POLICING THE ECONOMIC RECOVERY

LAST week, the Government secured the much-needed approval from the IMF board for some US$1.3 billion to be loaned to Jamaica for balance of payments support. More importantly though, this paved the way for the Government to secure the necessary financing from the other multilateral organisations.

For me, however, the greatest impetus to economic recovery last week was not the IMF loan, as the loan does not ensure economic recovery but simply provides a halt to the decline of the economy which will continue if the appropriate policies are not implemented. The greatest impetus to economic recovery last week was the arrest of the police seargent and others in the gun and ammunition find.

Why people invest
My reason for saying this is that the salvation of Jamaica does not rest solely in the way the macroeconomic numbers or fiscal accounts are managed. While the management of the numbers is very important (and being an accountant I know that), it is more important for us to remember that economics is a social science and people invest more because of social stability, predictability and confidence, rather than macroeconomic numbers or interest rates.

As an example, in 2008 global investors were accepting a negative return on US treasuries while other markets and instruments were giving positive returns. This was so because of the prevailing uncertainty in global markets at the time, and the first thing that investors want to secure is their original capital. If you can maintain your original capital then you can live to fight another day, but if you can't, then you have no other opportunity to invest if the current one fails. And failure must always be seen as a possibility.

In fact, when investing, the management of risk and minimising loss are always more important considerations than how much profit you can make. The reason for that is if you can minimise your downside risks, then it means that the number of times you have to win in order to get ahead does not have to be very high in order to be profitable.
If, on the other hand, you take a decision to go for broke and you fail, then more than likely you will be wiped out in one go. So when making decisions about investments, investors usually find the best balance between risk and reward.

It is therefore important for us to understand how the potential investor thinks about the risk element of the investment. Investments take place in all types of environment. In Afghanistan and Iraq, for example, people do make investments, but these are investments that have a relatively short payback period. A rational investor would not, for example, seek to establish a business such as an online book store or an agro-processing plant in Afghanistan, even if he is getting money to borrow at zero per cent. Instead, he may seek to do some trading business where there is a quick turnaround on the investment.

Similarly in Jamaica, there are many people who would want to invest more in agriculture but refrain because of the high incidence of praedial larceny.
It is therefore very important for the investor to see (1) a stable social environment; (2) a predictable system of justice and fair play; (3) maintenance of law, order, and discipline; (4) a favourable industrial climate; (5) reduced bureaucratic structure and impediments; and (6) appropriate legislative protection. After all these are in place, then we will start to see serious investments taking place in the country.

Sure we will see some investments taking place, but they will only be in the form where investments are relatively quickly recouped. As examples we will see investments in financial institutions and services, where other people's money is used as capital while enjoying high returns, or we will see investments in trading and services, which have low capitalisation and quick returns. This, in fact, is the way that Jamaica's economy is structured for the most part, and the reason for that is because of all the impediments faced by potential investors. So if we want to see real long-term investments taking place we have to address those issues.

Efficient, corrupt-free police
At the heart of this drive for recovery, therefore, is the need for a corrupt-free and efficient police force. In the largest economy in the world one can't drive 100 yards without seeing a police car, and do not dare try to bribe any of them, or else you will certainly end up on the wrong side of the law. In the US also, while there are predictable and very efficient laws in place to ensure discipline, protection of human rights, and equity, these laws are not overbearing and do not require that everything that happens in the country has to go through a bureaucrat or the minister in charge. What they do is lay the foundation and guidelines for all to follow.

In Jamaica, for example, I can never understand the system of the Tax Compliance Certificate (TCC), which starts off by assuming that everyone is a criminal. Why does the person who has never been a problem have to go through the same process as the person who has had multiple run-ins with the authorities? Wouldn't it be more efficient to have a system where everyone is assumed innocent and if you have problems with the authorities then you are blacklisted and required to go through the process?

In Jamaica also we do not have much respect for human rights. As I keep saying, if people always have to be crying out for justice, then what time do they find to be productive? So once again, because of the way our bureaucrats operate, we waste a lot of productive time and resources dealing with issues such as Armadale and the Horizon Remand Centre, whereas if we had ensured that the rights of these people were being protected in the first instance we wouldn't have to waste time and money on these matters.

The people who are responsible for this should be asked to pay back the monies spent by the state in investigating. I am heartened by the prime minister's response to the announcement by the public defender that his office was denied entry to the Remand Centre. That is disgraceful for a country that calls itself civilised.

And how can any investor have confidence in the police's ability to solve murders and deal with extortion if they can't even control the night noise or the taxi drivers on the road? It would seem to me that these are basic aspects of discipline that any state should be able to maintain. The police seemed to have been making some effort to do so, but as usual when something starts in Jamaica it is kept alive for about... nine days. So once again people are parking (or stopping for a long while) in vehicles on Knutsford Boulevard to go into the food places thus obstructing traffic while all the policemen stationed at the Knutsford Police Post are holed up in the office trying to enjoy the air-conditioning, I assume.

If we are really serious about economic recovery, then while interest rates and other fiscal and monetary policies are important we can never really see real development occurring without first ensuring that we behave like a civilised society. Because as far as I am concerned, our society is far from civilised. In this age of globalisation there are far too many options available to investors other than Jamaica, so we must compete aggressively. For me, therefore, Owen Ellington is going to have the most pivotal role to play in 2010 in policing the economic recovery of Jamaica.

NOW FOR THE NEXT STEPS

THE inevitable debt rescheduling is upon us in the form of the Jamaica Debt Exchange (JDX), and is a welcome attempt to resolve the burdensome debt that would have led to Jamaica's continued suffering. While some of us may argue about the structure, and what we might or might not have done differently, one thing for sure is that the government must be commended for such a bold decision.

Let us understand, though, that the JDX is only the first in a series of steps that must be taken if we want to get to where "X" marks the spot on the treasure map of success. Like all treasure maps, there is a certain pattern and direction in which the steps are to be taken to arrive at the precise location of where the treasure is hidden.

The JDX is nothing but finding the map that will lead us to the treasure. It has added to it the fact that our path is now blocked by hostile forces that will only allow us to pass if we find the treasure. Our failure to do so will no doubt lead to an inescapable death, as we will have nothing to barter with for our lives. In short, the step that we have taken has set us on a path of no return, which we can only survive by taking the necessary steps to achieve the economic success that has eluded us for so long.

It is obvious to me what needs to be done in order for us to achieve that success. As I pointed out in my book, in April 2009, the only chance of seeing development in this country will have to come from "a much needed paradigm shift". That paradigm shift has not happened yet, and has only been started by the JDX. What policies are put in place will determine our progress along that much-needed seismic shift, which will only be truly complete and sustainable with a reform of our constitutional political system.

So now that we have turned the wheel of the car in the direction of the right path, we now have to keep the car on that path. Of utmost importance will be fiscal management. This will make or break the developmental structure we are trying to build. There can be no more "run with it" if we are to reach the Promised Land, because we have "sinned" so many times along the journey that there is no more forgiveness to come.

I reviewed the numbers in the economic programme, and if one does some projections it shows the significant challenges that face us down the road.

Based on the government projections, it is easy to compute that nominal GDP is expected to be $1.581 trillion in 2014. This means that based on the government estimate of a 120 per cent debt/GDP ratio by then the debt stock will be $1.898 trillion at that time.

The economic programme also provided the projected fiscal balance and primary balance percentages of GDP. We can compute the interest costs from that, which would see us having a fiscal balance of -$11 billion and a primary balance of $144 billion in 2014. If we assume that public sector wages are kept at the same figure for the next four years then we can also impute the following:

* While expenditure on programmes and capital expenditure will move from $129 billion in 2010 to $205 Billion in 2014, in real terms the 2014 spend will actually be less than currently, at $124 billion. This implies a much reduced state, which can be good if the state moves to the role of a facilitator of development rather than continuing to intervene. On the other hand, if it is not implemented properly we can end up with a much weaker state.
* If public sector wages are representative of the total wage bill in the economy, and wages are kept at the same figure over the next four years, and assuming we have steady employment, the real purchasing power of consumers will decline by an accumulated 34 per cent over the four years. This has a negative implication for businesses, and means that there will be less vibrancy in local business activity and an increased focus on external markets. This will mean that while the country may meet our earnings targets, we will create a greater disparity between the higher and lower income classes, which may lead to a further decline in the middle class. This will have to be guarded against as it is not good for development for this to happen.
* These numbers also show that over the next four years government will still have a need for financing, even though interest as a percentage of revenues is projected to come down from 53 percent in 2010 to 33 percent in 2014. The numbers also show that consumer purchasing power is expected to decline, which means that government funding is going to be primarily through company taxes and external funding, as consumption taxes will almost certainly underperform those. The implication is that the standard of living will decline for most.

