A practical approach to financing education

Once again we are at the start of a school year, and politics raises its ugly head in one of the most important components of our development — education. Ever since I can remember, every year the parties spar about the need for government to ensure that no student is denied access to their exam results or entry to school if they do not pay the auxiliary fees. And this sparring match has been going on for years, and the position taken depends on who forms the government. Predictably, the government side will bemoan its lack of funding, while at the same time saying that no school should deny entry to anyone who does not pay. On the other hand the opposition always says that the government must ensure that no child is denied entry because of lack of ability to pay.

What neither opposition nor government has failed to say is, if the government cannot finance the school programme and the parents don't have to pay the much needed auxiliary fees, then where is the money to come from. In other words everyone expects the school to deliver the highest possible quality of education without the necessary funding to provide the desired quality. So I am always amazed when the opposition, government, and education ministry officials stress the importance of not denying students to enter school without paying and then bemoan the inability of the government to finance the service they say must be provided.

Traditional versus new high schools
And then we wonder why there is a vast difference between the results of traditional and newly anointed high schools. We wonder why the quality of the output of schools is lacking. And we fail to recognise the link between our uttering about, and inaction towards proper education financing, and the declining productivity levels we have been seeing in Jamaica between the 1970s and 2007, as reported by the Jamaica Productivity Centre. The fact is that the world entered an information revolution in the 1970s when ideas became more valuable than machinery and capital, which resulted in Jamaica being left way behind because of our inability to develop our human capital and more specifically our education system.

The recent announcement by the Education Minister about the approach to financing the exam subsidy is a move in the right direction. The fact is that the financing of education must not be treated as a welfare programme (as it has been since the 1970s) but must be provided because there is some value added to be gained, just like any other investment. It is therefore wise to ensure that only students who maintain a certain grade point level are rewarded with the exam subsidy. This sort of approach is essential in the financing of education if we are to achieve the desired results with the very limited resources we have, and have always had.

In deciding how we finance education it is important to take a problem solving approach to the issue. First we should determine what it is that we want our education system to achieve. If the objective is to provide a welfare system that can provide a good election platform speech then congratulations we have already achieved the objective and we do not have to do anything further, because we have succeeded in ensuring education's place on that grand stage of political football. If on the other hand we want an education system that can provide a highly productive workforce that will contribute to the economic development of the country, then it is essential to ensure that we take a practical approach to education financing.

Two primary means of financing
For most schools there are two primary means of financing. These are (1) government financing; or (2) fees charged by the school. This assumes of course that we are thinking about the provision of an acceptable quality of education, which includes basic things like water, electricity, security, books, a school management programme, etc. Now if we look at it logically (that is not through a politician's eyes) it is clear that if the government cannot provide adequate funding to achieve that quality education, then it must come from the fees and vice versa. On the other hand, we can do what we have been practicing in this country and ensure that the school has access to neither avenues of funding and create another political argument that the government is not doing anything to improve the quality of education.

There is of course one other source of financing, which is available mostly to the traditional schools, and that is the contribution from past students. I am fortunate to be on the board of my old school - Jamaica College - where the funding requirements has substantially been met by the contribution of old boys. We have a vibrant old boys association and an established trust fund, where we raise much of the funds needed to improve the school's physical and education facilities. This along with the commitment of the old boys, serving as board members and assisting the school programmes, as well as the managerial skills of the principal, has seen the school transformed from one where our quality was being threatened to one which is sought after by parents.

The fact is that the government does not, and for a long time has never had, the type of funding needed to properly finance education, despite their best efforts through the ministry. In my own view therefore unless we are willing to continue to accept the sub standard education system we have, then it is going to be necessary to ask parents to fund (through auxiliary fees) a part of what is needed to ensure that their child receives a better education. The fact also is that many of the fees are in the range of J$10,000 to J$15,000 per annum, or just over J$1,000 per month. This is significantly less than what is spent on phone cards and/or at the hairdresser in one month for many persons. So why not talk a little less so you can afford a proper education for your child.

The other approach is similar to the minister's approach to the exam subsidy. The government has to look at the value added being gained from how the limited resources are being spent, and more precisely target spending to areas that will give it the greatest return. So for example, at a recent seminar I presented at on Education Financing, I asked a ministry official if they had any numbers on how many accountants, doctors, lawyers were needed for the next ten years, and the answer was no. So how do we target our expenditure in the best way if we do not know how many professionals are needed in order to achieve the country's development, and particularly the 2030 vision. There must be a link between how we finance education and the national development plan. In other words, the person who wants to study the DNA of a raindrop should not be given the same level of subsidy as one who wants to become an accountant or doctor.

Another way is to also encourage companies to finance the education of some of their employees, eg through tax incentives. There are a lot more ways I can think of but it would take a lot more time to discuss. The point is that if we truly are concerned about education's role in the country's development then we must take a practical approach to its financing and not see it as a welfare programme.

The definition of madness
Einstein defined madness as doing the same thing repeatedly and expecting different results. Leading up to and even right after, the recent Tivoli incident, there were many people singing praises of the security forces and the need to support them. I cannot recall any other time in recent memory, where the security forces were so well supported by the Jamaican people from all walks of life. It was very refreshing and I thought that we were about to turn the corner, where the relationship between the security forces and the people of Jamaica developed that needed trust to tame the crime monster we have become so accustomed to.

Then came the secrecy surrounding the Tivoli episode, then Buckfield, and finally the killing of the 15 year old in Tredegar Park. And it seemed as if the police were retreating to their old ways with each incident. The irony is that I know there are some police that are trying their best to overcome the image of the past. But if this was not a wasted opportunity then I don't know what was.

Why won't interest rates come down?

FOR years I have listened to many people discuss why the banks won't reduce interest rates, even going as far as saying how cruel the banks are, and even referring to them as extortionists. This sort of argument has received traction from not only the man in the street but even supposedly intelligent persons who should better understand what determines interest rates.

More recently the Government, through the Minister of Finance, has been pursuing policies to create a more facilitative environment to encourage the reduction of interest rates generally. After all, talk alone was never going to do the trick, as the banks were faced with a choice of (1) lending (at a risk) to the private sector -- in the face of high crime, decreasing real income, relatively high inflation, etc; or (2) placing money on government paper, at a relatively high return (with little risk). The choice for any prudent person would have been obvious.

Breaking the cycle
So the only way to have broken that cycle was to effectively reduce the return on government paper, which could only have been done by (1) in the short term, restructuring government debt; (2) in the medium term, sustaining that restructured debt by focusing on prudent fiscal management; and (3) in the long term, causing economic development to happen. The first one was easiest to do -- and was necessary although many could not see it at the time; the second is easy in the short run, but more challenging to sustain; and of course, the third is always going to be very challenging. In order to succeed in all three, a set of economic and social policies would have to be put in place or else we would see short-term gains followed by more severe pain. But this is not the topic being discussed so I will move on.

Shaw and his team have been doing all that they can in the drive for lower interest rates. All they can realistically do is create the environment for reduced interest rates, but can do no more besides plead with the banks to reduce rates at a pace they would like to see. Well, there is one more thing they can do, which is to encourage greater competition in the lending market. This has its own inherent risks, but my own belief is that a well managed and thought-out strategy would have the desired effects while reducing the inherent risks.

Interest rate determinants
Back to the question at hand, though — why won't interest rates come down? The truth is that we have started to see interest rates coming down; however, it will not be at the pace we would like for a number of reasons:

1. The first is that our lending market is not competitive enough, and I believe that this is a policy that government must pursue: (a) to enable the consumer to get the best price for money and (b) to enable further development of the capital market. This must, however, be carefully managed and implemented;

2. Interest rates are the price of money, and are determined by demand and supply. Even though rates offered on government instruments have come down, there is still a relatively high demand for funds by the government. The solution to this is to either increase the supply of money or reduce the demand for money by government. The first has other risks associated with it and the latter takes time;

3. Because of the reduction in real and disposable incomes, and the hardships being faced by many businesses, the risk associated with lending has increased. Therefore, even though people may be demanding money, the bank needs to assess the risk to ensure they can be paid back over the life of the loan. So it is a chicken and egg situation, in that while the loans are needed to jump-start the economy, the fact is that the risk is high because income has declined. One of the ways to deal with this is for equity to be injected initially by government, for example, in terms of direct equity stake or interest subsidies. One other major determinant of risk is predictability about government policies and crime;

4. Many people also have sound ideas but do not have the proper due diligence evidence, for example, projections and a business plan. Banks assess projects based on independent assessments. So a business plan done by a well-known and independent accountant, for example, carries less risk than one done by a connected party;

5. Interest rates are determined also by the relative value of currencies. So to see lower interest rates we might have to see a stronger Jamaican dollar versus the US dollar, all other things being equal, but this also depends on the balance of payments situation, as currency values can only consistently improve if productivity and the trade balance improve. If these factors get relatively worse then it means the currency will depreciate and the way to maintain stability may be to increase interest rates;

6. Within the financial institutions themselves, I do not believe that they have yet made the skills set transition. Many of the ads that come out still focus on non-productive loans -- for example, it seems a bit futile to me to be promoting motor car loans when that market is destined to decline. Why swim against the tide? [There is one financial institution that has made a transition, and I think now is the time to buy their shares]. Another indicator to me is that, unlike in the US, there is not a great emphasis on the skills set to be able to analyse and predict what will happen in the economy. In the US, for example, banks invest a lot in the resources that can predict what will be the likely out turn in the economy. If you can reasonably predict economic outturn then you can prepare your company for the future. I am aware of some companies that have done that, but I don't see the public display of it by the local banks.

