A perfect economic storm

The next six to nine months will be one of, if not the most challenging, in the economic history of independent Jamaica. And I say independent Jamaica merely because I am not aware of what the economic circumstances were before. In fact what is brewing I would call a Perfect Economic Storm.

I say this not just because bad management of the economy over the years is finally coming home to roost, but also because the vicious global environment will play havoc on vulnerable economies such as ours. The reason for our vulnerability is because we have allowed ourselves to be destroyed by the virtues of consumerism, corruption, crime, and political rather than economic decisions. In fact the infrastructure that would make our economy able to weather the current global shocks does not exist because we have failed to educate our people and insist on productivity.

The makings of a storm
So what we have is an economy where productivity is declining each year, or is flat at best; the people are uneducated compared to our trading partners; capital infrastructure is low compared to our trading partners; economic growth is highly dependent on imports; and the cost of business is artificially inflated because of crimes such as extortion. Combine all of this lack of proper infrastructure with the lack of proper leadership in both the private and public sectors and what you have is an economy that is not able to protect itself from any unfavourable external shocks.

But what are some of the shocks we face that will make for this perfect economic storm, against this background of a vulnerable economy. They are:
- The rising oil prices have caused us to shell out more than an additional US$1 billion per year, when exports are not growing near fast enough to close the increasing trade gap. And because we have destroyed the mass transit infrastructure then people have no choice but to drive their personal cars, and so we cannot adapt to rising oil prices as quickly as developed countries such as the US. With all of this even if oil pulls back in the short term, the long term prospects is indicating it will continue to rise;
- Rising food prices is causing havoc on consumer spending and may start to impact general nutritional levels. If this happens we could then see a negative impact on health costs in the near future. Food prices should continue to rise in the foreseeable future. Add to this the fact that our agriculture is plagued by unproductivity, praedial larceny, and a high import content and it makes the situation seem grim;
- The government does not have the fiscal space this year to divert resources into much needed social programmes. It is going to be very important this year that the fiscal target is met, not just because we have been missing it for years, but also as a result of the changed international financial environment which means that we will be punished if we miss it;
- Crime, and lawlessness, continues to plague the country. Because of the social degradation and the lack of proper enforcement of discipline in the society over the years corruption and lawlessness have become ingrained. This single factor has been the main reason for the underperformance we have seen in tourism and domestic investment when compared to the rest of the region;
- Probably one of the most important turn of events over the last 2 months has been the significant downturn in business confidence. What this means is that we can expect to see stagnated economic activity in the near future, if conditions remain the same;
-The worsening economic situations in the US, Canada, UK, and Europe (our main trading partners internationally) will impact negatively on tourism, remittances, and other export earnings. We may see some growth in some of these areas but the growth will not be enough to counter the inflationary effects of our imports. Europe and the US also seems to already be in a recession; and
- The failure of the “alternative investment schemes” will have a negative impact on consumer spending and personal loan portfolios of the banks, thus affecting their profitability, as they have spent the last three years pushing consumer credit. The impact on the financial system overall will be minimal if any though. This could in turn negatively impact the motor vehicle and housing industries and is the result of not having dealt with these schemes three years ago when at the time I was emphasizing the importance of regulating them and I was being told that I was marketing for them. The fact is that pushing for them to be regulated would have shaken out the illegitimate ones very early and prevented the potential impact it will have now. Instead we chose to get public opinion against us with the big stick approach.

All these factors had the seeds planted years ago, even the global events. What is happening now is that all these seeds have developed into trees ready to bear fruit. The fact that when global economic conditions were excellent we failed to take advantage of it adds to our woes today. When all these events come together in the very near future, as they will, you will have the making of a perfect economic storm. And if we were to even have flooding this hurricane season it will compound the effect.

Competence needed
But like all storms the ship can be guided through, even in one as furious as this one. What it is going to require is competent and fair leadership. Most importantly it is going to require superb leadership by the Prime Minister, as he is the captain and the ship is fully in his control. But it does not stop there; it is going to be very important to have in place competent, and not just name brand, persons strategically placed to lead important areas. If this is compromised then the ship can easily sink. I would even go as far as to recommend that an economic council of some sorts be established to help guide us through what is on the horizon, made up of “competent” persons from the opposition, private sector, public sector, and government. These persons should be paid, and so held responsible, but more importantly should be competent.

What I am saying is that there is hope, as the inefficiencies in (i) oil consumption patterns; (ii) agricultural production methods; (iii) consumerism; and (iv) bureaucracy, all leave us with significant space for improvement, and is therefore an opportunity. But it is important that we act decisively on improving these areas, in addition to enforcing discipline, if we are to sail through these troubled economic waters.

As an example, when oil was at near US$80/bbl last year I remember blowing the trumpet with Ralston Hyman about the necessity of dealing with the short term demand as a matter of urgency. When such a situation occurs it is necessary that the slow wheels of government bureaucracy do not stand in the way, as our inability to be proactive is part of the reason for where we are today. In the US for example, as large as their bureaucracy is they are able to make quick decisions when it comes to the economy.

In conclusion although the future looks tough, we do have the ability to go through it with minimal damage. This, however, is going to require strong leadership to do what is necessary to carry us through. I have said in the past, and will say again, that I am of the firm view that the Prime Minister is capable of doing that, and it is important that whatever space we occupy that we support him in doing so.

Failed leadership

I have always said the main problem I have with previous administrations is not the way they have managed the economy, but the breakdown of law, order, and discipline. Jamaica's problems with violent crimes did not start today. The fact that people were allowed to get away with small infractions has led to the major crimes we face today.
The indiscipline on the roads, the corruption by public officials (described as runnings), the blaring music at nights, and the general "Jamaica no problem" attitude. These have all resulted in Jamaica being one of the most murderous countries in the world. It is the inaction of our leaders who have been honoured with so many accolades, that has caused us to be where we are today. Leadership both in the public and private sector. This is what has caused the assassination of someone I have known for over 20 years, Douglas Chambers.

A sad day for Jamaica
It is a very sad day for our country when someone with all the intentions to make this country better is slain. For it is saying to us that if you try to do anything to improve Jamaica, and help to improve the lives of Jamaicans, then you will not make it. It is very symbolic of the way our leaders have approached this country, that is, Jamaica is a place to be plundered, not developed. In other words the tradition of Henry Morgan, the pirate, must be continued. When there is nothing else to plunder, and Jamaicans have killed off each other, then the same persons that have led us to this sorry state of affairs will move on to another country and retire in comfort.

Douglas' death was not orchestrated this year. If we are honest with ourselves it all started in the 1960s, after independence, when political violence started to rear its ugly head. At the time there were no high-powered weapons, which cause the gruesome slayings today. But we have always sought to use the best technology available to create bodily harm. This technology improved to what it is today, not because the poor man hired to commit the crime could afford to bring in the guns. He was too busy trying to find food for himself and his many children. Rather it was the "Honourable" politician, isolated behind security, that used the poor Jamaican like a rag cloth to wipe out what he considered dirt.

So, irrespective of what anyone might think about Douglas' style, his intention was always to clean up the corruption that is the legacy left to my generation, and the ones following, by those who have fought their way to power with the blood of the poor, plundered our coffers, and retired to a life of plenty. The Jamaica today is the legacy that has been left for us by some of the leaders we have bestowed with the title Honourable and many other awards. As I see what this legacy has done to Douglas, I ask, what is honourable about the Jamaica that has been created?

The legacy left by the generations before us is aptly described by Douglas' circumstances. He was given $1 a year and bullets. In other words, the legacy left by previous generations for us is poverty and crime. That is what is meant by $1 per year and bullets. Should we be thanking those who have gone before us for the legacy created, or should we be saying to them, "You have failed in the leadership of this country. It is time that you stop giving solutions to something you could not do when you were asked to by the people and allow us to do it". There is nothing I hate more than to hear those responsible for where we are now speak about what the solutions are to the problems we have today.

Jamaica as an experiment
It is as if Jamaica was nothing more than a lab rat to be tortured and poked in an experiment to prove a theory of the resilience of Jamaicans to "sufferation". Because no real attempt has ever been made to truly improve the lives of Jamaicans. So I find it very difficult to reconcile the fact that we have $1 Trillion in debt burdening the poor people of this country, while the old lady I saw walking on the sidewalk a few weeks ago (in bright sunshine) had to step off into the road to avoid a puddle of water. I find it very difficult to reconcile how we have supported public sector companies losing billions per year when the children line the streets hustling with no hope of a proper education or any health care. I find it very difficult to reconcile how we spend billions on hosting a cricket tournament for a few weeks when at the same time the police, teachers, and nurses are crying out for more resources.

And then when these questions are raised, some have the audacity to try and defend it. It is not only corruption that has helped to destroy this country, but the wanton way in which we have approached public expenditure in this country. We have spent money not to ensure the development of Jamaica, and Jamaicans, but to ensure that political parties hold on to power. And we may say that it is the people who decide who is put into government. But what we have been doing is keeping the people hungry and ignorant so that if we give them a plate of curry goat and a beer, then they will give away their lives. If our leaders had any respect for Jamaicans they would never entertain that sort of politicking.

