Creating a reward system for economic progress

Over the past few weeks, Jamaica has been grappling with the issues of a credit rating downgrade, a fragile fiscal situation, and a reported 3.9 per cent decline in the economy. The GDP numbers show that the only sector that has shown any positive signs of worth is agriculture.

On the other hand the benefits of the economic contraction we are facing are manifest in a stable foreign exchange rate, low inflation, and the ability to reduce interest rates given the contracting demand in the economy. In other words, the economic contraction has provided the country with a clean slate on which to draw a new design for the economy.

In order to create this new design though, we are going to have to sit down and carefully determine where we want to go and what the best options are to get there. We also have to remember that an economy is made up of individual players, who contribute to the macroeconomic numbers we love to bandy about, and create a system of reward that will encourage the type of economic behaviour we need to drive the economy forward.

This need to chart a new course for Jamaica is the most important task facing the country's policymakers now. The global crisis has provided us with that opportunity and if we mess it up this time, the consequences will be dire. It is therefore very important that we not only have all hands on deck, but that a team is constructed that will have nothing else to do, but chart the economic course for Jamaica. This must be the only job of the team, with no distractions of any other office.

SWOT analysis

In order to determine what plans are needed for Jamaica's progress, we have to approach it like any company that is involved in a strategic retreat. We first have to take a hard look at what Jamaica's long term objectives are and what is the vision we want to achieve, like the 2030 mission statement of making Jamaica the choice place to live and raise families.

After we have very carefully determined what our strategic objectives are, we should go about looking at a 'SWOT analysis' for the country, that is the Strengths, Weaknesses, Opportunities, and Threats that must be considered to achieve the defined vision.

We would, of course, seek to exploit the strengths and opportunities and put policies in place to eliminate the weaknesses and threats. As an example, how do we benefit from the opportunities in the fields of music and sports and how do we eliminate the threats presented by low literacy, onerous bureaucracy, and the abuse of our citizens? In the case of the Armadale inquiry for example, one logical outcome must be that those who were responsible for the horrific treatment meted out to the wards are held accountable for their actions as would be done in any self-respecting country.

This SWOT analysis would allow us to then plan the specific strategies we need to implement in the short, medium, and long terms. It would also allow us to determine which resources we will need to meet those strategic objectives and how best to spend those resources. Without this clear plan as to how we need to move forward as a country, we will continue to grope in the dark, shooting aimlessly at any obstacle that comes in our way without being sure whether it is a real target or a decoy.

For example, the biggest long-term problem we face as a country is production and productivity, which manifests itself in the balance of payments. The immediate short-term problem we face, however, is the fiscal problem, and the fact remains if we do not address this short-term problem we will not have the wherewithal to deal with the longer-term one. It is therefore very important that we understand what needs to be done in the short term and what the dependencies are. Without a proper understanding of this relationship we will only continue the downward spiral the country has found itself in since the 1970s.

Incentivising economic progress

But how do we ensure that the individual behaviour we seek to encourage finds its way into positive economic development-type behaviour patterns? At the heart of this is determining what the role of government is from the role of the market economy. I have always publicly stated my preference for the market economy as the main allocation method for economic resources.

The public sector bureaucracy has been too involved in determining the allocation of our scarce economic resources, which is one of the reasons for our lack of economic development. Examples include the takeover of private companies during the FINSAC era, the allocation of some of our best farmlands to sugar, and the allocation of scarce tax resources to prop up unprofitable public sector entities. All these experiences helped create a situation where we have to bear the high cost of inefficient resource allocation in the high interest rates we have been paying since the 1990s.

The question many would have is, that being the case, why wouldn't we have experienced high interest rates before the 1990s, when the government was always trying to allocate resources based on political and other non-economic considerations? The answer to that question is that prior to the 1990s Jamaica had a closed economy and was therefore protected from global competition. One consequence of this was foreign exchange restrictions. It is therefore more important now than ever that the market be used as the primary means of allocating resources.

The role of government therefore must be to create the incentives to push the market in the direction where we want it to move. The design of these incentives cannot be managed by bureaucrats and special interest groups sitting in a room by themselves to determine what is best for the country. It must be a very deliberate planning approach by a team of professionals, with no special interest employed by the government, and must be carefully looked over by the government and aligned with the country's strategic objectives based on the SWOT analysis.

This will of course mean understanding what sectors we truly have a comparative advantage in, rather than those we get aid from like sugar, and being aware of the main challenges facing the country. Coming out of this process, the government should then objectively create the incentives needed to encourage market behaviour towards economic progress. A failure to do so will mean a continuation along the path we have taken for the past three decades.

Are Jamaica's economic problems also social

The Bank of Jamaica governor recently held his quarterly press briefing and pointed to developments in the economy, which, although not promising, are vulnerabilities that we can take advantage of. The governor stated, as expected, that the economy declined by 3.5 per cent to 4.5 per cent for the last quarter and that the exchange rate is stable, inflation remains relatively low, and interest rates have declined.

These factors are not unexpected, and in fact is what I believed would happen in the economy. This is a natural effect of capacity leaving the economy. The fact is that Jamaica's economy, since the 1970s, has been propped up by debt. The increasing dependence on debt began in the 1970s and continued to the mid-1980s when the debt/GDP ratio rose to as high as 212 per cent. It then declined, as a result of the much higher growth levels being experienced, to 90 per cent in 1990. Since that time the debt/GDP ratio has been on an uptrend.

What has happened is that, since last year, we have not been able to borrow to supplement our inadequate income. This has caused a reduction in the country's capacity, resulting in a slowdown of economic activity, as 72 per cent of our economy relies on imports. The reduced foreign exchange and reduced demand have subsequently resulted in a scale-back of business/economic activity. Because of this scale-back in activity the demand for foreign exchange has dwindled (resulting in a stable exchange rate), and inflation is low because there is a lot less money chasing the goods in the economy.

The positive signals we are seeing in the economy are not because of growth, but more so because of (i) a contraction in the economy; and (ii) stagflationary pressures.

The positive effect, though, is that this provides us with the perfect opportunity to realign our economic structure and start to move forward on the right footing. Caribbean Cement has made the appropriate adjustments and is now focusing more on the export market where the real growth opportunities are. There are many companies, however, that do not have the export opportunities available and by now should have gone into retreat and made decisions.

Given where we are now, what the country needs to do is take advantage of opportunities by putting into place policies that will encourage export-led growth rather than building back the structure as it was before. This means that policies must encourage agriculture, tourism, and small business more than any other sectors. Some businesses will die and this is a fact we must accept if we are going to make that fundamental paradigm shift. The advice to businesses that I have always given is to get a professional who understands projections and the economic realities to guide you through your deliberations. One person told me that they had a retreat with their management and staff to discuss the prospects and it didn't help. Well, if you strategise with the same people that helped you get to the situation you are in, what do you expect?

This brings me to what I think the fundamental problem with Jamaica is, and why our economic behaviour is not geared more towards productive activity. The fact is that macroeconomic outcomes are nothing more than the accumulation of individual effort at the micro level. Therefore, if the micro activities are not encouraged to act for the best economic outcome, then what do we expect at the macro level? The fact is that Jamaica's debt problem is represented by the number of persons who themselves seek debt for things like car and furniture purchases rather than business activity.

The problem that Jamaica has is therefore fundamentally social. We must always remember that economics is a social science, so that if the social behaviour is not geared towards productivity, then we cannot expect the macroeconomics to be okay. We need to address the social problems effectively, if we are going to deal with the fundamental economic problems.

The way we have always sought to deal with our economic problems is to either borrow money or tax people more. The result of borrowing, of course, is obvious, and when more and more taxes are piled on people this encourages counterproductive economic behaviour. By imposing more taxes, we find that the only way to keep the economy going is by borrowing money.

A few years ago, as an example, I was elected chairman of a strata, which at the time had an overdraft at the bank. When I looked at the challenges facing the strata it was mainly because (1) there were unnecessary costs; and (2) persons were not paying their maintenance fees. Increasing the fees would not have made a difference, under the same behaviour, as it would merely mean spending more money irresponsibly and, secondly, it would not fix the problem of delinquency. So what was needed was to change the behaviour of expenditure and delinquency. Over the three years of average inflation of 12 per cent per annum we increased the maintenance fees around 15 per cent. More importantly, we set about changing the behaviour. At the end of the day we were not well -liked but, three years later, I left the strata with over $1 million in the bank for capital development. Today, it is one of the best-maintained properties without question.

Similarly, in Jamaica we do not seek to change behaviour, but we expect different results. Over the years we have expected that there will be an improvement in crime, but fail to control even the traffic on the roads or even the noise at nights. I see the Commissioner trying to deal with it, but the many years of neglect and the ingrained social behaviour present a serious challenge.

Again, we lament the poor relationship between the police and citizens, but the police are always being accused of brutality. What is an even more frightening situation is that the police are being accused of preventing journalists from carrying out their jobs, and seeking to arrest them if they resist. This is a very dangerous development that we must stop, and if untrue then must be clearly proven not to be so by the police.

The way we organise our social relationships will determine our economic future. We cannot have a truly productive society if our social relationships do not encourage a focus on the type of behaviour that will develop into production and productive relationships. At the heart of this is the way we treat and develop our human resources, as any well-run company will tell you. If the people within an organisation or country are not respected, outcome will be dire.

