Confidence is key to economic stability and growth

Probably the most senseless decision I have ever seen in my lifetime, was the decision by the Cyprus government and European Union to impose a levy of up to ten per cent on bank deposits.

I really cannot believe that persons interested in global market recovery, and solving the Cyprus problem, actually thought that this would have been an acceptable solution. In fact, the consequence of the decision is to cause risk aversion, and goes to the heart of what causes markets to function effectively.

I think the best thing should be for the persons responsible for this decision to identify themselves so that they could be on a list of "registered market offenders" just like the US have a list of "registered sex offenders".

Any way this turns out there may still be a rush to pull deposits out of Cyprus banks, and what the proposal was trying to avoid may happen anyway. That is possible bankruptcy, and certainly capital movement away from countries like Cyprus that need the capital. This is indeed a big setback for developing countries that need capital to move to, not away from their banks.

In fact, the austerity policies being pursued across Europe, which seems to be the work of German influence, is actually sinking the European countries further into recession. Austerity, without adequate economic programmes, is like someone said to me this week, standing in a bucket and trying to lift it. Even the usually solid UK economy, is threatening a triple dip recession, as a result of the effect of the austerity programme pursued some three years ago.

When asked on Facebook about whether the Cyprus situation could happen in Jamaica, my response was a definite "No!". Say what you want about our politicians, they would never do something like this. In fact I don' know anyone outside of the Cyprus government who would have agreed to this decision. My own feeling is that they may have no option but to resign in order to restore confidence.

The Cyprus situation has caused persons around the world to remind themselves (once again after 2008) about how fragile financial markets are, especially in today's technologically interconnected world. The fact is that markets, and market transactions, are based fundamentally on trust. Trust in the market. Trust in the regulatory environment and justice system. Trust in the security forces.

Irrespective of how many laws we have on the books, what it shows is that the laws are only meaningful if everyone accepts them as the way to function. One of the roles of government is to ensure that the trust is maintained, as any breakdown in that trust causes increased risks, which lead to macroeconomic instability.

In the case of Cyprus, the government was the one that betrayed that trust and created market instability.

This Cyprus fiasco should cause us to reflect on understanding what is required to improve our own economic fortunes. It provides an avenue for reflection on how we have approach market development, and what we have been doing wrong, thereby resulting in Jamaica not seeing any growth of consequence since the late 1980s and even then it was too short a period to have any long term effect.

What we must understand is that government cannot by itself provide a sustainable growth path. What government can do is provide welfare, short term stimulus to the economy, or an environment that facilitates a path for private sector development. In other words, the best role for the government is to stimulate or facilitate economic activity, but not to seek to try to create economic development.

Economic development (activity) is best done by working though the private sector. It is only the private sector, and not public sector, that is motivated to be efficient through the profit motive, and ultimately improve market and country competitiveness. It is only the private sector that can take advantage of the comparative, and competitive, advantages of economies. Not the public sector.

One of the main problems that Jamaica has faced since independence (and possibly before) is that our government seeks to get involved too much in the economy, and by doing so creates a crowding out effect on private sector development. This desire to be involved in the economy, and be the hero of Jamaican's economic salvation, has caused the over taxation of production, over emphasis on welfare, and the increased and slow moving bureaucracy. It has also resulted in a private sector that in many respects is uncompetitive because of the fifty years of government effectively telling it how to run its business, through fiscal, monetary, and regulatory policies aimed at ensuring the survival of big government rather than private sector development.

As far as I am concerned the main thrust of the austerity policies, including Cyprus, coming out of the 2008 recession, has been to ensure the survival of government bureaucracy, through emphasis on fiscal adjustment. Only in countries like the US, Brazil, and China has the emphasis (through stimulus programmes - not necessarily just new cash) been on spurring growth through private sector resuscitation.

It is this philosophical difference, and deep understanding of what sustains the fragile balance of a market economy, that has led the US to turn around the fortunes of their economy, unlike the economic death sentence that Europe seems doomed to, and the seemingly haste with which Cyprus seems to want to carry out that death sentence by slitting its own throat.

Solving our foreign exchange crisis

Over the last week there have been two issues dominating the media, which illustrates to me that Jamaica's foreign exchange crisis is driven primarily by the way we approach challenges.

