2011 will be a challenging year

Last year I indicated that in 2011 we could look forward to some recovery in the global and local economy. This will be more evident in the global economy, as I believe that the Jamaican economy will still continue to struggle because of the structural issues it continues to face. It is my view also that the contractionary effect of the IMF policies will cause the recovery to be more of an uphill task than if the contraction was not as deep.

There are some positives that have happened during the recession. These include (1) Tax administration; (2) Divestment programme; (3) Attention to the Public Sector Transformation Programme; (4) Reduction in interest rates; (5) Emphasis on local agricultural production; (5) Completion of the Falmouth Pier and Montego Bay Conference Centre; and (7) Focus on reducing corruption in the police force and crime generally.

Despite these positives, however, the economy will continue to see significant challenges in 2011, in my view. Indications of this can be seen in the following areas:

o Global inflationary pressures from oil and food price increases, which I had indicated would take hold in 2011. Even before these global pressures, Jamaican businesses were already seeing inflationary pressures but could not increase prices because of falling demand;

o Interest rates globally will increase to deal with inflation and excess liquidity resulting from fiscal interventions in countries such as the US;

o The PSOJ has, through its National Security Advisory committee, pointed out that security is a major cost because of crime. They estimate that a whopping 20% of small business revenues go into security-related costs. The implication is that we may not see the upswing, in small business ventures, needed to drive job creation and growth;

o Commercial bank loans are trending down, and more importantly the loans to the productive sector, such as agriculture, have decreased;

o The majority of funds under the IMF programme have already been received. The positive side is that government has been able to successfully raise funds on the capital market, and should attempt to replace the expensive debt; and

o The trade deficit is worsening year over year.

The fact that the global recovery is slowly continuing this year represents an even greater disadvantage for Jamaica than the recessionary effect experienced last year. This may seem perplexing to some, but the reason for this is very simple. Between 2009 and 2010 when the Jamaican economy was in decline, I believe that while it proved difficult for individuals, it was good for the Jamaican economy. The reason for that is because of the way the Jamaican economy is structured. Prior to the recession, the Jamaican economy was growing, although at small rates. The contradiction, however, is that while the economy was growing, so was the debt and fiscal deficit. Simply put, what we were doing was growing by consumption, based on borrowed money. Therefore for every $1 we produced we consumed 72 cents of it, and exported 28 cents. At the same time we were importing between 70 and 80 cents to produce that $1. Mathematically, therefore, we were importing 80 cents and only exporting the equivalent of 36 cents (assuming we mark up the production by 50%).

Therefore when the economy was contracting, we were actually reducing the need for borrowed funds, and therefore cutting our suit to fit us.

Now that the global economy is recovering, we still have the same basic infrastructural problems that have been with us since the 1990s. If you factor in the negative effect of market demand, you will find that there is going to be a tug of war between fiscal and private sector demands. It will therefore be imperative for the public and private sector to find a happy medium, and this I think will be driven by government policy. There are some good initiatives undertaken (as mentioned above), but we will have to be a lot more decisive in our policies if we want to ensure that we stop the train before the track runs out.

Initiatives I support the government on - and wonder about what the IMF is thinking - are the JDIP, purchase of buses, and similar projects. If we are going to ensure that the economy does not go through any further contraction, government must take the lead in infrastructural projects that will not only provide much needed infrastructure and employment, but will also contribute to future savings in foreign exchange. The two most important sectors to focus on are agriculture and transport.

I can recall the opposition expressed when I supported the need for more money to be spent by the government on infrastructural projects. Suppose government had not continued to spend on road improvement and projects such as Falmouth Pier. Apart from the greater loss of jobs and crime we would have experienced, what sort of infrastructure would we have in this country? It is important that we not ignore our infrastructural support, or else we will be even less competitive.

A critical look at the balance of payments tells us about the challenges that lie ahead. A cursory look seems to indicate that things are going well, as we see the current account deficit improving by US$137.7M for the January to September period in 2010. The areas of improvement were (i) Services - US$56.2 million; (ii) Income - US$93.7 million; and (iii) Current Transfers - US$82.5 million. This overall performance is good, as any line we get the money from to turn around our fortunes is good. We have to be careful about how we develop these areas, however, so that we do not revert to the structural challenges coming out of the 1990s, as this will lead to a need for high interest rates in order to have macroeconomic stability.

The challenges from the BOP can be seen in:

(1) Declining trade deficit. Specifically we see a reduction in exports and an increase in imports;

(2) Services, although improved, show one of the reasons as a decline in expenditure of Jamaicans travelling abroad. This is good as it means lower consumption of overseas items but not because of increased expenditure locally, which means that it is a weakness of consumer demand;

(3) Income has improved because of reductions in official interest payments and reduction in profits remittances. The former is what we want to achieve, and is a move in the right direction, but the latter means there is less incentive for foreign investments; and

(4) Current transfers, which have come primarily from remittances, and an indication that the country is heading back to reliance on non-productive income.

The BOP and economic stagnation tells me that the market is trying to make the necessary adjustment to become more efficient. This is the way markets work. We continue to be dogged, however by societal, political, and bureaucratic challenges that inhibit this necessary market adjustment. If these challenges are not addressed effectively, then we will find ourselves with the same structural problems we have had since the 1990s.

Overall this means that although we see the global recovery, because of Jamaica's inherent structural problems we will continue to face challenges in 2011. Hopefully some of the policies being pursued by the government will bear fruit and alleviate some of these challenges.

A SWOT analysis of Jamaica's economy Part 3

OVER the past two articles I tried to develop a simplistic SWOT analysis and demonstrate the method that should be used to target the development objective of the country in the most efficient manner. There is no one solution that is right and the others wrong, but there is always going to be one that is the most efficient use of resources and greatest value-added return, which is what this analysis is trying to do.

