Understanding the effect of an IMF agreement

IN recent months, there has been significant attention placed on the need for Jamaica to have an IMF agreement in place and its timing.

Most persons have correctly stated that it is critical for Jamaica to have an IMF agreement in place, and even more so because of the speculative effect on the US dollar, that it is essential that an IMF agreement be in place as soon as possible.

I also agree that we need an IMF agreement, as quickly as possible, so as to bring greater certainty and confidence to the markets. However, I have always maintained that it is even more important that we balance the need to have an agreement in place with ensuring that we have an agreement that will assist in the "real" development of

the country.

And I say this against the background of the last agreement, which I, along with Ralston, were the first calling for an agreement (with much criticism), but after it came we were also the first to say that it would not have been successful (again to much criticism). I don't think that we have to discuss whether it was successful or not, for the result is there for all to see.

It is against this background that I say it is very important we have an agreement that will speak to the development of the country, and not one which, like the last one, projected oil imports would move from 14 per cent to 14.5 per cent of GDP over the period of the agreement. We must have an agreement in place, that will, as the PM has said, balance people's lives while balancing the books. Because the reason for governance is not to just balance books but to ensure that the standard of living of Jamaicans improve.

With that said, however, this does not mean that timing is not important, as uncertainty surrounding the timing of an agreement will also cause much hardship on the people of Jamaica.

Uncertainty will no doubt lead to higher interest rates and inflation, primarily as a result of the depreciation of the Jamaican dollar. The timing must therefore be aligned with the level of the NIR, and the conditions we agree to.

I have always maintained that while it is certainly the most desirable state to have an agreement in place before the end of 2012, it is not necessary to bring back confidence and certainty to the market.

This is so because investors do not emphasise the current conditions in a market, as much as the future conditions. And in fact, the current condition is assessed in order to predict the future. That is because the nature of an investment is that you make a return in the future not the current.

Unless of course you invest in a Ponzi scheme. Therefore, while many are still arguing about the need to have an agreement in place now, the truth is that the holders of money have long gone passed that period and is now looking at the effects on next year. In fact I think that most investors would have already dismissed the notion that an IMF agreement is coming by the end of 2012, and would have positioned their portfolios accordingly.

What is important, in order to remove the uncertainty, and bring back confidence in the market, is communication around the timing of an IMF agreement. This also must be very transparent and said with a certain degree of certainty.

It is also very important that the agreement be in place before the NIR reach critical levels. My own view is that much of the demand for US dollar is speculative, and not based on immediate demand for business purposes. However, this is to be expected as businesses, and individuals, will seek to improve their financial position and guard against foreign exchange losses, which can have a very debilitating effect on a business or person.

It therefore is a waste of money to be running ads that seek to encourage persons not to speculate on currency else they could end up losing. This is a liberalised market economy, where money is an investment like equities or bonds.

So if an investor sees that they can make money betting on money, then let them take the risk. If they get burnt then it is just like any other investment. What will ultimately discourage persons from speculating on money is when the risk of the investment opportunity is too high for the expected return.

In terms of how much money we can expect to get from an agreement, I believe that Shaw is correct that in the ordinary course of an agreement it will be US$400 million. This is because the IMF lends to countries on a quota arrangement and the last agreement had used up our quota, as far as I remember, to the tune of the US$1.2 billion. It therefore is logical to assume that under the rules, we would only be entitled to an additional US$400 million.

However, I don't see this as a big problem. The fact is that the real immediate challenge the government faces is the fiscal account, and therefore what the government needs is budgetary support. If you cast your minds back to the last IMF agreement, in addition to the IMF loan, an additional US$1.2 billion was supposed to come in from multilaterals, which primarily would be used for budgetary support. You will also remember that in order to have access to those funds it was necessary to have an IMF agreement in place.

This is the real value of an IMF agreement, not necessarily the IMF money. And this is why the BOJ governor has indicated that the US$800 million we received from the IMF is still sitting there, as we never needed to draw down on it for balance of payments (BOP) support, which is what it was available for, as we had a strong NIR.

The declining NIR means that unless we see remittances and earnings increase or imports decrease relative to earnings; or investment funds coming in as a result of confidence being restored, then we will need to draw down on the IMF funds. If we get to that point, then we will see even further declines in the economy. An IMF agreement will lead to investment flows coming in.

Let us be very clear, however, that an IMF agreement will not solve our current economic predicament, particularly if the policy focus is similar to the last agreement. The only way to sustainably solve our economic problem is to recognise that our major challenges are the BOP, and in particular energy and food costs, and law and order. Which if both are addressed properly can add over $100 billion to the economy, with minimal pain, outside of a cultural shift, which will also see increased disposable incomes for Jamaicans.

Why does Jamaica need austerity?

I read with interest the call by Chris Zacca, the PSOJ President, to advise Jamaica's about the austerity measures we are about to undergo with the IMF and it reminded me of a statement made by our PM, Simpson-Miller a few years ago, that it is important to balance people's lives while balancing the books. To many this may have seemed like an election statement, but nothing could be truer about the way we need to approach our future. In any negotiations with the IMF it is important that this is born in mind, especially as I hold to the belief that austerity is. Other necessary to see prosperity in Jamaica. In fact my firm belief is that austerity will only lead to more prolonged suffering for Jamaicans. Europe has experienced this and along with the IMF is retreating from the original austerity focus in favour of the previously rejected stimulus. I want to hear from the voices that were once very much in favour of austerity measures being imposed. I believe Jamaica can easily address much of our economic challenges if we allow ourselves to implement fiscal solutions to our law and order energy options. These hold the key to our economic turnaround and not fiscal austerity. Thee should of course be responsible fiscal spending, but austerity will drive us further into the ground. If we take the appropriate fiscal actions and the necessary calculated risks we can avoid austerity and see robust economic development.

Sandy reveals our vulnerabilities

HURRICANE Sandy has, based on media reports, had a devastating impact on Jamaica. From media reports we will be left with a bill of billions, something we can ill afford now. It will no doubt change the IMF negotiations flavour and result in having more relaxed targets. Any other approach could prove suicidal to our economy.

There are reports of widespread flooding, damaged infrastructure, at least one life lost, and downed trees. This comes when the world is going through their own economic challenges, and in particular Europe (including the UK) and the US, which are our largest donor countries. This implies that the economic aid we have become used to, after disasters, will not be what we are used to, which has never been enough.

Let us remember that this was only a category one hurricane, and we must give thanks for that, else we could have been seeing much more significant damage to our very fragile economy and infrastructure. I deliberately did not say “natural disaster”, as my friend Leachim Semaj would remind me that there are no natural disasters, there are only disasters caused by man’s actions. This is true of the situation Jamaica faces after Sandy.

The fact is, the reason we have so much damage and displacement is because of poor leadership and governance since Independence. It is due to poor governance why we find ourselves in the situation where we still court the IMF in an on-off relationship, since the 1970; why our real per capita GDP is what it was in the early 1970s; why the Jamaican dollar was more valuable than the United States (US) dollar in 1969 to where one US dollar now buys in excess of 91 Jamaican dollars; why law and order generally, murders, in particular, has got so bad that Jamaica is known just as much for reggae music and athletics , as its criminals. I could go on.

So when I hear of persons being flooded out, damaged infrastructure, persons at shelters asking for pampers, or of Jamaicans risking their lives to pick up fallen fruits off downed trees so they can eat dinner; I know it results from poor governance.

Because if we had any idea of what vision we wanted for this country after we received political independence then we would not be where we are today.

I don’t know if anyone else sees it, but we are rapidly getting closer to Haiti than to other countries. What we must understand is that these situations do not happen overnight, but with continued neglect and degradation over time. If we do not start seeing reality, instead of ignoring the signs by saying we should look at positives only, then we will be there soon.

The blame of where we are today, however, is not of our leaders only, but all of us. We were the ones who continuously elected our leaders, even though they neglected us during the five years between elections, and won our affection back with a plate of curry goat, a beer and a rental car. This is the majority electorate, but there were some also who sold their souls to the politician for a waiver or favour. This culture is so chronic that the hotel I wrote about last week was willing to offer only me, of all the dissatisfied Jamaicans, some redress because I threatened to write about the experience.

I know we are not serious about development because we have failed to recognise what will really solve our problem. Unless we see that our fundamental problem is productivity and the balance of payments, then we will always be courting the IMF. I have on many occasions pointed out that addressing our energy crisis and law and order are the only things that will solve our economic, social and fiscal challenges. Anything else is fiddling while Rome, I mean Jamaica burns.

The irony is that addressing these challenges will mean less economic and social pain for Jamaica, than the fiscal approach the IMF has only three years after espousing austerity indicated it was an incorrect approach, and is now supporting stimulus along with responsible fiscal spending. As far as I am concerned, responsible fiscal or personal spending should be in place even in good times. In good times you should save and invest to ensure that in bad times you can spend. The simple logic of Keynesian economics.

I cannot understand why we have not been able to address the energy crisis. Let me first say I agree with the Government’s decision to reduce their involvement in the LNG project. Apart from the fact that Government should rightly, as Paulwell always says, not have any role in determining the energy choice, my view from the start has always been that coal is a much better option for Jamaica, from a cost and supply perspective, for industrial use.

For retail use I am very much in favour of renewable energy. I have personal experience to show. My last light bill was $2,663, and I was able to have electricity when JPS went down during Sandy and the batteries powered my refridgerator, lights, phone batteries, and the radio throughout the night. While I have electricity, my Internet provider’s service went down, which is the frustrating part. This from a system I started three years ago, and added to it as able to, and I am now almost off the grid, which I don’t want to be as the wise financial decision is to use the cheaply provided first 100 KWH from JPS.