This is by no means an exhaustive list but it illustrates the factors that go into determining interest rate levels. What this shows, though, is that there is very little that the Government can do besides create an environment to encourage interest rate reduction. The Bank of Jamaica and the Ministry of Finance could reduce interest rates to zero if they wanted to; the fact is that this does not necessarily translate into lower commercial lending rates. This was clearly demonstrated in the US, where the Federal Reserve decreased interest rates to near zero, but even then yields and commercial rates were still relatively high.

I believe that from the fiscal management point of view that environment is already emerging from the policies being implemented. And I say 'emerging', as the key to the fiscal management programme is going to be sustainability, and government will have to demand less money, even at lower rates. The next most effective government policy is the encouragement of greater competition in the market. After all, it is this sort of effect that has caused banks to be reducing interest rates, not because they care about their customers. Default on your loan and you will see how far that "care" takes you. And there is nothing wrong with that. The private sector should be motivated by profit, not benevolence.

So when the question comes up again, why won't interest rates come down? The answer must be that it is because there are many determinants to interest rate levels, and that it is really nothing more than the price of money. So anyone who believes that the price of money is too high, then maybe they would not be averse to reducing the price on their own goods, as, given the reduction in disposable income, the price of goods has also become too high.

Crime's enormous economic curse

Last week I was horrified, like every other well-thinking Jamaican, to see the video tape of the killing of a Jamaican citizen with no apparent justification. The act was committed by members of an organisation that has sworn to "serve and protect" the same citizens whom have been accusing them of brutality for decades. The irony is that the police force, which has been trained to investigate and solve crimes, has been unable for decades to properly investigate and solve accusations of extra-judicial killings. At the very least that smacks of incompetence by an organisation trained to do just that.

Is it any wonder then, if the police cannot deal with the disorganisation within their ranks, that they have been unable to deal with the crime monster that has torn this nation apart? In my experience, however, there are some very good and hard-working policemen and women, and I am sorry that they have to be tainted by this sort of incident.

Barbarism
I am even more disgusted by the barbarism of some of the citizens gathered around, who were cheering on the police, and even some of those from whom I have heard comments from in the media and on places like FaceBook, who say that the "alleged" murderer deserved what he got. What these people fail to understand is that societies and organisation have to live by rules in order to develop and thrive.

While an organisation is small, it is easy for the leadership to be involved in every decision taken and to control that decision to his/her liking, but if it is to grow then strict rules must be established and stern sanctions imposed for breaking those rules. This has been Jamaica's problem: our desire not to be "shackled" by rules and consequences. I believe that this is at the root of our crime problem and that there is a tremendous economic opportunity from our crime challenge. The opportunity lies not in perpetuating the crime monster but in recognising the gains that can come from dealing with it effectively.

The World Bank has stated in the past that crime robs us of about four per cent of GDP. And this is obvious for even the blind to see. Let's take the example of what happened in Buckfield recently. Think about the effect this one incident has had on the confidence and action of overseas and local investors. Why would someone want to invest in a country where the basic concept of human rights is abused by the very same people who are sworn to protect it? If this basic rule is not kept, then what about the more complex ones like commercial cases in court? Think about the devastating effect on the productivity of the workforce from lower-income communities who live in fear of the police. Think about the future scientist growing up whose only thoughts are focused on a chance to leave Jamaica and establish his profession in another country. Think about the real estate value that is locked away in crime-ridden communities.

Now think about the accumulated effect of all this negative behaviour on Jamaica's economy. What our leaders have failed to understand since independence is that at the basic level economies grow because of the behaviour patterns of the smallest denominator in a country: the citizen/consumer/worker/investor - whatever you want to call them. Economics is a social science focusing on behaviour. Not about the fiscal and monetary policies governments and bureaucrats dream up. And the economic evidence in Jamaica shows that we have got it wrong since independence 48 years ago.

Therefore (and I want the leaders to follow my logic), if economies react to the behaviour of individuals, then wouldn't it seem logical that the best way to make economies grow is to positively influence the behaviour of the market players? If we create an environment where people feel good about investing and spending, then it follows that the economy will grow and governments could garner more revenue without imposing more taxes. But regrettably we do not think that way and it is our failure to do so that has led us to where we are today, after 48 years of disgraceful treatment of our citizens.

This is the way enlightened countries like the US (where we all desperately want to go to) develop their economies. If the US did not have this philosophy, then "dog nyam we supper" when it comes to the global economy, because some of the policies in Europe are surely not helping.

What are the opportunities?
So what opportunities can we garner from solving this crime problem? By way of analogy, if you are responsible for rearing a recalcitrant child, do you beat him into submission or do you try to reason with him no matter how frustrating that task might be? You might even have to impose sanctions. If your answer is the former, then you represent the leadership that Jamaica has seen since independence. If your answer is the latter, then you are fitted for leadership in the US.

The point is that Jamaica has for decades tried to control crime by using a big stick, which simply creates behaviour that stymies the development of our economy and society. So if we continue beating that child (Jamaican citizens), then we should not be surprised when he turns to a life of crime and wants to be a criminal instead of a scientist, doctor, or any other progressive professional.

If we are to quell the crime monster and reap the tremendous economic benefits from doing so, then the continued policy of physical assault against the citizen must change. Policing must be geared towards encouraging good behaviour rather than beating into submission those who are alleged to commit crimes. That is for the courts to decide and why we have a constitution and every time we breach it we disrespect our founding fathers.

So solving crime has more to do with instilling discipline than using force. And while force is necessary sometimes, it is only warranted when it prevents a greater evil from being committed. The focus should be on things like (1) greater community policing - working with children specifically in communities; (2) ensuring that the police have respect for the citizens and their RIGHT to contest the accusation of any police member; (3) dealing with the flagrant traffic violations that occur every day (cameras could be used to catch those who violate traffic laws and tickets sent to the registered owner of the vehicle); (4) similarly charging persons who litter and destroy the environment, or those who violate building codes; and (5) dealing with environmental noise, from dances or churches, at any time of the day. Our current laws assume one shift and weekday work only, which encourages that to play out.

Finally I would like to add that we need to equip our policemen and women for efficiency. I am always appalled that in this day and age (where we spend billions of dollars on roads and other such things) that we have police still taking notes in books, instead of equipping our police personnel with computers, which should be attached to databases. Policemen and women asked to do proper investigative jobs should have the latest technology - computers, digital cameras and recorders, postpaid cellphones, etc. If cost is the explanation for not providing these essential tools to the police, then we truly do not understand the economic benefits of reducing crime.

If I had my way

LAST week I tried to convey my thoughts on the current state of the economy, and my belief that the economy has been deflated enough (whether intentionally or not) to now take the opportunity to breathe new, unpolluted air into it. I still do not believe that all the structural flaws are removed, which still act as impediments to properly aligning the economy, but the fact is that if we wait too long to restart the engine then the economic locomotive could see its engine going into a state of paralysis. Hence, what we have to do is address the remaining structural impediments while we reposition the economy for real development.

The positive structural adjustments that have taken place include (1) the successful debt restructure; (2) IMF programme; and (3) reduction of the trade deficit. It is important to note that the success of the debt restructure hinged on the IMF programme, as without the IMF funds the debt restructure would not have been sustainable for so long, as we would have long seen a return to high interest rates and even more pronounced fiscal deficits. Note I do not mention the reduced interest rates and revalued exchange rate, as these are merely outcomes of policies and by themselves should not be celebrated.

Seismic shift
The reduction of the trade deficit occurred as a result of the seismic shift in the economy that decreased aggregate demand, as the debt restructure removed discretionary capital and disposable income; and forced a change in the returns seen by companies. This is similar to what happened in the US in 2008, as any significant restructure of the financial system will always have an impact on disposable income and capital, which affect aggregate demand (for example, the unregulated financial organisations). One of the undesired consequences is the increase in unemployment, which could not be avoided as many jobs depended on the continuation of the debt bubble we found ourselves in. Therefore, a consequence of deflating that bubble meant that there were going to be some dislocation to jobs and businesses as we have seen, and this is why it was important to increase the social intervention programmes.

