The importance of correct tax reform

As we are approaching the completion of the white paper for tax reform it is very important that we understand the importance of getting the tax reform process correct. When this administration came to power in December 2011, Minister Davies said shortly after that the administration would extend the timeline for the tax reform agenda, as it was very important to ensure that proper consideration was given to the process. I totally agreed with him, because the green paper I felt would not have provided us with the necessary impetus for any long-term benefit, rather just delivering temporary fiscal space, which is how we have approached tax policy in this country for a long time.

In fact the last time any significant effort was made to use tax policy to positively affect the economy was in the mid-1980s. Every other time we have changed tax policy has been to provide additional revenue for the fiscal accounts, at the expense of the economy.

In fact I believe that we have become so accustomed to thinking about the government accounts even before the economy, that the private sector when making proposals about taxation measures always seem to be more concerned with maintaining or improving government finances than the economy. This while they seek to eke out some benefit for the private sector, by apparently not upsetting the government's voracious and never-ending appetite for taxes.

This is demonstrated in the fact that the latest private sector proposal seems overly concerned with providing the government coffers with an additional $7 Billion, in the hope that the government will allow some of the much needed reform as outlined in the proposal.

This I think is the main problem with how we approach, not only tax reform, but economic solutions. Our primary focus on the fiscal accounts, to the detriment of the wider economy, always gets us into a worse fiscal situation. The evidence is there for all to see and analyse.

So as we prepare to finalise the tax reform white paper, we must ascertain what objective we are trying to achieve through tax reform. Will we continue to focus on the fiscal accounts, and try to pull more money from the economy to fill the significant fiscal gap we face, or will we be bold enough to apply apropriate measures that will lead to economic development and a better long-term fiscal situation? This is what countries like the US did by reducing the tax rate in order to allow for greater economic activity. We will not be able to approach it in the same way, as we have other social issues that would prevent maximum value, but our approach must be in that direction.

Our approach to tax reform should include measures to ensure that there is greater growth in the economy. If we have this as our objective then we can look at the various proposals and determine how the economy will benefit from their implementation. I will address some of the major proposals.

The first thing is the matter of the expansion of the GCT on basic items, while at the same time lowering the rate across the board and having a more targeted welfare system. This to me seems like a logical argument, as currently most of the benefit from the exempted items goes to the higher income group which has the ability to spend more than the lower income group. If we are able to better target these benefits to the lower income group then it does make sense to go with this proposal, as it will mean that, contrary to the emotional responses, more money will get into the hands of the poor. The key to this is to ensure that we have an efficient means of targeting the benefits to the poor.

The second proposal of lowering the corporate tax rate to 15 per cent, for most companies, is a desirable objective, in my view. However, it is more important to ensure that rate reductions happen first with the PAYE group, as the propensity to spend is greater in this group, which will have a more positive effect on the economy. If we therefore need to phase the reform proposals, as I think is the prudent thing to do, then I would marginally reduce the corporate tax rate (to maybe 25 per cent), while having a much steeper reduction in the PAYE rate.

This takes me to the proposal to increase the GCT rate for the tourism sector. One of the challenges here is that there needs to be further consultation with the hotel sector, in order to do some simulation on how this would affect their own viability and the economy. It is important to consider this carefully as the hotel industry is extremely important to the economy as a whole and any attempt to increase the GCT rate that negatively affects the sector could have a devastating impact on our foreign exchange earnings, which could be hard to reverse.

One other proposal, which I would not agree with, is to remove the 50 per cent tax break for the companies that list on the Junior Stock Exchange, for the second five years of their listing. If you think about it, this is a small price to pay for the benefit of formalisation and increased employment that arises from the listings.

My own view is that we need to eventually move to a regime of consumption taxes and totally eliminate direct taxation, as this will cause a greater multiplier effect of money in the economy and also is less of an administrative burden for the tax authorities. The argument against consumption tax is that it is a regressive tax on the poor. While this may be so, correct tax reform will lead to greater income from a more vibrant economy, and coupled with a more efficient welfare distribution method, this will outweigh the negatives of moving to an entirely consumption-based tax system.

Whatever we decide to do, we must be guided by the principle of economic stimulation, rather than the usual narrow focus on the fiscal accounts. Getting it wrong again, as we did with the recent tax packages, could have a devastating effect on the economy. Are we capable of making the needed bold decisions?

Oil: an example of our inaction

ONE of the things, it seems, that governance is famous for in Jamaica, is doing nothing. We have heard the many expressions that we love to study everything, and seem to do nothing. Hence we have many reports from commissions of inquiry, and other committees, just sitting down and gathering dust. We also have a tendency to call for studies on things we have already studied. It would be interesting if an investigative reporter did a piece on all the commissions of inquiry we have had, and compared the recommendations against what has been implemented.

The success of anything I can think of, even academic studies, is to be found in the practical use, or put another way — the implementation. This is one reason why we have not been able to move forward as a country, as we are caught up in too much rhetoric and arguments as to why something can't happen. This is a characteristic of our bureaucracy, which does not encourage risk and reward, but rather encourages inaction for fear of the consequences.

This is also a characteristic of our business environment, where if someone fails in an attempt to start a business, he/she is faced with ridicule and punishment, rather than encouragement. Because of that consequence, persons will hold on unrealistically to a failing business, incurring debt and more inefficiency, rather than admit failure. And this ridicule is not only in our social arena, but also our legislation (like our bankruptcy laws), which does not encourage innovation and reinvention like in the US. So failure is not accepted as a route to success, and so many persons either do not take risks and innovate, or incur more losses than necessary in order to avoid failure.

One example of our inaction which as a result has cost us significantly, is our energy use, and more specifically oil. We have had an oil crisis since the 1970s, and have failed to do anything about it. More recently it has threatened, since the turn of the century, to destroy our economy, and is winning the battle.

I did a search on "oil" on my blog, and saw where articles I wrote about the threat of oil were as follows:

* July 2006 - "Oil: Jamaica's main external threat";

* Feb 2008 - "Oil: still Jamaica's main external threat";

* March 2008 - "Where will oil go?";

* August 2008 - "What price for oil?";

* June 2009 - "Jamaica's balance of payment challenge";

* March 2011 - "Oil and food price threats";

* March 2011 - "Energy again"; and

* July 2011 - "Jamaica's continuing energy crisis".

All these articles referred to the major threat oil prices pose to the Jamaican economy. Yet the amount of oil we consume today is the same as we did ten years ago, which is approximately 98 per cent of our energy needs. In fact, the last time that any significant effort was made to improve our energy efficiency was the establishment of Wigton Wind Farm in Manchester.

This is why I am 110 per cent behind the energy minister in his effort to reduce energy costs by 40 to 60 per cent, and to also bring competition to the distribution of energy. The only action that will cause sustainable reduction in energy costs is competition. No goodwill effort from any company, while still a monopoly, will help.

One of the things that we must do is create a vision of where we want to go, and so I was surprised at those who said that the minister's idea about reducing the energy cost to consumers by 40 to 60 per cent in four years is unrealistic. This is especially as I have seen this sort of reduction in my consumption since using solar equipment at home. I guess the DNA of some is just to oppose. My argument with the minister's proposition would be that four years is too long and that consumers can start seeing that sort of reduction in six months, not based on a hypothetical argument but on my own experience.

The other argument, which is really just another example of our inability to think long term and outside of the box, is that it is too expensive to install a renewable energy solution. So the result of that thinking is to continue paying the current cost. The fact that I am an accountant tells me that if you intend to use electricity for the rest of your life, then it makes sense to borrow the money and make the capital investment, which has a payback during your lifetime, and certainly within seven to eight years. Some people would prefer to go borrow money to buy an expensive car, which increases costs instead of reducing them.

It would even suit you to pay an amount of $10,000 per month forever, if it reduces your living cost by $12,000 per month, as you would really be saving $2,000 per month.

My own view is that it would be to the medium-term benefit of the government accounts and economy, if the government were to assist persons with establishing renewable energy solutions with the money from the GCT on electricity.

There are other solutions that can take effect in six months, with the proper will and implementation, that could significantly reduce our oil import bill, which would also assist in stimulating the economy. The irony of this is that it does not actually require any new funding to come into the economy. All it requires is a deliberate will to implement certain structures and discipline.

At 37 per cent of our import bill, oil certainly remains the most significant external threat to our economy, even more than when I wrote the first article in July 2006.

Will we still be discussing this issue in another six years? If we rally behind the initiatives of the minister and ensure that they are pushed through, we could see the long needed relief. If, however, we adopt the approach of someone who told me last year that I was wrong that oil prices were going back up, but would go back down under US$80 per barrel, then I may be able to resubmit this article for printing in six years' time.

