Lessons for the economy — mountain bike style

IN October I used a bicycle ride to point out lessons for the economy. Today, I will do so again, using a different type of cycling — mountain bike style.

On Boxing Day, I started with a mountain bike ride from Liguanea to Irish Town and back. I hadn't been on my mountain bike for a while, preferring the road bike because of its speed and smoothness, but having already experienced descending from Newcastle on the road bike, on the rough potholed-filled road, I knew it wouldn't be pleasant. I therefore chose to go up on the mountain bike, which is sturdier, has shocks and much bigger tyres.

The lesson here is that as we go into 2013, it is critical to understand the vision of where we want to end up and ensure that we have the right people and systems in place to ensure we meet those goals comfortably. It is time we admit that Vision 2030, as currently being pursued, will not happen. In many instances, I think we have good people in the public sector but the system they have to work with does not facilitate initiative. So it is tantamount to buying a professional footballer to play in a prep-school competition. In other words, if we are serious about getting investments in the country in 2013, one of the priorities to address is the archaic bureaucracy that inhibits initiative and growth.

We started our journey through Hope Pastures, then unto Hope Gardens, before we made our way up the hill to Irish Town. Knowing fully well that we needed to conserve most of our energy for the climb, we spent the first mile or so just getting warm enough.

Going into 2013, the biggest tasks to face are the completion of the IMF agreement, tackling law and order effectively, the energy crisis, and unemployment. We must therefore recognise that it is essential to plan which tasks to tackle, and how to execute them, in order to receive the maximum benefit. We will not be able to do everything because of scarce resources so we must select the ones which will result in the greatest immediate benefits.

Take the IMF agreement, for instance. I agree with Minister Phillips that we must ensure that the programme is practical and does not leave Jamaica in a worse position. All the prior IMF agreements have not been to the benefit of the country, yet we always return to them. On the other hand, the longer we wait to sign the agreement, the less leverage we will have because it is a race against the NIR level.

When riding up a hill, there is always pain. Your legs burn as the lactic acid builds up and you have to keep drinking to get the electrolytes back in your body. The most important thing to do is to mentally block out the pain as you climb the mountain. If you think about it too much, and allow your mind to get the better of you, you will stop.

In 2013, we must set out at a pace that ensures we get to our destination, also ensures that we achieve our target. Setting impractical goals and making too radical decisions could result in pain without success. I am thinking about the targets under an IMF agreement. In 2010, the targets were unrealistic. Despite this, we continued with them until Minister Phillips recently admitted that we can't just take any agreement. It makes no sense to have pain with no gain. If the agreement is unrealistic all we will have is pain.

Just like riding up the hill we needed to drink, similarly in 2013 if we are to tackle unemployment and bring growth to the economy there needs to be stimulus spending from as early as the first quarter.

After we got to our destination, it was time to make the trek downhill. This is the fun part. Descending the hill at speeds of up to 27 mph, and having to avoid the pot holes, loose dirt, watching for the oncoming vehicles, and ensuring you make the corners without going over the cliffs, brings a certain rush. You have to ensure that you are focused on the task of descent, when going at those speeds; else you could easily end up in an accident. I have seen this happen. However, once things go well, it is most enjoyable.

In 2013, Jamaica will face its own challenges. We will have our own version of a fiscal cliff, as I expect revenues will be weak as the economy remains weak. It would also be bad for the economy, and ultimate fiscal revenues, to increase taxes. So I don't think that is a practical option. What we will have to do is focus on what are the underlying causes of the problems, and "spear fish" rather than "net fish" to solve them. In the past, what we have done is just place a Band-Aid on the problem. So we allow inflation, devaluation, borrow money, or raise taxes. What this has done, however, is just kick the can down the road. The reality we face today, however, is that there are no more roads to kick the can down. We are at a point where the "chickens have come home to roost".

One of the things we must do is take some risks in our policy decisions. I find that our bureaucratic rules are so conservative that nothing usually happens when needed. What we must do is take the risky policy decisions that causes a game changer.