There is one more structural adjustment that needs to happen quickly, and is being pursued by the Government, and that is a rationalisation of the public sector and the reduction of the state's role in the economy. This by itself will cause further deflation in the economy, and so must be coupled with policies geared towards filling that gap. Some of this is happening, for example, the recent announcement of tax incentives to the tourism industry for capital refurbishment. This is the way tax policy must be used to influence development, not just as a tool to maintain the status quo of the public sector.

Another policy move, which I think will enhance the business operating environment, is the move by the tax administration to provide efficient tax payment services, including online payment and payroll tax consolidation. Kudos to the director general and her team for the direction in which they are taking tax administration. If I had my way, though, I would do away with the TCC process as is and move more towards consumption taxes, as both these structures are penalties to business efficiency and economic growth.

The recent pronouncement by the finance minister that the focus this year would be on growth needs to go further, I think. If I had my way, my focus would be on development, from which sustainable growth would come. I would continue to focus on restructuring the economic foundation and implementing facilitative policies to reduce which include bureaucracies that add to inefficiencies. One such entity that readily comes to mind is the RGD. For the life of me, I cannot understand why across administrations we have been unable to deal with the oppressive practices of this institution. We have, to some extent after all, been able to reduce violent crimes, but cannot deal with the inefficiencies at the RGD.

Positive crime- reduction effect
One other thing I have been speaking about for a while is the positive effect that crime reduction will have on the business and investment environment. This has been seen in recent weeks and the security forces must continue their efforts to attack this monster, State of Emergency or not. In fact, I wish that the politicians would retreat to some private enclave and discuss the "whodunit" of the State of Emergency saga last week, and, when they have arrived at a conclusion, present the findings to Jamaica. I, for one, am tired of the bickering about this episode and wish that both parties could just find it within themselves to have a civilised and constructive discussion on it. The public bickering is not helping our security forces.

Last year I had indicated that if I had my way I would have extended the IMF facility to allow more breathing space for the economy to adjust. While I still believe that some of that is necessary, I had indicated that belief within the context of our crime situation then, and in fact had stated that with the crime level then that the economy could not adjust fast enough to deal with the structures of the IMF programme. With the recent successes at dealing with crime, I think that the IMF programme has become more palatable but I still think that some relaxation of the straight-jacket is prudent.

I still believe, however, that our focus on fighting crime needs to be widened. Not through any military assault but through greater efforts to observe the rights of the citizen, a much more friendly and respectful approach by the police (the soldiers have received a lot of compliments), and by dealing with what I call the pillars of indiscipline -- the traffic and noise indiscipline. Crime reduction will be more permanent if these are done.

If I had my way, I would use the public sector resources to focus more on developing the local linkages in our economy. So I would place great emphasis on R&D, and put the sleeping Scientific Research Council in the spotlight, while encouraging scientific studies through scholarships and grants. For example, why shouldn't the Students' Loan Bureau be encouraged to offer scholarships and reduced interest rates to students in areas that could help build our comparative advantage?

The last thing I will mention (but by no means the end) is energy. If I had my way, I would focus much of the public sector resources on (1) eliminating the monopoly of the JPS, and (2) developing renewable energy capacity for retail and transportation consumption. Included in this would be greater investments in public transportation, even far beyond what the minister speaks about. The value-added benefit from focusing on the energy and transportation is significant, both in financial and productivity terms.

If I had my way, I would implement these and other policies to ensure that Jamaica is put on a path for economic and social development, and not restrict my focus to economic growth as we have been so consumed with in the past. Governments should never think of themselves as responsible for economic growth, because the truth is they suck at it. Governments should be the facilitators by creating the environment and push for the private sector to do what they do best.

If I had my way, I would reduce government and the public sector to the role of spectator in the game of economic development, always cheering along their team while staying away from participating in the play. If only I had my way.

Is the economy improving?

Over the past few weeks there has been much debate about whether the macro-economic measurements are any indication of improvements taking place in the economy, and by extension whether we are witnessing the start of an economic turnaround. Those who support this idea point to (i) a revaluing Jamaican dollar; (ii) lower inflation numbers; (iii) improvements in agriculture; (iv) significant improvements in the trade deficit; (v) declining interest rates; (vi) increased confidence numbers; and (vii) reduced crime levels.

On the other hand those who oppose the idea of improvements in the economy point mainly to (i) increased unemployment; (ii) negative effects of revaluation on exports; (iii) stagnant and declining income levels; (iv) increased business difficulties; and (v) reducing exports and future effect of oil price increases on imports.

Both arguments have validity
The question that must rest on the minds of non-technical Jamaicans is, who is right? Is the economy in fact improving, or is it that the declining economy is causing the macro-economic measurements to portray improvements in the economy?

The answer is that both arguments have validity, as one could successfully argue either position, especially if you are preaching to an audience sympathetic to your own leanings. What is needed, though, is an objective analysis of the economy to determine what the true position is. I will attempt to provide a synopsis as I see it, but the truth is that much more space than this column would be needed to go into the detailed analysis required.

In making any assessment, one should always start with the objective. For example, if one is assessing the economy in relation to the motor car versus thew agricultural industry then you would need to state different objectives. This is because both industries can oppose each other in terms of what is good for each. Agriculture earns foreign exchange while motor cars require it, and so within the context of our current economic circumstances the interest of one is opposed to the other. In different economic circumstances they could be aligned. But any proper analysis needs to be done in relation to present circumstances.

In the case of the Jamaican economy the objective must be to see the improvement in the standard of living of all Jamaicans and the general improvement in the economy. The way to measure that is at a macro level looking at overall GDP growth, but to also drill down to look at income levels, job creation, and which sectors are improving. The reason for this is that the country can achieve growth while the economic foundation is getting worse. For example, in the fourteen years to 2007 although Jamaica saw growth in every year, deeper analysis showed that in all fourteen years the non-exporting sectors grew while in only three of those years the export sectors grew (Chung, 2009). So while the overall economy was growing, this was being done by the growth in debt rather than production. In other words we were growing based on other people's money.

So the economic challenges we are seeing over the past two years are due in part to the global recession, but more importantly because of our economic management for decades before that.

Recent data from STATIN shows that Jamaica's imports have been growing at an increasing rate versus exports since the 1980s. Surprisingly, the numbers reveal that in the 1970s, exports increased by 136 per cent while imports increased by 97 per cent. On the other hand, the period of the 1970s was the worst growth period on record. The years after that did see some growth, but imports surpassed exports at an ever increasing rate up to 2009. The direct correlation with the increase in debt leads to the conclusion that we were improving our lifestyle based on borrowing.

1970s similarity
The problem we faced in the 1970s, however ,is similar to the challenge we face today, in that we are experiencing GDP decline but at the same time we are seeing improvements in the trade deficit. One difference between the 1970s and today is that we have recently been seeing a revaluation in the Jamaican dollar, but this can be explained in four ways (i) a reduction in demand for US dollars, as a result of declining economic activity and financial transactions; (ii) a liberal foreign exchange system today that reacts more to demand and supply than before; (iii) a shorter assessment period, so that sustainability has to be questioned; and (iv) the inflow of loans from the IMF and multilaterals. The truth, though, is that the improvement in the exchange rate today is not due to productivity improvements but rather a decline in economic activity, as supported by the productivity data. This is not a good thing, as it means that income levels will eventually fall on this premise.

The same argument holds true for lower inflation numbers and to some extent interest rates. The main argument for reduced interest rates is of course the game-changing JDX programme, as this alone caused a steep fall-off in the average rates of interest rates offered by the government, which was the main competitor to private loans. The appetite of government for debt did not change, and what happened was that with the inflow of external loans, the demand for local debt and higher interest rate pressures decreased. The lower economic activity assisted by ensuring that demand for US dollars decreased.

What one realises from all of this, however, is that the improvements in the economic numbers are not as a result of improved productivity or exports, but are caused by other factors that give a sense of well-being. It is for this reason that the confidence indices have therefore increased. Because as the numbers show, even though consumers are more confident they also have low expectations for any job prospects or increased spending. The confidence increase is therefore more psychological than based on any real improvement. In fact confidence numbers were at their highest in Q3 2007, just before the recessionary decline.

With all this said, though, this adjustment in the economy is necessary if we are to see the much needed revaluation, as the economy was similar to an addict. Only in this case the drug was debt and declining productivity. In order for the rehabiliatation to occur it was therefore necessary to deflate the economy and create a new foundation that can lead to sustainable development.

