Jamaica's economy playing out as expected

When I listened to some of the reactions of surprise to the PIOJ's report on the January to March 2009 economic performance, I wonder if we are really serious. As far as I am concerned the economy is playing out as expected. Whenever I am asked about the 2.8 per cent downturn in the economy, during that period, as if it is unexpected, I refer to the article I wrote on July 18, 2009 titled "A perfect economic storm". At the time I started saying that "The next six to nine months will be one of, if not the most challenging, in the economic history of independent Jamaica".

For me it was obvious that if things continued the way they did and if leadership did not come together, we would be experiencing all we are today. In fact, it is worse than I expected, as the Lehman collapse made things much worse but the trend I expected is playing out. The extent to which we are feeling it today could have been avoided but too much time was spent in political diatribe and side arguments that distracted us from what we needed to do as a country.

Identifying the fundamental challenge
So the consequence of the country not adequately projecting and preparing for the economic downturn has landed us in a situation that I believe will be hard to avoid now. I never expected such a sharp decline in the first quarter, which is going to be better than the second quarter in my estimation. What is happening also is that the economy is already like a runaway car, which is harder to stop once it gets going, and would have been easier to slow down prior to it starting to pick up speed. It is now going to take much more effort, and financial resources, to slow down the decline.

With all of this said, though, it is still possible to lessen the effects on the country, and I had written in my book about the real cause of the problem and gave an example of a five-year plan that could place us on the path to economic development. Some will not take what I say seriously, though, as I am just an accountant trying to talk about economic matters, but I will continue to be comforted by my own voice.

In order to determine how we can deal with the challenges we face, and which are worsening, we must first understand what the underlying problem is. This again I outlined in my book, which in summary is the fact that the country spends more foreign exchange than it earns. Unless this equation is changed we will always be caught in the downward spiral of economic stagnation/decline and debt. If we accept that this is the fundamental problem then it makes no sense addressing symptoms, which we have always been doing. Because of where we are today the measures to address the problem get more and more difficult the longer we wait.

What do the first-quarter results tell us about the state of the economy? If we properly assess this then we can make an assessment of what needs to be done. And if this is properly addressed then we won't even have to talk about high interest and exchange rates, as they will be automatically improved. We won't have to talk of crime, as economic prosperity will come to our citizens. In effect, if you address the cause of the illness then usually the patient gets better.

Inflation as projected by the BOJ is expected to be between 11 to 14 per cent this year, driven mainly by the new taxes introduced in the budget. This was expected and we must now pray for no inclement weather during the hurricane season that will cause any agricultural damage, as this would push inflation further.

As expected agriculture is the only real growth area, and the sector I have been pushing aggressively since 2007 as Jamaica's gold mine, instead of looking for it in the hills. The goods- producing sector has declined as expected, and in particular construction and mining. These will continue to decline in the second and third quarter, and agriculture will continue to be the main growth area.

The services sector has declined by 1.6 percent, and I expect that it will decline further given the decline in the goods-producing sector as fewer services will be demanded.

Proposed quick fixes
The fact that the process of decline has started we will then have to manoeuvre through the economy's adjustment and it will be painful as many more will lose jobs, or become unemployable in the changing economic environment. This changing economic environment means that different skill sets will be required, which many of us have not prepared for.
There are some short-term solutions that I think can be taken to lessen the effect and make for a quicker economic recovery, as follows:

. The most important, I think is, to create a much more facilitative environment to encourage small business development. This is the sector that has been saving developed economies like the US, as the large companies are unable to react quickly to changing circumstances and most will see decline. The bureaucracy, however, is stifling small business growth. Even so I have seen evidence of many people trying to get into new businesses, especially amongst the younger generation.

. An aggressive move must be made to build out agro-processing plants and greater investments in agriculture. Agro-processing will allow us to reduce the risk from weather as well as add greater value to our exports using the same resources. I know of at least one person who has wanted to make an investment in agriculture but has faced some hurdles.

. Public transportation - this is a quick fix, as if we were to immediately start a park-and-ride system from highly populated cities and towns such as Portmore and Spanish Town we could reduce traffic congestion and oil use. My idea for park-and-ride systems and direct shuttles to major work areas is also in response to the lack of security on public transportation. This could reduce significantly the oil bill in a time when as I said at the start of the year oil could end the year at US$70 per barrel.

. Infrastructure spending should take place around tourism areas and agro-processing. This would have the double effect of increasing employment and preparing our main sectors where we have a comparative advantage for global economic recovery.

. Income tax and GCT incentive should be provided to companies that add foreign exchange to the country through exports or reverse exports.

. Vocational training - this is the quickest way to improve the skill set of the many who sit idly by at street corners waiting for an opportunity. The last time I said this I was accused of promoting illiteracy, even though this is an improvement for many.

What is needed to address the economic challenges is a fundamental shift in the paradigm, which no doubt is difficult for the government to do because of the fundamental flaws that exist in the infrastructure.
Also the need to balance the social with the economics is always a challenge.

In the short term there are some quick fixes which must be implemented if we are to lessen the effects of the inevitable economic decline.

Poor and boasy…Jamaica’s plight

The budget debates are over, and I think I have done enough commentary on the presentations, and would like to look at what I have always, and still consider to be one of Jamaica’s main challenges. And nowhere is this more demonstrated than in the rise of one of Jamaica’s street boy’s to prominence in the Magnum’s King and Queen contest on television.

Poor and Boasy is the name adopted by the winner of the said contest, and his story is one that should encourage all Jamaicans and make us determined about what needs to be done to truly unearth the hidden potential of Jamaica. He walked away with the $1 million prize but by doing so gave us a message worth much more, that of the significant talent that lies unexplored in our neglected people.

Poor and Boasy reflects Jamaica’s plight in two ways – (1) His name signifies Jamaica’s borrowing over the years to be “boasy”, as we have used it for consumption items such as cars; and (2) The fact that we have neglected the poor citizen of this country who has the talent to bring fame and fortune to Jamaica.

Jamaicans’ aggressiveness
And when I say neglected people I do not only mean the other street boys who have to hustle by wiping car glasses, but I mean most Jamaicans who have to suffer the indignity of the inefficient public sector bureaucracy; the less than adequate roads and transportation system; the unprofessional behaviour of the police, who they are forced to pay with their taxes; and the debt they are called on to pay that most have not benefitted from. So is it any surprise that Jamaicans are known the world over as an aggressive set of people, as our leaders over the years have helped to create this aggression, which it is only through this self taught behaviour that many have learned to survive.

Some Jamaicans have turned this aggression into a positive by channeling it to significant achievements. The problem however is that many also channels this into criminal activity, which holds the great majority and the country at ransom.

It is this scant regard for the citizen of Jamaica that I believe has led us to where we are today. Because achievements are not spoken about in terms of development of the rights and democracy of the Jamaican citizen but rather in terms of macroeconomic targets and fiscal deficits. And I am in no way saying that these targets are not important but just as in the US the rights and development of each citizen must be at the central part of any planning or development we look towards. I believe this is the only true way to achieve real economic and social development. If we put the Jamaican citizen at the heart of all our plans then we will achieve all the macroeconomic targets that have long eluded us as it is people that drive a country forward not debt.

