Prosperity requires new thinking

THERE is something the Honourable Dennis Lalor always says to me that has a lot of relevance for the country, and individuals. That is: "Bird seed don't make John Crow sing." For any reader who is not Jamaican, a John Crow is the same thing as a vulture. What it simply means is that no matter how much bird seed you feed to the John Crow, it will never sing like a bird simply because it cannot.

Similarly, Albert Einstein said the definition of madness is to do the same thing over and over again and expect different results.

EINSTEIN... said, the definition of madness is to do the same thing over and over again and expect different results.

In effect, what both gentlemen mean by the respective quotes is that if you are doing something that can never produce the result you desire, then doing it over and over again can never give you the result you want. In other words, in order to get the result you want it is necessary to approach the problem with new methods and thinking.

So recently I have heard comments to the effect that the Jamaican dollar is overvalued, and that we need to let it find its true value. There have even been target rates quoted such as J$120 and J$150 to US$1. My question, though, is can we allow the dollar to devalue within the context of the current environment where productivity capacity is limited, where the major component of imports is oil, and where a significant part of our export inputs are imported. Is devaluation going to make us use less oil, if we do not change our energy source first, or are the exporters going to absorb the import cost increases when they price their exports?

Similarly, can we really improve the efficiency of the bureaucracy by just laying off public sector workers, or would it not be more beneficial to approach the problem from the point of view of changing the rules and processes to create a more efficient environment?

As individuals, can we improve our financial situation by the same consumption and investment habits we had before, or do we need to change them?

From both the country and individual perspective, if what we have been doing is giving us the results we want, then obviously there is no need to change it. And you should keep doing what you have always been doing. If, however, you are not happy with the results, then it means that you have been feeding bird seed to a John Crow and expecting it to sing. In other words, if you want to hear singing then you have to realise that it makes no sense feeding the John Crow, as it will never sing. Get rid of the John Crow and get a bird that has the ability to sing.

Only after you have done that do you even stand the possibility of hearing any singing coming from the bird. Note that the John Crow is a bird, but it is not one with the ability to sing.

So, if we want to see a country or individual prosper, then doesn't it similarly mean that we have to ensure that we equip ourselves with the resources that will lead to prosperity? If we change the brand bird seed, and feed it to the John Crow it still won't sing. Even if we increase the quantity, and change the brand, the John Crow still won't sing.

So, irrespective of how much money we get to borrow from multilaterals, and no matter how much tax we put on the people of Jamaica, and no matter how many public sector workers we lay off, or how many wage freezes we have, the fact is that if we continue to make these changes within the context of an environment that is not competitive or productive, it really is nothing more than an exercise in frustration.

The only way for us to see any sustainable prosperity in Jamaica is to fix the structural problems we have. And these structural problems have been with us since Independence, as even the growth in the booming 1960s was primarily because of foreign investments. All the structural challenges existed at that time also.

What are the major structural issues we face? Energy cost, inefficient bureaucracy, law and order, and the need for proper tax and incentive reform. Doing anything else without fixing these is, well, giving bird seed to a John Crow and expecting it to sing.

From an individual's perspective the same applies. If you have financial challenges and it arises primarily because your consumption expenditure is too high for your income, then refinancing any debt you have will not change your financial problems. What you must do is radically change the way you consume in relation to your income. For an individual it is much easier as you can get a good financial advisor to assist. Just make sure you get a good one and follow the advice. In other words, resist the temptation of buying a dog and then do the barking yourself.

In both cases, what is needed for any increase in prosperity has to start with a new way of thinking. This is the first step in changing that paradigm. Regrettably, I do not think that as a country, and as individuals, we have realised that this is the first step. So the old way of thinking persists and what happens is that the same ideas used in the past are repackaged under a different name. And sure, you can always get away with selling a newly repackaged item at least once. But the taste and effect are going to be the same, irrespective of the packaging.

So in order to hear that sweet singing sound that only a bird can make, let us first think about what type of bird can sing, and which one delivers the melody we want to hear, before we start feeding it bird seed.

Changing costly cultural habits

In 2011 I remember having a discussion with someone who questioned my continuous advice that people should look towards solar energy at home, and if necessary borrow the funds to install it. At the time he said that he would rather to borrow the money to buy a new car, as data showed that the investment in solar was not a good payback.

That argument I couldn’t understand because while an investment in solar energy gives a return on investment, in savings and convenience, I don’t see how one gets any return at all from a car. Particularly if you borrow the money for the purchase. Well maybe there is the social benefits.

At the same time, in 2012, we saw where bank loans, and in particular personal loans (mostly for cars) increased over 2011.

Being the stubborn person I am, I went ahead with my plans to invest in solar energy at home, and today enjoy significant savings and much convenience. I have never regretted the decision and investment.

Today I spoke with someone who advised that many persons today are having difficulty servicing their car loans, and over the weekend I heard two stories where cars were seized by the bailiff while they were in transit. Additionally I have heard stories of businesses in trouble because some business people borrowed money to purchase motor vehicles, instead of saving the money or reinvesting it in the business.

This reminds me of a real life story where two men who were truck drivers in the 70s had $250,000 each. One decided to buy a house in Beverly Hills and the other a business, and continued to rent. Today the one with the house still has it and the one who went into the business could but many of those houses, and in fact has many investment properties.

These examples show that one of the most significant factors that cause financial hardship, even though there is a recession, is the cultural attitude of many in the country. This is illustrative of what investment advisors always tell you that there are two things that cause people to lose money – fear and greed. And in the Jamaican context I want to add another – the need to “profile”.

I have found in many instances that people who make bad financial decisions do so because they want to impress others with the so called badges of wealth. That is the car, house, and other accessories. So what they do is borrow the money and live today with the income they expect in the future.

This cultural attitude is what has caused financial distress for many Jamaicans. And I find that the ability to overcome this “profile” attitude is a significant step in regaining financial health. This is why one of the first things I mention in my book is the first step to financial reform is an acceptance of what needs to be done and an acceptance of the inherent problem.

When I was around sixteen, my uncle said to me. “its not how much you earn that is important but rather how much you earn”.

Some will come to grips with this problem and reform their finances but many more will not. They will continue to make mistakes and suffer from the need to live the culture of profiling. My own view is that this need is derived from an underlying insecurity but I am no psychologist.

This cultural attitude can be found in many countries and cultures but I think Jamaica has a big dose of it. If we are to overcome our financial challenges then there is going to have to be a radical reform of this culture, so that we can invest in productive assets, just as Trinidad did in the 1980s, while we invested in motor vehicles. After all it is the individual lifestyles that sum up to the overall condition of a country,and we must remember that economics is a social science and hence is based on cultural attitudes also.

If anyone wants to make the change they can, especially if they have someone advising them about it, but the deeper you have found yourself in this culture is the more difficult, and more help you will need.

Devaluation not good for Jamaica

Over recent weeks there have been utterances from several quarters - including economists, analysts, and technocrats – about the benefits of devaluation for the country.

The argument being made, is based on the theory that if we were to devalue the J$ in relation to the US$ then our exports would get relatively cheaper and this would lead to a greater demand for Jamaican exports. This is a strategy that countries like the US, Europe, and China are well aware of, and it seems as if there is a constant currency value war between these countries. The US for example is constantly complaining that China’s currency is undervalued, which leads to China’s goods being cheaper than the US gods, resulting in the massive trade deficit the US has with China.

If this argument holds true then the position being put forward by those in favour of the Jamaican dollar being devalued, and as some put in finding its true value, should be correct then.

The question is, if this argument is true then why has the J$ moved from a position in the 70s where it was stronger than the US$, to where it is today (approaching 100) and it seems as if our economy is getting worse, and more importantly our trade deficit is expanding. Shouldn’t the massive devaluations we have seen (over average $2.50 per year since the 70s) result in an improved trade deficit.

This is where those who propose devaluation fall short in their argument, as the assumptions they make is incomplete.

The fact is that devaluation can only help a country’s currency IF and only IF the country’s currency being devalued has the productive capacity to replace the imports. So in Jamaica’s case where 45% of our imports are oil (35%) and food (10%), the question to be asked is do we have the productive capacity to replace the imports. So as expensive as oil gets can we substitute it with locally produced energy sources? Or can we replace our food imports with locally produced foods?

The answer to these questions is no. So therefore irrespective of how much the dollar is devalued, we will still need to import oil and food, because we have not put the energy policy in place to grow for example renewable energy generation to replace foreign oil. And in the case of food, praedial larceny, lack of proper roads, and using farm lands for construction inhibits local food production.

The other argument for imports that we can substitute with local production, is that 70% of our export content is from imported raw materials, as labour costs (unlike China) are a very small percentage of inputs. So it follows that as the dollar devalues the cost of exports increase also because more money has to be found for the imported content.

Therefore, my conclusion, as was the same for Seaga and Davies, is that the only thing devaluation does is cause inflation and erodes spending power. The only way to solve the problem is to fix the structural issues of crime, energy, and bureaucracy.