Coming out of the last article, I identified three possible areas that would provide maximum return, in relation to the resources that need to be invested. The three specific areas I identified were (1) dealing with indiscipline to create order and fairness in the society; (2) breaking up the JPS monopoly hold on the energy distribution lines and creating an efficient transportation system; and (3) reforming the tax system (already we have seen where just improving tax administration has resulted in significant compliance improvement. Can you imagine if this was coupled with real productivity-oriented tax reform?).

This week I want to take a simplistic look at the possible effect of focusing on these three areas by imputing financial numbers from the initiatives, and hence completing another step in looking at the SWOT approach.

	GDP Effect ($M)
	Yr 1	Yr 2	Yr 3	Yr 4	Total
Productivity plus from improved justice	34,048	34,048	34,048	34,048	136,190
Import substitution / agro-processing	7,695	15,390	23,085	26,933	73,103
Energy savings - retail	25,650	12,825	7,695	7,695	53,865
Energy savings - transport
Tax reform effect	16,314	16,314	16,314	16,314	65,256
	83,707	78,577	81,142	84,989	328,414
US$ equivalent	979	919	949	994	3,841
	BOP Effect ($M)
	Yr 1	Yr 2	Yr 3	Yr 4	Total
Productivity plus from improved justice
Import substitution / agro-processing	7,695	15,390	23,085	26,933	73,103
Energy savings - retail	25,650	25,650	25,650	25,650	102,600
Energy savings - transport	25,650	25,650	25,650	25,650	102,600
Tax reform effect
	58,995	66,690	74,385	78,233	278,303
US$ equivalent	690	780	870	915	3,255

The table (Figure 1) shows imputed values from the initiatives outlined. It shows a total four-year positive effect of J$328.4 billion on GDP and J$278.3 billion (US$3.2 billion) on the Balance of Payments (BOP). The actual outcome could be more or less, so what I am trying to do here is show an approach to selecting the best value-added initiatives and how to do an analysis on the financial projection. It is important to focus on the effect on GDP and BOP, as these should be the real objective of economic policy.

With respect to productivity improvement from improved justice and discipline, this assumes an improvement of one productive hour per week per person in the labour force multiplied by the average labour output dollar amount. The assumption is that if we were to improve justice and order in the society then we could see people being at work longer and producing more productively as a result of (1) persons not spending time focusing on issues of justice; (2) fewer resources being spent in the courts dealing with justice and indiscipline problems; (3) greater availability to the human and real estate resources in the inner-city communities; (4) less traffic congestion and more productive time as a result of improved road conditions; and (5) productivity increase from lower crime levels, including extortion and praedial larceny. What is obvious is that the initiative of creating a more ordered society and improved justice will always have the largest positive impact on GDP because it creates greater efficiencies in the market economy.

Another initiative mentioned in the table is the focus on food import substitution from increased agricultural productivity and agro-processing. The table assumes that food import substitution is done to 10 per cent in year one, 20 per cent in year 2, 30 per cent in year three, and 35 per cent in year four. This initiative will have a positive effect on both GDP and the BOP to the same extent, and is assumed to have a positive four-year effect of J$73.1 billion.

The energy initiative that focuses on retail consumption (through renewables) and transportation (through an efficient public transport system) is assumed to have the effect of reducing the energy consumption of these two sectors by 50%. This is not hard to believe given the significant positives that can flow from these initiatives, and is assumed to have a positive impact on GDP and BOP of J$53.9 billion and J$205.2 billion respectively. The effect on GDP comes from the creation of energy jobs. The attractiveness aspect of it is that they are short-term initiatives, yet they have the largest positive impact on the BOP.

The final initiative of productivity-oriented tax reform, I assume will cause a positive GDP impact of 5% of tax revenues budgeted for the current year. This I think is very conservative, but you know us accountants. Never count our chickens even after they hatch, as they could still die. In addition to the good work being done by the Tax Administration to reduce bureaucracy, we should be looking at tax reform aimed at improving productivity and keeping monies longer in the economy to have a greater multiplier effect. These include moving more towards indirect from direct taxation. This will allow for greater spending and hence a higher multiplier effect. Incentives also need to be geared more towards production and productivity in foreign exchange-earning industries.

This is by no means an exhaustive list of value-added initiatives and requires much deeper and dedicated analysis, especially to arrive at the financial possibilities. What I have tried to do over these three articles, however, is show one method for arriving at the greatest value-added initiative given the limited resources we have.

The debate will no doubt continue, but what is obvious is that we need to define our SWOT and systematically choose the best initiatives based on return on investment and difficulty to achieve.

A SWOT analysis of Jamaica's economy Part 2

THE article last week generated quite a bit of interest from persons in and outside of Jamaica, with many wanting a deeper breakdown of the SWOT analysis. While I am not able to provide a complete analysis because of space constraints, although needed, it was always my intention to go into more specifics.

A SWOT analysis is nothing more than a snapshot that tells at a point in time what the various areas of the analysis are. This would be the same approach one takes to a business plan, and is a very logical and objective way of properly assessing the current situation of a company or country. My own view is that fixing the economy and society is not a difficult task. What we have always lacked is the will to place the interest of the country above that of the party. I will try to outline below some of the initiatives that can have the greatest positive impact on the country's development.


In looking at what was produced by the SWOT analysis, what you want to do is strengthen (or maintain) the strengths, fix the weaknesses, develop the opportunities, and minimise (or eliminate) the threats. If you can successfully do this, within the context of your agreed objectives, then it will lead to greater development.