It is my belief that the current state of the economy provides a good platform for creating a sustainable development path. This, however, will require carefully crafted policies geared towards development rather than short-term consumption.

So in my own view, while there are positive macro indicators, these are not because of real development but as a result of the necessary economic contraction. I don't know of anyone who paints a car without first removing the old coat.

Jamaica's productivity misallocation

ABOUT a week ago I was asked to do a presentation on the Jamaican economy, and in my research looked at the problem of productivity and its impact. Even more important was the misallocation of our resources even as we strive to improve productivity and our economic fortunes.

The table shows that while we grapple with the problem of productivity, the challenge is even more far-reaching than we think. The implication from the numbers is that Jamaica's productivity problem does not only arise from input costs and the efficiency of workers but rather speaks directly to a problem of market allocation of resources.


Compensation challenge
The source of the measurements shown is the Jamaica Productivity Centre's recent publication of a study for the period 1973 to 2007.

It shows that there is a serious disconnect between percentage changes in output per worker versus unit labour cost. This is illustrated at the total and sector levels as follows:

* Total Economy --measurement shows that even though the output per worker has declined by an annual average of 1.3 per cent, at the same time the unit labour cost (compensation) has increased by an average of 0.4 per cent per annum.

* Sector level -- both the goods and services sectors show declines of 1.7 per cent and 0.5 per cent respectively; however, per unit labour cost did not reflect this decline in productivity, as wages fell by only 0.6 per cent in the goods-producing sector and rose by 1.2 per cent in the services sector. This is even more pronounced when you consider that over the years we have increased the services sector from less than 50 per cent of the total economy to over 70 per cent. So over the years we have been rewarding declining productivity.

* Industry level -- a look at the specific industries also reveals that in agriculture, mining, and transport, storage and communications we have seen average productivity increases while at the same time seeing declines in unit labour cost per worker. The converse is true for construction and the financing and business services sectors. In the much-touted manufacturing sector, while there has been a decline in productivity, unit labour cost has remained flat.

What these numbers show us is that a primary problem of productivity is that we have been allocating resources very inefficiently, and implies that one of the reasons why we may not have seen more capital being allocated to various industries is that the market is broken. In other words, markets will usually allocate resources where it is most efficient to do so but clearly, something has been wrong with the allocation of resources in Jamaica, as we seem to have been rewarding markets that are inefficient while penalising markets that increase in productivity. This, of course, leads to a distorted return on capital and this uncertainty results in capital staying out of any long-term investment in the market.

Decreased competitiveness
The result of all of this, of course, is that productivity declines and with increases in compensation relative to output, inflation results. GDP output also becomes less competitive in relation to the rest of the world and so exports suffer in favour of the more competitive imports. This in turn results in the devaluation of the Jamaican dollar and inflation ravages bring compensation back in line with market conditions and we end up in a vicious circle with inflation, or increased debt, and high interest rates.

The fundamental cause of all of this is, of course, the political system, which results in inefficient allocation of resources. The problem is that our market is not allowed to work correctly because policies have always encouraged behaviour aimed at encouraging political results instead of economic results. So when, over the years, politicians sit in Parliament and make policy decisions it is done primarily because of political reasons and not to cause the market to improve. As an example, duty waivers and incentives may be given to those with close political connections or to repay a debt for campaign contributions.

These policy actions have the consequence of rewarding persons/companies that are not the most efficient and also industries in which Jamaica might not have a natural comparative advantage. Economic theory teaches us that if a country wants to maximise its global competitiveness then it must focus on where it has

its comparative advantage. However, interruptions in the smooth workings of markets by the state cause market determination to be distorted, and this eventually was what led to the collapse of socialist states such as the Soviet Union and Eastern European countries, and the move by China towards a market economy.

An inescapable fact is that the market will always have its pound of flesh and, just as the false creation of wealth in the United States (US) led to the recent financial crisis, so too the distortion of market activity through politically motivated policies has caused Jamaica's economic and social decline. At least in the US whenever there is a problem in the economy the markets are allowed to self-correct, with a minimal amount of government assistance to allow for a smoother correction. In Jamaica's case, however, there has never truly been a period where the market has been allowed to work effectively and so the problem has accumulated.

It has always been my view that if we are to truly fix Jamaica's economic challenges then government intervention must be kept to the minimum, always ensuring that public policy does not determine private sector resource allocation, as was done with interest rates in the 1990s. And this use of interest rates to distort market allocation was not unique to Jamaica as this was a primary cause of the global financial crisis.

Until then we will always remain less competitive than we can be as a country even though we have the potential to be very successful.

Analysing the economy's prospects

Ever since the lower interest rates (through the JDX) and the revaluation of the Jamaican dollar, many have been hailing these signs as a recovering economy. It always amazes me that people always seem to arrive at conclusions prematurely without doing any real analysis of the facts, and this leads to incorrect decisions regarding the future of the country and within companies.

No doubt the lower interest rates and a revalued dollar are positives for the economic framework but by themselves are not sufficient for economic recovery. In fact interest rates and the exchange rate are merely symptoms of an underlying factor, and if we are truly to understand the prospects for the economy then we must carefully analyse the underlying factors and not draw conclusions based on the symptoms.

Carl Ross correctly stated that despite the positive indicators, significant risk still remains in the Jamaican economy, and we are not out of the woods. I had also indicated in my book that in order for the economy to move forward we would first have to go through a period of economic decline for structural adjustments to take place. This is because the problem with the Jamaican economy cannot be solved by merely tinkering with the macroeconomic indicators but needs major surgery because of the flawed social and economic foundation upon which it rests.

Effect of social instability
We have all seen the consequences social instability has on the economy, evidenced by the unrest a couple of weeks ago, and on the economic side growth has always had a deleterious effect on the long-term prospects of the economy. I say that because such a significant part of our production is based on imports that when we increase production we are also increasing our appetite for imports and foreign exchange.

This leads me to the recent revaluation of the Jamaican dollar. While this has been a positive so far for the economy (as it helps to stabilise inflation) the fact is that the revaluation has not resulted from any increase in exports but rather by a decrease in imports as a result of shrinkage in the economy (in fact because of the close relationship between imports and exports, the decline in exports also contributed to the decline in imports). At best what this allows is a temporary reprieve where we can make the necessary adjustments in the economy to ensure this trend continues.

This is reflected in the Balance of Payments (BOP) for the calendar year 2009 when compared to 2008. It shows that although the current account balance improved from a deficit of US$2.8 to US$0.9 billion this resulted primarily because of a significant decline in imports (40%), as a result of the reduction in the price of oil. At the same time exports declined by 49%, and there was also a decline in remittances of 7%.

This decline in remittances stems no doubt from the continuing effects of the global crisis on income levels in the US and UK, as a result of unemployment and decline in real incomes. I expect that the global recovery is going to be a long process and the effects on disposable incomes will linger.

What the BOP shows is that Jamaica still remains at the mercy of oil prices, and this is why I have been saying that the greatest economic challenge to business and Jamaica's economy remains the high energy costs. This is even more so than interest rates, which is really just a symptom of the seriously fractured political, social, and economic infrastructure.

JPS rate hike
The recent furore over the proposed rate hike by the JPS is evidence of the high cost energy has on businesses and the disposable income levels of consumers. The approach we take to arresting costs, however, is not to allow the markets to work but to seek to apply strong-arm tactics and regulatory control. The best way to deal with high mobile phone and electricity charges is simple - implement portability for telephone numbers and net metering for the energy sector. If these simple steps are taken I guarantee that the market will ensure that prices decrease.

Since I put solar panels in place at home I have seen my electricity bill decline from $14,000 to $4,000 per month. This is even before any GCT is applied (which I don't pay because I do not use over 200 KWH) and I am oblivious now to the arguments about rate increases or GCT being applied. This ability is available to all taxpayers as they can get the money for a solar system to borrow from NHT and I guarantee that if implemented properly, the loan repayment will be less than the monthly JPS bill. I also expect that oil prices will go up as soon as Europe sorts out their mess, so rates will inevitably go up in the future.

It is important for us to take advantage of these positive signs in the economy though, as the reduced interest and exchange rates are not sustainable if the correct adjustments are not done to the structure of the economy and social conditions. The decline in these two indicators has more to do with a reduction in demand (and disposable income) than with any economic recovery. In fact the recent numbers show that for the first quarter, while the overall economy declined by only 0.6%, the goods-producing sector declined by approximately 6%, and we need to remember that the services sector always lags behind the goods-producing sector, as without real production taking place the services sector cannot survive without new capital being introduced through loans or new investments. It will be difficult to get new investments unless we deal with our social conditions, the cost of energy, and other factors such as bureaucracy.