While the country faces vulnerabilities, this is not necessarily bad as the structures that have broken down were not very secure in the first place. The economy must, by necessity, contract before it can start to grow properly, just as you have to demolish an old building before a new one can be built.
What is necessary now is to put in place policies that will fundamentally change our productive relationships. It starts with how our society is organised.

What are Jamaica's options?

While the country prepares for the IMF, another blow has been delivered in the form of an Independence Day (birthday) gift. Namely, Standard and Poor's (S&P) has downgraded us to CCC+, which it indicated earlier in the year it would have done if conditions did not improve.

So now that both the IMF and the S&P downgrade are here, what next for the country?

It is quite clear we face severe challenges as a result of the onslaught of the global crisis. These are illustrated in what I consider to be the country's "financial statements", the Balance of Payments (BOP) and the Fiscal Accounts. For anyone who was paying attention to the trend of these accounts it would have been clear that both the IMF and the S&P downgrade were inevitable, as any basic financial analysis would have shown the country trending to this position.

There are three indicators that would have been cause for concern, namely:

1. Since tracking the fiscal accounts the first three to six months of the fiscal year always show positive cash flows over budget;

2. Since the last published BOP numbers, oil prices have moved from just over US$30 per barrel to over US$71 per barrel. The implication of this of course is that our import bill will increase, while at the same time our exports have been declining; and

3. While there is a fall in imports (outside of oil), this is against the background of an economy where 72 per cent of our GDP output is based on imports for local consumption. The inevitable result of that as it shows in the GCT and SCT on imports (from the fiscal accounts) is a contraction in the economy.

So it is obvious that the 2009/2010 fiscal year is going to be a very challenging one, and for more reasons than just the fiscal out-turn. While many continue to espouse the "green shoots" in the global economy, they forget some very important factors as they relate to Jamaica. While I have always believed that the global economy will start to see a bottoming and a slow start to recovery come the last quarter of 2009, the fact is that the Jamaican economy will still continue to feel negative consequences for the following reasons:

. Initially the global recovery will be a jobless recovery. In fact the recent US earnings results and consumer confidence numbers are not as good as expected. Jamaica's main foreign exchange earner depends on jobs in the US and UK mainly. This means that even after recovery starts, alumina/bauxite and remittances in particular, and tourism to some extent, will still see a negative impact;

. Oil continues to be in an uptrend and as the US economy in particular starts to show increased recovery. There will be an increased demand for oil and the US dollar will continue to lose value internationally, sending up the price of oil (based on a cursory look at the charts oil could end up between US$90 and US$100 per barrel by the first quarter of 2010). The implication for Jamaica is increased imports in dollar terms;

. A declining US dollar will be bad for Jamaica, as our main foreign exchange earnings are in US dollars, so prices from places like China, Europe and Canada will increase; and

. The more fundamental factors are crime and bureaucracy. The fact is that the cost of crime and bureaucracy on Jamaican businesses is greater than even the cost of high interest rates and will negatively affect investments in the areas that will lead us out of the slump - agriculture and small businesses. The greatest benefit for future growth comes from solving these factors that are under our own control.

Two main areas of focus

The two main areas that we need to focus on are: (1) the Balance of Payments (BOP); and (2) the fiscal accounts. These require different actions, but if both areas can be brought under control then the fundamental paradigm shift required in the economy can be achieved with the least pain possible. It entails, however, taking the correct policy decisions that will drive the appropriate economic behaviour to favour reductions in both.

One of the calls that many seem to be saying today is "export or die". While that is commendable, it is a longer-term target, as if we wait on exports to pick up to save the economy then we will be in for a long, painful ride, as it takes time for businesses to get up to speed with exports. For example, although we have been seeing growth in the agriculture sector, this will not result in the increase in exports we need in the short term to deal effectively with the BOP challenge.

In order for the economy to realise the paradigm shift needed, it must first contract. The reason for this is because 72 per cent of our GDP output is based on imports for local consumption, while only 28 per cent is based on exports. This means that we need to see around 50 per cent of GDP value change from production for local consumption to exports in order for foreign exchange inflows to equal outflows, given our current level of imports for production. If not managed correctly this can be a very painful exercise.

The fact is that on an annualised basis Jamaica will lose between US$1.4 billion to US$1.8 billion out of total foreign exchange earnings of approximately US$6.6 billion, a loss of at least 20 per cent. This will no doubt result in a slowdown of economic activity, even with IMF support, which will result in the painful experience of many businesses either significantly reducing profits or making losses. If not managed correctly, one of the painful consequences will be that many businesses will close their doors, leading to negative social and economic consequences. The natural extension of this is less tax revenues for the fiscal accounts, and this in itself will force the reduction in government spending, further contracting the economy.

It is therefore critical that policies are put in place to make this necessary transition as painless as possible, and while a part of that solution must be some borrowing from multi-laterals (after receiving the IMF stamp of approval), it cannot be seen as the panacea. The only real solutions must come from the fiscal policies implemented to deal with first reducing the imports of oil and food, an easier short-term solution than "export or die".

So while we fall at the feet of the IMF, let us remember that it is nothing more than a bank intent on being repaid, and just like a bridging loan for personal use, is no cure for a relative shortage of income. If we do not implement the necessary policies to transition during the period of IMF support we will only end up with more debt and the same problems.

Small business

Apart from the need to implement policies to (i) reduce crime and bureaucracy (the biggest problems we can control directly), (ii) reduce dependence on oil, and (iii) reduce dependence on imported food; the real growth in the economy will come from an increase in small business activity. It is therefore very important that the improvement in the environment to encourage small businesses continues. The main inhibitors to small businesses are crime and bureaucracy.

There is, of course, a need for cheaper financing. Even if present, in a difficult environment to operate the chance of success is reduced. So as I have always said, even if we have cheaper funds available for small businesses, if the small entrepreneur sees business risk from crime and bureaucracy, then why would he borrow? Business is all about risk management and entrepreneurs will always assess the risk in relation to payback on their investment.

It is going to be a difficult adjustment in the economy and will be painful for some businesses. How painful it is going to be will depend significantly on how much we embrace the change and what policies are put in place to make the transition easier, just as the US realised the need for stimulus funds to ease its own economic crunch.

Unlike the US, however, Jamaica does not have the money needed to create a fiscal stimulus programme sufficient to significantly halt the slide in the economy. It is therefore necessary that the limited funds available be used in a targeted manner, not to try to create a surplus of funds to replace the dying economic activity, but rather as a targeted stimulus for new businesses to emerge. My vote therefore has always been, and continues to be, the spending of stimulus primarily to support the emergence of small businesses.

The logic is simply that if funds are limited, then you have to look to spend those limited resources in the area(s) that provide the greatest growth opportunities. In a declining economy, it is going to be very difficult for large businesses to expand and create jobs, so the creation of jobs must come from the emergence of small businesses. In addition, the market economy is always going to be able to grow much quicker than the bureaucracy of government.

So as I wrote in July 2008, 2009 will be the most difficult economic time for independent Jamaica. At the time I wrote it many shrugged off what I was saying as pessimism about the Jamaican economy, but that was what all the numbers were showing. Let me hasten to say that it is strictly as a result of financial analysis, based on my training as an accountant, and not any form of "card" reading, lest I be thought of as some sort of sorcerer and condemned to be burnt at the stake.

The question now therefore is, what do the numbers show about the economy for 2010? While I have an opinion on that, I will continue to reserve it for now, and say that it depends on what policy actions are taken. If we take the appropriate steps now, then 2010 could be a better year, but not without some amount of pain first. If, on the other hand, the wrong steps are taken, 2010 could very well end up being worse than 2009.

Just like when we gained independence in 1962, we are again faced with choices to make about our future. These are not choices to be faced by the government alone. The choices have to be made by all of us about what sort of 2010 and beyond we will face as a country. Which road will we choose?

The Caribbean Cement dilemma - to manufacture or not

I have been following with some interest the recent tribulations of Caribbean Cement (CCCL), as they seek to justify imposing CET on imported cement. In contrast there are others against the CET, arguing that the 2006 experience of bad cement from CCCL almost shut down the construction industry and should never be allowed to happen again.

This argument is compelling, remembering the reports of the negative effect on the local economy and lost growth opportunities at a time when the world was booming.

CCCL argues that since 2006 they have invested heavily in productive, storage, and quality control capacity resulting in a very small chance of any recurrence. They also posit that they are capable of supplying 100 percent of market needs and further that the imported cement is nothing but dumped product, which we can remember had a debilitating effect on the dairy industry, eventually causing it to basically shut down resulting in lost production and employment.

The experience of the dairy industry should not happen again. Even more recently Goodyear made a decision to close its manufacturing operations and concentrate on imports, as much cheaper tyres were being imported. One of the questions therefore is when it is necessary to protect an industry, and the answer lies in looking at the net effect on the economy.

In considering this I spoke with the persons at CCCL, to get some numbers to do some analysis on CCCL's benefits to the Jamaican economy. So for transparency's sake I am declaring that the numbers are from CCCL and that I hold a small amount of shares. But what is important is the logic of the arguments, and numbers can always be verified.