The trigger of the gun that killed Douglas may have been pulled by a poor Jamaican man. But it was the mismanagement and inaction of our leaders that developed the criminal and gave him the gun. The trigger was not pulled last Friday. It was pulled as far back as 1962 when we gained independence and failed to develop this country to become one where discipline, structure, and development were given top priority. Danville Walker has realised this in his recent address where he said that those evading customs duty are the well-to-do. It is not the poor man who pulls the trigger who evades customs duty. It is not the poor man that is abused by the police who evades income tax.

So when I hear people criticising the government for not giving a long enough time for the tax amnesty I think about how bare-faced criminality is. For those who evade taxation are as criminal as the man who fires the gun. So how can we criticise the "dons" in August Town for calling a peace truce when the white-collar criminals who evade taxes are also calling for an extension on a tax truce? In fact it is the deprivation of the revenue that has resulted in many respects to crime in this country because education, health, and social services cannot be funded. But then again, maybe if that revenue was coming in we would have wasted it on the scandals that have dogged Jamaica for many years.

It is not one or two wayward men who killed Douglas. It is a well-oiled system of corruption, indiscipline, and lawlessness that has been created by years of neglect and dismal leadership. But we must all understand that when violent crimes take place in Jamaica it is a cry for help by poor Jamaicans who have been abused for decades. And we who have the ability to do so must double our resolve to improve this beautiful and blessed country by fighting the corruption and indiscipline that engulf us.

Douglas was one of thousands of Jamaicans who lost their lives in the fight for "scarce benefits and spoils". But he was at the forefront of trying to change a system that stinks of corruption. He was at the forefront of trying to put in place a better life for Jamaicans, who suffer the indignity of travelling the public transportation system while those responsible for its demise drive in air- conditioned gas guzzlers. So even though he may have had his conflicts with the people, he was truly a champion of the people.

So I say to the young people of Jamaica: Even though the legacy left for us is one of "$1 a year and bullets," we must have the resolve to help Jamaica to rise like the Phoenix from the ashes. And when we have our conflicts, as we always will, do the same thing Douglas would do and say "Come, let's go drink a beer and talk bout it". Big up Dougie.

Taming the inflation monster

Inflation is probably the greatest threat facing the consumer daily. This is because the global impact of food and energy will continue to have a devastating effect on the incomes of Jamaicans. Those at the lower income levels will feel it even more, and our policies over the years have created many such persons.

It is because economies move in cycles (good times followed by bad) that I have for years lamented the fact that as a country we have failed to take advantage of the record growth levels the world has seen in recent years. When times are good it is essential that we put aside resources to help us through the bad times. So when the world was growing at rates of six per cent to eight per cent as a country we failed to take advantage of it. In fact, we seemed to have been satisfied with growth rates of two per cent, as whenever we made that mark it would appear we were in a celebratory mode. This is even as neighbouring countries were growing at rates between 8 per cent and 10 per cent per annum.

Adapting to inflation
So here we are today, like everyone else negatively affected by global inflation. Every country in the world today is trying to cope with escalating energy and food prices, of which the greater threat to the world is food inflation. The truth is that food inflation will continue for longer than high oil prices, as while we can curb energy consumption it is very difficult to do so with food. So the main failing that we have as a country is not really that we cannot satisfactorily control the global impact but that (1) we have failed to take advantage of the high growth rates; and (2) the lack of infrastructural investment over the years means that our capacity to deal with the global impact is just not there.

In other countries, such as the United States (US), while they are faced with high energy prices they are able to curb consumption by increasing their use of the mass transit system. In the US since last year they have increased the use of mass transit by over five per cent. So they are able to reduce energy consumption by not only fewer people driving but obviously it means less traffic, and also the consumers are able to reallocate the funds saved on energy consumption from transportation to food. In Jamaica's case, however, because of the lack of any proper mass transit infrastructure (road, rail, and water) the Jamaican consumer is not able to move to mass transit, and therefore continues to face high energy and food costs without being able to reallocate expenditures.

So while countries with choices can minimise the impact of inflation, countries like Jamaica get the full brunt of it. This is primarily because of our failing over the years to invest in the capital and social infrastructure of the country, even while we have racked up debt of J$1 trillion. The debt has not gone into development but rather consumption.

So while on the one hand we have a very significant debt level, there is nothing to show for it because the significant part of our debt has gone into consumption. And this is why places like the IMF, and local commentators like myself, have been saying for years that the continued expenditure on places such as Air Jamaica, Sugar Company, and JUTC without any strategic benefit was giving away our nest egg. In addition to these expenditures we have seen the money that has been wasted on scandals such as the Intec fund, Sandals Whitehouse, NSWMA, Operation Pride, and others.

We could do well today with the billions of dollars wasted on these for social programmes support, as the US is doing with the rebate cheques they have sent out. Instead, during the good times our approach has been to waste our resources, and "suck salt through a wooden spoon" when times are bad. This is not a new phenomenon for us, as after the boom of the 1960s we again wasted our resources by our policies in the 1970s, when we had an accumulated negative growth of close to 20 per cent.

What is the solution?
But how do we now address this? What we have to do is first understand what is causing the problem. The inflation problem is caused primarily by the global impact of rising oil and food prices. Even local food is affected because of our dependence on imported fertilizer, and exacerbated by the low agricultural productivity, which results from small farm plots, inadequate irrigation, and the lack of technology. What we also have to realise is that inflation in Jamaica is mainly caused by food, which accounts for approximately 41 per cent of total inflation. Energy consumption makes up less than 10 per cent. It would seem logical then that any attack on inflation must first be directed at food and energy, as these account for almost 50 per cent of inflation.

In addition, because our import dependence is so high, it means that inflation not only causes increased price pressures directly but it also causes a greater demand for foreign exchange, which places pressure on the exchange and inflation rates. So we must develop strategies that have the effect of (1) minimising our need for foreign exchange; and (2) increasing our agricultural productivity. Some of these solutions will take some time but others can have an immediate impact.

The low-hanging fruit, for example, is in the area of energy consumption. One such solution is in place already and this is the $500,000 loan offered by the NHT (10 years) for solar energy equipment. The NHT of course needs to ensure that anyone who accesses this loan is tax-compliant. But a typical three-bedroom home may cost about J$300,000 to J$400,000 to place the lights, television, computer, and other small appliances on. This could run these for the entire night and could reduce your energy bill by at least half. So if your light bill is $10,000 per month, the payback period on the investment is 6 to 8 years, and the life on solar equipment is approximately 40 years. This is a conservative example, as the bill and percentage saved is usually higher.

In addition, the introduction of fiscal policies to curb consumption could have an immediate payback. For example, charging private cars to access areas such as New Kingston during work hours, and having significant parking charges in these areas will encourage people to move to mass transit. At the same time though an immediate investment in buses to accommodate park-and-ride services will make our public transportation system more palatable. In the UK and US one pays to go into London and Manhattan during work hours. In the UK there is a charge for vehicles such as SUVs that drive into certain designated zones. The effect on the retail consumption of electricity and transportation could see reduction in the energy bill of between US$700,000 and US$1 Billion, if properly implemented.

The longer-term strategy being adopted by Chris Tufton should have a beneficial effect on food inflation. What we must do is not only start to grow more of what we consume, but we must also (1) develop local organic fertiliser on a mass scale; (2) grow staple crops, such as rice, cassava, yams etc on a large scale and not the small farming plots we do now; (3) put money in fixing the long- neglected arterial roads for greater access to farming lands; (4) use technology, such as is done in Israel, to ensure the greatest yield possible, standardise our agricultural products, and ensure year-round production of certain items. If we approach this properly we can have enough for export also but certainly will be able to replace the imports in the hotel sector.

Just as Jamaica lacked the capacity to grow at rates in excess of three per cent in good times, we also do not have the capacity to adapt to changing economic circumstances because of the lack of proper infrastructural investment, and wastage of our resources. There are some short-term fiscal policies that can address inflation concerns, but the timing and proper implementation is critical.

Breaking the vicious cycle

At the end of the last fiscal year, we officially got to the $1 Trillion national debt mark. This is something that was well within out reach from early last year, and with the off the book debts we had well surpassed long ago.

Now that we have achieved the $1 Trillion figure though what does that mean to us. As many people would be aware, I am not one who is concerned just about the level of debt. Whether it is $1 Trillion, $200 million, or $200 Trillion is not important all by itself. One could say that the debt/GDP ratio is an important mark, and it is from a comparative view, but again is not in itself the sole indicator of whether or not things are getting better or worse.

The debt/GDP ratio is a good trend indicator of whether as a country we are doing better or worse, but still has its weaknesses. In our case the debt/GDP ratio started to decline around 1996/97 with the financial crisis of the 1990s and the introduction of FINSAC. From that point on the situation got progressively worse until around 2006/07 when we started to see the gap begin to narrow but not by much. With the debt figure getting to over $1 trillion at the end of 2007/08 the debt/GDP ratio still went down from 132% at the end of 2006/07 to 126%, as a result of a greater rate of GDP growth relative to the debt level.