Surviving under the IMF

AT the end of December 2012, when it became clear no International Monetary Fund (IMF) deal was coming, I wrote an article that was published on January 4, titled "Jamaica without the IMF", as I felt that it was important to think about options. This was because not having a deal by the end of 2012 meant there were harsher measures than expected that would be coming.

Many persons said that there was no option but the IMF, and that we must get an IMF deal. Well, we did and some of the same persons who were saying there was no other option are now criticising the tax package and the National Housing Trust (NHT) drawdown. I can never understand what some of us want.

A home built with solar cells that double as roofing material. Investing in renewable energy to cut energy costs would be a smart move in the face of the harsh economic climate, advises Dennis Chung.

So here we are facing IMF terms that obviously will cause further contraction in the economy, on top of the devaluation we continue to see. A point here is that devaluation, as both Seaga and Davies recognised, does mostly harm to Jamaica and little good. This is because most of our export content is from imports, and so any devaluation only makes the cost of our exports more expensive, and will either result in increased export prices or shutting down of businesses which can't recover costs. How we deal with that is for another discussion, as what I want to focus on today is how the individual can deal with the current environment.

There are certain measures individuals can take to protect themselves, which in the short to medium term will result in a reduction in economic activity and fiscal revenues, but at least will protect against the terms of the IMF agreement.

To be clear, there are some people who are going to be affected more than others because of situations like debt levels (especially personal debt such as credit cards and car loans) and if they have not been working for a while. However, I believe that everyone can protect themselves to some degree against the coming environment if you have the commitment, discipline, and work with someone who can help. After all, when you are sick you go to a doctor, why not seek financial expertise when you have financial issues?

The issues I will mention come from discussions I have been having on Facebook, and out of which a group has been started, to discuss specific issues that can help people cope with the economic conditions while also improving your health. In fact, the main motivation was health reasons but also results in protection against the economic environment.

The objective is that you want to maintain your standard of living as much as possible by reorganising your expenditure and habits to maximise the utility of your resources. The first thing I say to people is if you do not have consumption debt, then do not acquire it, and if you have it, then get out of it as quickly as possible. So the credit card and car loan you should shy away from.

You also should seek to improve your income, as just cutting back alone (as in the austerity measures) will only result in a decline in living standards. So a real-life example is someone I recently coached who was an office helper in an organisation. Before her contract came to an end I told her, and her colleagues, to look at starting their own business. The better-paid and more formally educated ones chose to go and work for someone else. She said to me that she wanted to start her own business but had no capital. So I asked her what she liked to do and she said food. So I told her to go bake a cake and come back and sell slices to the people at the office. Within a month she was selling a few cakes and today her customer base has expanded, she is building her house, is thinking of employing someone, is making more money than when she was working, and is enjoying it much more.

The other thing to do is examine your consumption and see how you can be more efficient at it -- For me this includes improving health, which also means less future medical expenses.

So there are two things that I have done that have improved my quality of life and at the same time reduced my consumption expenditure (although required some upfront investment) and put more money to savings.

The first is to go with renewable energy at home. I have been using solar for the last three years, and today generate 80 per cent of my energy needs. A good problem I face is that for about four hours I generate more energy than I need and because I have a charge controller on the system it doesn't use the maximum it can. But what it also means is that within two years I would have paid back for the cost of the system and have another 10 to 20 years of use before replacement, and I never suffer during Jamaica Public Service outages or cost increases, from fuel prices or devaluation. Today my water and light bills are approximately the same.

The other thing I do for health purposes primarily, but ends up saving me money also, is to grow my own herbs, vegetables, and fruits. Today what I grow accounts for 10 per cent of my food consumption and the plan is to move it to 70 per cent in six months, which is achievable because I am practically vegetarian. The most important thing is that it is healthier, as it is fresher and I know it is organic, but secondly, it is much more convenient to just go outside and pick what you want to eat.

Everyone can do this to some degree, and it is a much healthier alternative. Can you imagine if enough people adopted this approach to reduce unnecessary consumption and create their own energy and food consumption, the amount of foreign exchange savings the country would have?

It is important that we start to think this way, as there has not been presented as yet any economic agenda that is going to increase GDP and spending power of the masses. What we need to do, therefore, is start to take our own individual actions to cope.

These actions will no doubt decrease economic activity, and reduce taxes from consumption and income, but at least they are the best way for everyone to contribute to the country's balance of payment solution, while improving their own circumstance.

Fix the structural deficiencies to see growth

THERE were two occurrences within the past week that reminded me that Jamaica still has a lot to do in order to see long-term sustainable development.

There was an announcement that an International Monetary Fund (IMF) team is on the island, and it is expected that a staff-level agreement should be reached after this visit. This means that we can expect board approval within six weeks, which would be just before the 2013/14 budget is tabled.

A Jamaica Public Service (JPS) worker about to climb a light pole. The Office of Utilities Regulation’s decision to cancel the process which would have facilitated JPS to use liquefied natural gas as its main fuel source, was one its most impractical decisions ever, says Dennis Chung.

There seems to be general acceptance that any IMF agreement is just a stop-gap measure, as articulated by Prime Minister Portia Simpson Miller and more recently the Private Sector Organisation of Jamaica (PSOJ) president Christopher Zacca. What is also evident is that the government has to be careful not to get an agreement like the 2010 one where the targets set were unrealistic and never had a chance of being met.

Correctly, the position of the PNP's NEC is that there should be no new taxes, which is a position I have supported for years now. This position is supported by the numbers that show that since fiscal year 2003/04, we have seen four tax packages up to 2012/13 and the shortfall in collections has been more than the tax package. For the current financial year the tax package is $25 billion, and already we see a shortfall of $11 billion to December 2012, with the highest projected months to come. It is clear that the only effect of tax packages is to reduce disposable income, economic activity, and push inflation. So the position of the NEC is an enlightened one.

The other event of interest is the development: re the Office of Utilities Regulation (OUR) terminating the approval of the Jamaica Public Service Company (JPS) to pursue the liquefied natural gas (LNG) facility. This is one of the most impractical decisions to have come out of that body, and there have been a few. What is the rational for denying the JPS another 30 days, when they were the sole bidder and we need an energy solution like yesterday? I mean, are we going to go over the bidding process again, only to select JPS as the sole bidder again? Do we expect that after making such a decision that other persons, seeing that after JPS has spent US$2 million on this process are going to compete for the facility? How many persons do we think have US$600 million sitting down and waiting to invest, especially given the monopoly hold that JPS has on the industry?

And I say this having indicated at the start of the LNG project that it would not have come to fruition, in the time projected, and being one who has always believed that coal is the most practical way to go for industrial energy, and renewable for retail and office consumption. It just does not make any practical sense to turn down JPS's request for an additional 30 days. Even if we do not see the savings on electricity cost, at least we would have seen the benefits of the investment in the economy.

Anyway, I have given up trying to understand the mental workings of some of our bureaucrats.

In any event, my pet peeve is why we seem to stand around and wait on long-term solutions. Why do we not look at the plausible short-term solutions to 60 per cent of our oil consumption, in the form of retail and transportation consumption? If we had acted on these four years ago, then we could have saved at least US$2 billion on our trade deficit.

So the country stops as we focus on getting an IMF agreement and long-term energy solution. We fail to understand that we can at the same time, and should, work on other short-term policies to reduce the urgency for these longer-term policies.

The other area that we do not seem to understand how to resolve is the matter of public sector bureaucracy. When the PSTU was being set up, a few years ago, I had indicated that we would not see any benefit from it in the projected two-year time period. It has been approximately four years now and we still are debating how to deal with public sector bureaucracy.

I said it then and I say it again, we cannot bring efficiency to the bureaucracy by centralising the solution in the same bureaucracy it is supposed to improve.

The most prudent way to bring efficiency to the public sector is to (1) reform the rules that govern public sector bodies, so that things do not take forever to happen, like public sector rationalisation; and (2) put good people in charge of these public sector bodies with the requisite authority and objectives, and pay them a part of their salary based on agreed improvements. Instead, we argue about how much money some of these bureaucrats are paid instead of what value they are adding.

As an example, if you pay someone $2 million, who adds $1 million value, and someone else $20 million, who adds $30 million value, then who is more expensive?

It is time for us to change the way we approach solutions to our challenges.

We must understand that we shouldn't wait around on major projects to fix our structural issues, because many times the small actions can add a lot more value. We need to focus not just on major announcements.

Again, I state my view that we can see short-term solution to the energy crisis if we make the right policy decisions, and in addition, we can see improved public sector operations if we focus on solving the public sector individually.

Until we realise this and take the necessary actions, then we will certainly get an IMF agreement but will find ourselves back in this economic quandary sooner rather than later.

The meaning of consumer and business confidence

LAST year, when the Jamaica Chamber of Commerce (JCC) reported that consumer and business confidence were at their highest level for years, many persons were excited about the prospects. I remember speaking with Ralston Hyman on the matter, and pointed out that the numbers were deceptive of the true situation, as we both expected that the economic situation would worsen.

This week the JCC reported that confidence was now at its lowest for three years.