The first is the discussion that has taken place regarding the uncertainty of the Petrocaribe deal because of the death of Venezuelan President Hugo Chavez, and what it would mean for Jamaica's (and other Caribbean countries') balance of payments. In the case of Jamaica the immediate effect would be a US$600 million hit.

The second is the fact that the NIR went below the internationally acceptable benchmark of 12 weeks of imports, and the lowest level in ten years.

These two situations are an illustration of what the real challenge is that we face as a country.

In the case of the Petrocaribe uncertainty, the discussions focused primarily on how we can save the agreement, and what prospects we face for doing that if the opposition party were elected in the upcoming general elections. In other words, the conversations have focused around hoping that we can continue to benefit from this arrangement.

This for me is the wrong conversation to have. In other words, this development should be a wakeup call for us, that after 50 years of political independence we still cannot secure economic independence, not just in Jamaica but as a region. The conversation that we need to have is, how we can ensure that we move away from the need to ask another country to support our productive capacity, while putting us into more debt. We also need to ask ourselves, how have we utilized the Petrocaribe debt to spur greater productivity and increase our competitiveness? How has the manufacturing sector benefited from the use of the Petrocaribe debt to enhance the efficiency of their energy use?

These are the questions we need to ask ourselves so that we can get to a solution. And note I used the term Petrocaribe "debt" rather than "fund", as no matter how nice the arrangement sounds it really is just more debt that we are accumulating.

We rightly should be grateful to Chavez and his government, for allowing this facility to the Caribbean nations, but as a region we must also ask ourselves if we have been using this facility in the best way for the improvement of the country, productive sector, and the people. In other words after so many years benefitting from the Petrocaribe debt, are we still not facing a more serious energy and balance of payments crisis.

The second issue of the NIR seems to be a recurring theme. Whenever the NIR starts to decline we are always consumed with discussions like when will the International Monetary Fund deal be signed, or can the government access multilateral support or private capital.

In both these instances, the conversation we have in response to the crises is about how we can continue to live another day in dependency syndrome, rather than how can we eliminate the need to face these crises again.

This was brought home to me recently in two discussions I had this week.

The first was with someone who was coming to the end of a contract of employment and I asked the question, what are your plans after the contract has ended. The response was that something will work out. When I tried to engage the person on making plans, and not just leaving it to chance, the response was that Jamaica was a difficult place to live in and that the earnings was not enough, and the solution was to leave Jamaica. Contrast that with someone else who just a few months ago was earning less than the person, who said to me that she wanted to start a business and today earns more than she did and is in a growing business.

So I said to the person that the problem you have is that you always try to blame everything around you for the problem you are having when the problem really is that you have failed to act.

The other situation is where recently I addressed a group of persons about what they need to do to improve their lives, and in particular what they need to do about improving their health. This came out of my most recent book.

This set of persons has significant challenges in relation to their health, but everyone who was there seemed upbeat about their chances because they were determined to address the root cause of the problem. Because of this attitude, and approach to dealing with the challenge they face, some reported on the progress they were making.

So it is with our foreign exchange crisis, which has been with us since the 1970s. If we are to solve it then it is going to require that we do a lot of things differently. It is going to mean that we recognize that the problem to our energy crisis is not to defer some of the payment for our oil bill but reduce the cost of energy significantly by generating energy more efficiently, using a diversified energy source, and through an improved public transportation system.

It is also going to mean creating greater productivity in agriculture by dealing with crime, having greater economies of scale, and better marketing of our produce. It is also going to mean that government becomes a facilitator of the productive sector, and economic activity generally.

If we are to solve our foreign exchange crisis then the discussions about the Petrocaribe debt must move from how likely are we to save it to how quickly can we get to a position where we do not need it.

Prosperity requires new thinking

THERE is something the Honourable Dennis Lalor always says to me that has a lot of relevance for the country, and individuals. That is: "Bird seed don't make John Crow sing." For any reader who is not Jamaican, a John Crow is the same thing as a vulture. What it simply means is that no matter how much bird seed you feed to the John Crow, it will never sing like a bird simply because it cannot.

Similarly, Albert Einstein said the definition of madness is to do the same thing over and over again and expect different results.

EINSTEIN... said, the definition of madness is to do the same thing over and over again and expect different results.