Recently some of our listed companies have also shown a decline in profitability, which has resulted primarily from a decline in real income, as they have done a good job of controlling costs, which in plain language means they have reduced real incomes by either reducing staff or reducing operating expenditure. This of course translates to lower disposable incomes and leads to a vicious cycle. A deeper analysis of these company results show that even with the declining incomes they have been faced with inflationary pressures that they cannot pass on.

Over the past two years I have called for a few things to happen if we are to get on the path to recovery - (1) restructure the debt (2) deal with the social conditions as a priority (3) borrow more and invest in addressing the underlying challenges to the economy. As I always maintain, there is nothing wrong with debt as long as the marginal revenue is greater than the marginal cost. I see now that the government is seeking to secure some US$1 billion to address the social and crime conditions, and I for one applaud that effort, wishing that it had come sooner.

For example, at one company we took a strategic decision to finance our operations (and negative current ratio at the time) by financing the operations from payables. So instead of paying in 30 days we would pay in 60 to 90 days while building profitability in the company. It paid off because we were able to carefully identify the market opportunities and chart a plan as to how we would get to profitability. This is the sort of careful planning we need to use when borrowing money.

So the economy is at a crossroads right now. It was necessary for the economy to be given an anaesthetic so that the necessary surgery could be performed but it would be wrong to assume that the stable signs indicate that the patient has recovered. It simply means that the patient is sleeping. In order for full recovery to take place, the surgery must be skillfully done so that on awakening we will have growth that adds to development. It is going to be a long process (as was pointed out by Ross) but if we take the necessary steps to make the economic and social structural shifts then the economy will finally emerge on a path of real development. And there are some simple steps that can be taken to put us on that path.

I weep for Jamaica

I remember a few months ago being on a talk show with a private sector leader who was clamouring for reduced interest rates as a means of spurring investments and driving the economy forward. At the time I told to him that the reduction of interest rates would not, by itself, move the economy forward and that we would be better served by improving the weak social and political infrastructure spawning the lawlessness in the society. It has always been obvious to me that the need to address our social and political infrastructure is the root cause of our economic and social challenges.

Even while the successful JDX provides some breathing room in the economy, even this is hostage to our social and political problems. And we must understand the crime we have in this country is only a symptom of the political architecture that has held down this country since independence. We started with the wrong foundation and you cannot expect to grow fruit from trees that are planted in mud.


Economy taken a beating
Over the past three to four days Jamaica's economy has taken a real beating from the events that have unfolded. A simplistic direct computation of the losses over the past four days can be to look at four days GDP output, which at a GDP value of $1.1 trillion amounts to some $17 billion assuming 261 working days. In addition to the GDP loss, however, there is the loss of disposable income from events being postponed and generally lower spending in the economy. This will also have a lingering effect as people will be guarded with their spending and investment in our unpredictable social environment.

The effects on tourism and long-term investments will continue to cripple our economic turnaround. Jamaica is a well-known brand and any marketer will tell you that a well-known brand always suffers more from bad news than lesser known brands. So while we expect the publicity from good news about the brand, such as sports or music achievements, similarly when there is bad news then expect the same or more, publicity. Just think about the effect on Tylenol sales worldwide when cyanide was found in one single packet.

So the immediate and longer-term economic impact will be devastating. Not only from international investors but also local consumption and spending. The Finance ministry will face challenges to its revenue programme from this fallout, despite all the positive adjustments that have taken place. I trust that people will believe me now when I say that even more important than interest rates and macroeconomic targets is ensuring that the social and political infrastructure is on a sound footing, as dealing with this will have a much more positive economic impact on the country than any macroeconomic policy.

I weep for Jamaica. Not because of where we are as a country today but because of the lack of understanding of the fundamental challenges that we face by persons who should understand. I weep for Jamaica because of the comments I continue to hear, which tell me that the same emotional responses are coming out as happened when West Kingston came under siege in 2001 or when the slaughter of children dominated the media. I weep for Jamaica because it seems as if we still do not understand what the root causes of our problems are. We do not understand that the main cause of our problems emanates from a lack of respect for citizens' rights, and not from any high rise building or the number of guns on the road. If we do not try to win the "hearts and minds" of the people of Jamaica then we will only be setting ourselves up for another confrontation.

This day has been in the making for a very long time. At least since the 1970s. The state of emergency in the 1970s, which saw many rights being abused, the 1980 election, the Green Bay massacre, the police squads formed over the years from the 1970s until now, the Braeton incident, Janice Allen, the Constant Spring lock-up, 2001 Tivoli attack, police killings. And I could go on. These were all under the guise of preventing criminality. Has it worked?

Support for the security forces
I fully support our security forces, and commend them for their bravery and protection of us Jamaicans. I ask that they respect the rights of their fellow Jamaicans. The movie Invictus portrays a giant (Nelson Mandela) who showed that compassion, respect, trust and forgiveness was the way to rebuild a nation, not retribution. In viewing the news over the past few days I have seen some glimmer of hope that the security forces are starting to change their approach and respecting more the rights of Jamaicans. We need to institutionaliSe this approach.

The problem, however, is not just with the security forces or politicians, but with civil society. I have heard and read the commentary of many Jamaicans (including those overseas) saying that the security forces need to go into another garrison and do the same thing they did in Tivoli, and deal with the criminals. This mindset is the problem we face. I thought that it is not until people are found guilty in a court of law that they become criminals. How would those people who promote this idea feel if they were children in Tivoli over the weekend, or how would they feel if they even had a relative in that situation?

Why are people so stubborn and illogical? We have tried this approach since independence and it has not worked. Why do we want to live in countries where human rights are respected but don't think that our own country is good enough for this sort of respect? Civil society, when you wake up every morning, before you start to blame the politicians and security forces please install a mirror in your bedroom and look in it before you go to the kitchen and eat some of the food that others are being deprived of.

I hope that when all of this is over that we do not go back to business as usual, and more importantly that we do not respond in emotional ways to what has happened. We must deal with the underlying challenges which can only be addressed by proper analysis and careful planning, not the usual responses of "kill them all". This is a defining moment for Jamaica, and we must deal with it in a rational way.

If we want this economy to move forward, and develop in the way it should, understand that only a stable social and political infrastructure can ensure that. When this is done, then I guarantee that we will be on the way to progress.

For all those who have contributed to and supported criminality, who have ignored the need for respecting the rights of others, who have turned a blind eye to corruption, and who have played politics over patriotism, take a bow. You have all contributed to what is happening in Jamaica today and should be proud of your accomplishments. I have always lived by the philosophy that I should not speak about anything I don't fully understand, and if I don't have a rational solution that I should keep my mouth shut. I invite anyone who falls into that category to do the same.

My Jamaica, My vision

A few months ago I started to focus on the belief that if this country is to move forward it is more important to have social and political stability that even a successful Jamaica Debt Exchange (JDX) could not bring. This need to focus on social stability is obvious because social decay in Jamaica has created a greater challenge for us than any immediate fiscal problems.

When I was writing my book I started out with a financial analysis of the macro-economic numbers, determined to find out what the underlying causes of Jamaica's economic challenges were. After all, I grew up in Jamaica hearing about our macro-economic targets, and what economic policies need to be put in place in order to ensure economic development.

So over the years of my own development I have heard politicians, economists, and business persons speak to the need for lower interest rates, free market economy, tax incentives, and a host of other economic and financial initiatives.

Fundamental problem not economic
However, when I got to the end of the analysis I realised that the fundamental problem Jamaica faced was not the economic and fiscal programmes implemented over the years. And it all came home to me because I have listened to and been impressed with much of the analysis over the years, and have always wondered why these supposedly knowledgeable persons cannot find a solution to Jamaica's persistent challenges.

I concluded that the problem with Jamaica, and why it cannot develop economically, is because of the social and political infrastructure. So try as we might to develop theoretically sound financial and economic programmes, unless we bring some stability and sensibility to our social and political systems then we will always be chasing our tails. And so the JDX and other such fiscal initiatives will only be temporary reprieves from our fiscal and economic plight, just as the first MOU was celebrated as the panacea for our economic challenges. We all know what happened to the MOU, despite the several pronouncements of various sector leaders on how great it was. It seemed that I was the only voice at the time saying that it would not work.

Similarly, over a year ago I took the flak of many (along with Ralston Hyman) for saying that the only way to deal with the fiscal situation was to restructure the debt. Based on recent events I do not think I was incorrect.

In July 2008 I wrote an article called "The perfect economic storm", where I indicated that 2009 would be the worst economic period for Jamaica since independence. This again was at a time when others were telling me that I did not know what I was saying.

