Making the case for stimulus

When we are faced with a slowdown in earnings, it is always natural to seek to reduce spending and hunker down for more difficult times. This reaction is logical when we are faced with uncertainty and is the principle behind business and consumer confidence measures. Naturally if you have tremendous earning power then you will go out and spend today what you expect to earn in the future.This is what the world did, particularly the US and Jamaica, which ended up in the financial crisis we saw emerging in 2007. If, on the other hand, you are uncertain about your future income, you will feel the need to cut back and spend only on essentials as you want to preserve your lifestyle as long as possible.

So too it is with a country's fiscal accounts. When times are good there will be the urge to spend, spend, spend. Jamaica did this when we had bauxite money and so too did Trinidad with their financial wealth from oil.

But is this the best approach to ensure economic or personal development, or is it a sure way to continue on a downward spiral? After all, you can never improve if what you are doing is simply saving the income you already have, as you will still have to eat and soon your income will be depleted if there are no new financial.

In the 1920s there was a soft drink called Moxie, which was more popular than Coca Cola and Pepsi, and in fact was the most popular soft drink in the US at the time. It is still produced today, and is in fact the longest continuously produced soft drink in the US, but is only a strong regional brand today. In the depression of the 1930s, Moxie Company decided to cut back on its advertising spending, and instead focused on building sugar reserves. Coca Cola on the other hand, through Robert Woodruff's leadership, took the decision to expand its advertising during the depression, and in fact marketed the brand globally during that time.

Today the results are there to see, as I am sure that not many of you reading this column knew about the Moxie soft drink and its history.

This flies in the face of the natural motive of wanting to cut back on expenditure in the lean years, and in fact supports the case for stimulus funds. In other words how can you sustain a company, economy, or person if the solution to lean times is to cut back on spending continuously? A strategy focused around continuously chopping expenses, without seeking more revenues will inevitably lead to one consequence.

This is why I believe that the recent action taken by the UK to slash fiscal expenditures in the face of a declining economy will only further weaken that economy. This is especially so in the light of the stagnant global climate.

The concept of the need for government spending in times of a retreat of private sector spending is the argument behind Maynard Keynes' economic arguments. And this I think is what saved the US, and by extension the world, from economic collapse. If the US had gone the route of the UK we would all be literally "sucking salt through a wooden spoon".

This is why I have always made the case for carefully calculated stimulus funds to be injected into the economy by the government, and why I welcome the concept of the JDIP and the recent acquisition of a US$20 million loan to the SLB. I welcome this type of spending in particular because of what the funds are targeted for. In the case of the JDIP the spending is targeted at improving the country's infrastructure, and we have recently seen how fragile and underdeveloped our infrastructure is. And in the case of the SLB loan, it is always welcome to see increased funding for access to higher learning.

After all, it is this type of spending on infrastructure and education that is needed to drive this country forward. They will not only have the short-term effect of immediately providing short term stimulus to the economy but will have the more beneficial longer-term effect of creating value added in the economy, which will in turn contribute to productivity and investments.

I am happy to see these initiatives in the face of the contractionary effects of the IMF programme.

It is important to understand, however, that not all increases in expenditure are good, whether in times of excess or scarcity. It is very important that we understand this concept, and not focus on cutting back on expenditure when times are bad but spending unwisely on all sorts of consumption when times are good. I am sure that many OLINT and Cash Plus victims today wish that they had saved some of the excess they received during the days of prosperity, instead of the lavish spending of monies they expected.

Similarly when the world was expanding rapidly, and everyone was willing to lend us money, we borrowed as much as we could and spent primarily on consumption,using borrowed funds. In fact in 2004 our fiscal budget saw less than 5 per cent being allocated to capital expenditure. After all, times were good and we thought that Jamaica could always get money to borrow. In fact one thing that always surprised me, as an accountant, was our seemingly stupid celebration of the fact that we were able to always go to the market and get loans This was hailed as a success,but I could never understand the wisdom behind that viewpoint.

As an accountant I am always wary of debt, and manage it carefully within what we refer to as the debt to equity ratio. Or in economic terms, the debt to GDP ratio.

One may feel tempted to argue that based on this argument we should not borrow anymore, but that also is a nonsensical argument, as debt as an absolute is never bad, no matter how much it is. What is bad about debt is how it is used. In other words ,as long as the marginal revenue of debt is greater than the marginal cost of debt, then debt is theoretically always good. There are of course other factors that enter into the equation but these require much more discussion which can be undertaken at a future date.

The point I am trying to make is that even though we do not have the reserves or power of the US, we still need to provide stimulus to move the economy forward. It is because of the slowdown in government and private sector spending that led to the increase in poverty levels. And a country, company, or person that seeks to continuously cut back on spending in order to avoid crisis, actually only shifts the crisis to a point where it starts to feed on itself for survival until there is nothing left. That is the law of nature.

I therefore welcome the JDIP and SLB loan, and look forward to similar well thought-out projects of that nature. This is not the time for the timid. We need to be bold like Coca-Cola but we must do so guardedly and ensure that the expenditure is made wisely, by using the right minds to implement the policy, otherwise we will end up much worse than where we are today.