A logical approach to economic and social development

There has been a renewed round of debate, following the supplementary estimates and PSOJ tax reform proposal, on what policy prescriptions are required to move the Jamaican economy forward. This local debate has been happening at the same time as some international economists and financial commentators have been espousing the benefits of the Keynesian approach of the US versus the fiscal austerity measures of Europe. Even Mervyn King, after the UK went the austerity route some two years ago, in the ECB's February Inflation report is quoted as saying that the current fiscal austerity measures will stymie growth.

Two of the limitations we suffer from in Jamaica are short-term and extreme thinking. In the first case we always seem to be thinking about the short-term fiscal and economic solution, which is why we seem to be constantly making sacrifices, and in the second case we condemn the for Keynesian approach as if it is mutually exclusive with fiscal discipline. I don't think anyone who argues for stimulus is saying that we should be fiscally irresponsible and spend in a scattershot approach. Rather, just as Obama did in the US, we are saying that specially designated stimulus funds should be targeted towards employment, for those with the highest propensity to spend, and also at value-added projects.

Our failure to do so will result in social and comparative advantage deterioration. My own view is that Greece will sink further with these fiscal austerity measures, because fiscal austerity doesn't address the underlying problem, similar to Jamaica's of the balance of payments. It is also a blinkered way of thinking to speak about improving the fiscal and economic situation, without giving much consideration to the social realities.

If we therefore truly want economic and social development, we must look at not only the inhibitors, but also how best to utilise our resources, present and to future. This simply means doing the proper financial analysis to determine the greatest value added, and can be seen as a SWOT analysis focus where we build on strengths / opportunities and eliminate weaknesses / threats.

One of the first things to understand is that our blinkered focus on the fiscal accounts over the years is one of our primary problems. The most important measure of our economic (and ultimately social success) is the balance of payments, and more specifically the trade deficit. Over the years, however, we have ignored this and have instead chose to borrow money to close that gap, rather than address the underlying problems of international productivity and comparative advantage. This is fundamentally what has caused our debt crisis.

So if we take a careful look at our balance of payments we will see where oil and food make up 37% and 10% of imports respectively. Isn't it therefore logical that if we focus on reducing these, and substituting them with local solutions, that this will provide an automatic boost to our trade numbers? So when the Energy Minister speaks about competitiveness in energy and putting solar solutions at home, why is the first reaction that poor people can't afford it? It is this inability to think outside the box that keeps us poor. I support 100% of what he is saying because I had solar equipment installed two years ago and my electricity consumption is 50% of what it used to be. Increasing electricity rates are no longer a problem for me. Isn't it therefore cost effective to get a loan from NHT or a financial institution, such as RBC, to install the equipment?

Dealing with food and oil imports by even 30% to 50% will eliminate our trade deficit and be a positive for the fiscal, which is a symptom, not a cause.

It is also very important for us to understand that investments in capital infrastructure, around our areas of comparative advantage, such as tourism and agriculture, are critical if we are to remain competitive. So while I understand the need to cut the current capital expenditure budget in the fiscal accounts, we must ensure that we increase the capital spend around our areas of comparative advantage; otherwise we will lose the competitive edge and push our balance of payments further into decline. I happen to think also that the renewable energy solution is a new area of comparative advantage for us.

We also need to realistically focus on policy reforms that can take place in the short versus medium term. I have always maintained that (i) public sector rationalisation, the way it was approached, was never going to happen in the short term; and (ii) pension reform is a medium-term project. We fool ourselves into unrealistic projections when we project outcomes way before they are possible.

So the only realistic short-term project now is tax reform (and some legislative reform), which needs to be approached in a way that drives economic growth, and provides the spending stimulus needed for the economy. This is why I am in favour of (i) reducing, with a view to eliminating, direct tax at the PAYE level; and (ii) implementing a sales (as opposed to value- added) tax on all items and services, while at the same time reducing the consumption tax rate and having more targeted welfare funds to persons below a certain income category. Many might not agree, but my responsibility is to provide the most logical financial solution.

Very importantly also, we must take steps to improve law and order, because if we do so then areas of crime like murder, praedial larceny, and tourism harassment will decline. On the other hand a focus on one specific area of crime, without a general law and order focus, will not achieve the desired long term-effect. I again support the initiative of the Security Minister in this matter. We must now move further and address the "in your face" disciplinary issues of traffic and night noise. No one wants to live and raise families in an undisciplined and boisterous society.

What we must understand is that Jamaica can never truly move forward unless we make the citizens, and consumers the centre of development. After all, isn't this what a society is all about?

The case for fiscal stimulus

DURING the period of this recession, one of the fundamental disagreements among economic commentators is how relevant are the teachings of Maynard Keynes.

In other words, in a recessionary environment should one increase fiscal spending, in order to provide stimulus for the economy, or should one consolidate fiscal spending in order to reduce the fiscal deficit?

Those opposing fiscal stimulus, argued in countries like Jamaica, that because of the lack of resources, the only viable option was to in fact cut back on fiscal expenditure and by doing so assist in the reigning in of the ballooning fiscal deficit. This was seen by many as the only way of resolving the economic challenges faced by the country.

Some three to four years after the height of the recession, my view is that we have enough evidence to determine what has worked and what has not.

Approximately two to three years ago we saw different roads being taken by Europe and the US, on different sides of the Keynesian argument. The Eurozone went the way of fiscal austerity and the US the way of fiscal stimulus spending. The result is that the US has seen an improvement in their economic and social environment, while the Eurozone has seen a decline, including an increased threat to the Euro as a credible currency. The table shows trends in the unemployment and growth rates in the EU and the US since 2008.

 

	2008	2009	2010	2011
Eurozone real GDP growth rate	0.8%	-4.0%	1.8%	-0.3% Q4
US real GDP growth rate	1.1%	-2.6%	2.8%	2.8% Q4
Eurozone unemployment rate	7.4%	9.0%	9.5%	10.4%
US unemployment rate	7.2%	9.3%	9.7%	8.5%
Note: The 2011 growth rate is the fourth quarter estimate

The table above clearly shows that the US has seen a faster recovery than the Eurozone, in these key measurements. This is despite the criticism Obama's administration faced about reckless fiscal spending, and the consequent increase in the fiscal debt, during the period of fiscal stimulus. Who is having the last laugh just before US elections now?

In fact, in the recent ECB February Inflation Report, Governor Mervyn King is quoted as saying "...ongoing problems in the Eurozone and fiscal consolidation at home combined to put brakes on growth". US Treasury Secretary Timothy Geithner, only a few weeks ago in a CNN interview said that it is not possible to grow by cutting expenditure in a recessionary environment.

Similarly in Jamaica we embarked, via the 2010 IMF agreement, on a policy of fiscal expenditure consolidation and new tax revenue measures in order to improve the fiscal situation. My argument at the time was that the approach was wrong and would lead to a contraction of the economy and fiscal revenues, as the fiscal side depends on the real economy and in the face of private sector spending retreat any contraction in fiscal spending would also negatively affect the economy and ultimately the fiscal accounts. The result is there for everyone to see.

How do we move forward though, as the economy is still faced with significant structural problems today and the fiscal challenges are even more chronic than in 2007, primarily because the economy is weaker and the capital markets are not as easily accessible as prior to the recession?

One reader wrote to say that my promotion of fiscal stimulus spending, and my promotion of JEEP type programmes, was tantamount to printing money to finance these programmes, which would ultimately lead to higher inflation and an unstable macroeconomic environment. If the reader had read the entire article, however, he would have seen that my argument is for value-added debt financing and not the printing of local currency, which would not be a real resolution to the problem.

One may argue that this will increase the debt to GDP ratio; however, my argument has always been that the level of the debt to GDP ratio is not as important as the trajectory of the ratio, and the use that the debt is put to. Again I refer to 1984 when the debt to GDP ratio went to 212 per cent before declining to 90 per cent in 1990.

It seems irrational to me that if one has a monthly debt payment of $100 per month and income of $50 per month (with non-discretionary expenses of $45), that you can cut expenditure enough to address the debt effectively, or before you die of starvation. While some better spending of income is needed, it should be clear that the only sustainable way to deal with the debt is to increase your income if the plan is not to default. This is what has happened in Greece, and the recent austerity measures will only make the situation there worse.

My own recommendation therefore continues to be that Jamaica has to (i) seek new debt to address value-added infrastructural projects around our areas of comparative advantage, such as tourism; and (ii) reallocation of some of the resources to focus on areas such as green energy jobs, crime reduction, law and order, and agro-processing facilities. At the same time the initiatives being implemented by Paulwell must be timely to ensure that we resolve our energy and consequently competitive challenges.

While proposing increased value-added debt, I do realise that there is a great risk if not implemented properly, but this risk increases the longer we wait to take the necessary bold decisions. The fact is that what we have been doing has not been working. Isn't it therefore time for us to realise that and take a hard look at how we make policy and fiscal decisions. Certainly new taxes and capital expenditure reduction are not optimal solutions.

One thing I can guarantee is that if we continue on the path we have always been on then we can only reap more of what we have been reaping. I can also guarantee that within the context of the current environment, the fiscal consolidation policies we have been pursuing will only lead to greater pain.