Lloyd Distant, chairman of the Jamaica Conference Board, with pollster Don Anderson at Tuesday’s presentation of fourth quarter surveys of Business and Consumer Confidence. Economic optimism among businesses fell to near its lowest levels during the past four years, the survey found.

Based on the way the economy has progressed, it seems obvious that the expectations last year did not correctly perceive what would happen with the economy's performance.

What is it though that caused this gap? Was it that the JCC survey was wrong? Was it that since the optimistic expectation things have significantly changed in the economy? Or do business persons and consumers surveyed not have a realistic understanding of what will happen with the economy?

Why would we have said last year that the optimistic confidence numbers do not give a realistic picture of what will happen? We would have said this before it was known that the IMF agreement was not going to be signed before the end of 2012, when everyone expected that it would. So it is not that we expected the economy would have deteriorated, as a result of no IMF agreement. Therefore the reason (uncertainty from lack of IMF agreement) the respondents gave for the low confidence numbers would not have been why we felt that the economy was going to deteriorate.

This leads to the question what is the real benefit of the consumer and business confidence numbers to the prediction of economic performance? Because they are important indicators to watch, even though they should not be relied on solely. In fact, no single indicator should be relied on solely.

Two such indicators that by themselves should not be used as a barometer of future economic performance are interest rates and exchange rates. As a country we tend to oversimplify our reliance on these, to tell us how the economy is going to do. So we believe, for example, that because interest rates are low and the exchange rate stable, then that means the economy does not have a problem. In fact, when economies are growing interest rates and inflation are usually increasing, and require active intervention by the central bank to curb their movement. This is because the demand for money and goods usually exceeds the pace that the supply grows at.

The main reason for saying, last year, that the confidence numbers did not accurately reflect what was going to happen in the economy was the structural deficiencies we saw. These included (1) the still weak global economy; (2) the high cost of energy; (3) the trade deficit; (4) the inefficient bureaucracy; and (5) the general uncompetitiveness of the Jamaican market. If you consider all of this within the context of a closed capital market, then it seemed obvious at the time that even if the IMF agreement was signed before the end of 2012, the measures that would be imposed would reflect continuing fiscal tightening, which would serve to further contract the economy.

In fact, most countries worldwide that have gone the route of fiscal tightening have seen a slowdown, and many have seen a double-dip recession. This is why, even though many criticise JEEP

as short-term, unsustainable jobs, the fact is that programmes like those are necessary to keep economic activity alive. Can you imagine what would have been the outcome if JEEP did not exist? So while I agree that it is not sustainable long- term, as a short-term measure this sort of stimulus is critical.

In fact, this was the main reason given last year for the high levels of consumer confidence especially.

This brings me back to the original question: what then, is the purpose of business and consumer confidence measures if they were so way off in relation to the economic and business climate we face today.

The fact is that business and consumer confidence perception can only measure what the respondents are aware of, and their understanding of the market. If the respondents surveyed do not have a full understanding of how to analyse market conditions going forward, and therefore make a more informed assessment, then they could end up having expectations that are at variant with the actual outcome.

Additionally, it also depends on who was surveyed. If, for example the persons surveyed were primarily those previously unemployed who got a job through JEEP. Or perhaps it was a business person who saw more activity coming in because of JEEP employment. They would naturally feel good about the increased income levels and also about their ability to acquire the things they want to. When people feel confident about their future earnings, then they go out and spend on consumer items -- they take out furniture on layaway, take out car loans, when everyone was raking in high returns through Cash Plus and OLINT, remember how they used to spend? Even though the promised returns were just on paper. That is the sort of thing that confidence of future earnings does. It creates a vibrant economy and causes spending to go up and the multiplier effect of money to increase.

This is the effect of stimulus on an economy as we saw with the response about JEEP last year. On the other hand, when people are wary about their future incomes they tend to contract spending, leading to a slowdown in economic activity.

The confidence index therefore, is important for measuring expectations of future spending levels, in relation to consumer spending and investments. However, as I have always said, one should always be guarded about increasing confidence perceptions when an economy has structural issues, and should always look for a trend of improving numbers, which one survey does not make a trend.

It is important for us to understand this, so that we do not incorrectly make decisions based on an unrealistic target.

Jamaica's policy options

THERE are two things of importance to Jamaica that occurred over the past two weeks which will have an effect on what happens to our economy going forward.

The first is the update on the state of the International Monetary Fund (IMF) negotiations provided by the Government last Monday (January 14, 2013) and the second is the report by IMF Chief Economist Olivier Blanchard, which says that the IMF's austerity policies applied in Greece were miscalculated and made the situation worse.

IMF Chief Economist Olivier Blanchard said austerity policies applied in Greece were miscalculated and made the situation worse.

These two statements are closely related, even though they relate to two different countries. This is because based on the approach the IMF seemingly wants Jamaica to take — increase in the primary surplus from 6.3 per cent to 7.5 per cent of GDP, increased taxes, and expenditure cuts — it hints at a similar austerity policy (that did not work in Greece).

My own view is that the increased primary surplus target is going to be extremely difficult to attain, and further expenditure cuts and tax increases will only pave the way for further economic contraction. This is a view I have always espoused from the start of the recession (in Jamaica) in 2009. Since then we have had massive tax packages and the targets have not been achieved, understandably so, and, even more, the economy has contracted from the levels at that time.

Further, it was obvious that these same measures that were promoted in the 2010 IMF agreement, have had a significant effect on what is happening in Jamaica today. The fact is that the targets in that agreement was very unrealistic, and even more so today continue to be so.

This is why over the last two weeks I have written about the need to think about Jamaica without an IMF agreement, and what our alternatives are.

First let me pause to say that the update provided by the Government was a step in the right direction, as any information is better than no information for markets. People can now plan whether to forge ahead with business activity, or make plans to scale them down.

It is important for us to remember that businesses don't just plan to expand. They also plan to contract. I also want people to understand that the role of the private sector, in a properly functioning market, is to make decisions in the best interest of their shareholders. Not to act like charity organisations. When the private sector stops behaving like they should then I guarantee that economic activity will become inefficient and lead to decline. Government's role is to create the environment where when they pursue their own interests it is in the best interest of the country, and people.

These points are what should guide the Government's policies going forward. That is if the IMF policies are so stringent that they are going to contract the economy significantly, then should we go ahead with it? We must remember that when economies contract, disposable incomes decline, unemployment increases and businesses fail. The cycle then starts again as a decline into the abyss. In short, we will become like an animal feeding on itself until there is nothing left.

The second consideration is that Government needs to create the environment for businesses to do well. When businesses do well they hire more people, which creates more disposable income, and so the cycle continues to improve, as long as the appropriate fiscal policies are in place.

The fiscal challenge that the government faces is significant, and therefore one can understand the need to raise new taxes, or decrease expenditure to address the crisis. The fact, however, is that decreasing expenditure and increasing taxes will only lead to further decline unless the proper fiscal policies are put in place. I believe that the right fiscal policies will start to see results in six to twelve months, but I fear the bureaucracy will prevent us it from happening. I said this in 2008, when PM Golding at the time announced the stimulus package. Things move too slow in Jamaica.

Another statement the Government made, which is also commendable, is that they will do everything to protect the most vulnerable. Let us understand, however, that the only way to sustainably protect the vulnerable is to grow the economy. It is always the holders of capital who get the benefit of money put in the economy and if they can't get enough then money becomes inactive, which hurts the vulnerable most. So, again, if we do not do the necessary things to grow the economy then the number of vulnerable will increase and the pain will come back to them quickly.

The Government is between a rock, a hard place and another hard place. In other words, they have very tough decisions to make, and if they make the wrong decisions, or those to only improve the fiscal accounts, then we will be back in this situation very soon. Remember when the IMF agreement came in 2010 it was supposed to be the one to solve our problems, as all the other agreements before that. We need to listen to Blanchard. In short, the Keynesians have won, as they have the stimulus in China, US and Brazil as examples of success.

What we must also be aware of is that because we embarked on the 2010 agreement, and when it went into abeyance we took so long to act, then our options narrowed. There will be no way to avoid fiscal difficulties, and as far as I am concerned. Whatever path we choose the fiscal challenges will be there. Government will have to make hard choices to continue to function as needed, but making the short term decision to increase taxes and reduce expenditure could make it worse.

I have my own views on what can be done to improve the fiscal accounts, bearing in mind that at this point the fiscal accounts will have short term challenges irrespective of the path chosen. So before we see an improvement, things will get worse, but the option we choose will determine how long we remain in a tough situation.

This is a time for unity and to support the Government, especially as the PM has committed to continue to speak to the people.

Why can’t we get it right?

When I look at the challenges faced in the Caribbean, I have to say that the main problem we face is one of governance, which for the life of me I can’t understand why we can’t get it right. And this I say because I think the solution is so simple.

One of the reasons why I think that we have the challenges we do is because we focus on symptoms rather than real root issues, mainly because it does not serve our political ambitions to do otherwise. Political ambition not only of the leaders, and politicians, but in many cases the followers are greater political hacks than the leadership of the political movement.