From where I sit, and looking at this preliminary and brief analysis, it is not going to be an easy road. But government is going to be hard-pressed to ensure that the disparity in income is not too wide as this could lead to social conditions that we want to avoid. Government will also be tempted to raise taxes but must of necessity tighten its belt just like the consuming public; otherwise the extraction of more from less will result in further hardships.

One other spin-off from this is that local capital is going to be eroded and we will have to rely on foreigners to invest, if we are to see any substantial increase in economic activity. Lower interest rates will have the effect of making sectors more competitive, and will create opportunities in other sectors, but will not by itself spur investments. Investments depend more on predictability and the ease of capital to go to work. Therefore while the country embarks on the new economic programme, an essential ingredient of that is the significant reduction and control of crime and bureaucracy, in addition to maintaining low inflation levels.

There is a lot more detail that can come from this analysis but space does not allow it. Suffice it to say that the path of no return we have just started will not be

HOW TO DESTROY A COUNTRY AND BRAND 101

THOSE of us aware of the way some universities name their courses will be familiar with the use of the term 101 to refer to beginner courses such as 'Economics 101' etc. Similarly in Jamaica we could easily create another course and sell to the globe (if anyone wanted it). That is 'How to destroy a country and brand 101.'

This is evident in light of the recent report in the Sunday Herald that the decade 2000 to 2009 was the bloodiest on record, with over 13,400 citizens over the period, and 2009 being the bloodiest year on record with 1,680 murders committed.

This is a stark contrast to the country that gained independence in 1962, that grew at an average of over six per cent per annum in the first decade of new nationhood, and that Lee Kuan Yew came to visit in the 1960s as an inspiration for the development of Singapore. So I think that we are more than qualified as a country to teach this course.

The ingredients
To start with, you need to have a country that is considered the jewel of the Caribbean, with a lot of hope and promise, and a lot of natural resources that would be the envy of any other island. The country would need to be capable of achieving great heights and brand recognition not achieved by many countries many times its size and population. Some of these attributes include some of the best beaches in the world, bauxite, some of the best agricultural products, the world's best athletes, inventor of reggae music, and world- renowned artistes such as Bob Marley. The country also includes a people who are amongst the most talented and warmest in the world, and a resilience unmatched by any other.

Next you want to be able to wrest that gem of a country away from the wicked imperialists and give it to those who served at the feet of our former great house masters as the house servants. Allow them to write a constitution, and create a political system that is more in favour of power for the political party than for the people.

Of necessity, also, we must have a people with a relatively high illiteracy rate, who are willing to murder their own for a box of beer and a plate of curry goat at election time, every five years. This is easy if they are kept poor enough, and cordoned like cattle in places called garrisons. You also have to ensure that the health and education systems are inadequate so that the masses are kept unhealthy and uneducated, thus ensuring their loyalty to the providers of the curry goat they are fed every five years.

And there are some other necessary ingredients that cannot be left out. These can be listed as:
1. A police force that is built on political interference and up until recently has never been allowed to do what is necessary to clean up itself. The police force must also be allowed to oppress the rights of the citizens who live in the garrison communities, mainly so that they recognise that they remain nothing but pawns in the greater purpose of the country's destruction;
2. Maintaining a political system that ensures that the representatives elected by the people are more loyal to the political party than the people who elected them, thus ensuring that democracy is really a sham; and
3. A middle class and private sector that are not interested in the country's development. Where there may be a few who are really interested, make sure that their efforts are stifled by the many.

When all these ingredients are present, one will have the perfect recipe for destroying a country and brand. What you will have to do, though, is ensure that these ingredients are blended together correctly and consistently applied, for example, over a 47-year period. If this is done correctly then I guarantee that even with the abundance of natural resources, the close proximity to the world's largest market, the excellent individual achievements of the athletes and artistes, and the resilience of the people, the country and brand will be close to annihilation.
You are guaranteed to create an atmosphere where differences between the people are not created by intellectual discourse but by where you were born, or the colour of your party. I guarantee that you will have a country that will be seen as a basket case by the rest of the world, and one where the people will not be allowed to travel freely, as they will need to have permits called visas.

To top it off and make it seem legitimate, you would have to bestow titles of honourable on those responsible for killing the country and its brand.

Other noteworthy mentions
I must applaud the efforts of the police, and in particular Acting Commissioner Ellington, for the sustained efforts on the road and the push to clean up the police force. This is the first step in trying to tame the crime monster, and the high level of murder in 2009 must not be seen as a failure of these policies. The country's law and order has been compromised for a long time and it will take some sustained effort to recover it.

What the police must be careful of, though, is not to confuse effort with success. The police recently published a list of the number of guns recovered, operations carried out etc, and claimed success. I am sorry to inform them that that is not success. It reminds me of a statement by a friendof mine that a particular financial institution was doing well because the asset base had grown considerably, and I had to point out that success is profitability and equity. Similarly, success for the police will only arrive when public law and order is restored and the number of murders has been significantly. In fact the police would be more successful if there were no operations carried out and crime reduced. That would speak to greater efficiency.

The police must be encouraged to continue their efforts and ensure that the rights of citizens are maintained.

The other point is the practice by a major retail outlet, Pricesmart, to have the security give/collect the parking ticket and also manually lift the heavy metal barrier for each vehicle, which must amount to hundreds of times per day. Apart from holding up traffic this practice seems almost inhumane to the security guards, although it must serve as a weight-training exercise for them. It would seem to me that a better way is to adopt what is done at MegaMart where the security post is covered and they have a remote-controlled gate. It really can't cost that much to follow MegaMart's example.

J'CA BURDENED WITH $115B IN NEW TAXES OVER 6 YEARS

FINANCIAL analyst Dennis Chung says that Jamaicans have been taxed an additional $115 billion over six years to grow the debt and not the economy.

He told the Observer's Monday Exchange that these new taxes only fuel government's ability to borrow for succeeding fiscal years.

"The budget imposed an additional $115 billion in new taxation cumulatively over six years (between fiscal years 2003/4 to 2008/9). Has that generated any growth or development? No. What it has done, however, is ensure that we borrowed an additional $234 billion in debt," he told journalists and economists at the Observer's Kingston head office on Monday. "And I put it to you that the only reason we were able to collect that $115 billion was because we borrowed that money to put in the economy."
The cumulative taxes represent a similar amount, which the government hopes to borrow from the International Monetary Fund (IMF) this year.

Chung's argument is that new taxes within an already declining Jamaican economy are more likely to shrink the economy and lead to lower tax revenues rather than increase it.

"Everyone knows I am against additional taxation. The very nature of tax is non-productive, I can't imagine anywhere else in the world where you're trying to develop the economy, a shrinking economy, and you throw more money out of it."
His analogy was a half-empty glass that leaks from the bottom but is also skimmed from the top "and you expect it to be full. It cannot work".

Empirically, the evidence does not support a taxation model, he reasoned.
"Certainly when the US tried this approach in the 1930s it led to the Great Depression. Other countries which have come out of the recession have not come out through increased taxation, but reduced taxation," adding that governments have increased public spending and deficits.

Chung who is the author of Charting Jamaica's Economic and Social Development -- A much needed paradigm shift wrote in his column that the economy needs to be stimulated rather than taxed.

"Unless that is done then I am almost certain that we will be speaking about the same issues next year, only from a worse vantage point. A year ago I had told all who criticised me for saying we need to look at restructuring the cash flows re the debt that we would be talking from a worse position a year later," he said.

Chung who is also an Observer columnist, added in his Christmas day article that "if the rate of taxation were to be reduced by two per cent, at a multiplier effect of four, then the government could in fact collect marginally more tax than is currently the case".

The logical solution, he wrote, was to withdraw the government's influence on the economy in the form of taxes and the bureaucracy; and second, improve the multiplier effect by introducing fiscal measures that will increase confidence and the economic outlook.

Prime Minister Bruce Golding announced his fourth tax package for the year on December 23rd. Government is seeking to raise $21.8 billion -- annualised -- to close the gap in the budget as a result of the economic downturn affecting small and large economies worldwide. Budgetary support of US$1.3 billion is also being sought from the IMF, and the Opposition has suggested that the new tax measures were part of the IMF conditions.

Included in the new tax package is increased GCT from 16.5 to 17.5 per cent, but for goods and services supplied by the tourism sector GCT will increase from 8.25 to 10 per cent effective April 1, 2010.

Golding said that individuals earning incomes above $5 million annually will be charged increased rates of income tax from January 1, 2010, to March 31, 2011. The new rates include: no tax on salaries under $441,168; 25 per cent on salaries up to $5 million and 35 per cent over $10 million.

