Over the past few weeks, Jamaica has been grappling with the issues of a credit rating downgrade, a fragile fiscal situation, and a reported 3.9 per cent decline in the economy. The GDP numbers show that the only sector that has shown any positive signs of worth is agriculture.
On the other hand the benefits of the economic contraction we are facing are manifest in a stable foreign exchange rate, low inflation, and the ability to reduce interest rates given the contracting demand in the economy. In other words, the economic contraction has provided the country with a clean slate on which to draw a new design for the economy.
In order to create this new design though, we are going to have to sit down and carefully determine where we want to go and what the best options are to get there. We also have to remember that an economy is made up of individual players, who contribute to the macroeconomic numbers we love to bandy about, and create a system of reward that will encourage the type of economic behaviour we need to drive the economy forward.
This need to chart a new course for Jamaica is the most important task facing the country's policymakers now. The global crisis has provided us with that opportunity and if we mess it up this time, the consequences will be dire. It is therefore very important that we not only have all hands on deck, but that a team is constructed that will have nothing else to do, but chart the economic course for Jamaica. This must be the only job of the team, with no distractions of any other office.
SWOT analysis
In order to determine what plans are needed for Jamaica's progress, we have to approach it like any company that is involved in a strategic retreat. We first have to take a hard look at what Jamaica's long term objectives are and what is the vision we want to achieve, like the 2030 mission statement of making Jamaica the choice place to live and raise families.
After we have very carefully determined what our strategic objectives are, we should go about looking at a 'SWOT analysis' for the country, that is the Strengths, Weaknesses, Opportunities, and Threats that must be considered to achieve the defined vision.
We would, of course, seek to exploit the strengths and opportunities and put policies in place to eliminate the weaknesses and threats. As an example, how do we benefit from the opportunities in the fields of music and sports and how do we eliminate the threats presented by low literacy, onerous bureaucracy, and the abuse of our citizens? In the case of the Armadale inquiry for example, one logical outcome must be that those who were responsible for the horrific treatment meted out to the wards are held accountable for their actions as would be done in any self-respecting country.
This SWOT analysis would allow us to then plan the specific strategies we need to implement in the short, medium, and long terms. It would also allow us to determine which resources we will need to meet those strategic objectives and how best to spend those resources. Without this clear plan as to how we need to move forward as a country, we will continue to grope in the dark, shooting aimlessly at any obstacle that comes in our way without being sure whether it is a real target or a decoy.
For example, the biggest long-term problem we face as a country is production and productivity, which manifests itself in the balance of payments. The immediate short-term problem we face, however, is the fiscal problem, and the fact remains if we do not address this short-term problem we will not have the wherewithal to deal with the longer-term one. It is therefore very important that we understand what needs to be done in the short term and what the dependencies are. Without a proper understanding of this relationship we will only continue the downward spiral the country has found itself in since the 1970s.
Incentivising economic progress
But how do we ensure that the individual behaviour we seek to encourage finds its way into positive economic development-type behaviour patterns? At the heart of this is determining what the role of government is from the role of the market economy. I have always publicly stated my preference for the market economy as the main allocation method for economic resources.
The public sector bureaucracy has been too involved in determining the allocation of our scarce economic resources, which is one of the reasons for our lack of economic development. Examples include the takeover of private companies during the FINSAC era, the allocation of some of our best farmlands to sugar, and the allocation of scarce tax resources to prop up unprofitable public sector entities. All these experiences helped create a situation where we have to bear the high cost of inefficient resource allocation in the high interest rates we have been paying since the 1990s.
The question many would have is, that being the case, why wouldn't we have experienced high interest rates before the 1990s, when the government was always trying to allocate resources based on political and other non-economic considerations? The answer to that question is that prior to the 1990s Jamaica had a closed economy and was therefore protected from global competition. One consequence of this was foreign exchange restrictions. It is therefore more important now than ever that the market be used as the primary means of allocating resources.
The role of government therefore must be to create the incentives to push the market in the direction where we want it to move. The design of these incentives cannot be managed by bureaucrats and special interest groups sitting in a room by themselves to determine what is best for the country. It must be a very deliberate planning approach by a team of professionals, with no special interest employed by the government, and must be carefully looked over by the government and aligned with the country's strategic objectives based on the SWOT analysis.