This I find very worrying, as I see many young persons who are setting out on continuing the tradition of political tribalism, in the Jamaica in particular. They espouse ideas purely based on political stance rather than rational reasoning. It is apparent that although slavery ended in 1834, they still are caught in a trap of mental slavery that incapacitates their God given ability to think.

But when I look at the Caribbean I see all sorts of problems. Other countries accuse Barbados of not welcoming some CARICOM citizens, with their “abuse” of women at the airport. In Trinidad it seems commonplace for the squabbling, because of obvious political reasons, to continue, while crime escalates there like in Jamaica. In the Turks and Caicos and Cayman we have recently seen moves by the British to charge the leaders for corruption. Not to say that it is any less rampant elsewhere, its just that they have the British to watch over them. In Haiti the masses seem to be continuously oppressed by the politicians who continue to fight for “scrap”. And here in my beloved Jamaica, we see where the police have killed more people this year than number of days, political tribalism is rampant, it takes two years to report on the over 70 lives lost in Tivoli, we have a Traffic Ticket Amnesty that was a good move but the way it was organized reduces the states credibility, a justice system that does not give quick justice, and I could go on.

In addition our economies, in the main perform poorly. With the worst performing economy now being Jamaica, as even Haiti is seeing growth. We have had several debt restructures in the Caribbean – Dominica (2004); Grenada (2005); Belize (2006 and 2012); Jamaica (2010); Antigua and Barbuda (2010); and St Kitts and Nevis (2011). This is why the rest of the world looks on at us as beggars, and a really sad lot. We borrow people’s money and then we don’t pay it back.

The other problem is that we seem to focus on the wrong solution all the time. or in fact we focus on things that will not solve the problem. The main focus is not on the debt and fiscal accounts, when in my mind this is not the main problem. So we will again apply prescriptions, such as the 2010 IMF agreement in Jamaica, that well the results show what happened. And if that doesn’t work, well just tax the people more, until the whole country is in poverty.

In 2009 when I wrote my book “Charting Jamaica’s Economic and Social Development”, I started by looking at the macroeconomic numbers since 1962, hoping to find the problem with Jamaica by analyzing the numbers. My conclusion led me to the reality that the problem with Jamaica, and by extension the Caribbean, was not to be found in the numbers but rather the constitutional political system. The UK did us a grave injustice when they left us with the Westminster system of governance.

Sure it can work in the UK, but this is because they have a much larger population of tradition and morality that we do not have. So, as I said in the book, whereby the UK has some 600 Members of Parliament (MPs), where only 120 form government, all of our majority side is usually a part of government in one way or the other.

So the UK has 480 opposition and true back benchers to oppose government. We really have an impotent opposition in Parliament as the government side will always win. So in effect, the Westminster system in small island states creates virtual dictators for 5 years, or until an election is held. What’s more people in Jamaica do not give feedback on legislation going through Parliament, so they have their way all the time.

The Caribbean Countries that have done well have been fortunate to have political leaders that have chose the right path, in spite of the political system. Sandiford in Barbados and Chambers in Trinidad. They were, however, one term Prime Ministers. Simply because the people voted them out for choosing the right path.

Which takes me back to the real problem, the citizens. We as a Caribbean people are the main reasons why our countries are the way they are. We do not demand performance but rather political decisions. We do not demand a better standard of living for all but rather a bigger contract for ourselves. We do not demand justice but turn a blind eye when the abuse does not affect us. We do not demand a more structured society but give excuses for indiscipline, saying it is a part of our culture. We do not look towards the future but rather short term benefits.

We do not use our resources for productive purposes but rather for entertainment. And I single this one out because I always hear people say, but what can I do? And we always say someone else should do it. Instead we use a very powerful tool, social media, to post our political leanings or follow the “immoral” lives of entertainers. We do not realize the power we have in our hands.

So my conclusion is that, whatever happens to us we have nothing to complain about as we are the ones who tolerate and promote it. We do not use the tool of social media, as done by other countries we strive to be like, or get a plane ticket to, for the betterment of the country and our lives. We use the media in a similar fashion.

So why can’t we get it right in the Caribbean? Look in the mirror.

Avoiding economic and social decline

JAMAICA is once again at an economic crossroads. Only this time it is more critical that we take the correct path, as the wrong one today leads over a precipice.

The last time we were here was in 2009, when we chose the route of the International Monetary Fund (IMF) and the Jamaica Debt Exchange (JDX). What we failed to do, though, is make the lasting adjustments necessary to ensure that we did not arrive at such a crossroads again.

Consumerism fundamentally makes for vibrant economic activity, says Dennis Chung.

I will once again make some suggestions about what our alternatives are, to which I once again expect criticism. Just as in 2009, I remember both Ralston Hyman and I saying we needed to go to the IMF, restructure the debt, and when the IMF agreement came that it would not work. We received much criticism and comments to the effect that we didn't know what we were saying. But I will once again give my views and welcome the criticisms that may come, as the contention of ideas is what drives innovation.

The first thing to do is understand what fundamentally drives real economic growth and what kills it. Once we understand this, then it is fairly easy for us to determine which path we want to take based on the roadmap that is laid before us for either path. The approach needs to be similar to when assessing an organisation and determining the main structural issues on which success depends.

The first thing to understand is that there is fundamentally one thing that makes for vibrant economic activity, and that is consumerism. This, in turn, depends on disposable incomes and employment levels. So the higher the levels of disposable incomes, the greater will be the level of economic activity and the wealthier a society will be. This is why the focus of the US during the recent economic crisis has been on unemployment, housing and retail consumption. The better these indicators then the more businesses will invest and the greater GDP growth.

Secondly, investments are always attracted to economies that are easier to do business (bureaucracy) and have predictable rules (law and order). If these are compromised then what we will get are investments that look for quick returns and low levels of capital investments. I have discussed this in great detail before, and therefore it is the first matter of consumerism that I want to focus on.

As we analyse various paths available for us to get out of the current economic quagmire, we need to understand the effect, and associated risks, on the fundamental building block of economic growth of consumerism. This is the basic argument behind stimulus versus austerity theories. The argument for stimulus is that, if the economy totals $100 and the government accounts for $50 and the private sector $50, then in an economic recession, if the private sector production reduces to $30, and if government spending reduces to $30, it will mean that the economy will shrink to $60.

Similarly, if the Government increases taxes, in such an economy, then it will mean that the consumer (private sector) will have less money to spend, and this will reduce economic activity. The result will be less company profits, increased unemployment, lower disposable income, and consequently lower "real" fiscal revenues. Let me also add that any significant reduction in disposable incomes will result in business failures.

Therefore, as we look at the alternatives, we must understand this effect of consumerism on the economy. This means that any solution we agree on implementing, must consider that employment is increased, disposable income is protected, and productivity increased.

It is for this reason that I do not support accepting anything the IMF dishes out to us. If, for example, they demand that we implement a significant tax package, say upwards of $30 billion, and/or implement JDX2, are we willing to accept this, even though we are well aware that it more than likely will have a significant negative impact? This is why I say it is always prudent to ensure that there is an alternative to any path. In other words, while we continue to negotiate with the IMF to get the best deal for Jamaica, let us also think about alternatives. That is just plain common sense. In 2010 we accepted an IMF agreement which we said was impractical. Where are we today? Further, suppose the IMF agreement is not reality until March, does this mean we don't think of alternatives.

I am personally in support of the statement by the finance minister that he will not accept just anything thrown at us.

Secondly, we must understand that new taxes will only cause further contraction. The tax packages we have introduced since 2010 is evidence of this. Since we love to follow the US so much, just look at the reaction of the market when they thought that they were heading for the fiscal cliff, and also when they believed that the Fed was not going to provide further stimulus.

Let us assume, however, that we will be able to negotiate a great deal with the IMF. The fact is that if we do nothing else, we will find ourselves back in our current predicament in a year or less. In 2010 we had the JDX and an IMF deal. Today, we are in a worse situation. This is because we failed to take the needed actions.

What we must also understand is that the longer we take to act then the more difficult the choices will be. This is why the IMF deal has become so important. Because of this delay, even if we implement what is necessary, then there is going to be some short-term pain. What is important for us to know, however, is how long the pain will be and how quickly we can reverse it.

I agree that the IMF deal will lessen the short-term impact, but that again depends on what the terms are. The choices we face are:

* IMF terms are too strenuous, and result in both short and long-term challenges.

* We go without the IMF, and implement the correct fiscal policies, then we will have short-term difficulties and good medium to long-term prospects.

* The IMF terms are favourable, and good accompanying fiscal policies, we will have a temporary reprieve and good medium to long-term challenges.

* The IMF terms are favourable, and no fiscal policy initiatives, then we will have a temporary reprieve and a worse long-term challenge.

These are the choices we face, and must seriously consider.