We therefore need to ask ourselves what we must do to change course and ensure that we meet the 2030 vision of the place of choice to live, work, and raise families.

Jamaica's options diminishing

THIS is one time when I hate to say "I told you so" as it is in relation to Jamaica's economy. This is because it always seems as if the appropriate prediction to make is that implemented policies will not work and will cause our economic situation to worsen. I can, however, share this feeling of despair with Anne Shirley, Al Edwards, and Ralston Hyman, and therefore say "We told you so", as most other regular financial commentators do not need to share this feeling of guilt.

The recent fiscal and trade numbers point to what we have been saying since 2009, that the taxes imposed and the IMF programme would have had a contractionary effect. Added to this the fact that the IMF agreement was in limbo for over a year and this created industrial instability caused by the decision to reverse public sector wage contracts.

So here we are two years later with tax revenues running $14.5 billion behind target, for the first nine months of 2011/12, which I expect to worsen as we head into the final quarter. In addition, the balance of payments (BOP) for the first eight months of the 2011 calendar year showed a worsening current account deficit over the prior year comparative period of US$647.6 million, or over 150 per cent.

This suggests, in the strongest possible way, that we have not addressed the structural challenges facing the economy. But is this any surprise when the same IMF programme projected that oil imports would move from 14 to 14.5 per cent of GDP over the projected period?

What is more frightening about the fiscal numbers (as shown in the table) are the following:

- When compared to prior year, June, November, and December 2011, all showed reduction in tax revenues;

- For the nine months tax revenues were just up 5.1 per cent, when inflation was approximately 7 per cent, signifying a real reduction in tax revenues;

- In the current fiscal year, tax revenues fell short of budget by $13.3 billion more than the shortfall in the prior year; and

- The last three months of the fiscal year are always the most difficult for meeting tax revenue targets.

Against this background the minister and his team must craft a fiscal budget for 2012/13. This seems like a very difficult task within the context of our political, social, and economic environment. I have always maintained over the years that there are always options that can take us out of this mess, and I can think of a few. If these will be considered is dependent on our political and social environment. Will we take the road less travelled in Jamaica to economic development? I hope so, but history is not on the side of that being done.

What is clear is that because of the fiscal decisions taken since the recession hit us, we find ourselves here today. So all those who thought that Maynard Keynes was just something out of a Mother Goose fairy tale, it is instrumental to note that even Europe is now accepting that they need some stimulus to help create growth, as the fiscal austerity they embarked on two years ago has not worked. On the other hand, the US went the way of Keynes, and provided stimulus to the economy, resulting in growth, even though fragile. The US dollar has once again regained some credibility.

It is evident that our options are diminishing fast, as our failure to take the bold decisions have had persons comparing us with the demise of Greece and other parts of Europe. Instead we should have been compared with the US today, if only we had not discarded the teachings of Keynes.

So it is clear that programmes like the JEEP and Jamaica Employ are going to be critical to move the economy forward. I can think of a few ways that these can get off the ground while having the advantage of improving our BOP and using the least amount of resources. I trust that the cabinet retreat will emerge with a solid programme that will provide the much-needed stimulus.

It is going to be difficult, though, because of limited resources available. I have long said that Jamaica has a bigger accounting than economic problem. But being an accountant, maybe my views are prejudiced.

Apart from the stimulus option, the only other solution to the fiscal problem is to go for more value-added debt through the IMF programme. Going to the market is going to drive up interest rates, so it should not be seen as a solution. And also, cutting expenditure and/or raising taxes are only going to cause a further contraction in the economy.

It is important to reach an agreement with the IMF as soon as possible, as each passing day can only bring uncertainty. It was important for the minister on assuming office to have met with the IMF, and made the announcement of the status as he did. It is important now to finalise the discussions and keep the markets informed about what is happening.

It is also prudent to understand that of the three much-talked- about reforms being pushed (tax, pension, and public sector), only one can practically happen before the next IMF agreement, and that is tax. In the present form, however, the green paper will only serve to continue the tradition of the fiscal priority negatively affecting the economy.

Pension, I have always maintained, is an embedded compensation and therefore requires much consultation in addition to reforming the structure, as all the money has previously been lost in the consolidated fund. Public sector reform was approached in the wrong way and was therefore doomed to long deliberations.

With all that said, what is obvious is that our options are very limited, and it is going to take the best of the minister, his team, and the Government to steer the Jamaican ship through the troubled waters ahead.

The IMF and interest rates

TWO issues that will be most critical in the current economic environment are the IMF and what will happen to interest rates. This is against the background of the weakening fiscal and trade situation that Jamaica faces, as well as the weakening global situation, with Europe still in a significant debt crisis, growth in China slowing, and the US economy still uncertain.

In fact there are two international reports that should cause some concern, both reported on Tuesday January 17, 2012.

In the first report, the World Bank lowered its growth forecast for the world economy down from 2.5 to 2.7 per cent, while at the same time warning of a possible shutdown of a major European economy and a situation similar to the Lehman collapse.

Additionally an article on www.cnbc.com, which states that more investors are going more into cash than stocks and bonds.

What these show is that there is still a lot of uncertainty and perception of risk in the markets. It is when these perceptions lead to negative consumer behaviour that Jamaica will see the effects. That is a slowdown in consumer demand that will have an adverse effect on our foreign exchange earners, and an increased perception of risk means an upward pressure on interest rates.

But even without this slowdown effect, Jamaica still has (and always had) a significant foreign exchange problem. This problem is only exacerbated now because of the lack of a capital market to run to. This means for us that there is no other option for us but to secure a favourable deal with the IMF. In fact it was reported on January 13, 2012 that UBS had warned its investors to stay away from Jamaica's debt until the issue with the IMF is sorted out. The expectation of UBS is that yields would climb, which is consistent with my view from last year that interest rates would trend up. In fact rates have already started to trend up and we have been seeing an increase in activity of government going to the market for financing.

The reason for our current situation stems from the unrealistic targets of the IMF agreement originally which caused us to worsen the fiscal situation through the further contraction of economic activity. This is a lonely position I have always maintained along with Ralston Hyman, while others espoused the need to have the structural adjustments done swiftly. Well, if you take away drugs at one go from an addict, he might go into shock and die.

But here we are with worsening fiscal and balance of payments numbers, and as far as i am concerned they will deteriorate further. So the only practical saving grace, to ensure that inflation, exchange rate and interest rates remain relatively low and stable, will be not only saving the IMF agreement but more importantly getting a more realistic agreement that will ensure sustainable growth. Even with that, there will still be upward pressure on inflation and interest rates. This is why I have always maintained that the government needs an independent team to advise them on solutions. But I am just a minion so I don't expect it will happen.

What is certain is that the challenges we face are significant, as these realities have to be balanced with the expectation from the manifesto declarations, particularly the JEEP programme.

Whatever the promises were, however, it is important to take a realistic approach to the issues. One such is the matter of the rollback of GCT on electricity charges. This, in my view, would only be of short-term (maybe for two months) benefit to consumers. Instead what we need to do is use that fund of around $2 Billion annually to reduce the dependence on electricity by providing a credit to taxcompliant individuals who install renewable energy solutions at home.

An argument was made to me recently that this will not benefit small businesses, which in my view is a very narrow way of thinking about it. If consumers have more disposable income because of lower electricity use, they will have more money to spend with businesses, resulting in greater economic activity and profits for businesses. The only thing that will help industrial use of electricity is cheaper distribution costs in the medium term, and new energy sources in the long term. My choice, of course, has always been coal.

Telecommunications landscape

From as early as April 2011 I wrote that the Digicel-Claro deal was a red herring, and I see that it is still being focused on as LIME's Waterloo. In June 2011, after reviewing LIME's financials, I indicated that although LIME had cash resources for about two years or so, the business model and regulatory environment would eventually lead to their demise. The key regulatory issues being number portability and cross-network charges. What we will be careful of when addressing particularly the latter is that government does not start setting rates and overregulating, as this will surely kill the industry also.

Today it is obvious not only that LIME is close to shutting down, which would be the prudent decision with the current environment and business model, but more importantly that Jamaicans could once again face a monopoly when the telecommunications sector is so important to productivity.

So we are almost a year after my article and nothing has been done to address the regulatory issues, which I think speaks to the uselessness of the OUR, just as they seemed impotent in the JPS situation. I am happy to hear that the Minister is going to take it into his own hands to ensure that the environment is changed to accommodate greater competition. It is important that this be done immediately, as the ones who will really suffer are the consumers.

What is important from the above is that it is critical that we find immediate solutions to (i) the IMF agreement; (ii) the fiscal challenge; and (iii) the cost of energy.

Facing the challenges ahead

One certainty of the upcoming fiscal and calendar year is that it is going to be difficult and will require all hands on deck. This is why it disturbs me that when I look at some of the messages on social media, I see young persons, apparently expressing their disgust that the PNP won the election, saying that they expect that they will fail as a government. This is similar to the sentiments I saw expressed in 2007 by young persons sympathetic to the PNP.