My interest in this issue is because of the apparent interest in removing the CCCL blemish we have on our record of declining manufacturing in this country. I see for example in the Gleaner (June 25, 2009) where the president of the JMA, Omar Azan, is quoted as defending Jamaican patties against imported patties because of its positive contribution to the Jamaican economy. Based on this argument I would expect therefore that is in favour of the protection of CCCL also, which would mean he is working not only on behalf of his members but in the interest of the Jamaican economy.

First I want to look at the arguments against the duties on imported cement:

1. CCCL is perceived to cause the shutdown of the construction sector in 2006. The fear is that this situation could recur. We need to consider, however, if this is still justified. CCCL has invested US$177 million in its production facilities, which has the capacity to produce more than the market demand. In fact the increase in inventory in 2008 over 2007 on CCCL's audited accounts supports this argument. CCCL has increased its export of cement, demonstrating excess capacity.

2. Another argument is protection of fair competition. This was the same argument forwarded publicly for the dairy industry, and may have been the case for tyre imports. The result is that we now have no dairy industry and no manufacture of tyres, and no doubt would have lost much employment and are at the mercy of the producers overseas who can export inflation to Jamaica, causing further pressure on the foreign exchange rate. We see also the massive import food bill because of our lacklustre performance in agricultural production.

3. Some argue that the profits are paid out to the overseas parent company. In fact the last dividend payout made by CCCL was in 2005 (as reflected on the audited accounts), which means that the money would either be reinvested in the company or is in the cash reserves.

There are also some compelling arguments for supporting CCCL's position. These can be summarised as follows:

1. When I looked at the audited financials it is obvious that in order for the plant to keep open it has to produce a minimum amount, else it may not make sense keeping it open. This I surmised from the rising inventory even when sales are falling, which means that below a certain level of production adds greater per unit costs. If sales continue to decline then the plant may reach a point where it has to scale down considerably, leading to the following:

a. Unemployment, as layoffs would of course be the prudent decision (the unemployment would not only be at the plant but throughout the island at various distribution channels etc); and

b. Increased costs of cement to the market

2. Information I received from CCCL showed that they pay out annually $2.8 billion in salaries, $3.4 billion in purchases, collect and pay $1.3 billion in GCT, and $500 million in statutory payments. Any significant disruption in operations could see these economic benefits being cut significantly, which could add to the economic and fiscal challenges we face. CCCL employs some 439 persons of which 242, or over half, are in production. The logical decision for a company like CCCL is if production falls below covering variable costs then it would obviously want to shut down its production facility and concentrate on importations alone, similar to Goodyear and Nestle. This would mean a minimum job loss of 242 persons in addition to the significant reduction in demand for electricity, thus negatively affecting GDP.

3. One other option available to CCCL of course is to increase exports, and dedicate most of its production to exports. What will happen, though, if something goes wrong with the imported cement, which is also a real possibility as we do not know about the reliability and quality standards of the overseas facilities? The fact is that CCCL could not easily re-channel its goods back to the Jamaican market and even when done it may be at a premium.

4. My understanding (CCCL information) is that every tonne of imported cement demands US$100 to be sent abroad, while every tonne of CCCL cement produced results in US$25 being sent abroad. This means that if the 720,000 tonnes CCCL sold into the market were imported it would mean an additional US$54 million being sent abroad per annum.

I think the arguments on both sides have merit and again must say I have only got information from CCCL and not the other side. The arguments for maintaining our manufacturing sector are compelling, as the head of the JMA has argued. The Minister has correctly stated that one cannot, without merit, impose restrictions on imports, as the world moves towards freer trade (although at times it seems it's just Jamaica).

What we must do, however, is ensure that imports are at a justifiable price and not just a price to close down CCCL or any other manufacturer and then we suffer future price rises, as with the dairy industry. We have to also ensure, particularly in this case, that the quality of the imports and the production facilities meet certain minimum standards. I also am wary of us losing a local industry in a product such as cement, as when China and the other emerging economies start to grow at rapid rates again we might find ourselves in a very long line waiting for cement.

The minister has his work cut out for him, as CCCL also needs to justify the claim that the 2006 problem will not recur. Once this is satisfied, however, I would support the JMA head's argument to protect the local industry as in the case of patties. I welcome arguments from the other side as debate is necessary to arrive at the best solution for Jamaica.

The IMF is a necessary stop gap

Much debate has taken place on whether or not Jamaica should approach the IMF for some facility to support the Balance of Payments challenge we face. Some have gone as far as to document their feeling for and against the IMF, including emotional responses to the past record of the IMF.

Being an accountant, my vision is dominated by numbers, and so I fail to see how any reference to the IMF's past indiscretions affects (1) its current situation; and (2) the fact that there is really no other source of funds. The fact is that Jamaica is even in a needier situation than other countries that were growing at better rates, but still needed to go to the IMF. Let us be clear about that. It makes no sense to die for lack of treatment because you don't like the doctor.

The choices we make

This emotional response to such matters is one reason why we are now being asked to write off US$4.2 million (J$374 million) in Cricket World Cup (CWC) losses. In fact, I remember the lack of foresight my friends used to say I had because I did not see the benefit that CWC would have to Jamaica. Based on their arguments it was supposed to have had monetary benefits for years to come and in fact the Trelawny multi-purpose stadium was going to be the launching pad of sports tourism.

In an article, I wrote in March 2007, titled "Cricket, aeroplanes, and poverty", I stated."On the day of the opening ceremony, at the expensive Trelawny multi-purpose stadium... In true Jamaican style, we showed the world that we know how to party. Two stories later, I saw an elderly teary-eyed lady saying that she fell down carrying water in a bucket to her home, because there was no running water. Still another report showed a man saying that his car had been damaged by the police whom he had to lend to chase thieves on many occasions, as they had no vehicle, and he was having difficulty being compensated."

What this indicates is that it is the choices that we make that determine what lies in our future. The probability is that if that lady is still alive she still may not have running water and the police force still has less than adequate capital equipment to fight crime. But we had a great party for two weeks.
Maybe if we had even gone with the stringent measures imposed by the IMF up to the 1990s we would have been better off today, as the truth is that we have really made a mess of our country without the IMF to blame anyway.

So we are at a decision point again and for some persons reason gives way to emotions, as it is easy for those who are not really feeling the economic pinch yet to say "let's suffer through it together".

What they need to understand is that some are already suffering badly, as illustrated by the thousands that converged for the 100 jobs offered by the fire services. And we shouldn't fool ourselves that the economic recovery is around the corner, as we were reminded by the recent World Bank report, which stated that the world economy will decline by 2.9 per cent instead of 1.7 per cent. That is 100 per cent worse than previously estimated, and really comes as no surprise to me as I had indicated that the recent hopeful signs we were seeing was probably nothing more than a short pause in a downward trend. I am not convinced, for example, that the US equity markets is in a longer-term up trend until the Dow Jones closes above 9,000.

But while we may go to the IMF, let us also not move from the emotion of extreme hate to extreme love, as we need to understand that the IMF is nothing more than a stop gap on our path of economic stagnation and decline. Borrowing money has never on its own, and never will, fix our economy.

It seemed as if this was the answer to all our problems because in the 1990s to 2007 we could have got money to borrow. So as long as one is able to borrow money at a faster rate than you have to pay it back then you will always be able to increase your consumption.

Debt's hypnotic quality

And this is the hypnotic quality of debt, until the reality of not being able to borrow anymore hits us.

Just as participants in the various unregulated investment schemes (UFOs), or even the regulated ones like Madoff, were in the heavenly bliss of high returns and chose to increase their consumption of luxury items rather than save the additional income they were so fortunate to have. I myself was hoping that the Jamaican schemes would have complied with the FSC and we would have created an investment edge just as we do with our athletics and music. This was not to be, and in the end the IMF estimates that they took some 12.5 per cent to 25 per cent of GDP out of the economy.

Just like that money from the UFOs, the IMF funds will only be a stop gap measure and will not address the fundamental problem of the inadequate economic structure - in simple terms, we spend way more than we earn. While we are benefiting from the IMF flows, it is necessary to continue the fundamental reform of our economic structure, as failure to do this will only see us in a more desperate situation at the end of the three to five-year period that we may get the IMF facility for. Unless we make a paradigm shift in our fundamental production and consumption relationships, we will face more suffering at the end of the IMF facility, and then the emotional ones amongst us will say, "see, I told you the IMF was the wrong way to go", not fully understanding that it would have been our own actions (or inactions) that would continue to cause our suffering.

As we go forward and the decision of the government unfolds about the IMF, we need to debate the issues in a very practical manner, and need to understand that the IMF will be nothing more than a stop gap measure and by itself will not be a solution to our problems.

The only things that can make a difference are the fiscal policies that are implemented, as without these we will only delay the onslaught of the infection of economic stagnation that has plagued this country since 1990.

We need to make a determination as to how we measure development. Do we measure development by the number of cars, phones, or foreign goods on the shelves? Or do we measure development by trade surpluses, higher literacy rates, lower crime levels, and improved productivity? The decisions we take will determine the path we set for ourselves and the outcome we eventually achieve.

And if, as persons have commented to me, we hang our hopes on the desired improvement in the global economy, that would be a mistake. The fact is that job losses continue in the developed economies we depend on, and even if the situation starts to stabilise, the road to recovery is going to be very long, implying much reduced consumer expenditure. It could be a five-year recovery period for the developed world.