Also Jamaica Public Service (JPS) residential customers, effective January 1, were to pay 17.5 per cent GCT on electricity usage that exceeds 200 kilowatt hours per month. The measure was expected to earn the Government revenues of $1.2 billion.
A reviewed package was announced days later requiring the JPS customers to pay a special 10 per cent GCT on whatever electricity they use in excess of 200 kWh each month. The adjustment is now expected to yield $1.45 billion.

Subsequently, JPS notified the public that it would not be able to collect the tax until its billing system could accommodate it. They are targeting a start-up date in March to implement the tax.

What power, what glory?

AS we go into 2010 it would suit us to remember a song from one of Jamaica's greatest singers, Ernie Smith. He released "We de people/the power and the glory" in 1976, and these words ring true today more than any other time, as if he had some prophetic vision of what Jamaica would become under our political system. Or is it that the same culture existed then? I remember the state of emergency at the time but was too young to really appreciate all that was happening.

I also remember the 1980 election and the celebratory sounds of gunshots that rang out throughout Kingston when the sun started to go down. It was indeed a period of change in Jamaica that we never seemed to capitalise on, as many other countries have done, as we find ourselves back in the same quagmire of tribalism as in 1980. So for Jamaica it always seems like an everlasting state of deja vu.

Words ring true
Lines from Ernie Smith's song include the following:

* "As we fight one another fi the power and the glory, Jah kingdom goes to waste and every drop of blood we waste a fi wi own disgrace"

* "We the people want to know where we going...we have too far to go not to

really know just how we getting there and if we getting anywhere"

* "We have too much to change not to know the range of possibilities and changeabilities"

* "Can't build no foundation pon a if nor a but. Are we building a nation or are we building a hut? Can't build no dream on a fuss nor a fight"

These lines aptly describe how Jamaica has progressed over the years and the fight between the two political tribes, who seek the power and glory of a sinking ship, quite content with being the captain when it is at the bottom of the ocean.

Realising that the ship (Jamaica) will eventually sink to the depths of poverty and the point of no return if we continue, I have to ask, what power and glory is there in a damaged nation? What power and glory is there in seeing our people continually suffer? As far as I am concerned there is none, and we need to realise that when the Jamaican ship goes down the half with PNP or JLP won't stay afloat while the other half sinks. This is physics, as my son would say.

A lot of the blame must rest with our citizens, however, who would rather discuss their disgust on verandahs while showing hypocrisy in public. So one reader writes to chastise me for "insulting" the Jamaican people in my last column when I said that as usual they focus on the wrong issue regarding whether to tax the rich or the poor, when what really needs to be discussed is the effect of taxation on the country.

This is nothing but an escape from reality, which as a people we have perfected as illustrated by our ability to profile in the latest cars, clothes, and attending the most expensive events even while we are overdue on our credit cards or other loan payments. As I said to Bev Manley in November 2008, as a country we would not deal with the effects of the global financial crisis because politics would take precedence over the needed debate on how to move the country forward. So instead of planning how to chart the country's progress in 2009, our discussions focused on elections, nailing corrupt individuals, arguments about sexual orientations, and whether the government was meeting its timetables or not. Even now we refuse to focus on the real issues before us. It seems we have lost the capacity to do so, or could it be a deliberate strategy?

Inevitably, in our quest to victimise each other we end up hurting everyone who lives in Jamaica. There is no way the rich can get richer if poverty increases and there is no way the poor can improve if the rich are targeted.

Facing reality
So in response to the reader, the argument is not whether Jamaicans felt insulted or not; it is whether it is true or not, and on that I think I stand vindicated. In order to solve a problem we first need to admit we have one. And we are a country that prefers "suss" over facts.

This article really has nothing to do with economics, or numbers, with which people relate my columns. This is because, as I concluded in my book, the real problems Jamaica faces are social, as it is the accumulation of behaviour that determines what happens in an economy. We cannot debate the balance of payments or fiscal accounts without understanding the behaviour that causes the deficit in these numbers. Economics is about behaviour, and economic theory assumes that social behaviour is not in contradiction to development.

So as we go into 2010 we must realise that it is irrelevant what policies or taxes are put in place if we cannot address the issue of disunity. If anyone can identify a country that is as tribalistic in their politics as we are and has achieved economic and social development, then I am willing to learn, but frankly I can't recall any. What I see on CNN of these countries, on the contrary, is constant warfare between their citizens.

As an example, it is my view that what drives our high interest rates is the risk to investment that arises from our crime rate and bureaucracy. That is, investors are more concerned about uncertainty and risk in an economic environment when determining whether to invest, rather than the level of interest rates. Return on investments will always adjust to the cost of money in a predictable investment climate, and interest rates will eventually come down if this risk is removed.

So as a country we need to determine where we want to go, not where we want our political party to be in relation to the other political party. We need to fully understand that when the PNP side of the ship goes down the JLP side goes down with it also. When we understand this, then that will be the point at which we start to develop as a nation. The IMF agreement will not help if we fail to understand this basic concept of community and nationalism. And more importantly, we will never see economic or social development without it.

For 2009 my personality of the year is the Jamaican people for enduring the ravages of the global financial crisis and our own self-imposed destruction through our tribal politics, practised more by the followers than by the politicians.

I think I am getting to the point where I have to assess whether or not it makes sense to continue to contribute to economic commentary in Jamaica, as it does not seem to make a difference in the ever downward spiral Jamaica continues to face. Until then I have to ask, what power and what glory are we fighting for?

No new taxes: a better alternative

As usual in Jamaica we consume ourselves with arguments around the wrong alternative. So instead of discussing the real issues that will carry the country forward we end up being caught up in the political and social spins on the various issues.

The fact is that the recent discussions re the tax package, as to how much burden the rich or poor should bear, is really a redundant argument. Empirical evidence and logic show that you can't help the rich by burdening the poor and similarly you can't help the poor by crucifying the rich. The latter is supported by the rich taking up the offer of "five flights a day to Miami in the 1970s" and the former supported by the recent decimation of the US consumer in 2007/8, which caused economic declines, and a worldwide global recession.

Poor and rich suffer together
Economics does not distinguish between rich and poor, like politics, and is concerned with things like total money in circulation and the multiplier effect. I don't remember, limited as my knowledge is, looking in any economics book and reading about whether to burden the rich versus the poor. So once again politics takes the forefront in Jamaica, in the face of a worsening economy.

My argument has always been, and continues to be, that any new taxes within the context of an already declining Jamaican economy are more likely to shrink the economy and lead to lower tax revenues rather than increase it. This of course assumes that the other two arguments forwarded holds, that is (1) no new debt; and (2) reduced government expenditure.

It is only logical that if an economy is stagnant or declining (that is no real growth from production) at say $1 Billion, there is no new input in it from loans or other external funds, and in addition taxes are taken from the economy, then logically the economy must shrink. So we can verify this by assuming the following:

The table clearly shows that without any growth in the economy, if money is taken out then the size of the economy will contract and subsequently the tax collections will decrease, instead of the intended effect of increasing revenue.

This I think is borne out by Jamaica's fiscal numbers over the years. Looking at the fiscal numbers between 2003/4 to 2008/9, the government has increased taxes every year for a total tax increase over the period of $115 Billion. Over the same period the total new debt was $232 Billion, and was the only reason why the economy managed to grow, and also the only reason why the government was able to collect the increased taxes. So it stands to reason that if there is to be any increased economic activity or even a maintenance of the current economic activity, then the only way is for new loans to be introduced into the system.

Replacing higher cost debt
One way that the government is correctly doing so is by replacing the higher -cost debt with lower-cost debt. That again is another argument and I don't think it will have the effect intended for other reasons, but I will not get into that here.

On the other hand if the rate of taxation were to be reduced by 2%, at a multiplier effect of 4, then the government could in fact collect marginally more tax than is currently the case. This could be further increased if through fiscal policy, crime falls bureaucracy is addressed thus allowing the multiplier effect to increase.

The logical conclusion then is that the way to find ourselves easing out of this vicious downward spiral is to (1) withdraw the government influence on the economy in the form of taxes and the bureaucracy; and (2) improve the multiplier effect by introducing fiscal measures that will increase confidence and the economic outlook.

So the argument that we have been having over the past week on whether to tax the poor or rich is really based in politics rather than economics, as proper economic policy dictates that in times of recession less taxes and increased stimulus is needed as promoted by Maynard Keynes. This theory has been successfully used in the recent recession.

So my view is that what is needed is not new taxes but a stimulation to the economy, and a restructuring of the bureaucracy and fiscal policies to engender the much needed paradigm shift. Unless that is done then I am almost certain that we will be speaking about the same issues next year, only from a worse vantage point. A year ago I had told all who criticised me for saying we need to look at restructuring the cash flows re the debt that we would be talking from a worse position a year later.Need I say more?