But you will never have enough resources to do all the things that need to be done. So a government, for example, has a limited amount of funds available to it but has a multitude of challenges to address and calls for help to answer. How do you then decide which one to address, and when? The when is important because timing is of course critical. The way to do this is to determine what the most efficient use of your resources are.

As an example, if you have $1,000 and can either pay off debt that costs 20 per cent per annum, or put away the money at 10 per cent per annum, then it seems more prudent to pay off the debt, and save 10 per cent of $1,000. On the other hand, you may be running a business and therefore may need cash resources of $200 to ensure that the business will not be threatened. You may therefore choose to pay off $800 in debt and maintain $200 in debt and $200 in cash. The direct cost of that decision is $200 times 10 per cent but there may be an opportunity benefit, as if you were cashless the cost to the business might have been much more.

Similarly, as a country we should do the things that add the greatest value in the shortest possible time. That is if a decision adds value of $1,000 in five years, it may not be as valuable as one that adds $300 in one year. This is the sort of analysis that needs to take place if we are to maximise our resources.

What then are some of the major initiatives that I think will add the greatest benefit to Jamaica? If our objective is economic and social development, and in particular, the best improvement in per capita income and social interaction, then we must focus on those things that cause these to happen. This for me means improving the quality and standard of living. The way to improve the quality and standard of living is to ensure (i) a basic respect for the human rights of every Jamaican citizen; (ii) universal access to a minimum standard of education and health care; (iii) increased opportunity for greater income levels; (iv) structure and discipline in the society, so that everyone can enjoy quiet and civility when interacting with others, for example when driving; and (v) a prosperous private sector, which in turn can create jobs. I do not, and never will, believe in the government trying to pick winners or providing massive amount of welfare for communities. This merely discourages an efficient market, undermines productivity, and in the end causes corruption and disorder in society. Another spin-off, which we know all too well, is that this results in significant debt.

Therefore we need to focus on the things that will increase private sector productivity and competitiveness; and also improve the quality of life of people. The latter is necessary, as even if you are wealthy and live in a society with high levels of indiscipline, your quality of life is still substandard.

So for me therefore, it is a no-brainer. I want to improve my strengths but realise that that does not necessarily mean focusing on the strengths. If I were to focus on the weaknesses then that would serve the purpose of removing the weaknesses and improving the strengths. So the first order of business for me would be to deal with the culture of indiscipline. In doing this I would strengthen tourism, improve productivity and production, and improve tax compliance. The other positive of focusing on this is that it does not require any resources really, what it needs is greater accountability. So if the police and public sector were held more accountable, then they would implement the regulations already on the books. So just imagine the police did the simple job of strictly enforcing discipline on the road and the Noise Abatement Act. Just imagine if the KSAC enforced the zoning laws. Just imagine, if instead of a bureaucratic public transformation process we put accountable people in charge of public bodies, and schools, and give them the authority and held them accountable when they failed to meet agreed objectives. These things don't take any additional resources but have far-reaching effects in strengthening the quality of life, improving productivity, and reducing crime.

Secondly, I would break up the JPS monopoly and encourage persons to invest in renewable energy and put a few billion dollars into the JUTC to create an efficient and secure public transportation system. These two initiatives could result in approximately US$600 million per year in import savings, and eliminate the trade deficit in four years.

My third focus would be to reform the tax system to encourage private sector development, and export in particular, rather than the narrow focus on the fiscal that we have practiced for decades. This would include moving away from direct towards indirect taxation, and removing the incentives from industries to rewarding foreign currency earnings. The government has recognised the need for reform, and the $6-billion investment is welcome. What we must ensure is that the reform is not just about collecting more for government but more importantly will focus on tax reform to encourage private sector development and exports.

If these three areas are focused on then it will take care of most of the items identified on the SWOT. So, contrary to the content of some of the responses I received, it does not matter if the list of weaknesses is longer than the strengths, as the value added from focusing on just a few of the weaknesses will significantly reduce the list of weaknesses and threats.

The result of focusing on these three areas will definitely mean development, and real growth for Jamaica. So I don’t consider it difficult, but it must be a deliberate strategy with specific and measurable objectives. The real solution would be to introduce the separation of powers, but that may be a lot more difficult to achieve in the current environment.

Much more analysis is needed on this, but again space does not permit.

A SWOT analysis of Jamaica's economy

SINCE the start of the year I have received many questions (both locally and internationally) about the prospects for Jamaica's economy in 2011 and beyond. Perhaps more so today than in previous years, persons are understandably more curious about Jamaica's prospects for growth. This is understandable because with the world coming out of a very significant global recession, there are many realignments of investment portfolios taking place, and investors are more cautious, after being ravaged by the global events since 2007.

Investors also are becoming a lot more conscious of global investments, and understand that true diversification is not just among asset classes but more importantly between economies. This is an underlying philosophy that Jamaican policymakers need to understand as we craft policies around the economy. As a result of improvements in technology and investor awareness, there are greater choices across economies when choosing where to put money to work. So that even an individual investor can open an online brokerage account and invest overseas in what they consider a more attractive and predictable environment. This, I believe, will be the scene for investors from 2011 going forward, and will be to the disadvantage of countries that do not get their investment environment right.

One particular question being asked is, what are the prospects for the Jamaican economy and investments in particular? I don't believe that this question can be answered in a "one size fits all" sort of way, as it depends a lot on the type of investment one is involved in. For example, while I believe that there are significant growth prospects for small businesses, it depends on the type of business one is in and the approach to that business development.

What I would therefore like to do in this article is look at a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of the Jamaican economy. This requires much further discourse for anyone looking at an investment or business opportunity.

The table outlines generally the SWOT of the Jamaican economy as I see it, and provides an indication (based on interpretation) of where businesses and investors should be looking for 2011 and beyond.