I do believe, however, that a country like Jamaica has the capacity to significantly lessen the effect of the global crisis, as I have always maintained. But this depends on our fiscal policy actions, not new debt, whether through the IMF or capital markets. And it depends on all of us as Jamaicans.

It's the little things that matter

I am sure that everyone has heard the saying "it's the little things that matter". This is usually in reference to a relationship but is no different at a country level or in business. After all, it is the little things that determine behaviour shaping the outcome of larger issues.
Dennis Chung

For example, in a company the outcome of profits is the result of many decisions that take place during the year. These could be matters such as enforcing deadlines, defining a proper marketing plan, creating financial projections based on the correct assumptions, etc. All these actions result in profit or loss for the company, as the sum of these parts results in the whole. This is why companies have line managers who deal with day-to-day management issues, because if these little things are not controlled, then the CEO's vision will be meaningless as there will be a disconnect between vision and reality.

Prerequisite for development
Similarly, for a country's progress it is the little things that matter. The overarching goal of a country is economic and social development, which means that not only should the country achieve relatively high levels of economic growth but the average citizen must feel like social progress is constantly being made. For development to occur both must happen simultaneously.

But a part of the danger in achieving that development lies in the management of the little things in a country, which if we get it right will translate into the economic and social development we require. Economics and sociology are based on human behaviour, and so if we were to always positively affect human behaviour then this would yield economic and social progress.

The average citizen's behaviour is not affected by macroeconomic targets, or by interest rates. In fact, it is the other way around. So it is logical that the desired outcome of interest rates and macroeconomic targets must start by first influencing the behaviour of the average citizen so that it translates into the economic and social behaviour needed to enhance development.

That is the way markets have always worked and will continue to work. In the United States, for example, the relaxed financial regulatory environment resulted in behaviour on Wall Street in which financial institutions created the risky Collateralised Debt Obligations (CDOs) causing the financial crisis in 2008.

This is why I keep saying that Jamaica's economic challenge is a social problem. It is primarily the way we have organised our society that has caused the economic stagnation we have seen since 1990. If, on the other hand, we were to arrange our society differently the resulting behaviour would create economic progress.

The biggest challenge the country continues to face is crime and the deviant behaviour of not only our most notorious criminals, but by most people. After all, when someone breaks the law or is unproductive at work, the cry is always to give him/her a chance or "is just a hustling". When the prime minister was speaking about the night noise recently, he mentioned that when confronted by the police the citizens will cry out that it is their way of enjoying themselves and it keeps them from criminal activities, as if everyone should ignore their lawlessness simply because we are being spared escalated crime levels.

Or when someone is caught breaking the traffic laws they say how hard the policeman is for giving them a ticket or impounding their vehicle. The lawlessness on the roads is symptomatic of the wider crime problem.

Respect for the citizen
On the other side of the coin, how can we expect our citizens to respect the law if the law does not respect them or we create an environment where, to get ahead, you must be stronger than everyone else? It is very important that justice not only be done but also be seen to be done. Two such instances come to mind.

(1) The police cannot expect that the citizen will give them intelligence to solve crimes if they are seen as the enemy of the citizen. And while I understand that most members of the police force are good people, similarly not all Jamaicans are criminals, but we have a very bad reputation as a country overrun by crime. Once a policeman is accused of a crime the public must know what has been done, as the recent reports of arrest have shown. Similarly, if a citizen accuses a policeman of a crime he did not commit, then the citizen must be held accountable.

(2) In the recent case of Nicole Fullerton, it should not have taken ten years. In order for justice to be done one must have the right to a quick trial, as happens in the USA. The Enron and other such cases were completed in one to two years, and started even after the case mentioned here. This is so for many cases in Jamaica that do not receive the profile of the Fullerton case.

I will say again, if we cannot solve these small issues then there is little hope of dealing with murders.

There are many other issues we need to deal with, but one other is the matter of how we protect our children. Recently, we have seen attempts to deal more firmly with carnal abuse and other cases. But where are the child protective services, or any other agency that deals with children's rights? It seems as if they are content with just developing policy about how to deal with child abuse, when what is needed is on-the-ground action.

Each day there is clear evidence of child abuse on our streets which does not need any in-depth investigation to deal with, and in fact contributes greatly to the deviant behaviour when these very children grow into men and women.

I speak of the children who can be seen on the streets:

(1) Selling goods, and they will tell you it is their parents who sent them out. This is child labour for all to see;

(2) Wiping windscreens and creating a nuisance to motorists;

(3) Unsupervised on the streets at all hours of the night; and

(4) Mothers who take their babies to the stop lights to join the ranks of the increasing number of beggars

If the child agencies were serious about dealing with abuse and protecting the rights of children, then these are some low-hanging fruit they would deal with. We do not need any new policies or laws to address these challenges.

Finally, one significant positive for improving our tourism product, or the general quality of life, does not cost much money. It is dealing with harassment on the roads. Those who engage in this activity should be taken off the streets and sometimes it is in plain sight of police officers, who have become so accustomed to this cultural norm that they don't even know what it is. For example, New Kingston, which is our main business centre, is filled with beggars who even set up car washes at the side of the roads.

Now after allowing all of this to happen on a daily basis within the clear view of the authorities, can we really say that we are serious about development?

Jamaica's Balance of Payments Challenge

At the start of the last fiscal year, I indicated that in 2009 the fiscal deficit would not be the most important economic indicator to focus on, as it was in the past. I thought that the Balance of Payments (BOP) would be the most important indicator to manage as I saw two things happening - (1) oil I thought, would go to US$120 per barrel and (2) the drying up of credit meant that the only way to create stability in the economy would be to manage the BOP.

Well, oil went to US$147 per barrel and, as expected, the trade deficit widened even further. I then expected that as the recession set in oil would fall to below US$70 per barrel and foreign exchange earnings would fall also, even more than the benefit from the fall in oil prices.

This again played out, and both the foreign exchange earnings and the oil price fell more rapidly than I expected, particularly after the fall of Lehman Brothers. I also indicated that even though in the second quarter of the last fiscal year, inflation as running over 20 per cent annualised, I expected that it would end the year between 11 and 14 per cent, which it did.

Why do I say all of this? It is because it is easy to predict the general trend of numbers given the relationship that exists between both of them. So it really should not be any surprise what happens in the economy, because if one is able to project one of two indicators, and general sentiment, then it is usually simple to predict the others.

The problem with Jamaica's economy still remains the BOP, to which all our other fortunes are tied, and therefore the only way to fix the economy is to address the BOP.

There is another worrying trend developing that we need to be aware of and put policies in place to deal with. These can be seen as follows:

1. Oil is again on the rise, and as I had anticipated at the start of the year, it could well average a price of US$70 per barrel for the year and hit US$100 per barrel by next year (I had told some of my friends when oil was at US$30 per barrel to buy oil, so I am coming for my commission, even if they didn't buy it).

2. The recovery that is coming may very well be a jobless recovery, meaning that the jobs lost will not be recovered.

3. Even after the global economies start to recover it will be a very long process, and this means that demand for consumer products, such as cars, may not recover any time soon. Remember that the average American has lost 25 per cent of his/her wealth, which was based on air in the first instance.

These are worrying signs for Jamaica as it will have a negative consequence on the BOP as follows:

1. Oil in January 2009, when the price was near US$30 per barrel was 23 per cent of the BOP, and will no doubt become a serious drain again.

2. Jamaica's main foreign exchange earners - tourism, remittances, and bauxite/alumina - depend heavily on consumer spending, and so may see little growth, at best.

This no doubt means that the country and companies will have to find ways to deal with this problem. I have suggested some of these possibilities in the past so will not bother to go over them, but suffice to say that I mentioned three areas:

1. I indicated that the most important minister in 2009 would be the agriculture minister, as the country's growth prospects depend on agriculture. He has in my view, done a good job within the confines of the environment he has to work in. In the first quarter of 2009, agriculture and fishery grew by 10 per cent while no other sector grew.

2. Crime, I indicated, would still be the biggest challenge for Jamaica, and it continues to be.

3. Bureaucracy - this continues to be a bug bear and will stymie the growth of the real growth prospect for the economy, the small business sector, as this is where future job growth will come from.

Change will only come from Jamaicans
While the government continues to grapple with the problem, we must all realise that real change will only come from us as individuals. Some of us have given up on Jamaica and have left her shores. In fact, I do receive a lot of email and messages on Facebook, re Jamaica's plight and what needs to be done.
Two weeks ago, I received an email from someone I know asking if I still had hope for Jamaica, and why I continued to try with a sinking ship. Similar sentiment has been expressed to me in other emails, but not in so direct a manner.

The fact is that we cannot as a people give up on our country. We cannot have any other country of birth, unless we believe in reincarnation, and then again, you may come back as a cockroach, only to be stepped on. But then again, is that any different from the way Jamaicans have been trampled on since independence? We could debate that.

The point is that Jamaica's change will only come from us Jamaicans and we must persevere to ensure that positive change comes. It is not going to be easy, as many Jamaicans themselves do not care too much about Jamaica. As long as their bellies are full then "Jamaica, no problem". And what I find is that this attitude is amongst those who are most vulnerable if Jamaica fails.

There are, on the other hand, some good Jamaicans I have the privilege of knowing, and these mostly are men who do not have to concern themselves about Jamaica, in reality, as they could always lead a good life elsewhere.