We must avoid the arguments like the one I read in the article reporting on the SLB loan, which hailed it as increasing the access for poor people. It is not about poor and rich people, but rather about where the expenditure adds the greatest value.

The objective of economic development

If you don't know where you are going then any road will take you there. This is obvious, as without a destination in mind then there is clearly no incorrect strategy, as wherever you end up will be appropriate for the strategy employed. So there are two choices from this analogy - (1) let the strategy determine your destination; or (2) let the destination determine your strategy.

As I listen to various commentators on Jamaica's economy, most fall within two categories, namely those who believe that the government is on the right path and those who believe they are the wrong path. Logically only one group can be correct, unless of course the objectives of the arguments are different. That is if the objective is simply that either the JLP or PNP hold state power, then seemingly logical arguments can be made to support both sides. If, however, the objective is for economic development then it is more difficult for both sides to be correct. Or can they both make valid arguments? Clearly they both can make valid arguments if the objective of one side is macroeconomic and fiscal stability while the other is improvement in the standard of living of the population.

This is why it seems so paradoxical to accept the arguments that (1) the fiscal accounts are improving but the economy is declining; (2) interest rates are down but loans are down; or (3) increase in the debt to GDP ratio can be good for the economy.

The answer as I indicated lies in the objective of the argument or strategy.

So this is why I have said that even though the IMF is pleased with our performance under the programme, this is not necessarily an indication that the economy is improving. It is simply an indication that the fiscal accounts are improving, and that the IMF feels the programme is working within the context of the objectives outlined in the programme. Also the fact that the economy has declined for twelve consecutive quarters does not mean that the fiscal management programme is not the right policy, and that the team at the Ministry of Finance (MOF) is not doing a good job.

Again what this depends on is the responsibility of the MOF team and their objective. I have always maintained that the objective of the MOF is not to generate economic growth but rather to manage the fiscal accounts and macroeconomic indicators, so that the former is not unbearable (as we have had since the 1990s) and the latter is stable. If they achieve these two objectives, in my view they would have done well to deliver on their responsibilities.

I believe the MOF has been able to deliver both relatively well, and therefore the emphasis on their performance to explain a declining economy will only lead us further down a path we have been on for a long time: an unknown destination.

I think that in order for us to be able to start solving our economic challenges, and move towards real economic and social development, it is important for us to first define what we want to gain from economic development. If the objective of economic development is macroeconomic stability and improving fiscal numbers, then we have achieved it and we can all rest easy. If, on the other hand, economic development means economic growth and improved income levels and standards of living, then we have a very far way to go.

If we accept the latter definition, then it means that there are some other things we must accept. First is that proper fiscal management and economic development are not mutually exclusive, and in fact both usually go together, which is why in the 1990s when we had declining fiscal numbers, what we had was not development but some growth. On the contrary, in the latter part of the 1980s we had a stable exchange rate, relatively lower interest rates, declining debt to GDP ratio, economic growth, and productivity improvement. That, in my view, was development as opposed to growth.

So we must start to understand that economic development does not rest entirely or even significantly at Heroes Circle. In fact, my own belief is that the Heroes Circle team is properly executing their responsibility, and would be welcome in any organisation in the position they represent : the Finance department.

If not at that address, where does responsibility for economic development lie? In my view economic development depends on the policies that encourage the expected social and economic behaviour that leads to vibrant economic activity, productivity, and wealth. Encouraging this behaviour pattern does not reside with the MOF but rather relies more on ministries such as Labour, National Security, Health, Education, Local Government, Transport, and the Office of the Prime Minister. It is these ministries that control the organisations that can affect social and economic behaviour.

As an example, if over the years the proper planning and quality control had gone into building our road infrastructure and the planning of residential and commercial zones, then that would have made a significant difference to the approach and cost of investments. Wouldn't it have made a significant difference to the cost of production, as the cost of transport and planning for things like telecommunication infrastructure would have been less? If we had a security force, which over the years took the approach that is being hinted at by the present police commissioner, then wouldn't we have a much less violent society to enjoy, and wouldn't that translate into more productive people? If we had a proper education system in place, and means of funding it, then wouldn't that result in more productive resources and greater opportunity for everyone?

The fact is that one of Jamaica's biggest problems is our objection to rules and regulations. So even though we are prepared to live in the well ordered and highly rules-based US, we are not prepared to accept the same for our country. Therefore when the authorities decide to move against illegal squatting, there are some politicians or citizens who will cry oppression. Never mind the long-term effect on infrastructure and the economy. We have long known what it is to be the "now" generation from even before the internet, as we have always sought short-term satisfaction over long -term gain.

Are we prepared to embrace economic and social development? I don't think so. because we have not made that paradigm shift in our thinking and approach that is required to take us from complaining to action.

Our focus on criticising the authorities, or whoever stands in our way, continues to be unproductive because it does not comply with our objectives. If we want to move towards successful economic development then we must have a clear definition of what that development is, and that view must be shared by all stakeholders. Everyone will not get everything they want, but everyone may get most things they want.

