Is the economy improving?

Over the past few weeks there has been much debate about whether the macro-economic measurements are any indication of improvements taking place in the economy, and by extension whether we are witnessing the start of an economic turnaround. Those who support this idea point to (i) a revaluing Jamaican dollar; (ii) lower inflation numbers; (iii) improvements in agriculture; (iv) significant improvements in the trade deficit; (v) declining interest rates; (vi) increased confidence numbers; and (vii) reduced crime levels.

On the other hand those who oppose the idea of improvements in the economy point mainly to (i) increased unemployment; (ii) negative effects of revaluation on exports; (iii) stagnant and declining income levels; (iv) increased business difficulties; and (v) reducing exports and future effect of oil price increases on imports.

Both arguments have validity
The question that must rest on the minds of non-technical Jamaicans is, who is right? Is the economy in fact improving, or is it that the declining economy is causing the macro-economic measurements to portray improvements in the economy?

The answer is that both arguments have validity, as one could successfully argue either position, especially if you are preaching to an audience sympathetic to your own leanings. What is needed, though, is an objective analysis of the economy to determine what the true position is. I will attempt to provide a synopsis as I see it, but the truth is that much more space than this column would be needed to go into the detailed analysis required.

In making any assessment, one should always start with the objective. For example, if one is assessing the economy in relation to the motor car versus thew agricultural industry then you would need to state different objectives. This is because both industries can oppose each other in terms of what is good for each. Agriculture earns foreign exchange while motor cars require it, and so within the context of our current economic circumstances the interest of one is opposed to the other. In different economic circumstances they could be aligned. But any proper analysis needs to be done in relation to present circumstances.

In the case of the Jamaican economy the objective must be to see the improvement in the standard of living of all Jamaicans and the general improvement in the economy. The way to measure that is at a macro level looking at overall GDP growth, but to also drill down to look at income levels, job creation, and which sectors are improving. The reason for this is that the country can achieve growth while the economic foundation is getting worse. For example, in the fourteen years to 2007 although Jamaica saw growth in every year, deeper analysis showed that in all fourteen years the non-exporting sectors grew while in only three of those years the export sectors grew (Chung, 2009). So while the overall economy was growing, this was being done by the growth in debt rather than production. In other words we were growing based on other people's money.

So the economic challenges we are seeing over the past two years are due in part to the global recession, but more importantly because of our economic management for decades before that.

Recent data from STATIN shows that Jamaica's imports have been growing at an increasing rate versus exports since the 1980s. Surprisingly, the numbers reveal that in the 1970s, exports increased by 136 per cent while imports increased by 97 per cent. On the other hand, the period of the 1970s was the worst growth period on record. The years after that did see some growth, but imports surpassed exports at an ever increasing rate up to 2009. The direct correlation with the increase in debt leads to the conclusion that we were improving our lifestyle based on borrowing.

1970s similarity
The problem we faced in the 1970s, however ,is similar to the challenge we face today, in that we are experiencing GDP decline but at the same time we are seeing improvements in the trade deficit. One difference between the 1970s and today is that we have recently been seeing a revaluation in the Jamaican dollar, but this can be explained in four ways (i) a reduction in demand for US dollars, as a result of declining economic activity and financial transactions; (ii) a liberal foreign exchange system today that reacts more to demand and supply than before; (iii) a shorter assessment period, so that sustainability has to be questioned; and (iv) the inflow of loans from the IMF and multilaterals. The truth, though, is that the improvement in the exchange rate today is not due to productivity improvements but rather a decline in economic activity, as supported by the productivity data. This is not a good thing, as it means that income levels will eventually fall on this premise.

The same argument holds true for lower inflation numbers and to some extent interest rates. The main argument for reduced interest rates is of course the game-changing JDX programme, as this alone caused a steep fall-off in the average rates of interest rates offered by the government, which was the main competitor to private loans. The appetite of government for debt did not change, and what happened was that with the inflow of external loans, the demand for local debt and higher interest rate pressures decreased. The lower economic activity assisted by ensuring that demand for US dollars decreased.