When US President Obama was elected to office, and Jamaicans were celebrating and joining in with the feeling of hope, I indicated that Jamaica would soon fall back into its own way. The fact is that we always celebrate and help the cause of everyone except Jamaicans. I remember our assistance in the Grenada revolution, and being at the forefront of the war against apartheid. We even applauded the courage of Colin Powell to break ranks with his party and support Obama, even though if someone ever supported someone in either political party they are thought of as JLP or PNP. In Jamaica there are no Jamaicans, apparently. And so we remain divided.

I appeal to all Jamaicans to stand up for what is right for Jamaica, as each time I see the likes of a Usain Bolt, Bob Marley, Mike Macullum etc I realise how much of a mighty people we are. Imagine, if we were to really take seriously the advancement of Jamaica, where we would be today.

Saving Jamaica $1 at a time

Two years after the Cricket World Cup (CWC) was held in the Caribbean, at much expense to the member countries, we are learning of how financially devastating it has been to the economies. In fact, Jamaica is being requested to write off US$4 (J$356) million of debt, and by doing so sink the Jamaican people further into poverty.
Dennis Chung


In addition to this requested write-off Jamaica spent nearly US$100 million in upgrading infrastructure and preparing for the hosting of CWC. The total expenditure to the Jamaican people, with this write-off, would be US$104 million. At today's exchange rate we are talking about approximately J$9 billion.

Expense accountability
I was one who along with Ronnie Thwaites warned that CWC was not the best use of our resources, and he is correct in reminding the Jamaican people that a warning was sounded about the expenditure at the time.

The Gleaner's editorial of June 4th 2009 can be interpreted to explain the comments by Thwaites as nothing but chest-beating, which I find an unfortunate explanation, as the media should be the very ones concerned about accountability. It is unfortunate that the Gleaner does not seem to recognise the comments as a call for accountability. It is not whether the money had a benefit or not but was it the best use of the scarce resources, and would agree with the Gleaner that the JTI must tell us if it has followed through on its post-tournament programme.

Instead it seems as if Jamaicans are being asked to pay no attention to the money that could have gone to educating many youths, fighting crime etc. Maybe we should be happy to just accept it. Never mind that the Trelawny sporting complex has never been made use of, and has effectively become a monument of waste. While I do understand the need for improving our infrastructure (and little argument can be made about the spending on Sabina Park), I expect that the media and politicians like Thwaites should be those watching out for the Jamaican people.

Secondly, I am concerned that the report in the Gleaner stating that the Ministry of Finance representative said that the accounts were completed, is reported as being countered by the Auditor General - "However, Auditor General.said the final accounts were completed but not signed."

If this was said then it would be erroneous, as a signed copy of the auditor's report is essential for a set of accounts to be deemed complete. It is this signed report that verifies its accuracy. If it means not signed by the directors then it would still be the same as auditors should not sign accounts unless signed by directors. Can you imagine a public company submitting an unsigned year-end report to the stock exchange saying it is complete, even though not signed?

It is therefore very important that we ascertain whether the accounts have been signed off by the auditors, and the report qualified or unqualified, as it would be irresponsible for Jamaica to write off any debt on the basis of an incomplete set of financial statements, that is without getting verification of the accuracy by a signed auditor's report.

The greater point, though, is that if we are going to save Jamaica from further debt and waste it must be done $1 at a time. We cannot excuse comments by a politician about past waste as "chest-thumping", and then at the same time ask them to be more vocal about the people's business.

Receiving the truth
A pastor recently said to me that if one wants to always receive the truth then you must be a good receiver of the truth. So if we dismiss an attempt by a politician to bring accountability to past expenditures, then can we complain when they fail to do so in the future? And can we continue to say to them that they must speak to the people about what is right and wrong?

I have found that we love to criticise without proper research, our politicians, while at the same time expect them to always be true to us. If we learn nothing else from Obama it must be that you cannot seek unity or positive action with hostility. In many instances we have vilified our politicians incorrectly, and because of that some might feel frustrated about making any change. If they try to level with Jamaicans they are not believed as we look at all politicians as having a deceitful objective, which I have found to be untrue. Just like criminality it is a few who create havoc. Does that mean we should treat all Jamaicans as criminals?

If we are to save Jamaica, it must be by looking at every $1 we spend and accept every comment by any politician, on either side, as long as it adds any hope that we intend to hold each other accountable for our actions, past and present. In doing so we must be careful not to falsely accuse our public servants, or in this case not to throw aside their well-intentioned statements as "chest-thumping". We must encourage this sort of dialogue, and not be more turned on by rumours vilifying others. That as far as I am concerned is gossip, at whatever level it happens. If we continue to do so then Jamaica will soon end up with public servants who are really not serving Jamaica.

For years I have heard Thwaites from the back benches of Parliament calling for accountability for each dollar we spend, and ensuring that we properly go through every line on the budget to ensure that we get value for each $1. If we were doing this maybe as a country we would have $700 billion instead of $1.2 trillion in debt. Or put another way, maybe we would be paying out 25 cents of each dollar for debt servicing rather than 56 cents. Imagine how much good this would have done for our economy.

And let me hasten to add, lest I be accused of speaking in Thwaites' favour because of friendship, that I will support him and any other politician as long as they speak in the interest of Jamaica and Jamaicans. Equally, if he, and others, forget their duty to Jamaica I will criticise them.

So while we excuse comments about the need for accountability as "chest-thumping", Jamaica is J$9 billion in debt with no clear accountability as to how the money we are now being asked to write off was spent, as the accounts are not independently verified. And no doubt we will continue to add more and more expenditure to our debt without doing any proper assessment of what the value is for Jamaicans.

Let us not forget that the money spent on CWC was not just expenditure to be forgotten because it had a perceived value. Part of the analysis must be what value it had for Jamaica, and much of it would have had a positive value. But was it the best use of the funds? We should remember that J$9 billion is the equivalent of J$3,333 for every Jamaican, or put another way, approximately half of the recently imposed tax package, as a result of past expenditure that we did not do any cost-benefit analysis for.

If we are also going to be asked to write off an additional US$4 million, then we must (1) ask for properly audited accounts to be presented in support; and (2) properly assess the cost or benefit and let the Jamaican people know what they are being asked to bear.

Jamaica's economy playing out as expected

When I listened to some of the reactions of surprise to the PIOJ's report on the January to March 2009 economic performance, I wonder if we are really serious. As far as I am concerned the economy is playing out as expected. Whenever I am asked about the 2.8 per cent downturn in the economy, during that period, as if it is unexpected, I refer to the article I wrote on July 18, 2009 titled "A perfect economic storm". At the time I started saying that "The next six to nine months will be one of, if not the most challenging, in the economic history of independent Jamaica".

For me it was obvious that if things continued the way they did and if leadership did not come together, we would be experiencing all we are today. In fact, it is worse than I expected, as the Lehman collapse made things much worse but the trend I expected is playing out. The extent to which we are feeling it today could have been avoided but too much time was spent in political diatribe and side arguments that distracted us from what we needed to do as a country.

Identifying the fundamental challenge
So the consequence of the country not adequately projecting and preparing for the economic downturn has landed us in a situation that I believe will be hard to avoid now. I never expected such a sharp decline in the first quarter, which is going to be better than the second quarter in my estimation. What is happening also is that the economy is already like a runaway car, which is harder to stop once it gets going, and would have been easier to slow down prior to it starting to pick up speed. It is now going to take much more effort, and financial resources, to slow down the decline.

With all of this said, though, it is still possible to lessen the effects on the country, and I had written in my book about the real cause of the problem and gave an example of a five-year plan that could place us on the path to economic development. Some will not take what I say seriously, though, as I am just an accountant trying to talk about economic matters, but I will continue to be comforted by my own voice.

In order to determine how we can deal with the challenges we face, and which are worsening, we must first understand what the underlying problem is. This again I outlined in my book, which in summary is the fact that the country spends more foreign exchange than it earns. Unless this equation is changed we will always be caught in the downward spiral of economic stagnation/decline and debt. If we accept that this is the fundamental problem then it makes no sense addressing symptoms, which we have always been doing. Because of where we are today the measures to address the problem get more and more difficult the longer we wait.

What do the first-quarter results tell us about the state of the economy? If we properly assess this then we can make an assessment of what needs to be done. And if this is properly addressed then we won't even have to talk about high interest and exchange rates, as they will be automatically improved. We won't have to talk of crime, as economic prosperity will come to our citizens. In effect, if you address the cause of the illness then usually the patient gets better.

Inflation as projected by the BOJ is expected to be between 11 to 14 per cent this year, driven mainly by the new taxes introduced in the budget. This was expected and we must now pray for no inclement weather during the hurricane season that will cause any agricultural damage, as this would push inflation further.

As expected agriculture is the only real growth area, and the sector I have been pushing aggressively since 2007 as Jamaica's gold mine, instead of looking for it in the hills. The goods- producing sector has declined as expected, and in particular construction and mining. These will continue to decline in the second and third quarter, and agriculture will continue to be the main growth area.

The services sector has declined by 1.6 percent, and I expect that it will decline further given the decline in the goods-producing sector as fewer services will be demanded.