Until then we will continue on the path we are on, without knowing our final destination.

Jamaica after the global recession

MOST persons agree that the worst of the global recession seems to be over for now. There was a heightened risk of a double dip occurring, which is still possible, but this has been reduced with the return of growth to emerging economies. The US and Europe, while still seeing growth, have certain inherent risks present, as much of what caused the crisis has still not been rectified. What is obvious, though, is that it will be a very long road to recovery, measured in years.

So now that the worst of the recession has passed, how does Jamaica find itself? There was much discussion at the start of the recession that Jamaica must find a way to derive benefits from the downturn, so that when the recession ends we will be in a much better position to capitalise on the recovery. The question must therefore be asked, what has been the result?

No fundamental change
In short, can we say that in 2010 we are more ready to take advantage of the global recovery - as slow as it will be - than we were in 2007? The short answer to this is, we are no more ready to take advantage of it than we were then, and in many respects we are even less ready to do so. I will examine why I say so, but first want to point out that one of the significant reasons we are unable to do so is because of our mentality as a welfare state, where we blame the authorities (government and public sector) for everything. This has resulted in us casting the blame where the problem does not originate and therefore we end up chasing the wrong solution.

This misdirected blame is a fundamental cause of our inability to successfully tackle our problems. I have always maintained, for example, that the finance ministry cannot resolve the economic challenges on its own, as its remit encompasses only the fiscal situation, and through the BOJ it can only try to influence short-term monetary policy. The longer-term economic development depends more on the social and environmental issues affected by non-financial policies.

So while the finance ministry has seen successes in the fiscal and macroeconomic areas, the social and environmental conditions do not allow for the benefits of those successes to filter through. This will create the impression that the policies out of that ministry do not work, when in fact they do work within the confines of our social and environmental conditions. The same is true of the policies pursued by the agriculture ministry.

The success lies in the fact that if those policies were not pursued the country would have been in a much worse position than in 2007. But this is not easily measured or appreciated, as success for most is not measured by dangers avoided, but rather by income growth, as most people will not have the ability to look at the opportunity cost or benefit.

As an example, the increase in the number of persons below the poverty line was always going to be expected, as the last two to three-year period has been the worst economic time we have faced in independent Jamaica. One could argue about the rate of increase, or the extent of the poverty within the poverty group, but any argument without significant analysis of policy choices during the period would at best be superficial. But I guess on both sides the arguments make for good politics, and that as we know is more important for not only politicians but for Jamaicans to be able to debate.

Reduction in crime commendable
I say that because since around 2008, as a country we have been more interested in debating scandals and various other politically motivated issues than having any real discussions about how we as a country will ensure that at the end of the global recession we are more equipped to take advantage of any recovery.

So in 2010, after having many scandals and other political issues argued, we still do not find ourselves with any greater comparative advantage. We find that we have a much worse infrastructure, which means that our tourism product has not improved in any way to compete with places like Cancun; our road networks have been devastated by a little rain resulting in our farm roads being destroyed; and there are no greater incentives for small businesses to flourish. In fact, I remember my call in 2008 for loans to deal with infrastructural development being dismissed by other commentators who thought the way to go was to reduce debt in a recessionary environment.

On the other hand we have seen where crime has declined — which is to be commended, and is a positive sign for investments. And we have seen stability in our macroeconomic measurements and reduction in interest rates. We have also seen a renewed attitude in the police force that I believe will cause the transformation that is needed to permanently cause the improvement in public order and discipline if continued. This must be encouraged.

When we look at the real economy, however, we see that the structure is still the same as it was in 2007. The fact is that we haven't seen any fundamental shifts in how our economy is structured, and this is reflected not only in the GDP numbers but also the Balance of Payments (BOP).

The table shows the export, import, and oil import numbers over the last one year. It further shows the ratios of imports/exports and oil/imports. What the table shows is that over the past year we have seen the ratios of imports to exports and oil to imports basically remaining in the same average. The implication of this is that there has been no change in the relationship between the economic factors, and hence productivity of inputs.

Similarly, an examination of the GDP numbers shows that there is the same basic relationship between our export producing versus our consumption producing sectors. One positive that has occurred is that there has been an improvement in our food and beverage and tobacco categories of imports, both declining by 9 per cent and 11 per cent respectively, in the January to May 2010 versus 2009 period. This no doubt has resulted from the policy actions of the ministry of agriculture. The manufactured and miscellaneous manufactured goods categories showed a 0.8 per cent decline and 15.15 increases respectively in the same period, however, reinforcing the point that the relationship between the GDP sectors has not shifted.

So while we have seen successes on the fiscal management side and in the agriculture sector, we cannot say that there has been any positive fundamental shift in the economic structure that will allow us to create a greater comparative advantage. The reasons for this, however, will not be found in the usual suspects we pursue, as the chronic social, political, and cultural nuances of the country have caused much of our challenges.

There are still of course options that we can take to ensure that we hasten the path to economic and social development but are we as a people ready to embrace this? I am not sure.

