So the programme is counting on (i) improved tourism, remittances, and FDI inflows; and (ii) even more frighteningly that oil prices will be at US$83.40 per barrel in 2013/14. Yesterday oil traded at US$89.02 per barrel. The IMF projections are showing that oil imports will move from 14% to 14.5% of GDP. If one were to project today's prices to 2013/14, then oil imports would be 42.7% of projected imports in 2013/14 instead of the projected 40%. All projections are that oil prices should go beyond US$90 by the end of 2010, and surpass US$100 by summer 2011.

The other consideration, as it relates to any significant uplift from tourism, remittances, and FDI, is the current state of the US and global economy. If one looks at the market that supports our tourism and remittance inflows, it is not wealthy persons, but rather middle to lowermiddle income earners. I am not saying that these inflows won't improve, but certainly not enough to change our economic fortunes.

With respect to FDI, I am hard-pressed to see where they will achieve the levels we saw before the start of the recession, as global income and demand will remain subdued. Even with high levels of FDI, we have a problem with absorptive capacity, so that much of that investment will come in, spend a little time with us, and then go back out, unless we can change our social and economic relationships quickly.

Within the context of the global environment, I believe that commodity prices will cause inflationary pressures. This will be at a time when the US, egged on by the Republicans, is promising deep spending cuts come January 2011. In fact, a bill passed in the House last Wednesday has seen fiscal cuts, as the US faces a significant fiscal deficit and high debt levels. Remember that the only reason why the world did not sink into depression in 2008/2009 was because of the US stimulus. These spending cuts include a two-year year wage freeze for nonmilitary federal workers.

Add to this (i) the fiscal cutbacks in Europe and the looming threat to their monetary system, caused by the debt crisis of the PIGS; (ii) US unemployment rate increasing from 9.6% to 9.8%; (iii) Germany and Euro-zone economic indicators showing a slower than expected growth; and (iv) a very worrying increase in US consumer credit, when a reduction was expected. This shows that the recent improvements in the US economic spending may be because consumers are back to their old habits again.

So the consumers we are depending on for tourism and remittance inflows are faced with inflationary pressures, wage freezes, fiscal cutbacks, and are borrowing more again. What this says to me is that the risk of relying on these consumers is high, and could lead to vulnerabilities in our projection. And remember the job of managers is really all about managing and eliminating risk as much as possible, in order to achieve growth.

The implication of the above (oil price increases and the global economy) is that we must cause a change to the IMF projections, which includes an economic programme that includes much-needed stimulus funds, a focus on import substitution — in particular food imports through agroprocessing, and a focus on reducing fossil fuel consumption through renewable energy projects and an organised transportation system. The four critical ministries are Agriculture, Transport and Works, Energy and Mining, and National Security — or more specifically, the police.

Minister Tufton has been for a while promoting production in the agriculture industry, and the truth is that if it wasn't for this focus then Jamaica would have been looking at a much greater significant economic decline and aggravated social conditions. He must continue on his path, and I know he faces bureaucratic hurdles that are the bane of our economic development. I will say again that unless we address our bureaucracy, then we are going nowhere.

The next steps for Tufton must be to support the growth of the agro-processing industry, and I see he has been pushing for storage of excess production which is long overdue. I really don't understand why it has taken so long for us as a country to focus on this. Instead in the past all we have done is encourage farmers to start a new crop each year and what is excess belongs to the goats, cows, and pigs (not the European ones). Tufton must also push Minister Henry to provide adequate farm roads to ensure that the cost of transportation does not inhibit competition with the imported foods, and importantly get the Scientific Research Council to start making some significant contribution to the development of the industry.

Henry, I think, is one of the more organised and hardworking ministers, and I think he has been doing the best he can with the scarce resources and what we have as a road infrastructure. He must continue on this path but also must ensure that the JDIP road development is used to fix roads that add most to the value-added of economic growth. For example, we must be able to deal with a smooth flow of traffic in the corporate area, as the lack of this impedes productivity significantly. This, of course, includes a much more efficient public transportation system, where many challenges are faced and improvements have been made, but need to be done at a much quicker pace. For example, I would want to see the quick incorporation of the small operators into a highly organised transportation system. This would also serve the purposes of positively affecting productivity, significantly lowering the oil bill, and easing off inflationary pressures.

On the matter of energy, I think that much more (and at a faster pace) needs to be done with renewable energy. I wouldn't waste time arguing with the JPS, a monopoly that doesn't seem too concerned about the public interest, despite ads to the contrary. My focus would be first on breaking down the bureaucracy surrounding the solar energy loans through the NHT, and special loans to encourage businesses to move towards renewable energy sources. This combined with a more efficient and secure transport system will save the country hundreds of millions of US$ and, if implemented correctly, by 2013/14 alone will cause the elimination of the trade deficit, which the IMF is projecting will increase.

After my column last week, I don't think I need to say much about security and the need for the police to start influencing behaviour. We cannot grow an economy where indiscipline is rife, which as far as I am concerned doesn't take much to change. Just a little will. Look for example in New Kingston — where there is a police station — at the blatant parking violations each night.