Organized chaos – behind Jamaica’s governance

One of the most important requirement for a country, or business, to move forward is that those who govern must organize a structure that engenders trust and provides a framework for development. That framework must be predictable and allow citizens, or workers, to plan their own progress within the country or organization. If this framework is absent then more than likely you will be left with participants who not only thrive on chaos, but also assist in creating it.

So in a country, if indiscipline, and lack of the rule of law, is perpetuated by the state then the “structured” citizen will soon either migrate or fade into the background and allow the unethical and criminal elements to come to the fore. In the case of an organization, the worker who is good at sabotage or victimization will soon become management, as they feed off the example of the CEO.

The result will be lower levels of productivity and eventual demise of the company, or social and economic challenges in a country. Whenever you see a company, or country, with financial and social challenges it is usually because they have failed to organize themselves in a structured way to thrive. Even when a properly organized company has to close down there is usually some order to it.

Our beautiful island, Jamaica, is no different. It is this organized chaos by the state that in my view is primarily responsible for the economic and social challenges we have continued to face over the years. The state has continued to perpetrate oppressive and unfair treatment on its citizens, which if it were done by a private citizen, or company, they would at the very least face civil action. Well if done in a civilized and structured society that is. In our case one of the organized state led chaos is the lack of structure in the justice system that usually ensures justice is so significantly delayed that it results in the victim’s long suffering.

The following are examples.

The failure of the financial system in the mid 1990s was caused primarily from the policies pursued by the government, and then the improper distribution of the assets, by the government agency FINSAC, exacerbated the problem. This in no way excuses the poor management of banks and businesses, as playing a significant part in the collapse, but even so it was poor management of the regulatory system by government authorities that allowed banks and businesses to flout with what was to become death for many. This is similar to the 2008 crisis in the US.

[And let me make a very controversial statement and not comment any further in this post. Even though I disagree with the policy at the time I believe that today Omar Davies would  make a good finance minister. This explanation is for another time.]

In the last administration it was the state that was responsible for the disruption and fear that arose out of the Tivoli “invasion” and all the matters surrounding it. It was the way it was handled that caused so much lost productivity and loss of lives, in my view. Not to mention the reputation crisis Jamaica faced at the time.

It was also because of how governments have managed the economy over the years that has resulted in our flirtatious relationship with the IMF, and also resulted in exchange rate depreciation, relatively high interest rates, and the need to restructure the debt. These have resulted in many lost investments and losses to current investments, and to the decimation of the manufacturing sector that was so vibrant in the 60s to 80s.

It is the lack of inaction, and bureaucratic process, of the state that has resulted in us having such a high energy cost to grapple with and the the relatively high levels of poverty that we see in the country.

It is because of our politics why we have seen the existence of garrisons, which have resulted in the victimization of many, the abuse of children, and the decay of many of our communities and real estate resources, which result in higher costs of living for areas that have not been yet affected by “ghettoization” but which Jamaica, as a whole is in danger of becoming. We only have to look at the way that the state has allowed chaos to rule in communities through allowing noise (Noise Abatement Act in my view promotes noise) and commercialization in residential communities. So once thriving residential communities have descended into a pit of confusion.

[Let me once again pause to say that I welcome to moves on zoning announced recently but hope it is not just an announcement. It is long overdue and could significantly improve investment values']

It is the state that has supported over the years the wanton abuse of citizens by the police. Again though there are moves by the commissioner and the setup of INDECOM by the last administration to address these issues and they have been working. Also the DPP has in my view acted professionally in aiding the process. But we must ensure that these arms of the law are not inhibited and given the needed resources. The emergency powers that the police had for many years, since the 70s, and the crime bills that were introduced a few years ago, however, were in my view further oppression on the people. I am therefore happy to see the work of the various law agencies today, as I believe that there is a greater sensitization about the rights of the people.

The final one I want to look at is the embarrassing way in which the Traffic Ticket Amnesty was handled. Only in Jamaica, and some other backward country, could the state perpetrate such an oppressive situation on the citizens. The burden of proof was shifted from the accuser to the accused and this was done with a system that even the accuser admitted was not in good condition (the database). And after inconveniencing the citizens for weeks, and losing productive hours way in excess of the $340 million collected, then seek to remedy the situation. I agree 100 percent that those with outstanding tickets must face the full force of the law but the state has a responsibility to ensure that the system of proof, or evidence, is first flawless. It sounds like when the police round up a whole community of men and arrest them to find one person. In fact I am appalled that one man could accumulate over 1,000 tickets and still be allowed to even sit in a motor vehicle. Again it was the organized, or disorganized, state system that has allowed this to happen.

And more disappointing to me is that they got my favourite, and one of the most hard working policemen, caught up in this. SSP Lewis.

This as far as I am concerned is nothing but organized chaos, and a primary reason for our economic and social challenges. It is only when we change from state organized chaos to proper structures based on equity and fairness will we start to see a shift in economic and social behaviour for the better.

Jamaica without the IMF

AS I read the December 29, 2012 statement, issued by the finance minister re the status of the IMF negotiations, I thought to myself that it is not clear when Jamaica is to expect an IMF agreement. I say this because both the minister's statement and the one issued by the IMF are unclear about a timeline. In fact, the timing seems to be dependent on the achievement of certain prior actions. I am not sure what the prior actions are, but certainly one thing came to the fore. The fact that "...the examination of even higher primary surpluses in the medium term to underpin targets for debt reduction" was mentioned, means to me further expenditure cuts.

If you look at the fiscal accounts to November 2012, it shows that the fiscal deficit is off target by approximately $2 billion, but deeper examination shows that this is as a result of expenditure coming in $8 billion less than projected, and revenues underperforming by $10 billion. So we have sought to maintain the fiscal deficit target by reducing expenditure which, in my view, means further weakness in the economy.

We must have an alternate plan for Jamaica without the IMF. (Photo: AFP)

If one examines the recent history of the IMF programme, and in particular Greece, you will see that the emphasis is on debt reduction via reduced fiscal expenditures. In my view, this will not have any significant benefit for Greece. In fact, it is the primary cause of the social disruptions and the hardships they face. In short, the IMF cannot point to any success under that approach. Moreover, we see where even Germany is beginning to feel the effects of the weakening euro economy. Any recovery in global markets will be buoyed by the US, and to a lesser extent China, and both economies have gone the path of fiscal stimulus.

I say all of this to bring the reality home that if it is that the IMF insists on drastic spending cuts, such as reducing the public sector or cutting back on capital expenditure, then I would expect that the government in its wisdom must resist. We have already seen what the 2010 IMF programme has amounted to, and to continue on a path that has proven not to work can be defined as nothing else but madness.

We therefore need to support the minister in his resistance to any such measure and must face the reality that we must have an alternate plan for Jamaica without the IMF.

But what does this mean for us?

In order to answer that we have to look at what the main challenges faced by the country are and mitigate the risks of not having an IMF agreement in place. The major risks of not having an agreement in place are (1) finding approximately US$250 million for debt payment; (2) funding the budget shortfall because revenues are underperforming and (3) eliminating the foreign currency shortfall.

An IMF agreement would deal with these three main issues. However, if the prior action for the agreement is that we must lay off significant number of public sector workers, increase taxes, and/or reduce further capital expenditure, then we will find ourselves back in the current situation shortly; particularly if we fail to take the fiscal policy decisions that are necessary for economic development, with or without the IMF.

There are, of course, some realities that we have to face and some actions that we need to take if we are going to achieve the economic development that has eluded us since the 1960s. What is required to take these decisions is more political will than anything else.

Let us assume that we have the political will, and also there is no IMF agreement. How can we then mitigate the risks mentioned above and at the same time see a path to economic development.

The first thing we need to do is ensure that we have adequate foreign currency in the system to pay the maturing debt and also to satisfy the demand for production and consumption. Addressing first the debt maturity, I am sure that we can find a way to pay the maturity as it arises. It is just a matter of cost of funds. I am sure that ministry officials must already be doing their homework.

The way for us to satisfy the foreign currency shortage is in my view to immediately address the thorn of energy and food costs. These amount to 45 per cent of imports and can significantly reduce the foreign currency deficit if addressed decisively and radically through fiscal policy. I have discussed a lot in the past and so will not go into any details. However, an example is when I pointed to the need to not remove the GCT on electricity but rather set up a fund where "tax-compliant" persons would be given a credit from that fund if they were to set up renewable energy at home. If we had taken that approach we would have today seen a reduction in oil imports. The will needs to be there first, and Jamaicans must start making demands based on future benefits and not only immediate ones.

The other problem which will remain is how to deal with the need for funds to finance the fiscal expenditure. The solution is certainly not to cut the public sector but rather to address the issues of bureaucracy and law and order.

Again, I have spoken to about three issues repeatedly -- energy, bureaucracy, and law and order. Therefore, I will not go into details, but suffice to say these three will add over $100 billion to the economy, if the proper fiscal policy initiatives are taken in a decisive manner.

Because we have not addressed these matters before however, the solution is not going to give us the immediate result we need for this year's fiscal accounts. However, if we start addressing these now, then in six months I think we can start seeing results.

This will happen, however, only if we start and act decisively, or else the only option may well be the very bitter medicine of the IMF.