In effect, what both gentlemen mean by the respective quotes is that if you are doing something that can never produce the result you desire, then doing it over and over again can never give you the result you want. In other words, in order to get the result you want it is necessary to approach the problem with new methods and thinking.

So recently I have heard comments to the effect that the Jamaican dollar is overvalued, and that we need to let it find its true value. There have even been target rates quoted such as J$120 and J$150 to US$1. My question, though, is can we allow the dollar to devalue within the context of the current environment where productivity capacity is limited, where the major component of imports is oil, and where a significant part of our export inputs are imported. Is devaluation going to make us use less oil, if we do not change our energy source first, or are the exporters going to absorb the import cost increases when they price their exports?

Similarly, can we really improve the efficiency of the bureaucracy by just laying off public sector workers, or would it not be more beneficial to approach the problem from the point of view of changing the rules and processes to create a more efficient environment?

As individuals, can we improve our financial situation by the same consumption and investment habits we had before, or do we need to change them?

From both the country and individual perspective, if what we have been doing is giving us the results we want, then obviously there is no need to change it. And you should keep doing what you have always been doing. If, however, you are not happy with the results, then it means that you have been feeding bird seed to a John Crow and expecting it to sing. In other words, if you want to hear singing then you have to realise that it makes no sense feeding the John Crow, as it will never sing. Get rid of the John Crow and get a bird that has the ability to sing.

Only after you have done that do you even stand the possibility of hearing any singing coming from the bird. Note that the John Crow is a bird, but it is not one with the ability to sing.

So, if we want to see a country or individual prosper, then doesn't it similarly mean that we have to ensure that we equip ourselves with the resources that will lead to prosperity? If we change the brand bird seed, and feed it to the John Crow it still won't sing. Even if we increase the quantity, and change the brand, the John Crow still won't sing.

So, irrespective of how much money we get to borrow from multilaterals, and no matter how much tax we put on the people of Jamaica, and no matter how many public sector workers we lay off, or how many wage freezes we have, the fact is that if we continue to make these changes within the context of an environment that is not competitive or productive, it really is nothing more than an exercise in frustration.

The only way for us to see any sustainable prosperity in Jamaica is to fix the structural problems we have. And these structural problems have been with us since Independence, as even the growth in the booming 1960s was primarily because of foreign investments. All the structural challenges existed at that time also.

What are the major structural issues we face? Energy cost, inefficient bureaucracy, law and order, and the need for proper tax and incentive reform. Doing anything else without fixing these is, well, giving bird seed to a John Crow and expecting it to sing.

From an individual's perspective the same applies. If you have financial challenges and it arises primarily because your consumption expenditure is too high for your income, then refinancing any debt you have will not change your financial problems. What you must do is radically change the way you consume in relation to your income. For an individual it is much easier as you can get a good financial advisor to assist. Just make sure you get a good one and follow the advice. In other words, resist the temptation of buying a dog and then do the barking yourself.

In both cases, what is needed for any increase in prosperity has to start with a new way of thinking. This is the first step in changing that paradigm. Regrettably, I do not think that as a country, and as individuals, we have realised that this is the first step. So the old way of thinking persists and what happens is that the same ideas used in the past are repackaged under a different name. And sure, you can always get away with selling a newly repackaged item at least once. But the taste and effect are going to be the same, irrespective of the packaging.

So in order to hear that sweet singing sound that only a bird can make, let us first think about what type of bird can sing, and which one delivers the melody we want to hear, before we start feeding it bird seed.

Changing costly cultural habits

In 2011 I remember having a discussion with someone who questioned my continuous advice that people should look towards solar energy at home, and if necessary borrow the funds to install it. At the time he said that he would rather to borrow the money to buy a new car, as data showed that the investment in solar was not a good payback.

That argument I couldn’t understand because while an investment in solar energy gives a return on investment, in savings and convenience, I don’t see how one gets any return at all from a car. Particularly if you borrow the money for the purchase. Well maybe there is the social benefits.

At the same time, in 2012, we saw where bank loans, and in particular personal loans (mostly for cars) increased over 2011.

Being the stubborn person I am, I went ahead with my plans to invest in solar energy at home, and today enjoy significant savings and much convenience. I have never regretted the decision and investment.

Today I spoke with someone who advised that many persons today are having difficulty servicing their car loans, and over the weekend I heard two stories where cars were seized by the bailiff while they were in transit. Additionally I have heard stories of businesses in trouble because some business people borrowed money to purchase motor vehicles, instead of saving the money or reinvesting it in the business.