So when I hear parliamentarians spending so much time discussing the level of the minimum wage, I wonder if they do not realize that the need to have such a lengthy discussion on it means that we have failed Jamaicans. The setting of the minimum wage should be procedural without any comment if we develop a country where Jamaicans have the requisite skills and opportunities to earn a lot more than the minimum wage. The fact that we have to spend so much time deliberating on the minimum wage means that our gift to many Jamaicans since independence is to keep them at the minimum wage level, and to make it seem as if we care by adjusting it upward each year, only making life more and more difficult.

It is the failure to address the theme of the citizen at the centre of our development, which I think has been the biggest failing over the years of the debates and the country. In the 1970s the world moved into the Information Age and helped to usher in the need to grow based on a knowledge based society, which Kim Marie Spence put on the table recently in a review of the budget on Direct. I do not think that there is anyone who will dispute the fact that we live in an era where a competitive edge is not based on the amount of capital one has (that was the industrial revolution) but is very much dependent on the human capital of a country or company.

Knowledge/Efficiency Age
It is ideas that create a competitive advantage not machines. Everyone has access to technology and machines, as even if they can’t buy it they can easily outsource it. The Internet allows an individual working from his/her home to have access to the global marketplace and appear to the world to be a large corporation. In fact the mammoth office building and its attendant costs are now a competitive disadvantage. This I believe will be more pronounced in what is emerging to be a new economic order that will come from the current economic downturn. We are looking at the birth of a new era that will maybe be called the Knowledge or Efficiency Age.

For decades we have always been talking about the need for economic and social development in Jamaica and have different periods where we have focused on both separately. In the 1960s we had economic development; in the 1970s we had social development; in the 1980s we had economic development; and in the 1990s to 2000s, we suffered from the effects of globalization. What we need is to have a period where the focus is on developing both the economic and social aspects of Jamaica. I believe that the only way we can do that is to place at the centre of our development the citizen of Jamaica.

I commented in my last column on the need to change the format of the budget debates, as the current one does not serve as the developmental tool that a budget should be. One of the things I would want to see achieved is the setting and debating of developmental objectives before the revenue and expenditure estimates are worked out and tabled. In setting these objectives the central theme must be the protection of the rights and improvement of the Jamaican citizen. This was espoused somewhat in the 1970s but the shortcoming was that the belief was that it could be done without proper economic development. The fact is that neither can be done successfully without the other.

The budget did address the call on the people to bear the sacrifices needed for us to move forward, and we now need to specify a timeline to see the benefits of the sacrifices. While appealing to the Jamaican people for their patience and understanding, and recognizing the challenges we face, we must also say that we abhor (i) every time a citizen’s rights are abused by the police or criminal, (ii) the fact that every Jamaican owes over $400,000 as a part of the national debt without seeing any benefit, (iii) the condition of and the indiscipline on the roads and the night noise that Jamaicans have to put up with, and (iv) the lack of opportunities and education that stagnates our economy.

We should also commit to every Jamaican that if we make the sacrifices now and follow the road map for economic and social development (which should be communicated to the people) then these are the targets that we will achieve. We must assure the citizen that their rights and development are at the forefront of every policy decision.

If we continue spending too much time debating the minimum wage and the continuation of handouts to the poor, we reduce the hope to make Jamaicans really “boasy”.

Tax as a developmental tool

The budget debate is currently underway, and as I write this the prime minister and Opposition leader have not yet made their contribution, and the minister of finance is to deliver his closing address.

This budget is no doubt by far one of the most difficult ones we have faced as far as I can remember. This time Jamaica has found it difficult to borrow its way out of our self-inflicted challenges, and all of this in the face of the worst global economic crisis since the end of World War II. Many of us, including myself, were not born then and this would therefore be the worst we have seen.

But what does that mean for Jamaicans? Even though the world has gone through good times, Jamaicans have always been asked to tighten their belts. Each year, the budget comes around we are always bracing for the high probability of more taxes. I can't remember a budget where there was a net give-back to the Jamaican taxpayer. The trend of Jamaican taxes, over the years, is always to ask Jamaicans to fork out more and more. And this is even as (i) we were borrowing more money every year and (ii) social services have been deteriorating fast. This has resulted in negative development for the country as a whole.

A cultural problem
The truth is that taxes in Jamaica for a very long time have been used as a means to plug a financing gap, and continue to fund an inefficient public sector bureaucracy. So even when many celebrated the implementation of the first MOU, I lamented its introduction as I saw it as another cover-up of the inefficiencies in the bureaucracy and a means to allow Government to continue on its merry way of spending more than it could afford to. This was only delaying the inevitable, and what they have done is place more burden on the people who they say they're trying to save.

What should have been done with regard to the MOU is that it should have been used as an opportunity to restructure the public sector, and allow for the transition of some of the workers out of the public sector into the private sector where they would have had much better earning power and the bureaucracy would have been more geared towards private sector productivity. But that was not to be, as consideration of finances by the government has not been about development but rather just a juggling of the books.

So because of our failure to implement financing policies as a support for broader development objectives, we have as a country found ourselves in the unenviable situation of having to contract the economy. This is simply because we have failed, when times were good, to generate any fiscal surpluses. So an analogy is that one would be earning exceptional income and fail to save in good times, choosing instead to spend it all on consumption. The result is that when times get bad there are no savings to fall back on, forcing one to cut back drastically on their lifestyle. In Jamaica, our culture does not encourage saving, like the Jews and Chinese, for example. Once we get a little money then everyone should know, as we have to drive the most expensive car and buy the most drinks at the bar.

I remember only last year going into a bank and meeting someone I have known for a while. Being courteous, I asked him how things were going, to which he answered 'very rough', as his payments from OLINT had ceased and he couldn't afford to properly maintain his Land Rover. I then suggested to him that he should sell his Land Rover, as it was fairly new, buy a cheaper car and invest the remainder of the money in his business. Of course, in true Jamaican style, he answered that if he sold his Land Rover it would affect his image. There endeth the conversation and I could see the fruitlessness in suggesting anything else. I hope he and his Land Rover are okay.

This is similar to the way that we have approached the national finances.

A move to consumption taxes
This is why I supported in principle the move to consumption taxes, as it influences consumption behaviour. What we need to do is use tax policy as an instrument for influencing productive and consumption behaviour. For example, we suffer primarily from spending more foreign exchange than we earn. What I would do then is use consumption taxes as a tool to encourage production and consumption of local goods and discourage consumption of imported goods. So if oil is the largest import value, then a tax on retail fuel consumption is the right move but should be complemented with (i) an efficient, disciplined, and safe public transportation system; and (ii) fares subsidised to encourage public transportation.

Similarly, tax incentives should be given to those investing in agriculture - primary and agro-processing production. The investment should have certain conditionalities such as large-scale production, where economies of scale can accrue.

The suggestion by Dr Davies for a surcharge on interest payments is consistent with the argument that the interest component of the budget needed to be looked at and some way found of alleviating the earlier cash flows, as this would create the fiscal space needed to ensure the economy does not contract significantly. The suggestion made by Dr Davies is however, more radical than anyone else would have thought as this would amount to a unilateral permanent impairment on the net earnings to debt holders. This is opposed to a temporary impairment in cash flows only, which would provide the debt holders with full restitution and also an economy that would have greater future earnings potential, assuming that the extra cash flow is used for development purposes.