What one realises from all of this, however, is that the improvements in the economic numbers are not as a result of improved productivity or exports, but are caused by other factors that give a sense of well-being. It is for this reason that the confidence indices have therefore increased. Because as the numbers show, even though consumers are more confident they also have low expectations for any job prospects or increased spending. The confidence increase is therefore more psychological than based on any real improvement. In fact confidence numbers were at their highest in Q3 2007, just before the recessionary decline.

With all this said, though, this adjustment in the economy is necessary if we are to see the much needed revaluation, as the economy was similar to an addict. Only in this case the drug was debt and declining productivity. In order for the rehabiliatation to occur it was therefore necessary to deflate the economy and create a new foundation that can lead to sustainable development.

It is my belief that the current state of the economy provides a good platform for creating a sustainable development path. This, however, will require carefully crafted policies geared towards development rather than short-term consumption.

So in my own view, while there are positive macro indicators, these are not because of real development but as a result of the necessary economic contraction. I don't know of anyone who paints a car without first removing the old coat.

Jamaica's productivity misallocation

ABOUT a week ago I was asked to do a presentation on the Jamaican economy, and in my research looked at the problem of productivity and its impact. Even more important was the misallocation of our resources even as we strive to improve productivity and our economic fortunes.

The table shows that while we grapple with the problem of productivity, the challenge is even more far-reaching than we think. The implication from the numbers is that Jamaica's productivity problem does not only arise from input costs and the efficiency of workers but rather speaks directly to a problem of market allocation of resources.


Compensation challenge
The source of the measurements shown is the Jamaica Productivity Centre's recent publication of a study for the period 1973 to 2007.

It shows that there is a serious disconnect between percentage changes in output per worker versus unit labour cost. This is illustrated at the total and sector levels as follows:

* Total Economy --measurement shows that even though the output per worker has declined by an annual average of 1.3 per cent, at the same time the unit labour cost (compensation) has increased by an average of 0.4 per cent per annum.

* Sector level -- both the goods and services sectors show declines of 1.7 per cent and 0.5 per cent respectively; however, per unit labour cost did not reflect this decline in productivity, as wages fell by only 0.6 per cent in the goods-producing sector and rose by 1.2 per cent in the services sector. This is even more pronounced when you consider that over the years we have increased the services sector from less than 50 per cent of the total economy to over 70 per cent. So over the years we have been rewarding declining productivity.

* Industry level -- a look at the specific industries also reveals that in agriculture, mining, and transport, storage and communications we have seen average productivity increases while at the same time seeing declines in unit labour cost per worker. The converse is true for construction and the financing and business services sectors. In the much-touted manufacturing sector, while there has been a decline in productivity, unit labour cost has remained flat.

What these numbers show us is that a primary problem of productivity is that we have been allocating resources very inefficiently, and implies that one of the reasons why we may not have seen more capital being allocated to various industries is that the market is broken. In other words, markets will usually allocate resources where it is most efficient to do so but clearly, something has been wrong with the allocation of resources in Jamaica, as we seem to have been rewarding markets that are inefficient while penalising markets that increase in productivity. This, of course, leads to a distorted return on capital and this uncertainty results in capital staying out of any long-term investment in the market.

Decreased competitiveness
The result of all of this, of course, is that productivity declines and with increases in compensation relative to output, inflation results. GDP output also becomes less competitive in relation to the rest of the world and so exports suffer in favour of the more competitive imports. This in turn results in the devaluation of the Jamaican dollar and inflation ravages bring compensation back in line with market conditions and we end up in a vicious circle with inflation, or increased debt, and high interest rates.

The fundamental cause of all of this is, of course, the political system, which results in inefficient allocation of resources. The problem is that our market is not allowed to work correctly because policies have always encouraged behaviour aimed at encouraging political results instead of economic results. So when, over the years, politicians sit in Parliament and make policy decisions it is done primarily because of political reasons and not to cause the market to improve. As an example, duty waivers and incentives may be given to those with close political connections or to repay a debt for campaign contributions.

These policy actions have the consequence of rewarding persons/companies that are not the most efficient and also industries in which Jamaica might not have a natural comparative advantage. Economic theory teaches us that if a country wants to maximise its global competitiveness then it must focus on where it has

its comparative advantage. However, interruptions in the smooth workings of markets by the state cause market determination to be distorted, and this eventually was what led to the collapse of socialist states such as the Soviet Union and Eastern European countries, and the move by China towards a market economy.