This table represents a synopsis of some of the strengths, weaknesses, opportunities, and threats. Of course, it requires a whole lot more analysis and with a little more thought we could arrive at a much more comprehensive list. This I believe is the first thing we need to understand if we are to seriously assess and tackle the challenges facing Jamaica. In short, what is needed is a wholesome approach to dealing with Jamaica's economy.

I say, this because over the years governments have taken very good policy decisions on specific issues, without fully understanding the impact it has on other issues. Therefore the net result is that we end up with a net worse situation, as one sector improves by "x" but another worsens by "x + y". This is also the flaw I find in much of the analysis that I have heard over the years. So while persons speak of special interests that sound excellent, there is always the knock-on effect that is not considered.

Strengths

* Tourism product

* Agricultural opportunities (particularly import substitution opportunities)

* Culture, music, sports

* Geographic location

* Bauxite and alumina

* Renewable energy sources supply

* Focus on prudent fiscal management

* Tax administration development

Weaknesses

* Crime and culture of indiscipline and lawlessness

* Poor human rights system

* Poor representation of electors

* Low literacy and poor school governance

* Poverty -- economic dependence

* Inefficient court system

* High cost of energy

* Poor organisation of small businesses

* Unfriendly tax policies

* Political system

* Inefficient bureaucracy

* Poorly structured economic foundation

* Poor infrastructure

* Inaccessible garrison communities

Opportunities

* Global recovery -- increased markets

* Import substitution opportunities

* Renewable energy opportunities

* Poor structure and import dependency means greater opportunities to grow

* Public sector rationalisation

* Tax reform and simplification

Threats

* Global recovery -- inflation, higher interest rates, etc

* Rising oil and commodity prices

* Focus on more investor-friendly emerging economies

* Upcoming election

* Fiscal appetite for revenue

* Inadequate health care

This is the sort of approach I would expect policymakers to take. So if this approach is taken, then why don't we see the results? I am sure that many of the initiatives taken by our politicians and bureaucrats over the years have been good. The problem, I believe, is that many of these initiatives have been taken within the context of the same inefficient structure that created the problem in the first place. So in effect what we end up doing is fixing the symptoms rather than the underlying problem.

This is similar to an organisation trying to improve productivity by giving incentives to workers and preaching teamwork etc. All of this, however, is being done in an environment without effective leadership, management, or rules. The result is that the workers get more of the profits, but productivity and profits, eventually decline.

Although I digressed into the policy holders at the state level, this sort of approach in assessing an economy for investment and business decisions is also very important. So that, to all those who ask the question, if you were considering the economic environment then you would perform first a SWOT analysis of the economy generally. Secondly, you would look at the areas of that analysis that impact you the greatest, and then quantify the effect on your decisions.

When one looks generally at this SWOT for Jamaica over the coming year, it tells me that 2011 is going to be a challenging year for Jamaica, but will also provide significant opportunities for us to move forward as a country. That, however, will depend on the policy decisions that are taken to enhance the strengths, reduce the weaknesses, take advantage of the opportunities, and hedge against the threats.

I have not written a column over the last three weeks, but have taken the time out to listen to much of the commentary and analysis since the start of the year. And after listening, I see a lot of this analysis wanting and see us falling back into the same habits that existed before the great recession.

2011: The year of what?

WE come to the end of another year, when it is accepted that we reflect on what happened in 2010, and make resolutions and forecasts about what we want for 2011. From my own perspective I don't see anything special about a new year, as going from one year to another is really just like going from one day to the next. The only difference is that instead of measuring in days or months, the measurement is done in years. For if we were to look at how much of the new year resolutions we have achieved as a country or individual, what would be the success rate, 10 per cent, 40 per cent, zero per cent, or even negative.

The truth, however, is that the world is made up of cycles, whether it is in our daily living or even patterns one can find on the stock market. So our world is always predictable, and human beings feel comfortable with it being that way. We cannot deal with the unknown and so are usually slaves of our own fear, and therefore continue to practice what we are used to. Stepping outside of our norm, into the unknown, is something that psychologically we find uncomfortable. This is why most people need leaders, and this is why we never truly recognise our heroes until they are dead. Most people cannot deal with the thought of change, and so don't like to entertain out-of-the- box thinking.

But change we must have if we are to move forward. After all, what is being touted as the greatest "game-changer" for 2010 — the JDX — was a break from the downward cycle of debt, which if not done would have surely led to debt default. We also remember however that persons did not accept at first the need for this change, proving my point that generally people are not comfortable with change, even when it is clear that the current path is unsustainable.

Heroes like Martin Luther King, Nelson Mandela, Marcus Garvey, Mahatma Gandhi, and other such, also preached change. But the reaction of the society was that these individuals were outcasts and everything was done to shut them down. Today, however, those persons are revered in the same society that sought to silence them, primarily because most persons in the society now feel comfortable because their teachings are the accepted culture.

And this need for comfort and acceptance will continue as long as people are alive, because most people are followers, and will always be comfortable only with what they know. And in many instances it is because they lack the ability to do the proper analysis to understand what the future holds. Whether you call it financial analysis, prophecy, or being psychic, it all boils down to an attempt to project what is in store for the future.

The Chinese, for example, try to predict generally what will happen in the coming year through their calendar, which is based on the lunar cycle. They assign twelve animals to each year over a twelve-year cycle. So next year will be the year of the rabbit, as we step out of the year of the tiger. The rabbit is supposed to be affiliated with success. So will we see success in 2011 according to the Chinese calendar, or is a better explanation that in every year there is always success and failure, and so these projections shape our perception rather than being accurate explanations? In other words, is it that what happens to us in our future is determined by our belief of what will happen rather than the accuracy of any prediction? Put another way, are we the creators of our own destiny? And if this is so then isn't the fact that we do nothing about reshaping our future, because of fear of the unknown, what causes us to remain stagnant. This is a lesson for the country and us individually.