Improving our infrastructure

The recent effects of Tropical Storm Nicole showed us once again that Jamaica is a poor and underdeveloped country. It seems as if every time the rains fall the infrastructure damage is always greater than the time before. I can't imagine what would happen to us if we were to get a really serious category 4 hurricane.

This as far as I am concerned is a test run, and should alert us to the state of disrepair of our infrastructure. This problem is one that has been lamented for years, and has been in the making for a very long time. The fact is that there has been no serious upgrading of our infrastructure, apart from the north and south coast highways built in the early part of this decade. When I used to comment on the need to put money into our capital infrastructure, this is the sort of debacle that I envisioned would happen if (1) enough funds were not allocated for development, and (2) the funds were not properly spent.

The fact is that there has been no serious upgrading of our infrastructure, apart from the north and south coast highways built in the early part of this decade.

Insufficient capital expenditure
It is clear that the fiscal programmes have failed in both areas. The fiscal budget from 2004/5 (the earliest information on the MOFPS website) shows that in that year only 4% of total expenditure went into capital expenditure, and not all of that went into infrastructure spending. Over the years that amount has marginally increased, and in this year's budget the amount allocated to capital expenditure is 16% of total expenditure.

Secondly, the damage done to our roads after a little rain, or even just from regular use, shows that the quality of the road work has been deplorable. We have simply been laying down asphalt without any concern for proper road construction. Consequently, the little money that we have spent on our infrastructure has been frittered away, because the drainage and the durability of the roads were not considered. Bouygues has had to come to show us how to build roads.

Currently there is some controversy about the JDIP, which is to be funded by a US$340 million loan from the Chinese and an injection of US$60 million from the GOJ. I can't believe that at this time when (1) some stimulus is needed for the economy because of the economic downturn, and (2) the need for a proper road infrastructure which the poor taxpayers have paid for time and time again, we are indulging in a war of words which could lead to a delay in the spending. I can understand the need to ensure that the money is properly spent, and the NWA should be held to account for the quality of the spending, but we must ensure that these funds get into the economy.

The fact is that infrastructure spending is necessary in order to counter some of the negative effects of the economic downturn, as many people have lost jobs, particularly in the construction sector, and we need this spending in order to bring back some amount of consumer demand. My view would be that the decision as to where the funds are spent should be ultimately decided by the responsible organisation, the NWA, based on the infrastructure needs. The NWA must be held to account to deliver work of high quality. Slipshod work is taking us back to an almost primitive state. We must as taxpayers, represented by the GOJ and the Opposition, demand that our tax dollar is spent in an efficient manner.

I am in support of the Minister of Transport in his bid to ensure that this programme is undertaken and that a proper multi-modal transportation system is developed. The JDIP will obviously form a critical part of that transportation system. For too long the people of Jamaica have been transported like cattle, instead of enjoying a decent and efficient way of moving around, starting from the disbanding of the JOS. This has been a failing of governments from the 1980s through to the present, with some amount of improvement coming during Peter Phillips' tenure as Transport Minister. Moving people around is essential for a vibrant economy, and Minister Henry's intentions must be supported for the good of the country.

Two JDIP arguments
There are two other points that have been made about the JDIP:
1. That the Road maintenance fund will not be enough to repay the loan. This is an essential point noted by the Auditor General, and needs to be addressed. I believe, however, that it shouldn't be addressed by slowing down the programme but rather consider the loan from a value added return perspective. The question is, will the programme allow for value-added to the economy that will justify finding the additional funds to pay back the loan? If the answer is yes, then as I always say, debt is always good up to the point where the marginal return equals the marginal cost; and
2. That there is an amount of approximately US$30 million to US$40 million to be allocated to management fees. Some have even suggested that this means that less money will be available for spending on the roads themselves as money will have to be paid for management fees. Well, I think that proper management of the project is essential, and if there is not proper management in place then the project should not go ahead. Without proper management we may end up with the same low quality of output we have seen in the past. What we must ensure is that appropriate, management is put in place and an assessment is done to ensure that the management fees are appropriate but it is better to have fewer well managed projects than more projects with a lack of proper management skills.

What is clear from the rains that we have experienced is that Jamaica's capital infrastructure is woefully lacking. If we are serious about achieving the mission of the 2030 vision, which includes the place of choice to live for families, then of necessity we must have a proper capital infrastructure. We cannot continue to have infrastructure where one has to be avoiding potholes, flooded roadways, roads without proper sidewalks for pedestrians, or the risk of a bridge collapsing while you crossit, or being cut off from civilasation because a bridge has collapsed and there is no alternative route.

My advice to those sparring about the politics of the JDIP is that the programme is necessary for the current economic state and Jamaicans generally. Let's not cause both to suffer because we see this as another political football. Please sit down and iron out the differences, and let us ensure that the programme goes forward in an efficient manner.

Let the buyer beware

THE term Caveat Emptor is a Latin phrase used in economics, which means "let the buyer beware'. The reasoning behind this philosophy is that the ultimate protection for market transactions is the responsibility of the buyer. This I think is the real essence of the protection in market economies, as one can never truly provide legislation to protect the buyer against every possible infraction by sellers.