An inescapable fact is that the market will always have its pound of flesh and, just as the false creation of wealth in the United States (US) led to the recent financial crisis, so too the distortion of market activity through politically motivated policies has caused Jamaica's economic and social decline. At least in the US whenever there is a problem in the economy the markets are allowed to self-correct, with a minimal amount of government assistance to allow for a smoother correction. In Jamaica's case, however, there has never truly been a period where the market has been allowed to work effectively and so the problem has accumulated.

It has always been my view that if we are to truly fix Jamaica's economic challenges then government intervention must be kept to the minimum, always ensuring that public policy does not determine private sector resource allocation, as was done with interest rates in the 1990s. And this use of interest rates to distort market allocation was not unique to Jamaica as this was a primary cause of the global financial crisis.

Until then we will always remain less competitive than we can be as a country even though we have the potential to be very successful.

Analysing the economy's prospects

Ever since the lower interest rates (through the JDX) and the revaluation of the Jamaican dollar, many have been hailing these signs as a recovering economy. It always amazes me that people always seem to arrive at conclusions prematurely without doing any real analysis of the facts, and this leads to incorrect decisions regarding the future of the country and within companies.

No doubt the lower interest rates and a revalued dollar are positives for the economic framework but by themselves are not sufficient for economic recovery. In fact interest rates and the exchange rate are merely symptoms of an underlying factor, and if we are truly to understand the prospects for the economy then we must carefully analyse the underlying factors and not draw conclusions based on the symptoms.

Carl Ross correctly stated that despite the positive indicators, significant risk still remains in the Jamaican economy, and we are not out of the woods. I had also indicated in my book that in order for the economy to move forward we would first have to go through a period of economic decline for structural adjustments to take place. This is because the problem with the Jamaican economy cannot be solved by merely tinkering with the macroeconomic indicators but needs major surgery because of the flawed social and economic foundation upon which it rests.

Effect of social instability
We have all seen the consequences social instability has on the economy, evidenced by the unrest a couple of weeks ago, and on the economic side growth has always had a deleterious effect on the long-term prospects of the economy. I say that because such a significant part of our production is based on imports that when we increase production we are also increasing our appetite for imports and foreign exchange.

This leads me to the recent revaluation of the Jamaican dollar. While this has been a positive so far for the economy (as it helps to stabilise inflation) the fact is that the revaluation has not resulted from any increase in exports but rather by a decrease in imports as a result of shrinkage in the economy (in fact because of the close relationship between imports and exports, the decline in exports also contributed to the decline in imports). At best what this allows is a temporary reprieve where we can make the necessary adjustments in the economy to ensure this trend continues.

This is reflected in the Balance of Payments (BOP) for the calendar year 2009 when compared to 2008. It shows that although the current account balance improved from a deficit of US$2.8 to US$0.9 billion this resulted primarily because of a significant decline in imports (40%), as a result of the reduction in the price of oil. At the same time exports declined by 49%, and there was also a decline in remittances of 7%.

This decline in remittances stems no doubt from the continuing effects of the global crisis on income levels in the US and UK, as a result of unemployment and decline in real incomes. I expect that the global recovery is going to be a long process and the effects on disposable incomes will linger.

What the BOP shows is that Jamaica still remains at the mercy of oil prices, and this is why I have been saying that the greatest economic challenge to business and Jamaica's economy remains the high energy costs. This is even more so than interest rates, which is really just a symptom of the seriously fractured political, social, and economic infrastructure.

JPS rate hike
The recent furore over the proposed rate hike by the JPS is evidence of the high cost energy has on businesses and the disposable income levels of consumers. The approach we take to arresting costs, however, is not to allow the markets to work but to seek to apply strong-arm tactics and regulatory control. The best way to deal with high mobile phone and electricity charges is simple - implement portability for telephone numbers and net metering for the energy sector. If these simple steps are taken I guarantee that the market will ensure that prices decrease.