Therefore, if even some of that logic is correct, then Jamaica needs to define what type of year 2011 will be. The year of growth, development, more debt, or better education. What will 2011 be the year of? It is only through properly analysing what is possible, and wanting that to happen why something will happen. This is why accountants do budget forecasts, and it is usually the company that sticks to the fundamentals of the projections that achieves the plan. So the CEO who sets out on his own path, thinking that he can make up for the plan later, will only find himself and the company in difficulty come the end of the year, and have to make more resolutions for the next year.

One reason, of course, for plans not being realised is that they are too unrealistic, such as a smoker of 20 years, saying on December 31 that he/she will stop smoking on January 1. Similarly in the past as a country we make grand predictions about GDP growth of four per cent or six per cent, which in the context of the Jamaican economy is totally unrealistic. But guess what, it sounds good and most people are willing to just accept that feel-good prediction rather than face the reality of what the real outcome will be. And so when there are some among us that make more accurate and realistic, but less feel-good predictions, they are seen as negative and labelled outcasts. Sort of reminds us of the Marcus Garveys of the world. And when their predictions come up correct in the most part it is ignored because ego does not allow us to accept, when we are incorrect.

All of the above was said to show that progress depends on human behaviour, and what we do and do not accept. The growth of companies depends on how employees behave, and the growth of countries depends on how the citizens behave. Investments depend on how markets behave, or how society behaves (crime).

And so as we move into 2011, it is important for us to understand that economic and social development is not a factor of being able to only attract overseas investors or creating a macroeconomic environment that is stable. This has been our mantra from as far as I can remember, with what result. An average growth of one per cent per annum. If we look at societies that have achieved any semblance of development, even the much-touted Singapore or Ireland — or are the Irish touts still sure about it — at the root of their development have been consensus and a deep respect for human development.

It therefore means that 2011 must be the year of a focus on a better society. This simply means a society where the Jamaican citizen is put at the heart of development, as I can assure you that there will be no economic development without proper social development. We must move away from our rich history of human rights abuses, a societal indiscipline, and culture of tearing down each other, if we are to move forward. I always find it amazing that the same people who went to school, or grew up together, are always so willing to tear down each other because of ideology.

It is only through consensus and respect that we will develop as a country. I always maintain that economics is nothing more than the result of human behaviour. Therefore if we want to encourage the economy in the right direction, we must first encourage the right behaviour.

So for me, the personality of 2010 was the average Jamaican for all he had to endure, and 2011 should be the year of the Jamaican.

Time to step up our game

One of the contradictions of Jamaica is our ability to show how great we are as a country, but still continue to suffer from low economic growth and issues such as human rights abuses. We are known to have one of the warmest set of persons in the world; received the title of happiest country in the world; consistently we are rewarded as one of the best tourist destinations; we continue to outclass other sporting giants; and our music and people continue to make an impact not consistent with our size.

Despite all of this however, we have not been able to achieve any significant economic and social development since independence and continue to see the suffering our people have to bear at the hands of those who are supposed to protect them.

What accounts for this contradiction in a country that can consistently produce the best in music, sports, business, and science? What is it that prevents us from making the leap from that demonstrated global excellence to the needed economic and social development?

My own view is that the only thing that has failed Jamaica is political leadership. Everything, and everyone else, has been successful. Politicians have held back this country from the greatness that we should be seeing in our country and people. If we look at all the excellence that Jamaica has achieved, it has been through individual achievement, despite the governance of our political and economic affairs. And this excellence has been achieved without the country providing any opportunity or support to these persons. We always recognize our own people only after they have achieved acknowledgement outside of the country, they are dead, or if they are affiliated to a political party. Apart from this there is no structure that allows for us to recognize the ability of our citizens. This type of behaviour we could describe as acting like "wagonists".

One of the reasons for this is the lack of proper accountability of our leaders, including those at every level of society. One such situation is the leadership of the education system. It is in light of this that I support the recent assessment done by the Ministry of Education, and the minister's policy announcement that teachers will be held accountable to a performance standard. This I think is one of the more significant policy developments, if implemented - many policies in Jamaica are nothing more than an announcement.

The reason for this is because we will never see a general improvement in our education system, and eventually productivity development, if we do not ensure that the persons in leadership positions in the educational institutions are held accountable. This is the whole purpose of performance pay, for example, which the JTA had rejected, just as they are now not accepting responsibility for what they need to do to ensure that this accountability is implemented. And I say JTA leadership because I know that there are some excellent teachers out there who would like to see the whole system step up to their level. I also believe that teachers (and other public sector workers) need to be compensated better based on performance levels.

I have seen the benefit of this type of approach (which I wrote about a few weeks ago) at Jamaica College. It is only logical that if you want to see an improvement in the behaviour and academic performance of students that it requires proper leadership and performance from our teachers, and principals. How can students perform in an environment where teachers do not turn up for classes, or turn up late? How can students perform in an environment where the physical infrastructure is dilapidated, such as non-functioning toilets? How can students perform if the people teaching them are not properly trained themselves?

So isn't it logical that if we are to improve the performance of students that the first things to do are to (i) create an enabling environment; and (ii) to hold the guardians of that environment - school management and teachers accountable. Isn't that the same thing we need for businesses to succeed - create an enabling environment? Isn't this the same thing we say of police-citizen relations, that in order for people to respect and work with the police, the police needs to respect them and set proper examples? So if we are clear about the need for this for businesses and policemen, then what do we expect of our vulnerable children.