Pyramid economy
This, however, is not the full story as the growth in GDP includes inflationary growth, which we know last year was relatively higher but also because the GDP component is also very important. In the last quarter, January to March 2008, GDP growth was 0.2%, which is one of the worst numbers we have seen in a while. My own view is that the global impact has had a lot to do with this, but even more importantly the constant decline in productivity over the years is beginning to catch up with us.

Since 1962 Jamaica has recorded growth of approximately 97%, of which some 69% occurred between 1962 and 1971. So over 35 years we have seen accumulated growth of around 28%, and this is at the heart of our problems. For the last 35 years we have had an average annual growth rate of approximately 0.8%. We did see some reversal of this worrying trend in the 1980s, when between 1982 and 1991 the accumulated growth was approximately 15%, but since then growth has averaged just about 1%. This is while other countries were growing consistently at rates over 5%, so obviously Jamaica is going to become relatively poorer.

The significant reversal in our fortunes started, as I indicated, around the mid 1990s when the financial crisis occurred and money stopped moving into productive ventures and went into chasing paper, producing no productive assets. So the economy was operating like one big pyramid scheme where high returns were being promised on paper without the productivity to back it. The only way to keep the paper chasing going was obviously to borrow money to pay those that invested in our high yielding paper. This as far as I am concerned is similar to a pyramid scheme where new monies have to be taken in all the time to pay out those who are already holding paper instruments, which is a promise to pay.

Over the past few years though we have seen some growth in the economy, and also have boasted about the amount of foreign direct investment that has come into the economy. We have also seen record inflows in terms of remittances and each year we have broken the mark of the number of tourists that arrive on our shore. Based on these and other numbers we have been propagating that poverty is down, the economy is growing, and Jamaicans are better off. We have even gone as far to say that Jamaicans are better off because they have more cell phones, more cars, and yes “man have more gal”.

Changing productive and consumption relationships
But even while “man have more gal”, cell phones, and cars we still see where Jamaica’s debt has been climbing, inflation is going up, and the economy seems to be stagnating as growth rates of 3% and above seem like a fairy tale. And the truth is that unless we break the vicious pyramid like cycle, where we continue to borrow money to pay those who were in before, we will always face the same challenges. The only way to break free of that cycle is to fundamentally change our consumption and productive relationships.

Even though we are seeing growth, and some erosion of the debt/GDP ratio, this reliance on this indicator is also misleading. My own view is that the only way for us to really address the problem of the debt/GDP, and how much of each dollar we pay out in debt, is not to focus primarily on the debt but rather to focus on the denominator, GDP. And it is not just a matter of growth in GDP that is important but what sectors have grown. In the 1960s, when we saw significant growth rates, this came primarily from manufacturing and at that time the Jamaican dollar was valued more than the US dollar. At that time we also took advantage of the areas we had an economic comparative advantage in also.

Since the 1990s the growth that we have had is primarily in the services (financial, real estate, distributive trade) and construction. The real sectors such as mining & quarrying, tourism, and agriculture have not performed as well. So our growth in recent years is sort of like a two edged sword. While on the one hand it makes our numbers looks good, these are in sectors where we do not have a natural comparative advantage and where a significant part of the inputs are imported. So while our growth numbers look good the balance of payments suffer, and we end up spending more than we earn. This in itself leads to greater demand for foreign currency and the only way to keep the exchange rate stable and keep inflation low is to borrow money. It is because of this cycle why we are being affected so significantly by the global crisis. The fact is that as credit tightens globally interest rates on debt is going to be negatively affected and as prices globally go up we are going to import inflation. This is the corner we have painted ourselves into with the economic policies we have pursued.

The only way for us to break out of this is to fundamentally change our approach to economic growth. The focus for growth must be in the areas of agriculture, and not just the growth of primary products but also agro-processing where we retain greater value in the economy, and also in tourism and mining. These are the areas where we have a comparative advantage and economics 101 teaches that in the areas where there is a comparative advantage there is also the potential to retain greater value.

The other area that we can have a significant impact is to change our consumption patterns in energy. The energy bill at current oil price levels will move by over US$1 billion. My own view is that an investment of some J$5 billion in this area could see us saving up to US$1 billion (J$71 billion). This seems like good value for money.

The point though is that since the 1990s Jamaica has been caught in a vicious cycle of debt chasing debt (borrowing more to pay older debt), resulting in a pyramid type economic effect. Unless we fundamentally change our production and consumption arrangements then we will forever be like the stupid dog that continuously chases its own tail.

Déjà vu

In recent weeks Jamaica has been seeing significantly increased number of murders. And it seems as if those responsible are getting more brazen. I mean assassinating two policemen in a group carrying high powered rifles in brought daylight, is an indication that the gunmen are fearless. Shooting children and senior citizens also show heartlessness. Assassinating a young lady in the middle of the day in York Plaza, a busy intersection, illustrates their confidence that they will not be caught by the police.

The reaction on the airwaves the day after the murder of the policemen was predictable. The talk show hosts discussed what they thought were the underlying factors, and pointed out to the police that their past actions were partially to blame for what we experience today. And the policemen rejected any blame and vowed to get the cop killers, calling on the community for support.

Leadership inaction
This round of events seems like déjà vu. I am sure that I have heard these sentiments being aired before, and the same reaction from the police. But after a few days we always continue to do the same thing that we have always been doing, so no doubt we will always get the same results, and in the case of crime get worse results as the societal impact gets worse. The question is, in the decades that we have been talking about the rising crime levels, and more so within the last 10 to 15 years, have we done anything different.

The popular response, from the eighties, has been to create special police squads that always seem to have escalated the abuse on our citizens. This no doubt has alienated the citizenry and ended up with them feeling they have no alternative but to protect the gunmen from the police, as they are the sole protectors of their communities. Over the years when we have always complained about rising crime we have seen the corruption in the police force and by public officials increase. We have seen numerous political scandals involved billions of dollars with no solution. We have seen a financial crisis that has cost this country dearly and at the end of it no one has been held accountable. We have seen where children have been left to grow up on the streets without any state intervention to hold parents accountable.

So it is this inaction by our leaders that has resulted in the vicious crimes we see today that not only cost us at least 4% per annum in GDP growth but is the main reason for the deterioration in the quality of life of Jamaicans. Even children have to be careful traveling on the roads, as we never know when they will be killed for a cellular phone or no reason at all. And the commissioner (Lewin) is correct; this monster of crime is not going to go away over night. We have spent years of neglect and poor governance encouraging the sowing of the crime seeds, and now it is beginning to bear fruit. In fact Jamaica has become known as world leaders in the production of crime, as we have killed the manufacture of goods and services.

The high incidences of crime today was predictable and only leads me to conclude that our leaders lack the ability to see the consequences of their actions or just plain do not care about Jamaica. I have always held the view that Jamaica is seen as a place to be plundered, and that this view has been carried on in the tradition of Henry Morgan and his pirates. Today the pirates do not travel in ships but comfortably in expensive cars. I believe that this is the view of our leaders as I do not believe that even the most ignorant of us could be stupid enough not to see the societal effects of ineffective leadership.

Three generations lost
So the actions of our leaders and lack of development as a consequence has resulted in the neglect of around three generation of youngsters that have been educated in various methods of committing crime. This is at the heart of the problem. For years we have been speaking about the marginalization of our young men. We have seen where females form around 70% of the university enrollment. Doesn’t that raise questions about what was happening to our young men and wasn’t it enough to spur our leaders into action. It seems not. Instead the focus of our politicians has been on winning elections at all costs.

I really do feel it for the poor Jamaicans of this country that have suffered under the inadequate leadership offered by power hungry politicians. Jamaicans have always been known world wide as a warm and friendly people and poor leadership has turned the image of Jamaicans into a vicious bunch of murderers. It is time for us to really start to put people and Jamaica first. It is time for us to start acting responsibly in our governance, and when appointing people to positions or taking decisions, to do so in the best interest of Jamaica, not because someone is a political supporter. But even if we want a political supporter make it one that is capable of doing the job. We must ensure that everyone is treated the same and that no one is above the law while the rest of us mortals have to abide by it. It is time for a new dawn in Jamaica, and this is a passion I have. I long to see the day when Jamaica takes its rightful place in the world, as we have so many talents and competitive advantage.

And this is the reason why I said last week that I am relying on the characteristics displayed by Bruce Golding. I am encouraged by some of his actions and comments about equality for all. I am encouraged by his resoluteness for a better Jamaica and I hope that he continues on this path as I really do believe that this is one of the last chances we have as a country. Past leadership has failed us and some should never see it fit to offer themselves for public office again and act as if now that they are no longer in governance (and I speak not only of the last administration) that they now have the answer to what over decades they have not been able to resolve. I can never understand why Jamaicans believe these utterances.

Some people have written to say that I should pronounce that I am an advisor to the government, to put my comments in perspective. This view is nothing but a continuation of the tribal way in which we view things, as because someone may wear a certain colour, at a point in time, we shoot the messenger rather than look at the message objectively. Then again many do not have that ability, but I do understand the request in the context of the environment we live in. Irrespective of our views I think we can all agree that if nothing is done about this crime monster it is going to consume everything positive about Jamaica, and no practical economic projections or development can take place in this environment. But the change to dealing with this must start with leadership.