It is interesting to note that these statements are not coming from the politicians who lost but from young persons who are supposed to be tomorrow's leaders. If this is the situation, then what hope do we have for tomorrow? Don't we have the sense to realise that if the PNP fails, no part of Jamaica will be spared? It is not that one area will do badly and the other will do well, based on the occupation by party supporters.

My message to these persons is that they should do everything in their power to make sure that the government of the day succeeds because 2012 is going to be a difficult year, and any wrong move could affect us for a very long time to come. Unless, of course, they have dual citizenship and don't plan to live here.

With that said, I want to look at some of the challenges we face as a country. Let me first say that while I believe that there will be significant challenges ahead I do not believe that they are insurmountable, and further I do not believe that there has to be a heavy dose of bitter medicine to resolve the challenges. It depends on how the situation is handled.

What is certain is that if the wrong moves are made then any slippage is going to have a significant negative effect on the country. One may say the following:

o But there is macroeconomic stability and this means that things are improving and we are on a path to growth; or

o But we have been here before, for example the financial crisis of the mid-1990s, and we managed to bring the economy back to small but consistent growth prior to the recession.

The difference this time is that we are working from a weakened position.

While I agree that there is macroeconomic stability, as I have always said, the best way to achieve stability in a patient is to kill the patient. So the reason why all our macro targets look good is because of the lack of economic activity. So everything seems stable. In fact when economies grow significantly, and start to overheat, the macro variables are never stable without monetary and fiscal policy intervention. If left unchecked, inflation and exchange rates will increase based on demand from growth.

What we have failed to remember is that the primary role of governance and economic policy is for the improvement of the standard of living of the people in the country. So managing to improve macroeconomic numbers, while the majority of the people get poorer, is bad policy. This is why I have always held the view that a Keynesian approach in a recessionary environment is not only necessary but is a responsibility of governance. We are now seeing the effects of the pro-cyclical and fiscal-oriented approach, as is being shown in the fiscal revenue targets.

This brings me to the other point, where one might say that we have been here before. Sure we have seen significant inflation and exchange rate movement in the early 1990s, and to some extent the early 1980s. We also had a significant recession in the early 1980s. We also saw many business failures in the mid-1990s. The difference is that in the 1990s and 1980s we had a very big advantage that we do not have today and that caused us to be able to find a way out of that crisis. We had access to debt through the capital markets.

There is a significant difference between today, the 1990s, and the 1980s. Without the ability to borrow money, or receive grants during those two periods, we would have seen a significant economic problem. The problem Jamaica has always faced is one of not being able to afford what we want to consume, whether it is on the government accounts or balance of payments (BOP) side.

Today what has happened is:

o We have a worsening BOP, with the first seven months of 2011 showing deterioration in the balance of payments by over US$600 million, and a current account deficit of over US$900 million. This was caused primarily by an increase in oil imports of over US$550 million and in addition associated freight costs. It is for this reason that I have always emphasised each time the need to deal with our energy situation as a priority. I am supportive of Paulwell's approach and hope that we can achieve this soon.

o Our fiscal revenues are some J$8.5 billion behind target, wile our expenditures are only J$3 billion behind target. This means that our fiscal deficit is J$5.5 billion worse than projected. I expect that given the low demand environment this situation will worsen.

But alas, there is no capital market to run to and get money unless we are willing to offer higher interest rates, and even so persons will be a lot more wary and unable (because of their own circumstances) to take up GOJ debt. What is certain is that there cannot be a JDX2 unless we want to see a serious problem in the economy. Also the FDI flows that helped us in the 1990s to 2000s are no longer there. In fact it seems more profits are being sent abroad than those coming in.

The government is also faced with the challenge of having to provide jobs, and I think has made the right decision that it is not practical to lay off public sector workers. This is something I have been saying for a while, as the redundancy cost and the negative effect on a stagnant economy would be impractical. Additionally I also agree that pension reform is not something that can materialise in the short term. I think, however, that we can start the process of tax reform in short order. We don't have to implement everything at once, but certainly it is important to pick the low-hanging fruits as soon as possible. How do you in the short term just change an embedded compensation package? Apart from equity issues it is just not an easy task.

So then what do we do? We have a worsening BOP and fiscal deficit and little ability to manoeuvre. It seems obvious to me and comes right back to the argument I have been pushing for the last few years. The only real hope is to grow our value-added debt, as was done in the mid-1980s, and ensure that what we use it for is greater than the cost. I don't know anyone with monthly income and debt payment of $50 and $100 respectively, who can reduce their debt by cutting back on expenditure.

Our only viable option right now is to get an extended fund facility with the IMF, as this is not only the avenue to IMF funds but also other multilateral funding. This means that we must save the IMF agreement, as without the IMF there is little else that can be done. And as I have always said, the targets we were pursuing were doing nothing more than contracting the economy while we were running out of options.

There are some policy moves that can be taken to make things easier ,and I am hopeful that this will be pursued by the government.

At the individual level, this is the time to get out of unproductive debt and consolidate your own expenditures.

Why the JLP lost–a lesson for governance

I have been seeing some of the comments by the young labourites. They range from sadness to anger and results a lot in accusing the PNP of vote buying and ballot stealing. I am almost pretty confident that both sides may have sought to engage in these nefarious activities but even if there was some of that it did not affect the results.

I think the PNP gave a solid whipping to the JLP, and there are reasons why. Primarily amongst them is that the JLP, from around two years ago, started to lose touch with the people.

When then PM Holness announced the election I said to supporters of both sides that the PNP would win the election. As far as I was concerned, the PNP was working the constituencies for far longer, there were outstanding issues in the IMF and JDIP, I think more time would be needed for the people to warm up to Holness, and an election between xmas and new year was not going to upset people’s vacations (low turnout). A low turnout is always good for the PNP because of their larger and more committed base.

It is important to remember that economies and people are primarily motivated by micro issues, and not the macro, and so the idea of the IMF programme achieving the macro targets and no consistent stimulus package being put in place, was bound to result in job losses that caused the major swing in apathy from the JLP.

As I consistently said, the IMF programme was pro-cyclical and resulted in economic contraction further than what was necessary and a big part of the contraction resulted from the tax packages.In other words too much fiscal focus.

Combined with this was public sector salary and pension issue, which created much isolation, and this combined with the economic decline / job losses from the global effects, resulted in a growing resentment of government, especially when unnecessary expenditures were reported.

The Holness factor helped but this was wiped away by the poor campaign by the JLP, especially when compared against a better one by the PNP and a PNP manifesto that communicated better despite continuing less details. Remember Jamaicans don’t read much and so the shorter pictorial PNP manifesto communicated better. The PNP also presented a younger team (even if it just perception) and the JLP focused on a younger leader, while in error focusing on attacking PSM. Add to this some slip ups during the campaign.

So in the end the people either voted against the above or didn’t vote because of it. It is important to understand that economies and people are driven by micro issues, which also means that with a more aware, and jobless, citizenry, the election would have been won by the attention of MPs and candidates in the constituency.

In the end it boiled down to the PNP having a closer connection with the people and running a better campaign, which in the end was a more positive campaign on issues than the JLP’s. So it is not that vote buying or anything like that lost the election. The answer is in the mirror.

This is also a lesson for anyone that governs Jamaica from now as Jamaicans seem to vote a lot more on representation rather than national issues.

What is necessary in 2012

AT the time of writing the polls have not opened as yet. But whoever forms the next Government will still be faced with the global and local economic challenges in 2012.

Globally we can look forward to the following:

* Much weaker Europe, and an overall weak global economy;

* Oil prices I expect to continue their upward trend;

* Inflationary pressures, as governments seek to avert economic downturn by expanding money supply; and

* Consumer spending to see some recovery but remain relatively weak when compared to pre-recession levels.

Locally, I expect that these global factors will have an impact, at least in terms of limiting our earnings potential. The truth, however, is that much of what happens to Jamaica in 2012 is going to depend on the policies we pursue.

One of the things that we must start to understand is what drives economies. In other words, as I said last week, the first question that should have been posed to the candidates in the recent debates was, what is your explanation of the problem? It is a simple question, but the truth is, unless we understand the problem then we can never find the appropriate solution, and I think that this is what has escaped us for years, if not decades.

I do not think that we have an understanding of what our real issues are. Our inability to define the real problem Jamaica faces has caused us not to grow this economy in any meaningful way since 1990.

I have long said that economies are nothing more than the behavioural interaction of people, as they go about their business of satisfying everyday needs and wants. It is important to understand the link between Mazlow's Hierarchy of Needs and economics.

As people satisfy more and more of their basic needs, they move towards economic activity that leads to self-actualisation. And the price of self-actualisation is higher than the price of basic needs. So it stands to reason that the more satisfied people are, the higher the value of expenditure, which will lead to greater economic expansion.