I do not want anyone to think, however, that merely structuring tax policy around development objectives is the panacea we have been looking for. There is a lot more that needs to be done (as I explained in my book) such as dealing with crime and certain social and political issues.

One of the things I would change, if I had control of the process, is the format of the budget debates. The way the budget debates are structured has been with us for decades, even though the world has changed many times over during that time. I would adopt a structure that would help me to support my developmental objectives, while at the same time considering all options before finalising the budget. The way our budget is structured, it is cast before any serious consideration is given in the debates.

So I would first start with a discussion on the developmental targets. I would have the Government and Opposition spokespersons debate the developmental objectives, for all Jamaica to see. Next the government would look to determine what tasks are necessary to achieve the objectives, and place the most efficient structure and costs to each task. This would determine the expenditure requirements. I would then look at the revenue options, bearing in mind the negative effect on economic activity of taxes, and so any taxes being extracted should have a value added in excess of what it detracts from the economy. I would then allocate the revenue resources to the expenditure in order of priorities. This may mean an extended budget debate but at least we would get it right. These are just my very simple thoughts on making the budget debates relevant to development.

A failure to realise that taxes should be used as a tool for development, instead of just to raise more money, will mean that Jamaicans will be continually called on to fund a bureaucracy we will be less able to afford each year. The incremental result will be greater reductions in the real income of Jamaicans each year.

Jamaica at a crossroads

In the months leading up to the 1980 election, Jamaica was at a defining moment on its history. At the time I was just about 14 years old, and I remember well the fireworks sound of gunshots that rang out across the city. Four years earlier (1976) the citizens faced a state of emergency, and at that time I remember everyone having to ensure they were at home by 7 pm, or else face the possibility of prosecution. There were cries of political victimization, and it was no surprise that four years later, exacerbated by the long election campaign, Jamaica fell into a long period of violence leading up to the dipping of the finger in the red ink to make a choice between ideologies.

Ideological and economic crossroads

Jamaica at the time was at an ideological crossroads, whether real or perceived. Coming on the heels of the economically prosperous 1960s, the people of Jamaica no doubt wanted a greater distribution of economic and social opportunity and sought it through "democratic socialism", offered by the PNP. This was in stark contrast to the capitalist model offered by the JLP, and in which one would have to earn economic opportunities through productivity. By the time 1980 came around, the ideologically charged atmosphere of the global cold war was being played out in Jamaica.
Jamaicans spoke and "democratic socialism" was rejected in favour of capitalism. This was indeed a defining period in Jamaica's history and one no one can forget.

Today Jamaica is at another crossroads, but unlike that of 1980, this one is economic. There is no real difference in the apparent ideology of both political parties. And I don't believe that there is any real difference in the way both parties view the current economic situation. The reality is that Jamaica is now in a position where it must make certain hard decisions, which we have been postponing for years in order to avoid the short-term political and economic consequences. These choices have been forced upon us because unlike the past 15 years or so, we are no longer able to postpone the inevitable through debt.
On Friday, July 18, 2008, I wrote an article called "A perfect economic storm" in which I indicated that the following six to nine months would be the worst economic period for independent Jamaica. Since then I have revised that projection to say that it would actually be for a further period of maybe another 12 months, as I did not see the impact from the failure of Lehman Brothers, which was the main turning point in the global crisis.

Jamaica is now at an economic crossroads. In my own view the policy choices, and actions we take this year will determine our future, both socially and economically. There is no remaining flat, or moving sideways as traders say. We either will be successful or suffer significant economic and social damage. Some people will say that I do not know what I am saying, as they did when I said in March 2007 that the US would go into recession in 2008, and also when I wrote the July 18, 2008 article. Or when in the second quarter of the last fiscal year, when annualised inflation was running over 20 per cent, I indicated that inflation for the fiscal year would be between 11 and 14 per cent.

What I will say to that is that I never have a problem with being thought of as wrong, as long as I am right. This is a 'do or die' year for Jamaica as the chickens have finally come home to roost on top of the burdensome debt we have consumed in cars and other consumption items.

Budget implications

So we have a situation where, without even considering the funding for the budget, we already see the economy will be contracting, as the budget expenditure is approximately four percentage points less in real terms. This means that there will be less expenditure in the economy. The result therefore is that economic activity both from the public and private sectors will be less, which means a contraction in the economy.
A lower real expenditure was expected. However, given the expected downturn in economic activity, layoffs, and lower profits in this fiscal year, I expect that tax revenues are going to see a significant decline. In addition to this the capital markets remain tight. This means that revenues overall will be negatively affected and we can't spend what we don't have.

There is of course some tax dollars than can be generated from compliance enforcement, but we will have to see if it will result in a net gain in tax revenue. The fact is that, just as in the US, the top five or ten per cent of the persons/companies earn the great majority of profit/revenue. The question then is whether this top five per cent is already captured in the tax net, which means that most of the tax revenues would have been captured already and therefore one could not assume an equal dollar of tax for the persons/companies not in compliance. The tax dollar would get less with each additional person brought into the net. In addition, two other factors may mean that those revenues may not have a positive impact, at least this year - (1) the cost of going after that additional tax dollar will reduce the net retention; and (2) the effect will come after the time lag of an audit and court cases. Despite this it must be done in order to have a more structured society.

In addition to this I believe that inflation in this fiscal year will be greater than last year. Many expect that the global recession may see an end by 2010. The downside of this is that as analyst/investors expect demand to return we will see a depreciation of the US dollar and commodity prices will increase. On the domestic side, if the gas tax and other user fees are increased and also other prices such as bus fare and electricity costs, then we will also see domestically generated inflation.

So we could very well experience stagflation, which is something we must try to minimise as much as possible. Stagflation is a combination of economic decline and inflation. The implication is that businesses will be faced with rising costs and lower demand, so that profits will shrink.

Based on the structure of Jamaica's economy I do not believe that this situation can be avoided if we are to properly restructure the economy. What we can try to do is minimise the impact. I believe that one significant way in which this can be done is for greater economic activity to be spurred through government spending, particularly on infrastructural projects, especially in light of our low skilled labour force.

The only way for Jamaica to chart its way through these rough seas is to create the necessary fiscal space, as there will be lower if any private sector led growth this year. Hence the necessity of the expenditure cuts in the budget. The question leading up to the conclusion of the budget, however, is "Is that enough?"

What is certain is that we are now faced with a defining period in Jamaica's history, where we are faced with two roads, and the actions we take as a country will determine which one we take.

Micro as important as the macro

All the talk of the global downturn always seems to focus more on the macro numbers and what governments need to do in order to help to stabilise economies.

In fact, it would seem as if the whole world has shifted from the reliance on the market economy, and has now placed responsibility for development on governments, leading many to say that the era of the market economy is over as the market has not proved to be an efficient tool for development. The argument is always" see what it has done. It has set us back decades." Of course nothing could be further from the truth, but that discussion is for another time.