Passport office
On another note, I visited the passport office recently to renew my passport and was pleasantly surprised. The system of service was very efficient and the people there were very helpful. It was not like many other government offices where you could be falling down and no one comes to your rescue. These people were very attentive to their “customers” and always had a smile. The process was seamless and painless. In fact when the automated system called my number (322) a lady came up at the same time and said she had 317 and that her number came before mine. I withdrew to the side as the cashier said to her that “in here 322 comes before 317”, which reinforced in my mind that they were committed to following the system that was in place. This is indeed refreshing in a country where there is no respect for rules. Respect to the passport office, whose administrators should help some other places that are excellent at PR but very poor in service.

Understanding inflation concerns

Last year, when oil was close to US$90 per barrel, I indicated that it would go to US$100. In an article I wrote in March, when oil was US$105 per barrel, I indicated that by April/May 2008 oil would hit between US$110 to US$120 per barrel. There were persons who publicly, and privately, said that I did not know what I was saying and that oil would soon go back down to US$85 per barrel. I even remember someone saying to me that I was talking up the price of oil, even though I am a mere accountant in a country that is responsible for a very insignificant amount of global consumption. But such is the emotion called illogic that so many of us seem to possess.

When one looks at the daily oil chart it still shows a very bullish trend, and on that basis some had said that they expect oil to still continue rising unabated. At the same time we are facing rapid increases in global food prices, as evidenced by a very basic staple, rice, which already this year has increased by 117 per cent. There are reports also that Costco and SAM's club, in the US, have been restricting the sale of rice. There are reports that in over 33 countries across the globe there have been food riots this year already.

Again, I believe that emotion is taking over, and people are not correctly analysing the situation and now the talk is that this trend will continue indefinitely. So people have transformed from telling me that I don't know what I am saying about oil prices going to US$120 per barrel, to the point now where they are saying that these rises are going to continue indefinitely and predicting indefinite doom and gloom. Now anyone who understands how markets work will realise how irrational these arguments are, and will also appreciate that what is driving these comments is nothing more than emotions.

Food inflation
I do admit that food inflation will be the greatest concern for Jamaica, and the world, in 2008. As a matter of fact it is a greater crisis today than the price of oil, which was a greater crisis last year. So today it is more important to deal with the threat of food inflation than the price of oil, whereas last year oil prices were more of a threat to the economy. This is the dynamic nature of the markets, and even more so in this electronic age, where policies must be nimble enough to deal with the crisis of the day as they will continue to keep changing, especially in times of great uncertainty and market instability.

Both food and oil will on average be higher than last year, but the fact is that the rate of inflation will slow down. So when the critics say that inflation will continue to be high, at around the same rates as last fiscal year (20%) then it really speaks to a lack of understanding of the concept of inflation. Let us take an example; oil rose from US$70 per barrel last year to US$120 per barrel this week, which is a US$50 absolute increase or 71.4% over last year. The same US$50 increase over US$120, however, is only a 41.7% increase, which is 30% less than the prior percentage.

This is the concept of inflation. It is not that prices may not increase but that the rate (% change) of increase is going to slow down. The slow down will result because of two reasons. The first is that the base on which the inflation rate is computed will be larger, thus the rate of increase will be lower, and the second, in my view, is that towards the third to fourth quarter of this year, oil and commodity prices will start to back off.

The greatest threat to higher local inflation is in fact something that no one has been speaking of, that is the threat to our local food supply from a natural disaster such as a hurricane.

US dollar recovery
The slow down in prices will result also from a stronger US dollar as well as equilibrium being achieved between demand and supply for food. The fact is that there is a speculative relationship between US dollar weakness and the higher prices in oil and other commodities, which accounts for approximately US$20 to US$30 on current oil prices. This results because traders, and investors, seek to protect the real value of their holdings by bidding up the price of commodities to compensate for the weakness in the US dollar. The US dollar, however, will strengthen in the third and fourth quarter for the following reasons:

. The economic data out of the US is showing signs of stability. While there are still some negative signs in the housing market, there are signs of a slight recovery in jobs and company profits over the expectation of economists.

In fact, even though the most recent jobs data shows a slight decline, the sector of small businesses showed a strong 55,000 addition. This is a sign that the economy has started to reach a bottom and could start to recover soon;

. The Fed is expected to cut rates by just 25 basis points at its next meeting and then be finished with rate cuts. The present threat of inflation means also that as the economy shows signs of stability the pressure to decrease interest rates will subside and in fact if prices continue to rise then rates may even go back up slightly;

. Other economies have already started to show signs of weakness, and in fact countries like the UK have already started to reduce interest rates. As the expectation of rate decreases falls in the US and increases in other countries then the interest differential between the US dollar and other currencies will decrease thus causing strength in the US dollar; and

. As the US shows signs of recovery then the equity market will start to recover. This will lead to investors putting risk on the table again and selling the Japanese yen against the US dollar thus causing strength in the dollar.

As food prices increase you will find more food planted globally. This will in turn increase supply and as countries, such as Jamaica, seek to increase local food production and also move to greater self- sufficiency, then demand will also be tempered.

These two factors will combine to reduce food prices towards the end of the year. This will result in a lower rate of inflation over last year, as when you are close to the plateau of prices it is difficult to have the same rates of increase. This is logical.As I have always said though, I think ethanol is over-rated as a fuel source, and in fact it has been one of the reasons for the higher food prices. The US, through Congress, has mandated that 25 per cent of corn production should go to biofuel production. What this has done is reduced the supply of corn for food consumption, placing pressure on the price. Now all my logical senses tell me that faced with food shortages or higher energy prices this mandate will be lifted, as eating is always going to be more important than driving. With the expected fall in oil prices also we will see less emphasis on using our food sources for energy. In any event I have always believed that coal is a better option.

Although we have seen that the prices of rice and corn commodities have increased, we have also seen that the prices of live cattle and milk, for example, have decreased this year. So the picture is in fact mixed.

The fact though is that markets always behave in this manner when trying to find equilibrium. So it will spike up and go down until it finds the equilibrium price, and this is influenced by market forces such as changes in supply and demand. So will prices be higher than last year on average? Certainly. But the rate of increase will be lower than last year, which is what inflation is.

Change is hard but necessary

“Everyone wants to go to heaven but no one wants to die”. These are well known words and were even belted out by Peter Tosh in one of his hit songs. How does one go to heaven if death is not involved, as death is a necessary ingredient of making it to heaven? And this is the dilemma we face as a country.

From when Omar Davies was Finance Minister he used to point out that the only way we can achieve significantly lower Debt/GDP ratio, and make more money available for social spending, is to first balance the budget. This was recently repeated by Don Wehby at a recent Mayberry Investor Forum. Any sensible argument from analysts will also confirm that this is in fact so. The question then is if we all know that the only way to reduce the strain on the fiscal accounts, and make more money available for social programmes, is to balance the budget then why have we not been able to achieve it for so many years.

Wanting fiscal results
In fact of the 45 years between 1962 and 2007, we have managed to balance the budget approximately 6 times. And this is at the heart of our high Debt/GDP ratio and lack of money available for spending on Jamaica, as we have to continuously borrow money to fund the budget. The fact is that we have just been living above our means for too long. If one continues to spend more than is earned then eventually your assets will be seized, and you will end up with nothing.

This appetite for spending more than we earn is driven by first of all the Jamaican culture, but more importantly is supported by political rather than economic expedience. As the saying goes “Good politics does not make for good economics” because in many instances politicians have to promise short term fiscal irresponsibility and sacrifice long term gains. This tendency is even more pronounced in countries such as Jamaica where we suffer from such a relatively high illiteracy rate where 70% of our high school student population leaves without one subject. An unbelievable statistic in a country that is based on 70% services, which requires human input to create competitive services.

Based on the literacy levels we would be better suited to a manufacturing economy. But of course as usual we fail to properly plan our development based on the resources available and go with where the political wind blows. The political directorate of course does not behave like visionary leaders but rather a businessman who seeks to maximize gains by promising high short term gains knowing fully well that the long term stability is compromised. But the fact that politicians are able to do this successfully over the years is more an indictment of our own ignorance as a people rather than the actions of politicians. I mean politicians do the same wrongs to us every year and who continues to vote for them. So who is more stupid, the fool or the one who continues to follow the fool?

If we really want change in this country then we must understand that it requires a fundamental difference in the way we do things. So that when the Prime minister makes decisions, that are unpopular, but is made with the prospect of making conditions better in Jamaica, we should analyze it on its merit for improving the country rather than who we think may be offended. And in some cases no one feels offended but the politics is always more important than the economics for many archaic minded politicians. When decisions are made to properly restructure loss making companies, or dispense with them, we have to understand that the short term sacrifices that may be necessary is good for the long term gains. Instead of thinking long term, however, we tend to oppose the good decisions because over the short term they are not politically correct, as Jamaicans at every level of society, are more concerned about curry goat politics rather than good economics.