Last Monday I was a presenter at a regional conference on banking and credit put on by Consumers International in Barbados, and funded by the IDB. I think it was a very productive seminar, with much discussion on some of the issues that consumers face, and ultimately some of the challenges that lead to market failures. The conference delegates discussed ways to improve consumer protection in relation to the predatory banking practices in the Caribbean.


Banking practices
Ironically the day after the conference ended the Business Observer published an article titled "Jamaican banking region's worst". At first glance it would seem that the World Bank report was saying that Jamaica's banks were the worst in a group of bad banks, but when one reads further it actually shows that Jamaicans embrace banks less than other territories in the region. It showed that Jamaica had the lowest penetration of loans and deposits per 1,000 adult population count.

This is so although there are many branches of the various commercial banks scattered across Jamaica. I believe that there are explanations such as the greater use of instruments through securities dealers and the tendency for many to engage in community-based banking, referred to as "partner".

Whatever the reason, however, one thing that cannot be discounted is the fact that the Jamaican banks are predatory in their pricing towards consumers. Since they are no longer able to make money from the easy pickings of GOJ securities, they have now turned on the hapless consumer who is charged for even thinking of making a withdrawal, or deposit, or even thinking. Such is the nature of Jamaica, where, as a docile bunch of people we allow politicians, banks, and everyone to step all over us in the name of harmony. I would much rather say we dont want to stand out from the crowd.

In other progressive countries, such as the US we all aspire to reach, consumers are a belligerent bunch of people who understand the real meaning of the term Caveat Emptor. So whether it is their politicians, banks, or retailers they give them a piece of their mind when they feel shafted. And in those progressive countries they are supported by the media, rather than wallowing in the alleged misdeeds of others at the drop of a hat.

The fact is that the only way for true market economy development and growth is through consumer development. The problem in the region is that we have a tendency to regulate everything in the name of protecting our poor citizens, who cannot do a job of protecting themselves as the slave mentality still permeates the society. So we must ensure that everything government touches is biased towards welfare, that is, giving a man a fish rather than teaching him to fish.

So for example, education is always a favourite topic for politicians who profess that no one has to pay for education (even if it's just $10,000 or $20,000 per year) but they don't say where the funding will come from.

Here is another example of over-regulation: at the end of the mid-90s financial crisis in Jamaica, regulations were introduced to prevent the recurrence of the events leading to the crisis . In my own view, we went too far and had too much regulation, because we had to protect the naivety of the Jamaican population. The result, I believe, is that the over-regulation stifled capital innovation and development and may have contributed, in this way, to the rise of the Ponzi culture.

Market progress
One may argue that at least our financial system was not impacted negatively by the recent crisis, but then again we did not benefit from the growth before the crisis, and it is a well known fact that markets never move in a straight line as market progress is always tainted with pullbacks, or corrections. But always in the end the net effect is progress. This is the nature of the market economy, that market players overreach, and by doing so create bubbles along the way and there is consequently always pullback.

The irony is that the extent of the recent global financial crisis was caused by the regulators: contrary to the belief that it was the fault of the banks, the crisis (bubble) actually started in the Bill Clinton era, where the rules at Fannie Mae and Freddie Mac were relaxed to allow for the toxic mortgage-backed securities to seem like gold. To support the home expansion, Alan Greenspan reduced interest rates to 1 per cent, and to put the icing on the cake the rating agencies gave these toxic securities AAA rating. All the banks were doing was packaging the securities endorsed by the Federal Government and the ratings agencies. But such is the nature of the short-term memory of people where they will always only remember the last bad act, rather than the millions of good ones before.

Similarly in Jamaica, it was the fiscal policy of high interest rates that led to the financial crisis we faced. The fact is that banks are nothing more than market players trying to sell a product — money — and they will always seek the highest price if the market allows it. The call therefore to crucify the banks (for doing a market function) with regulations is nothing more than an emotional response which has never truly had any long-term benefit. I am the first to admit that the bank's pricing policies are predatory, but the best ways to improve markets are (1) through competition; (2) information; and (3) consumer education.

Any other way will only lead to short-term relief, which simply distorts the market and will lead to another bubble. The bank charges survey that was done by the CAC is one example of what is needed to reduce the charges by the banks, as faced with consumer pressure they were forced to revise down their fees. If we want to see market development then we must give the CAC more resources and regulatory authority over consumer-related issues.

So the emotional arguments about the need to place strict regulations on banks will be nothing more than a futile long-term effort. It seems, however, that human beings are prone to continue making the same mistakes over and over again, as the tendency is always for politicians the world over to play to the cries from the loudest mouth rather than rational reason. I guess politicians are also only market players catering to the demands of their constituents. This is why economic and social progress is always greater in societies with a more educated and aware population, as they know what is best in the long term and place pressure on politicians to represent their ideas.

So it is clear to me that despite the ranting of many who believe banks, politicians, etc. should be muzzled with regulations, if we pursue that path - as a globe - we will only be setting ourselves up for the next round of market failure. And with the efficiency of globalisation, the next one will be worse than what was just experienced. In fact the US is trying to fix the problem with the same policies that caused the problem. So in the end the only true protection against economic and social failure is Caveat Emptor.