Since I put solar panels in place at home I have seen my electricity bill decline from $14,000 to $4,000 per month. This is even before any GCT is applied (which I don't pay because I do not use over 200 KWH) and I am oblivious now to the arguments about rate increases or GCT being applied. This ability is available to all taxpayers as they can get the money for a solar system to borrow from NHT and I guarantee that if implemented properly, the loan repayment will be less than the monthly JPS bill. I also expect that oil prices will go up as soon as Europe sorts out their mess, so rates will inevitably go up in the future.

It is important for us to take advantage of these positive signs in the economy though, as the reduced interest and exchange rates are not sustainable if the correct adjustments are not done to the structure of the economy and social conditions. The decline in these two indicators has more to do with a reduction in demand (and disposable income) than with any economic recovery. In fact the recent numbers show that for the first quarter, while the overall economy declined by only 0.6%, the goods-producing sector declined by approximately 6%, and we need to remember that the services sector always lags behind the goods-producing sector, as without real production taking place the services sector cannot survive without new capital being introduced through loans or new investments. It will be difficult to get new investments unless we deal with our social conditions, the cost of energy, and other factors such as bureaucracy.

Recently some of our listed companies have also shown a decline in profitability, which has resulted primarily from a decline in real income, as they have done a good job of controlling costs, which in plain language means they have reduced real incomes by either reducing staff or reducing operating expenditure. This of course translates to lower disposable incomes and leads to a vicious cycle. A deeper analysis of these company results show that even with the declining incomes they have been faced with inflationary pressures that they cannot pass on.

Over the past two years I have called for a few things to happen if we are to get on the path to recovery - (1) restructure the debt (2) deal with the social conditions as a priority (3) borrow more and invest in addressing the underlying challenges to the economy. As I always maintain, there is nothing wrong with debt as long as the marginal revenue is greater than the marginal cost. I see now that the government is seeking to secure some US$1 billion to address the social and crime conditions, and I for one applaud that effort, wishing that it had come sooner.

For example, at one company we took a strategic decision to finance our operations (and negative current ratio at the time) by financing the operations from payables. So instead of paying in 30 days we would pay in 60 to 90 days while building profitability in the company. It paid off because we were able to carefully identify the market opportunities and chart a plan as to how we would get to profitability. This is the sort of careful planning we need to use when borrowing money.

So the economy is at a crossroads right now. It was necessary for the economy to be given an anaesthetic so that the necessary surgery could be performed but it would be wrong to assume that the stable signs indicate that the patient has recovered. It simply means that the patient is sleeping. In order for full recovery to take place, the surgery must be skillfully done so that on awakening we will have growth that adds to development. It is going to be a long process (as was pointed out by Ross) but if we take the necessary steps to make the economic and social structural shifts then the economy will finally emerge on a path of real development. And there are some simple steps that can be taken to put us on that path.

I weep for Jamaica

I remember a few months ago being on a talk show with a private sector leader who was clamouring for reduced interest rates as a means of spurring investments and driving the economy forward. At the time I told to him that the reduction of interest rates would not, by itself, move the economy forward and that we would be better served by improving the weak social and political infrastructure spawning the lawlessness in the society. It has always been obvious to me that the need to address our social and political infrastructure is the root cause of our economic and social challenges.

Even while the successful JDX provides some breathing room in the economy, even this is hostage to our social and political problems. And we must understand the crime we have in this country is only a symptom of the political architecture that has held down this country since independence. We started with the wrong foundation and you cannot expect to grow fruit from trees that are planted in mud.


Economy taken a beating
Over the past three to four days Jamaica's economy has taken a real beating from the events that have unfolded. A simplistic direct computation of the losses over the past four days can be to look at four days GDP output, which at a GDP value of $1.1 trillion amounts to some $17 billion assuming 261 working days. In addition to the GDP loss, however, there is the loss of disposable income from events being postponed and generally lower spending in the economy. This will also have a lingering effect as people will be guarded with their spending and investment in our unpredictable social environment.

The effects on tourism and long-term investments will continue to cripple our economic turnaround. Jamaica is a well-known brand and any marketer will tell you that a well-known brand always suffers more from bad news than lesser known brands. So while we expect the publicity from good news about the brand, such as sports or music achievements, similarly when there is bad news then expect the same or more, publicity. Just think about the effect on Tylenol sales worldwide when cyanide was found in one single packet.