Lessons for the economy — mountain bike style

IN October I used a bicycle ride to point out lessons for the economy. Today, I will do so again, using a different type of cycling — mountain bike style.

On Boxing Day, I started with a mountain bike ride from Liguanea to Irish Town and back. I hadn't been on my mountain bike for a while, preferring the road bike because of its speed and smoothness, but having already experienced descending from Newcastle on the road bike, on the rough potholed-filled road, I knew it wouldn't be pleasant. I therefore chose to go up on the mountain bike, which is sturdier, has shocks and much bigger tyres.

The lesson here is that as we go into 2013, it is critical to understand the vision of where we want to end up and ensure that we have the right people and systems in place to ensure we meet those goals comfortably. It is time we admit that Vision 2030, as currently being pursued, will not happen. In many instances, I think we have good people in the public sector but the system they have to work with does not facilitate initiative. So it is tantamount to buying a professional footballer to play in a prep-school competition. In other words, if we are serious about getting investments in the country in 2013, one of the priorities to address is the archaic bureaucracy that inhibits initiative and growth.

We started our journey through Hope Pastures, then unto Hope Gardens, before we made our way up the hill to Irish Town. Knowing fully well that we needed to conserve most of our energy for the climb, we spent the first mile or so just getting warm enough.

Going into 2013, the biggest tasks to face are the completion of the IMF agreement, tackling law and order effectively, the energy crisis, and unemployment. We must therefore recognise that it is essential to plan which tasks to tackle, and how to execute them, in order to receive the maximum benefit. We will not be able to do everything because of scarce resources so we must select the ones which will result in the greatest immediate benefits.

Take the IMF agreement, for instance. I agree with Minister Phillips that we must ensure that the programme is practical and does not leave Jamaica in a worse position. All the prior IMF agreements have not been to the benefit of the country, yet we always return to them. On the other hand, the longer we wait to sign the agreement, the less leverage we will have because it is a race against the NIR level.

When riding up a hill, there is always pain. Your legs burn as the lactic acid builds up and you have to keep drinking to get the electrolytes back in your body. The most important thing to do is to mentally block out the pain as you climb the mountain. If you think about it too much, and allow your mind to get the better of you, you will stop.

In 2013, we must set out at a pace that ensures we get to our destination, also ensures that we achieve our target. Setting impractical goals and making too radical decisions could result in pain without success. I am thinking about the targets under an IMF agreement. In 2010, the targets were unrealistic. Despite this, we continued with them until Minister Phillips recently admitted that we can't just take any agreement. It makes no sense to have pain with no gain. If the agreement is unrealistic all we will have is pain.

Just like riding up the hill we needed to drink, similarly in 2013 if we are to tackle unemployment and bring growth to the economy there needs to be stimulus spending from as early as the first quarter.

After we got to our destination, it was time to make the trek downhill. This is the fun part. Descending the hill at speeds of up to 27 mph, and having to avoid the pot holes, loose dirt, watching for the oncoming vehicles, and ensuring you make the corners without going over the cliffs, brings a certain rush. You have to ensure that you are focused on the task of descent, when going at those speeds; else you could easily end up in an accident. I have seen this happen. However, once things go well, it is most enjoyable.

In 2013, Jamaica will face its own challenges. We will have our own version of a fiscal cliff, as I expect revenues will be weak as the economy remains weak. It would also be bad for the economy, and ultimate fiscal revenues, to increase taxes. So I don't think that is a practical option. What we will have to do is focus on what are the underlying causes of the problems, and "spear fish" rather than "net fish" to solve them. In the past, what we have done is just place a Band-Aid on the problem. So we allow inflation, devaluation, borrow money, or raise taxes. What this has done, however, is just kick the can down the road. The reality we face today, however, is that there are no more roads to kick the can down. We are at a point where the "chickens have come home to roost".

One of the things we must do is take some risks in our policy decisions. I find that our bureaucratic rules are so conservative that nothing usually happens when needed. What we must do is take the risky policy decisions that causes a game changer.

The new year is one that we will either (1) feel the joy (adrenaline) of fixing the economy once and for all; or (2) see significant declines in our economic fortunes.

This takes me back to where I started, however. The journey to success depends on ensuring that the best people are on board and that the system facilitates the needed initiative. When I say correct people I just don't mean public sector workers, but very importantly the boards of public bodies and the leadership that will take the needed decisions.

I don't think the actions we need to take have to be very painful if the correct fiscal policy decisions are implemented. However, the longer we wait then the more painful the actions will have to be.

Inspirational story for 2013

As we go into 2013 there is a true story I have to share with you. I have commented on it already but based on even more recent developments, I think I should expand it.

About 2 years ago I spoke to someone who was an office help, and told her that she should think about starting her own business. At the time she kept saying she wanted to get another job as her contract would soon be up. I kept talking to her and told her that what she would earn rom a job would be insignificant in comparison to having her own independent income. This is a fundamental principle mentioned in the book “Achieving Life’s Equilibrium”, as it is truly the only way to true financial independence.

If you think about it this person had everything working against being a business person. She was not highly formally educated, has always had a job, was a typical person who splurged on new hairstyles and nails every week, and just was not thinking about any form of business.

She eventually came to me about 9 months ago and said she wanted to try her own business but had no capital. As I also explained in the book, I told her that capital was overrated. I sat down with her and discussed what she had a passion for, and she said it was food, as she thought that she could start a business with food. I then explained to her that she should start with no overheads and start small.

Therefore guided her to start with selling slices of a cake. So she started her business with one cake. She did that for about two weeks and then moved to two cakes, then three, and so forth. What it did was to transform her way of thinking, as she stooped going to the hairdresser frequently, as she said she needed to save capital for her business. She also (through discussions with me) started to think about new business ventures. Every day she would come to me and talk to me about a different idea she had. Soon her business expanded to the point where she was dealing with different products, her customer base is growing, and she is now making more money than when she was under contract.

I saw her recently and she has got a mortgage to purchase a piece of land and is starting to build her own home soon. She currently lives in the inner city but says that she wants to move, not because she is ashamed of where she is from. She says that there is a lot of business potential there but what kills it is the violence and the many young boys just sitting on the corner everyday. She says that the environment is disrupting her ability to expand.

I expect that soon she will be looking to hire someone to assist her as she is extremely busy these days and pops in to see me only to discuss new ideas and get guidance as to how to approach her business.

I truly am proud of her, as the transformation has been nothing less than magnificent. I have spoken to many well educated persons, who have been in financial trouble and they were not able to overcome. Why. Because of an attitude and just believing and having the discipline to realize goals.

I am trying to get her to tell her story but she is shy about doing so. I am sure that one day she will be contributing to the employment of the country and paying her taxes as she is organizing her company affairs now.

What is christmas really about? I want to put another spin on what the real meaning of Christmas is. We have come to know Christmas and the new year as a time of festivities and gift giving. And also a time to rest after a long year of work, assuming of course you are employed (by someone or preferably by yourself). However, shouldn't we be viewing Christmas as the following: - at time to reflect on accomplishments over the past year. We always talk about setting new year's resolutions but never review our accomplishments against goals set at the start of the year. We don't really review our personal achievements versus plans. - shouldn't we also be reflecting on how we have individually impacted positively someone else. In other words what is the sense of your life if you have not added to society. Whether it be national building or helping someone to achieve personally or ensuring your child becomes a positive impact - instead of putting ourselves in debt shouldn't we practice prudent spending and ensure that we use it as a time to plan and help others plan for the future. It seems to me that the season has become too commercialized and is really about businesses extracting money from people and ensuring they owe them for the rest of the next year and then start the process again. So when we think about Christmas and our actions, the question must be asked, are we looking at it the wrong way

The economy in 2013

ONE question I get a lot is: what is to be expected of economic performance in 2013? In particular, people want to know about the IMF agreement, the exchange rate, inflation, and GDP growth in particular.

My response usually is: it depends on a few things. Firstly, it depends on the timing of the IMF agreement, and even after we get the agreement signed, it also depends on what the terms of the agreement are. It also depends on what happens in terms of employment and disposable income levels. It depends a lot also on the direction of fiscal policy.

Hundreds of job seekers turn up at the Christian Fellowship Church to to apply for warden vacancies at a Correctional Services Department recruitment drive. Unemployment levels are at 12.8 per cent, according to the latest government figures.

The fact is that there are so many uncertainties that the best one can do is make some general predictions about what can be expected depending on the timing and outcome of the factor mentioned above.

What we can say is that:

1. By the end of 2012 we will be looking at an exchange rate of above 93. Going into 2013, depending on the timing of the agreement and the terms, we could see further slippage of the dollar or stabilisation and a possible small revaluation. The further the IMF agreement appears to be, then the more the exchange rate will depreciate and the longer the wait, the faster the pace of depreciation could be. Therefore, it is crucial that we have an agreement in place as soon as possible. Bear in mind that there is a time within which the agreement must occur, as the race is against the level of the NIR. What I would caution against, though, is purchasing US$ now and putting it down as cash deposits, as the possibility is that unless you have matching liabilities, then it is really too late to acquire US$ and just put it down based on the present available information. In summary, at one extreme, while I do not expect any significant revaluation, if any, at the other extreme, the level of the rate depends on the timing and terms of the IMF agreement.