Imagine if we had kept the GCT on electricity and used it to create a fund that could provide a credit to persons who install renewable energy at home. The benefits would have been (i) permanent energy use reduction in the short run; (ii) increased disposable incomes; (iii) increased productivity; and (iv) reduction of approximately US$300 million ($27 billion) to US$400 million in imports. Combine that with providing JUTC another $1 billion per year to roll out a much more comprehensive service, reducing the need for personal transportation. This could reduce our import bill by another US$300 to US$400 million. And then if we improve law and order, and add another $50 billion (conservative) to the economy. We would solve our fiscal, economic, and some social issues all at once, and it could be done within six to twelve months.

Instead we have created a situation where our people risk lives to pick up fruits off fallen trees during a hurricane, after 50 years of self-governance. Indeed, Sandy has revealed our vulnerabilities, which in my mind is more in the way we have governed ourselves. Indeed Leachim, there are no natural disasters, only disasters created as a result of man.

Cycling: A lesson for Jamaica’s development

LAST Saturday, I was among a group of men and women, who cycled from Kingston to Negril, as a part of an annual charity ride. Respect is due to these men and women who pay to ride, and support charity each year, enduring 158 miles and approximately 11 hours of pain.

We started the journey in two groups, at 4:30 am and 5:15 am, setting out on the route over Mount Rosser via Fern Gully to Montego Bay and on to Negril. There was an immense amount of planning before, as preparations had to be made for the riders with refreshment and one lunch stop, appropriate support vehicles, police escorts, and ambulance support.

Much like with cycling over long distances, economic development requires planning and preparation for challenges. (Photo: GeS)

This is one of the first areas Jamaica fell down in. We never really determined the route we were going to take to development, and therefore never really prepared and laid out milestones. The result is that we have taken many paths but never seeming to reach because we have never known our destination. We were certain we wanted political independence, but then what.

As we set out, the first real hill we tackled was Mount Rosser. A very important lesson was learned here. Those of us who have ridden that hill before know that you need to manage your energy going up the hill and approach it between seven and nine miles per hour (mph). There were overseas cyclists who went up the hill with a burst, and were soon seen walking with their bicycles up the hill. We completed the hill at our moderate pace.

In similar fashion, Jamaica has never really planned for challenges, and always seem to be reacting. Two examples come to mind. The first is that every year we seem to be caught off guard by nature — rains or hurricanes — simply because our system of parish governance never seems to truly keep the country in a state of readiness. We know that heavy rains come every year, but we do not keep drains cleaned or have heavy sanctions for people who litter. We continue to allow people to build in vulnerable areas after they have been flooded. Or we fail to apply proper town planning and allow businesses to invade residential areas, eventually turning them into slums.

Secondly, in 2008 when it was apparent that the world was going into recession, we never looked perturbed, and acted as if it was going to pass us by. When we started to prepare was when the worst had passed globally, and even today we still do not seem to have come to grips with it. In other words, we knew that the hill was coming but still continued to ride at 20 mph.

The next challenge was going down Fern Gully in the pouring rain, and even more, getting to the end of Fern Gully and meeting the everlasting road works. We were fully aware of the dangers of Fern Gully when it is dry, and when wet it is more dangerous, as you have little brakes. However, if you are aware of the danger, then you ride a certain way — slowly and what we cyclists say as in your drops (holding on to the lower part of the handlebar). Failure to do so will result in what happened to some persons — you fall and suffer serious pain.

What was most discomforting though was the man-made challenge of the road work at the end of fern gully, which is illustrative of the disregard we have for taxpayers in this country. How can we be doing that sort of work in a tourist town (forget about the insignificant citizens for a while) and have the road in that state, and even so for such a long period. We must show our people respect. But I guess they love it as I have heard no complaints.

After a few more hours of riding we made it to Montego Bay, where we stopped to have lunch. We were feeling the pressure of the ride, and wanted to finish, but knew that if we didn’t stop to eat lunch the probability was high that, even though we may finish, we could have done so with much more suffering.

This is a lesson for the world, not Jamaica alone. In perilous economic times, stimulus is necessary. You may be able to make it through but what is the sense of doing so if you are going to make your suffering worse in the process.

With 10 miles to go I was riding behind some cyclists who allowed a gap to open between the group in front. After 148 miles I had little energy to catch up with the group and hit a mental block. Two cyclists (Richie Bowen and Chris Foster) rode up at 25 mph — I was down to 19 mph — and gave me their wheel, which means ride behind them and be protected from the wind to build back my momentum. However, I was not ready to respond until a minute later when Chris Bicknell came at the same speed and gave me his wheel and I went with him. After a few minutes we were tiring and slowing to 21 mph, Billy Perkins went in front and carried us up back to 26 mph.

There are two lessons for Jamaica. We can only develop if we stop the tribalistic approach to politics and come together as a nation, and we can’t join organisations, and expect to benefit, without first being ready ourselves. The EPA, Caricom, and the CCJ come to mind. These are good for us, but only if we prepare ourselves to take advantage of them.

Even with all the pain of the ride, it was fun and for a good cause. The worst part was when I got to Ocho Rios, and after nine hours and 23 minutes in the saddle (total ride time), I, along with other guests, spent two hours trying to check in at Riu, even though we made reservations before. The other experiences at the hotel were very good, but to get to them was a problem.

What really irked me though was when I expressed my disgust and said I was going to write about it, at that time I was asked what could be done to make it better for me. There was no such gesture before to the other guests. I flatly refused the offer as it would have meant that I would have compromised my principles. How could I accept an offer selfishly, when all the other Jamaicans were suffering also? I was insulted that they would think I would have done such a thing, but maybe others have before, and could be the reason why we continue to receive such service in this country.

Growth options for Jamaica

STATIN'S final estimate of the 2012 second quarter growth, shows that the economy declined by 0.2 per cent, when compared to the similar 2011 period. This was as a result of declines in the Goods Producing and Services sectors of 0.2 and 0.1 per cent, respectively, and was the second consecutive quarter of decline being registered.

The truth is that this decline was always expected, given the fiscal consolidation measures, the resulting decline in employment, and the fact that the transport projects have not yet come on stream fully. This is also in light of the fact that the global market has weakened, and the IMF has even downgraded its projection for global growth, which forecast has been impacted by the continuing Euro zone crisis and the impending "fiscal cliff" in the US. If the latter is not resolved soon, then we could be looking at even further declines in the global market.

Increasing production of crops, such as Irish potato, will help to reduce Jamaica’s massive food import bill.

What do these scenarios hold for Jamaica's immediate future? This is especially in light of the pending IMF agreement. The reality is that the IMF agreement, whenever it comes, is really just a band-aid solution on a really bad cut. All it will do is slow down the haemorrhaging, but cannot solve the challenges we face. In order to get on to a path of sustainable development, we must deal with our structural issues. My own view, is that it is because of these fundamental structural issues, coupled with the global slow down, why the IMF has recently downgraded the growth forecast estimates from one per cent to negative 0.5 per cent.

My opinion, however, is that Jamaica, even now, has the capacity to grow even beyond the initial one per cent projection if we were to aggressively adopt the correct fiscal policy options. If we will do it depends on execution, which we have not been accustomed to in Jamaica as far as I can remember.

The first thing we must do is realise that our long-standing focus on the fiscal, to the detriment of the trade, side of the equation is a primary problem we face. The reason for this is that the country's economic challenges come primarily from the fact that we have had a continuous balance of payments deficit, which has resulted in the following:

* Exchange rate depreciation

* Increased debt

* Relatively high interest rates

* Relatively high unemployment rate

* Relatively high inflation rates

* Continued fiscal deficits

These in turn result from crime, low productivity, bureaucracy, and relatively inefficient taxation systems.

Therefore it would seem obvious that if we do not apply policies that fix the challenges of productivity, crime and bureaucracy, then we will not be able to increase the needed competitiveness of our production in order to reverse our BOP fortunes. Without fixing these issues then it is only a temporary solution to get another IMF agreement. We have been flirting with the IMF since the 1970s, and our economic performance has been much less than adequate.

It would seem to me therefore that the policies that we have pursued over the decades have not supported sustainable economic development. The only way for us to deal with this situation is to earn more than we do externally. The logical approach therefore is to resolve the issues of productivity, law and order, bureaucracy, and our tax system. The latter is being dealt with through tax reform but will not be meaningful unless the other structural weaknesses are addressed to a significant measure. This of course if we want to see true economic development take place.

My own view therefore is that the forecast of negative 0.5 per cent is only realistic if we do not address the structural issues. If, however, we take steps to address the structural problems then growth of above one per cent is very probable.

The straightforward BOP areas that can give us those benefits are energy and food. These account for 45 per cent of imports, and therefore it would seem logical that driving policies, within the context of scarce resources, must focus on dealing with these BOP areas. The question therefore is what is causing these imports to be so high. How can we reduce our energy cost and food import bill? This is the question we need to address.

I have on many occasions gone through the strategies we need to adopt to reduce the energy and food import bill, and so will not address here again. Suffice it to say if we reduce these costs by 30 per cent then it would eliminate the trade deficit and solve our fiscal and macroeconomic challenges. The fact also is that this is a path of lesser resistance than trying to deal with challenging external competitiveness head on, as this requires for us to deal with our internal competitiveness, which is necessary before we can even start to think seriously about external competition.