Poor customer service continues
A few months ago I wrote an article about poor customer service, and this seems to be growing worse. It seems as if this has escalated with the harder economic times. Only a few months ago I had experiences with two listed companies calling me about money I did not owe them, only to apologise and say that their systems had messed up.

Just this week Scotiabank, who I have a mortgage with called me on three different occasions to say that I had missed a payment. This was after a similar incident about two months ago. One lady even insisted that I (the customer) was wrong, wasting my time for five minutes and refusing to hang up when I told her she would have to call back as I was in a meeting. Well, she didn't call back but I had to call someone and tell them to stop wasting my time. Again the excuse is that the system was not working properly. Similarly NCB wrote to me a few months ago to say I owed them for a card they had sent me, which I had not requested and I had never accepted or used. They also blamed the systems.

Poor Jamaicans. We are let down not only by our governments over the decades but also by the poor customer service from various institutions. I long to see the day when the Jamaican citizen is put first.

Jamaica's opportunity

At the time of writing this column, I, like every other Jamaican, am waiting to see what tax package the government delivers and the final outcome of the IMF negotiations. Both these issues have been on the tongues of everyone except the dead in Jamaica.

Jamaica is, I believe, at a significant crossroads, as what happens over the next six to twelve months will determine if we go down like the Titanic or rise like the phoenix from the ashes. It is, I think, the "last hurrah" for Jamaica, because if we mess up this time then there is a very low probability of turning back. And this is why all hands must be on deck and political expediency must take a back seat. It also means that the way in which we seek to crucify persons for the smallest of mistakes must stop because I guarantee you that as we seek to emerge from the mire we are in, mistakes will be made. What we need to ensure is that the mistakes are controllable and do not have a materially detrimental effect. We need to take a practical approach to it lest we find ourselves being a victim of our own criticisms.

A serious bind
There is no denying that the country is in a serious bind, and this will have a dramatic negative effect on the lives of many Jamaicans. But I really do believe that the present crisis provides us with a significant opportunity, as we are forced to face our reality as we are unable to postpone our challenges by going to the capital markets. In addition to this inability to beg or borrow our way out of the problem, there are some positive signs as shown in the significantly improved balance of payments, and more heartening for me, the way in which the police seem to have risen to the challenge of ridding the streets of indiscipline and stemming the tide of corruption within its ranks. The police leadership must be applauded for this, and I only hope that the courts can start to support them by dispensing with cases quickly.

One thing is certain: when we emerge from this present crisis we will be looking at a different Jamaica. In order for Jamaica's economy to properly adjust we will see business failures, as well as changed consumption patterns that will result in changed market behaviour. And there is nothing wrong with that if we are to move ahead, but any resistance to change will see a more painful and prolonged transition.

One of the changes will be to the government bureaucracy and in particular the fiscal accounts. Government has responded to the shortfall in revenues by announcing that new taxes will be announced, and no doubt the IMF may have had some hand in this. While the truth is that the government did not seem to have any other option, I don't think this will improve the fiscal situation much and could in fact cause it to worsen.

The fact is that taxes have been raised twice since the start of the current fiscal year, and the revenues continue to underperform. In addition the signs are evident that the retail sector is in trouble. The Bank of Jamaica has released data showing that the real value of money in circulation this Christmas is lower than last year. Real GDP is also down by 4 per cent and over 40,000 persons have lost jobs since the start of the year. There also has not been any increase in the salaries of public sector and many other workers. The fact is that purchasing power has fallen by approximately 20 to 25 per cent.

The world has learned from the 1930s recession that in a declining economy the only viable course of action is to increase government spending and reduce taxes. This course was not taken in the 1930s when we had the great depresiion.

Under performing revenues
As at October 2009 tax revenues have seen a real increase of approximately 3.68 per cent over October 2008, which means that government is already taking more money out of the economy, no doubt to primarily pay debt charges. In relation to the budget, however, tax revenues have under performed by approximately 10 per cent, indicating that the economy will not give up anymore taxes.

Increased taxes will have the effect of reducing the real purchasing power of an already fledgling consumer market. This will in turn lead to more conservatism around spending and result in lower profits for companies, which will face a stagflationary environment. This will result in lower company profits tax, which will see more businesses closing their doors resulting in lower employment or lower incomes. This in turn will lead to lower PAYE collections. Again, if more people see lower income levels (from reduced income or unemployment) then the result is lower consumption, which of course means lower GCT, SCT, and customs duty.

In addition to this, as government seeks to further reduce interest rates then a natural outcome will be lower tax collected on interest. Some have argued that government needs to increase tax on interest payments but that move itself will have a downside which could cause a more significant longer-term problem. The Prime Minister referred to this in his interview last weekend, when he said that this would result in persons seeking a higher interest rate to compensate for the increased tax. In addition to that, any taxes on interest, or profits, raises the question of uncertainty and risk for capital and therefore could see a resistance to invest risk capital, which is what is needed for economic development. So while this is an attractive offer, it could lead to a Tiger Woods-type backlash.

In the past the government was able to increase taxes successfully because it borrowed monies to support the economy and by doing so created a false sense of growth.

So the question is, if new taxes will cause the economy to compress and not improve the fiscal, and if the attractiveness of taxing interest or profits further is not recommended, then what options does the government have?

The first thing is that the public sector like businesses must accept that the environment has changed and they must adapt, or pull Jamaica down with it. A smaller and more efficient public sector is necessary if we are to move forward, but the bureaucratic and inflexible culture of the public sector does not provide me with much hope. The Prime Minister is making an attempt to make the change and I wish him well. At the same time this is happening the only real viable option for growth is to conclude the IMF agreement and allow for access to multilaterals for budgetary support. When this funding is accessed, however, it must be spent efficiently and not get caught up in the old ways of expenditure habits in an increasingly burdensome public sector.

Diamond in the rough
While all of this is happening it is critical that we applaud the efforts of our entrepreneurs. About two weeks ago I was given a brief tour of the development that is happening at the Wexford Hotel and was quite impressed. The new wing of suites and facilities for meetings is impressive in an environment that has not been very kind to the tourism industry. This investment shows a certain amount of confidence in the Jamaican economy and must be commended, and I would even go as far as to nominate it for Business Leader in 2010, even though I have no influence on the selection committee.

HONESTY IS THE BEST POLICY

When I was growing up I always heard the phrase "Honesty is the best policy". This can be applied in many ways, as you can speak about being truthful to someone about an event or facing the reality of the situation. So even at the expense of looking bad, one should always understand that a delayed consequence in most cases is always much worse than confronting the reality as soon as it arises.

This has been the demise of Jamaica. We have simply failed to confront our reality for too many years and have suffered as a result. In my book I looked at Jamaica's economy (through numbers) since 1962, and the thread that underlies our economic demise is that for most of our 47-year history we have just failed to confront our reality and deal with it. Because of that we have continuously postponed our development by always telling ourselves a lie that all is well, not necessarily in words but by our actions.

Gloom and doom
In fact, over the past few years people have always told to me that I'm always predicting gloom and doom for the economy. And in fact just over a year ago someone said to me that I should stop being so pessimistic and "think positively". Only recently I was told that someone else said that I and three other analysts were being too negative on the economy and that we needed to talk it up.

My response to these accusations is that I have always believed that "honesty is the best policy". Because when we are honest with ourselves then we truly recognise the challenges we face and that is always the first step to deal with them. But when we continue to lie to ourselves, we continue to do things like borrow more money to afford the new car and new clothes, only postponing the day when the truth cannot be deferred. And so Jamaica finds itself in that situation today, where we can no longer postpone the truth of our reality.

There is, of course, a subtle distinction between realism and pessimism. Encarta defines them as (1) Pessimism - "tendency to see only negative or worst aspects.and to expect only bad or unpleasant things to happen"; and (2) Realism - "a practical understanding and acceptance of the actual.rather than an ideal or romantic view."

So people tend to confuse pessimism with realism because of their own lack of understanding of the circumstances. In other words, if a train is coming directly at you, then being optimistic that it will not hit you without action is stupid. So if you do not understand that the train is going to hit you and dismiss the warning as pessimism then it will of course hit and kill you. On the other hand, if you accept the reality that the train is coming, then you can act and move out of the way to avoid being killed. This is the purpose behind plans and budgets.