Space does not allow a detailed analysis, as done in my book, but these are just some of the more important focus areas needed to ensure that we get onto a new economic growth path.

Behaviour's influence on economic development

2010-12-03T05:23:00.001-05:00

I first want to congratulate my alma mater, Jamaica College, for a job well done in taking both the Manning and Walker Cups for 2010. This is a part of the coming together of the vision that the principal and Board had for the school approximately five years ago. Today, the school is excelling at academics, sports and, more importantly, has seen a significant improvement in its discipline.

I just want to say that it is indeed a privilege to have attended a school with so much tradition, and to have been a part of the board and foundation for the past five years. JC had a low period before that but has rebounded nicely, a part of which must be because of the tradition that institutions like JC carry. To all JC students, present and past. Fervet.

My journey with JC over the past five years is very illustrative of what is wrong with Jamaica's economy and society and one of the prime factors needed to turn it around.

When the new board and principal started some five years ago, the indiscipline and academics were totally unacceptable, and this had even started to negatively affect the sports programme. The decision was taken that this would not continue and the principal outlined to the board a five-to-seven year development plan, which was to take JC from the slum we had found ourselves in to the number one high school in Jamaica. Not dissimilar is the 2030 vision for Jamaica, as the place of choice to live for all Jamaicans.

Five years later, we can certainly say that JC is on that path of development, and is very close to achieving that ultimate goal. Since the Jamaica 2030 vision was developed just after the turn of the century, can we honestly say that Jamaica is on the path to achieving that vision in nineteen years? The short answer to the question is no. Let me be clear even if we will do it, the fact is that as Jamaica stands today, there is no indication that that goal will be achieved.

The economy, despite what I think are positive policy actions, has declined considerably; crime is still a problem, and the recent trends are "worrisome"; the justice system seems to be seriously broken, inclusive of the daily cry of the average citizen to end police abuse; the indiscipline on the roads and the blatant disregard for the Noise Abatement Act is relentless; an estimated one-third of Jamaicans are squatters; poverty levels have increased to 16.5 per cent of the population and 86,000 Jamaicans have lost jobs in the last two years; abuse of incarcerated persons, children and the aged continues unabated, and the list of social challenges continue.

The current societal problems are of course a result of years of abuse and disregard for a disciplined and orderly structure, primarily because the development of the country was not always as important as the need for state power.

So, can we honestly say that Jamaica is near to achieving the 2030 vision? Of being a first world country? In my view, there is a lot for the Government to do, like making some good policy moves and things of the sort.

One of the problems is that we have failed to understand that it is not possible to pursue development primarily by a focus on the economic indicators only. For years our main focus has been on the fiscal accounts and macro-economic stability, but can we gain any form of development with the social structure that we presently have? The answer is no. Michael Manley somewhat realised this in the 1970s, but his mistake was that he didn't recognise that in order for social development to happen, you also need economic development, which is primarily why socialism as a system has failed.

Going back to the JC example, the first thing the board did was not to focus on academics but rather on the culture of behaviour. In other words, it was realised that consistent academic performance could not be achieved without a change in the behavioural pattern of students. And the key word there is consistent. Because just like economic growth, one can have a year or two of acceptable growth but because of the societal problems, there is no consistency.

In addition to the behaviour modification changes, it was also realised that this should first start with the teachers, who are, after all, the ones who set the examples and govern the general behaviour. For instance if we do not have a police force that displays or politicians who project positive behaviour, then how can we expect the average citizen — for example, — a taxi driver, to obey any traffic rules?

This had a remarkable impact, as once the teacher group's behaviour was acceptable then it was easy to influence the student body in that way. There is a lot more that can be said but space does not permit. In short, the result is a school that has an improving culture of discipline, academics and performance at sports. In other words, there is now a culture of performance that is consistent and started with the social changes rather than the traditional focus on academics and students. One additional important factor was the physical improvement of the school. If you put a person in an unattractive environment then his/her behaviour will reflect the environment. So when one looks at Jamaica's physical infrastructure, and in particular the roads, what sort of behaviour should be expected?

It is no surprise that Jamaica has failed to achieve development over our 48 years of independence. How do we expect people to behave if they live like animals because there is no running water or proper housing facilities? How do we expect people to behave if they are constantly subjected to police excesses? How do we expect businesses to operate with a competitive spirit if the bureaucracy sets up stumbling blocks that the preference is given to those with connections? How do we expect people to obey the traffic rules if you are always avoiding potholes, there are no adequate signs, or the police themselves disobey the traffic rules?

What we must understand is that economics is a social science, meaning that it is as a result of social interaction. It follows, therefore, that the result of economic and social development is also as a result of social behaviour. If we do not develop a culture of discipline and civility, then the behaviour that results from that will not lead to positive development. As a result there will not be any consistent economic and social development.

Until we seriously understand that, and start acting on it, then we will be destined to long-term declines as a country. Of course we will have periods of development, such as the economic growth in the 60s and 80s, or the social changes in the 70s; but are we as a people only concerned about bouts of development, followed by longer periods of decline, or are we concerned about a goal such as Vision 2030?