In May 2008 I wrote an article called "Déjà vu", where I indicated that the uproar surrounding the murder of children at the time would soon fade and we would fall back into complacency as a nation until another upsurge occurred which would shock us. I was told by a commentator at the time that the media would not let up and would keep on it until something was done. Well, over 2,000 murders later, which includes even younger children in even more hideous ways, we are not as concerned as we were then.

I say all this to illustrate that it is not difficult to predict which way Jamaica is going. It is not difficult to understand what the fundamental problem is. It is not difficult to understand what needs to be done to solve the challenges. But what it takes is proper analysis and a political and bureaucratic structure that is geared towards solving the challenges. If, for example, the road network is not set up to encourage discipline on the roads; then confusion will ensue. Similarly if any organisation or political system is not set up to rely less on personalities and more on systems and controls, then how much success can we expect?

So at the end of writing the book I concluded that the real problem Jamaica had was a political system that did not allow for country first. A political system that depended more on personalities rather than political and constitutional systems. A political system that catered more to Jamaica's destruction than its development. I also concluded that what Jamaica needed was not just economic growth, as I heard many suggesting before, but rather "economic and social development", as opposed to just growth, if we were to make the transition from being a fledgling nation to one where we could realise our vision when the flag was raised for the first time in 1962.

Term limits
So for me what stood out the most in the Prime Minister's address to the nation last Monday night was his commitment to having term limits for Prime Ministers. I think that will be the start of the political revolution that is necessary for this country to move towards real economic and social development. I am heartened by this commitment, even more than the others that are being held on to, as this is the one that could bring about the greatest potential for change in the structure that will cause permanent change.

On many occasions in the past when asked how I thought the change would come, I indicated that the change in our fortunes will not come by way of any initiative from politicians but from the pressures of civil society. This is the strongest I have heard civil society speak since I have been aware of what is happening. Not even in the 1970s did civil society speak with such a strong voice, as it was the opposition JLP at that time that led the charge for change while civil society either migrated or kept quiet and hoped for the best. This time I see a maturity in civil society that has never been there before, and I think it has resulted from the openness of debate that has been growing. Not that the media has played the pivotal role that it has needed to, I must add, as I think the media has been more irresponsible in some of the commentary over the years.

And even though everything seems to be falling down around us every day, I believe that before the sun rises, the day is always at its darkest. What we need to do as a country is ensure that the sun does in fact rise, and civil society needs to continue to work with the government, and the commitments made by the Prime Minister, to ensure that we see the change we need. Even though the past two and a half years has seen the greatest challenges for Jamaica, I also believe that it offers much opportunity for change. Remember what it was like in 1980 leading up to the election?

I believe we have made some fundamental economic shifts, such as the restructuring of the debt cash flows, the reduction of interest rates, the move to public sector reform, the significant growth in agriculture, the commitment to divesting the loss-making public sector entities, and very importantly the moves by the Commissioner of Police to deal with corruption in the force. There is more to be done though, Commissioner, as the perception of lawlessness is still prevalent, which is easier to fix than we think if we have the will.

For me this is my Jamaica, as there is no other. This is the only place where I can truly be a first-class citizen, and we must ensure that every Jamaican feels that way through respect of human rights and severe punishment of those who violate other people's rights. My vision of Jamaica is consistent with the 2030 vision, the place of choice to live and work. But this cannot be achieved unless we permanently fix our political system, starting with the commitment by the Prime Minister to have term limits.

Value added focus

NOW that the budget debate is finished, our efforts must be focused on how to develop the country to achieve economic and social progress. Everyone had their say on the debates, most of which would have been influenced by political underpinnings, with persons espousing how great the presentation was by their political preference and not any objective assessment of what was presented.

One such person sent me a message to express disappointment in me saying that jobs were needed to move the economy forward. Instead, he said patience needs to be exercised to see the adjustment in the economy. In other words make the adjustments through painful measures that will result in job losses and people will respond by starting businesses because interest rates are falling and other adjustments are being done to create a facilitative environment. When I asked the question though of how he suggest we deal with the economy over the next six months and if he could specifically let me know how the adjustments will impact on the economy in precise terms, that question was ignored.

US government action
It seemed obvious to me, and the US government, that in order for the economy to grow that jobs need to be present. The US, for example, has a very facilitative environment for growth and business start-ups, but supposed they had ignored the declining job market and left it to spiral out of control, where would the world be today? Would Jamaica even be speaking about increased tourism or a return to bauxite if the US had allowed the job market to falter? Would there be any economic growth if disposable incomes from job losses had dwindled? I think not. But this is the myopic view expressed by many who do not understand that the economy is dynamic, and based more on confidence and expectations than macroeconomic data.

My own view is that the general direction of the budget and policies seem to be moving in the right direction. The focus on lower interest rates, a restructured debt cash flow, small businesses, tax reform, and generally an enabling environment is pointing in the right direction. This, of course, includes the commentary by the prime minister on the need for a radically reformed public bureaucracy and crime. This approach of changing the structural make-up of the economy is definitely a positive and must be encouraged, as for the first in a very long time it seems that we have properly set our sights on the direction we want to move in.

What we need to do now is bring that together into a set of specifically laid out plans with timelines attached as to when we will achieve what and where the accountabilities lie. In short what we must be doing is focus on developing a specific set of tasks to achieve a macro-objective. This macro-objective must be economic and social development (not just growth). Because of the long-running fiscal deficits we have had in this country, which has decimated our economic and social structure, we are understandably focused on the fiscal accounts as an objective. The fiscal accounts (and deficit) of course need to be a tool rather than the end of our journey, which seems to always be the main focus.

So we achieve a fiscal deficit of 6.5 per cent in 2010/11 and then what? The question is in achieving that fiscal deficit target, what will be the dislocation caused to the economy? How many persons will have lost or gained employment? What will have been the social impact of achieving the fiscal target? How many new businesses do we expect to start over the next year, as a result of the policy shifts being pursued and the stimulus being provided? How much activity do we expect to occur from the much-needed housing stimulus announced by the prime minister? What are the specific timelines for the well-needed public sector transformation being pursued?

Business interest
These are the questions which businesses need to know the answers to in order to move forward. So while we hear how great the presenters sounded -- who did not sound good, and who was being political and who not -- the question is do we have a clear picture of what our developmental plans are for the next 12 months and how the specific plans are to be achieved?' We have clearly identified the issues that need to be addressed, which was maybe best articulated in the prime minister's presentation. But at the end of the day apart from the "who done it" theme throughout the presentations do we have a clear indication of how the development plans will take shape? If the answer is yes and businesses can plan then we have had an excellent budget presentation irrespective of how the speakers sounded.

After reviewing all the speeches my own view is that the one which best identified our challenges and what needs to be fixed is the prime minister's presentation. This is the one that we can take away the most from in terms of what developmental objectives we should be focused on, as the other presentations were like a Sherlock Holmes mystery unsolved, focusing primarily on who did what, when, and where. Is that relevant in the crisis in which we find ourselves today? If it will put food on peoples' tables and money in their pockets then by all means go for it.

The prime minister's presentation discussed the main issues, but in my view he needed another hour to expand on what the specific action plans are in order to address the issues of focus. In my view, the housing stimulus through the NHT was a good move, as one of the primary sectors of growth is the construction industry and if we can get that sector revitalised along with the growth in agriculture then we will bring back much-needed economic vibrancy.

As I was saying to my friend in the message, however, we need to have some focus on creating new income (jobs) in order to ensure that the demand exists for the stimulus in order to maximise the economic benefits. As an example, before the housing stimulus could have worked in the US they had to ensure that the job losses were halted. Can you imagine if they had provided the housing stimulus with job losses increasing? The benefit would not have had the maximum impact, which is how we need to approach spending. Hence, we need to ensure that the maximum value is achieved from each expenditure or initiative.

In order to maximise the value added there are a few areas we must concentrate on. The fact is that money is tight for the for the government and the strategy must be to maximise the expenditure by focusing on the greatest value-added strategies, as we do not have, as the prime minister says, reserves available from the days of historic worldwide growth or the ability to borrow given the IMF programme we are on (which I believe the adjustment period needs to be extended whether by the Stand By or Extended Fund Facility. Which one we have is academic as long as we get the adjustment period extended).

Public law and order
So I am heartened by the report in the newspaper about the focus of the police commissioner on dealing with law and order issues such as (1) night noise; (2) traffic violations; (3) safe public transportation; and (4) littering. My only question is why did it take so long to realise these need to be focused on? I only hope that this time we are serious about it, as restoring public law and order is the best method to deal with our crime monster. I only hope that the New Kingston police post becomes active and the people who stop along Knutsford Boulevard, while someone goes to buy food, are dealt with as parking in the roads by the police who seem to ignore them. Commissioner you will find that restoring public law and order will lead to other serious crimes being reduced, which I say based on logic rather than any policing experience.