The new year is one that we will either (1) feel the joy (adrenaline) of fixing the economy once and for all; or (2) see significant declines in our economic fortunes.

This takes me back to where I started, however. The journey to success depends on ensuring that the best people are on board and that the system facilitates the needed initiative. When I say correct people I just don't mean public sector workers, but very importantly the boards of public bodies and the leadership that will take the needed decisions.

I don't think the actions we need to take have to be very painful if the correct fiscal policy decisions are implemented. However, the longer we wait then the more painful the actions will have to be.

Inspirational story for 2013

As we go into 2013 there is a true story I have to share with you. I have commented on it already but based on even more recent developments, I think I should expand it.

About 2 years ago I spoke to someone who was an office help, and told her that she should think about starting her own business. At the time she kept saying she wanted to get another job as her contract would soon be up. I kept talking to her and told her that what she would earn rom a job would be insignificant in comparison to having her own independent income. This is a fundamental principle mentioned in the book “Achieving Life’s Equilibrium”, as it is truly the only way to true financial independence.

If you think about it this person had everything working against being a business person. She was not highly formally educated, has always had a job, was a typical person who splurged on new hairstyles and nails every week, and just was not thinking about any form of business.

She eventually came to me about 9 months ago and said she wanted to try her own business but had no capital. As I also explained in the book, I told her that capital was overrated. I sat down with her and discussed what she had a passion for, and she said it was food, as she thought that she could start a business with food. I then explained to her that she should start with no overheads and start small.

Therefore guided her to start with selling slices of a cake. So she started her business with one cake. She did that for about two weeks and then moved to two cakes, then three, and so forth. What it did was to transform her way of thinking, as she stooped going to the hairdresser frequently, as she said she needed to save capital for her business. She also (through discussions with me) started to think about new business ventures. Every day she would come to me and talk to me about a different idea she had. Soon her business expanded to the point where she was dealing with different products, her customer base is growing, and she is now making more money than when she was under contract.

I saw her recently and she has got a mortgage to purchase a piece of land and is starting to build her own home soon. She currently lives in the inner city but says that she wants to move, not because she is ashamed of where she is from. She says that there is a lot of business potential there but what kills it is the violence and the many young boys just sitting on the corner everyday. She says that the environment is disrupting her ability to expand.

I expect that soon she will be looking to hire someone to assist her as she is extremely busy these days and pops in to see me only to discuss new ideas and get guidance as to how to approach her business.

I truly am proud of her, as the transformation has been nothing less than magnificent. I have spoken to many well educated persons, who have been in financial trouble and they were not able to overcome. Why. Because of an attitude and just believing and having the discipline to realize goals.

I am trying to get her to tell her story but she is shy about doing so. I am sure that one day she will be contributing to the employment of the country and paying her taxes as she is organizing her company affairs now.

What is christmas really about? I want to put another spin on what the real meaning of Christmas is. We have come to know Christmas and the new year as a time of festivities and gift giving. And also a time to rest after a long year of work, assuming of course you are employed (by someone or preferably by yourself). However, shouldn't we be viewing Christmas as the following: - at time to reflect on accomplishments over the past year. We always talk about setting new year's resolutions but never review our accomplishments against goals set at the start of the year. We don't really review our personal achievements versus plans. - shouldn't we also be reflecting on how we have individually impacted positively someone else. In other words what is the sense of your life if you have not added to society. Whether it be national building or helping someone to achieve personally or ensuring your child becomes a positive impact - instead of putting ourselves in debt shouldn't we practice prudent spending and ensure that we use it as a time to plan and help others plan for the future. It seems to me that the season has become too commercialized and is really about businesses extracting money from people and ensuring they owe them for the rest of the next year and then start the process again. So when we think about Christmas and our actions, the question must be asked, are we looking at it the wrong way

The economy in 2013

ONE question I get a lot is: what is to be expected of economic performance in 2013? In particular, people want to know about the IMF agreement, the exchange rate, inflation, and GDP growth in particular.