This reminds me of a real life story where two men who were truck drivers in the 70s had $250,000 each. One decided to buy a house in Beverly Hills and the other a business, and continued to rent. Today the one with the house still has it and the one who went into the business could but many of those houses, and in fact has many investment properties.

These examples show that one of the most significant factors that cause financial hardship, even though there is a recession, is the cultural attitude of many in the country. This is illustrative of what investment advisors always tell you that there are two things that cause people to lose money – fear and greed. And in the Jamaican context I want to add another – the need to “profile”.

I have found in many instances that people who make bad financial decisions do so because they want to impress others with the so called badges of wealth. That is the car, house, and other accessories. So what they do is borrow the money and live today with the income they expect in the future.

This cultural attitude is what has caused financial distress for many Jamaicans. And I find that the ability to overcome this “profile” attitude is a significant step in regaining financial health. This is why one of the first things I mention in my book is the first step to financial reform is an acceptance of what needs to be done and an acceptance of the inherent problem.

When I was around sixteen, my uncle said to me. “its not how much you earn that is important but rather how much you earn”.

Some will come to grips with this problem and reform their finances but many more will not. They will continue to make mistakes and suffer from the need to live the culture of profiling. My own view is that this need is derived from an underlying insecurity but I am no psychologist.

This cultural attitude can be found in many countries and cultures but I think Jamaica has a big dose of it. If we are to overcome our financial challenges then there is going to have to be a radical reform of this culture, so that we can invest in productive assets, just as Trinidad did in the 1980s, while we invested in motor vehicles. After all it is the individual lifestyles that sum up to the overall condition of a country,and we must remember that economics is a social science and hence is based on cultural attitudes also.

If anyone wants to make the change they can, especially if they have someone advising them about it, but the deeper you have found yourself in this culture is the more difficult, and more help you will need.

Devaluation not good for Jamaica

Over recent weeks there have been utterances from several quarters - including economists, analysts, and technocrats – about the benefits of devaluation for the country.

The argument being made, is based on the theory that if we were to devalue the J$ in relation to the US$ then our exports would get relatively cheaper and this would lead to a greater demand for Jamaican exports. This is a strategy that countries like the US, Europe, and China are well aware of, and it seems as if there is a constant currency value war between these countries. The US for example is constantly complaining that China’s currency is undervalued, which leads to China’s goods being cheaper than the US gods, resulting in the massive trade deficit the US has with China.

If this argument holds true then the position being put forward by those in favour of the Jamaican dollar being devalued, and as some put in finding its true value, should be correct then.

The question is, if this argument is true then why has the J$ moved from a position in the 70s where it was stronger than the US$, to where it is today (approaching 100) and it seems as if our economy is getting worse, and more importantly our trade deficit is expanding. Shouldn’t the massive devaluations we have seen (over average $2.50 per year since the 70s) result in an improved trade deficit.

This is where those who propose devaluation fall short in their argument, as the assumptions they make is incomplete.

The fact is that devaluation can only help a country’s currency IF and only IF the country’s currency being devalued has the productive capacity to replace the imports. So in Jamaica’s case where 45% of our imports are oil (35%) and food (10%), the question to be asked is do we have the productive capacity to replace the imports. So as expensive as oil gets can we substitute it with locally produced energy sources? Or can we replace our food imports with locally produced foods?

The answer to these questions is no. So therefore irrespective of how much the dollar is devalued, we will still need to import oil and food, because we have not put the energy policy in place to grow for example renewable energy generation to replace foreign oil. And in the case of food, praedial larceny, lack of proper roads, and using farm lands for construction inhibits local food production.

The other argument for imports that we can substitute with local production, is that 70% of our export content is from imported raw materials, as labour costs (unlike China) are a very small percentage of inputs. So it follows that as the dollar devalues the cost of exports increase also because more money has to be found for the imported content.

Therefore, my conclusion, as was the same for Seaga and Davies, is that the only thing devaluation does is cause inflation and erodes spending power. The only way to solve the problem is to fix the structural issues of crime, energy, and bureaucracy.