Selfish motives
The selfishness of Jamaicans leads us to want change for everyone else except ourselves. So everyone, except me, must make the sacrifice for a better Jamaica, which I will of course partake of. That is the thinking that has helped to destroy this country. So when a politician is faced with a choice of political fallout or making a decision in the best interest of the country, history has shown us that most of our politicians have made the choice ensuring that there is no political fallout. As far as they are concerned the ignorant poor people of this country are not educated enough to understand that their long term future is at risk so they won’t notice that we are sending them like lamb to the slaughter. It is for this reason that I believe that there are many who should never think about offering themselves for office in this country again. But that is if they have a conscience.

In Barbados the economy was falling apart, and a Prime Minister came to office called Erskine Sandiford in 1987. He made the ultimate political sacrifice to ensure that the economy was put back on the right track by making the decisions that was certain political suicide but in the best interest of the country. It is to the detriment of the Barbados people that they voted him out, and I believe that they are still benefiting from his policies but recently has shown some signs of vulnerability.

In our case, however, we have had Prime Ministers that have always made decisions in the interest of the political party and to hell with Jamaica, as the party and party members are always more important than the ordinary Jamaicans. So while slavery ended in 1834 feudalism continues unabated with the advent of the political party.

If we really desire change, and want to see this country develop, then we must change our behaviour. If we want to balance the budget then we must accept that tax reform is necessary, and should not mislead the people that the additional $2.9 Billion in taxes is any real burden, when $2.9 Billion of new taxes is coming from cigarette smoking. Are we trying to encourage cigarette smoking by criticizing that tax? If we really want change we have to understand that when a decision is made to change personnel in a political administration we must look at the benefit to be gained, or the loss from such a move, rather then focus on how large the cabinet is. Are we saying that we are okay with the high levels of crime and fuel bill? If we really desire change we cannot continue to say that public transportation is only for the less fortunate amongst us rather than see how we can make it acceptable to all, as it is ludicrous to continue current consumption levels of oil when the only gas we produce is from the mouths of some of our politicians and bodily functions. If we really desire change then we must accept that it is unacceptable to continue government support of our loss making public sector bodies that add little economic support, while we debate whether we can afford $2 Billion for health care and another $2 Billion for education.

My own view is that Bruce Golding is of the ilk of Erskine Sandiford, as he is proactive in the decisions he has made in support of making for a better Jamaica. No doubt the perception that he has ruffled the feathers of some of his supporters may have some merit. But isn’t the development of the country more important. We have to be very careful that we don’t throw the baby out with the bath water, as I really believe that this is the last stand before we plummet into a Haiti like situation.

As I said at the start if we want to go to heaven there is a precondition to that. Let’s make sure that we end up not going to heaven but still die.

A tale of two approaches

Over the past two weeks we have all been engrossed in the budget debates and the developments in the Cash Plus saga. As usual the presentation by Audley Shaw took place and the response came later from Omar Davies, and there were criticisms for and against both presentations. While both presentations had their fair share of politics, and also highlighted some very salient points, I believe that the overall response from the public and media has been lacking in quality.

As usual we tend to keep judging the quality of the presentations based on (1) how well it was delivered, and (2) how much more expenditure was allocated to critical ministries and how large, or small, the tax package was. My question is, isn’t this the same way we have been assessing every budget? Hasn’t every budget each year sought to give more money to the police and education? And what has been the result of this traditional approach to budgets? It certainly has not resulted in any rates of growth to speak of, as we continue to feel special when we eke out a 2% growth rate. The increased expenditure on security over the years has not served to reduce crime.

Wrong approach
This to me implies that there is something seriously wrong with the way we have approached the creation of budgets over the years. It seems to me that the problem we have had with the crafting of budgets had more to do with the philosophical approach rather than the amount of money we allocated to one project or another. The last time we have seen any respectable growth level was in 1990, when growth was at 5.5%. Since then we have been lucky to see growth in excess of 2%, even while we have budgeted (and spent) significant increases on security and education, and imposed significant tax packages on the Jamaican people. The result of all of this has been more hardships, higher crime rates, and no growth.

It seems to me therefore that there was something philosophically wrong with our budget approach. The fact is that our budgets were focused on controlling expenditure and paying off the debt. For a very long time budgets have not been focused on creating a platform for growth, which is the only way that we will get out of this now $1 Trillion debt level that Jamaica is burdened with. Increasing expenditure on security, education, and health by itself will not provide us with the platform needed for growth.

In any event this criticism of whether the budget is realistic or not is more an attack on the technocrats, who were the main architects of the budget rather than the politicians who really just set the framework for what the budget should look like. This is the difference between operations and policy. The latter is responsible for setting direction, and the former for making recommendations about that direction.

This I think is at the heart of the difference between the two approaches to the budget. The opposition spokesman on finance has chided the finance minister for an unrealistic budget. This is an attack on the same technocrats he worked with in preparing past budgets rather than on the finance minister. The fact is that the finance minister would be the one who would set the course but the technocrats would sail the ship.

Therefore any criticism of the finance minister should have been on the philosophical direction of the budget rather than (1) the amount of money allocated to ministries, which would have been submitted by the various departments; and (2) the level of inflation and growth, which would have been provided by the technocrats responsible for projections. I am therefore yet to see any constructive criticism of the real essence of the finance minister’s responsibility which is the philosophical approach of the budget.

A foundation for growth
The fact is that this year’s budget is fundamentally different in its approach in that it seeks to lay a foundation for growing an economy rather than just seeing how much more we can tax Jamaicans to pay debt or how much more expenditures can be increased, e.g. road infrastructure where the massive amounts spent in the past seems to have been spent incorrectly as the quality of the roads fixed only a few years ago leave little to be desired.

The budget this year addresses some fundamental issues that were not much of a concern in the past, which centre on preparing the Jamaican economy for growth, which is the essential ingredient that we have lacked over the years. This can be seen from a few initiatives such as:

1) Tax amnesty programme that seeks to formalize the informal players. It seems as if the only thing we have done in the past about the informal sector is to brag about how large it is;

2) A symbolic gesture to the taxpayers of this country that more money will be placed in their hands for expenditure – reduction in transfer taxes/stamp duty and an increase of the threshold. Although small this is a move in the right direction;

3) A desire to spend within our means and bring efficiency to the use of funds – so that budgets are not just increased for the sake of spending more money this year over last but a targeted approach is taken to spending and reducing the burden of loss making entities on Jamaicans such as Air Jamaica;

4) An emphasis on encouraging lower oil consumption – the increased taxes on motor vehicles should be seen as an encouragement for people to curb spending on a severely escalating energy bill. What we need to ensure now is that through the JUTC a very efficient public transportation system is provided; and

5) Addressing the cost of tobacco on our health system by taxing this nuisance more so that more money will be available for persons who fall ill as a result of this scourge.

This I think is the difference in the approach to the budget, and what should be highlighted. It is not just about how much more money is spent this year over last. But rather how will I more properly spend the money that the Jamaican tax payer has worked so hard to pay. It is not about how will I increase tax revenues this year above inflation levels, but rather what uncollected taxes are out there to be paid and what do I have to do to collect it and level the playing field. It is not just about raising taxes to raise money to pay debt but rather how to use taxes as a means to drive behaviour and encourage growth. It is not just a matter of borrowing money to finance the budget but rather putting debt to work productively.

I do agree with Omar Davies that the greatest challenge this year will be that of food security and is a matter that must be addressed going forward. The government has shown its commitment to addressing this by allocating $1 Billion for subsidy support his year, following on the $500 million last year, which I will admit came too late. We could successfully argue that it is not enough but a time must come when we start to live within our means. The way we approach this will be critical for Jamaicans and the contribution of the Agriculture Minister will be very important in solving this looming crisis.

Even this situation will demonstrate that it is not how much money that is thrown at it that is important but the approach to solving the problems of the country. To continue on the path of just cutting expenditure or throwing money at problems would have had us continue on a road to certain destruction.

The loss of thought

While growing up, I have always heard people say that the younger generation does not solve problems as well as the older generation had. This is something I have found myself saying, as it seems that our ability to solve problems just keep getting worse with each passing year. On the other hand economies such as the US seem to be getting better at resolving issues, and a prime example of this is the way they have dealt with the current subprime crisis compared to the way in which Jamaica handled the 1990s financial crisis. I will not delve into this comparison, however, as I have exhausted this comparison at a lecture I did last week and have some amount of fatigue from that. But I use this as a real example to show the distinction between how we deal with problems versus the rest of the world.

Growth deficiency
And this is the reason why in 45 years (1962 to 2007) we were able to grow at only an accumulated 97.7% or an average of only 2.17% for each of those years. What is even more frightening is that 1962 to 1972 accounted for some 69% of that, so that over the last 35 years we have managed to grow an accumulated 28.7%, or an average of 0.82% each of those 35 years. When broken down into decades we see the following comparisons:

- 1962 to 1971 - 69.0%
- 1972 to 1981 - ( 9.0%)
- 1982 to 1991 - 18.5%
- 1992 to 2001 - 9.5%
- 2002 to 2007 - 9.7%

This if course is the underlying economic problem that Jamaica has, and there is a fundamental reason for this problem. But the reason is not to be found in numbers but rather in behaviour and more importantly the type of leadership that we have had at the helm of this country.