Proposed quick fixes
The fact that the process of decline has started we will then have to manoeuvre through the economy's adjustment and it will be painful as many more will lose jobs, or become unemployable in the changing economic environment. This changing economic environment means that different skill sets will be required, which many of us have not prepared for.
There are some short-term solutions that I think can be taken to lessen the effect and make for a quicker economic recovery, as follows:

. The most important, I think is, to create a much more facilitative environment to encourage small business development. This is the sector that has been saving developed economies like the US, as the large companies are unable to react quickly to changing circumstances and most will see decline. The bureaucracy, however, is stifling small business growth. Even so I have seen evidence of many people trying to get into new businesses, especially amongst the younger generation.

. An aggressive move must be made to build out agro-processing plants and greater investments in agriculture. Agro-processing will allow us to reduce the risk from weather as well as add greater value to our exports using the same resources. I know of at least one person who has wanted to make an investment in agriculture but has faced some hurdles.

. Public transportation - this is a quick fix, as if we were to immediately start a park-and-ride system from highly populated cities and towns such as Portmore and Spanish Town we could reduce traffic congestion and oil use. My idea for park-and-ride systems and direct shuttles to major work areas is also in response to the lack of security on public transportation. This could reduce significantly the oil bill in a time when as I said at the start of the year oil could end the year at US$70 per barrel.

. Infrastructure spending should take place around tourism areas and agro-processing. This would have the double effect of increasing employment and preparing our main sectors where we have a comparative advantage for global economic recovery.

. Income tax and GCT incentive should be provided to companies that add foreign exchange to the country through exports or reverse exports.

. Vocational training - this is the quickest way to improve the skill set of the many who sit idly by at street corners waiting for an opportunity. The last time I said this I was accused of promoting illiteracy, even though this is an improvement for many.

What is needed to address the economic challenges is a fundamental shift in the paradigm, which no doubt is difficult for the government to do because of the fundamental flaws that exist in the infrastructure.
Also the need to balance the social with the economics is always a challenge.

In the short term there are some quick fixes which must be implemented if we are to lessen the effects of the inevitable economic decline.

Poor and boasy…Jamaica’s plight

The budget debates are over, and I think I have done enough commentary on the presentations, and would like to look at what I have always, and still consider to be one of Jamaica’s main challenges. And nowhere is this more demonstrated than in the rise of one of Jamaica’s street boy’s to prominence in the Magnum’s King and Queen contest on television.

Poor and Boasy is the name adopted by the winner of the said contest, and his story is one that should encourage all Jamaicans and make us determined about what needs to be done to truly unearth the hidden potential of Jamaica. He walked away with the $1 million prize but by doing so gave us a message worth much more, that of the significant talent that lies unexplored in our neglected people.

Poor and Boasy reflects Jamaica’s plight in two ways – (1) His name signifies Jamaica’s borrowing over the years to be “boasy”, as we have used it for consumption items such as cars; and (2) The fact that we have neglected the poor citizen of this country who has the talent to bring fame and fortune to Jamaica.

Jamaicans’ aggressiveness
And when I say neglected people I do not only mean the other street boys who have to hustle by wiping car glasses, but I mean most Jamaicans who have to suffer the indignity of the inefficient public sector bureaucracy; the less than adequate roads and transportation system; the unprofessional behaviour of the police, who they are forced to pay with their taxes; and the debt they are called on to pay that most have not benefitted from. So is it any surprise that Jamaicans are known the world over as an aggressive set of people, as our leaders over the years have helped to create this aggression, which it is only through this self taught behaviour that many have learned to survive.

Some Jamaicans have turned this aggression into a positive by channeling it to significant achievements. The problem however is that many also channels this into criminal activity, which holds the great majority and the country at ransom.

It is this scant regard for the citizen of Jamaica that I believe has led us to where we are today. Because achievements are not spoken about in terms of development of the rights and democracy of the Jamaican citizen but rather in terms of macroeconomic targets and fiscal deficits. And I am in no way saying that these targets are not important but just as in the US the rights and development of each citizen must be at the central part of any planning or development we look towards. I believe this is the only true way to achieve real economic and social development. If we put the Jamaican citizen at the heart of all our plans then we will achieve all the macroeconomic targets that have long eluded us as it is people that drive a country forward not debt.

So when I hear parliamentarians spending so much time discussing the level of the minimum wage, I wonder if they do not realize that the need to have such a lengthy discussion on it means that we have failed Jamaicans. The setting of the minimum wage should be procedural without any comment if we develop a country where Jamaicans have the requisite skills and opportunities to earn a lot more than the minimum wage. The fact that we have to spend so much time deliberating on the minimum wage means that our gift to many Jamaicans since independence is to keep them at the minimum wage level, and to make it seem as if we care by adjusting it upward each year, only making life more and more difficult.

It is the failure to address the theme of the citizen at the centre of our development, which I think has been the biggest failing over the years of the debates and the country. In the 1970s the world moved into the Information Age and helped to usher in the need to grow based on a knowledge based society, which Kim Marie Spence put on the table recently in a review of the budget on Direct. I do not think that there is anyone who will dispute the fact that we live in an era where a competitive edge is not based on the amount of capital one has (that was the industrial revolution) but is very much dependent on the human capital of a country or company.

Knowledge/Efficiency Age
It is ideas that create a competitive advantage not machines. Everyone has access to technology and machines, as even if they can’t buy it they can easily outsource it. The Internet allows an individual working from his/her home to have access to the global marketplace and appear to the world to be a large corporation. In fact the mammoth office building and its attendant costs are now a competitive disadvantage. This I believe will be more pronounced in what is emerging to be a new economic order that will come from the current economic downturn. We are looking at the birth of a new era that will maybe be called the Knowledge or Efficiency Age.

For decades we have always been talking about the need for economic and social development in Jamaica and have different periods where we have focused on both separately. In the 1960s we had economic development; in the 1970s we had social development; in the 1980s we had economic development; and in the 1990s to 2000s, we suffered from the effects of globalization. What we need is to have a period where the focus is on developing both the economic and social aspects of Jamaica. I believe that the only way we can do that is to place at the centre of our development the citizen of Jamaica.

I commented in my last column on the need to change the format of the budget debates, as the current one does not serve as the developmental tool that a budget should be. One of the things I would want to see achieved is the setting and debating of developmental objectives before the revenue and expenditure estimates are worked out and tabled. In setting these objectives the central theme must be the protection of the rights and improvement of the Jamaican citizen. This was espoused somewhat in the 1970s but the shortcoming was that the belief was that it could be done without proper economic development. The fact is that neither can be done successfully without the other.

The budget did address the call on the people to bear the sacrifices needed for us to move forward, and we now need to specify a timeline to see the benefits of the sacrifices. While appealing to the Jamaican people for their patience and understanding, and recognizing the challenges we face, we must also say that we abhor (i) every time a citizen’s rights are abused by the police or criminal, (ii) the fact that every Jamaican owes over $400,000 as a part of the national debt without seeing any benefit, (iii) the condition of and the indiscipline on the roads and the night noise that Jamaicans have to put up with, and (iv) the lack of opportunities and education that stagnates our economy.

We should also commit to every Jamaican that if we make the sacrifices now and follow the road map for economic and social development (which should be communicated to the people) then these are the targets that we will achieve. We must assure the citizen that their rights and development are at the forefront of every policy decision.

If we continue spending too much time debating the minimum wage and the continuation of handouts to the poor, we reduce the hope to make Jamaicans really “boasy”.

Tax as a developmental tool

The budget debate is currently underway, and as I write this the prime minister and Opposition leader have not yet made their contribution, and the minister of finance is to deliver his closing address.

This budget is no doubt by far one of the most difficult ones we have faced as far as I can remember. This time Jamaica has found it difficult to borrow its way out of our self-inflicted challenges, and all of this in the face of the worst global economic crisis since the end of World War II. Many of us, including myself, were not born then and this would therefore be the worst we have seen.

But what does that mean for Jamaicans? Even though the world has gone through good times, Jamaicans have always been asked to tighten their belts. Each year, the budget comes around we are always bracing for the high probability of more taxes. I can't remember a budget where there was a net give-back to the Jamaican taxpayer. The trend of Jamaican taxes, over the years, is always to ask Jamaicans to fork out more and more. And this is even as (i) we were borrowing more money every year and (ii) social services have been deteriorating fast. This has resulted in negative development for the country as a whole.

A cultural problem
The truth is that taxes in Jamaica for a very long time have been used as a means to plug a financing gap, and continue to fund an inefficient public sector bureaucracy. So even when many celebrated the implementation of the first MOU, I lamented its introduction as I saw it as another cover-up of the inefficiencies in the bureaucracy and a means to allow Government to continue on its merry way of spending more than it could afford to. This was only delaying the inevitable, and what they have done is place more burden on the people who they say they're trying to save.

What should have been done with regard to the MOU is that it should have been used as an opportunity to restructure the public sector, and allow for the transition of some of the workers out of the public sector into the private sector where they would have had much better earning power and the bureaucracy would have been more geared towards private sector productivity. But that was not to be, as consideration of finances by the government has not been about development but rather just a juggling of the books.

So because of our failure to implement financing policies as a support for broader development objectives, we have as a country found ourselves in the unenviable situation of having to contract the economy. This is simply because we have failed, when times were good, to generate any fiscal surpluses. So an analogy is that one would be earning exceptional income and fail to save in good times, choosing instead to spend it all on consumption. The result is that when times get bad there are no savings to fall back on, forcing one to cut back drastically on their lifestyle. In Jamaica, our culture does not encourage saving, like the Jews and Chinese, for example. Once we get a little money then everyone should know, as we have to drive the most expensive car and buy the most drinks at the bar.