My own computations indicate that if we are to effectively address these structural issues, then you could see an effect of approximately $100-billion improvement in the GDP. The big question, however, is will we seriously challenge these structural issues, having not done so effectively before.

The need for this is even more evident, given the study of debt by the IMF recently that concluded that fiscal consolidation without policies to drive growth will only result in economic stagnation.

So my view continues to be that Jamaica can see growth in excess of the previously projected one per cent, but only if we approach fiscal policy from the angle of addressing certain structural deficiencies.

Cheap energy, low crime key to growth

Over recent months, there have been a significant amount of discussions about the need for an IMF agreement, and what will be our fate with and without one in place.

While I agree that, because of our present circumstances, an IMF agreement is essential if we want to maintain some amount of macroeconomic stability and confidence, the fact is that as a country we really didn't need to have an agreement if we had addressed certain structural issues.

Improving law and order is a critical structural issue that needs to be addressed for there to be growth in Jamaica.

I believe that an agreement was necessary at the time of the 2008 global crisis, simply because the fact that markets were closed meant that an IMF agreement would instill confidence in our financial partners. However, if you look at what needs to be done to solve our balance of payments problem, and our growth challenge, and resultant fiscal issues, it will become obvious that if certain structural issues are resolved, then an IMF agreement becomes redundant.

I am not going to go into any detail on this, as I have done so on many occasions. But suffice to say that oil and food account for 45 per cent of imports, or just about US$3.5 billion. If certain structural issues were addressed, that results in a 30 per cent reduction in the cost of these items, then we will be speaking about an annual reduction in FX outflow of US$1.05 billion. You would also be looking at eliminating your trade deficit in four years, and local economic activity would expand.

Two of these structural issues I want to look at today are energy and crime, as I believe that these two are the most pressing issues we face. Certainly not the IMF agreement. And until we realise this fact, and solve it, then we will have a very long marriage with the IMF.

The issue of energy I have always maintained is the largest financial crisis we face, as the cost is a major deterrent to doing business in Jamaica. It is a primary reason why most businesses are formed in services, rather than production. Recently, however, there was an announcement that the government is going to change its role in the LNG project.

I see no problem with that, as long as no one electricity production company controls the supply of LNG. This could lead to monopolistic practices, which would put us back in the situation that Paulwell is trying to rid us of. I have also always maintained that I do not see any significant savings from LNG. The truth is that I don't care if someone wants to invest their money in it, as long as the minister continues to push for liberalisation of the production and distribution of multiple sources of energy.

The other critical structural issue that needs to be addressed — if we want to see growth in this country — is law and order. This includes crime, and particularly the brutal crimes we have seen over the last two weeks. I say law and order because if we are to solve the incidents of murders and rapes, which we all are so sensitive to, then even though legislation changes, such as DNA, and better investigation training is necessary, it is far from sufficient.

When I hear people talk about the need for tougher legislation and greater crime-fighting resources, I wonder if we are really serious about solving crime. Or more importantly, if we really understand what is necessary to fight crime. Recently, five brutal rapes were committed. I hope that the response is not like when we had a spate of missing children, including young Ananda at the time, where everyone responds with disgust and then it is forgotten until another outrageous incident occurs.

Because if we are really serious about solving crime, and at the same time fixing the economy, then we cannot be speaking about measures to deal with criminals, after the crime is committed. We will need to address the problem of lack of law and order, that is what leads to crime. We must deal with the indiscipline on the roads, the violation of the night noise act, the violation of the zoning laws, and, very importantly, the very slow process of the court system.

What we need is a society ruled by law and order. Not one where we are concerned about the murders and rapes when they occur, but as citizens still continue to practise the indiscipline on the roads and ignore our neighbours' right to peace and quiet.

There is a very strong link between law and order and economic growth and investment. People, and companies, don't reside in a country just because murders and rapes are low, which of course is necessary. But they reside in a country because there are opportunities and the society is a disciplined one, where people's rights are respected and enforced quickly.

So while we continue to comment on the IMF agreement, we must remember that, while it is necessary given our predicament, that it will not by itself solve our problems with prosperity and growth. If we get an IMF agreement without addressing the structural challenges, then we will still continue to face balance of payments, fiscal and economic issues.

Good governance is essential for economic recovery

SINCE 2008, the global economy has been going through a tumultuous time. However, the challenges faced, the global economy will one day recover. We will all forget the 2008 recession, and relegate it to the history books, only to be taught in economics and finance classes. In another 20 years, the children of today will become adults, and the cycle will begin again, eventually leading to other recessions and depressions. The 2008 recession will only be remembered when we fall into another recession or depression and at that time people will compare that future recession with what happened in 2008.

In fact, we may find at that time Europe may once again talk about austerity measures as a tool to end economic stagnation, only to find out again that it does not work.

Factors affecting economic growth have more to do with how we construct our social relationships.

So, irrespective of how we may feel today, the world economy will once again rise and there will be prosperity, waste and even greater consumerism. Even here in Jamaica, we can see that motor vehicle, and other personal loans, are once again on the rise and we haven't even turned the corner as yet. But this is the natural progression of economies. The smart person will, of course, realise this and start acquiring the undervalued assets in anticipation of that rise once more.

Every time there is a global crisis, however, there is always some power and economic shift. Some economies will take greater economic prominence, such as what we have seen with the shift to the BRICs. And some economies, and societies, will face greater challenges and may not recover. For example, coming out of the ‘80s and ‘90s boom, we saw Japan's economy being stagnant for a decade. Now it’s Europe's turn, and luckily for the world, the US escaped a similar fate by stimulating the economy rather than applying austerity.

The bigger fear, however, is that the economy will not recover from the downturn but result in social degradation. Countries that come to mind include some in Africa, and even closer to home Haiti. So even though markets and economies will naturally go through cycles (captured in the theory of the Fibonacci Sequence), there is always the fear to guard against factors that will prevent them from coming out of a slump in the cycle.

This is why socioeconomic relationships, and structures, in a society are so important. In other words, this is why a focus on macroeconomics to the detriment of the social side is very dangerous, as what it does is lead to deterioration if not properly managed. For this reason I support the policies being pursued by Barack Obama, and not the “shock and awe” that the Republican policies would once again bring to the US economy. In fact, Bill Clinton, in his speech at the convention this week, correctly said in saying that those policies would only lead to economic challenges again, as they were the very same policies that caused the problem in the first place.

But what are some of the factors that make a society stay in the economic slump cycle? We could look at our own situation and ask that question also, as we have been in an economic slump since the 1970s. Some may argue that they have seen development. True. But as an accountant, my view of development is when it is done with equity, rather than debt. If you have to rely on debt to achieve development then you are in a slump.

The factors that prevent an economy from emerging from a slump are societal in nature. The factors have more to do with how we construct our societal relationships, which also filter into our economic relationships. Fundamentally though, it has to do with governance and our political system more than anything else.

It’s how we govern that determines our crime levels, law and order, bureaucracy, and priorities. This was the primary principle that Clinton addressed in his speech. Governance is the main factor that continues to drive the US economy to be the longest dominant superpower, and also why so many people flock to their embassy. Because with whatever imperfections they may have, in my view, it is the best of an imperfect world. And if I get any messages from any Jamaican, who has migrated to the US, disagreeing with me on this point then…

Another very important factor that comes directly out of governance is the issue of law and order. This is the most damaging factor that can ensure that an economy does not emerge from a slump. If there is no law and order, then there will be indiscipline. And if there is indiscipline then there will be crime. That is such a simple equation that if it formed the main part of the math curriculum, we would have had excellent results at CXC.

Because people are more impacted by major crimes, we tend to focus on them rather than the underlying cause of lawlessness. This is what the US has mastered. Irrespective of whatever else is happening there, they have established a system of law and order in their country where everyone is treated the same.

So even while the global economy is moving ahead on all engines once more, we have to understand that if we don’t solve the problem of law and order, there will be no improvement in our justice system. There will be no improvement in productivity. There will be no improvement in income levels. There will be no improvement in the fiscal accounts. There will no improvement in our debt situation.

And law and order does not just mean that citizens be held accountable under the law, but more importantly, that those responsible for upholding the law are being seen to do so in the interest of the citizen.

So as we move forward to take advantage of the coming economic recovery — that will see a new economic balance between countries — which side will we be on?

We must agree on education

Based on some discussions I was having on Facebook recently, I have made a decision that I will offer no public commentary (written, interviews, or public presentations) on the macroeconomic environment, debt, IMF, or any predictions on where the economy is going, for the next few months. That is not until late January 2013. I will restrict any public commentary to any specific issues, more to deal with matters outside of any discussion on the macroeconomic environment, such as public sector rationalization, education, crime, energy etc.

I will still however accept any calls from anyone in the media who wants an explanation of certain issues, which I do give occasionally. Just that it will be for their own personal consumption. The reason for those who have asked is that I want to focus on some specific issues I think are very important and leave the economic issues to those charged with the responsibility for it.

What I would like to discuss today, however, is a matter that came up during the last administration, and has arisen again. In the last administration both the then education minister and the opposition spokesperson on education, agreed that children should not be forced to pay auxiliary fees to school, as everyone must have access to education. This time it is the current education minister who is saying that students must pay the auxiliary fees, and the opposition spokesman is saying that they should not for the same reason.

On the first occasion I was a member of the Jamaica College (JC) school board, and saw the negative effect that the lack of these fees can have on the general quality of education, as there would be no resources to run the school. A big part of the problem is that government does not provide enough funds for a school to even exist, much less to provide quality education.