Leadership's important role

JAMAICA'S economy has been going through a rough patch for the last 12 consecutive quarters. This has caused much stress to many Jamaicans, and in particular the 80,000 reported to have lost their jobs. We have seen some positives, which include the fiscal management programme [including JDX], the relative stability of the macroeconomic numbers, and the reduction in the murder rate. At best, however, these can only be short-lived without longer term stimulation of consumer demand.

Despite the challenges faced by the economy, however, I believe effective leadership can ensure that we emerge stronger than before the recession. When I say stronger I don't just mean an artificial feeling of wealth that results from debt, but a properly structured and progressive economy. That is what I am hoping will be the outcome of the sacrifices that Jamaicans have made over the past two years. For too many times, since independence, Jamaicans have been asked to make sacrifices with nothing to show.

Norman Manley's vision
For this to happen, however, it is going to be necessary to have effective leadership to take us to prosperity. This is what Jamaicans have craved for a long time and it is time it is realised. I think that even our politicians will accept that political leadership has failed Jamaica, since the vision of Norman Manley and the others who fought for political independence. Our political leaders have done nothing but squander the opportunity afforded us by independence. It seems as if they continue to be more concerned about accusations and scandals rather than the welfare of Jamaicans.

I sincerely believe, however, that with effective leadership and focus, that Jamaica's fortunes can be improved. In fact, effective leadership is going to be critical if we are to navigate the dangerous waters of the global and local economy. Over the past two years, while the national debate always centred around scandals, I have been involved in three public sector successes that resulted from the quality of leadership involved.

The first has been the Air Jamaica divestment, for which I was project manager and had the honour of being the only person involved from inception to the end. When Don Wehby called me to his office and said he was relying on me to make the divestment a success for him, I gave my assurance that I would do my best. The first thing Don did was to pick a suitable person to lead the divestment team, and after we discussed it he settled on none other than the Honourable Dennis Lalor, who managed to successfully bring the project to completion. Having worked on this project, I can tell you that the choice of the appropriate person to lead the project was essential, as it was the quality and co-ordination of the team that ensured success, given the challenges faced along the way. The events make interesting reading but requires a book.

The second team, which has been highly successful, is the Jamaica College School Board. I cannot sing enough praises for the leadership of the Honourable Danny Williams, as board chairman, and Ruel Reid, as principal. The board, led by Danny Williams, worked with the operations, led by Ruel Reid, to make Jamaica College the number one school in terms of facilities and improvement in my estimation. To understand the transformation that has taken place one would need to know where the school is coming from. I can safely say that no other high school offers a more rounded experience for the students, and today Jamaica College is one of the best looking high school campuses, having just completed our new auditorium that is big enough to hold the entire school population.

The third team is the Jamaica Ultimate Tyre Company Limited, which when the board took over in 2007 was making a loss of over $1 million per month and today is making over $2 million per month, and is now looking forward to filing and paying our estimated taxes. The support and leadership provided by the minister of transport was essential in ensuring the successful transformation.

So while the country has been enveloped in the discussion of scandal after scandal, over the last two years, I have been involved in a few successes in the public sector. I am quite certain that there are many other such examples, which we can learn from. It also makes me believe that Jamaica can rise from the economic declines we have been seeing and put this country on a sustainable development path, despite the economic challenges.

Common characteristic
The one common characteristic, in all three cases, was in my view effective leadership. All three cases could have gone a different way if the leadership focussed on the challenges only. But instead, Lalor, Williams, and Henry, all outlined at the start a mission of where they wanted the process to end up, and then they chose the team that was going to work on that mission with them. Whenever things went wrong (such as the scandals) they never attacked anyone on the teams, but rather sought to assist in solving the challenges. In all three cases also they allowed the team members around them to express their views and potential.

I, like many others, have become tired of the finger pointing that has become second nature in our politics, while the people suffer. Given the significant economic challenges that face us if the issue of consumer demand is not dealt with effectively, I think it would be in the best interest of everyone for our leaders to find that consensual working relationship, and finally deliver to Jamaicans the promise of 1962.

The fast tracking of the public sector transformation project is one of the positives that we have seen in recent times. We have been talking about public sector transformation for a long time, and finally it seems like we may get something, even if some believe that it was hurried primarily because of a fiscal crisis rather than a need for improvement.

What I am not sure of, however, is what the end game is. In other words if we just reduce the number of public sector workers without improving service delivery, and other efficiencies, then it would have been a grand waste of time.

Last week I went to a public sector outfit to transact some business. I was always impressed by the transformation they have undergone over the past two years, where the service improved significantly over what it was before. When I went last week, however, one of the critical persons said she had to go to lunch and therefore the persons who were there had to wait until she got back from lunch. There was no replacement, even though the government has increased the fees significantly. Immediately I saw the old culture creeping back in.

This is a problem of leadership. I sympathise with the lady who had to go to lunch, as it was way past her lunch time with no relief. But the managers did not care enough to provide a relief person so that while she went to lunch the public (paying customers) could be served. Again a problem of leadership.