The other areas, which I believe needs focus if we are to create a development environment, are:

* Public sector bureaucracy -- big impediment to business but the way that the prime minister outlined to deal with it is not adequate. There is a fundamental change that needs to take place, which I will not mention here.

* Energy costs -- critical is we are to become competitive in capital intensive investments and resolve our balance of payments problem. The main focus initially should not be on developing LNG plants, but should be a focus on public transportation investment and development and retail consumption. While the NHT facility for households is good, it suffers from bureaucracy and is not facilitative enough. The benefits of addressing these two areas are great and would not only increase competitiveness but also improve living standards and significantly reduce the trade deficit.

* Tax reform as mentioned by the finance minister is critical to development. The December tax package was not good for economic development. One thing I must commend the Minister for is his willingness to look at what has and has not worked and make the changes. The move to simplify taxes for small businesses is a good move. I would go further to agree with Ethlyn Norton-Coke that we must move towards indirect taxation, which would ensure greater compliance and a greater multiplier effect throughout the economy.

If we focus our resources and energy on these areas then this is where we can achieve the greatest value added. Now that the budget debate is over, and the investigations into "who done it", we should now solve the mystery of economic and social development by outlining a detailed plan of action.

Public bodies and their roles

The Government must be commended for placing before the parliament, and by extension the people of Jamaica, the revenues and expenditure estimates for public bodies. This is significant as the expenditure estimates for these bodies amount to approximately 72 per cent of the central government expenditure and, importantly also, these public bodies expect to commit taxpayers to an additional J$36 billion in loans for fiscal year 2010/11.

This should accelerate the steps towards International Public Sector Accounting Standards (IPSAS), the public sector equivalent to IFRS. If we are to properly assess and address our economic challenges we must be fully aware of all government commitments, both cash and accrued expenses. This will force governments to put all the cards on the table and cease the long-standing practice of meeting fiscal deficit targets by just not paying bills, which in the end harms the economy more than not having known what the true deficit position is.

Myopic views
I am constantly amazed at the myopic view taken of public bodies by elements of our public and private sector leadership, as well as those professing to be knights in shining armour who come flying in on one of the many airlines to prescribe what is "good for us" and fly back home to watch the events unfold on CNN in the luxury of their homes.

The view put forward is that public bodies are costing the Government a lot of money so we need to just cut them out totally, and given the chance, they would do so immediately without any regard for the immediate negative effect on the economic and social conditions of the country. I will agree that some public bodies should be divested and the Government is making the right moves to deal with these bodies.

For example, the Government has either taken steps or stated its intention to divest itself of Air Jamaica, the Sugar Company, Wallenford Coffee and Caymanas Track Limited, among others. And the Government is spot on about the need to get its tentacles out of these businesses, as by their very definition, bureaucracies should not be involved in trying to compete in the market economy. They will always lose.

On the other hand, there are certain bodies which are critical to the economy and the public infrastructure. One such is the JUTC. These bodies should not be targeted to reduce losses without considering the opportunity cost of such an action. So when people say to me that the JUTC costs too much money and we should just do away with it, I have to ask myself what banned substance were they just partaking in, or is it that they are so blinkered in their views that border on being ignorant.

It is very important not to approach the operation of public bodies, or the fiscal deficit, with a narrow- minded approach. This dangerous way of thinking could lead us to not have any proper public infrastructure a few years down the line if we approach it in this way. The purpose of public bodies, and fiscal policy for that matter, should be to target economic and social growth and development. One of the reasons why we have failed to develop as a country is that we have had this long-standing obsession with monetary policy and applying fiscal policy with a view to increasing government revenues rather than addressing it to macroeconomic objectives we lay out year after year without being successful in meeting them. The bottom line is that if we intend to go down road X but we take the path that leads us down road Y, then how can we expect to reach to the end of road X, unless it runs into road Y? Similarly, the approach that we take to fiscal policy will only lead us to our macroeconomic objectives by what Jamaicans call "buck up". Targeting the fiscal deficit as a policy decision, for example, ignores the need for development in the economic and social environment.

Questions to ask
So while the Government is totally on the right path of not wanting to compete with private sector interests in coffee, air transport, and horse racing (can you believe government is involved in this?), there are some public bodies that are critical to an efficient economy. Another argument for government not competing in the industries mentioned is, how fair is it for Government to own interest in a sector that it also regulates? This seems like a serious conflict of interest and one that the private sector should be concerned about.

On the other hand, places like the JUTC should not be assessed according to profit or loss, but rather the following questions need to be asked:

1. What need is the public body fulfilling?

2. What would be the effect on the economy and public order if the body fails to deliver service, or not provide service at a certain minimum standard?

3. How can implementing the service bring efficiency to the economy or save the country much-needed foreign exchange?

4. How can I improve the movement of persons throughout the country, and what is the expected benefit to productivity?

5. What is the most efficient cost structure for carrying out the needed operation?

These are just some general questions that must be asked when assessing the need for a public body, and the question about cost should always be after determining the expected benefit to the economy. So, for example, if we were to have an efficient and safe public transportation system, then we could save billions of dollars from (1) oil imports; (2) productivity increases; (3) freeing up of traffic; and (4) implementing access charges to business districts, just as in Manhattan or London. Before this can be properly implemented, however, we need to have a well-run, and very importantly, safe public transportation system. In the end all of our misfortunes come back to the crime monster.

There are also some public bodies that should be merged, as they provide basically the same function. Some of these include (1) the Betting, Gaming, and Lotteries and Racing commissions; (2) JIS and PBCJ; (3) MIDA and the Self-Start Fund; (4) DBJ and EXIM Bank, and there are many others. This move may not only save the Government hundreds of millions in expenditure but would also create a more efficient service delivery to the market.

While we are going through these necessary consolidations and eliminating what needs to be removed, we must recognise the importance of some public bodies to growth and development. For example, if the JUTC even cost $2 billion to run per annum, if it was saving us 50 per cent of the oil bill related to transportation and getting people to work in a more productive state of mind, or easing the traffic congestion leading to less need for road development and repair, then it would have been $2 billion well spent, as opposed to spending $500 million and not maximising on the benefits of such a public body.

The budget’s role in development

As far as I can remember, every year the government goes to parliament and outlines the expenditure and revenue estimates for the upcoming year. And you can be sure that as night follows day that some new taxes or fees are to be added to the overall economy. Even if something is given to the citizens, be assured that it is going to be taken back elsewhere.

The questions we must ask is why do governments come to the Jamaican people year after year for more but we still see no real development in the country. There are some that will argue that Jamaicans drive better cars, live in better houses, and carry two or three cell phones so the citizen must be better off. While we enjoy natural developments, as a result of the technological advances, the fact is that (as I pointed out in my book) in1975 we were ranked in the top 39 percent of countries surveyed in the Human Development Index (HDI), while in 2005 we moved to the 57 percentile. So relatively speaking Jamaica has declined in HDI ranking.

Governments are parasitic
For years Government has been parasitic, just like the mosquito which sucks blood from the body without replacing it, waiting instead for it to be nourished by other sources before it starts its blood sucking again. The problem is that at some point in time that constant sucking of blood without any adequate replacement will make the person ill and eventually lead to their death.

Add to that the fact that the person is very sick already and what you do is hasten the process of death. So compare that to an economy that is in recession and you will understand why new taxes will only serve to shrink the economy further. Can you imagine if the US in 2008 chose to increase taxes in order to reduce the fiscal deficit? The global economy would have crashed and cause devastation.

So we can understand the effect on the fiscal accounts from the tax package introduced in December 2009.The February fiscal numbers show this. Cursory looks at the fiscal numbers do not reveal the true picture, as the fiscal deficit and tax revenue is distorted by the JADEX. And so one would be misled to utilize those numbers for any assumptions without making the adjustments to smooth out that extraordinary item as accountants would do.

If one were to adjust out the extraordinary items caused by the JADEX, the normalized fiscal deficit would in fact be approximately $121.3 Billion and not $135.6Billion, or 12% of GDP rather than 13%. No doubt the IMF took this into consideration. On the other hand as it relates to the tax revenues, they actually underperformed in January by 19.47% ($4.3 Billion) if normalized. This is because one would have to remove the tax effect of the JADEX in order to arrive at what the normalized tax would be, which I estimate at $17.8 Billion compared to a budget of $22.2 Billion.

The tax revenues is what I am more concerned with than the fiscal deficit target, as it measures how healthy an economy is. And remember that this is in the context of the December tax package. Moreover this does not include the GCT on electricity bills and increased property taxes, which I think will have a further contractionary effect on disposable incomes, which is the blood supply of economies.