My position is the same today as it was then. That is auxiliary fees are essential for the school to run, and government should not expect that the schools can run without filling the funding gap, which they don’t have the money to do. If the students do not pay this fee then how can we expect that the equality of education will improve, particularly in the schools that are already struggling to keep up with the more traditional high schools? How can we expect to turn out greater productivity in the work force if we do not provide quality education att he secondary level because of lack of funds?

It is for this reason, and my first hand experience, why I am fully in support of the position of the education minister on this. We always say that we want someone to lead by doing what is right for the country, and not popular or politically motivated. Well this is an example of a principled position.

In our 50^th year of independence, how can we seek to encourage this dependency syndrome at such a basic level? The auxiliary fees average maybe around $10,000 per year. That is the equivalent cost of a phone, a few weeks call credit, a pair of shoes, two trips to the hairdresser, or going to a party or two. Why would we want to encourage any parent out of making the right choice for the sake of their children? What sort of society would we encourage when we do that.

In any event the solution cannot be for persons to pay auxiliary fee if they want. The system must be that auxiliary fee must be paid, and if you need help then seek some assistance through the government programme. But not continue to give the people a fish rather than teach them how to fish. Or is it that politicians still want people to remain dependent on them for handouts, lest they lose their power.

I see for example that politicians have come out against the recent eviction of some squatters, and saying that government must find a place for them to live. If the land is owned by a private individual don’t we understand that when as politicians we make these sounds that we are saying that private capital is not welcome? And if we scare private capital then will it not mean that the same people we are trying to help will only get poorer? Or are we content with how our society, and dependency syndrome, has developed over the last 50 years and want to continue it.

When someone has eight children, with another on the way, is it the responsibility of government, and other taxpayers to take on that responsibility. Please let’s start the change we need in this country and not start teaching the next generation that they should rely on government for everything. Auxiliary fees, especially at such small amounts, must be compulsory and I fully support the minister on his stance. It is all about taking personal responsibility for our actions.

If after we gained “political” independence in 1962 this was the theme throughout the society, we would have seen much higher standards of living today. Instead we have a lower literacy rate than Barbados and Trinidad, and we had no choice but to reverse the “free” education policy started in the 1970s, which to my mind was a good thing but did not have the structural support.

The other issue I want the minister to deal with is the dreaded GSAT exam. Years after it has been implemented we see where there seems to be a greater disparity between traditional and non-traditional high schools generally, worsening CXC results, and more importantly children focusing so much on academics that they shun in many respects the very important development aspects of sports, socialization, and health.

I see much academic talent coming out of the schools, but child health issues is a problem, and I find that the teamwork ability that we get from sports is lacking in many of the children. Maybe it’s because the other distraction is just sitting around a computer and video game.

Minister, I don’t know how many people will support you, but I am totally in your corner with this one, primarily because it is the right thing to do. If we disagree on everything else, one thing we must agree on is education.

After Jamaica 50, Olympics comes economic reality

NOW that the euphoria of the Jamaica 50 and Olympic celebrations are over, many of us are now getting back to reality. This reality has always been present for some of us, unlike the Jamaican in the diaspora who sent me a Facebook message to ask that us residents not discuss the challenges Jamaica faces during the Olympics as she didn't want to read about anything depressing during that period, so that she could enjoy the Olympics. In my words, why don't you natives in Jamaica stop talking about the problems there so that we in the diaspora can enjoy the successes Jamaica has in the Olympics without any distractions.

This is the reason why I do not support the diaspora being given the right to vote, or make any decisions affecting Jamaica and Jamaicans.

Governor of the Bank of England, Mervyn King, who was at the forefront of the UK’s austerity drive three years ago, this year said that if the austerity measures were continued, the UK economy would continue to decline.

So us residents now, have to deal with the reality of the need to have an IMF agreement in place, continuing to deal with the fiscal and crime challenges, and two days after our birthday seeing unemployment raise with the addition of another 207,000 persons to the unemployment line. This will no doubt push more people into the informal sector of the economy.

Going forward though, us natives will have to find a way to address the development challenges we face. We must seriously ask ourselves. Have we been tackling the problems correctly, and what do we need to do to ensure that we increase the quality of life for us as citizens?

Another question we must ask is: How do we do so in a challenging global environment? I think it is very clear for the world to see now that the austerity measures that Europe embarked on three years ago have not been working and will not work. In fact, Mervyn King (governor of the Bank of England), who was at the forefront of the UK's austerity drive three years ago, was quoted in February as saying that if the austerity measures were continued the UK economy would continue to decline. This, after it slipped back into recession. Greece, which is in its fifth year of recession, recently saw another annualised GDP decline of 6.2 per cent. King was only this week quoted as saying that he saw no end in sight for the Euro debt crisis.

The US, on the other hand, under the leadership and insistence of Barack Obama, chose to increase the debt and stimulate the economy. This has resulted in the US economy seeing small but consistent GDP growth. The US should be thankful the Republicans were not in charge, else they would still be in recession.

In the case of Jamaica, we have sought to consolidate on the fiscal side, but also we have introduced some stimulus measures. These include the JEEP programme and we have restarted JDIP. In addition to that there is the intention to kick-start the projects under the Ministry of Transport, which cannot come soon enough, as the growth projection numbers without them will be stagnant and you could be looking at increased unemployment.

However, while these are necessary to keep the wheels of the economy turning, it is far from sufficient if we want to start the engine of development. We need to change how we think about solving these economic problems that has plagued us since the 1990s. That is development must be driven by two things: (1) the main focus must be on the Balance of Payments; and (2) we will need to get projects on the ground to stimulate the economy through greater employment.

If we can succeed with these focus areas then the fiscal accounts will not be a problem. It is even more critical to deal with these, as without addressing these fundamental problems the fiscal accounts will always have a problem. And the truth is that, if, as S&P says, our fiscal choices are restricted much further then the fact is that the next area to look at for reducing will have to be the public sector wage bill which, in my view, would be disastrous to the economy.

Many will say that the public sector is too bloated, and needs to be cut, and will even agree with the no more than nine per cent of GDP argument. My question is on what basis do you say that the public sector is too bloated and what is the magic of nine per cent. Many persons who say that do not have any evidence to support that argument apart from what the IMF has said. My argument is that with unemployment being over 14 per cent, consumer and business confidence falling, and the IMF agreement not yet finalised, we would be suicidal to think about putting more people on the unemployment line.

What we must therefore do is, while providing the jobs stimulus needed (and it must be done strategically), our focus must be to grow the overall GDP, and not narrowly focus on debt reduction. I agree that our debt must go down, and not just the debt-GDP ratio, which can be inflated away. However, we must reduce the debt not by sucking the life out of the economy, but by increasing the income available to pay it off. Greece tried the "squeezing the life out of the economy" way, and they are in their fifth year of recession.

My own view is that it is not difficult to do this. It, will however, require no lesser office than that of the prime minister, to make sure that it is co-ordinated with all ministries. I have mentioned on many occasions the method by which this can be achieved, and so will not bother to reiterate. But suffice it to say that between energy, crime, and transportation, you are looking at over $100 billion that can be added to the GDP.

One other thing I would like to mention here is my synopsis of what I think the way forward for the energy sector should be. I am in full support of the view expressed by the energy minister that the distribution monopoly, currently held by JPS, must be broken up if we want to enjoy the benefits of lower energy prices on a sustained basis. My own view has always been also that we could end up regretting any decision to focus on LNG only as a replacement, as the price of LNG is projected to increase. Diversification must be the answer, but more importantly it must be diversification led by multiple players in the market, not by a monopoly.

Minister Paulwell, full speed ahead. You are on the right track as you have done already with the telecommunications sector.

Jamaica 2012: A time for reflection

I didn’t watch the full Emancipation message delivered by Prime Minister Portia Simpson Miller, but did see excerpts of it. I think she has hit the nail on the head when she said that Jamaica needs to use the occasion of the 50th year of Independence to reflect. We need to reflect on what went wrong with our development, because where we are today is not where most of the people, in 1962, thought we would be.

I have talked to some persons who, in 1962, felt a sense of pride seeing the Jamaican flag replace the British flag. However, many of them today question whether we made the right decision in 1962 to seek Independence from Britain. We have only recently seen where Britain stepped into the Turks and Caicos to restore confidence in the public bureaucracy there. Maybe if we were still a colony they would have stepped in to do the same here.

Prime Minister Portia Simpson Miller lays a basket of flowers in tribute to the ancestors during the Emancipation Jubilee celebration early Wednesday morning at Seville Heritage Park in St Ann.

My own view is that despite the fact that we have failed miserably to deliver a better tomorrow for the children, it was indeed the right decision for us to seek Independence in 1962.

There is no arguing the fact that we have failed miserably to deliver the hope that was promised in 1962. It was Norman Manley himself who said that his generation had accomplished the mission of seeking political independence, and the next generation had the responsibility of achieving economic independence. Can we truly say that he would be happy with what we have achieved? Can we even say that he would be happy with the way we have treated our political independence, where we have developed two tribes, that I remember clearly would kill each other because of the colour shirt worn in the run up to the 1980s election.

Would he be happy with the fact that even 50 years after we are still very much divided among party lines, not so much at the level of the politician, but more so at the level of the ordinary citizen. Would he be happy to see that elected officials are abusing the person in parliament responsible for carrying out the “law” there. Would he be happy to see the way we abuse the rights of our citizens, by keeping them locked up without charge, or for the way that the justice system is administered. Would he be happy to see how we have developed relative to the rest of the region.