This is illustrated by countries like the US, where as more and more persons become wealthy they start demanding products that cost more. This means that manufacturers of goods and services can increase revenues, and also more business opportunities become available. The trick to this expansion is that it must be done from earnings and not from debt, as the US found out in 2008, and this is what contributed to our problem. Otherwise, the whole house of cards will come falling down.

It is this lack of focus on the consumer that has been at the heart of Jamaica's failure to achieve sustainable economic growth. An examination of our policies over the years will reveal that we have focused on the fiscal accounts or growth without earnings. In other words, the central focus of government policy has been either growing consumption with debt or taxing Jamaicans every year to stabilise the fiscal accounts.

The fact is that this approach will not work, and it is important that going into 2012, whoever forms the Government understands this. Moody's has indicated that the policies of the Government must continue in 2012 if we are to maintain their rating, and we could see improvement if we continue the policies. While Moody's is generally correct, there has been a missing ingredient in our policy that is working against greater economic success. This is what has always been missing from as early as independence.

We have failed to recognise the importance of the consumer to the economy and so have failed to realise the sustainable growth that we need. We have praised economies such as Singapore and the US, and have held them out as models that we need to emulate. But what we have failed to understand about what makes these countries great is that their primary development focus is centred on protecting the individual rights of citizens (from other citizens and the state) and ensuring that everyone has access to the same opportunities. This is, fundamentally, all we need to strive for, and the rest will follow.

If we ensure that (i) citizens' rights are protected, (ii) everyone has the best opportunity to succeed (which includes access to education and health), and (iii) discipline and structure are enforced, then I guarantee that the economy will see unprecedented growth and development, as persons move from the lower rung of Mazlow's Hierarchy to the top.

If this is done, then the market will drive greater innovation and value.

However, as I have long argued, in a stagnant environment just coming out of a long recession, the market needs a push. This is where Keynesian policies must be pursued, and is why the IMF agreement was pro-cyclical. This is why stimulus projects (whether you call it JDIP or JEEP) are important, and necessary. What we must ensure is that they have the necessary parliamentary oversight for transparency, but even more important, I think they must provide the maximum benefit to the economy. My preference is a focus on infrastructure and renewable energy projects, for the maximum benefit to be derived.

It is important that people have meaningful jobs. Jamaica's unemployment numbers from even in the 1960s reveal the lack of focus on full employment as a government policy.

So as we go into 2012, with a newly formed Government, we need to try a new approach. We need to put the individual rights and opportunities of the people at the centre of our policies. We must focus on employment opportunities as a part of that.

We will never achieve the development we want without this, because if people are always concerned with justice and red tape, then there is no room for innovation and they will remain at the bottom of Mazlow's Hierarchy, which is where underdeveloped economies find themselves.

After 50 years it is finally time for us to break away from the colonial structures that seek to protect state against subjects and truly make the citizen the primary focus of our democracy.

Go out and vote

Tomorrow is election day and I just wanted to ad some thoughts after observing what has been happening over the past few weeks. I have observed the accusations and the fanatical way in which our young persons in particular have approached our politics, and am not feeling good about our youth.

I am not speaking particularly about the candidates but rather the supporters, who when I look at the FB posts and comments I find it disheartening as the comments are really not about the issues but the attacking of personalities. When will we get away from this sort of politics. Maybe I am idealistic but I believe that Jamaica deserves better than this.

My message to everyone is that you should all go out and vote, as it is not only the most fundamental democratic right that our forefathers gave their lives for in some instances, but is also a responsibility to your country. Anyone who ignored this responsibility and either didn’t enumerate or doesn’t plan to vote I think it is a betrayal to democracy.

I would never tell anyone who they should vote for, and do not want to have a conversation on that, so if there are any comments on this post then please do not introduce any tribalistic views. They will be ignored but I would love any comments on the issues, which I will entertain that discussion going into tomorrow if I can help to clear up any thoughts anyone has.

When you have privately thought about the issues please go out and vote, as it is a responsibility we have to our country. And vote on what you think is best for you and your country.

I personally am tired of the tribalistic approach, as whichever party forms government at the end of the day it is our government if we call ourselves Jamaicans and whoever is elected government on Thursday should get the support of everyone because I do not know of any part of Jamaica that will sink while the other part stays afloat.

The competitive nature of election is good because it helps to preserve our democracy but when it is over we need to move forward as one country, and make for a better place to live for all.

Do you know where you're going to?

Do you know where you're going to?

Do you like the things that life is showing you

Where are you going to?

Do you know...?

— Diana Ross, 1975

We could ask ourselves these questions after we listened to all three debates and digested the manifestos, leading up to the election on December 29th. Indeed these questions are critical ones we need to answer before we place our "X" on Election Day.

This is one of the disappointments I had after the debates, as they seemed to be anti-climatic. True, they got progressively better, starting with the disastrous youth debate, but can anyone honestly say that after listening to the debates we know where we are going to?

What we know after the debates is what we knew before. We know that it is necessary for the country to maintain its fiscal discipline and extend the IMF agreement; public sector, tax and pension reform is going to be critical going forward; there must be a real focus on quality and access to education; there must be continued focus on governance and corruption; energy costs must be reduced; bureaucracy is a major inhibitor that must be addressed; the justice system needs to be reformed; the debt and productivity issues must be addressed.

Prime minister Andrew Holness and Opposition leader Portia Simpson-Miller during the leadership debate on Tuesday.

We knew all that before the debates and it seems as if that is all we still know after. One of the major problems is that the Debates Commission did the country a disservice with the format of the debates, which they tried to correct in the last one (which improved it somewhat). The fact, though, is that it didn't seem as if the debates were designed to unearth any additional information and direction for Jamaicans, but were designed just to appease the need for debates to be held. So I would think that more blame for the failure is at the feet of the Debates Commission than the participants. After all, the participants only answered what was asked and didn't have to worry about much follow-through because of the format.

So as a country we need to seek our answers elsewhere. Let me pause to congratulate Peter Bunting and Danville Walker for hosting their own local debate, which is a really progressive move.

I think we could get more information from the manifestos, which give a pretty comprehensive view into the thinking of both parties. And both parties must be congratulated for coming out with such comprehensive documents in such a short time, as both do show a clear understanding of what the issues are and lay a foundation for more specifics.

They do attempt to answer the question posed above, that is "do you know where you're going to?" They do include very detailed descriptions of where they want to take the country, by looking not only at general policy issues but some specifics as to what is to be done to achieve those policy objectives. I think the JLP document includes more specifics, but the PNP document communicates better and emphasises more consultation.

The JLP places greater emphasis on private sector-led growth; as opposed to the PNP that emphasises more government-led growth. Interestingly though, on the important matter of energy, the JLP seems to prefer a more involved state solution unlike the PNP that emphasises a market competition model.

Even so, I feel that neither document directly addresses the real structural issue with the economy but does so in a roundabout manner.

So if the time spent on the debates had been spent focusing on analysis and discussion of the manifestos, it would have had greater benefit to the understanding of where both parties want to take us. The truth is that there is not much policy difference between both parties, as is expected because our options are very limited, and so what is important for us to understand is who can better take us to our goal, as we have suffered in the past from an almost deceitful relationship of broken promises, much like a dejected spouse.

This takes me to the main criticism of both manifestos. They are too long and because of this length they fail to communicate an overarching vision to the electorate. Their failure to provide an executive summary has left the reader without a framework of the vision of the manifestos. They seem to be an attempt to provide something for everyone, and so have talked about everything under the sun in the attempt to satisfy everyone. But by doing so they lost the direction and emphasis of the policies.

So the manifestos do a better job of telling us where we are going to, but because of the disorganised presentation and the amount of information, we are not sure of how we will get there.

What was needed was a statement of general objectives, which the PNP document sought to do, but this should be around a central theme of development. And the documents did mention the main areas of focus at the start, but the way the rest was written veered from the stated emphases. In other words, if they were answering exam questions the body and conclusion of the answer would not connect with the introduction.

This is not difficult to correct, however, and it would be a good strategy for both parties to summarise the main points and present them to the electors, who are more concerned in this election about "what are you going to do for me?" than "what have you done for me lately?". The latter seems to be where some of the old-style politicians want to focus - including the awful youth debate, which surprisingly had more old-style politics and inaccuracies than the two latter debates.

So since the debates have failed to deliver, my suggestion is that we go to the manifestos, which provide a lot more information and only need some more attention paid to wading through much of the unnecessary and repetitive content.

To all my readers, have a happy holiday.

PNP manifesto analysis

I have been asked to provide a brief analysis on the PNP manifesto by a few of my FB friends, and so will attempt to do so below. It of course requires further discussion and hopefully some of that discussion will take place on this post so that the issues will become a lot clearer. I only have 2070 friends so it may be worthwhile if everyone could share the discussion with your friends so that it can be far reaching.