My response usually is: it depends on a few things. Firstly, it depends on the timing of the IMF agreement, and even after we get the agreement signed, it also depends on what the terms of the agreement are. It also depends on what happens in terms of employment and disposable income levels. It depends a lot also on the direction of fiscal policy.

Hundreds of job seekers turn up at the Christian Fellowship Church to to apply for warden vacancies at a Correctional Services Department recruitment drive. Unemployment levels are at 12.8 per cent, according to the latest government figures.

The fact is that there are so many uncertainties that the best one can do is make some general predictions about what can be expected depending on the timing and outcome of the factor mentioned above.

What we can say is that:

1. By the end of 2012 we will be looking at an exchange rate of above 93. Going into 2013, depending on the timing of the agreement and the terms, we could see further slippage of the dollar or stabilisation and a possible small revaluation. The further the IMF agreement appears to be, then the more the exchange rate will depreciate and the longer the wait, the faster the pace of depreciation could be. Therefore, it is crucial that we have an agreement in place as soon as possible. Bear in mind that there is a time within which the agreement must occur, as the race is against the level of the NIR. What I would caution against, though, is purchasing US$ now and putting it down as cash deposits, as the possibility is that unless you have matching liabilities, then it is really too late to acquire US$ and just put it down based on the present available information. In summary, at one extreme, while I do not expect any significant revaluation, if any, at the other extreme, the level of the rate depends on the timing and terms of the IMF agreement.

2. I expect that there will be inflationary pressures, primarily as a result of the exchange rate depreciation in recent months. This, however, does not necessarily mean that we will see runaway prices, as this also depends on what happens with employment and real disposable incomes. The fear here is that if unemployment remains high, and/or disposable incomes reduce, then we could be flirting with an undesirable economic term called stagflation. This simply means the inability to raise prices, because of weak aggregate demand, even though costs have increased. The result of stagflation is always a reduction of business activity, leading to higher unemployment. In any event, I expect that 2013 inflation will be higher than 2012, and may be in the region of low double digits. If it is lower then it means that businesses will come under pressure and some may not survive. Based on the devaluation, some inflation is going to prove necessary for business survival. There are of course certain assets, such as real estate and motor vehicles, where inflation will be higher than the average. It is for this reason that I believe that real estate is a good investment, and, in fact, one should have been looking at real estate as an investment option from a few months ago. This is because prices were depressed and interest rates relatively low.

3. One question that comes up every time I speak about the attractiveness of mortgage rates is, where will interest rates go? I do expect that we will see an uptick in interest rates in 2013, but no sharp increase. The factors that will cause an increase include a weaker Jamaican dollar, and continued trade deficit problems; slightly higher global rates as demand increases for loans with a slow recovery in global growth; and increased risk in emerging market debt, such as Jamaica. However, global rates will still remain relatively low and I think Jamaica's primary source for loans will be from multilaterals, once we finalise the IMF agreement, which means lower debt rates. Financial institutions will also continue to compete for loans, as demand will remain weak and consumers will make more informed financial choices.

4. I also expect that unemployment will decrease in 2013. There are three primary factors that will lead to lower unemployment. The first is that the government will increase stimulus spending and also bring on new projects. Secondly, a signed IMF agreement, and the seeming desire to bring back law and order will lead to increased private investments. Thirdly, I see that public transportation will improve and, also, that more persons will move towards cheaper energy sources (with or without government), resulting in higher disposable income levels.

5. The trade deficit will continue to be a problem, but I think it can improve slightly. This improvement can come as a result of lower dependence on oil, for transportation, retail consumption, and more offices going with cheaper energy sources. I don't hold out much hope for industrial energy use becoming more efficient, however. At the same time, we could see a slight improvement in exports, but primarily oil and food imports could reduce and improve the deficit.

All of this is going to be dependent on fiscal policy, and timing and terms of an IMF agreement. In other words, if the government seeks to raise more tax revenue in this weak economy, then the result could be further contraction of the economy. However, if they seek to provide some stimulus to the economy, whether directly or through projects like the highway and port expansion, then the economy will improve. Another example is with regards to law and order. If the drive to improve discipline continues, then we could see greater security and confidence coming back to the economy.