Surviving under the IMF

AT the end of December 2012, when it became clear no International Monetary Fund (IMF) deal was coming, I wrote an article that was published on January 4, titled "Jamaica without the IMF", as I felt that it was important to think about options. This was because not having a deal by the end of 2012 meant there were harsher measures than expected that would be coming.

Many persons said that there was no option but the IMF, and that we must get an IMF deal. Well, we did and some of the same persons who were saying there was no other option are now criticising the tax package and the National Housing Trust (NHT) drawdown. I can never understand what some of us want.

A home built with solar cells that double as roofing material. Investing in renewable energy to cut energy costs would be a smart move in the face of the harsh economic climate, advises Dennis Chung.

So here we are facing IMF terms that obviously will cause further contraction in the economy, on top of the devaluation we continue to see. A point here is that devaluation, as both Seaga and Davies recognised, does mostly harm to Jamaica and little good. This is because most of our export content is from imports, and so any devaluation only makes the cost of our exports more expensive, and will either result in increased export prices or shutting down of businesses which can't recover costs. How we deal with that is for another discussion, as what I want to focus on today is how the individual can deal with the current environment.

There are certain measures individuals can take to protect themselves, which in the short to medium term will result in a reduction in economic activity and fiscal revenues, but at least will protect against the terms of the IMF agreement.

To be clear, there are some people who are going to be affected more than others because of situations like debt levels (especially personal debt such as credit cards and car loans) and if they have not been working for a while. However, I believe that everyone can protect themselves to some degree against the coming environment if you have the commitment, discipline, and work with someone who can help. After all, when you are sick you go to a doctor, why not seek financial expertise when you have financial issues?

The issues I will mention come from discussions I have been having on Facebook, and out of which a group has been started, to discuss specific issues that can help people cope with the economic conditions while also improving your health. In fact, the main motivation was health reasons but also results in protection against the economic environment.

The objective is that you want to maintain your standard of living as much as possible by reorganising your expenditure and habits to maximise the utility of your resources. The first thing I say to people is if you do not have consumption debt, then do not acquire it, and if you have it, then get out of it as quickly as possible. So the credit card and car loan you should shy away from.

You also should seek to improve your income, as just cutting back alone (as in the austerity measures) will only result in a decline in living standards. So a real-life example is someone I recently coached who was an office helper in an organisation. Before her contract came to an end I told her, and her colleagues, to look at starting their own business. The better-paid and more formally educated ones chose to go and work for someone else. She said to me that she wanted to start her own business but had no capital. So I asked her what she liked to do and she said food. So I told her to go bake a cake and come back and sell slices to the people at the office. Within a month she was selling a few cakes and today her customer base has expanded, she is building her house, is thinking of employing someone, is making more money than when she was working, and is enjoying it much more.

The other thing to do is examine your consumption and see how you can be more efficient at it -- For me this includes improving health, which also means less future medical expenses.

So there are two things that I have done that have improved my quality of life and at the same time reduced my consumption expenditure (although required some upfront investment) and put more money to savings.

The first is to go with renewable energy at home. I have been using solar for the last three years, and today generate 80 per cent of my energy needs. A good problem I face is that for about four hours I generate more energy than I need and because I have a charge controller on the system it doesn't use the maximum it can. But what it also means is that within two years I would have paid back for the cost of the system and have another 10 to 20 years of use before replacement, and I never suffer during Jamaica Public Service outages or cost increases, from fuel prices or devaluation. Today my water and light bills are approximately the same.

The other thing I do for health purposes primarily, but ends up saving me money also, is to grow my own herbs, vegetables, and fruits. Today what I grow accounts for 10 per cent of my food consumption and the plan is to move it to 70 per cent in six months, which is achievable because I am practically vegetarian. The most important thing is that it is healthier, as it is fresher and I know it is organic, but secondly, it is much more convenient to just go outside and pick what you want to eat.

Everyone can do this to some degree, and it is a much healthier alternative. Can you imagine if enough people adopted this approach to reduce unnecessary consumption and create their own energy and food consumption, the amount of foreign exchange savings the country would have?

It is important that we start to think this way, as there has not been presented as yet any economic agenda that is going to increase GDP and spending power of the masses. What we need to do, therefore, is start to take our own individual actions to cope.

These actions will no doubt decrease economic activity, and reduce taxes from consumption and income, but at least they are the best way for everyone to contribute to the country's balance of payment solution, while improving their own circumstance.