So the immediate and longer-term economic impact will be devastating. Not only from international investors but also local consumption and spending. The Finance ministry will face challenges to its revenue programme from this fallout, despite all the positive adjustments that have taken place. I trust that people will believe me now when I say that even more important than interest rates and macroeconomic targets is ensuring that the social and political infrastructure is on a sound footing, as dealing with this will have a much more positive economic impact on the country than any macroeconomic policy.

I weep for Jamaica. Not because of where we are as a country today but because of the lack of understanding of the fundamental challenges that we face by persons who should understand. I weep for Jamaica because of the comments I continue to hear, which tell me that the same emotional responses are coming out as happened when West Kingston came under siege in 2001 or when the slaughter of children dominated the media. I weep for Jamaica because it seems as if we still do not understand what the root causes of our problems are. We do not understand that the main cause of our problems emanates from a lack of respect for citizens' rights, and not from any high rise building or the number of guns on the road. If we do not try to win the "hearts and minds" of the people of Jamaica then we will only be setting ourselves up for another confrontation.

This day has been in the making for a very long time. At least since the 1970s. The state of emergency in the 1970s, which saw many rights being abused, the 1980 election, the Green Bay massacre, the police squads formed over the years from the 1970s until now, the Braeton incident, Janice Allen, the Constant Spring lock-up, 2001 Tivoli attack, police killings. And I could go on. These were all under the guise of preventing criminality. Has it worked?

Support for the security forces
I fully support our security forces, and commend them for their bravery and protection of us Jamaicans. I ask that they respect the rights of their fellow Jamaicans. The movie Invictus portrays a giant (Nelson Mandela) who showed that compassion, respect, trust and forgiveness was the way to rebuild a nation, not retribution. In viewing the news over the past few days I have seen some glimmer of hope that the security forces are starting to change their approach and respecting more the rights of Jamaicans. We need to institutionaliSe this approach.

The problem, however, is not just with the security forces or politicians, but with civil society. I have heard and read the commentary of many Jamaicans (including those overseas) saying that the security forces need to go into another garrison and do the same thing they did in Tivoli, and deal with the criminals. This mindset is the problem we face. I thought that it is not until people are found guilty in a court of law that they become criminals. How would those people who promote this idea feel if they were children in Tivoli over the weekend, or how would they feel if they even had a relative in that situation?

Why are people so stubborn and illogical? We have tried this approach since independence and it has not worked. Why do we want to live in countries where human rights are respected but don't think that our own country is good enough for this sort of respect? Civil society, when you wake up every morning, before you start to blame the politicians and security forces please install a mirror in your bedroom and look in it before you go to the kitchen and eat some of the food that others are being deprived of.

I hope that when all of this is over that we do not go back to business as usual, and more importantly that we do not respond in emotional ways to what has happened. We must deal with the underlying challenges which can only be addressed by proper analysis and careful planning, not the usual responses of "kill them all". This is a defining moment for Jamaica, and we must deal with it in a rational way.

If we want this economy to move forward, and develop in the way it should, understand that only a stable social and political infrastructure can ensure that. When this is done, then I guarantee that we will be on the way to progress.

For all those who have contributed to and supported criminality, who have ignored the need for respecting the rights of others, who have turned a blind eye to corruption, and who have played politics over patriotism, take a bow. You have all contributed to what is happening in Jamaica today and should be proud of your accomplishments. I have always lived by the philosophy that I should not speak about anything I don't fully understand, and if I don't have a rational solution that I should keep my mouth shut. I invite anyone who falls into that category to do the same.

My Jamaica, My vision

A few months ago I started to focus on the belief that if this country is to move forward it is more important to have social and political stability that even a successful Jamaica Debt Exchange (JDX) could not bring. This need to focus on social stability is obvious because social decay in Jamaica has created a greater challenge for us than any immediate fiscal problems.

When I was writing my book I started out with a financial analysis of the macro-economic numbers, determined to find out what the underlying causes of Jamaica's economic challenges were. After all, I grew up in Jamaica hearing about our macro-economic targets, and what economic policies need to be put in place in order to ensure economic development.

So over the years of my own development I have heard politicians, economists, and business persons speak to the need for lower interest rates, free market economy, tax incentives, and a host of other economic and financial initiatives.