In discussing the macroeconomies and what role governments must play, we must remember also the importance of the micro sectors - businesses and individuals. Many times we forget that the macro economy is nothing more than the accumulation of all the micro players in it. So, for example, when we speak about the national debt of over J$1.1 trillion, we tend to forget that the debt is made up of thousands of individual borrowers and recipients of those debt funds.

Options faced

The government cannot accumulate debt if personally we do not spend more than we earn and/or if we are producing more than we consume. The demands for government expenditure are in the final analysis to support our own total consumption. One could argue, though, that the government's role is like the father who should ensure that he implements fiscal discipline on the children to ensure that they spend within their means rather than mortgage the house to support their unacceptable lifestyle.

The point therefore is that dealing with the economic downturn is more going to be about how we deal with it individually rather than what financial support government can provide. We can, for example, support behaviour that is continuing the excessive use of resources above what we earn, but that is certain long- term destruction.

It is therefore important that the correct fiscal policies be put in place to cause a shift in consumption and production behaviour patterns. This structural change in behaviour will no doubt be forced on individuals as the economic situation forces change. As an example, as economic activity slows down it means that there will be less disposable income, which in turn means that people will be able to afford less and businesses will get less money, causing the start of the cycle all over again. Faced with this situation, we can choose to do one of three things:

1. We can seek to borrow money to afford the luxuries we are normally used to, such as high-end cars etc;

2. We can adjust our lifestyle by reducing our debt and not spend on unnecessary acquisitions; or

3. We can seek to produce more at our individual levels and so maintain our income levels through greater production.

Obviously the third option is the most desirable, but it is going to take some time for that behavioural change to take hold. The first reaction of many people will be to see if they can borrow more to maintain the lifestyle they have become accustomed to, and this includes businesses as well. My advice would be that in our current economic situation this would be the wrong choice for long-term sustainability. The best action is to first put in place option two above, shortly followed by option three. The reason why people seek to act on option 1 first is because for sentimental and other emotional reasons they try to hold on to what they know.

It is because of this why I have been saying that the world not only faces economic challenges but also psychological challenges which must be addressed. This is why it was refreshing for me that the RJR Group put on the "Yes you can survive in 2009" public seminar last week. They correctly identified that a wide cross section of professionals, including bankers, psychologists, and accountants, are necessary in oder to open this debate with the public. More important than the stimulus support that governments put in place will be our own behavioural changes to determine whether or not we are able to cope with the changed economic structure of the future.

Looming transformation

Let us not kid ourselves, Jamaica and the world are going to see a forced transformation of the economic structure. The boom in credit that we have become used to is at an end, and with that we will see a change in the face of businesses and a tempering of economic activity. Even after economies have stabilised and started to recover, for a very long time people will stay away from debt as they restructure their own portfolios.

This is as much a wake-up call for businesses as it is for individuals. When people call me about what to do with their businesses, as they have seen a significant decline in activity, I advise them the same way I would an individual. They need to speak with a professional and have that person lead them in at least a two-day strategic retreat where they look at their business and determine (1) its viability given what changes will happen; and (2) if there is a way to restructure their companies to take advantage of a changing marketplace.

If they determine that it is not possible then there is one best option. The worst thing to do for an individual and a business is to hold on to something that cannot survive because of sentiment. The long-term effect is even more devastating.

In addition to the current situation, I expect that there are going to be some more challenges that consumers, particularly in an open economy like Jamaica, will face. At the start of the year I indicated that I expected two global events to happen this year - (1) that oil prices will go back up, because of supply concerns and an indication that demand is returning to the US; and (2) that the US dollar will devalue against the other major currencies. Therefore, based on this, I see that the world could see another round of inflationary pressure.

Both expectations are starting to happen. Oil prices are slowly inching back up and I think as early as 2009 to 2010 we could see oil prices back at US$100 per barrel, and the US dollar has already started to lose value. And if the US dollar goes above the 1.40 to 1.41 mark against the Euro, then it could easily trade back up closer to 1.60. Both these factors will prove to be inflationary and if prolonged we could see people shying away from the US dollar as a reserve currency. This is even more dangerous if China decides to unload the US debt they hold, having already expressed concern about the stability of US debt.

Bernanke's move to indicate that the Fed will be buying back over US$1 trillion of US government debt will also mean increased money supply, lower borrowing cost, and higher inflation. This move by the US to get the economy going with an emphasis on credit is a wrong long-term strategy.

In the final analysis though, while stimulus packages can help to stabilise economies by providing much-needed economic activity, the ultimate solution is going to come from how we act as individuals.

Deciphering the global downturn

As the global crisis continues, it seems with the new indicators each day that the situation is worsening. The ADP employment numbers out of the US this week shows that an estimated 697,000 jobs were lost in February. This is ahead of the more important Non-farm payrolls jobs report, which will come on Friday, when job losses are expected to come in at 650,000 for the month of February. US unemployment is also expected to rise in February from 7.6 per cent to 7.9 per cent. The week has continued to see a fall off of GDP around the world also, with Sweden, Australia, and the Euro-Zone showing quarter over quarter declines of 0.3 per cent, 0.5 per cent, and 1.5 per cent respectively.

Both the Bank of England and the Euro-Zone are also expected to cut the central bank target rates to 0.5 percent and 1.5 percent respectively. The rate cuts around the world is in a desperate attempt by central banks to add liquidity to the system by allowing for easier access to credit but this has not been, and expected so, having the effect because the global challenges is one of more than just interest rate affordability. The real challenge is one for massive loss of wealth. Even with the rate cuts access to credit remains difficult and the cost of credit is higher.

Falling equity markets

The Dow Jones Industrial Average (DJIA), for example is below 7,000 at 6,850, and the technical and economic indicators are showing that the market may actually fall some more. The market could in my estimation hit the 6,500 mark and if it falls below 6,300 could be well on its way to the 4,500 level. This trend is consistent with equity markets around the world, which is likely to continue. Even though commentators on the business channel seem to be desperate to talk a bottom into reality, the fact is that the fundamentals do not support a bottoming at this time.

Equity prices are fundamentally determined by a company's current and expected earnings and the fact is that both scenarios remain bleak. We see where AIG, for example, recently lost US$61 billion over three months and the auto industry continues to go back to Congress for more support. All of this while consumer confidence is at its lowest for over a decade and personal consumption expenditure, although slightly up over January, remains very low. So in this environment of rising unemployment, falling confidence, and very low expenditure how does a company increase earnings. The only way for one to see value in a company in this environment is looking at the balance sheet value and making a determination as to whether the book value per share is way in excess of the currently traded price, if one expects that the company will remain resilient. However, institutions such as AIG have shown that even the managers themselves do not know the true state of their balance sheets.

It is because of this uncertainty of earnings and balance sheet values why investors have been shying away from equities and rushing to acquire US treasuries and Gold, what is referred to as a flight to safety. So in this type of mood consumers are not inclined to engage in the type of spending that can boost economic activity, content instead to spend on basic requirements.

So globally the world seemed destined to an economic slump for at least another few months, into 2010. Because even though we might start to see signs of recovery at the end of 2009 the fact is that consumers will take some time to build back the massive amounts of wealth lost, which on equity markets alone (globally) was over US$35 trillion when the DJIA close to 10,000 and since then fallen off by approximately one-third. This implies that between October 2008 and now wealth losses from the equity markets may have been down an additional US$10 trillion.