We could also ask the same question of another of the founding fathers, Alexander Bustamante, who in 1938 led the labour riots and went to jail for the cause of the working class. Would he be happy to see that in 2012 the GDP per capita is the same as it was in the 1970s.

And if we are uncertain about the answers we would get from them, then ask one who was around at that time who is still alive today, Edward Seaga. Ask him if he is happy to see how Jamaica has progressed over 50 years despite the sacrifices he has made to stay in public life.

If the answers are that they are happy then we have much to celebrate. But if they are not happy then as the Prime Minister said, we must take time to reflect on what we have done and what we need to do.

I am sure that there are many things right about Jamaica, and I think it is still potentially the best place to live. The things that are right about Jamaica can be seen in the “Wray” and “Digicel” ads, and are things we speak of every day. The culture, food, sporting accomplishments, the relaxes atmosphere, the beauty of the island, our tourism, our bauxite, and our people. These are the things that we speak of when we talk about Jamaica. But these things have existed since 1962, and are either as a result of the working class or individual achievements.

Even our tourism and bauxite has survived against the odds. Our tourism has thrived because of the ingenuity of a few, who because they saw that tourism could not exist in its original form, because of crime and environmental degradation, bought beautiful pieces of Jamaica and locked away the tourist in all-inclusive resorts. Bauxite has survived because of foreign investments and previously high demand, because for 40 years we have failed to address the policy issues that would have made these plants more competitive through energy.

I agree also that we have seen much infrastructure development, but not enough. When I look at documentaries on Singapore I see stories of high-rise buildings, and a lot of industrial construction. Most of our own infrastructure development has happened from government intervention, or housing developments, which again through the NHT is government intervention. So even the infrastructure development is not because of well, “development”, but rather government intervention from debt.

We do have the raw material needed for development. These are all the things I mentioned above. But we are like a child turning 18 in 1962, who our parents gave all the tools to succeed. We had a strong dollar, bauxite, tourism, growing industries, good transport system, and concessionary prices for goods we produced. What they never taught us, however, was to govern our people in such away that we could realise their full potential, but rather left us with a philosophy that bureaucratic structures and the security forces are there to control the people rather than protect them. So 50 years later when we would be 68, that child turn adult, is now up to his ear in debt and has managed to isolate all his friends and family, because of the divisive way in which he sets one set of family against the other, never trusting anyone.

So it is indeed a time to reflect on what we want for the next 50 years, instead of just thinking about the massive party that is planned for us during these celebrations. Because after the party what? For if we are satisfied with the last 50 years of development, then sure lets party and go back to what we have always been doing. But if we are not satisfied, or can’t answer either way, then as the prime minister said, let’s reflect on what went wrong and what we need to do.

At 50, Jamaica still not truly independent

ON August 6, 2012, Jamaica will celebrate 50 years of political independence. I deliberately say political independence, because after 50 years we still have not come to grips with how to manage our finances, and consequently our economic fortunes. In fact, we have never truly been economically independent, not even in the booming 1960s, and so we can safely say that we are still economic slaves.

In the 1960s, even when we were growing at rates in excess of 10 per cent per annum, we still were supported to preferential rates for sugar and banana, and so we never really stood on our own two feet fully. During that time we were learning to walk, and started to creep with help from the old colonial masters. Today, as a 50 year-old adult, we still remain on the breast of other countries, and so in our 50th year of self- governance we are clamouring for support from the IMF.

Jamaica has made much progress over the 50 years, but a lot of the development is as a result of debt, not earnings. (Photo: Aston Spaulding)

There are some who like to hide their heads in the sand and say that we have much to be thankful for as we have achieved much. They point to our sporting and cultural success; the amount of road and building constructions; more access to communications, cars, and other luxuries. I, for one, would never deny that Jamaica has not made progress because we have in many respects.

We have become a very powerful international brand; a lot of development and institutional establishment have taken place; there has been much social and legislative improvement; our tourism product is number one; and we have seen a lot of commercial development.

However, when one looks at development and success, it is never done in isolation. So while there is no denying that we have made much progress, the truth is that a lot of the development we have seen is as a result of debt, not earnings. This is tantamount to a person of 50 years having a house, car, and other assets, as a result of either debt from the bank (loans) and/or gifts from his parents (grants). He has not, however, developed enough to be able to afford these things from his own ability to earn.

Also, development and success must be seen relative to others. In 1962, Jamaica was seen as the jewel of the Caribbean, and in fact we were visited by Lee Quan Yew,

as an example when he was developing Singapore. Secondly, we were in a position to refuse Federation with other Caribbean countries because we were fearful that their poorer economies would have been a burden to us. Well, today much of our economy is owned by two of those economies — Trinidad and Barbados.

* In 2012, our GDP per capita is the same as it was in the early 1970s — 40 years later.

* We have one of the highest murder rates in the world.

* We have one of the highest debt-to-GDP ratios in the world, and only recently we were being compared to Greece.

The fact also is that when you look at the areas of our excellence — sports, tourism, culture, and music — these are all based on the exploits of individual Jamaicans, and has nothing to do with any support structure provided in the Jamaican environment. In contrast, the Jamaicans who have done well in these areas, such as Bolt, Ottey, Powell, Fraser-Pryce, Louise Bennett, Bob Marley, Butch Stewart, Ranny Williams, etc, have all done so in spite of the many challenges faced in the Jamaican environment.

Our governance has failed us miserably, so that 50 years after colonial rule, we still find that the lower-income classes are discriminated against. We have areas (inner cities) where many Jamaicans cannot go to. In fact, we have greater access to other countries than we do in these areas within our own country. We find almost on a daily basis that there is a conflict between the police and our citizens, or we find that our governance is executed in such a way that we find it easy to tarnish the name of people, as a result of our political parties or bureaucrats believing that they have a right to impose anything they want on citizens who do not share their views.

So 50 years later, our citizens are still under a form of colonial rule.

Fifty years after, we have a school exam in place (GSAT) that encourages class discrimination, as based on the school you end up at you are seen as either having a future or not. I am happy to see that Minister Thwaites is trying to change this because we cannot continue to expose our young to this type of discrimination.

And if we talk about business development, we see that the businesses that dominated close to 50 years ago are virtually the same that exist today. Little or no private sector innovation, which is reflected in the number of listings on the equities markets over the period.

Back to the issue of discrimination, though. This discrimination is reflected in how we treated the issue of the Jamaica 50 song. My main issue with the nonsensical approach to this Ja 50 song business is not the play out of the polarisation of the people by the arguments about the song, but that we ignored the festival song competition as the avenue to select the song and chose to give the spoils to a select few. The competition has historical value and I think it would have been best to choose the Ja 50 song from this competition, and provide a cash prize of around $2 million, and so open it up to the creativity of our Jamaican citizenry. This for me was a reflection of how we have developed.

The governance that has got us to this point also manifested itself in the disgraceful behaviour in parliament a few weeks ago, when there was a blatant refusal to obey the rules (law and order) by those who are supposed to uphold it.

So after 50 years, and being born after Independence, I think Jamaica can be the best place on earth to live if we take our governance seriously. We still have the potential to be the most attractive place on earth to live, but we must all take responsibility by realising that we are all Jamaicans, and not two tribes living in one country. If not, then in another 50 years the children will be asking about the lost 100 years of Independence.

Competition is important for development

THE Global Competitiveness report is one of the most important guides in determining the development of a country, as it is international competitiveness that drives a country's net earnings and investment attractiveness.

This in turn affects foreign exchange availability, exchange rate, fiscal earnings, standard of living, etc. This is why my view is that a focus on the balance of payments (BOP) is much more important than the fiscal accounts. In fact, the policy in Europe of focusing on the fiscal accounts have resulted in a double dip recession in that region, and they will have a difficult time coming back from that policy error in my view.

The tourism sector is an example of what competition can do for the consumer and productivity

It is this lack of competitiveness that has prevented Jamaica from seeing the development it should have. No one can argue that Jamaica has not seen development since 1962, however, development should never be looked at in isolation. And certainly, relative to other countries, we have done very poorly, which is why many Jamaicans look to migrate in search of better opportunities; often to even some of the countries that were less off than we were when we decided against Federation with them.

It is also this lack of competitiveness that is causing Rusal to close its Ewarton plant. It is this lack of competitiveness why we have to constantly be providing incentives and waivers for companies to invest in Jamaica. It is this lack of competitiveness why an all- inclusive room in Jamaica sells for just US$250 per night double occupancy, while a room alone in downtown Miami sells for US$300 per night. It is lack of competition why our electricity bills are so high, causing a relatively lower standard of living and uncompetitive output.

On the other hand, it is competition that has caused Jamaicans to have so much access to telecommunications and Internet service, which has resulted in improved infrastructure for business, and attraction for investment. Prior to this, I am old enough to remember when you had to wait years, sometimes, to get a telephone, or when you were charged when someone called you on your cellphone.

If we therefore want to improve our competitiveness and see development, there are a few things which we must do.

The first is that we need to ensure that the regulatory environment is changed to encourage competition. In the 1990s we took measures to liberalise the economy, but we failed to ensure that we had the regulatory framework that would allow us to benefit from liberalisation, while at the same time protect us from the excesses of liberalisation, hence the 1990s financial crisis.