This will of course mean understanding what sectors we truly have a comparative advantage in, rather than those we get aid from like sugar, and being aware of the main challenges facing the country. Coming out of this process, the government should then objectively create the incentives needed to encourage market behaviour towards economic progress. A failure to do so will mean a continuation along the path we have taken for the past three decades.
Friday, August 21, 2009
Friday, August 14, 2009
Are Jamaica's economic problems also social
The Bank of Jamaica governor recently held his quarterly press briefing and pointed to developments in the economy, which, although not promising, are vulnerabilities that we can take advantage of. The governor stated, as expected, that the economy declined by 3.5 per cent to 4.5 per cent for the last quarter and that the exchange rate is stable, inflation remains relatively low, and interest rates have declined.
These factors are not unexpected, and in fact is what I believed would happen in the economy. This is a natural effect of capacity leaving the economy. The fact is that Jamaica's economy, since the 1970s, has been propped up by debt. The increasing dependence on debt began in the 1970s and continued to the mid-1980s when the debt/GDP ratio rose to as high as 212 per cent. It then declined, as a result of the much higher growth levels being experienced, to 90 per cent in 1990. Since that time the debt/GDP ratio has been on an uptrend.
What has happened is that, since last year, we have not been able to borrow to supplement our inadequate income. This has caused a reduction in the country's capacity, resulting in a slowdown of economic activity, as 72 per cent of our economy relies on imports. The reduced foreign exchange and reduced demand have subsequently resulted in a scale-back of business/economic activity. Because of this scale-back in activity the demand for foreign exchange has dwindled (resulting in a stable exchange rate), and inflation is low because there is a lot less money chasing the goods in the economy.
The positive signals we are seeing in the economy are not because of growth, but more so because of (i) a contraction in the economy; and (ii) stagflationary pressures.
The positive effect, though, is that this provides us with the perfect opportunity to realign our economic structure and start to move forward on the right footing. Caribbean Cement has made the appropriate adjustments and is now focusing more on the export market where the real growth opportunities are. There are many companies, however, that do not have the export opportunities available and by now should have gone into retreat and made decisions.
Given where we are now, what the country needs to do is take advantage of opportunities by putting into place policies that will encourage export-led growth rather than building back the structure as it was before. This means that policies must encourage agriculture, tourism, and small business more than any other sectors. Some businesses will die and this is a fact we must accept if we are going to make that fundamental paradigm shift. The advice to businesses that I have always given is to get a professional who understands projections and the economic realities to guide you through your deliberations. One person told me that they had a retreat with their management and staff to discuss the prospects and it didn't help. Well, if you strategise with the same people that helped you get to the situation you are in, what do you expect?
This brings me to what I think the fundamental problem with Jamaica is, and why our economic behaviour is not geared more towards productive activity. The fact is that macroeconomic outcomes are nothing more than the accumulation of individual effort at the micro level. Therefore, if the micro activities are not encouraged to act for the best economic outcome, then what do we expect at the macro level? The fact is that Jamaica's debt problem is represented by the number of persons who themselves seek debt for things like car and furniture purchases rather than business activity.
The problem that Jamaica has is therefore fundamentally social. We must always remember that economics is a social science, so that if the social behaviour is not geared towards productivity, then we cannot expect the macroeconomics to be okay. We need to address the social problems effectively, if we are going to deal with the fundamental economic problems.
The way we have always sought to deal with our economic problems is to either borrow money or tax people more. The result of borrowing, of course, is obvious, and when more and more taxes are piled on people this encourages counterproductive economic behaviour. By imposing more taxes, we find that the only way to keep the economy going is by borrowing money.
A few years ago, as an example, I was elected chairman of a strata, which at the time had an overdraft at the bank. When I looked at the challenges facing the strata it was mainly because (1) there were unnecessary costs; and (2) persons were not paying their maintenance fees. Increasing the fees would not have made a difference, under the same behaviour, as it would merely mean spending more money irresponsibly and, secondly, it would not fix the problem of delinquency. So what was needed was to change the behaviour of expenditure and delinquency. Over the three years of average inflation of 12 per cent per annum we increased the maintenance fees around 15 per cent. More importantly, we set about changing the behaviour. At the end of the day we were not well -liked but, three years later, I left the strata with over $1 million in the bank for capital development. Today, it is one of the best-maintained properties without question.