Failed stimulus plans

In order to try to address the problem the US government, first through Bernanke and Paulson, and now more though Obama and Geithner, have tried to address the problem through various forms of a fiscal stimulus package. As I had indicated from when Paulson and Bernanke announced their package, it would not revive the economies and at best would only ease the pain slightly. The current situation is like the common cold that can only be relieved by medicine, but has to run its natural course. But his would depend on the form the stimulus packages took. And to date the only one that has some form of resemblance to understanding the real issue is Obama's package that includes assistance for those behind in their mortgages.

The fact is that from last year when this great hurrah was being made about bailing out failed financial institutions, I indicated that would not work and all that was needed was for the governments to assure depositors and other customers that their money would be guaranteed by the government, similar to what Ireland did to bring back some confidence to the markets. Allocating large sums of money to the financial institutions was, a waste of money.

And the constant courting of Congress for further bailouts is proof that there is no end to this bottomless pit. My own view is that there should have been an orderly liquidation, or better mergers, of these financial and other institutions. Not in the way that they allowed Lehman to fail on its own, but an orderly break up and mergers of the good parts of the business and winding down of the bad parts. This approach would have saved the US, and the world, much grief.

But it didn't happen and finally a package comes from Obama that seems to correctly recognise that solving the problem cannot be done by bailing out financial institutions but rather has to hit at the heart of where the problems truly are, the consumer and more specifically addressing the problem of the housing market. The fact is that the underlying problem is that the US economy is based 70 per cent on consumer spending and bailing out financial institutions without bringing back consumer demand for goods and credit cannot solve the problem. And this is why the money given to financial and other institutions will not make the equity markets and economic activity better. It will only lead to a waste of taxpayers' money.

To properly address the problem, one must look at reinvigorating consumer demand, and the only way to do so is to provide the consumer with some amount of relief of their debt burden when compared to their wealth, which the real problem is the fact that house values have gone down significantly causing a freeze in credit markets (on which most loans were based) and a drastic slowdown in economic activity leading to job losses. The housing assistance plan by Obama should therefore be of greater assistance to the US economy than the bailout of these irresponsible financial institutions who do not even know how much value they have on their balance sheets.

Even though I have some confidence that the real problems are now being considered, the fact though is that there has been such a significant loss of wealth globally that it will take a while for consumers to start spending on discretionary items again, and even more importantly we will not for a very long time see a return to living standards of two years ago.
What this means for the world is that there will be less money being spent globally for a very long time.

Proactivity is necessary to cope with crisis

Recently a US resident relayed two stories to me to indicate the distinction between the United States and the Caribbean region in solving challenges. In the first case he told me of a friend who accidentally dialled 911, intending to dial a 919 area code, and communicated that to the person who answered the 911 call.

Thinking that this explanation had been accepted she hung uo and started to dial the right number but before she could complete the call there was a knock at the door, which turned out to be a policeman, who politely insisted that he be allowed to enter the house to ensure she was not insisting the 911 call was a mistake under duress. She also noticed that another policeman had gone to the back door to provide cover. After being satisfied it was a mistake they left.

In the other case he relayed to me that in Trinidad a historic building, used as a police station, had burnt to the ground. The irony was that the fire station was only a few yards away, but when they connected the hose to the hydrant and turned it on, the water pressure was not enough to supply the water needed to put out the fire so the firemen all watched this historic building burn to the ground.

This latter situation could almost as easily have happened in Jamaica, and in fact even if a deliberate call was made to 119 the police may not have answered the call and if answered may not have turned up until a few hours after the criminals had done their worst.

A difference of approach

This difference in approach may also be one of our downfalls as a country when it comes to coping with the global crisis. As I indicated last year when the stimulus package was announced by PM Golding, the bureaucracy and our culture is likely to work against us and by the time we get around to really addressing the challenges it would have been over.

If we look, for example, at the urgency with which the US sought to introduce the stimulus package it is indicative of the type of action needed. In our case, however, even though we have the advantage of a lag effect of what happens in the US, as a country we have failed to properly plan for the coming storm, and have only sought to take the debate seriously as a country only when we have started to feel the effects. So even when it was obvious what was coming we were still as a country prepared to continue the rhetoric of trying to score political points and engaging in public discourse that serves as a distraction from the main challenges.

So we have now started to feel the effects, as we start to see layoffs and reduced earnings, and we have now moved to the next stage of dealing with a challenge, as psychologists will tell you, that of panic (the first stage is denial). Because as a country we did not properly prepare for it we are now seeking to manage the crisis with irrational responses that will only make the situation worse. Take for example the suggestion of the JMA that a part of the reserves, held by the BOJ, be allocated to helping local manufacturers, or even the public outcry that the high interest rates were not necessary because the rest of the world is reducing interest rates. These arguments not only indicate that people do not understand the fundamentals of the problem but also that we are making arguments out of being reactive rather than thinking proactively.

Last year I also indicated that some businesses will fail, as there is going to be a forced restructuring of the economy, and also because many businesses will not take the appropriate steps to ensure their survival. The cry that is coming from the business sector is evidence of this. Naturally we would expect that people will try everything to save what they have, as they are also in their own three-step stage of dealing with a problem, but that is the wrong approach. Even in the US, while the Congress was busy providing the first-round bailout for the auto industry, I had indicated this was a wrong move, as they would come back for more and eventually there would be at least one bankruptcy arising. Well, today we see that these companies have gone to congress for a few billion dollars more. And in the end they will be unable to avoid the inevitable.

US stimulus will not help Jamaica
Another thing that Jamaica and the Caribbean need to understand is that the additional US$787-billion stimulus package signed in the US recently may help to stabilise the US economy but it will not help ours. The problem the world faces is more of a psychological crisis than economic, and as one US commentator said recently we must understand that the world will not for a very, very long time see the standard of living returned to the levels it had become used to. We must accept that there has been a significant loss of wealth that has created a massive psychological problem, and that many had relatively high debt based on the artificial wealth they had. Therefore, the first order of business for Americans benefiting from the stimulus package is going to be to realign that debt once again. The prolonged downturn was once again addressed by the Fed last Wednesday.

At home we also see that there are projections of a prolonged downturn in the economy, and as I expected the greatest opportunity for growth will be agriculture. I have been imploring Jamaicans to support the plans that the agriculture minister has as this is our area of opportunity. And this is really a logical argument, as this sector will not only allow us to create an active local economy but also substitute a lot of the food imports.

At the end of the day we can either be proactive and make the necessary decisions to help the economy or have them forced upon us by the economics of the market. Bear in mind that the latter is always more violent as it will not lead to a smooth transition from where we are now to where we want to be. This will have to take the form of fiscal policy initiatives as monetary policy cannot solve the challenges we are facing on any sustainable basis, and has been the cause of where we are today.

At the heart of it is simple economics, as any housewife can tell you: we spend more than we earn as a country, and it is to this that fiscal policies must be targeted.