This is why the initiative by Paulwell to bring competition to the energy sector is critical, as without it there is no guarantee that the present monopoly will deliver the best service and price to the consumer. Even with all the PR they are doing now, it is not sufficient to rely on the good deeds of a monopoly, as the behaviour of the consumer in a competitive environment is always more efficient. And in a world that is highly dependent on technology, energy is the new factor of production.

But we must go further in changing the regulatory framework, to encourage competiveness. The financial sector is probably one of the most important in driving development, as it allows for access to the necessary fuel for businesses, which is capital. This is one of the reasons why the US is able to see a proliferation of startup businesses after the financial crisis, and why companies there can expand into global powerhouses so quickly. It is capital that gives legs to ideas. However, if you have limited avenues to access capital then what will happen is that capital stays mainly with businesses that have reached a size where they are uncomfortable with risks and new ideas.

Governments here have attempted to deal with this deficiency by providing access to special funds, through avenues such as the DBJ, but these routes are laced with bureaucracy and are inadequate. The last attempt to allow any increased competition in the financial sector was in the 1990s, prior to the financial crisis, under Davies. In my view, despite the crisis, it was the right thing to do. The problem was that the regulatory environment did not keep pace, guarding against excesses. But like everything in Jamaica, if a good idea, like this instance or Spring Plain, doesn't work, then we kill it, as we do not have a culture that encourages innovation.

Another important issue to be dealt with, if we want to see greater competitiveness and development, is the justice system and law and order. If we really want investments and competition in Jamaica, then court cases can't take years to resolved, and employees can't take companies to the Industrial Disputes Tribunal, on frivolous charges, costing the company significant legal costs and time without the possibility of recovery.

Also, we can't expect greater productivity if the rights of citizens are not given prominence.

In addition to bureaucracy and crime, the Global Competitiveness Report, highlighted the taxation system as one of the top three inhibitors to improving competitiveness in Jamaica. The system and face of the tax system in Jamaica has improved significantly, thanks to the new TAJ. However, my own view is that the effective tax rate in Jamaica is relatively high when compared to the disposable income and government services offered in other countries. This makes a difference as to where people, who have the choice, choose to pay taxes.

So until we make this a more competitive economy we will be forever chasing our tails and trying to find a solution to our BOP and fiscal deficit. No amount of new taxes, government incentives, or austerity will solve the problem. These only amount to resistance against the powerful, invisible hand of the market. Until we fix the structural issues then for another fifty years we will be moving from crisis to crisis.

The telecommunications sector and tourism are examples of what competition can do for the consumer and productivity, although I think we could enhance the values if they were not subject to so many taxes. We however need to go a step further to ensure this continues.

For telecommunications to improve and have greater competition, the coming number portability is a necessary step. In addition, however, we must have a situation where there is a sharing of the cell site infrastructure. This will reduce the entry, and operating, costs for new entrants that may not have the capital of major players. It will also further reduce the cost and bring newer technologies to consumers.

In the tourism industry, if we are serious about maintaining our comparative advantage, and increasing earnings (not necessarily number of tourists, but dollars per tourist) then we should be strict about our environmental protection, developing proper infrastructure in our tourist towns, and for once address the tourist harassment situation.

All these things we must do however, only if we are serious about growth and development.

A financial look at a possible growth strategy

OVER the last two weeks I looked at a possible growth strategy for Jamaica, and focused on five ministries from which I think the growth impetus can come. These are energy, transport, security, justice and tourism. A question was asked by a reader: Why not mention agriculture also? I do agree that agriculture, is a significant growth area, but the truth is that agriculture depends on what happens at security, energy, transport, and tourism before it can really get started.

The point, therefore, is that if we focus our limited resources on fixing the areas under these ministries, then it will provide a push for the other ministries, and so in a sense these ministries should, in my view, be the focus of fixing the structural deficiencies that prevent growth.

The austerity measures that were being pushed by German Chancellor Angela Merkel were going to result in a further deterioration of the EU economies, and the debt crisis. (Photo: AP)

Someone else asked about finance. True that finance can affect the environment that creates interest in investments, and how capital moves. The fact, however, is that given the fiscal constraint faced by the Government, there is not much that finance can do to positively impact growth directly. It can only serve a role by facilitating the changes needed in these five ministries through providing the much-needed resources.

Before I look at what a financial perspective on growth can be, it is important to mention that the recent EU summit clearly demonstrates that the austerity measures that were being pushed by Germany were going to result in a further deterioration of the EU economies, and the debt crisis. A continuation of the policies would also have led to reduced global confidence and acceleration into global recession again.

The leaders recognised this, and took a common-sense approach by providing a stimulus fund to prop up the fragile EU economies through the banks, and the floating of bonds. This of course means more debt immediately, but the truth is that the debt crisis cannot be solved without incurring more debt. It may seem contradictory, but it is really the only common-sense approach.

In Jamaica, it seems clear that the crisis we face cannot be solved by just a focus on the fiscal accounts, and therefore, the element of the budget that focused on the energy, transport, and tourism projects are critical. The Government has apparently realised this and the focus has shifted (from my perception) to a discussion on the energy initiatives and projects. And I hope that the media can focus on this, as the discussion about which song should be the Jamaica 50 song is really a waste of time, as without growth we may not have energy to sing anyway.

Over the next six to 12 months, we should focus on energy and transport on two fronts.

First, aggressively move households towards renewable energy solutions. This should be done through education, government funding, and private funding. The monthly payment on a loan to install renewable energy will, in all probability, be less than the savings on the JPS bill. Retail consumption is 30 per cent of our US$2-billion import bill, or US$600 million. A reduction of 30 per cent usage amounts to US$180 million ($16 billion) per annum, which goes directly to increased disposable income.

Second, improved public transportation system, which again accounts for 30 per cent of the oil bill (US$600 million). If we can again implement "park and rides" and penalise persons who want to drive into New Kingston and downtown, during work hours, through access fees, we may be able to save another 30 per cent of the US$600 million bill. Again, another US$180 million that goes directly to disposable income.

The other benefit of an improved transport system is the increase in productivity. For example, the implementation of a properly run school bus system, which I am sure parents would pay for, would significantly improve productive hours used to pick up children, in addition to the increase in productivity from decreasing traffic congestion. Assume a 5 per cent increase in GDP from this, then you would be looking at an increase of approximately J$55 billion.

Studies have consistently shown that crime robs the country of approximately two to four per cent of GDP. Based on discussions, I am confident that the security minister is serious about improving "law and order" and reducing the scourge of crime in the country. And he is supported by probably the most effective police commissioner we have ever had, and we must all support him to ensure that he continues his work, as we all have a personal responsibility to help with solving crime. Let's assume that at the low end of the estimates we can improve GDP by two per cent. This amounts to $22 billion in GDP growth. This is also justification for providing the needed resources to security to put proper mechanisms and structures in place, as the payback on even loans for this initiative will no doubt be greater than the cost of the loan.

The intention of Justice Minister Mark Golding to promote an aggressive legislative agenda is also necessary, as our archaic laws stifle business opportunities. What he also needs to focus on is ensuring that the courts move with alacrity, so that cases are not adjourned continuously, delaying justice and costs, which in my view is greater than the cost of going to the Privy Council. These initiatives will also significantly positively impact tourism and and agriculture. Let us also assume that these initiatives conservatively spur a one per cent GDP growth. We again would be looking at a $11 billion GDP growth.

These are what I think can be the direct impact of focusing our resources. However, these initiatives will no doubt cause a chain reaction in things like new investments, and reduction in prices, such as real estate, if we can free up the resources kept locked up in the inner cities.

We would therefore be adding a minimum disposable income increase of $32 billion, which, assuming a low multiplier effect of two, could see around $64 billion being added to GDP. This would be in addition to the GDP increase of $88 billion from the initiatives mentioned before. The total GDP increase would be $120 billion.

Assuming the tax take of 29 per cent from the economy, then this would provide an additional $34.8 billion in fiscal revenues. This would enable the government to reduce tax rates and encourage even greater investments and spending, creating a positive spiral of economic activity.

While the numbers may not be exactly what would happen, it does show the virtue of economic growth as the solution to the global crisis, as opposed to the fiscal austerity path Europe so wisely curtailed.

Jamaica's growth strategy — Part 2

THE reason that five ministries — energy, transport, tourism, security, and justice — can cause "sustainable" growth in Jamaica, is they can hit at the heart of our economic challenge. That of productivity, which results in our deteriorating balance of payments challenge. The fiscal challenge is only a distraction of the real structural issue we face. What I am heartened about with these five ministries is that the ministers have been performing well, and I think are intent on being successful. I think they are also supported by three good junior ministers: Damion Crawford, Julian Robinson, and Morais Guy.

The most important, and easiest fix is to deal with our energy costs. The high energy cost (US 40 cents) per kilowatt hour causes us to be globally uncompetitive, even in our areas of comparative advantage (tourism and bauxite). Unless we fix this problem, then even with fiscal tightening, the economic situation will only get worse. We can, I think, in the short term (even without the industrial production changes), save around US$400 to US$500 million in the short to medium term. And if Minister Paulwell continues to implement his vision, I think we can do so and see the economy being stimulated by up to that amount coming back as disposable income for consumers.

The area of transport is also very important from two aspects. First the "mega" projects, as they are referred to, are critical for our short- to medium-term economic growth. One, because they will have a short-term stimulus effect on the economy, and second, because the long-term benefits of the highway and port expansion can be significant (I don't have enough space to explain the effect). Secondly, the area of properly organising the transport sector is critical. This itself can result in oil imports savings of at least US$200 million annually, if implemented correctly. But more importantly, it can significantly increase productivity.