Reviving consumer demand

Last week I indicated that consumer demand is essential for growth in any economy; and this is whatever market system is in place. In 2008 I had indicated that stagflation was the greatest risk that the economy faced, and still faces. Stagflation results from falling / stagnant prices in the face of rising costs. The risk of stagflation results from depressed consumer demand, which is caused primarily by reduced employment or real income levels.

With estimates of job losses in Jamaica since 2007 up to 80,000, and real income levels falling - through job losses, wage freezes, and fewer working hours - this fear is becoming an increasing reality. Although there have been long-standing cries from the MSME sector, the reality of an increasing stagflationary environment is showing up in the published corporate results. We are seeing where consumer companies such as Salada, Red Stripe, and Caribbean Cement are seeing falling / stagnant revenues while experiencing rising costs of sales and administrative expenses. Even in the Lasco Distributors Prospectus we see where the gross profit margin declined from 20% in 2009 to 14% in 2010.

These performances no doubt result from declining aggregate demand caused by an uncertain jobs market. It is therefore going to be very important, if we are to turn around our economic performance, that new jobs are created. We see that even the US has recognized how important jobs are, and President Obama has gone on an all-out war against unemployment.

Inadequate stimulus
The US is reported to have made the mistake of not providing enough stimulus funds initially, so as to create the multiplier effect necessary to halt the economic slide. In our case, one of our failings was the inability of the funds provided by the government for small businesses to have been quickly disbursed to the productive sector.

I had indicated at the time that those funds should have been disbursed directly by institutions such as the DBJ. While recognizing the risk associated with such an arrangement, I had indicated that the risk to the economy of not doing so would have been much greater as more MSMEs would have started to close their doors. The recently held mock funeral, by the MSME sector, is evidence of this.

But what can we do not to halt this slide in corporate performance? And it must be halted because many small companies are either at the end or are nearing the end of their investment cycle. This simply means that they may be making the decision not to continue in business so as not to face further losses. One example of this type of decision is the recent closure of the Amart chain, and before that we saw places like Sammy's shoe store downsizing their operation.

Some persons have said that because of the 12 consecutive quarters of decline the economy is in depression and not recession. A depression is defined as "a severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels". We are experiencing inefficient economic productivity and high unemployment ,but falling prices are yet to come. Falling prices will not come in a uniform manner but will start with prolonged retail sale events, or can be evidenced by falling corporate revenues. While there is some evidence of both happening, I don't think that it is sufficient to say that prices are generally falling. The important thing to understand is that we are close to that, and thus the technical definition of a depression.

This is why I have said that while the government's focus on fiscal management was essential, continues to be , and was effectively executed, there must now be a shift in focus to stimulating consumer demand, through not only increased employment but also increased income levels.

Changing options
The option we had up to last year of direct lending to the MSME sector is still necessary but is no longer sufficient. The decline in consumer demand means that even if funds are available at near zero percent, businesses will be reluctant to borrow, as the probability of making a profit will have declined. What you will find is that people will borrow to secure either current standards of living or refinance more expensive debt. This may be a significant factor in the decline in commercial banking loans and increase in building society loans.
The focus therefore needs to be on stimulating consumer demand. This stimulation can only result from increased jobs and income levels, and so this must be the primary focus going forward. The question may be asked, how one can revive consumer demand in a declining economy and a global environment that is fearful of a double-dip recession? While it has become much more difficult than it was a year ago when consumer psychology was not as negatively affected, it is still possible. What it requires, however, proper analysis and swift implementation. And by swift I don't mean at the rate our public sector wheels turn. In fact in 2008, when the government indicated that it would provide a stimulus to the economy, I indicated to Bev Manley that it would be ineffective because of the slow pace of our public sector bureaucracy.
Within the context of our economy, there are two primary avenues where consumer demand can be successfully stimulated. The first is through import substitution in areas such as agriculture, tourism inputs, and energy. The second is through fiscal incentives, such as reduced taxes and the reduced size of the bureaucracy and more market-supported regulations.
In the case of import substitution this needs to be done through (1) the proper organization of the agriculture landscape - standards of production, properly organized division of labour, agro-processing, and land reform; (2) more organized linkages between the tourism, agriculture, and craft sectors; and (3) focus on creating greater renewable energy sources, which would have the effect of creating jobs, lower energy costs, and the side effect of reducing the monopolistic hold of the JPS. In all these cases, the effect is replacing import costs with a more vibrant local economy.

Fiscal incentives will also create a facilitatory environment for businesses to flourish. This includes tax incentives aimed at encouraging local and export production, reduced bureaucracy, infrastructural development, public sector transformation, and a market encouraging regulatory environment.
The government must continue its focus on prudent fiscal management, including the divestment programmes, and its encouragement of improving the export sector. This is the right policy direction but also needs to add a more significant emphasis on consumer demand stimulation.