Similarly, in Jamaica we do not seek to change behaviour, but we expect different results. Over the years we have expected that there will be an improvement in crime, but fail to control even the traffic on the roads or even the noise at nights. I see the Commissioner trying to deal with it, but the many years of neglect and the ingrained social behaviour present a serious challenge.
Again, we lament the poor relationship between the police and citizens, but the police are always being accused of brutality. What is an even more frightening situation is that the police are being accused of preventing journalists from carrying out their jobs, and seeking to arrest them if they resist. This is a very dangerous development that we must stop, and if untrue then must be clearly proven not to be so by the police.
The way we organise our social relationships will determine our economic future. We cannot have a truly productive society if our social relationships do not encourage a focus on the type of behaviour that will develop into production and productive relationships. At the heart of this is the way we treat and develop our human resources, as any well-run company will tell you. If the people within an organisation or country are not respected, outcome will be dire.
While the country faces vulnerabilities, this is not necessarily bad as the structures that have broken down were not very secure in the first place. The economy must, by necessity, contract before it can start to grow properly, just as you have to demolish an old building before a new one can be built.
What is necessary now is to put in place policies that will fundamentally change our productive relationships. It starts with how our society is organised.
These factors are not unexpected, and in fact is what I believed would happen in the economy. This is a natural effect of capacity leaving the economy. The fact is that Jamaica's economy, since the 1970s, has been propped up by debt. The increasing dependence on debt began in the 1970s and continued to the mid-1980s when the debt/GDP ratio rose to as high as 212 per cent. It then declined, as a result of the much higher growth levels being experienced, to 90 per cent in 1990. Since that time the debt/GDP ratio has been on an uptrend.
What has happened is that, since last year, we have not been able to borrow to supplement our inadequate income. This has caused a reduction in the country's capacity, resulting in a slowdown of economic activity, as 72 per cent of our economy relies on imports. The reduced foreign exchange and reduced demand have subsequently resulted in a scale-back of business/economic activity. Because of this scale-back in activity the demand for foreign exchange has dwindled (resulting in a stable exchange rate), and inflation is low because there is a lot less money chasing the goods in the economy.
The positive signals we are seeing in the economy are not because of growth, but more so because of (i) a contraction in the economy; and (ii) stagflationary pressures.
The positive effect, though, is that this provides us with the perfect opportunity to realign our economic structure and start to move forward on the right footing. Caribbean Cement has made the appropriate adjustments and is now focusing more on the export market where the real growth opportunities are. There are many companies, however, that do not have the export opportunities available and by now should have gone into retreat and made decisions.
Given where we are now, what the country needs to do is take advantage of opportunities by putting into place policies that will encourage export-led growth rather than building back the structure as it was before. This means that policies must encourage agriculture, tourism, and small business more than any other sectors. Some businesses will die and this is a fact we must accept if we are going to make that fundamental paradigm shift. The advice to businesses that I have always given is to get a professional who understands projections and the economic realities to guide you through your deliberations. One person told me that they had a retreat with their management and staff to discuss the prospects and it didn't help. Well, if you strategise with the same people that helped you get to the situation you are in, what do you expect?
This brings me to what I think the fundamental problem with Jamaica is, and why our economic behaviour is not geared more towards productive activity. The fact is that macroeconomic outcomes are nothing more than the accumulation of individual effort at the micro level. Therefore, if the micro activities are not encouraged to act for the best economic outcome, then what do we expect at the macro level? The fact is that Jamaica's debt problem is represented by the number of persons who themselves seek debt for things like car and furniture purchases rather than business activity.
The problem that Jamaica has is therefore fundamentally social. We must always remember that economics is a social science, so that if the social behaviour is not geared towards productivity, then we cannot expect the macroeconomics to be okay. We need to address the social problems effectively, if we are going to deal with the fundamental economic problems.
The way we have always sought to deal with our economic problems is to either borrow money or tax people more. The result of borrowing, of course, is obvious, and when more and more taxes are piled on people this encourages counterproductive economic behaviour. By imposing more taxes, we find that the only way to keep the economy going is by borrowing money.