The third area of tourism is also critical. First tourism will benefit greatly from initiatives in energy and transport, which will see the profitability and product become more competitive. Secondly, though, the additional rooms that are on the cards to be built will also create a stimulus impact that could also increase jobs and consumption. What is going to be very important is that institutions like HEART be aligned with the development so that they can provide the skills needed.

The fourth area of security needs no discussion really, as we have talked the area of crime's impact to death (no pun intended). Suffice to say that the approach being executed by Minister Bunting of going after the money is the most logical and practical approach, and seems to be reaping success. More importantly, though, is the increased presence and work of the police on the roads as we start to bring back some law and order to the streets. We must now focus on getting rid of noise pollution, so that people can get to rest and be more productive.

The final ministry to mention is that of Justice. In particular, I think that the focus of Minister Golding on getting the legislative agenda active, and dealing with some of those archaic laws that hold back the productivity of the country is critical if we are serious about competing globally as our laws are indeed "a shackle" for economic and social development.

So the recently concluded budget did not only look at fiscal tightening but, I think, did have a growth strategy outlined, and did recognise the need for providing stimulus to the economy in order for us to grow. Stimulus, of course, does not necessarily refer to getting loans from overseas for government, but rather also putting policies in place, and reallocating funds (such as the JEEP) to ensure that the consumer lives to fight another day.

It is also clear that unless these growth strategies become reality, then we will be facing another fiscal crisis next year.

Jamaica's growth strategy — Part 1

I think the experiences of the US and Europe has shown us that the only way for us to get out of this global meltdown is to create greater growth in the economy. In fact, European central bank governors, such as Mervyn King, now realise that the austerity programme they had embarked on two years ago will not work, and that what is needed also is to mix that fiscal austerity with some form of stimulus in order to ensure that their economies do not fall back into recession. Countries such as the UK and Spain have already seen their economies fall back into recession as a result. This argument is one that was always supported by Christine Lagard, the International Monetary Fund chief.

My own view on the global economy, is that things more than likely will get worse because I still do not think that Europe gets it enough. I think Germany may end up having its way, in a bid to keep the euro currency together, but that the strategy will end up hurting Europe even more. This is in light of the fact that the US economy has also started to show more signs of weakness, and the emerging economies have started to slow. If these situations get worse then I believe that we could be looking at a global recession, which could possibly become a depression.

Spanish trade union members demonstrate against the government economic measures. Countries such as the UK and Spain have already seen their economies fall back into recession due to the lack of a stimulus programme. (Photo: AP)

If that worst case scenario happens then it could have dire consequences on Jamaica because of our dependency on tourism, bauxite, and remittances. The other implication is that the world may have to see some recession to recover, as government's scamper to save the fiscal situations with more taxes and the money printing presses.

But what can we do, in this year of our 50th year since independence, to ensure that our economy is protected as much as possible, and that we actually see some growth.

After 50 years, my own view is that Jamaica has suffered enough, as we have failed to govern ourselves properly to ensure economic independence, and since early in our independence have always gone cap in hand to other countries rather than seek to stand on our own two feet.

The way the recently concluded budget is crafted may have been the best that we could have done. It is no secret that the tax package was always going to be inflationary and cause a contractionary effect on the economy. Left on its own the tax package would have caused further economic agony, as taxes always filter down to the consumer and cause a contraction in aggregate demand while having an inflationary impact, which means a reduction in living standards. This is compounded by the fact that even with the tax package we will still be borrowing more than we will be paying back.

We can, however, still see a reduction in the debt to GDP ratio, if even we have only one per cent growth and see enough inflation on the nominal GDP to pull the ratio down slightly. The problem with that is that it will only kick the can down the road, as the medium to longer term effect will be a loss of even more productivity, primarily because any resulting depreciation in the exchange rate will not improve our balance of payments by itself, as our structural issues will not allow us to take advantage of exchange rate depreciation.

Therefore in order to recognise the growth possibilities (and strategy) coming out of the budget we have to look beyond the tax package, including any tax reform that will come. Certainly the public sector and pension reform that is being worked on will also create some amount of fiscal space, if implemented properly. The most positive outcome of that will be to give us an IMF agreement, but that again by itself will only be kicking the can down the road, as this sort of fiscal space will only be temporary, just as the JDX was, and will only give us breathing space to do the other things necessary.

In order to understand where the growth is then we must look beyond the fiscal accounts, and look towards five other ministries. These are (in order of importance to growth immediately) -- energy, transport, tourism, security, and justice. These are the ministries that have the potential to reverse the productivity problem in Jamaica, and set us on a path of real sustainable development.

It is therefore imperative I think that we start to have the conversations publicly around these and leave the technocrats to look at the tax package, and reform, as they cannot help our immediate growth situation.

CONTINUED IN PART 2 NEXT WEEK

What was the alternative to the budget taxes?

AS expected, the revenue estimates seek to raise an additional $23 billion in taxes from the economy. I expected a maximum of $20 billion in new tax measures, based on my computations, and accept accountability for being wrong by $3 billion.

What I also expected was the usual suggestion that Government should roll back taxes that affect “me” but place them on everyone else. Seriously now, what did we expect when we chose to not go with fiscal stimulus and instead “deal with our debt burden”, and accept bitter medicine now. Did we not expect it to hurt us as much as it hurt Europe?

Tax on telephone calls may have been an effort to lure revenues with minimal impact on local players and the economy.

The latest unemployment numbers (released by the PIOJ) show that 23,000 more persons were added to the unemployment line in January 2012. This is the direct result of the fiscal tightening we chose when the recession hit.

Well let's not cry now over spilt milk, as we should live with the consequences of our choices. The argument that the debt-GDP ratio is too high is a non-argument, as in 1984 our debt-GDP ratio was at 212 per cent, before falling to 90 per cent at the start of the 1990s, prior to the economy growing an average of six per cent per annum in the latter half of the 1980s, which clearly supports the point that what is important about debt is the return versus the cost.

One of the main arguments against new loans is that interest rates would go up. That's true, but as Dr Davies realised in the 1990s, the trade off for lower interest rates, in a low productivity society, is higher inflation. And inflation, in a consumption society like ours, is a greater burden on the poor than high interest rates. So when the price of chicken and corn beef go up we have lower aggregate demand, which leads to less jobs, and eventually more suffering and social challenges.

But this is where we are, so it makes no sense exploring what could have been, as we have already spread our bed. Now we must lie in it.

The question therefore is, was there an alternative to the $23-billion tax package. In other words, could it have been done in another way so that so many persons do not “bawl”? Let's explore what the possibilities were, bearing in mind that any tax package was always going to be contractionary, as taxes always hurt the consumer in the long run.

If one examines the tax lines on the budget, you will see that there are not many areas that one can get many taxes from. These are (i) PAYE and Statutory Deductions; (ii) Customs Duty; (iii) GCT/SCT; (iv) Company taxes; and (v) Tax on Interest.

We can, I think, rule out PAYE, as this would mean a greater burden on consumers leading to even further contraction in aggregate demand and the economy. Similarly, the WTO rules, and the possibility of reduced demand rules out increasing custom duties further. Company taxes come mainly from financial institutions, which still pay the old tax rate (as the rate was not reduced for them) and in any event increased taxes on them would find its way into higher interest rates. And tax on interest would result in increased demand for higher rates and could result in capital flight.

So the only real option we are left with is GCT / SCT rates, and the fact is that at 17.5 per cent we couldn't increase that rate as again it would have a much greater effect on reducing aggregate demand. The only choice left therefore was to reduce the rate marginally while at the same time broadening the base. What is missing is a proper social welfare distribution mechanism, but there was no alternative but to get some money from GCT.

But the GCT money would not have been enough, and therefore one would have to look at other areas that have a high enough volume of activity to guarantee revenue flows. Alas, the good old telephone calls. After all, Jamaicans love to chat and the low Internet penetration rates, means that we talk on the phone more than the free Internet connection. So there was no doubt that money would come from there.

Secondly, in terms of other areas of the economy that have the volume the fiscal revenues can rely on, they were remittances, tourism, and bauxite/alumina. Taxing remittances would see, I think, a slowdown in remittances, as more cash would be sent in the post, and also it would be a burden on the poor who get most of the remittance flows. Also one could not tax bauxite, which is a struggling industry. The only other available option was tourism, which is a shame as we are pressuring an industry that already is seeing a declining comparative advantage.

In deciding to tax telephone calls and tourism, the minister may have reasoned like this, how can I tax these so that it has a minimal impact on the players and the local economy. The way to do that, of course, is to tax the overseas consumers, so this is how the tax would have been placed on the rooms and the incoming calls.

For the above reasons, my view still stands that the tax package presented was very close to the best that could be done, given the fact that we decided to abandon the fiscal stimulus route and go with fiscal tightening. My objections would be to the tax on books, and also that it didn't appear that there was much consultation with the tourism industry re the timing of the taxes, given their contractual obligations.

I have heard suggestions that we should increase property taxes, to fall in line with what exists overseas. Sounds good, but how can we increase property taxes when the collection mechanism doesn't work properly, and in fact is horrendously inefficient. This means that we will still not collect the tax we want unless we fix the system first. Secondly, all it is going to do is increase rental rates, as any well-thinking property owner would pass it on to their tenant.

The next time that someone gets up and says, take the tax off this and that, please provide an alternative.