On this point I support the minister and the ministry in its efforts, and urge them to prod on with the implementation, as this I believe is the most significant policy decision made in transforming education as far as I can remember. It is not enough to just create a more difficult exam - GSAT - and separate the performers from non-performers. What we need is a GSAT for teachers and principals.

It is time that we face the realities of our underachievement and step up our game.

Economic vulnerabilities
As I indicated a few weeks ago, while the economy will start to benefit from the recovery in the global economy, I do not believe that we have made the structural changes necessary to lead us to a new development path. The head of the IMF mission in Jamaica stated (Observer) that "the IMF couldn't impose growth targets but could only facilitate growth". I don't see how one can impose growth, as if it is a dictate to be followed, but secondly isn't all we need a programme that facilitates growth.

What is clear is that once again the economy will be vulnerable to the current oil prices levels, at over US$90 /bbl and heading to over US$100 next year. This will negatively impact the balance of payments, spending power, and business costs. The result is inflation pressures. What we must do now is focus on renewable energy sources in retail consumption and transportation improvement - 60% of our oil bill. Business costs cannot escape the short term impact of higher oil prices, as it is much more expensive to deal with that problem, as the highest costs come from air conditioning and manufacturing.

The other vulnerability we will suffer from is rising prices from food based commodities such as corn. The agriculture ministry has been doing a good job of improving domestic agriculture production, but as I indicated months ago, they have reached their capacity of what they can efficiently do. The only way to see a significant upswing in agriculture, and adequately replace food imports, is to significantly increase agro-processing of local products. This, however, is negatively impacted by the bureaucracy and social factors.

There are of course other areas of vulnerability, but space does not permit them to be mentioned. I am also clear that we can avoid much of the negative impact from the slow recovering global economy, but there are some structural problems that will make it difficult to achieve. These vulnerabilities could begin to show January/February.

I would like to take this opportunity to wish everyone happy holidays.


Read more: http://www.jamaicaobserver.com/business/Time-to-step-up-our-game_8252453#ixzz1923BnA7F

Jamaica's new growth path

MY main disappointment with the IMF projections is that there is no promise of a restructured economy once the programme is over. All it does is offer money to tide us over while the global economy recovers, and then we are back to the same old economic structure that caused us to be in the problem we were long before the global recession.

So the programme is counting on (i) improved tourism, remittances, and FDI inflows; and (ii) even more frighteningly that oil prices will be at US$83.40 per barrel in 2013/14. Yesterday oil traded at US$89.02 per barrel. The IMF projections are showing that oil imports will move from 14% to 14.5% of GDP. If one were to project today's prices to 2013/14, then oil imports would be 42.7% of projected imports in 2013/14 instead of the projected 40%. All projections are that oil prices should go beyond US$90 by the end of 2010, and surpass US$100 by summer 2011.

The other consideration, as it relates to any significant uplift from tourism, remittances, and FDI, is the current state of the US and global economy. If one looks at the market that supports our tourism and remittance inflows, it is not wealthy persons, but rather middle to lowermiddle income earners. I am not saying that these inflows won't improve, but certainly not enough to change our economic fortunes.

With respect to FDI, I am hard-pressed to see where they will achieve the levels we saw before the start of the recession, as global income and demand will remain subdued. Even with high levels of FDI, we have a problem with absorptive capacity, so that much of that investment will come in, spend a little time with us, and then go back out, unless we can change our social and economic relationships quickly.

Within the context of the global environment, I believe that commodity prices will cause inflationary pressures. This will be at a time when the US, egged on by the Republicans, is promising deep spending cuts come January 2011. In fact, a bill passed in the House last Wednesday has seen fiscal cuts, as the US faces a significant fiscal deficit and high debt levels. Remember that the only reason why the world did not sink into depression in 2008/2009 was because of the US stimulus. These spending cuts include a two-year year wage freeze for nonmilitary federal workers.

Add to this (i) the fiscal cutbacks in Europe and the looming threat to their monetary system, caused by the debt crisis of the PIGS; (ii) US unemployment rate increasing from 9.6% to 9.8%; (iii) Germany and Euro-zone economic indicators showing a slower than expected growth; and (iv) a very worrying increase in US consumer credit, when a reduction was expected. This shows that the recent improvements in the US economic spending may be because consumers are back to their old habits again.

So the consumers we are depending on for tourism and remittance inflows are faced with inflationary pressures, wage freezes, fiscal cutbacks, and are borrowing more again. What this says to me is that the risk of relying on these consumers is high, and could lead to vulnerabilities in our projection. And remember the job of managers is really all about managing and eliminating risk as much as possible, in order to achieve growth.

The implication of the above (oil price increases and the global economy) is that we must cause a change to the IMF projections, which includes an economic programme that includes much-needed stimulus funds, a focus on import substitution — in particular food imports through agroprocessing, and a focus on reducing fossil fuel consumption through renewable energy projects and an organised transportation system. The four critical ministries are Agriculture, Transport and Works, Energy and Mining, and National Security — or more specifically, the police.

Minister Tufton has been for a while promoting production in the agriculture industry, and the truth is that if it wasn't for this focus then Jamaica would have been looking at a much greater significant economic decline and aggravated social conditions. He must continue on his path, and I know he faces bureaucratic hurdles that are the bane of our economic development. I will say again that unless we address our bureaucracy, then we are going nowhere.

The next steps for Tufton must be to support the growth of the agro-processing industry, and I see he has been pushing for storage of excess production which is long overdue. I really don't understand why it has taken so long for us as a country to focus on this. Instead in the past all we have done is encourage farmers to start a new crop each year and what is excess belongs to the goats, cows, and pigs (not the European ones). Tufton must also push Minister Henry to provide adequate farm roads to ensure that the cost of transportation does not inhibit competition with the imported foods, and importantly get the Scientific Research Council to start making some significant contribution to the development of the industry.