A few years ago, as an example, I was elected chairman of a strata, which at the time had an overdraft at the bank. When I looked at the challenges facing the strata it was mainly because (1) there were unnecessary costs; and (2) persons were not paying their maintenance fees. Increasing the fees would not have made a difference, under the same behaviour, as it would merely mean spending more money irresponsibly and, secondly, it would not fix the problem of delinquency. So what was needed was to change the behaviour of expenditure and delinquency. Over the three years of average inflation of 12 per cent per annum we increased the maintenance fees around 15 per cent. More importantly, we set about changing the behaviour. At the end of the day we were not well -liked but, three years later, I left the strata with over $1 million in the bank for capital development. Today, it is one of the best-maintained properties without question.
Similarly, in Jamaica we do not seek to change behaviour, but we expect different results. Over the years we have expected that there will be an improvement in crime, but fail to control even the traffic on the roads or even the noise at nights. I see the Commissioner trying to deal with it, but the many years of neglect and the ingrained social behaviour present a serious challenge.
Again, we lament the poor relationship between the police and citizens, but the police are always being accused of brutality. What is an even more frightening situation is that the police are being accused of preventing journalists from carrying out their jobs, and seeking to arrest them if they resist. This is a very dangerous development that we must stop, and if untrue then must be clearly proven not to be so by the police.
The way we organise our social relationships will determine our economic future. We cannot have a truly productive society if our social relationships do not encourage a focus on the type of behaviour that will develop into production and productive relationships. At the heart of this is the way we treat and develop our human resources, as any well-run company will tell you. If the people within an organisation or country are not respected, outcome will be dire.
While the country faces vulnerabilities, this is not necessarily bad as the structures that have broken down were not very secure in the first place. The economy must, by necessity, contract before it can start to grow properly, just as you have to demolish an old building before a new one can be built.
What is necessary now is to put in place policies that will fundamentally change our productive relationships. It starts with how our society is organised.
Friday, August 07, 2009
What are Jamaica's options?
While the country prepares for the IMF, another blow has been delivered in the form of an Independence Day (birthday) gift. Namely, Standard and Poor's (S&P) has downgraded us to CCC+, which it indicated earlier in the year it would have done if conditions did not improve.
So now that both the IMF and the S&P downgrade are here, what next for the country?
It is quite clear we face severe challenges as a result of the onslaught of the global crisis. These are illustrated in what I consider to be the country's "financial statements", the Balance of Payments (BOP) and the Fiscal Accounts. For anyone who was paying attention to the trend of these accounts it would have been clear that both the IMF and the S&P downgrade were inevitable, as any basic financial analysis would have shown the country trending to this position.
There are three indicators that would have been cause for concern, namely:
1. Since tracking the fiscal accounts the first three to six months of the fiscal year always show positive cash flows over budget;
2. Since the last published BOP numbers, oil prices have moved from just over US$30 per barrel to over US$71 per barrel. The implication of this of course is that our import bill will increase, while at the same time our exports have been declining; and
3. While there is a fall in imports (outside of oil), this is against the background of an economy where 72 per cent of our GDP output is based on imports for local consumption. The inevitable result of that as it shows in the GCT and SCT on imports (from the fiscal accounts) is a contraction in the economy.
So it is obvious that the 2009/2010 fiscal year is going to be a very challenging one, and for more reasons than just the fiscal out-turn. While many continue to espouse the "green shoots" in the global economy, they forget some very important factors as they relate to Jamaica. While I have always believed that the global economy will start to see a bottoming and a slow start to recovery come the last quarter of 2009, the fact is that the Jamaican economy will still continue to feel negative consequences for the following reasons:
. Initially the global recovery will be a jobless recovery. In fact the recent US earnings results and consumer confidence numbers are not as good as expected. Jamaica's main foreign exchange earner depends on jobs in the US and UK mainly. This means that even after recovery starts, alumina/bauxite and remittances in particular, and tourism to some extent, will still see a negative impact;
. Oil continues to be in an uptrend and as the US economy in particular starts to show increased recovery. There will be an increased demand for oil and the US dollar will continue to lose value internationally, sending up the price of oil (based on a cursory look at the charts oil could end up between US$90 and US$100 per barrel by the first quarter of 2010). The implication for Jamaica is increased imports in dollar terms;
. A declining US dollar will be bad for Jamaica, as our main foreign exchange earnings are in US dollars, so prices from places like China, Europe and Canada will increase; and
. The more fundamental factors are crime and bureaucracy. The fact is that the cost of crime and bureaucracy on Jamaican businesses is greater than even the cost of high interest rates and will negatively affect investments in the areas that will lead us out of the slump - agriculture and small businesses. The greatest benefit for future growth comes from solving these factors that are under our own control.