Monopoly in telecommunications

I wrote an article in early June 2011, pointing out that Cable and Wireless Jamaica was in danger, as their losses were unsustainable, and that there would be no reprieve for them because the regulatory environment at the time did not allow for greater competitiveness, but also because their business model was wrong.

Well Paulwell has ensured greater regulatory competitiveness but I think there business model is still wrong and their ads are really not attractive enough to cause any switch. In any event, even if they were to get many of the Digicel customers with the current business model they would more than likely still lose money.

My concern though is that we need a competitive telecommunications industry, especially in mobile phones, as one player will certainly mean higher cost for consumers. Maybe one of the things that C&W needs to do is spin off the mobile company and make it stand on its own and by doing so maybe they could write back the impairment on the mobile company assets, as future cash flows may not be so threatened.

What is more concerning than the $20-billion revenue statement loss however, is the negative cash being generated from operations, as the $15-billion write off is really a noncash item based on the expected viability of the company, but the negative cash from operations is more threatening to everyday business.

For the sake of the consumer I really hope that C&W makes the appropriate strategic decisions, and saves the company, as competitiveness in the sector is critical for Jamaica.

The case for fiscal stimulus

LAST week I read with interest the comments to my article, and thought that it would be good to respond to these comments and explain the role of fiscal stimulus, and why it is important for Jamaica. The comments included that I always have a negative view on the economy, irrespective of which government is in power. Commentators also suggested that austerity is needed rather than fiscal stimulus, given that places like Europe have always had stimulus.

With regard to the first comment mentioned, I would only say that I am grateful that the recognition is there that I comment negatively regardless of which government is in power, as it shows impartiality. Secondly on this comment, is there any evidence that our economic development has been improving. If not, then it would seem that my comments are warranted. If however we have been seeing welcome economic development then I would be wrong. I will let the reader make that judgement.

International Monetary Fund (IMF) Managing Director Christine Lagarde recently warned that UK policymakers do more to boost economy. (Photo: AP)

On the second comment, I wouldn't really refer to the waste in fiscal spending during the periods before the recession as the same as the need for stimulus today. The fact is that the reason you need "fiscal" stimulus during a recession, or stagnant economy, is that the private sector will not invest where aggregate demand is low. It is therefore necessary for Government, through fiscal and monetary policy, to provide stimulus to the economy, in order to improve aggregate demand. Without that, then aggregate demand will remain low, and the private sector, because of its profit motive, will not make any new investments. The result is economic stagnation, and increased unemployment, which causes further reduction in aggregate demand.

Only this week there were three reports that showed that the fiscal tightening, in Europe and Jamaica, has caused further declines in the economy.

The first is a report by the Organisation for Economic Corporation and Development warning the Eurozone of a possible severe recession if growth strategies are not adopted, especially since Greece announced that they may be exiting the economic bloc.

The second is where the International Monetary Fund (IMF) has been urging the UK to focus on growth by providing stimulus to the economy, either by direct fiscal spending or reducing interest rates. The IMF's fear is that if Europe does not halt its current decline then the global economy could be negatively affected, and again lead to another global recession.

The third is an affirmation from the IMF that approximately 44 per cent of Jamaicans are living below the poverty line. That is on less than US$2.50 per day. This does not look to me like the IMF projections, and fiscal tightness, we were depending on has worked.

Those who argue against fiscal stimulus say that we cannot continue to live beyond our means, and that the most important thing to consider is the high levels of debt, and that we need to run the country like a business.

The problem with these arguments is that they are simplistic, as they do not consider the social impact of the actions. What we need to remember about a country is that it cannot be run like a business, where if it is not profitable you can shut it down and start a new business. When a business closes then all they will need to do is pay the redundancy costs due and start anew. On the other hand one cannot shut down a country and cannot get rid of human resource (social) problems by merely paying redundancy costs. While the consequence of a business closure may be industrial action, if a country reduces its economic activity severely then you could have industrial unrest.

At the same time, during a recession, the private sector will always seek to cut back on expenditure and activity because of a reduction in disposable incomes. One can always argue that eventually businesses will always start to invest again and economies do recycle and become prosperous again. The problem with that argument is that this cycle can take a very long time, during which period there can be a lot of suffering and social decay.

When this happens in a country we are not talking about lost profits, as a business would consider, but rather we are talking about lost lives. It is the responsibility of Government to ensure that the lives of its citizens are maintained at a certain standard of living, and any Government that fails to do so has really failed in its primary objective of improving the rights and living standards of its citizens.

It is for these reasons that fiscal stimulus is important in times of recession, as when the private sector retreats then the only other source of stimulating aggregate demand and providing the jobs to do so is government. Hence the importance of a programme like Jamaica Emergency Employment Programme.

I would be the first to admit that Jamaica has a serious debt problem, but even more important than the absolute level of the debt is the debt-GDP ratio. Now this ratio changes not only by the numerator (debt) but also the denominator (GDP). In addition, the only way that the debt will be paid off is if the GDP increases — that is if there is growth.

Applying austerity measures will cause the GDP to either decline or remain stagnant, resulting in no growth at best. The debt-GDP will increase anyway because debt naturally increases because of interest costs. In addition, declining or stagnant GDP leads to a loss of the productive base of a country, which makes it more difficult to get growth in the future.

It follows therefore that the path of least resistance, to reduce the debt-GDP, is to increase GDP (grow the economy). In times of recession this can only be done by first practicing short to medium-term fiscal stimulus. A failure to do so will most certainly result in higher poverty levels and Europe-like symptoms.

Growth will not come from the budget

THE Government has presented the 2012/13 estimates of expenditure, and it is reflective of the serious fiscal crisis that faces the country. About a month ago I wrote that "...the fiscal crisis we face today is maybe the toughest one we have ever had to face". And the fact that 54 per cent of the $612 billion budget is allocated to debt servicing is evidence of this. This also means that the amount of money left for expenditure in the local economy is just $276 billion.

Anyone who understood what was facing us is certainly not surprised by this very tight budget, especially as we all know that it is essential for us to satisfy the IMF and the perception of the creditors from whom we will have to, in very short order, approach for loans.

Even with this tight budget, though, the Government did the right thing by reallocating some of the funds to deal with the JEEP programme, which is well needed to provide income for those with the highest propensity to spend. However, the budget presented will not be enough to promote the much needed economic stimulus. The problem of course is that our refusal to have accepted that the economy needed stimulus over the past two years has resulted in an economy that has contracted over that period.

I think even the previous naysayers must now agree that Maynard Keynes was right when he indicated how necessary fiscal stimulus is in times of economic recession. As an example, Europe could continue to face difficulties well beyond when the US has fully recovered because of the mistake they made by relying solely on austerity measures.

As a result of our policies, and the resultant need to tighten the fiscal budget, the fiscal accounts are losing its relevance in terms of being able to help generate growth in the economy. This is why the economy is just projected to grow between zero and one per cent this fiscal year.

My own view though, is that even with the current fiscal situation, the economy can still grow within the two to three per cent range if we are serious. For this to happen though it is going to require a change in the way that we think about sustainable development. One of the first changes in thinking is that we need to understand that the preoccupation with the fiscal accounts, to the detriment of the economy and external account, must change.

In fact, the first thing we need to recognise is that any significant tax package will more than likely cause a further contraction in the economy. This may be the way that those who craft the budget are looking, but it has not worked before, and therefore more than likely will not work again. If we ignore logic for fiscal expediency, then we could find ourselves at this juncture again next year.

If, however, logic does not prevail and there are going to be new taxes, then logic again dictates that it would be better to reduce the tax at the levels where there is the highest propensity to spend in the local economy and place the tax burden where there is a higher propensity to save, or spend externally. What would be practically translated into is reducing the PAYE rate, while increasing the consumption tax on imported items that are locally produced, as an example. Even this sort of approach is not sustainable, however, as it could result in capital moving offshore.

The corner that we have painted ourselves into, however, is one where we had no option but to present this type of budget. The result of our failed fiscal policies over the decades, and the absence of policies that enables the market towards productivity.

While we recognise that the budget will not assist with any growth in the economy this year, there are three initiatives that could help to significantly stimulate the economy. These are:

* The move by Minister Paulwell to bring greater competitiveness to the energy sector, while at the same time bringing greater awareness to the benefits of going with renewable energy primarily at residences. This is something that I have been pushing for over two years and I am happy to see that the current minister is taking this seriously, as because of the past reluctance to properly embrace this, it has cost the country significant amounts of foreign exchange;

* The three mega-projects being introduced by Dr Davies, if they can get past the bureaucracy that has stifled so much of our progress, will definitely provide a significant stimulus to the economy; and

* The push by the Transport Ministry to bring some order to the transportation system has the potential of providing significant savings to the energy bill and increasing productive hours. This can easily happen if we do what is necessary to properly structure and realise the benefits from the transport system.

So while the projection is for the economy to grow between zero and one per cent, I think that this view of how the economy will perform is really restricted by the capacity of those looking at the economy to think outside of what exists today. If we do a little thinking, and acting, outside of the box, it is my view that we can see two to three per cent growth. But we must first have the will to do what is necessary to achieve this.

Private-Public Hospital (PPH)

Only this week I was at a private hospital that I'd had a bad experience with late last year. Again I had another bad experience, which made me wonder if it wouldn't have been better for the patient to have gone to the University Hospital, or even KPH.

It seems as if this hospital is taking the Public-Private Partnership (PPP) thing to another level and is now touting the concept of PPH, as the wait to see a doctor topped two hours at this newly crowned PPH. The only difference is that the cost of the PPH is more than the pure public hospital, even though the wait time is the same or worse.