So I will again repeat some immediate steps that need to be taken. First introduce a national economic task force that will include the best thinkers to tackle the strategies needed to address the economic challenges. And secondly, on a micro level, businesses need to engage professional help to determine the best course of action, as many companies in the US have been doing. Making suggestions that Government should provide bailout funds is not the first line of defence as (1) Government does not have the reserves like the US to do this; and (2) in a world of declining demand it won't help anyway.

The recent numbers coming out of Japan and the continued fall-off of equity markets is an indication of what is still yet to come. And even though the February US unemployment numbers are not out as yet, there will be continued increased unemployment. It is therefore going to be challenging but there are still some opportunities which can only be had with rational thinking and being proactive.

Coping with the crisis must be structured

The PIOJ this week indicated that the projection over the next two years is for the Jamaican economy to decline by approximately 2 percent in 2009 and slightly improve in 2010. They also indicated that this was a best case scenario. My own view is that more than likely the declines will be greater, as the global situation I expect will get much worse.

The Dow Jones Industrial index will more than likely fall below the support level of 7500 and may fall to 6700. This will result from further slowdown in economic activity in the US, and cause lower consumer confidence and greater losses of wealth from the falling value of investments and increasing job losses.

So the PIOJ is correct in saying that what we are feeling currently is just the outer bands of the economic storm, and we should brace ourselves for the real storm winds that will soon start to hit us. So while we continue to score political points and grapple with issues that have no relevance to immediate progress, let us understand that this thing is coming at us fast.

Structured decisions needed

But just as when a hurricane is about to hit, the ODPEM will tell us, it makes no sense to panic and whatever preparations we are doing as a country, irrespective of how late, we must approach it in a very rational and structured manner. This is advice I have had to give to some business people recently. The fact is that many businesses are starting to see very difficult times, and this is just the outer bands.

One friend called me, almost in tears, to ask me to sign off some financial projections he had done in a business plan in support of a loan. It was apparent from what he was saying that this was his last hope of continuing in operation and supporting himself, wife, and children. Irrespective of that I had to advice him that I could not sign a document which (i) I did not do the proper due diligence to ensure the assumptions had a proper basis; and (ii) I did not agree with some of the assumptions. If I were to do that I would be compromising my professionalism, which even though it was hard to listen to him plead that is not something I would ever do. I had no choice but to advise him on what to do but insist that I could not sign the projections, as this would compromise my own conscience and professional duty.

I hope the friendship has not been compromised but even in this time we must ensure that we always do the right thing. In any event I believe that he may thank me one day for not exacerbating his situation with temporary relief only to find out that he is suffering later from more problems caused by increased debt, as Jamaica finds itself today as a result of borrowing for mainly consumption over the years.

The point is that even as many businesses are facing difficult times, any decisions taken must be approached in a very structured and rational manner. The problem with many businesses is that they have for too long either not engaged or have disregarded the advice of their accountants, and have instead focused on the Income Statement, not understanding that businesses need to be managed from the Balance Sheet. Even some accountants when they sit on boards ignore the fundamental principle of managing from the Balance Sheet and instead focus on the short term signs of the Income Statement. Based on my own cursory glance at the accounts of CL Financials, it seems to me that this is the way the company may have managed its strategy.

As I always say, a company never goes out of business because it makes losses, but rather because it runs out of cash. If we look for example at what is happening globally, the problem is not that many companies do not have significant reserves but rather that they have no liquidity. So even though one may be showing profits like CL Financials, if that is not translated into cash all organs of the business will cease to function just as when blood leaves the body.

Engage professional help

So for a very long time I have been saying, both in writing and electronically, that businesses (and government) need to engage the services of professionals to advise them on the way forward. I guess between 2007 and 2008 when I was saying it some might not have believed that what I was projecting was realistic but today it is even more essential. As I have been saying, in the US even though unemployment is on the rise they are finding that demand for accountants, financial analysts, and technology personnel is on the increase as businesses demand these services to advise them on the best options and how they can improve their operations.

The fact is that spending money to be able to get a guided look into the crystal ball is often better than going full speed ahead without knowing where you are going. In other words the cost of an accident is usually much greater than the cost of servicing the car to ensure safety. One option may be that there is no hope for the business and the best bet is to close it down, and even though this may not be emotionally acceptable, it will cost a lot less to follow this unemotional advice. We need to face the reality that some of the businesses as we know them today will no longer exist in the near future. What we are seeing in large businesses is pro-activity in dealing with what is coming instead of waiting until the storm hits.

On a more macro level, the country as a whole needs to do a lot more to prepare for what is coming and it has to start with having rational discussions about coping strategies. My own feeling is that we need to establish a national committee that will have oversight for developing the much needed strategies. The members of the committee should be paid as professionals and should be solely responsible for determining the intricacies of the challenges facing the country and recommending policy options for coping. They should do nothing else but this. After all we have commissions of enquiry for everything else that we can eke out a political advantage from, even if the recommendations are never implemented. And finally the composition of the committee should be the people with the best analytical skills and not picked on any other basis.

Minimum wage issue

Briefly on the minimum wage issue, don’t we by now realize that it is nothing more than something pushed by politicians and trade unions for short term benefit. The minimum wage has been in place since the 1970s. Has it caused any improvement in the fortunes of the workers or has it only caused inflation, job losses, and greater uncompetitiveness of Jamaican companies. I have always felt that one cannot legislate successfully an increase in the real income of workers. All it does is to create a temporary reprieve in the suffering of the worker but eventually leads to inflation as businesses have to increase prices in order to be able to cope with the increased costs and keep their businesses viable. Today the situation is direr as because of slowing demand, prices cannot be increased, even though costs are increasing. This is a sure formula for a closure of businesses.

So while we are asking businesses to try to keep people employed by decreasing the number of days worked or reducing wages across the board, instead of laying off workers, at the same time we are trying to increase the minimum wage. Now tell me where the logic is in that argument. The only way to increase real income is the same as it was in the 1970s, when the minimum wage was introduced, which is increased productivity. No other way will have a lasting effect.

Preparing for the economic storm

On July 18, 2008, I wrote an article called the "Perfect economic storm", in which I said the following six to nine months would be the worst period in Jamaica's economic history. At the time, even though I had indicated from the year before that the US would go into recession, I did not think the global crisis would have been as bad as it is and is expected to become.

Last week, for example, in a single day, listed companies in the US announced over 50,000 layoffs. This is in addition to the hundreds of layoffs at unlisted companies. The unemployment rate in the US is projected to go up to 10 per cent. Countries across the globe are seeing record levels of unemployment and jobless claims. In Jamaica, the Planning Institute of Jamaica (PIOJ) has indicated the economy will decline by over two per cent in 2009/10 and unemployment will rise to 12 per cent. The director-general of the PIOJ is telling us to brace for rough times ahead.

I have even been in contact with business people who are having a very difficult time.

Why are we surprised?
My response is, we should not be surprised. From as early as 2007 I remember espousing the US would go into recession and that it would significantly affect Jamaica because of the significant per cent of our trade with that country. Even while others were saying that we could look to other countries, I cautioned against Europe, Canada, and the UK as I expected them to be affected because of the trade they do with the US also. The fact is that today it seems as if the Eurozone and UK may be in worse shape than the US, hence the strengthening of the US dollar against those currencies.