Two main areas of focus
The two main areas that we need to focus on are: (1) the Balance of Payments (BOP); and (2) the fiscal accounts. These require different actions, but if both areas can be brought under control then the fundamental paradigm shift required in the economy can be achieved with the least pain possible. It entails, however, taking the correct policy decisions that will drive the appropriate economic behaviour to favour reductions in both.
One of the calls that many seem to be saying today is "export or die". While that is commendable, it is a longer-term target, as if we wait on exports to pick up to save the economy then we will be in for a long, painful ride, as it takes time for businesses to get up to speed with exports. For example, although we have been seeing growth in the agriculture sector, this will not result in the increase in exports we need in the short term to deal effectively with the BOP challenge.
In order for the economy to realise the paradigm shift needed, it must first contract. The reason for this is because 72 per cent of our GDP output is based on imports for local consumption, while only 28 per cent is based on exports. This means that we need to see around 50 per cent of GDP value change from production for local consumption to exports in order for foreign exchange inflows to equal outflows, given our current level of imports for production. If not managed correctly this can be a very painful exercise.
The fact is that on an annualised basis Jamaica will lose between US$1.4 billion to US$1.8 billion out of total foreign exchange earnings of approximately US$6.6 billion, a loss of at least 20 per cent. This will no doubt result in a slowdown of economic activity, even with IMF support, which will result in the painful experience of many businesses either significantly reducing profits or making losses. If not managed correctly, one of the painful consequences will be that many businesses will close their doors, leading to negative social and economic consequences. The natural extension of this is less tax revenues for the fiscal accounts, and this in itself will force the reduction in government spending, further contracting the economy.
It is therefore critical that policies are put in place to make this necessary transition as painless as possible, and while a part of that solution must be some borrowing from multi-laterals (after receiving the IMF stamp of approval), it cannot be seen as the panacea. The only real solutions must come from the fiscal policies implemented to deal with first reducing the imports of oil and food, an easier short-term solution than "export or die".
So while we fall at the feet of the IMF, let us remember that it is nothing more than a bank intent on being repaid, and just like a bridging loan for personal use, is no cure for a relative shortage of income. If we do not implement the necessary policies to transition during the period of IMF support we will only end up with more debt and the same problems.
Small business
Apart from the need to implement policies to (i) reduce crime and bureaucracy (the biggest problems we can control directly), (ii) reduce dependence on oil, and (iii) reduce dependence on imported food; the real growth in the economy will come from an increase in small business activity. It is therefore very important that the improvement in the environment to encourage small businesses continues. The main inhibitors to small businesses are crime and bureaucracy.
There is, of course, a need for cheaper financing. Even if present, in a difficult environment to operate the chance of success is reduced. So as I have always said, even if we have cheaper funds available for small businesses, if the small entrepreneur sees business risk from crime and bureaucracy, then why would he borrow? Business is all about risk management and entrepreneurs will always assess the risk in relation to payback on their investment.
It is going to be a difficult adjustment in the economy and will be painful for some businesses. How painful it is going to be will depend significantly on how much we embrace the change and what policies are put in place to make the transition easier, just as the US realised the need for stimulus funds to ease its own economic crunch.
Unlike the US, however, Jamaica does not have the money needed to create a fiscal stimulus programme sufficient to significantly halt the slide in the economy. It is therefore necessary that the limited funds available be used in a targeted manner, not to try to create a surplus of funds to replace the dying economic activity, but rather as a targeted stimulus for new businesses to emerge. My vote therefore has always been, and continues to be, the spending of stimulus primarily to support the emergence of small businesses.
The logic is simply that if funds are limited, then you have to look to spend those limited resources in the area(s) that provide the greatest growth opportunities. In a declining economy, it is going to be very difficult for large businesses to expand and create jobs, so the creation of jobs must come from the emergence of small businesses. In addition, the market economy is always going to be able to grow much quicker than the bureaucracy of government.