I remember only last year going into a bank and meeting someone I have known for a while. Being courteous, I asked him how things were going, to which he answered 'very rough', as his payments from OLINT had ceased and he couldn't afford to properly maintain his Land Rover. I then suggested to him that he should sell his Land Rover, as it was fairly new, buy a cheaper car and invest the remainder of the money in his business. Of course, in true Jamaican style, he answered that if he sold his Land Rover it would affect his image. There endeth the conversation and I could see the fruitlessness in suggesting anything else. I hope he and his Land Rover are okay.

This is similar to the way that we have approached the national finances.

A move to consumption taxes
This is why I supported in principle the move to consumption taxes, as it influences consumption behaviour. What we need to do is use tax policy as an instrument for influencing productive and consumption behaviour. For example, we suffer primarily from spending more foreign exchange than we earn. What I would do then is use consumption taxes as a tool to encourage production and consumption of local goods and discourage consumption of imported goods. So if oil is the largest import value, then a tax on retail fuel consumption is the right move but should be complemented with (i) an efficient, disciplined, and safe public transportation system; and (ii) fares subsidised to encourage public transportation.

Similarly, tax incentives should be given to those investing in agriculture - primary and agro-processing production. The investment should have certain conditionalities such as large-scale production, where economies of scale can accrue.

The suggestion by Dr Davies for a surcharge on interest payments is consistent with the argument that the interest component of the budget needed to be looked at and some way found of alleviating the earlier cash flows, as this would create the fiscal space needed to ensure the economy does not contract significantly. The suggestion made by Dr Davies is however, more radical than anyone else would have thought as this would amount to a unilateral permanent impairment on the net earnings to debt holders. This is opposed to a temporary impairment in cash flows only, which would provide the debt holders with full restitution and also an economy that would have greater future earnings potential, assuming that the extra cash flow is used for development purposes.

I do not want anyone to think, however, that merely structuring tax policy around development objectives is the panacea we have been looking for. There is a lot more that needs to be done (as I explained in my book) such as dealing with crime and certain social and political issues.

One of the things I would change, if I had control of the process, is the format of the budget debates. The way the budget debates are structured has been with us for decades, even though the world has changed many times over during that time. I would adopt a structure that would help me to support my developmental objectives, while at the same time considering all options before finalising the budget. The way our budget is structured, it is cast before any serious consideration is given in the debates.

So I would first start with a discussion on the developmental targets. I would have the Government and Opposition spokespersons debate the developmental objectives, for all Jamaica to see. Next the government would look to determine what tasks are necessary to achieve the objectives, and place the most efficient structure and costs to each task. This would determine the expenditure requirements. I would then look at the revenue options, bearing in mind the negative effect on economic activity of taxes, and so any taxes being extracted should have a value added in excess of what it detracts from the economy. I would then allocate the revenue resources to the expenditure in order of priorities. This may mean an extended budget debate but at least we would get it right. These are just my very simple thoughts on making the budget debates relevant to development.

A failure to realise that taxes should be used as a tool for development, instead of just to raise more money, will mean that Jamaicans will be continually called on to fund a bureaucracy we will be less able to afford each year. The incremental result will be greater reductions in the real income of Jamaicans each year.

Jamaica at a crossroads

In the months leading up to the 1980 election, Jamaica was at a defining moment on its history. At the time I was just about 14 years old, and I remember well the fireworks sound of gunshots that rang out across the city. Four years earlier (1976) the citizens faced a state of emergency, and at that time I remember everyone having to ensure they were at home by 7 pm, or else face the possibility of prosecution. There were cries of political victimization, and it was no surprise that four years later, exacerbated by the long election campaign, Jamaica fell into a long period of violence leading up to the dipping of the finger in the red ink to make a choice between ideologies.

Ideological and economic crossroads

Jamaica at the time was at an ideological crossroads, whether real or perceived. Coming on the heels of the economically prosperous 1960s, the people of Jamaica no doubt wanted a greater distribution of economic and social opportunity and sought it through "democratic socialism", offered by the PNP. This was in stark contrast to the capitalist model offered by the JLP, and in which one would have to earn economic opportunities through productivity. By the time 1980 came around, the ideologically charged atmosphere of the global cold war was being played out in Jamaica.
Jamaicans spoke and "democratic socialism" was rejected in favour of capitalism. This was indeed a defining period in Jamaica's history and one no one can forget.

Today Jamaica is at another crossroads, but unlike that of 1980, this one is economic. There is no real difference in the apparent ideology of both political parties. And I don't believe that there is any real difference in the way both parties view the current economic situation. The reality is that Jamaica is now in a position where it must make certain hard decisions, which we have been postponing for years in order to avoid the short-term political and economic consequences. These choices have been forced upon us because unlike the past 15 years or so, we are no longer able to postpone the inevitable through debt.
On Friday, July 18, 2008, I wrote an article called "A perfect economic storm" in which I indicated that the following six to nine months would be the worst economic period for independent Jamaica. Since then I have revised that projection to say that it would actually be for a further period of maybe another 12 months, as I did not see the impact from the failure of Lehman Brothers, which was the main turning point in the global crisis.

Jamaica is now at an economic crossroads. In my own view the policy choices, and actions we take this year will determine our future, both socially and economically. There is no remaining flat, or moving sideways as traders say. We either will be successful or suffer significant economic and social damage. Some people will say that I do not know what I am saying, as they did when I said in March 2007 that the US would go into recession in 2008, and also when I wrote the July 18, 2008 article. Or when in the second quarter of the last fiscal year, when annualised inflation was running over 20 per cent, I indicated that inflation for the fiscal year would be between 11 and 14 per cent.

What I will say to that is that I never have a problem with being thought of as wrong, as long as I am right. This is a 'do or die' year for Jamaica as the chickens have finally come home to roost on top of the burdensome debt we have consumed in cars and other consumption items.

Budget implications

So we have a situation where, without even considering the funding for the budget, we already see the economy will be contracting, as the budget expenditure is approximately four percentage points less in real terms. This means that there will be less expenditure in the economy. The result therefore is that economic activity both from the public and private sectors will be less, which means a contraction in the economy.
A lower real expenditure was expected. However, given the expected downturn in economic activity, layoffs, and lower profits in this fiscal year, I expect that tax revenues are going to see a significant decline. In addition to this the capital markets remain tight. This means that revenues overall will be negatively affected and we can't spend what we don't have.

There is of course some tax dollars than can be generated from compliance enforcement, but we will have to see if it will result in a net gain in tax revenue. The fact is that, just as in the US, the top five or ten per cent of the persons/companies earn the great majority of profit/revenue. The question then is whether this top five per cent is already captured in the tax net, which means that most of the tax revenues would have been captured already and therefore one could not assume an equal dollar of tax for the persons/companies not in compliance. The tax dollar would get less with each additional person brought into the net. In addition, two other factors may mean that those revenues may not have a positive impact, at least this year - (1) the cost of going after that additional tax dollar will reduce the net retention; and (2) the effect will come after the time lag of an audit and court cases. Despite this it must be done in order to have a more structured society.

In addition to this I believe that inflation in this fiscal year will be greater than last year. Many expect that the global recession may see an end by 2010. The downside of this is that as analyst/investors expect demand to return we will see a depreciation of the US dollar and commodity prices will increase. On the domestic side, if the gas tax and other user fees are increased and also other prices such as bus fare and electricity costs, then we will also see domestically generated inflation.

So we could very well experience stagflation, which is something we must try to minimise as much as possible. Stagflation is a combination of economic decline and inflation. The implication is that businesses will be faced with rising costs and lower demand, so that profits will shrink.

Based on the structure of Jamaica's economy I do not believe that this situation can be avoided if we are to properly restructure the economy. What we can try to do is minimise the impact. I believe that one significant way in which this can be done is for greater economic activity to be spurred through government spending, particularly on infrastructural projects, especially in light of our low skilled labour force.

The only way for Jamaica to chart its way through these rough seas is to create the necessary fiscal space, as there will be lower if any private sector led growth this year. Hence the necessity of the expenditure cuts in the budget. The question leading up to the conclusion of the budget, however, is "Is that enough?"

What is certain is that we are now faced with a defining period in Jamaica's history, where we are faced with two roads, and the actions we take as a country will determine which one we take.

Micro as important as the macro

All the talk of the global downturn always seems to focus more on the macro numbers and what governments need to do in order to help to stabilise economies.

In fact, it would seem as if the whole world has shifted from the reliance on the market economy, and has now placed responsibility for development on governments, leading many to say that the era of the market economy is over as the market has not proved to be an efficient tool for development. The argument is always" see what it has done. It has set us back decades." Of course nothing could be further from the truth, but that discussion is for another time.

In discussing the macroeconomies and what role governments must play, we must remember also the importance of the micro sectors - businesses and individuals. Many times we forget that the macro economy is nothing more than the accumulation of all the micro players in it. So, for example, when we speak about the national debt of over J$1.1 trillion, we tend to forget that the debt is made up of thousands of individual borrowers and recipients of those debt funds.