So I was ridiculed by some for suggesting that Jamaica would see a significant downturn and was told to think positively. Well, I tried, but the logics of technical and fundamental analysis of the markets have not allowed me to think that way, as my brain resisted any thought of irrationality.

So I am sorry for thinking the Jamaican economy into a downturn. And I am going to make an adjustment to my prediction of July 18, 2008, as I was wrong about the following six-to-nine-month period being the worst in our economic history and change that to the 12 to 24 months from today. As I have always been saying - and I see that the PIOJ agrees - the global effects will linger on in Jamaica for at least 12 months after they have ended in the US.

The extent to which the crisis affects us though, will depend on how we prepare for it as a country, companies, and individuals. The fact is that if we prepare correctly there are opportunities available, and some significant ones if we prepare properly. And these opportunities are there for the country, companies, and individuals. I will not go into the specific opportunities, as I have committed to addressing them for two entities in February and would not want to pre-empt that. But suffice it to say that economic activity is like a trade.
For there to be a loser there must be a winner on the other side. What we must do is ensure that we are on the winning side. After all, managing risk is all about having knowledge and how we act. Risk reduces with knowledge, and is the difference between a gamble and a trade for example. A trade is making a decision with research and knowledge of where the probabilities are highest. A gamble is making a decision without proper analysis.
So as a country, and companies, we must decide if we want to make a trade or a gamble.

The threat of inaction
But as I said to Bev Manley last year, my greatest fear for Jamaica, and companies, is not that we do not know, or have the ability to know, what to do. It is that our politics, bureaucracy, and refusal to face reality will drive us to inaction. While the rest of the world has been debating since last year how they intend to, as one team, address the coming (not here yet) eye of the economic storm, Jamaica has been sidelined by distractions around issues that have nothing to do with progress but rather scoring individual points.

The opportunities that can accrue to Jamaica, and companies, can only come through preparation. Gone are the days when anyone could make a prediction about markets and what will happen. In a market where everything was going up that was easy. Try today when most things are going down, and volatility is the order of the day.

Today requires real analysis. An example I have is a situation where someone asked me about my recommendations made on equities, based on the fact that the PE ratio was low. This proved to me that some of the financial advisors have not come to grips with what is happening in markets today, as a cursory look at PE ratios only works when markets are going up, or are fairly stable. What is required now is hard-nosed balance sheet and company analysis. Needless to say, I promptly advised her not to listen to that financial institution again.

As a country we have to face the reality that we do not have the reserves to do what countries like the US and UK can, or even little Trinidad or Barbados. That is a large enough fiscal stimulus package that will create a real positive impact. Let's face the facts that we just do not have the money, as while the world was growing at record levels we squandered the opportunities to capitalise on that. Since 1972, we have grown an average of around 1.8 per cent per annum, and certainly over the last 15 years or so we have averaged less than one per cent per annum.
So now that we have dug ourselves into this deep hole, with what seems like the intention of creating a pathway to hell, we have to approach the crisis in a different manner. When one is in such a deep hole, with no ladder or other implement to help us out, the only way to get to the top is to slowly pile up dirt until it reaches the top. So what we must do to turn the economy around is to carefully put the structures in place to ensure that quality growth takes place in the economic and social environment.

For example, I would have thought that one of the most fundamental things that every company should be looking at immediately, if not done already, is to have a two-day strategic planning session with a view of creating a crystal ball view of the fortunes of the company over the next two years. This way, a decision can be made about what should be done to take advantage of opportunities, stay afloat, or shut down. Not doing so and then wanting to make a decision after everything has failed is mere stupidity to say the least.

As I always say, though, when one is sick we go to doctors. Why then when we need financial and strategic help do we not speak to those who understand what is happening and can make practical forecasts? The power of positive thinking has always, in my view, been a fad that some writers made a lot of money from. Of course, one must have a positive attitude but it must be within a context of the power of "practical thinking".

My advice to the country, companies, and individuals is the worst is yet to come. All we have been seeing thus far is the fallout from the alternative investment schemes. Get professional advice. And the situation is not any better in other parts of the globe, and may be worse in terms of impact, as this is a worldwide economic storm.

2009 - A year of challenges and opportunities

As we move full speed ahead into 2009 there is no doubt that it will be a very challenging year globally. Some of us had thought for a while that challenging economic times were ahead, and had stated this even in the face of opposition, by not only local commentators but even while persons such as Bernanke, Paulson, and Bush were praising the soundness of the US economy. I remember in March 2007 having a radio conversation with Ralston Hyman where he supported my thought that the US would go into recession by 2008 as the obvious threat to the consumer at the time would significantly slow economic activity. At the time many thought we were speaking rubbish and this denial continued well into 2008.

Even though today everyone admits that Jamaica and the world will have significant economic challenges, there is still an indication that as a country we do not understand what is required to face the challenge. When one reads and listens to the international press on a daily basis and compares it against our own local information it is obvious. In the US, UK, and Europe the main debates taking place are about what needs to be done to save the economy. In Jamaica, however, the main stories have nothing to do with a debate on the economy. Instead we are distracted by other stories, which to me is nothing more than a reflection of our state of poverty as a country.

Bleak global future
As an indication of the challenges that lie ahead, we can look at the main foreign exchange earners of remittances, tourism, and bauxite/alumina. All these earners are being affected negatively by the global economic challenges. Remittances in November 2008 saw a 17.5 per cent decline over the same period in 2007. Tourism saw declines in October and November 2008, and bauxite/alumina has announced that there will be lay-offs coming.

On the global front we have seen where the job losses continue, as Alcoa has announced a 13 per cent cut in their labour force and Marks and Spencer will be laying off thousands. Early earnings warnings from corporate giants such as Alcoa, Intel, Wal-Mart and Time Warner show that there is more pain in store for US equity markets, and thus greater loss of wealth. A technical analysis of the Dow Jones chart shows that it is now trading sideways and could see a move either up or down, but given the earnings warnings and unemployment difficulties ahead, my bet is that it will see further declines.

In fact, a CNBC article ("Early Warnings Signalling an Ugly Earnings Season") state "Analysts expect consumer-sensitive areas such as retail and parts of technology to be among the hardest hit as rising unemployment squelches consumer spending and hurts revenue and earnings. Even President-elect Obama's plan for a massive stimulus package isn't expected to have much impact until later this year." The recent manufacturing indices in a number of countries have shown significant declines and the US jobs number on Friday January 9, 2009, is expected to be significantly worse.

The global situation I think is therefore very bleak and in my view this may be an "L-shaped" recession rather than the previously thought "U-shaped" recession. And if the stimulus plan in the US does not have the intended effect, then some think we could be looking at a state of depression. Whether it gets there or not it is obvious that consumer spending across the globe will be significantly tempered for at least 12 to 24 months. This is important for Jamaica as the three main foreign exchange earners depend to a great degree on consumer spending, which means that we could see earnings significantly affected. I expect also that even after the recession has ended the effects in Jamaica will linger on for at least another 12 months as consumers try to build back the massive wealth they lost in 2008.

Opportunities exist
But while there are many challenges ahead, I believe that there are many opportunities for Jamaica and individuals.