And this distinction, in my view, is one reason why the global financial crisis has caused so much stress for so many, and even closer at home why many individuals find themselves in difficulty after the collapse of the unregistered investment schemes.
In March 2007 when it was obvious to Greenspan and even two local analysts (Ralston Hyman and I) that the US economy would enter recession, the great Bernanke and Paulson were confident that the US would not enter recession and the bias was still towards monetary policies geared towards tightening. Similarly, many local persons were unwilling to accept the reality that the unregistered schemes were in fact unsustainable and thought many who warned to "check before you invest" were pessimistic.

The consequences of both are on record for everyone to see.

Benefit of realism
If, on the other hand, both situations were looked at from a realistic and analytical point of view, then much of the pain that the world and individuals go through today could have been avoided. The world may still have fallen into recession but policies could have been put in place earlier to make it less painful. And if persons were more realistic about the investment schemes, much individual pain could have been avoided.

The problem is that people always find greater comfort in going with the crowd and so would rather believe what the crowd is saying rather than the minority. This is why markets crash, for example, because people usually follow the herd mentality and flock to investments along with the crowd, which inevitably leads to bubbles and eventual market crashes. There is nothing that replaces good and solid analysis.

So if you think about it, if Jamaica had faced the reality of our structural economic challenges decades ago then we would be in a much better position than we are today, and therefore "honesty is always the best policy". But we get there not by calling down "fire" on all those we deem to be pessimistic but by carefully analysing why they are pessimistic and comparing it against our own well-researched findings.
So when the National Anthem says "give us vision lest we perish", I think we need to add to that: "and allow us to properly analyse and interpret lest we be blinded".
When I listen to some of the analyses relating to the present challenges we face I only see a repeat of the same mistakes made, as a lot of the analysis and solutions are misguided. The one thing you want to do when faced with a challenge is first and foremost maintain a clear head and do not rush to judgement and solutions, as this is just as dangerous as taking the line of optimism without foundation.

Last year (2008) I had indicated that companies and individuals should have started to put their house in order for what was coming this year. Those who did are better today than those who did not; even though survival is never guaranteed, at least you get to live longer than those who did not.

As we go into 2010 the probability is that the economy will decline further, which will be exacerbated by the fact that many companies and individuals did not prepare adequately. But we can see a better 2010 if the correct choices are made at the country, company, and individual levels. The question is, will we continue to be optimistic without foundation or face the reality and allow for well-founded optimism?

The business of productivity

Recently, the Jamaica Productivity Centre released a productivity report on the period 1972 - 2007 in Jamaica, where it showed that over the 35-year period the labour productivity of the Jamaican worker declined by 1.3 per cent per annum. It further stated that at our current rate of growth it would take 40 years to get to Barbados' current per capita
GDP level.

What surprised me about the report weren't the findings, as anyone who is even slightly aware of what is happening in Jamaica will know that our productivity and growth levels are at the bottom of the pile. What I am surprised about is the reaction to the information, as if "Wow, I didn't know we were doing this badly". It seems as if everyone has forgotten that the last time the centre reported the results were similar.

Consistent decline
The fact is that Jamaica's productivity has always been in consistent decline since the 1970s, as I illustrated in my book, with the exception of the decade of 1980 to 1990, when the Total Factor Productivity (TFP) - productivity measurement factor - was 1.0. In the decade 1960 to 1970 the TFP was 2.4, 1970 - 1980 it was minus 3.8, and in 1990 to 2000 it was minus 1.7; all measured as annual averages.

During similar periods, this was reflected in the GDP growth numbers. These periods are 1962 to 1971, when accumulated GDP growth was 68.5 per cent (average annual of 6.9 per cent); 1972 to 1981, accumulated GDP growth of minus 9.5 per cent (average annual of minus 1 per cent); 1982 to 1991, accumulated GDP growth of 19 per cent (average annual of 1.9 per cent); 1992 to 2001, accumulated GDP growth of 8.9 per cent (average annual of 0.9 per cent); and 2002 to 2007, accumulated GDP growth of 9 per cent (average annual of 1.3 per cent.

One could ask the question why we had growth during the 1990s if TFP was negative. The answer is simply that we were able to grow because we borrowed to consume and create economic activity. So today we are faced with a situation where we have to pay back for all the money we borrowed to consume when we were not producing the means for our
own consumption.

This is at the heart of all our challenges. The question then is how we improve our productivity so that we can enjoy real economic development and all the benefits that come with it. First I think we need to get an understanding of what productivity is, as it seems obvious from the policies that our leaders have pursued that they really have no idea of what productivity really is.

So for the benefit of our leaders, productivity can be defined as "the rate at which a [country] produces goods or services, in relation to the amount of [resources] needed" - adapted from Encarta.com. In other words if someone employs $100 worth of resources and produces $200 worth of goods yesterday, and today can employ the same resource value and produce $250, then productivity would have increased by 25 per cent. What Jamaica has been doing is producing less with the same amount of resources, which means that more resources are needed to produce the same amount. But ironically our consumption has been increasing while our production has been falling. So in order to consume more we need to borrow from others who are producing more than they consume and end up with reserves. In effect Jamaica is a parasite on the world's production.

What of technological improvements?
But some may say that during the 1990s especially, we had improvements in technology, as more computers were put to use, the Internet came into being, and more persons had cellular phones. So if we saw an increase in the productive tools being used then obviously productivity must have increased. And some people have tried to argue with me in that manner, as Ripley would say "Believe it or not".

First, we need to understand that if we look at the use of technology in Jamaica, most of it is geared towards personal consumption, in my own informal analysis, rather than employed in productive use. And the reason why we are able to consume these productive tools is that we borrowed the money to consume them.

Secondly, and in my mind more importantly, we need to understand that a computer does not work by itself, nor does a new state-of-the art piece of machinery. All productive tools require a productive mind behind them in order to be the most productive they can be. So even when the police talk about the number of guns on the road, that is not what causes the crime. What causes crime is the number of criminal minds behind the guns. Similarly, when we talk about the absolute amount of debt, that is irrelevant without looking at how effectively each dollar of debt is used.

So the real challenge we have when it comes to lack of productivity is not how much foreign investment we attract, or how much agricultural land is in production, or how much money is pumped into the economy. The real problem of productivity comes back to the social issues. The problems relate fundamentally to how productive our people are. And so when we see a situation where 50 per cent of students leave secondary school without one subject, then is it any surprise that this translates into Jamaica having the lowest productivity rate in the region? Can we be surprised at our low rates of productivity when our citizens spend their days demanding justice from both the police and the criminals? How can people be productive if at a basic level they have to worry about their security? How productive can people be if their days are caught up worrying about their missing children?

And if our citizens cannot be productive, then what sense does it make to have the most efficient tools of productivity? We also need to remember, and everyone is seeing it now, that economies like Jamaica's thrive on consumer spending, and it is a known fact that most spending occurs within the lower-income classes, so that if they don't earn a decent wage the economy will stagnate. This is exactly what is happening as real purchasing power, particularly in the low-income groups has fallen significantly year over year.

So in the final analysis when we speak of productivity and growth it would do us well to understand that this is fundamentally a social problem. My own view continues to be that the failure of Jamaica's economy starts with our failure to protect and advocate for the fundamental human rights of our citizens, and unless we change this then we will persist on a path of economic and social failure.

The great USA that we look up to starts its constitution with the words "We the People of the United States, in order to form a more perfect Union, establish Justice." (You will note that Justice has a capital J). The fact is that unless we start to realise that all our economic and social challenges come from the inability to provide the Jamaican citizen with justice and a protection of his/her basic human rights, then I guarantee that next year this time, and into the foreseeable future, we will be talking about the decline of both the Jamaican economy and values and attitudes.

The economy must adjust to develop

From time to time, I talk to business people in Jamaica who tell me that with each passing day business is getting more and more difficult, as buyers are not only spending less but are taking longer to pay.

We see also where financial institutions have been reporting a fall-off in consumer loans, and targeting the small and micro business sectors.

Added to this we see where some 30,000 jobs have been lost since the start of the year, and my own expectation is that we may see another 15,000 more in job losses before the end of the fiscal year.

Money circulation
The fact is that real money in circulation has taken a beating, and more importantly the consumer purchasing power has taken a severe beating. When we speak about a vibrant economy it is important to remember that this is only possible with spending power in the hands of the average consumer, as we have seen in the US, which has had to introduce a very large stimulus package to keep their economy going.

The most recent US data has shown that the last quarter GDP has increased by 3.5 per cent but this in my view was driven by stimulus money more than any real recovery in the economy, as job losses still continue to mount.