When one examines our leadership, and the statement that each generation thinks less, one would see that the statement is not entirely true. It is true that younger persons do read less and generally do not reason as well as their older counterparts but this has more to do I think with the leadership that has destroyed the learning institutions in this country. Just as we export goods the same way today as we did 30 years ago, it is the same way that we seek to teach children to learn the in the same way they did 30 years ago. And all of this in a world that has changed in a very revolutionary way.

If one examines the leadership in this country over the years then you will see that there was a fundamental change in the leadership structure coming out of the 1960s but since the 1970s until now we have fundamentally maintained the same leadership structure. Now we are seeing another round of fundamental change in our leadership structure over the past two years or so, and those that have been part of the structure that has caused our dismal growth record over the past 35 years need to stay away and allow the new leadership to take charge and delver to us what they could not.

This leadership problem of course has resulted significantly from the fact that over the years we have appointed persons to leadership positions based on their political allegiance rather than their ability to think and solve problems. And this is not only at the political level but also the administrative level. This attitude has resulted in a cadre of leadership that is unable to think past the length of their noses when taking decisions, so the long term effect of decisions are not carefully thought out. So while the decision may resolve the current situation, in the long term it creates havoc. Such was the effect of the decision surrounding the 1990s financial crisis.

Monopolistic threat
But more recently I see where the Broadcasting Commission seems to be falling into that category also. There are two decisions they have made that really seems very short sighted and leaves me no option but to question how well they think about what they are doing, as both seems to me to be a question of solving short term problems and to heck with the longer term effects.

The first has to do with the cavalier way with which they dismissed the question of a possible monopoly developing in the cable market. This has nothing to do with the acquisition of their latest kill, Entertainment Systems, but the very real possibility of a monopoly developing in that market. I myself am a customer of FLOW but would love the option to switch to any other competitor in the market place if I feel the need, especially as I believe that their customer service has been consistently deteriorating. The Broadcasting Commission seems to be forgetting the “not too far in the past” monopoly position of Cable and Wireless, that has constantly proven itself to be a very inflexible monolithic structure.

By the looks of the persons on the commission they do not seem young enough not to remember the days of the single land line and cellular service from Cable and Wireless where they held us Jamaicans to ransom by “phone point” and extracted every dollar they could from us. Thank God for Digicel that rode in and saved us from the Cable and Wireless monstrosity, even though their own customer service has deteriorated, demonstrating the need for constantly having new entrants.

Similarly if the commission does not carefully monitor the FLOW situation then we could end up with a situation where the smaller players are forced out of the market and we could end up in a JPS type relationship. But being the forward thinkers they are they seemed to have dismissed this matter where as in the US it would have been a matter of public debate led by the regulators, as the consumer is always given precedence to the preferences of the corporation.

Instead they have sought to focus on some comments made by a radio personality, which nothing is wrong with, but have recommended the drastic action of suspending the radio station’s licence. I can only conclude that they must be mixing up the two cases and really meant to take drastic action in the FLOW case and not the latter one, as it would seem to me that they have confused the long term effect of both. In the case of the radio station they are sending a clear signal to the market that they can suspend freedom of the press at any time they so desire.

When, for example, Imus made his racial comments on US television was their a call for the lock down of the television station or disciplinary matters against Imus. The commission needs to be careful about the solutions they recommend else they could end up losing more credibility than they already have.

On the other hand they must be wary of the monopolization of the cable industry. Already I do not believe that we have enough competition in the market, and we have seen the benefits of competition in the cellular market. This is a prime example of the lack of clear thinking that has affected our development and growth over the years and especially in the last 35, which has resulted from a leadership deficiency.

America’s accounting recession

Last September I wrote an article entitled “Accounting side of sub prime”, as it was evident from that time that the real problem with the sub prime crisis in the US is one of accounting, and not economics. And this could in fact be a reason supporting the fact that the other major economies seem not be to be suffering as much from the credit squeeze in the US, as the underlying cause was not initially economics. At the time I stated that because of the accounting rules being used by the US, the sub prime crisis would deepen because they were not, and still are not, aware of what the full extent of the problem was/is. Initial estimates were that the total sub prime write off would be US$60 Billion and now it is being touted as over US$300 Billion.

Goldman Sachs in reporting its last results (1 ½ weeks ago) stated very importantly that they have always believed in “marking to market” their securities. Thus they have not been affected by the problem facing other financial institutions, such as the now defunct Bear Stearns, which “marked to model” and therefore became stuck with instruments that they have no idea what the real value is.

Underlying problem
This is the underlying problem of the sub prime crisis that continues to cause a tail spin in global financial markets, and is the cause of global inflation and global growth slow down. America is truly great. They not only caused the world pain by invading Iraq, but also had to create a global financial crisis by first of all being irresponsible with risk management practices, and secondly compounding this by wide monetary policy swings in the form of interest rates.

It is no secret that the current recession in the US is “made in America”, as it was the quick moves up and down in interest rates that caused the problem in the first place, and then the delayed action by the Bernananke led Fed that put the final nail in the coffin. So the US messes up and we all suffer.

But at a micro level the real problem is that the US’s rules based accounting means that financial institutions were allowed to mark to mythical model (self created) rather than value their instruments at what the market says they are worth. Similarly, the same accounting rules allowed events such as Enron and WorldCom to happen. The global accounting agenda should see some convergence taking place between US GAAP and IFRS come 2009, and my fervent hope is that it will be more like an acquisition of US GAAP by IFRS rather than a merger. We need to take what is good from their standards and incorporate it into ours.

So the effect of all this risk management is that global economies are being affected by higher inflation, and slow down in economic growth caused by reduced consumption patterns. The fact is that people in the US are seeing their wealth plummet because of a falling stock market and house prices. The weaker US dollar has also caused massive increases in prices of commodities such as corn, wheat, gold, and oil, which has resulted in significant inflationary pressures. This has occurred because the US dollar is a reserve currency. Hence a fall in the US dollar has seen investors buying commodities such as gold and oil to maintain the real value of their investments, while fleeing the weakening US dollar.

This fall off in US dollar has been caused by the change in relative interest rates. What drives currency values is interest rate expectations by investors, so as the expectation (followed by action) is that interest rates will fall in the US, and at the same time as interest rates in countries such as Australia and Europe rise or remain stable, then the spread between the US and these other rates become wider. As we all know, the return on money is interest, and so if the interest one can get from the Euro is higher than that on the US dollar then investors will buy the Euro and sell the US dollar. The result is that the price of the US dollar relative to the Euro depreciates, causing the weakening US dollar.

Consideration of risks
The reason for the Fed decreasing interest rates is to create more liquidity by providing cheaper money to the market, and thus encourage greater spending and investment to spur economic growth. Thus as long as the US economy is seen to be at great risk then the Fed will continue to decrease interest rates and the value of the US dollar will fall, followed by an increase in oil and gold fueled by greater speculative demand.

The decision of whether to decrease, increase, or keep interest rates stable is determined by whether the Fed believes that there is a greater risk to the consumer from a weaker economy or higher inflation. The irony is that as interest rates come down, and more cash is in the system then it means more spending that drives inflation. The Fed must therefore consider all economic data, for example inflation and housing sales, to determine whether to increase or decrease rates.

The important barometer for the Fed’s next move will be what happens with the financial institutions. If there is threat of another Bear Stearns then they most certainly will move rates lower. If the institutions show sign of stability, or increased profits however, they will either hold rates stable or increase, depending on the strength of the economic data. So this is the decision that the Fed faces, and to get an indication of what will happen globally then one only needs to look at the economic data coming out of the various countries.

The latest interest rate reduction, and provision of liquidity, seems to have temporarily stabilized the markets. The next three to four weeks will indicate whether it has worked to permanently, and this all depends on the value of the sub prime instruments. If house prices continue to fall then this could negatively affect the perception of the value of these instruments, which would imply further write downs and possibly another Bear Stearns. If house prices stabilize then this would be good for the US dollar and the global market. The difficulty is because there is no market to value the securities then the uncertainty of where the bottom is will drive the US dollar and equity markets lower. This uncertainty is caused primarily because the securities were not being marked to market.

In fact the real US economy, where companies sell tangible products, such as technology, food, etc. is not doing badly, and companies such as Pepsi and Apple are awash with cash. So the US does not have a problem with the economy, as the companies in the real economy are still doing well, with the exception of discretionary expenditures such as retail and autos, as consumer purchasing power is affected. The prayer for countries like Jamaica is that house prices will begin to stabilize but analysts are expecting housing prices to go down at least until June 2008, so let’s hope they are wrong.

I have heard some compare the “US accounting recession” to our own 1990s meltdown, and in some ways they are similar, especially with some calling for a bail out by the US government.
There are many others who are warning against a bail out, however, and it seems that they may eventually win. In any event the intervention by the Fed thus far into the Bear Stearns situation is of a different complexion from the way we approached the 1990s meltdown, which makes the difference in the after event, which will be the subject of a presentation I will today.

Where will oil go?

Over the past couple of weeks the media has in large part ignored the most important threat to Jamaica today for a soap opera type event. The most important threat of course being the price of oil and the soap opera event the arrest of Kern Spencer. As far as I am concerned the arrest and charge of Kern Spencer, and his colleagues, should merely be mentioned and left to the court to determine their innocence or guilt, which is really of no consequence to mention repeatedly in the form that it is being continuously carried.