An IMF agreement that comes too late, or with unfavourable terms, would do little to bring back confidence or improve living standards. Therefore, if we do not ensure that we secure a timely and practical agreement then all the predictions above will be different. The IMF, however, will only be a Band-Aid on a much bigger problem, and if we are not carafe will be back where we are today, just as we are back with a debt problem after the 2010 JDX.

I have to applaud the efforts to regularise the zoning of communities, and importantly, residential communities must be purged of businesses.

At the end of the day, however, businesses and individuals must ensure that they do proper planning now and also continue to monitor the environment, as the range of outcomes is still very dependent on policies going forward. It is important for businesses to work with the necessary expertise in order to make correct business decisions.

To all my readers, happy holidays.

The real effect of austerity

One of the raging arguments since the 2008 global recession has been between those supporting austerity and those supporting stimulus (Keynesians). Everyone knows I have always come down on the side of the need for stimulus, and have even gone as far as to say that we should be moving towards value added debt, as a greater risk is to shrink the economy and standard of living to the point where is difficult to retrieve.

Those in favour of austerity say, lets just deal with the pain now so that we can correct the future. In other words take some hunger now so that we can eat later. The only problem with that is that most of those who propose austerity measures are in a position where the effect will be that they will have less savings, not eat less.

I do realize the need for responsible fiscal spending, but that should be always. Not just in a recession but especially when there is growth. What the pro-austerity persons don’t realize is what is the real effect of austerity.

The real effect of austerity is the impoverishment it creates among those who are already poor. What it does is create a situation where we deepen and prolong the cycle of poverty for the most vulnerable, and even working poor, amongst us. What it does is play Russian Roulette with the lives of people, as there is no certainty that it will solve the problems, as in the case of Europe. What it does is ensure that a child grows up without hope, and wonder if they had done something in a past life to deserve the sort of suffering they have to grow up in.

What austerity does is create a uncaring attitudes and uncivilized behaviour that causes people to be callous to each other. What it does is create a lack of resources that causes the justice system to be unjust, the police not to have the resources to protect the people, that results in a general level of indiscipline and lack of law and order in the society because we can’t even afford to pay jurors to deliver justice, because they are hungry.

Austerity is another way of saying, if my family and I are ok then we can ask others to make the sacrifice.

I was motivated to put this on paper because of a very recent situation where someone I know very well was murdered leaving a family and friends to ask the question, why? and having to live with this reality for the rest of their lives.

I am not saying that this is directly linked to an argument around fiscal austerity but just saying so to highlight the fact that if we do not have enough funding to deal with the social waywardness, to make sure the police are effective, to ensure children have equal opportunity and proper nutrition growing up, to ensure that men can find adequate employment to raise their families and live their lives with dignity then we will have a problem.

We will have a problem like Greece, where they have applied fiscal austerity for over three years and still have an unemployment of over 25%, which is higher among youth. Where they have regular worker demonstrations because of the impact of austerity on the ability of people to eat. And still they don’t expect any significant improvement in their debt to GDP ratio until after 2020. So what happens until then to the vulnerable.

As the PM says, we have to balance people’s lives while we balance the books.

So the next time we speak of fiscal austerity, and not responsible fiscal spending, while not recognizing the need for stimulating the economy, as the US, China, and Brazil have, as opposed to Europe, and we have also realized the need as is evidenced by JEEP and such programme; think about what the real effect of austerity is, and then put yourself in that situation.

Restructuring Jamaica for growth and development

I think it is patently clear to everyone that the policies for Jamaica's growth and development have not worked. Since the 1970s, the country has been generally on a downward trajectory. We have seen pockets of growth, but the general trend has been a decline in our economic and social fortunes.

Recently we have seen where the Jamaican dollar has been depreciating, and the latest fiscal numbers show that we are significantly behind on projections for revenue and the primary surplus targets. It is also important to understand that the last half of the fiscal year is always the most challenging for meeting revenue targets and for cost containment. This is because (i) the greater amounts of revenues are always targeted towards the last quarter, and (ii) the lack of accrual accounting for expenditure means that earlier commitments always show up in cash expenses towards the end of the fiscal year.