In Jamaica's case, having spent all our future income already, we have no "savings" to create any stimulus for the economy. The fact is that the Jamaican consumer has been hit really hard over the past few months, and this trend I expect will continue for at least another few months. But this is necessary if we are to change the current economic structure of the country and reposition ourselves for development.
The following developments have caused havoc for the local consumer:

. 30,000 persons, or approximately 2.3 per cent of the labour force, have lost jobs since the start of the year;

. Real incomes have declined by about 10 to 14 per cent, as wages and salaries have been kept flat for the most part while we have seen inflation of 14 per cent in the last fiscal year; and

. There have been increases in taxes, food prices, fuel prices, and other basic items, further eroding the purchasing power of consumers.

This means that total consumer purchasing power has declined rapidly. Add to this the losses sustained by consumers in the unregulated investment schemes, and the fact that some have been paying off loans or saving more in anticipation of more difficult times, and you have a scenario where consumer spending has declined significantly. So even though the absolute amount of money in circulation may not be much different from what it was a year ago, the fact is that the real expenditure has declined significantly (even so, the BOJ has reported that the expansion in money supply was lower than projected). One could easily expect that real consumer expenditure could have declined by about 25 per cent year over year.

So what all of this means is that businesses are inevitably going to suffer and I expect that we will see business fallouts accelerating into the first quarter of 2010. In fact, when the car dealers received the recent stimulus package I was on a programme with two of them professing how happy they were with the stimulus. I told them that it would not make a difference and car sales would continue to decline. The fact is that consumer spending is driven by how many persons have jobs, expectations, and the purchasing power of consumers. So if one were to pull the stimulus money out of the US economy, there would no doubt be a decline once again.

Consumer spending necessary
Creating stimulus packages with no positive adjustment to the spending power of consumers will have little or no effect. The lesson from this is that instead of providing stimulus to the businesses, the government would be better off providing stimulus packages to the consumer. In the US, for example, the stimulus came mostly in the way of programmes such as the cash for clunkers, government employment projects, and extending unemployment benefits. This is the only way to positively impact the economy.

The Observer's Fashion Night Out is an innovative way of providing a stimulus to consumers as it provides them with greater purchasing power through lower prices. My own prediction is that the overall night will be relatively better for the merchants, but the downward trend in business will continue after the night is over. Businesses in clothing and other basic necessities should fare better. This one night will not develop any long-term loyalty, as loyalty in today's economy only comes through much lower prices.

But the fact is that this adjustment in the economy, through business fall-outs and lower consumer purchasing power, is necessary if the economy is going to develop. Jamaicans have for a long time lived above our means, thereby running up a significant trade deficit. The only way that we have been able to keep our heads above water, and avoid drowning, is to put on the debt "life jacket". Continuing the course of borrowing our way out of the problem will only make the adjustment more violent when it comes, as it is not possible to borrow forever. So the sooner we make the adjustment, the better it will be for us. Because we have taken too long to make this adjustment I think the next few months will be an experience in pain for many.

The role of the government in all of this must be to (1) encourage investment and (2) more importantly to ensure that the adjustment is as painless as possible. And this latter role is critical if we are to ensure the economy's adjustment in as rapid a timeframe and painless a manner as possible. Any prolonged adjustment period and too much pain will be bad for the country, and so careful policy implementation is going to be critical. Even if we were to select the appropriate policies and implement them, we could still have more challenges than we want.

What we will see is that businesses that rely on luxury items and imports are going to be the first to fail. Outside of that, businesses that fail to employ the necessary professional expertise to help them through this time will run into problems also. There are some that were more proactive than others and sought the assistance from last year and were able to adjust way in advance of the economic onslaught. Those less prepared will either see their capital depleted or will fade away into the sunset.

So even though the US economy is showing signs of improvement this is not going to have any short -term positive impact for Jamaica. We will continue to see the economy being weighted down by our past decisions. This adjustment, however, is necessary in order for us to put a halt to the stagnation we have found ourselves in since the 1970s (with a small moment of hope during the end of the 1980s) and start on the path of development.

As usual, however, the road we take is going to depend on the policy choices we make.

BETWEEN A ROCK AND A HARDER PLACE

n July 2008, I wrote an article entitled "A perfect economic storm", where I indicated that 2009 would be the worst economic time since independence.

Since then the winds preceding the storm have been blowing but have not made landfall yet because of the slowing economies, which resulted in the significant fall-off in oil prices. If oil prices had remained even at current prices then I think we would have felt the effects earlier.

That storm is now about to make landfall in Jamaica, and those who were thinking would have started to make preparations from last year. This, particularly since this storm is going to be for a protracted period and a new thinking is needed in business and nationally to deal with it.

Signs of the times
The signs are showing every day that the storm is coming onto our shores. The Government first announced the need to go back to the IMF, and this was followed by reports of a private sector proposed liability management programme. Then came the downgrade by S&P, the very upfront speech by the prime minister, the presentations by Professor Harris and Mr Livshits, and finally the report from the Economist Intelligence Unit (EIU).

All these revelations come as no surprise to us locals who have been saying for a while (some from in the 1990s) that Jamaica has a very serious fiscal situation and that the only thing that has been holding the pieces together was the fact that we were willing to mortgage away the wealth of not only our children, but even further generations by borrowing money to satisfy a lifestyle we cannot afford.

It could very well reach a stage where pregnancy terms in Jamaica move to twelve months as babies may not want to be born to face the approximately $482,000 debt they are saddled with at birth. But the fact that these reports are coming from foreigners makes it more real to many of us who have not been ardent followers of Bob Marley and managed to "emancipate ourselves from mental slavery", always hanging on to the word when delivered with an accent other than Jamaican.

So here we are in October 2009, looking helplessly at the oncoming economic tsunami, as it starts to ravage our shores. Our only hope being that it will not stay with us for long but deliver a swift blow and destroy what it must quickly, so that the excruciating pain will not last. We are indeed caught between a rock and the harder choices we have to make with each passing day.

In Jamaica, I have come to realise that it is not only death and taxes that are certain but also prolonged economic hardship. And because of this many people have said to me that Jamaicans are used to suffering and so this will be no different. This time, though, it will be different as there is no capital market to freely access, foreign-exchange earnings are significantly down, oil prices are trending back up, crime continues to destroy the country's stability, and the workforce has been decimated by the failed education policies over the decades, which is responsible for over 50 per cent of secondary school leavers not attaining even one subject at CSEC level. I wonder if these people were not listening to the presentation made by the Prime Minister re the state of the country's fiscal accounts, or maybe they did not understand what he was saying.

Short-term fiscal challenge
So while Jamaica faces a fundamental economic challenge (which can be seen as the Balance of Payments issue), this is preceded in urgency by the short-term fiscal problem, which must of necessity be addressed. If we do not adequately address the short-term fiscal challenge then any economic policies we put in place will be useless from my perspective.

The next three to six months should be challenging for the fiscal accounts, as the economic challenges start to set in even further. And we see indications of these. In an article, carried in last Wednesday's Business Observer, it reports that retail merchants have been seeing a fall in sales and are hoping that the Observer's Fashion Night Out will improve sales. On the same day another article correctly states that rising oil prices will reverse the trade gap.

Both these articles point to what is on the economic horizon, and dare I say that the merchants will be sorely disappointed, as even if they were to see some improvement in sales over that night, the probability is that sales are going to fall back right after, leading into a very blue Christmas. Even the banks are reporting a fall-off in automobile loans year over year.

The fact is that real incomes and aggregate demand is much lower than it was one year ago. We have seen where there has been a freeze on public sector wages, and even in the private sector wages have been frozen.

Faced with an increasing fiscal challenge, the Government had no immediate alternative but to increase taxes a total of $24 billion for the fiscal year, reducing GDP (after considering the multiplier effect albeit some of finds its way back into the economy but the majority will not). In addition to this, the $18-billion expenditure cut by the government will negatively impact GDP by approximately $72 billion. To deal with the short-term fiscal challenge, the Government did not have much alternative.

We also see where over 30,000 jobs have been lost, with more to come. And if all of that was not enough, the country will have to grapple with higher oil prices in 2010, which I expect to be at least US$90 per barrel by the middle of 2010. At the very least also the global economy is going to see very sluggish growth, even while the risks to another decline is possible with the debt crisis that countries such as the US and Japan face, as they rack up significant fiscal deficits.

Jamaican-made challenges
The greatest concerns I have for the Jamaican economy, however, are things that we have created ourselves. Firstly, the situation with crime still continues to be a noose around our necks. Even if the economy were to attempt to make an acceptable adjustment, the crime situation would hamper its progress, as the report from the EIU correctly states. The second situation is the low literacy level of our
working population. Recent data suggests that over 50 per cent of school leavers have not achieved proficiency in even one subject. The problem we face therefore is that compounded by the Government's inability to provide a suitable social safety net; the labour force does not possess the skills necessary to fend for themselves during this difficult period. So the only thing they know how to do is find employment, which is decreasing, as many of the businesses they were working with depends on imports to survive.