To be fair though the media is just reflecting news that they think will sell and the deep interest in this is really a reflection of Jamaicans desire for gossip instead of the real challenges that face us. Even in the reporting of the “soap opera” we have ignored the substantive points for the more superficial news, while seeming to forget that the real lesson from this is the need for accountability of politicians and the public sector rather than presuming guilt in a system that is known to have made “Bob Woolmer” type announcements.

So for me the most important debate that we should be having today is what will happen to the price of oil and consequently Jamaica, and not the role playing of the PNP in the “Silence of the Lambs” Light Bulb Scandal. The oil threat is something I wrote about again just two weeks ago and will continue to do so to try and encourage the much needed debate on this subject that will affect Jamaica’s fiscal accounts, balance of payments, inflation, and the life of every ordinary Jamaican.

Record oil prices
Last Thursday oil hit a record high of US$105.72 per barrel (at the time of writing) and by all indications is set to rise further. I had indicated that it was expected to go to between US$110 to US$120 per barrel by April/May 2008 and at the current rate could very well get there before then. What is even of more fundamental importance is that the analysts are now positing that there may be some fundamental demand problem, and not just the previous speculative pressure that was being touted. This is significant as if there is a demand problem causing the price to increase then it means that this is a greater support for oil prices to rise than any speculative reason.

There is no doubt that if something is not done to check the consumption of oil in Jamaica that we could soon be faced with a US$3 Billion bill annually. The NYMEX Crude Oil Futures chart shows the upward trend of the price of oil since March 1, 2007 when it was around US$62 per barrel to its present level of over US$105 per barrel. This is an increase of over 2/3, or 67%, in one year. If Jamaica, or any country, had inflation of 67% in one year we can just imagine the devastation to every day economic life.

What is even more important is the trend that is illustrated in the chart. The 90 degree line, labeled R, is the up trend support line, which shows that the price of oil is definitely trending up. For there to be a convincing start to a down turn in the price of oil, it would have to fall below this trend line support, which would mean a fall below the US$88 to US$90 per barrel, at current prices. But of some significance supporting the up trend argument also is that oil has consistently broken though key resistance levels, consistently making new highs. As long as new highs are being achieved then there is little hope of any reversal. The first major resistance it broke through was around October 2007 when it passed US$88 per barrel (S2) and secondly in February 2008 when it passed US$100 (S1) per barrel.

What we have to look for to determine if the up trend is weakening is if the next move up to another major resistance level is at the same rate, and of the same size as the move between US$88 and US$100. In other words, it took four months to move from US$88 to break through US$100, and it was a move of US$12 per barrel. If it takes us six months to move from US$100 to US$110, then this would be an indication that the trend could be slowing and could mean that demand for oil at the higher price is becoming less as consumers adjust their consumption patterns.

Immediate fiscal policies
All indications though are that in the near term there is a strong up trend, which means that unless there is some increase in supply or drastic reduction in demand then the price will continue to move up. The evidence is also pointing to the fact that the US economy will continue to weaken into the second quarter, which means that the pressure will be maintained for the price of oil to continue its upward trend.

If the price grows at the same rate then we would be looking at US$110 per barrel by April 2008 and US$120 by June 2008. This would mean that for the six months oil would be averaging over US$100 per barrel. This is quite significant for Jamaica and will certainly have some amount of inflationary pressures, in addition to the other imported inflation we are experiencing. For oil prices to show any significant move down it will first have to go down past the current major support level now of US$100 (S2) and then break the uptrend support line (R) before closing below US$88.

The implication for Jamaica is that immediate fiscal policies are needed to address this fundamental threat, as longer term energy solutions, such as alternate energy sources may be too little too late. Even the more immediate alternate energy possibility of solar energy in homes and businesses would take time to implement any support and the equipment itself. This means that the greatest benefits will only come from fiscal policies to drastically curb consumption.
In the mean time I expect that the US economy will continue to weaken and the interest rate reductions by the Fed will not have any effect short term effect on the causes of the underlying weakness. If the Fed had significantly reduced rates six months ago that would have been a different story but they have waited too long, and so consumer demand has been affected. This is what could happen to Jamaica’s economy is we wait too long to curb our energy consumption patterns, as economics is as much about timing as it is about behaviour.

Oil: still Jamaica’s main external threat

On July 29th 2006 my article was titled “Oil: Jamaica’s main external threat”. That situation has not changed, thanks to nothing being done to reduce our dependency on fossil fuels. In fact approximately 96% of our almost 75,000 barrels imported daily (27.4 Million barrels annually) comes from fossil fuels, or oil. At that time oil had climbed to US$78 per barrel, and last Wednesday it closed above US$100 per barrel for the second day running, and in fact passed US$101 per barrel during the trading day. Projections are rife that it could go to between US$110 to US$130 per barrel by April/May 2008.

The chart shows the movement of oil on a weekly basis, and in fact shows that prior to this week it was trading in a range, between US$87 and US$100 per barrel. What’s more it shows that oil prices have been on an up trend and the breakout from the range above the resistance level is not a good indication. A break above resistance (uncharted territory) implies that the price could keep going up. There is no history to show what the next resistance price might be and therefore what will stop the price of oil are really the sentiments of traders.

Weak US economy
What is clear though is that the higher oil price is being driven by a weakening US dollar, which will probably remain weak until the third quarter of this year. Many expect that the Fed will continue to cut rates in the short term, which will help to keep the US dollar weak. In addition the probability of a recession has increased, with at least one Fed chairman saying that a recession is very likely. My own view, and that of others, is that the US may already be in a recession and the data will soon catch up. Even if the US is not a recession, however, it is clear that the economy is very weak, as consumers are already cutting back significantly on discretionary spending in the US.

What all of this means though is that Jamaica, and the world, will continue to be affected by high oil and commodity prices. In short the whole world, and not just Jamaica, is being significantly affected by increasing inflation as a result of the weakness in the US economy. The global expansion, of recent years, that we have failed to take advantage of, is over and the world is entering the down trend of the economic cycle. This downturn, in my opinion, was unnecessary though and resulted from the interest rate policies pursued by Greenspan in the first instance and the drastic change implemented by Bernanke. One of the surest ways for oil prices to come down is either from US dollar strengthen or the price of oil is denominated in another currency, for example the Euro.

I believe however that the US dollar will eventually strengthen in relation to other currencies, not because the US economy will strengthen but because other economies will begin to weaken. This should help to ease the price of oil, but even so the average price for this year will still be significantly above last year. This of course means that we cannot become complacent, and do nothing much, as we have done from the writing of the energy policy in 2004. We have to reduce significantly our dependency on oil. The US and China, for example, both use coal for 50% and 60% respectively of their fuel needs. They have money; we don’t.

Effect on Jamaica
To illustrate the negative effect oil has on Jamaica, we use approximately 27.4 million barrels per year. When oil is at $101 per barrel it translates to an annual oil import bill of US$2.8 billion (J$197.7 billion), or 28% of approximate GDP of J$700 billion. So almost 30% of what we produce is spent on oil. If we could manage to implement policies to save even 15%, then we would realize an annual savings of J$29.7 billion. I am positive that many Jamaicans could find a lot of things to do with that money. We would have more money to pump into education and security, as companies would make greater profits and the government would get more taxes.

What this means to me is that a significant part of our “energy” should be focused on reducing “energy” from oil. We are of course very late in implementing policies, but must do so expeditiously. The management of funds in this country has sometimes appeared to be similar to that of a bookkeeper who seeks to increase profits, not by adding value, but by cutting costs. We have to look at value added not just from the point of view of cost reductions but also from spending where the returns are the greatest. Suppose for example that we had put J$700 million per annum for the last 5 years in developing an efficient transportation system. We could possibly have a transportation system reliable enough so that people would be willing to leave their cars at home.

When you consider that approximately 30% of our oil bill is spent on transportation, even a 20% savings would be significant. Suppose also we had loaned interest free money through the NHT to homeowners to implement solar equipment. We could realize a significant savings on retail electricity use, which would also accrue significant savings, even though the JPS might not be happy. Not to mention if we had made the proper investments in alternative energy sources such as coal, or wind technology, instead of just talking about LNG. We would be quite relaxed while oil prices are rising. My own personal opinion is that LNG is not the right choice, but that’s for another time.

The point though is that our current oil crisis is as a result of us not making the move to act on the threat we were well aware of. It seems as if we will have to get used to high oil prices though, as it is going to plague us for a while, even if it goes below US$100 per barrel. What this means is that we must put in place the necessary fiscal policies to address this ever growing threat.

Only results matter

When I was thinking about this article two experiences came to mind that were informative of the way us Jamaicans think. The first was over ten years ago when a well respected retired public servant said to me, “when you introduce someone to me, I am not interested in his title, as the title and position can go away but the man is always present”. In other words it is the integrity and character of the man that is most important and not the position he holds.

The other is when my son was relating an incident to me, about a year ago, when he was at a school concert where the DJ Busy Signal was performing and some other students were jumping to his performance. My son went to them and asked what he said, after he introduced himself on stage, because he was reeling off the lyrics very fast. The response was “we don’t know but it sounds good”.