Realising these challenges, however, will depend to a great extent on how we organise as a country and as individuals to meet these challenges. And while the government has announced a welcome stimulus package, and has provided funds for small businesses, I fear that as a country we are not taking the expected challenges serious enough, as we continue to be distracted by other debates. While I do realise that there are other things to be discussed, unless we engage in a serious discussion of the solutions realise we will always be mired in the poverty we have become used to as a country. As an example, the recent discussion in the US not to accept the senatorial appointment by the recently accused Illinois governor has been changed resulting from the need to focus the discussion around the economy.

Even the discussions around the Madoff Ponzi scheme always return to the effect it has on the economy and confidence. I also have little confidence that the bureaucracy will allow us to respond in time to the welcome policy initiatives announced by the government, and that by the time we get around to it the recession may almost be over, and we would have been seriously ravaged. But that is life in "Jamaica, no problem".

In saying this though I believe Jamaica faces many opportunities, primarily in agriculture and outsourced services. Agriculture I think can form the basis for a revitalised local economy and also provides niche export market opportunities. In addition I believe in times of crisis food security is very important. The opportunities in agriculture is something I have been espousing for a while and my discussions with Chris Tufton has shown that he has some well thought out plans for the future of the sector. As a country we must encourage much more debate on this.

While the opportunities are there, however, I believe the fastest approach to get this sector moving is through partnerships between government and the private sector in targeted projects, because the infrastructural problems such as roads, praedial larceny, and funding do not encourage private sector participation. I know of at least one major business person with available lands who is willing to take advantage of this opportunity in partnership with the government. The opportunities in agriculture must not be thought of as only primary production but must be extended to agro-processing plants. Why should we not have mainly Jamaican processed foods in hotels? The supply chain opportunities are immense.

The provision of outsourced services for countries like Jamaica in Information Technology and call centres, for example, are another area of opportunity. Although the potential profits are not as great as the agriculture potential, they are still a source of opportunity.

On an individual, and company basis, I believe there are many opportunities emerging. Anyone who knows of the herd mentality of investors, knows that when fear or greed sets in it always causes an over reaction and creates opportunities. I still think that the herd still has some running to do but opportunities are emerging and soon can be taken.

In the case of the government, companies, and individuals, however, it is very important to engage the services of someone who understands how to assist in the opportunities. In the US, for example, while job losses mount, professions such as accountants, analysts, and information technology are still in high demand, as when businesses seek to get more efficient and prepare for the road ahead they rely on these professions.

The Chinese say that there is opportunity in crisis. but unless we are prepared to meet the oncoming light it could turn out to be a train.

Confidence – key to growth

On March 30, 2007 I wrote about how important consumerism was for growth. Before and since then I have always discussed how important consumer confidence is to the development of economies, and capital markets in particular. Over the past few months we have seen where the global markets and economies have been collapsing. This also is as a result of confidence. It was being overly optimistic (confident) in the first place that led capital markets and economies to expand beyond the support of the productive bases, and it was the rapid loss of confidence that caused the faster decline in capital markets and economies globally.

Confidence and GDP
The table shows two confidence measures for the US compared to the quarterly real GDP outturn. It clearly shows that preceding the downturn in US GDP in 2009 there were significant declines occurring in confidence measures. The state street investor confidence index is a measure of confidence by looking at actual levels of risk in portfolios and the University of Michigan index measures the financial conditions and attitudes of households in the US.

This comparison is not surprising as it is confidence levels that drive spending habits and investments. Consequently if spending and investments are subdued because of a lack of confidence then naturally GDP levels will as a result decline. In order for economies to grow therefore confidence levels are important ingredients. No where is this more true than in the US where 70 percent of the economy is made up of consumer spending, and the US economy accounts for 25 percent of world consumption.

Even in an economy like Jamaica, where the state has been guiding resource allocation for many years, confidence is of utmost importance. Even more important than consumer confidence in Jamaica is investor confidence. This is because a significant part of our economy is not driven by the market but rather by paper pushing of financial institutions.

The fact is that Jamaica’s economy has been structured since the 1990s to be one based on trading of paper rather than economic activity. This is why it is so important that the management of the macro economy is far more important than the stimulus to the real economy, because we do not have much of a real economy in Jamaica. This means that even if the consumer were to spend much less this year than last year, the effect on the economy would be small compared to any fall off in trading of paper in the economy.

In any case this reveals that in both the case of the US and Jamaica confidence is key in driving the economy forward. The difference is that in the US the confidence of consumers are most important. In our case, however, the confidence of investors is most important. Understanding these differences will allow us to understand what policies are to be put in place in order to keep our economy afloat.

Regulatory need
It is this understanding of the importance of confidence in the sustainability of markets and economies that lead us to conclude that regulations and policies to drive confidence are utmost to economic development. So when people say to me that the era of the market economy is dead, this type of argument is only a representation of their limited sense of understanding what drives market economies. The need for regulation, especially as it relates to the financial sector, is not to introduce a socialist way of running economies, but to engender the necessary confidence to drive the market economy. The need for a fiscal stimulus package to drive the economy in times of recession is not to move away from the capitalist model (that has served this world so well) but to bring back the necessary confidence in order to allow the market economy to once again start growing.

The problem that we have when we start thinking about the demise of capitalism and the need to go to a more socialist type model is that we tend to over-regulate and over-control, which ultimately leads to a lack of market led growth. It is this very same situation that has led to the lackluster economic development that Jamaica has seen since the 1970s. Some persons have expressed to me recently that my view that agriculture can be the driving force behind Jamaica’s development is unfounded, as it has failed this country over the years and the way to go is high end services.

The reason why agriculture has failed is not because it does not have the potential necessary to drive Jamaica’s development. It has failed because there has been too much state intervention in the allocation of our agricultural resources and too little in terms of dealing with the very serious problem of praedial larceny. Imagine if we had policies that were geared towards (i) ensuring good roads for transporting agricultural produce, (ii) eliminating praedial larceny, and (iii) designating lands for agriculture instead of houses. This would engender the necessary confidence in investors so that they would make a business out of agriculture.

I always tell the true story of a well known Montego Bay businessman that invested 100 acres in mango production for export. As is expected in Jamaica he began having a serious problem with praedial larceny and finally caught the perpetrators on camera. Armed with the visual evidence he carried them to court and after a year the case was thrown out as the tape recording was not allowed as evidence in the courts. As you can well imagine he changed the use of the land from the planting of mangoes for export to building houses for consumption. The fact is that he no longer had the confidence that the system would protect him.

So as we move into 2009 I believe the most important policies are going to be those that are geared towards rebuilding the confidence of investors. This is especially true in a global environment that is going to pose serious economic challenges. The US is yet to face further job losses and only this week the housing numbers show that the recession is deepening in the US and the UK.

Here in Jamaica we have to ensure that our economy is still seen as a viable place to invest and this can only come about by creating an air of confidence. It is going to mean changing the way we do things and we must address as two of the most important impediments to investment, the problems of crime and bureaucracy. Even with the fiscal and economic stimulus package announced by the Prime Minister, if we are unable to deal with the problems of crime and bureaucracy then come this time next year we will be in a worse position talking about the same challenges.