Let me first start buy saying that it is encouraging that so many persons seem to have taken an interest in what is being proposed.

All in all, and given the timeframe of the election period, one could say that this document is a fair response. The fact is that there was not enough time for a more comprehensive document as elections are just around the corner, and I suspect that the PNP wanted to get this out prior to the Finance debate, as strategically it sets up the expectation of the debate and makes it easier to communicate for Dr Phillips. This is why a fixed election date is good, so that the process of consultation in campaigns can be longer and bring out more. It does show that work is happening, although I think that greater thought could have gone into the document.

There are some stronger areas, which show the strength of the spokespersons, such as Energy, Foreign Affairs, Education, Agriculture, and an understanding of the economic challenges. The policies do not seem to be inconsistent with the current administration, as expected, as there are really not many options available to whoever forms government. Will be interesting to see how the JLP’s compares, as I don’t expect much policy variation, which is why details on implementation is important. So we could end up at the same place if we do not have those details

I will also do the same synopsis of the JLP manifesto when it comes out.

My comments are listed as follows:

1. Our Mission: this gives  brief overview of the manifesto contents, and this and throughout the manifesto shows that the PNP seems to have a clear understanding of the issues that face the Jamaican people. It however does not in my view represent a mission but seems more like a summary of the views contained in the document and seems more like an introduction than a mission. This sets the stage for the rest of the document as it does not clearly define a mission, which is the first problem.
2. Foreword: sets out the PNP’s understanding of the challenges that lie ahead, and it is obvious that they are at one with the “bitter medicine” ahead that was sated by the Prime Minister. There is therefore an actualization by both parties that 2012, and the foreseeable future is going to be difficult for Jamaica. One would therefore expect that the document will continue to define what the “bitter medicine” will be, as the JLP also needs to do, so I will look at the contents to see if this “bitter medicine” is defined, as once you set up this type of expectation it is necessary to define it for the people if they are being asked to sacrifice.
3. Eighteen Steps to Full People Empowerment: this section does clearly set out some of the policy options that need to be undertaken, although I do not think that these will lead to people empowerment. People empowerment in the context of Jamaica is much more than setting out these policy objectives. In fact rather than “steps” to empowerment these seem to be statements of intent. Steps imply a path, but this does not seem like a path but rather a focus on the destination of the steps. The section does provide a good summary of what needs to be done, but is missing the most important thing in relation to the “empowerment” theme, which is the assurance of justice and equity. For example, what is the assurances that the rights under the Charter of Rights will be respected and that people won’t have to go to court to fight it? The most important aspect of empowerment for people include, in addition to justice, proper health and education access and facilities, but this is not mentioned in this empowerment section.
4. Current Economic Position: the following are noted:
1. Shows understanding of the challenges that Jamaica faces, but does not mention what I think is the primary problem, that of the Balance of Payments, which is impacted by productivity and competitiveness. There is a need for a credible medium-term economic programme, as indicated by the IMF. Will see if further that programme is provided in the document since it states the necessity for one to deal with the challenges ahead.
2. My own view is that the debt is NOT the central problem facing the government, and is only a symptom of the underlying problem. This seems to be the same focus on the fiscal as in the current IMF agreement, and the danger of this focus is that it ignores action on the underlying problem. This therefore suggests an agreement with the current fiscal focus.
3. Statement about what is required for a credible macro-economic programme continues to speak to a focus on fiscal and expenditure management. I would have thought that this statement would have included importantly reference to the JEEP (government stimulus) as an important characteristic, as the other things to be taken into account are not as important for economic expansion. Tight expenditure and debt ratio focus are both contractionary effects; and increased support from partners seems a contradiction in the face of the admission of the global crisis, as grants have already been underperforming and will continue to do so. It would seem that the “self-reliance” talk of the 70s would have been more appropriate. Agree 100% about the tax system and the corruption and waste.
4. Following paragraphs criticizing the JLP seems like wasted space, and tends to lose the reading flow from the party’s intent. I don’t think that a manifesto should include criticisms of the opponent but just focus on what the author intends to do. Leave that other part for the political platform and ads.
5. The opening of the plans and strategies does recognize the need for a mix of fiscal responsibility, growth strategies, and consultation. All are very important to move forward.
6. Correct that a new medium term IMF agreement is needed. Would have loved to see mention of whether an extended fund facility or standby agreement is needed, and what are some of the things that will be sought in this agreement. Don’t expect specifics as it is a negotiation and therefore understand the need not to say too much on this
7. MOU with public sector workers did not work before and certainly is not what is needed. Consultation does need to happen but needs to be focused on productivity improvements and how to best reward productivity.
8. The tax reform statement shows that they are consistent with the current tax reform paper, which in my view is not adequate. The aim of tax reform must be primarily stimulating the economy. After reading this I get the impression that the focus will be on fiscal – “widening the tax base”. I might misunderstand but it needs further clarification, so I will give the benefit of the doubt and say that the intent is for economic stimulation, but it needs further details.
9. Agree that programmes like JDIP and JEEP needs to be on the budget, and also needs parliamentary oversight, which I would think should have a parliamentary committee that oversees massive programmes.
10. I don’t like government identifying sectors for growth. Sounds too much like a government controlled state, which we have always been. Don’t discriminate by providing incentives to some and not the others. The market will pick the winners if the proper environment is created. The problem has always been that because we do not have the proper market environment then government becomes a welfare programme through incentives.
11. They state that they will “accelerate decision-making on the choice of fuel sources” and later goes on to state that they will be committed to diversification and set up a National Energy Council. While the document does correctly recognize the need for focus on this crucial problem, it seems to be bringing the government back into decision making and is in contradiction to what Paulwell has said, which I like. Government needs to only set certain environmental and regulatory standards and allow the private sector to determine what energy sources they want to invest in within those standards. I would have preferred to see Paulwell’s position replicated in this document. I don’t get the feeling that with the National Council that we are moving away from the bureaucracy that has stifled our energy effort so far.
5. JEEP: much of the programme hinges on this so it requires its own analysis:
1. not enough detail given the hype and expectation around it.
2. State that funding will come from existing state resources, which is the JDIP and TEF. Does the JDIP loan contracts and the purpose of the TEF allow for this sort of allocation?
3. Well designed infrastructure projects – agree that focus needs to be on infrastructure projects but more detail needed here. There was so much hype about JEEP that I believe it needs to be more clearly defined, especially as 25% of JDIP funds is to go towards it, in keeping with the call for transparency. JEEP is the same as JDIP in intent, that is a stimulus package, which is good for the economy but we need to have details and transparency so that it does not go the way of JDIP.
4. Says the measures to encourage investments (JEEP tax incentives) will not sector discriminate but above the document states that certain sectors will be focused on. Seems to contradict. This also implies the giving up of tax revenues. What will this do to the tax revenues and where will the shortfall be made up?
5. Disgaree with GOJ taking equity positions in firms. We tried it through DBJ funding and it didn’t wok and we could therefore end up with government getting involved in the productive sector again, such as after FINSAC.
6. The following sector focus sections shows what needs to be done in the various sectors we presently hold a comparative advantage in but it seems as if government involvement will be high. The sections do recognize that innovation is needed in these sectors but does not emphasize enough what the government needs to do to ensure that the environment is favourable to encourage investment, which is what is needed. It is obvious that a lot more thought went into the Agriculture section however.
7. The section on encouraging innovation, competitiveness, and entrepreneurship does not provide an understanding of what is needed to do so as it broadly speaks to what is to be done and again incentives, when what is needed is to create the building blocks for competitiveness as contained in the Global Competitiveness report, which shows what Jamaica’s main challenges are.
8. Foreign Affairs section seems ok and I would expect that as Hylton does have a good understanding of what is needed.
9. Creation of an Enabling Environment: this does show a clear understanding of what is needed in an enabling environment. It speaks to infrastructure, primary education and healthcare, social welfare programme, public/private partnerships, need for constitutional and legislative reform (not enough though on this important issue and what is proposed won’t make a difference in my view), crime (would have loved to see a move to make the police force more independent and accountable, such as is being done now with success), .

I think more detail is needed and hope that this will come out in the discussion over the next few days.

What are our options?

In answering the question of what are Jamaica's options, let's look at three scenarios. In both John Brown has income of $100 of which he spends $70 on necessities, $20 on discretionary items, and $10 he saves.

The following actions are taken by John:

o Scenario 1: accumulates debt of $25, which he uses to purchase a luxury item for consumption. Debt to Income ratio of 25%.

o Scenario 2: accumulates debt of $150, which is used primarily for luxury items for consumption. Debt to Income ratio of 150%.

o Scenario 3: accumulates debt of $150, which is used primarily for productive/investment purposes. Debt to Income ratio of 150%.

If John wants to reduce his debt, then he may do the following.

Scenario 1: this is a simple solution, as all John needs to do is cut back on the discretionary spending, and if his savings has a lower return than the cost of the debt then he could forego the savings and pay down the debt.