The problem with our budgets therefore is that there has been no real alignment between our budget process and the desired economic developmental objectives. So even while we set targets for economic growth, inflation etc., the fact is that our budgets have not been configured around our macroeconomic objectives. So we will inevitably end up missing our targets on that basis.

Budget philosophy
While this budget has made some improvements in that philosophy, I do not think that it has gone far enough to compensate for the negative consequences of the budget. The Minister of Finance has correctly recognized:

(1) the need for restructuring the debt cash flows – this is something I have touted for a while to much ridicule from most persons, even some who know embrace it as the best thing since sliced bread. As a matter of fact the much anticipated downgrades I was told would happen if we discussed it too much, all happened before it was discussed and after it was done and discussed we got upgraded. The Finance Minister has taken a very bold step in doing this and I think is consistent with his overall philosophy on the necessary adjustments that need to be done. While I welcome the restructure, my own view is that the pace of the restructure carries significant risks and means that other revolutionary changes must happen to minimize the JADEX risk, with some amount of social fallout. I also believe that the government is going to have to seek other loans like the China road loan to mitigate this risk;
(2) the need to rationalize and bring efficiency to the bureaucracy of government - among these efficiencies is one that I think is one of the most significant developments in recent times because of its positive effect on business costs and private sector efficiency. That is the efiling rolled out by the Tax Administration. I would certainly recommend this project for special recognition at an event like Business Leader or Jamaica Chamber of Commerce awards because of the efficiency it brings to businesses; and
(3) the need to reduce discretionary expenditure to only what is necessary and adds value.

So the overall philosophy of the Finance Minister is I think moving in the right direction. The problem is that the actions of the Finance Minister need to be supported by the other policy arms and actions of the bureaucracy. So that while the Finance Minister is pressing ahead there are other aspects that are weighting down his initiatives. Not least among them is crime, which I have been at pains to point out will only frustrate any financial effort made to turn the fiscal around, as even if the Shaw and his team get interest rates down to zero percent, no one will make any real productive long term investments in a socially decadent environment. The other factor is that we must settle the dispute between the government and teachers/nurses so as to avoid all the resulting unproductive time.

This problem of support can also be implied from the budget numbers, where there are significant real cuts in the budget for the public defender, OCG, auditor general, and courts. My opinion is not based on any detailed knowledge of the programmes but what we need is to get a clear indication of what will the resources allocated to these agencies do to improve the objectives and further serve as a stop to the excesses they seek to prevent. So the budget exercise must not just be a focus on how much is spent this year versus last or how much we can reduce the fiscal deficit by but must focus primarily on what are the deliverables expected in relation to the overall economic targets and whose accountability will it be for certain specific targets to be met.

Unless we understand this inextricable link between the budget and the behavioural aspects of the society we will continue to focus on how much we spend in relation to last year, in a very narrow financial way as I have heard some commentators do, which will only result in us going through the same ritual next year without any real benefit.

As I indicated though, I think the overall philosophy of the budget is changing for the better but we must improve its alignment with the overall economic objectives by taking a much more detailed view of the deliverables in relation to expenditure. That requires a certain shift, which I will not comment on here.

JAMAICA'S ENERGY OPPORTUNITY (PART 2)

AS a result of the numerous responses to last week's article, I thought it would be good to do a part 2. This is also based on my very firm belief that a focus on the efficient use of energy could be the single most beneficial economic activity for Jamaica. As I indicated, a mere 30 per cent reduction in our energy bill could eliminate our trade deficit within four to five years, and so a focus on a comprehensive energy policy would be most beneficial to the country.

In response to a comment from Omari last week:

(1) I agree that it would be more beneficial to focus on an overall energy project but one could argue also that as long as the cost of even a small project is less than the operations it makes sense. Prudence would dictate, however, that the most effective approach is used, as the rest of the world is exploring energy options and if their projects are more cost-effective then although our own may cost less than what currently exists, relative costs will be higher; and

(2) The payback period is typically six to eight years, but the way I implemented the system will cut my payback in almost half. Remember it is not just access to capital that is important but how it is used, which is why professional financial assistance is always prudent.

One other person indicated to me that he used grid-tie technology where the system runs on solar entirely from panels, but the excess produced by the panels not used is pushed back to the grid by turning the JPS metre back. He therefore indicated that he just used JPS at nights and does not invest in batteries. Apart from being illegal, if the numbers are worked out then there is no real benefit as what you push back in the day you use (and more) at nights. A battery backup would allow less JPS use and increase in the payback period, while having the convenience of electricity at night if the JPS supply goes. I guess the emotional thought of beating JPS has trumped the financial logic.

There are two other issues I wanted to address. These are to do with the way in which GCT is computed on the JPS bills and look at what may be an overly optimistic oil cost projection in the IMF projections. The latter is very important because oil is such a substantial cost to the country.

JPS GCT
The first thing is that the JPS is known to estimate many of its monthly bills. Therefore if they are going to charge GCT on consumption above 200KWH per month, then effectively what they are doing is levying estimated tax assessments on the public. This leads to another concern with the computation of the GCT component, and the JPS (and OUR) may want to tell the public how they will deal with what could be an overestimation of tax.

The table above shows two scenarios, based on an actual consumption over three months of 650KWH. In the first case there are two estimated bills of 150KWH each, based on prior consumption patterns, and in the second case three actual readings. The assumption of a $30 per KWH is used, and shows in case 1 where GCT comes out at $450, while the actual readings show GCT of $150, which is what the customer is actually liable for. So because the JPS does not provide an accurate reading per month the consumer is overtaxed by 200 per cent.

The question therefore is how the consumer is going to be protected against this possible overcharge of tax on their bill, which effectively is an overestimation of tax. The truth is that unless the JPS does actual readings each month then it cannot guarantee against this happening. The other policy that needs to be understood is how they will adjust GCT charges on bills that are erroneously sent to customers, as it is very easy to misread the analog metre.

There needs to be some policy direction from the OUR and JPS on this. I would hope that the OUR gave some thought to this. It doesn't affect me, though, as my consumption is less than 200KWH per month.

IMF oil projections
The other concern is the oil price projections in the IMF document, which projects oil price to average (barrel) - US$77.30 (2010/11); US$79.90 (2011/12); US$81.50 (2012/13); and US$83.40 (2013/14). These prices seem to be optimistic given the global energy realities as outlined by the International Energy Agency (IEA) and that oil is currently close to $80 per barrel ahead of 2010/11 and with the world still facing economic challenges.

The IEA states the following:
* Oil demand and price will peak in 2025, and until then oil prices will be on the increase. China and India will account for the steepest increases;
* The greatest demand increases will come from coal, followed by oil and then natural gas;

* Oil supply into 2030 will be mainly from "Fields yet to be developed and found". It goes on to state that the cost of finding oil continues to rise (a higher break-even price) and that there is a declining investment in new oil fields (declined by 19 per cent in 2009); and

* Demand is increasing at a faster pace than supply. Output from existing fields will drop by almost two-thirds by 2030. IEA states "Additional capacity of around ...four times current Russian capacity, is needed by 2030 -- half to offset decline at existing fields and half to meet increased demand".

These arguments also do not include any geopolitical concerns that may arise. It seems very likely therefore that next fiscal year oil could average between US$80 and US$90 per barrel and increasing until 2025, or until new sources of energy are found. The problem is that trends show a steady reliance on fossil fuels.

The question then is how we address our own energy policy going forward. The Green Paper on Jamaica's Energy Policy states that energy use is approximately 98 per cent from fossil fuels and the main users are bauxite/alumina processing (36.6 per cent); Electricity generation (24.7 per cent); and Road transportation (23.5 per cent). These three account for 85 per cent of Jamaica's energy use.

What is needed is an energy policy that targets these areas in specific ways, so that if we can secure policy-based loans to reduce usage by 30 per cent to 40 per cent by 2014, we could save up to US$791 million in 2014 alone. But this needs a multi-policy approach. For example, the bauxite/alumina sector should be looking at coal, wind and hydro; businesses and residences should be looking at solar and wind; and road transportation should be looking at investing in bio-fuels as well as providing more investment to develop the infrastructure and discipline in the public transportation system.

Although many think that natural gas is the way to go I am not a big fan of that approach. My own belief is that based on the demand-supply equation, coal will continue to be a cheaper option, and that coal technology will get better and provide cleaner coal. But that is just my own view based on the cost versus the financial benefit.

What is clear, though, is that the price of fossil fuels will continue to increase over the next 10 to 15 years, and as a poor country we will be negatively impacted. The IEA is very clear on its projections and we should make every effort to ensure that we use some of that sunshine we sell to tourists.