2. I expect that there will be inflationary pressures, primarily as a result of the exchange rate depreciation in recent months. This, however, does not necessarily mean that we will see runaway prices, as this also depends on what happens with employment and real disposable incomes. The fear here is that if unemployment remains high, and/or disposable incomes reduce, then we could be flirting with an undesirable economic term called stagflation. This simply means the inability to raise prices, because of weak aggregate demand, even though costs have increased. The result of stagflation is always a reduction of business activity, leading to higher unemployment. In any event, I expect that 2013 inflation will be higher than 2012, and may be in the region of low double digits. If it is lower then it means that businesses will come under pressure and some may not survive. Based on the devaluation, some inflation is going to prove necessary for business survival. There are of course certain assets, such as real estate and motor vehicles, where inflation will be higher than the average. It is for this reason that I believe that real estate is a good investment, and, in fact, one should have been looking at real estate as an investment option from a few months ago. This is because prices were depressed and interest rates relatively low.

3. One question that comes up every time I speak about the attractiveness of mortgage rates is, where will interest rates go? I do expect that we will see an uptick in interest rates in 2013, but no sharp increase. The factors that will cause an increase include a weaker Jamaican dollar, and continued trade deficit problems; slightly higher global rates as demand increases for loans with a slow recovery in global growth; and increased risk in emerging market debt, such as Jamaica. However, global rates will still remain relatively low and I think Jamaica's primary source for loans will be from multilaterals, once we finalise the IMF agreement, which means lower debt rates. Financial institutions will also continue to compete for loans, as demand will remain weak and consumers will make more informed financial choices.

4. I also expect that unemployment will decrease in 2013. There are three primary factors that will lead to lower unemployment. The first is that the government will increase stimulus spending and also bring on new projects. Secondly, a signed IMF agreement, and the seeming desire to bring back law and order will lead to increased private investments. Thirdly, I see that public transportation will improve and, also, that more persons will move towards cheaper energy sources (with or without government), resulting in higher disposable income levels.

5. The trade deficit will continue to be a problem, but I think it can improve slightly. This improvement can come as a result of lower dependence on oil, for transportation, retail consumption, and more offices going with cheaper energy sources. I don't hold out much hope for industrial energy use becoming more efficient, however. At the same time, we could see a slight improvement in exports, but primarily oil and food imports could reduce and improve the deficit.

All of this is going to be dependent on fiscal policy, and timing and terms of an IMF agreement. In other words, if the government seeks to raise more tax revenue in this weak economy, then the result could be further contraction of the economy. However, if they seek to provide some stimulus to the economy, whether directly or through projects like the highway and port expansion, then the economy will improve. Another example is with regards to law and order. If the drive to improve discipline continues, then we could see greater security and confidence coming back to the economy.

An IMF agreement that comes too late, or with unfavourable terms, would do little to bring back confidence or improve living standards. Therefore, if we do not ensure that we secure a timely and practical agreement then all the predictions above will be different. The IMF, however, will only be a Band-Aid on a much bigger problem, and if we are not carafe will be back where we are today, just as we are back with a debt problem after the 2010 JDX.

I have to applaud the efforts to regularise the zoning of communities, and importantly, residential communities must be purged of businesses.

At the end of the day, however, businesses and individuals must ensure that they do proper planning now and also continue to monitor the environment, as the range of outcomes is still very dependent on policies going forward. It is important for businesses to work with the necessary expertise in order to make correct business decisions.

To all my readers, happy holidays.

The real effect of austerity

One of the raging arguments since the 2008 global recession has been between those supporting austerity and those supporting stimulus (Keynesians). Everyone knows I have always come down on the side of the need for stimulus, and have even gone as far as to say that we should be moving towards value added debt, as a greater risk is to shrink the economy and standard of living to the point where is difficult to retrieve.

Those in favour of austerity say, lets just deal with the pain now so that we can correct the future. In other words take some hunger now so that we can eat later. The only problem with that is that most of those who propose austerity measures are in a position where the effect will be that they will have less savings, not eat less.

I do realize the need for responsible fiscal spending, but that should be always. Not just in a recession but especially when there is growth. What the pro-austerity persons don’t realize is what is the real effect of austerity.

The real effect of austerity is the impoverishment it creates among those who are already poor. What it does is create a situation where we deepen and prolong the cycle of poverty for the most vulnerable, and even working poor, amongst us. What it does is play Russian Roulette with the lives of people, as there is no certainty that it will solve the problems, as in the case of Europe. What it does is ensure that a child grows up without hope, and wonder if they had done something in a past life to deserve the sort of suffering they have to grow up in.

What austerity does is create a uncaring attitudes and uncivilized behaviour that causes people to be callous to each other. What it does is create a lack of resources that causes the justice system to be unjust, the police not to have the resources to protect the people, that results in a general level of indiscipline and lack of law and order in the society because we can’t even afford to pay jurors to deliver justice, because they are hungry.

Austerity is another way of saying, if my family and I are ok then we can ask others to make the sacrifice.

I was motivated to put this on paper because of a very recent situation where someone I know very well was murdered leaving a family and friends to ask the question, why? and having to live with this reality for the rest of their lives.

I am not saying that this is directly linked to an argument around fiscal austerity but just saying so to highlight the fact that if we do not have enough funding to deal with the social waywardness, to make sure the police are effective, to ensure children have equal opportunity and proper nutrition growing up, to ensure that men can find adequate employment to raise their families and live their lives with dignity then we will have a problem.

We will have a problem like Greece, where they have applied fiscal austerity for over three years and still have an unemployment of over 25%, which is higher among youth. Where they have regular worker demonstrations because of the impact of austerity on the ability of people to eat. And still they don’t expect any significant improvement in their debt to GDP ratio until after 2020. So what happens until then to the vulnerable.

As the PM says, we have to balance people’s lives while we balance the books.

So the next time we speak of fiscal austerity, and not responsible fiscal spending, while not recognizing the need for stimulating the economy, as the US, China, and Brazil have, as opposed to Europe, and we have also realized the need as is evidenced by JEEP and such programme; think about what the real effect of austerity is, and then put yourself in that situation.

Restructuring Jamaica for growth and development

I think it is patently clear to everyone that the policies for Jamaica's growth and development have not worked. Since the 1970s, the country has been generally on a downward trajectory. We have seen pockets of growth, but the general trend has been a decline in our economic and social fortunes.

Recently we have seen where the Jamaican dollar has been depreciating, and the latest fiscal numbers show that we are significantly behind on projections for revenue and the primary surplus targets. It is also important to understand that the last half of the fiscal year is always the most challenging for meeting revenue targets and for cost containment. This is because (i) the greater amounts of revenues are always targeted towards the last quarter, and (ii) the lack of accrual accounting for expenditure means that earlier commitments always show up in cash expenses towards the end of the fiscal year.

Jamaica’s balance of payments problem is dominated by the cost of food and oil, which now stands at almost US$88 a barrel.

Because of these situations, we are once again faced with the need to have an IMF agreement. Continuing our long courtship with the IMF since the late 1970s. This consistent need to be with the IMF should tell us that the policies we have pursued are just not working, and it is time for a shift. Jamaica faces structural deficiencies and until we tackle these head on, and solve them, then we will continue having to run to the IMF for macroeconomic stability support. Just like a child who runs to his parents every time he makes a bad decision and needs financial support.

So how do we address these structural deficiencies and put Jamaica on a path for growth and development. I deliberately did not say put us "back" on that path, because the truth is that even during the periods of growth since 1962, the fact is there was a failure to address these structural deficiencies, hence why we always fall back into economic and social malaise.

The first thing we need to do is understand the current challenges we face, and prioritize those risks to our development, just as any company would do. So what we must do is identify all the challenges and look at what value they can create if they are dealt with. In effect we need to perform a SWOT analysis of Jamaica. This is something I have written about and so will not get into any details.

My own view is if we were to perform that analysis then we would see that the main risk to Jamaica's economic and social development lie in three primary areas. The first is the balance of payments, which the problem is dominated by the cost of oil and food. The second is the cost of crime, which in my mind is the lack of law and order. And the third is the cost of the bureaucracy. My own analysis shows that if we were to just focus on policies to quickly eliminate these threats (risks) then we could easily add upwards of $100 billion to the GDP.

This is not to say that there are no other risks of importance, but as Jimmy Moss-Solomon said to me once, when your time or resources are limited just focus on the priority areas and execute well. If we were to focus on these three areas then we could start seeing significant economic and social positives within three to six months.

The current situation that faces us today, however is that we have a fiscal and balance of payments challenge. Today the fiscal challenge is more critical, although not what is going to solve the long term problem. The IMF programme of 2010, or any other one, as shown by the history, will not solve either the fiscal or other economic challenges. All it can do, as with the past programmes, is provide a temporary reprieve. The solution is with us.