Scenarios 2 and 3: these are not as straightforward as 1, because the questions of survival and comparing return on investment versus debt are relevant decisions.

In 2 for example, John could not just cut out discretionary expenditure, savings, and necessities to pay back the loan. Even if he could use all his income to pay back the debt, he still would not have enough money available. In any event it is not possible to use all his income because a substantial part of his income goes towards keeping him alive ($70/70%). And therefore if he were to just keep cutting back on expenditure to pay the debt, then he would at best become destitute and could end up in an early grave.

In 3, what he must do depends on the return he makes on the investment he uses the debt for. So if the debt cost him $5 per annum and he makes $10 per annum (after taxes and all costs) from the investment, then it may be worthwhile to keep the debt and pay down the debt from the investment while maintaining his current lifestyle. However, another important consideration is cash flow from the investment versus that of the debt, as cash flow is the most important consideration. A company never goes out of business because of accounting losses, but because it doesn't have net cash inflow. It is important to understand this point, because this relates to Jamaica's situation.

Some analysts continue to point to the debt to GDP ratio as our major problem. However, if I had a debt to GDP ratio of 500 per cent but I didn't have to make any debt payments until 10 years in the future, and someone else had a debt to GDP ratio of 150 per cent but had to make all the payments within a year, which one is better off today? The fact is that cash flow is more important than the ratios, which should really be used as a guide for policy and action and not the reason why one acts.

So in John's case it is important to understand the debt repayment terms, and this is why in the restructuring of the debt the timing of the cash outflows is so important. But all debt restructuring does is give more time to make adjustments, and so if John gets a reprieve in terms of timing of cash payments, he must ensure that he has a plan to adjust either his expenditure or income in order to ensure that when the payments start again he is not in the same position because he has not made the necessary adjustments.

It also seems obvious that John cannot resolve his debt problem (scenario 2) by just cutting back on expenditure, and so the only real option is for him to increase his risk in a very calculated way, in order to reduce his debt in the long term. Seaga did this in the 1980s, when the debt to GDP ratio increased to 212 per cent in 1984: this additional borrowing helped to result in average growth of 6 percent per annum towards the end of the 80s and a debt to GDP ratio of 90 per cent in 1990. This is a countercyclical approach, as opposed to the current IMF agreement which is procyclical, which could not help John in solving his debt problem without landing him to penury or death.

Even if John were to reduce his debt through forgiveness, cutting back on expenditure, or returns from investment, he would not solve his long- term problem without developing the discipline to live within his means. And he will not be able to get persons to continue to support his business if his service level is not consistent (low productivity), access to his business is difficult because of crime impact, or when doing business with him you are frustrated by an inefficient automated telephone system (bureaucracy).

I am sure that you have by now drawn the parallel between John and Jamaica. Jamaica's situation is about 80 and 20 per cent of scenarios 2 and 3 respectively. What this illustrates is that the real problem with Jamaica is not the debt to GDP ratio, which is just a symptom of the underlying issues.

Like John, if we are to solve Jamaica's long-term problems we must address the root causes of:

o Discipline and productivity;

o Bureaucracy;

o Energy and food import costs (more efficient spending on necessities); and

o Cash flow - matching inflow to outflow.

The Prime Minister in a recent speech indicated that the government must adopt a mix of policies to include countercyclical approaches, which is in contrast to the IMF agreement. One such project is the JDIP, of which I am really disappointed about the current circumstances, but it is important that it continue for the health of the economy.

It is critical that when we listen to the debates we are not caught up with terms that sound nice but that we try and understand the fundamental issues and how the proposed solutions will solve the problem. There are some analysts who in the past were not prepared to do the proper analysis and were very much in support of the IMF agreement, and today I am surprised to hear them saying that the terms need to be relaxed or renegotiated. The purpose of analysis is not to predict an event after it has happened. Predictions are made before an event. It was incorrect analysis that resulted in the global financial crisis, so we must be very careful about what we digest. Apparently it is not only politicians who "flip-flop".

I may not be able to listen to the live economic debate next Thursday, because of a previous engagement, but would implore everyone to do so and take careful note of the substance of the proposals rather than the surface issues. This is especially so as I do not believe that, whoever forms the next government, there are any different policy options that will work.

Government must move out of the way

LAST week, I told someone making a presentation that one of the challenges facing Caribbean businesses is that regulators act like parents rather than partners.

So regulation in Jamaica is not about working with the business community and civil society in order to assist them to develop, but rather it is more like a parent who keeps a watchful eye on a child, ready to pounce and punish at a moment's notice.

Because of this approach we have developed regulations and laws to provide welfare and punishment, rather than encouragement and teaching the populace to fish. This attitude is highlighted in two recent events. The first is the call to roll back GCT on electricity, which should never have been introduced in the first place.

In the first instance, the introduction of GCT on electricity bills was only a short-term measure to a fiscal problem and ignored the longer-term challenge of high energy costs to consumers and businesses.

Instead of trying to reduce our consumption of imported fossil fuels, the response was to add a tax to the use of it, not really to discourage persons from using it but to raise money for the government accounts.

This approach is similar to the way GCT was introduced on telephone calls, which again sought to raise taxes on something that is widely used.

The second instance I have discussed in previous articles was to state in the tax reform green paper that the most important function of tax reform is to raise money for the fiscal accounts.
It is this attitude that has contributed to much of our restrictive regulations and focus on the fiscal accounts at the expense of the economy and social infrastructure. Admittedly there seems to be an attempt to change this attitude with the public consultations on the tax reform paper, and pension and public sector reform, but this still moves too slowly.

My own view is that government must get out of the way and allow the economy to grow. If a mother is constantly protecting her children, even when they are adults, then what chance do they have to develop their own survival and developmental instincts?

It is this approach that causes businesses that do very well in Jamaica to tend to develop into monopolies or oligopolies. Sectors that readily come to mind are (i) financial; (ii) telecommunications; and (iii) energy. In all these cases it is because of government's desire to act like parents why these industries don't develop further for the benefit of economic growth and development, and, in the end, the benefit of the consumer. In other words, even though we say that we want the economy to develop, the barriers to entry and the burdensome legislation cause a lack of competitiveness.

So even within the financial sector, the long, drawn-out process to allow mutual funds and credit bureaus, for example, has no doubt robbed the country of much-needed capital.

The FSC has been trying to improve the timing of application approvals, but the problem with the “barriers to entry” is not so much the regulators but the regulation they have to work with. Some may argue that it is the strength of our financial regulations that prevented us from experiencing a significant fallout from the recession, but my view is that we could still have been prevented from having that experience even with more players, and businesses would have benefited much more.

In the telecommunications sector, I don't think much more needs to be said than the OUR has twiddled its thumbs while LIME is experiencing a slow and painful death. I have been a Digicel customer for years, and will be for the foreseeable future, but why does it take so long to introduce number portability and establish crossnetwork charges?

Maybe after LIME is dead and gone, and Digicel is the only one left standing, we will have these things introduced. By that time they will be redundant. That is when they are redundant.
The other sector is energy. Our political masters have seen it fit to create a licence that enslaves the Jamaican consumer and business at the hands of one of our new colonial masters — the JPS. Some attempt has been made to change that somewhat, by introducing net billing and power wheeling.

While these are commendable steps, they are far from sufficient to have any positive impact on energy costs to the consumers and businesses. The cost of setting up energy production far outweighs the benefits of net billing, and it is a better payback to produce and store. Also, power wheeling will not bring the economies of scale needed to change the cost landscape.

I understand the restrictions of that horrendous licence, but there are some things we can do outside of the licence that will bring much greater competition to the JPS, and force them to review their operations.

Firstly, we should not reverse the GCT on electricity bills but use it to set up a fund that will provide, say, a 50 per cent credit to “tax-compliant” persons who want to set up renewable energy solutions, with NCC-registered suppliers. Secondly, businesses should look at creating a co-operative-type company, which they all own a piece of, and set up a power generation company that they would power wheel to themselves. Unless the amendment said that you had to own 100 per cent of the power generation in order to power wheel.

These steps are necessary, as by the time LNG comes we will be “powerless”.
Finally, I believe that elections matter so much in this country because government has established itself as such a big player in the economy. When the Government has a financial problem it pressures the poor Jamaicans through taxes, and when elections are in the air we wonder who will be in charge, as it may certainly affect the business or our lives.

This should not be. Government needs to move out of the way and allow people and businesses to thrive.

Jamaica must solve her structural issues

At the time of writing I am sitting and waiting on a connecting flight to Suriname, to do a presentation on the IMF impact on the region. By the time this is published it will be done, but is worth mentioning. The fact is some persons think of the IMF as wicked imperialists (primarily because of political propaganda) and others think of the current programme as a panacea. The truth is that both points of view are incorrect.