So as I wrote in July 2008, 2009 will be the most difficult economic time for independent Jamaica. At the time I wrote it many shrugged off what I was saying as pessimism about the Jamaican economy, but that was what all the numbers were showing. Let me hasten to say that it is strictly as a result of financial analysis, based on my training as an accountant, and not any form of "card" reading, lest I be thought of as some sort of sorcerer and condemned to be burnt at the stake.
The question now therefore is, what do the numbers show about the economy for 2010? While I have an opinion on that, I will continue to reserve it for now, and say that it depends on what policy actions are taken. If we take the appropriate steps now, then 2010 could be a better year, but not without some amount of pain first. If, on the other hand, the wrong steps are taken, 2010 could very well end up being worse than 2009.
Just like when we gained independence in 1962, we are again faced with choices to make about our future. These are not choices to be faced by the government alone. The choices have to be made by all of us about what sort of 2010 and beyond we will face as a country. Which road will we choose?
So now that both the IMF and the S&P downgrade are here, what next for the country?
It is quite clear we face severe challenges as a result of the onslaught of the global crisis. These are illustrated in what I consider to be the country's "financial statements", the Balance of Payments (BOP) and the Fiscal Accounts. For anyone who was paying attention to the trend of these accounts it would have been clear that both the IMF and the S&P downgrade were inevitable, as any basic financial analysis would have shown the country trending to this position.
There are three indicators that would have been cause for concern, namely:
1. Since tracking the fiscal accounts the first three to six months of the fiscal year always show positive cash flows over budget;
2. Since the last published BOP numbers, oil prices have moved from just over US$30 per barrel to over US$71 per barrel. The implication of this of course is that our import bill will increase, while at the same time our exports have been declining; and
3. While there is a fall in imports (outside of oil), this is against the background of an economy where 72 per cent of our GDP output is based on imports for local consumption. The inevitable result of that as it shows in the GCT and SCT on imports (from the fiscal accounts) is a contraction in the economy.
So it is obvious that the 2009/2010 fiscal year is going to be a very challenging one, and for more reasons than just the fiscal out-turn. While many continue to espouse the "green shoots" in the global economy, they forget some very important factors as they relate to Jamaica. While I have always believed that the global economy will start to see a bottoming and a slow start to recovery come the last quarter of 2009, the fact is that the Jamaican economy will still continue to feel negative consequences for the following reasons:
. Initially the global recovery will be a jobless recovery. In fact the recent US earnings results and consumer confidence numbers are not as good as expected. Jamaica's main foreign exchange earner depends on jobs in the US and UK mainly. This means that even after recovery starts, alumina/bauxite and remittances in particular, and tourism to some extent, will still see a negative impact;
. Oil continues to be in an uptrend and as the US economy in particular starts to show increased recovery. There will be an increased demand for oil and the US dollar will continue to lose value internationally, sending up the price of oil (based on a cursory look at the charts oil could end up between US$90 and US$100 per barrel by the first quarter of 2010). The implication for Jamaica is increased imports in dollar terms;
. A declining US dollar will be bad for Jamaica, as our main foreign exchange earnings are in US dollars, so prices from places like China, Europe and Canada will increase; and
. The more fundamental factors are crime and bureaucracy. The fact is that the cost of crime and bureaucracy on Jamaican businesses is greater than even the cost of high interest rates and will negatively affect investments in the areas that will lead us out of the slump - agriculture and small businesses. The greatest benefit for future growth comes from solving these factors that are under our own control.
Two main areas of focus
The two main areas that we need to focus on are: (1) the Balance of Payments (BOP); and (2) the fiscal accounts. These require different actions, but if both areas can be brought under control then the fundamental paradigm shift required in the economy can be achieved with the least pain possible. It entails, however, taking the correct policy decisions that will drive the appropriate economic behaviour to favour reductions in both.
One of the calls that many seem to be saying today is "export or die". While that is commendable, it is a longer-term target, as if we wait on exports to pick up to save the economy then we will be in for a long, painful ride, as it takes time for businesses to get up to speed with exports. For example, although we have been seeing growth in the agriculture sector, this will not result in the increase in exports we need in the short term to deal effectively with the BOP challenge.