Henry, I think, is one of the more organised and hardworking ministers, and I think he has been doing the best he can with the scarce resources and what we have as a road infrastructure. He must continue on this path but also must ensure that the JDIP road development is used to fix roads that add most to the value-added of economic growth. For example, we must be able to deal with a smooth flow of traffic in the corporate area, as the lack of this impedes productivity significantly. This, of course, includes a much more efficient public transportation system, where many challenges are faced and improvements have been made, but need to be done at a much quicker pace. For example, I would want to see the quick incorporation of the small operators into a highly organised transportation system. This would also serve the purposes of positively affecting productivity, significantly lowering the oil bill, and easing off inflationary pressures.

On the matter of energy, I think that much more (and at a faster pace) needs to be done with renewable energy. I wouldn't waste time arguing with the JPS, a monopoly that doesn't seem too concerned about the public interest, despite ads to the contrary. My focus would be first on breaking down the bureaucracy surrounding the solar energy loans through the NHT, and special loans to encourage businesses to move towards renewable energy sources. This combined with a more efficient and secure transport system will save the country hundreds of millions of US$ and, if implemented correctly, by 2013/14 alone will cause the elimination of the trade deficit, which the IMF is projecting will increase.

After my column last week, I don't think I need to say much about security and the need for the police to start influencing behaviour. We cannot grow an economy where indiscipline is rife, which as far as I am concerned doesn't take much to change. Just a little will. Look for example in New Kingston — where there is a police station — at the blatant parking violations each night.

Space does not allow a detailed analysis, as done in my book, but these are just some of the more important focus areas needed to ensure that we get onto a new economic growth path.

Behaviour's influence on economic development

I first want to congratulate my alma mater, Jamaica College, for a job well done in taking both the Manning and Walker Cups for 2010. This is a part of the coming together of the vision that the principal and Board had for the school approximately five years ago. Today, the school is excelling at academics, sports and, more importantly, has seen a significant improvement in its discipline.

I just want to say that it is indeed a privilege to have attended a school with so much tradition, and to have been a part of the board and foundation for the past five years. JC had a low period before that but has rebounded nicely, a part of which must be because of the tradition that institutions like JC carry. To all JC students, present and past. Fervet.

My journey with JC over the past five years is very illustrative of what is wrong with Jamaica's economy and society and one of the prime factors needed to turn it around.

When the new board and principal started some five years ago, the indiscipline and academics were totally unacceptable, and this had even started to negatively affect the sports programme. The decision was taken that this would not continue and the principal outlined to the board a five-to-seven year development plan, which was to take JC from the slum we had found ourselves in to the number one high school in Jamaica. Not dissimilar is the 2030 vision for Jamaica, as the place of choice to live for all Jamaicans.

Five years later, we can certainly say that JC is on that path of development, and is very close to achieving that ultimate goal. Since the Jamaica 2030 vision was developed just after the turn of the century, can we honestly say that Jamaica is on the path to achieving that vision in nineteen years? The short answer to the question is no. Let me be clear even if we will do it, the fact is that as Jamaica stands today, there is no indication that that goal will be achieved.

The economy, despite what I think are positive policy actions, has declined considerably; crime is still a problem, and the recent trends are "worrisome"; the justice system seems to be seriously broken, inclusive of the daily cry of the average citizen to end police abuse; the indiscipline on the roads and the blatant disregard for the Noise Abatement Act is relentless; an estimated one-third of Jamaicans are squatters; poverty levels have increased to 16.5 per cent of the population and 86,000 Jamaicans have lost jobs in the last two years; abuse of incarcerated persons, children and the aged continues unabated, and the list of social challenges continue.

The current societal problems are of course a result of years of abuse and disregard for a disciplined and orderly structure, primarily because the development of the country was not always as important as the need for state power.

So, can we honestly say that Jamaica is near to achieving the 2030 vision? Of being a first world country? In my view, there is a lot for the Government to do, like making some good policy moves and things of the sort.

One of the problems is that we have failed to understand that it is not possible to pursue development primarily by a focus on the economic indicators only. For years our main focus has been on the fiscal accounts and macro-economic stability, but can we gain any form of development with the social structure that we presently have? The answer is no. Michael Manley somewhat realised this in the 1970s, but his mistake was that he didn't recognise that in order for social development to happen, you also need economic development, which is primarily why socialism as a system has failed.

Going back to the JC example, the first thing the board did was not to focus on academics but rather on the culture of behaviour. In other words, it was realised that consistent academic performance could not be achieved without a change in the behavioural pattern of students. And the key word there is consistent. Because just like economic growth, one can have a year or two of acceptable growth but because of the societal problems, there is no consistency.

In addition to the behaviour modification changes, it was also realised that this should first start with the teachers, who are, after all, the ones who set the examples and govern the general behaviour. For instance if we do not have a police force that displays or politicians who project positive behaviour, then how can we expect the average citizen — for example, — a taxi driver, to obey any traffic rules?

This had a remarkable impact, as once the teacher group's behaviour was acceptable then it was easy to influence the student body in that way. There is a lot more that can be said but space does not permit. In short, the result is a school that has an improving culture of discipline, academics and performance at sports. In other words, there is now a culture of performance that is consistent and started with the social changes rather than the traditional focus on academics and students. One additional important factor was the physical improvement of the school. If you put a person in an unattractive environment then his/her behaviour will reflect the environment. So when one looks at Jamaica's physical infrastructure, and in particular the roads, what sort of behaviour should be expected?