As I prepared and thought about the presentation, I thought that as a region we are too caught up with the IMF. After all it is just a bank to countries, seeking to get a return on its funds and ensure it gets repaid. The IMF does not and never will have the solution to our problems. We need to have it. So our flirting with the IMF in the 70s, 80s, 90s, and today has more to do with our own inadequacies than the "wicked IMF policies". In fact, before now, the only time that post IMF saw any significant growth was in the 80s when Seaga took the bold decision of playing hard ball until he got the terms that were best for the country. Outside of that, no one else was brave enough to face down the IMF.

So here we are again once ore in our flirtatious but unstable relationship with the IMF. This time, however, I think people are of the view that the IMF programme has more to do with us than them. The fact is that if we were prudent in managing our affairs then we wouldn't have to keep courting the IMF. It is because of our own irresponsibility, and inability to achieve true economic independence after leaving the home of colonialism in 1962, that economic independence continues to evade us, betraying the wishes of Norman Manley and Bustamante. In plain English, our leaders have turned us into adults incapable of fending for ourselves, having to hold on to the frock tail of our "old colonial mothers".

The fact also is that after the IMF programme we won't be in any better position if we do not address the fundamental structural issues of our economy. The only time that we have effectively done so was in the second half of the 80s, when we managed to reduce our debt to GDP ratio from 212 per cent to 90 per cent, and the economy started to grown an average of six per cent. The verdict is still out on the current programme, and while the policy reform directions are positive the pace is concern.

So as I wrote in my book in 2009, although for the 14 years to 2007 the economy recorded growth, the fact is that the GDP structure was showing that the only way we could continue growing on that path was by either borrowing or inflation. History shows that the former was chosen. So when the recession hit us in 2009, we had no choice but to fall down at the feet of the IMF, as we had been borrowing to create an illusion of growth, and when the credit card was no longer available we all know what happened. And Jamaica wasn't alone, as we were in the company of the US and Europe, if that is any consolation.

So the government had no choice but to go to the IMF, and was prudent in first restructuring the debt (JDX) - albeit six months late - and also accepting that reforms such as public sector rationalization, tax, pension, and divestments had to be done. The problem is that almost two years after, while some of these things have happened or started, it has not been sufficient to take advantage of the breathing space provided by the IMF programme funding and JDX. So in 2011 the economy is still as structurally weak as in 2007. I remember over the past three years I was at pains to point out that our preoccupation with scandals and such things would prevent us from focusing on the important structural issues.

Well here we are

What is needed is still as relevant as when i wrote my book in 2009. In fact the recommendations could apply today as if it was written yesterday. The economy still has significant structural issues, evident in the recently published June balance of payments (BOP) numbers. The BOP is the weather vane of the economy's direction. For the six month period the current account deteriorated by over US$500 million. The main reason being rising oil prices. Does this sound familiar? It should because we have been paying lip service to an energy solution since the 70s.

At the same time we have not only failed to implement the much needed tax reform but we have managed to produce a document that says the most important reason for tax reform is to raise money for the fiscal accounts. Does this sound like the cherry picking from the Matalon report that took place in 2005? Is it coincidental that the last time tax reform for economic reasons took place was in the mid 80s, or is there a link between tax policy objective and growth. Certainly when Ireland was growing what they did prior was to cut capital gains tax in half and reduce corporate tax rates to 15 per cent. Their fiscal and monetary irresponsibility after that undid the gains however.

My own belief is that the current reform policies are the right direction and needs to be continued. The truth is that there are not many other solutions that can be offered. The problem has been the pace of reform. That is (i) the IMF targets are too aggressive, causing social dislocation, and (ii) the much needed reforms have taken too long. In addition to this there has not been much emphasis on protecting citizens' rights and enforcing a disciplined society. The police commissioner is to be credited with dealing with corruption, but there is not enough being done to protect citizens from police abuse or enforce road discipline. The charter of rights was finally passed, but we don't want citizens to have to seek enforcement of rights, but for the rights to be respected from the start.

Nowhere is this inability to address our structural issues more prominent than in the Global Competitiveness Report, where it not only shows us falling in the rankings but clearly states that the main challenges to our competitiveness are crime, bureaucracy, and taxation. It is ironic because the reforms currently being pursued are supposed to address these issues. The problem is that we spend too long to enact change and too much time pursuing political rhetoric.

Unfortunately with election in the air, we might have more rhetoric and less issues being discussed. But maybe this is what Jamaicans want as they still hang on to buses as they go to political meetings to hear the latest personality attacks.

The result is that as we approach the end of the IMF agreement, the economy is still challenged for sustainable development, as in 2007. The difference is that over the past two years we have seen a significant global recession and there has been a move in the right direction with respect to policy. So the next time we think about the effect of IMF policies, let's look in the mirror first.

Jamaican economy vulnerable to global crisis

Today I want to address two issues, which could have a negative impact on the Jamaican economy. The fact is that even though fiscal and other reform programmes have been taking place, the economy still remains very vulnerable and can easily reverse the small positive growth we have been seeing for the past three quarters. This is why it is very important that as we approach an election that we all act responsibly to ensure that the economy is not damaged.

The first issue of grave concern is what is happening in Europe, and more particularly Italy, which has an economy much bigger than Greece and can result in catastrophic consequences for the global economy.

In September 2009, I had written an article titled "Risk of a double-dip recession?", in which I raised the real possibility of the world going back into another recession. And my main reason for saying so was that even though the markets were recovering, the fact is that all the policy actions that have taken place since the recession have not been aimed at arresting the structural issues but rather at cosmetically creating an impression of growth. There was therefore little doubt that the problem would once again show its face.

The situation as it is today, with significant challenges in European sovereign debt, is even worse than I had thought it would get. I had expected a double-dip, and then a slow recovery after that. However, if the crisis in Europe is not managed properly then we could be looking at a decade or more of stagnation and a significant negative impact on currency values, higher inflation and interest rates, and no or low growth. The fact also is that any second recession as a result of challenges with sovereign debt could be worse than the 2008 recession.

Although Jamaica has fared relatively well, when compared to other countries, during and coming out of the recession, which took hold here in 2009, there are some realities that we face. The first is that Jamaica's main foreign exchange earners are discretionary and will be amongst the first expenditure cuts by foreign consumers if uncertainty sets in. On Wednesday last, for example, we saw markets fall by 3 per cent, a significant strengthening of the US dollar implying flight to quality, and all-time high Italian interest rates.

The second is that the IMF agreement is coming to an end, if there is no extension, and it means that funding support will also end. If the global reality results in greater uncertainty then capital markets could remain close to the required funding, as we still have an earnings shortfall.

Oil prices should continue to rise, even in a stagnating global economy, and in fact the International Energy Association has said that if enough investment in oil exploration does not happen in the short term, oil prices could reach to US$150 per barrel. Jamaica has not managed to reduce the 96 per cent dependency on fossil fuels.

The fiscal situation remains fragile, and the Balance of Payments shows a worsening situation because of the lower than projected global growth and the dependency on oil.

It is therefore very clear that the Jamaican economy would be very much affected if the European debt crisis is not resolved positively. The other problem is that there is nothing that any Jamaican government will be able to do about it, as any escalation in the European situation would see much of the multilateral resources being directed there, even while capital markets are closed.

Telecommunication industry threatened

The other issue which is of some concern is the competitiveness of the telecommunications industry. In June of this year I had written about this same concern, based on the then pending Claro-Digicel deal, and the continued poor results of C&W. I had pointed out at the time that the competitiveness of the industry is under threat because of the following reasons:

o Dominant position of Digicel while there was no number portability or regulation of internetwork charges;

o Continued losses by C&W, which implies that continued upgrade to the infrastructure is questionable; and

o The declining income levels of consumers means that this will affect their ability to afford the services.

The reason why this sector is so important is that apart from energy, telecommunications is one of the most important ingredients in business and consumer life today. It is not just about making a telephone call but business models now have telecommunication as a central part. Also any monopoly situation could see significant cost increases for businesses, if not properly monitored by regulation and the market.

It is for this reason that the continued losses being shown by C&W is of some concern, as this is unsustainable and already it seems apparent that Digicel's network has been having some challenges.

I say that C&W has challenges, as they have more than doubled their losses for the quarter, from $549 million in September 2010 to $1.323 billion in September 2011. One could argue that this includes depreciation charges (non-cash) of J$1 billion, but importantly the operating profit over the same period fell by 50 per cent, from $802 million to $435 million. Total revenues also fell slightly. More importantly the cash flow statement shows that the company had negative cash balance at the end of the quarter.

My own view is that the business model is such that irrespective of what they do within that business model they will continue to lose money.

Whether C&W survives or not is not important to me. What is important is that the regulators take the steps necessary to protect the consumers and the cost structure of the telecoms market. This should be done by regulation and competition. This is why it is important to address the matters of number portability and cross network charges with some amount of urgency, and not deal with it in the same way we have allowed our energy crisis to fester since the 1970s. Telecommunications is too important a component of business and individual life to allow it to go the way of the energy sector.