One simple example comes to mind, and this speaks the mindset of the Jamaican people. When this administration came to power, various groups called for the removal of GCT on electricity, as it was a promise that was taking too long. My view at the time was the GCT should remain, and that the proceeds should be used to fund credits for "compliant" tax payers who chose to go with renewable energy solutions at home. The public would have none of that. Imagine if we had done that and we were able to get a 30 per cent reduction in electricity consumption as a result. We also would have had more work for people in energy solutions, and for each dollar saved it would have gone directly to consumption. Hence raising living standards.

So that single policy decision would have resulted in reducing our import bill by at least US$200 million ($18.4 billion), which would have gone into the pockets of consumers, and into the economy. It also would have increased GDP spending, as this is money in the hands of those with a greater propensity to spend. It would have increased the profits of companies and resulted in a lower demand for foreign exchange and could have spurred local production of renewable energy solutions.

There are other policy decisions that the public pressured governments into taking the wrong action, which could have resulted in GDP growth if it had gone the other way. The reality is that many times the policy actions we pressure governments to take result in our own demise, and then we end up blaming our governments for something we wanted them to do because it was in our short term interest.

One MP who I think has done good analysis and taken a practical decision on pension, and ultimately fiscal, reform is Mikael Phillips. Let's see what will play out with this.

We can still take those policy decisions and cause a paradigm shift in our economic and social fortunes if we want. It doesn't take anything more than the will to do it and the cost is negligible compared to the value added that will accrue.

With each day we do not take that action though, the options narrow. Today we are faced with a situation where we need to conclude the IMF agreement, but the fact is that we can do things that will significantly decrease our dependence on the agreement. It is only through restructuring the deficiencies in our economic and social framework that we will find a sustainable solution to economic and social development, just as Lee Quan Yew did in Singapore.

Inspirational story of a business start up from nothing

I really must share with you a very inspirational story, and one that I think is an example of how a change in attitude and perspective, can move us from financial dependence to independence. This was briefly referred to in “Achieving Life’s equilibrium”, as an example surrounding the principles of wealth creation outlined. Financial dependence for me is having to rely on “direct” employment from someone else for income. This is not to say that employment is a bad thing, as it depends on the job. What it says though that even while employed you should be constantly seeking to increase your financial independence through savings, or acquiring assets (real or intellectual) to enable your transition to have some income independent of “direct” employment. This is the concept that pensions are founded on.

Back to the story then.

From about two years ago I have been discussing with a group of contract workers that they should seek to establish their own business, and take the steps to do so while they are employed under the contract, so that they don’t have to rely on employment in the future. They included mostly office workers, those you would think would have been more accommodating of the idea. There was also one person who was what we call the “office help”, who when I first spoke to her about it resisted and said that she was trying to get another job and would continue to do so. Will refer to her as Rose for this article. This was in the height of the first recession.

Most of the other persons (those who you would think would gravitate to self employment) continued to search for a job also, and some even said it was too much to think about and go about starting their own business. After working with Rose for a few months, and talking to her about the expenditure choices she makes, and what she needs to prioritize I got through to her finally. I then gave her advice on how to start her own business with very little capital, a common excuse I hear from many, which I always say a lot of capital is not necessary. She started her business by discussing with me what she could market, and I went though with her what people would demand and why they would want it. She went about securing the goods and started selling into the market. She has been doing this for approximately one year now and was able to supplement her income, to the point where the income from the business has now replaced if not surpassed what she was getting from employment. And the income, and market is growing daily.

I continue to mentor her and show her ways in which she can improve her income, and she has been doing so. She was able to secure a mortgage through NHT, and is now able to generate her own income to offset the mortgage payment. She also comes to me with ideas almost everyday and I guide her as to what will work and what won’t. She is now thinking of expanding the business, and securing a loan to get some equipment, and I have shown her how to go about expanding it. She is even thinking of employing someone in the near future because of the amount of work she is seeing.

Recently herself and some office colleagues ended their contract, and the others gave a traditional farewell speech, and say how sorry they were to go. She on the other hand said she was grateful for the opportunity she had and that she has acquired the necessary tools to expand her business and thanks everyone, and looks forward to developing her own income.

It just goes to show that moving from one stage in life to the next is really a matter of perspective. I look forward to continuing to give her advice as she continue to expand her horizons, as she is truly an example to follow. She had little knowledge of business, but was willing to listen. And she had very little capital but was able to match the market with the product and turn over the little capital while reducing the risk.

I think she will do very well. 

Why is Jamaica back in recession?

THE recently released Planning Institute of Jamaica numbers show that Jamaica is technically back in recession. I say technically because although there has been no change in Jamaica's economic structure, and underlying problems since Independence, the technical definition of a recession is three consecutive quarters of decline.

We have joined the ranks of Great Britain and Spain who experienced double dip recessions also. I did not say Greece, because they really have never come out of recession, and therefore is still on their first dip. These countries got there because they contracted fiscal spending, and similarly this would have contributed to our own double dip.

An IMF agreement won’t solve Jamaica’s underlying challenges and create economic independence. (Photo: AP)

The fact, however, is that Jamaica's double dip recession is not caused by any fundamental change in the structure of our economy. The structure of the economy has remained the same since Independence and this is one of our primary problems. We have failed to transform the economy from a basic one to either an efficiency or innovation-driven economy, as is supported by the Global Competitiveness Report.

Over the period 1962 to 1972, and the mid 1980s to early 1990s, Jamaica saw its period of greatest growth, which was eroded significantly by the 1972 to mid 1980s decline, and recent period after the 2008 recession. It was not helped by the very slow growth period of the 1990s either.

But Jamaica's economy has not really been much different over these periods, and because of the lack of proper strategic policy and planning, even though we had periods of significant growth in the 1960s and late 1980s, we have failed to maintain the momentum. It would seem clear, therefore, that Jamaica's economy has suffered more from strategic policy failures than anything else. Or should I say governance.

Because of the underlying challenges in the economy, it was therefore, not difficult to predict that with uncertainty surrounding an IMF agreement, the dollar would have devalued and the economy declined. This is the same thing that would have happened in any part of Jamaica's history, if we had a lack of external capital (whether through debt or equity) coming to the country. So there is no difference really between the current situation and past ones, with the exception of the level of confidence that exists at any point in time. The 2008 global recession, consequent drying up of privately available capital, and higher risk aversion, would no doubt have made it much more difficult.

If you look at any of the decades, since Independence, and even before, you would see that Jamaica's economy is highly dependent on capital inflows. Whether it is classified as remittances, foreign direct investments, or other private capital flows such as deposits. Therefore, the only way that we have been able to keep our economy stable is either through borrowing, grants or remittances.

These are what have kept our consumption levels vibrant and our NIR high. Therefore, after the 2008 recession, when there was a (i) lack of private capital (as there was a flight to safety); (ii) slowdown of global investments; (iii) slowdown in remittances; and (iv) reduction in grants; then the only place that one could go to access any funds were the multilaterals. But the multilaterals will only lend to us if we have the seal of approval of the IMF. This is why the IMF has become so relevant globally again. Not because they have had successes, but rather they hold the key to funding for many countries.

If you look at the history this is also the reason why we were able to grow, when we did, and why we declined also. In the 1960s there was a lot of private capital (loans and equity) flowing into Jamaica as a result of banana, sugar, bauxite, and tourism. In the 1970s, because of the lack of confidence, created by the rhetoric of the policies then, that capital retreated. In the 1980s, the IMF seal of approval was in play and much capital flowed back into Jamaica, as showed up in our debt to GDP ratio, which hit 212 per cent in 1984. In the 1990s up to mid 2000s we again saw significant capital inflows, in the form of debt and direct investments. After the 2008 recession, however, that private capital dried up and only the multilaterals were left standing.

This analysis therefore shows us that public policy has failed to change the economy from external (colonial) dependence to independence. This also impacts our fiscal accounts, which is heavily dependent on taxes. The solution we have always pursued, to our fiscal challenge, is to either cut expenditure or tax more. Even during the growth period of the 1980s, our solution was to cut expenditure by reducing the public sector significantly. In the 1990s, we increased the public sector once again and sought to solve the fiscal problem by taxing more. This tax policy was carried into the current century and continues, where today it has come to a compulsory end as the economy has reached a point now where more taxes have a negative effect on the economy and revenues.

The reason why we have not been able to solve the fiscal crisis with this approach is because increased fiscal revenues primarily depend on growing the economy, which we have not been able to do.

It is for this reason I say that, even though an IMF agreement is necessary because we have made it so, it still will not solve the underlying challenge and create economic independence; which as Norman Manley said, should have been the mission of the generation after him.

To solve the problem, we need to change the equation in the balance of payments, and focus on creating a trade surplus. This is why solving energy, food imports, and law and order are critical to achieving a viable economy going forward.

Failing to do this will only continue our frustrated attempts to grapple with economic stability and the fiscal accounts, and we will never get rid of our economic masters.