But the problem is that with less expenditure in the economy (measured by a reducing GDP) and the limited ability of the government to access debt, then some of them will be forced to close down, or at best scale back their operations, leaving many without any immediate job prospects.

The prime minister indicated that Jamaica could be successful in obtaining some budgetary support from the IMF, and that would be welcome as it means that there would be monies available to support social safety and capital expenditure programmes, which are necessary to keep the economy buoyant.

Two-phased solutions
But the solutions must be seen in two phases. First, we must of necessity address the GDP situation, and this must be done through increased expenditure provided by fiscal initiatives. This can be done by either reduced taxes or increased targeted expenditure. This is what has worked to keep the developed economies afloat. The problem is where Jamaica gets the money to do so, as this sort of initiative is needed to resolve the challenges of the next three to six months if we want to maintain some buoyancy in the economy.

There are only two areas of fiscal expenditure that have enough critical mass to provide that sort of boost. The first is debt expenditure, but the Government has rejected any notion of a liability management programme, and wages and salaries. But based on what needs to be done to assess the wages and salaries situation, the redundancy payments that would have to be made, and the fact that most of the civil servants are teachers, nurses or police, then there is not much short-term benefit here.

I don't see increased taxes as an option as this will only serve to further reduce the GDP value and negatively affect businesses and jobs.

The only real short-term option we face is to borrow more money. And there is nothing wrong with that if the borrowed money is going to be surgically implanted in the economy to ensure the best return from those funds. If, on the other hand, the increased debt is spent on consumption then we fall back into the vicious debt cycle we have become so accustomed to.

What is needed is creating jobs through specifically targeting SMEs engaged in export-driven activities and also in the area of capital spending that will enhance foreign exchange-earning industries such as tourism and agro-processing.
In the medium to longer term, fundamental economic policy shifts will be needed to address Jamaica's development challenge and ensure that the increased debt to GDP ratio can be worked down. The economy will have to decline before it can start to develop. But the right policies are going to be necessary to ensure that when it declines it does in fact start to develop again.

As we are today caught between a rock and a harder place, as every day that passes the tsunami comes ashore the choices will get harder.

CRABS IN A BARREL

If one has ever seen crabs in a barrel, you will realise that they all try to come out of the barrel at the same time. So they climb on each other, in futility, as they can never individually come out of the barrel. Soon all the crabs die and none will be successful. If, on the other hand, they all realised their individual deficiency then they would join "claws" and assist each other in making their way out of the barrel.

This is also the way of the market economy. What a true market economy does, however, is ensure that the strongest and most efficient crabs will always survive by virtue of the invisible hand that guides the market. This doesn't happen in Jamaica though, as through political interference we have managed to replace the invisible hand with a very visible one that rewards political tribalism over the stronger and more efficient players. The result of this interference over the years has been a very inefficient market structure and the eventual death of all the crabs, rather than ensuring that the strong and efficient ones live to once again grow the population of crabs.

Fiscal Accounts
We, are of course, seeing the result of that in our fiscal accounts today, which has always been known to us, but has been so well outlined by the prime minister two weeks ago. The fact is, everyone who has done mathematics knows that the only way to prove our fiscal equation that one and one equals three is to add debt to it, as is illustrated in a chart on page 22 of my book. I pointed out that 1996 is when we started on this downward path in our debt to GDP ratio, when the debt started to accelerate at a faster pace than GDP. Immediately before that the debt to GDP ratio had declined to around 90 per cent, from 212 per cent in 1984, and since then has climbed to where it is.

This small illustration confirms that the size of the debt to GDP ratio is not important but what we do with the debt is. In the early 1980s, we were coming out of what was then the worst recession since the 1930s, and borrowed up to 212 per cent of GDP, much of that borrowing went into policies aimed at the country's development, rather than consumption as we have done since the mid 1990s. The result is that Jamaica was able to generate growth rates averaging around six per cent towards the end of the 1980s and substantially bring down our debt to GDP ratio.

The prime minister correctly states what the fiscal challenge is, and what we need to do now is look behind the fiscal numbers to understand what the real development challenge is for Jamaica lest the crabs keep killing each other again as they try to emerge from the barrel.

For the first in a very long time a politician (the prime minister) has come to us and laid out exactly what the challenges are that face the country, and this frankness is good as it serves as a wake-up call to all those who have been avoiding the reality of our situation. People have asked me, for example, why I am so pessimistic in calls on the economy, not understanding that if the car is heading off the cliff there is only one way to interpret that. And that it is that, the car is heading off the cliff, with all of us in it. So I am heartened by the honesty of the prime minister, because hiding from the facts never help.

What we need to do now that the message is out is to clearly outline a detailed plan of implementation as to how the challenges are to be confronted. I believe that in that plan there not only needs to be some deliberate actions by the Government, but we also need to remove the tentacles of Government from the operation of the market. That is reducing the bureaucracy and interference the prime minister referred to. It cannot be that government expenditure constitutes 47 per cent of our GDP. By any measure this means that we are operating in a state-run economy, and not a true market-determined economy.

When this reduction of government involvement happens, I expect that quite a few businesses will fail and jobs will be compromised, and not only in the public sector. What is therefore very necessary is for the Government to lay out a transition plan that will ensure that lost jobs and failed businesses can be replaced with as little pain as possible. Because of our failure to adhere to market economy rules over the years, any implementation without a proper transition plan will cause a drastic adjustment that will cause much pain, and so a carefully laid out transition plan is going to be extremely critical.

Jamaica is once again faced with an opportunity to make the much-needed paradigm shift in our economy, and based on the numbers and social influences, I believe that this could be our last such opportunity. The prime minister has made the step in the right direction but the road is going to be long and painful, however, I have seen through numbers what the alternative is like and trust me, if we continue on the same path, all the crabs in the barrel we call Jamaica will perish.

Risk of a double-dip recession?

The opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined in the term "green shoots". Markets have been responding positively to this feeling, as seen in the world equity markets, oil prices, and commodity prices.

One of the arguments which has not received similar attention is the very real risk of a double-dip recession, which is also referred to as W-shaped recovery. In other words, the economies would recover somewhat and then dip again into a recessionary environment before making a full recovery. At the very least, the market has been talking about a U-shaped recovery, which is a very long recovery period.

Real possibility
In my view, the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies.

These economies, such as the USA and UK, are still facing significant job losses, tight credit, and increasing credit card delinquencies. In addition to this, we are seeing where financial institutions are again starting to re-package loan securities and selling them to investors, albeit with less risk, but the fact is that the productive value is still not there to support these new derivatives.

Undoubtedly, recent data (this week) shows that there are indeed some signs of recovery. Out of the US, August 2009 industrial production has shown both month-over-month and year-over-year increases and retail sales have shown significant month-over-month and yearly increases in the same period. On the other hand, business inventories month over month have shown a decline of 1.0 per cent, which indicates that there are no robust projections of better times ahead from the point of view of Main Street.

These positive signs, however, could be the middle of the W-shape and we could still see another dip before the full recovery takes hold. This is especially as the positive indicators we have been seeing recently have, to a large degree, to do with the stimulus packages being implemented by the major economies, and not with any real growth in income levels, at the company and individual levels on a sustained basis. The fact also is that total wealth in the US has fallen off by about 35 per cent since last year and debt levels still remain very high.

In order for us to be sure of a sustained recovery we need to see a trend of at least three to four months of positive data coupled with net jobs being created. It must be remembered that 75 per cent of the US economy depends on consumer spending, and stimulating this spending with debt or government expenditure is not a sustainable solution.

The only way that sustainable recovery can return to the global economy is to increase production of goods rather than services. It still seems apparent that the US, in particular, is still trying to rely on services and credit as a way to grow the economy. This lack of real production in the world's largest economy still makes for a very fragile global economy, as even though there is production happening in markets such as China, the US still contributes around 25 per cent to world output. The greater risk in the US, in my view, is that the financial institutions return to increased risk too soon in a market where the consumer is still very vulnerable and debt levels are still too high. It also seems that much emphasis for increased financial activity is being placed on the increases in the equity markets that could see a pull-back in the very near future.

DJIA



In fact, the Dow Jones Index (DJIA) chart shows that the market is in a critical place and it is very possible that we could see a significant pull-back (see chart). In order to see the continuation of the uptrend in the equity markets, the DJIA will have to close above 10,000 and should ideally close above the one-year 72 per cent retracement level of over 10,400. In any event, one can expect a pull-back from the current levels and if this occurs before the DJIA closes above the 10,000 to 10,320 range we could be looking at a significant pull-back.