It is going to be essential for the government to take the lead in doing this, as with the economic crunch that the private sector has been facing a lot of capacity has left, and I get the sense that businesses are more concerned with remaining in business, which means preservation of cash. Again I will make the observation that this initiative will not be effective within the confines of the current public sector infrastructure

Consumer demand essential for growth

In September 2008, I wrote an article titled "Risk of a double dip recession?" where I pointed to the fact that there was a very real risk of a double dip recession despite "green shoots" at the time. Even though many were professing that the global economy was recovering, I still did not see the fundamental structural changes required to ensure sustainable economic recovery. The only thing happening at the time was the injection of stimulus money and the continued reliance on expanding credit facilities without any impetus to greater production.

Today we see where the gradual withdrawal of the stimulus funds from the US economy has caused increasing concerns of the economy falling back into recession. In fact, as I pointed out at the time, the US and UK economies were still facing high unemployment and delinquency levels.

Similarly in Jamaica, the recent green shoots we have been seeing resulted from the very rational moves to approach the IMF and the JDX. These two factors by themselves provided the economy with the necessary breathing space to allow for the systematic implementation of policies required to ensure that the economy emerges stronger after the recession. The fact is the economy has been in decline for the past two to three years, and it was these two moves that eased the pain that would inevitably have come with the fall of the global economy.

Our own local economy has been seeing some green shoots. Some of these include (1) the relatively successful fiscal management programme, (2) the divestment of certain loss-making assets, (3) the improvement in the balance of payments, (4) the increasing activity in agricultural production, and (5) the focused efforts on restructuring the education infrastructure (I didn't mention the JDX and IMF, as these are actions within a policy direction).

My own view is that these policy actions are in the right direction. My reason for saying this is that the way to achieve sustainable economic development is to ensure the foundation is secure, and so while the direction of these policy actions might bring some discomfort, the deflation of the economy was always going to be necessary in order to build a sustainable base.

However, while these policies are necessary for development, they are definitely not sufficient. And the pursuit of these policies, without other initiatives, can prove to do more damage than good to the economy. My reason for saying this is that the policy actions have mostly been deflationary, that is, they have all resulted in decreased economic activity.

Prudent fiscal management in a declining economy can only come from reduced real expenditure, as real fiscal revenues would have been declining also. Divestment of loss-making entities, while positively impacting the fiscal accounts, also has a negative effect on immediate economic expenditure. The improved balance of payments has come from a greater reduction in imports than a growth in exports, which again negatively impacts economic expenditure. While agriculture is improving, and there is greater focus on improved education quality and planning, the fact is that these will have longer-term effects. We also see that income levels have fallen, as a result of increased unemployment and decreased income levels.

So while it was necessary to deflate the economy in order to properly restructure the base, if we are to avoid the significant negative risk of ravaging deflationary effects, we must ensure that consumer demand does not fall too much. If consumer demand is not addressed, then we face the very real risk of disinvestments and further economic decline. It is therefore imperative that policy must focus on growing consumer demand as an essential ingredient for economic growth.

The only alternative to that is to grow our foreign exchange earnings, or foreign direct investments, but with the risk of declines in the global economy (or continued stagnation), the probability of this happening is decreasing.

Stop the mudslinging
One issue I want to discuss is what I see as a very real distraction to that necessary economic progress. This is what I call the "mudslinging" approach that we have taken on as a society. Because while our economies falter, all we have been doing is saying who is corrupt, who has breached policy or protocol, and the mudslinging goes on and on. It seems as if we are more concerned with decrying everyone else's actions rather than focusing on what we can do to help each other improve, or for that matter the country.

While it is necessary for our democracy that constructive criticism takes place on all issues, we must avoid the name calling and constant battering of everyone that wears a different colour shirt from the one we prefer, as it does not help the country. And what sort of example do we set for the children we claim to love so much? Or do we really care about our children who we abandon to beg on the streets or wipe car glasses for a living.

I for one do not judge someone based on the colour shirt they wear, as it seems to me that the character of the person is more essential. I went to school and grew up with persons in all the political parties; green, orange and blue shirts (I would mention the NNC but don't know what their colour is). And as far as I am concerned their character is substantially the same as I knew them before, so why should they immediately become an adversary because of the colour of their shirts. And this attitude I think is more prevalent in the supporters of the parties than the politicians themselves.

For example, even though I disagreed with the monetary policies pursued by Omar Davies, I have a healthy respect for him as an individual because of interactions I have had with him. In addition, his involvement in his constituency tells me a great deal about his character. Another example is while at the UWI, I was maybe one of the only capitalist-minded persons in Trevor Munroe's politics lectures, and knew his own views, but even so I thought that his contribution to debate and the knowledge he imparted were invaluable.

The point is that if we close our minds to people because of what their own preferences are then we lose the value of their contributions. I also feel good to know that I have been invited to do presentations for small groupings of the G2K, NDM, and PNP; because my own view is that the only way to convince those around me of my own belief is to talk to them. Not stay away. I therefore plead with the leaders, media, and every Jamaican to be more tolerant of each other, as this is the only way that we can move forward as a "nation".

This unity is necessary if we are to grow this economy, as economics cannot succeed without proper social interaction. And the way we have been behaving as a society is dysfunctional. We don't have to agree with everything that someone says to respect them as a person. This type of behavior is the essence of civilisation and intelligence.

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.