It is no surprise that Jamaica has failed to achieve development over our 48 years of independence. How do we expect people to behave if they live like animals because there is no running water or proper housing facilities? How do we expect people to behave if they are constantly subjected to police excesses? How do we expect businesses to operate with a competitive spirit if the bureaucracy sets up stumbling blocks that the preference is given to those with connections? How do we expect people to obey the traffic rules if you are always avoiding potholes, there are no adequate signs, or the police themselves disobey the traffic rules?

What we must understand is that economics is a social science, meaning that it is as a result of social interaction. It follows, therefore, that the result of economic and social development is also as a result of social behaviour. If we do not develop a culture of discipline and civility, then the behaviour that results from that will not lead to positive development. As a result there will not be any consistent economic and social development.

Until we seriously understand that, and start acting on it, then we will be destined to long-term declines as a country. Of course we will have periods of development, such as the economic growth in the 60s and 80s, or the social changes in the 70s; but are we as a people only concerned about bouts of development, followed by longer periods of decline, or are we concerned about a goal such as Vision 2030?

Where does the economy go from here?

Last Saturday both newspapers carried reports that the IMF not only revised the growth target for Jamaica but pointed to worrisome signs of increased poverty levels and high unemployment. The IMF is reported as calling this a "worrisome trend". Now I find it incredible that only nine to ten months after the IMF programme is in place - not even the halfway mark — the IMF is expressing dissatisfaction with the way the economy has progressed. And yes, I understand about the Tivoli incident and Nicole, but these merely hastened the inevitable, in my view.

And here I was, hoping that all that I had said earlier about the contractionary effects of the IMF programme was wrong, for Jamaica's sake. I really had no problem being incorrect about my forecast if Jamaica would benefit, because I really have no desire to see Jamaica worse off just to prove a point.

But I really find it incredible for the IMF to come in, impose a programme on us, and then after 86,000 job losses and over 100,000 more persons dropping into poverty, to say in a very casual manner that something is worrisome. Anyway, maybe I am just overreacting as one who really cares about the Jamaicans who have to endure.

I do believe that a tight fiscal management programme is necessary, and everyone knows - after the lambasting received - that I support the debt restructure through the JDX. I also am very supportive of the policy direction that the Minister envisions for the fiscal programme and the macroeconomic indicators, because I believe that where he wants to go with the market is the right direction, and one which we have not seen in a very long time. He must be applauded. The problem is the technical implementation, and in particular the IMF programme, and its ignoring of the real economy and myopic focus on the fiscal side.

In a way we as a country deserve the IMF straight jacket, having for so long been borrowing to feed our stomachs rather than trying to nourish the whole body. So we are today paying the price of lavish living with other people's money.

However, an analysis of the IMF programme showed that there was not going to be any real structural change to the economy after the 27-month period ends. In fact the biggest positive for the fiscal accounts would have been done by the government prior to the programme, which includes the JDX, divestment strategies, and planned public sector rationalisation. Outside of those, the programme really brings no added benefits other than allowing us to get some money to "stop a gap". The irony is that even with the government having made the fundamental fiscal changes needed, it was still very obvious that we needed the money that would flow from the IMF programme. So I guess he who pays the piper calls the tune.

The programme relies on reducing the fiscal deficit from increased taxes, and containment of expenses. The problem is that the increased taxes come from anaemic growth of the economy, which I always indicated was going to be difficult, as I thought the global recovery would be sluggish; and from containment of expenses. The problem with the containment of the expenses is that it has a contractionary effect on the economy when the private sector is in retreat.

The other point about the programme is that while it projects a reduction in the current account deficit, the trade deficit is expected to worsen. An integral part of this worsening is that it projects that oil imports, as a percentage of GDP, will move from 14 per cent to 14.5 per cent at the end of the programme. The reliance, of course, is on tourism, FDI, and remittances. So it really does not appear to project any needed structural changes to the economy. So after we have finished paying back the IMF we will have the same economic structure that caused the underlying problems we had with the economy just prior to the recession.

Well, not really, as the latest economic numbers released by the PIOJ show that there have been some positive structural shifts, as follows, which hopefully will bear some fruit if the social and bureaucratic changes are made:

o The areas of growth - agriculture, tourism, and mining and quarrying - are all either exports or import substitution. It is good that the export sectors are starting to grow before the rest of the economy, as hopefully we will start to take the lead from exports rather than consumption as we grow;

o Although agriculture has been growing consistently, the number of persons employed in the sector has been declining. This suggests, on the face of it, that labour productivity in the sector is increasing; and

o The free education and health policies have had a positive impact on household expenditure.

A close examination of the Human Development Report also shows that there was no significant improvement in Jamaica's HDI conditions, despite the PIOJ's press release that Jamaica improved as it moved from a ranking of 100 to 80. The fact is that six regional countries that usually rank above Jamaica were not measured; the total countries ranked fell by eight; and more importantly Jamaica's ranking did not improve because of HDI advances but because the other countries declined. So it's the case of the best worst.

One of the positives from this, however, is that despite the global recession, the government managed not to be as bad as other countries and seemed to do a relatively better job at containment.

So where does the economy go from here? I don't expect the local economy to improve in any significant way in the near term, and it still faces significant structural risks. I believe that there will be an improvement in our exports, and while consumption will remain subdued I expect that the trade deficit will worsen. This will be caused by increasing oil prices as the global recovery chugs along, which will also bring inflationary pressures.

Any recovery will not see the jobs coming back to where they were before, unless we make some bold decisions about our policy initiatives. I am not going to be specific about what policies I think can be implemented to cause this employment uplift (because of space constraints), but they include renewable energy, agro-processing, and a change in tax policy.

In writing this I really don't expect that anyone will take note, as I have been saying much of this for a while. But they say a prophet is never recognized in his own country, to use a metaphor, never in any way suggesting that I am a prophet. Far from it.

But at the end of the day my satisfaction is that I get to vent through writing.