Where does the economy go from here?

2010-11-28T07:30:00.000-05:00

Last Saturday both newspapers carried reports that the IMF not only revised the growth target for Jamaica but pointed to worrisome signs of increased poverty levels and high unemployment. The IMF is reported as calling this a "worrisome trend". Now I find it incredible that only nine to ten months after the IMF programme is in place - not even the halfway mark — the IMF is expressing dissatisfaction with the way the economy has progressed. And yes, I understand about the Tivoli incident and Nicole, but these merely hastened the inevitable, in my view.

And here I was, hoping that all that I had said earlier about the contractionary effects of the IMF programme was wrong, for Jamaica's sake. I really had no problem being incorrect about my forecast if Jamaica would benefit, because I really have no desire to see Jamaica worse off just to prove a point.

But I really find it incredible for the IMF to come in, impose a programme on us, and then after 86,000 job losses and over 100,000 more persons dropping into poverty, to say in a very casual manner that something is worrisome. Anyway, maybe I am just overreacting as one who really cares about the Jamaicans who have to endure.

I do believe that a tight fiscal management programme is necessary, and everyone knows - after the lambasting received - that I support the debt restructure through the JDX. I also am very supportive of the policy direction that the Minister envisions for the fiscal programme and the macroeconomic indicators, because I believe that where he wants to go with the market is the right direction, and one which we have not seen in a very long time. He must be applauded. The problem is the technical implementation, and in particular the IMF programme, and its ignoring of the real economy and myopic focus on the fiscal side.

In a way we as a country deserve the IMF straight jacket, having for so long been borrowing to feed our stomachs rather than trying to nourish the whole body. So we are today paying the price of lavish living with other people's money.

However, an analysis of the IMF programme showed that there was not going to be any real structural change to the economy after the 27-month period ends. In fact the biggest positive for the fiscal accounts would have been done by the government prior to the programme, which includes the JDX, divestment strategies, and planned public sector rationalisation. Outside of those, the programme really brings no added benefits other than allowing us to get some money to "stop a gap". The irony is that even with the government having made the fundamental fiscal changes needed, it was still very obvious that we needed the money that would flow from the IMF programme. So I guess he who pays the piper calls the tune.

The programme relies on reducing the fiscal deficit from increased taxes, and containment of expenses. The problem is that the increased taxes come from anaemic growth of the economy, which I always indicated was going to be difficult, as I thought the global recovery would be sluggish; and from containment of expenses. The problem with the containment of the expenses is that it has a contractionary effect on the economy when the private sector is in retreat.

The other point about the programme is that while it projects a reduction in the current account deficit, the trade deficit is expected to worsen. An integral part of this worsening is that it projects that oil imports, as a percentage of GDP, will move from 14 per cent to 14.5 per cent at the end of the programme. The reliance, of course, is on tourism, FDI, and remittances. So it really does not appear to project any needed structural changes to the economy. So after we have finished paying back the IMF we will have the same economic structure that caused the underlying problems we had with the economy just prior to the recession.

Well, not really, as the latest economic numbers released by the PIOJ show that there have been some positive structural shifts, as follows, which hopefully will bear some fruit if the social and bureaucratic changes are made:

o The areas of growth - agriculture, tourism, and mining and quarrying - are all either exports or import substitution. It is good that the export sectors are starting to grow before the rest of the economy, as hopefully we will start to take the lead from exports rather than consumption as we grow;

o Although agriculture has been growing consistently, the number of persons employed in the sector has been declining. This suggests, on the face of it, that labour productivity in the sector is increasing; and

o The free education and health policies have had a positive impact on household expenditure.

A close examination of the Human Development Report also shows that there was no significant improvement in Jamaica's HDI conditions, despite the PIOJ's press release that Jamaica improved as it moved from a ranking of 100 to 80. The fact is that six regional countries that usually rank above Jamaica were not measured; the total countries ranked fell by eight; and more importantly Jamaica's ranking did not improve because of HDI advances but because the other countries declined. So it's the case of the best worst.

One of the positives from this, however, is that despite the global recession, the government managed not to be as bad as other countries and seemed to do a relatively better job at containment.

So where does the economy go from here? I don't expect the local economy to improve in any significant way in the near term, and it still faces significant structural risks. I believe that there will be an improvement in our exports, and while consumption will remain subdued I expect that the trade deficit will worsen. This will be caused by increasing oil prices as the global recovery chugs along, which will also bring inflationary pressures.

Any recovery will not see the jobs coming back to where they were before, unless we make some bold decisions about our policy initiatives. I am not going to be specific about what policies I think can be implemented to cause this employment uplift (because of space constraints), but they include renewable energy, agro-processing, and a change in tax policy.

In writing this I really don't expect that anyone will take note, as I have been saying much of this for a while. But they say a prophet is never recognized in his own country, to use a metaphor, never in any way suggesting that I am a prophet. Far from it.

But at the end of the day my satisfaction is that I get to vent through writing.