Jamaica’s balance of payments problem is dominated by the cost of food and oil, which now stands at almost US$88 a barrel.

Because of these situations, we are once again faced with the need to have an IMF agreement. Continuing our long courtship with the IMF since the late 1970s. This consistent need to be with the IMF should tell us that the policies we have pursued are just not working, and it is time for a shift. Jamaica faces structural deficiencies and until we tackle these head on, and solve them, then we will continue having to run to the IMF for macroeconomic stability support. Just like a child who runs to his parents every time he makes a bad decision and needs financial support.

So how do we address these structural deficiencies and put Jamaica on a path for growth and development. I deliberately did not say put us "back" on that path, because the truth is that even during the periods of growth since 1962, the fact is there was a failure to address these structural deficiencies, hence why we always fall back into economic and social malaise.

The first thing we need to do is understand the current challenges we face, and prioritize those risks to our development, just as any company would do. So what we must do is identify all the challenges and look at what value they can create if they are dealt with. In effect we need to perform a SWOT analysis of Jamaica. This is something I have written about and so will not get into any details.

My own view is if we were to perform that analysis then we would see that the main risk to Jamaica's economic and social development lie in three primary areas. The first is the balance of payments, which the problem is dominated by the cost of oil and food. The second is the cost of crime, which in my mind is the lack of law and order. And the third is the cost of the bureaucracy. My own analysis shows that if we were to just focus on policies to quickly eliminate these threats (risks) then we could easily add upwards of $100 billion to the GDP.

This is not to say that there are no other risks of importance, but as Jimmy Moss-Solomon said to me once, when your time or resources are limited just focus on the priority areas and execute well. If we were to focus on these three areas then we could start seeing significant economic and social positives within three to six months.

The current situation that faces us today, however is that we have a fiscal and balance of payments challenge. Today the fiscal challenge is more critical, although not what is going to solve the long term problem. The IMF programme of 2010, or any other one, as shown by the history, will not solve either the fiscal or other economic challenges. All it can do, as with the past programmes, is provide a temporary reprieve. The solution is with us.

One simple example comes to mind, and this speaks the mindset of the Jamaican people. When this administration came to power, various groups called for the removal of GCT on electricity, as it was a promise that was taking too long. My view at the time was the GCT should remain, and that the proceeds should be used to fund credits for "compliant" tax payers who chose to go with renewable energy solutions at home. The public would have none of that. Imagine if we had done that and we were able to get a 30 per cent reduction in electricity consumption as a result. We also would have had more work for people in energy solutions, and for each dollar saved it would have gone directly to consumption. Hence raising living standards.

So that single policy decision would have resulted in reducing our import bill by at least US$200 million ($18.4 billion), which would have gone into the pockets of consumers, and into the economy. It also would have increased GDP spending, as this is money in the hands of those with a greater propensity to spend. It would have increased the profits of companies and resulted in a lower demand for foreign exchange and could have spurred local production of renewable energy solutions.

There are other policy decisions that the public pressured governments into taking the wrong action, which could have resulted in GDP growth if it had gone the other way. The reality is that many times the policy actions we pressure governments to take result in our own demise, and then we end up blaming our governments for something we wanted them to do because it was in our short term interest.

One MP who I think has done good analysis and taken a practical decision on pension, and ultimately fiscal, reform is Mikael Phillips. Let's see what will play out with this.

We can still take those policy decisions and cause a paradigm shift in our economic and social fortunes if we want. It doesn't take anything more than the will to do it and the cost is negligible compared to the value added that will accrue.

With each day we do not take that action though, the options narrow. Today we are faced with a situation where we need to conclude the IMF agreement, but the fact is that we can do things that will significantly decrease our dependence on the agreement. It is only through restructuring the deficiencies in our economic and social framework that we will find a sustainable solution to economic and social development, just as Lee Quan Yew did in Singapore.