In order for the economy to realise the paradigm shift needed, it must first contract. The reason for this is because 72 per cent of our GDP output is based on imports for local consumption, while only 28 per cent is based on exports. This means that we need to see around 50 per cent of GDP value change from production for local consumption to exports in order for foreign exchange inflows to equal outflows, given our current level of imports for production. If not managed correctly this can be a very painful exercise.
The fact is that on an annualised basis Jamaica will lose between US$1.4 billion to US$1.8 billion out of total foreign exchange earnings of approximately US$6.6 billion, a loss of at least 20 per cent. This will no doubt result in a slowdown of economic activity, even with IMF support, which will result in the painful experience of many businesses either significantly reducing profits or making losses. If not managed correctly, one of the painful consequences will be that many businesses will close their doors, leading to negative social and economic consequences. The natural extension of this is less tax revenues for the fiscal accounts, and this in itself will force the reduction in government spending, further contracting the economy.
It is therefore critical that policies are put in place to make this necessary transition as painless as possible, and while a part of that solution must be some borrowing from multi-laterals (after receiving the IMF stamp of approval), it cannot be seen as the panacea. The only real solutions must come from the fiscal policies implemented to deal with first reducing the imports of oil and food, an easier short-term solution than "export or die".
So while we fall at the feet of the IMF, let us remember that it is nothing more than a bank intent on being repaid, and just like a bridging loan for personal use, is no cure for a relative shortage of income. If we do not implement the necessary policies to transition during the period of IMF support we will only end up with more debt and the same problems.
Small business
Apart from the need to implement policies to (i) reduce crime and bureaucracy (the biggest problems we can control directly), (ii) reduce dependence on oil, and (iii) reduce dependence on imported food; the real growth in the economy will come from an increase in small business activity. It is therefore very important that the improvement in the environment to encourage small businesses continues. The main inhibitors to small businesses are crime and bureaucracy.
There is, of course, a need for cheaper financing. Even if present, in a difficult environment to operate the chance of success is reduced. So as I have always said, even if we have cheaper funds available for small businesses, if the small entrepreneur sees business risk from crime and bureaucracy, then why would he borrow? Business is all about risk management and entrepreneurs will always assess the risk in relation to payback on their investment.
It is going to be a difficult adjustment in the economy and will be painful for some businesses. How painful it is going to be will depend significantly on how much we embrace the change and what policies are put in place to make the transition easier, just as the US realised the need for stimulus funds to ease its own economic crunch.
Unlike the US, however, Jamaica does not have the money needed to create a fiscal stimulus programme sufficient to significantly halt the slide in the economy. It is therefore necessary that the limited funds available be used in a targeted manner, not to try to create a surplus of funds to replace the dying economic activity, but rather as a targeted stimulus for new businesses to emerge. My vote therefore has always been, and continues to be, the spending of stimulus primarily to support the emergence of small businesses.
The logic is simply that if funds are limited, then you have to look to spend those limited resources in the area(s) that provide the greatest growth opportunities. In a declining economy, it is going to be very difficult for large businesses to expand and create jobs, so the creation of jobs must come from the emergence of small businesses. In addition, the market economy is always going to be able to grow much quicker than the bureaucracy of government.
So as I wrote in July 2008, 2009 will be the most difficult economic time for independent Jamaica. At the time I wrote it many shrugged off what I was saying as pessimism about the Jamaican economy, but that was what all the numbers were showing. Let me hasten to say that it is strictly as a result of financial analysis, based on my training as an accountant, and not any form of "card" reading, lest I be thought of as some sort of sorcerer and condemned to be burnt at the stake.
The question now therefore is, what do the numbers show about the economy for 2010? While I have an opinion on that, I will continue to reserve it for now, and say that it depends on what policy actions are taken. If we take the appropriate steps now, then 2010 could be a better year, but not without some amount of pain first. If, on the other hand, the wrong steps are taken, 2010 could very well end up being worse than 2009.
Just like when we gained independence in 1962, we are again faced with choices to make about our future. These are not choices to be faced by the government alone. The choices have to be made by all of us about what sort of 2010 and beyond we will face as a country. Which road will we choose?
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