Options faced

The government cannot accumulate debt if personally we do not spend more than we earn and/or if we are producing more than we consume. The demands for government expenditure are in the final analysis to support our own total consumption. One could argue, though, that the government's role is like the father who should ensure that he implements fiscal discipline on the children to ensure that they spend within their means rather than mortgage the house to support their unacceptable lifestyle.

The point therefore is that dealing with the economic downturn is more going to be about how we deal with it individually rather than what financial support government can provide. We can, for example, support behaviour that is continuing the excessive use of resources above what we earn, but that is certain long- term destruction.

It is therefore important that the correct fiscal policies be put in place to cause a shift in consumption and production behaviour patterns. This structural change in behaviour will no doubt be forced on individuals as the economic situation forces change. As an example, as economic activity slows down it means that there will be less disposable income, which in turn means that people will be able to afford less and businesses will get less money, causing the start of the cycle all over again. Faced with this situation, we can choose to do one of three things:

1. We can seek to borrow money to afford the luxuries we are normally used to, such as high-end cars etc;

2. We can adjust our lifestyle by reducing our debt and not spend on unnecessary acquisitions; or

3. We can seek to produce more at our individual levels and so maintain our income levels through greater production.

Obviously the third option is the most desirable, but it is going to take some time for that behavioural change to take hold. The first reaction of many people will be to see if they can borrow more to maintain the lifestyle they have become accustomed to, and this includes businesses as well. My advice would be that in our current economic situation this would be the wrong choice for long-term sustainability. The best action is to first put in place option two above, shortly followed by option three. The reason why people seek to act on option 1 first is because for sentimental and other emotional reasons they try to hold on to what they know.

It is because of this why I have been saying that the world not only faces economic challenges but also psychological challenges which must be addressed. This is why it was refreshing for me that the RJR Group put on the "Yes you can survive in 2009" public seminar last week. They correctly identified that a wide cross section of professionals, including bankers, psychologists, and accountants, are necessary in oder to open this debate with the public. More important than the stimulus support that governments put in place will be our own behavioural changes to determine whether or not we are able to cope with the changed economic structure of the future.

Looming transformation

Let us not kid ourselves, Jamaica and the world are going to see a forced transformation of the economic structure. The boom in credit that we have become used to is at an end, and with that we will see a change in the face of businesses and a tempering of economic activity. Even after economies have stabilised and started to recover, for a very long time people will stay away from debt as they restructure their own portfolios.

This is as much a wake-up call for businesses as it is for individuals. When people call me about what to do with their businesses, as they have seen a significant decline in activity, I advise them the same way I would an individual. They need to speak with a professional and have that person lead them in at least a two-day strategic retreat where they look at their business and determine (1) its viability given what changes will happen; and (2) if there is a way to restructure their companies to take advantage of a changing marketplace.

If they determine that it is not possible then there is one best option. The worst thing to do for an individual and a business is to hold on to something that cannot survive because of sentiment. The long-term effect is even more devastating.

In addition to the current situation, I expect that there are going to be some more challenges that consumers, particularly in an open economy like Jamaica, will face. At the start of the year I indicated that I expected two global events to happen this year - (1) that oil prices will go back up, because of supply concerns and an indication that demand is returning to the US; and (2) that the US dollar will devalue against the other major currencies. Therefore, based on this, I see that the world could see another round of inflationary pressure.

Both expectations are starting to happen. Oil prices are slowly inching back up and I think as early as 2009 to 2010 we could see oil prices back at US$100 per barrel, and the US dollar has already started to lose value. And if the US dollar goes above the 1.40 to 1.41 mark against the Euro, then it could easily trade back up closer to 1.60. Both these factors will prove to be inflationary and if prolonged we could see people shying away from the US dollar as a reserve currency. This is even more dangerous if China decides to unload the US debt they hold, having already expressed concern about the stability of US debt.

Bernanke's move to indicate that the Fed will be buying back over US$1 trillion of US government debt will also mean increased money supply, lower borrowing cost, and higher inflation. This move by the US to get the economy going with an emphasis on credit is a wrong long-term strategy.

In the final analysis though, while stimulus packages can help to stabilise economies by providing much-needed economic activity, the ultimate solution is going to come from how we act as individuals.

Deciphering the global downturn

As the global crisis continues, it seems with the new indicators each day that the situation is worsening. The ADP employment numbers out of the US this week shows that an estimated 697,000 jobs were lost in February. This is ahead of the more important Non-farm payrolls jobs report, which will come on Friday, when job losses are expected to come in at 650,000 for the month of February. US unemployment is also expected to rise in February from 7.6 per cent to 7.9 per cent. The week has continued to see a fall off of GDP around the world also, with Sweden, Australia, and the Euro-Zone showing quarter over quarter declines of 0.3 per cent, 0.5 per cent, and 1.5 per cent respectively.

Both the Bank of England and the Euro-Zone are also expected to cut the central bank target rates to 0.5 percent and 1.5 percent respectively. The rate cuts around the world is in a desperate attempt by central banks to add liquidity to the system by allowing for easier access to credit but this has not been, and expected so, having the effect because the global challenges is one of more than just interest rate affordability. The real challenge is one for massive loss of wealth. Even with the rate cuts access to credit remains difficult and the cost of credit is higher.

Falling equity markets

The Dow Jones Industrial Average (DJIA), for example is below 7,000 at 6,850, and the technical and economic indicators are showing that the market may actually fall some more. The market could in my estimation hit the 6,500 mark and if it falls below 6,300 could be well on its way to the 4,500 level. This trend is consistent with equity markets around the world, which is likely to continue. Even though commentators on the business channel seem to be desperate to talk a bottom into reality, the fact is that the fundamentals do not support a bottoming at this time.

Equity prices are fundamentally determined by a company's current and expected earnings and the fact is that both scenarios remain bleak. We see where AIG, for example, recently lost US$61 billion over three months and the auto industry continues to go back to Congress for more support. All of this while consumer confidence is at its lowest for over a decade and personal consumption expenditure, although slightly up over January, remains very low. So in this environment of rising unemployment, falling confidence, and very low expenditure how does a company increase earnings. The only way for one to see value in a company in this environment is looking at the balance sheet value and making a determination as to whether the book value per share is way in excess of the currently traded price, if one expects that the company will remain resilient. However, institutions such as AIG have shown that even the managers themselves do not know the true state of their balance sheets.

It is because of this uncertainty of earnings and balance sheet values why investors have been shying away from equities and rushing to acquire US treasuries and Gold, what is referred to as a flight to safety. So in this type of mood consumers are not inclined to engage in the type of spending that can boost economic activity, content instead to spend on basic requirements.

So globally the world seemed destined to an economic slump for at least another few months, into 2010. Because even though we might start to see signs of recovery at the end of 2009 the fact is that consumers will take some time to build back the massive amounts of wealth lost, which on equity markets alone (globally) was over US$35 trillion when the DJIA close to 10,000 and since then fallen off by approximately one-third. This implies that between October 2008 and now wealth losses from the equity markets may have been down an additional US$10 trillion.

Failed stimulus plans

In order to try to address the problem the US government, first through Bernanke and Paulson, and now more though Obama and Geithner, have tried to address the problem through various forms of a fiscal stimulus package. As I had indicated from when Paulson and Bernanke announced their package, it would not revive the economies and at best would only ease the pain slightly. The current situation is like the common cold that can only be relieved by medicine, but has to run its natural course. But his would depend on the form the stimulus packages took. And to date the only one that has some form of resemblance to understanding the real issue is Obama's package that includes assistance for those behind in their mortgages.

The fact is that from last year when this great hurrah was being made about bailing out failed financial institutions, I indicated that would not work and all that was needed was for the governments to assure depositors and other customers that their money would be guaranteed by the government, similar to what Ireland did to bring back some confidence to the markets. Allocating large sums of money to the financial institutions was, a waste of money.

And the constant courting of Congress for further bailouts is proof that there is no end to this bottomless pit. My own view is that there should have been an orderly liquidation, or better mergers, of these financial and other institutions. Not in the way that they allowed Lehman to fail on its own, but an orderly break up and mergers of the good parts of the business and winding down of the bad parts. This approach would have saved the US, and the world, much grief.

But it didn't happen and finally a package comes from Obama that seems to correctly recognise that solving the problem cannot be done by bailing out financial institutions but rather has to hit at the heart of where the problems truly are, the consumer and more specifically addressing the problem of the housing market. The fact is that the underlying problem is that the US economy is based 70 per cent on consumer spending and bailing out financial institutions without bringing back consumer demand for goods and credit cannot solve the problem. And this is why the money given to financial and other institutions will not make the equity markets and economic activity better. It will only lead to a waste of taxpayers' money.

To properly address the problem, one must look at reinvigorating consumer demand, and the only way to do so is to provide the consumer with some amount of relief of their debt burden when compared to their wealth, which the real problem is the fact that house values have gone down significantly causing a freeze in credit markets (on which most loans were based) and a drastic slowdown in economic activity leading to job losses. The housing assistance plan by Obama should therefore be of greater assistance to the US economy than the bailout of these irresponsible financial institutions who do not even know how much value they have on their balance sheets.

Even though I have some confidence that the real problems are now being considered, the fact though is that there has been such a significant loss of wealth globally that it will take a while for consumers to start spending on discretionary items again, and even more importantly we will not for a very long time see a return to living standards of two years ago.
What this means for the world is that there will be less money being spent globally for a very long time.