The implication of the DJIA effect on the market of course, is that, if the pull-back is severe, then we could once again see a contraction in spending and the US economy would face contraction again and further job losses.

On the other hand, if the DJIA expands above 10,400 too quickly, then the market could face a sharp correction if real production does not keep pace with this rise in wealth. The fact is that a big factor causing the credit crisis was that spending grew at a much faster rate than the supporting real output value.

THE opinion of most market players globally is that the global economy seems to be showing signs of stabilisation and recovery, as coined by the term "green shoots". It is going to be very important then to watch the personal income, employment, and production data more than the retail spending going forward, to look for signs of a real recovery. It is also important that spending and financial market growth do not continue at a pace that far exceeds real output growth. One way of measuring this, of course, is to look at the companies that are reporting profits; that is real production versus services; and also, what price earnings ratios are trending to.

As the US economy stands now, there is still the high risk of a double-dip recession occurring and the signs of recovery that everyone is warming to could be a misplaced feeling of relief.

The other factor that could cause some amount of inflationary pressure is the fact that a lot of stimulus money has been pumped into these economies, which are not based on any real output increase, but rather on Keynesian economics. Keynesian economics says that when an economy is in recession, one should expand fiscal spending in order to reduce the negative effects of the economy.

This has worked to stimulate some demand and stability in the major economies but is a double- edged sword, as, if not properly monitored, it could cause significant inflationary pressures as there would be too much money chasing the goods in the economy.

Because of this fear, it is very important for the Federal Reserve, for example, to ensure that the money does not stay in the economy too long, and hence their intention to start pulling the stimulus money out of the economy come October 2009.

The downside to this, of course, is that if real output does not start to increase by the time the money is being pulled out, then demand will again contract and again raise the possibility of a double-dip recession. It is therefore a very delicate situation that must be carefully managed.

In any event, the increased fiscal deficit in the US could lead to a need for future tax increases, which could serve to further dampen consumption, and this is why a return to increases in real production is necessary to lessen that effect.

The increasing oil prices also run the risk of slowing down output and demand. From all indications, as long as people believe that the economic recovery is underway, then oil prices will continue to climb and could reach US$90 per barrel by the middle of 2010. If the DJIA contracts sharply, however, we could see oil prices heading back down to the U$40 to US$50 per barrel.

The other factor that could cause contracting demand in the US economy is the weakening value of the US$. The weakness of the US$ is expected to continue into 2010 and would result in a reduction in the real income levels of the US consumer. The implication of this is that in real terms the US consumer would be spending less, thus causing a contraction in real spending in the US economy.

These are some of the real possibilities facing the US economy, and by extension the world economy, which could lead to a double-dip recession in the US. The main indicator to look at will be the employment and production data, without the stimulus impact.

The careful management of the US economy is going to be critical to what the final outcome is, and it is necessary not to be too quick to make announcements contrary to the trend until one is certain, just as the Fed and treasury said the US economy was in good shape while it was headed to recession in 2007.

This risk of a double-dip recession, of course, has far-reaching implications for countries such as Jamaica.

Jamaica has the US as its main trading partner and so, any devaluation of the US$, in relation to other major currencies, means that the real spending power of Jamaica when purchasing goods from other countries, such as China, will decline.

Any return to a decline in the US economy also means that the US consumer will be negatively impacted and that in itself would have a negative impact on our main foreign exchange earners.

The best bet for Jamaica then is to see, first, a return to net employment in the US; and, secondly, the US$ starting to appreciate against the other major currencies. Both these scenarios, however, are not expected to occur before 2010.

Until then, Jamaica has no choice but to manage the fiscal situation effectively and to manage the fallout in business activity that will inevitably occur in the country through policies aimed at encouraging small business development, and reducing crime and bureaucracy.

Demanding more of a shrinking pie

Over the past few weeks the fiscal accounts have taken centre stage in economic news, whether it is because of the ratings from credit agencies, the need to reduce fiscal expenditure, or the industrial environment as a result of greater wage demands on the fiscal accounts.

What we need to be careful of is that we do not focus all our energies on finding solutions to the fiscal at the expense of the longer-term viability of the country, as the fact is that the fiscal accounts are nothing but a symptom of the underlying problem. The fact is that, even if we fix the fiscal accounts this year, and ignore the other fundamentals of the economy, we will sooner or later be caught in a much worse fiscal and economic situation.

This is the approach we have always taken for most of our independence and is why we are in the current predicament today. Instead of fixing the fundamental structural faults in the economy, we have always sought to borrow money to postpone the inevitable collapse of the economy.

At a crossroads

So once again we are at a crossroads, and based on utterances, it seems as if some are pressing for the same solutions to be implemented that have resulted in us being where we are today. This is no surprise to me, however, for many Jamaicans have always had a "big fish in a small pond" mentally. That is, they would much rather own 100 per cent of $10 rather than 10% of $1,000. Underlying this sort of philosophy I think is the "Great House" way of thinking, as well as the need to be the big fish, even while the water is being drained from the pond. So we would rather that every one dies, but in the end at least be the biggest dead fish.

So when decisions need to be made about cutting expenditures to fit the lifestyle or making decisions for a more efficient way of doing things, we tend to shy away from the practical approach. Instead, we seek to borrow funds to support a lifestyle that our income cannot afford. And not many of us can point to the government alone about this type of behaviour, as it is a daily part of the lives of many Jamaicans.

Two such examples that come to mind are (1) someone I know was going through a very difficult financial period but refused to sell his Land Rover because it would affect his profile; and (2) someone I heard of who rented a very expensive house and paid a big car loan (in order to drive a BMW) and in the process placed his family's financial future in doubt. And both cases occurred before the economic downturn started to take its toll. There are many other examples.

What we do not understand is that the accumulation of these individual behaviours is what results in the total debt levels in the country. But what governments must do is ensure that this fever is not replicated in government and put policies in place to prevent this. Well, we have failed to do so for a very long time and have now found ourselves in the situation where the prime minister has had to (and rightly so) announce significant expenditure cuts.

But while these necessary cuts are being announced, some of us still do not realise that the only way for us to see future development is to live within our means. There is no other way. The problem is that we have grown fat for so long on debt that we have forgotten about how to produce and earn for ourselves. So this has resulted in a situation where we were satisfied with becoming international beggars, through remittances.

The fact is that the tide has changed, and we are in a situation now where we must understand that no more can the country go along borrowing money to support consumption expenditure. It is not enough to have two cell phones and a car. We need to be placing emphasis on more agricultural lands in production and more factories.

Bail-out mentality

This paradigm shift in our thinking is proving very difficult for us to adapt to, and I think primarily because we have got accustomed to being bailed out. When the EU was going to cut the subsidies for sugar and banana we demonstrated against it and told them how to give away their money. Each year we budget income for grants. And finally, we are satisfied with training 80 per cent of our University graduates to seek employment overseas and send back what they will in the form of remittances.

Similarly, the government is facing a cash crunch and the economy is facing significant decline this year, and our efforts are consumed with dealing with industrial relations issues. I have no inside knowledge of the negotiations and cannot say what the arguments are for either side, but what I know, is that the country will suffer and at the end of the day we will be like the participants in the Iran-Iraq war. That is, what we are fighting for will have deteriorated so much that what the victor gets in the end will be much less than they had before the war started.

Just as the by-elections came and went and the country did not benefit, so this industrial climate will come and go eventually and the country will not benefit. I am certain that the teachers, police, and nurses deserve every cent of the money they are clamouring for, and I am also sure that the Government does not have the money. So what do we do in this situation? I would like to propose that the more logical solution is for both parties to sit down and try to create a win-win situation, so that it could be that the Government says to the teachers, for example, that if the pass rates can be improved in a measured way then instead of getting $8 billion you will get $12 billion (adjusted for inflation). The reasoning behind this is that the output of teachers, nurses, and the police do have an impact on GDP and government revenues indirectly.

Whatever is agreed to finally, it is clear that (1) the teachers, nurses, and police do deserve more money, but also have a responsibility to deliver quality service; (2) the Government has no money and the economic situation will worsen; (3) students must go to school, patients must be treated, and crime must be controlled. So being aware of all these facts, it must be within all of us as Jamaicans to find a win-win situation and this is going to mean that we have to sit down and talk to each other as Jamaicans, not as though we all live in a different country.

As far as I can remember we have always had industrial action for better wages, which has caused many disruptions, in our productivity and progress as a country. After all those disruptions can we truly say that, individually and as a country we have all improved? If the answer is yes, then we should continue in the same vein, but if the answer is no, then it makes no sense trying to get more out of a pie that is shrinking every day. What we need to do is sit down and recognise the limitations we have and find a way to increase the pie so that even if we end up with a lower percentage, it is more than what we had before.

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.