Jamaican culture
Both incidents illustrate the psyche of the Jamaican mind. Our culture is one where form is of greater importance than substance. So when you look at the Jamaican roads and compare it to Trinidad you see much more expensive cars, unlike in Trinidad where factories and businesses are as prominent as the cars we drive. Never mind that they are growing at rates of 9% per annum, and produce oil, while we are struggling to get to 2%, even in the best of times, and can hardly afford to pay our energy bill. We are suffering but we look good.

It is also instructive how we decorate many with CD’s and OJ’s, supposedly for the service they have provided to this country, and many have done well, but after 45 years of independence where are we. We are always much more concerned with the plan than the implementation. So when I was driving in from the North Coast over the weekend, on approaching Spanish Town, I looked up at the gadget that clocks your speed as you approach, to check how fast I was going. Of course it wasn’t working because what was important was the political opportunity when it was being launched rather than the function it provided. And we can go on and on.

The important point though is that as a country we have to move from where we create the plans only, such as the many reports on crime and other commissions of inquiry we have produced. And this has been the way we have approached crime solving over the years. We have produced many reports that tell us what the reasons for crime are, and have held many expensive functions to launch and celebrate the writers of the reports. We have even created special “crime” squads within the police force with great panache. But in the end crime has always escalated, as if all our efforts in the past were to spur on rather than inhibit the crime figures.

The new commissioner, Lewin, is taking a very practical approach to dealing with this crime monster, which people like me have been suggesting for a very long time. The approach is one of dealing first and foremost with discipline on the roads, in the society and within the police force. It is obvious that he has launched an assault on road indiscipline and the blaring night noises that some feel they have a right to impose on others. He has also taken a practical approach to policing, which is to get them patrolling on the roads, instead of sitting in police stations that we can’t afford to properly maintain anyway. It is more important to see the police on the roads than have a police station up the road. After all it is the police that solve the crime and not the building. So once again I encourage the security minister to keep peeling away at the apple rather than take a big bite only to find out that you have taken a chunk out of the worm.

Missing approach
This approach of properly focusing on getting results is what we have been missing as a country. Even though we have always been seeing declining productivity, aneamic growth, escalating debt, annual fiscal deficits, and slowing investments, we are always applauding the efforts and approach of those responsible. So tell me if the results are not forthcoming doesn’t it mean that there is something wrong with the approach. This lack of logic amongst some of our leaders (public and private sector) has always confused me. I mean why do we always seem to celebrate plans but fail to look at the results. It’s as if the “nine-day wonder” is not only just about scandals but everything, as after nine days we seem to forget what the goals were. I am convinced that we need to check the quality of the water from the National Water Commission, as this must be affecting us.

I remember a few years ago while we were having a significant public debate about the quality of our education system (which faded like everything else) that there was a discussion around pay for performance for teachers. Whatever happened to that concept? The teachers seemed to reduce their wage demands after this concept was introduced. I hope not fearing that they would not be able to meet the standards. But isn’t this something that we should be looking at. The argument was that it was difficult to measure the performance. Well if it is difficult to measure the output of the education system then those responsible may need some education themselves.

But certainly we need to move to a culture where we are measuring results and not just discussing the objectives. As an example, the growth projections since 2002 have, for the most part, been far from met, as shown in the table.
If we were to even go back further then it would be the same pattern, where we would see missed fiscal and growth targets. It is the failure to measure ourselves against initial targets that have helped to keep us where we are. And if we were to measure ourselves against our international competitors, even much smaller states, then it would be worse.

So the decision that we all face is, do we intend to go on ignoring targets and constantly making excuses for not meeting them. The common thing is that when targets are not met we give an excuse as to why, such as higher than expected salary increases. Never worry that salary increases is something that is for the most part within our control. It sounds good as an excuse so we will use it. Then after not meeting our targets we go on to set the same unrealistic ones we did the year before, even though the conditions that caused us not to meet the initial targets have not changed or have worsened. If we continue to set ambitious targets then all will be well.

This is a culture that we must change if we are to move forward. If we continue to operate as we always have then we will continue living in “la-la-land”, while our international competitors face the real challenges, analyze performance against initial targets and eventually do better than us.

Governance and growth

The recent Contractor General’s report on the “light bulb scandal” brings to mind the very important issue of governance. Over the past few years, Jamaica has been plagued with many governance issues in the political arena. We remember when the PNP government came to power in 1989, shortly thereafter JAG Smith was sent to prison for impropriety in the farm workers fund. This was the first time a former government Minister was imprisoned for misuse of funds.

From the 1990s to present we had reports on issues such as the Shell Waiver, NSWMA, Operation Pride, Intec Fund, Cement Crisis, Trafigura, etc. All in their own right costing Jamaica billions of dollars, not just directly but in lost opportunities. The “light bulb scandal” is nothing more than a continuation of the poor governance that has plagued this country and caused us untold amounts of damage to our economy. If we are serious about halting this trend then it is important that the allegations made by the Contractor General be properly investigated and the appropriate action taken. When referring to these “scandals’ it is always important for proper investigations to be done, as the associated parties could very well be innocent and it is important not to write off someone based on just an allegation.

Poor governance
The fact though that so many of these allegations come to the fore consistently is evidence of the fact of the poor governance that this country has seen since independence. And it will continue because successive governments have failed to put the necessary controls in place to ensure that this type of mismanagement of funds is difficult. This, I am convinced, is a primary problem for the aneamic growth rates, and decline of social standards, that Jamaica has always experienced.

Growth is stymied because the poor governance we have mad almost certainly ensures that the country’s resources are not used in the most efficient manner. So what happens is that the money we earn or borrow is spent without a return being generated on those funds, and the markets stop operating efficiently. In addition because our leaders are responsible for this type of behaviour it sends a signal to the youth that this type of behaviour is acceptable, and could be a reason why young politicians, and their followers, do not see anything wrong about flouting controls. The result is that we create a second tier leadership that carries on with the same behaviour patterns they have learned from the older leaders. This is supported by the allegations made by the Contractor General of the flagrant way in which the contracts were distributed, showing little concern for any appearance of legitimacy, if these charges are true.

Governance concerns are not just an issue in governments, however. And it is not just a concern in Jamaica. For example in the USA we remember the incidents of Enron and WorldCom, and we also remember cases of politicians brought up on charges of using public assets (such as airplanes) for private purposes. The difference between the USA and Jamaica is that when it happens in the USA it becomes of major public concern and is dealt with in a timely manner.

In the case of Jamaica, however, we find that governance issues, such as the banks during the FINSAC era, Trafigura, Dyoll etc., arise and it seems as if they are never brought to an end. Even today, after years and costing the country billions of dollars in debt and lost growth opportunities, there is still no resolution to the banking crisis in the 1990s. Even if there are then the public is not made aware of the final outcome so there is no learning.

UTECH auditors
One recent governance issue that had me concerned also was the matter of the suspension of the internal audit staff from UTECH. One source informs me that the internal auditors were sent on leave by the management and not the council. If this is the case then it should be of major concern not only to the Internal Auditors Association and the Institute of Chartered Accountants, but also the PSOJ, JCC, and everyone concerned about proper governance.

My reason for saying this is that internal auditors are supposed to answer only to the board of directors (UTECH Council) and not management. This line of reporting is necessary to ensure the independence of the internal auditors so that they can carry on their duties without fear of any backlash from management, whom they are supposed to ensure operate within the internal controls of the organization. When internal auditors are sent on leave based on suspicion only then this is a serious governance issue and all well thinking organizations should be concerned about the message that this is sending to the society.

The report on this incident indicates that the report was distributed to all members of council, as well as other parties. The leaking of the report is a serious breach of trust and I hope that when the matter is fully investigated that strong action is taken against whoever was the source of the leak. But it is important that the matter be investigated properly before any drastic action is taken. Even though the internal auditors were subsequently reinstated, it would be very interesting to understand what their state of mind is now when approaching any future investigations, if it is possible for them to be sent on leave and then reinstated, just based on a suspicion.

What is even of greater concern is that UTECH is an institution of learning, which no doubt would teach their students about the necessity of independence of internal auditors as a necessary ingredient for proper governance. This would be the case of “do what I say and not what I do” and I trust that UTECH will make a statement to clear up this issue, as I do not believe that the allegations made against UTECH could be so.

If we are to move this country forward though it is going to be necessary that good governance prevails. It is important for us to understand also that the main issues of governance are not to do with politicians. It is not politicians that run countries, but boards of public bodies, and the public sector. If we change our politicians each year and never address the sectoral level of management then we will always have the same result. So the low growth rates, and underachievement, that we have seen in this country has a lot to do with the management by boards and the public sector, as it is very difficult for any politician to make changes without their cooperation.

The fact is that many politicians in the past have appointed people to manage public bodies, based on friendship rather than competence, and it has resulted in not only them looking bad but also Jamaica suffering from the mismanagement. But I guess reputation has never been a consideration for some persons, as they rely on the “nine day wonder” phenomenon.
It is important for us to remember then that if a country, or company, is to realize its full potential then proper governance is going to be necessary for maximum growth. Proper governance ensures that returns are maximized, and is the only way that we can increase productivity and eventually compete effectively on the world stage.