Fundamental problem not economic
However, when I got to the end of the analysis I realised that the fundamental problem Jamaica faced was not the economic and fiscal programmes implemented over the years. And it all came home to me because I have listened to and been impressed with much of the analysis over the years, and have always wondered why these supposedly knowledgeable persons cannot find a solution to Jamaica's persistent challenges.

I concluded that the problem with Jamaica, and why it cannot develop economically, is because of the social and political infrastructure. So try as we might to develop theoretically sound financial and economic programmes, unless we bring some stability and sensibility to our social and political systems then we will always be chasing our tails. And so the JDX and other such fiscal initiatives will only be temporary reprieves from our fiscal and economic plight, just as the first MOU was celebrated as the panacea for our economic challenges. We all know what happened to the MOU, despite the several pronouncements of various sector leaders on how great it was. It seemed that I was the only voice at the time saying that it would not work.

Similarly, over a year ago I took the flak of many (along with Ralston Hyman) for saying that the only way to deal with the fiscal situation was to restructure the debt. Based on recent events I do not think I was incorrect.

In July 2008 I wrote an article called "The perfect economic storm", where I indicated that 2009 would be the worst economic period for Jamaica since independence. This again was at a time when others were telling me that I did not know what I was saying.

In May 2008 I wrote an article called "Déjà vu", where I indicated that the uproar surrounding the murder of children at the time would soon fade and we would fall back into complacency as a nation until another upsurge occurred which would shock us. I was told by a commentator at the time that the media would not let up and would keep on it until something was done. Well, over 2,000 murders later, which includes even younger children in even more hideous ways, we are not as concerned as we were then.

I say all this to illustrate that it is not difficult to predict which way Jamaica is going. It is not difficult to understand what the fundamental problem is. It is not difficult to understand what needs to be done to solve the challenges. But what it takes is proper analysis and a political and bureaucratic structure that is geared towards solving the challenges. If, for example, the road network is not set up to encourage discipline on the roads; then confusion will ensue. Similarly if any organisation or political system is not set up to rely less on personalities and more on systems and controls, then how much success can we expect?

So at the end of writing the book I concluded that the real problem Jamaica had was a political system that did not allow for country first. A political system that depended more on personalities rather than political and constitutional systems. A political system that catered more to Jamaica's destruction than its development. I also concluded that what Jamaica needed was not just economic growth, as I heard many suggesting before, but rather "economic and social development", as opposed to just growth, if we were to make the transition from being a fledgling nation to one where we could realise our vision when the flag was raised for the first time in 1962.

Term limits
So for me what stood out the most in the Prime Minister's address to the nation last Monday night was his commitment to having term limits for Prime Ministers. I think that will be the start of the political revolution that is necessary for this country to move towards real economic and social development. I am heartened by this commitment, even more than the others that are being held on to, as this is the one that could bring about the greatest potential for change in the structure that will cause permanent change.

On many occasions in the past when asked how I thought the change would come, I indicated that the change in our fortunes will not come by way of any initiative from politicians but from the pressures of civil society. This is the strongest I have heard civil society speak since I have been aware of what is happening. Not even in the 1970s did civil society speak with such a strong voice, as it was the opposition JLP at that time that led the charge for change while civil society either migrated or kept quiet and hoped for the best. This time I see a maturity in civil society that has never been there before, and I think it has resulted from the openness of debate that has been growing. Not that the media has played the pivotal role that it has needed to, I must add, as I think the media has been more irresponsible in some of the commentary over the years.

And even though everything seems to be falling down around us every day, I believe that before the sun rises, the day is always at its darkest. What we need to do as a country is ensure that the sun does in fact rise, and civil society needs to continue to work with the government, and the commitments made by the Prime Minister, to ensure that we see the change we need. Even though the past two and a half years has seen the greatest challenges for Jamaica, I also believe that it offers much opportunity for change. Remember what it was like in 1980 leading up to the election?

I believe we have made some fundamental economic shifts, such as the restructuring of the debt cash flows, the reduction of interest rates, the move to public sector reform, the significant growth in agriculture, the commitment to divesting the loss-making public sector entities, and very importantly the moves by the Commissioner of Police to deal with corruption in the force. There is more to be done though, Commissioner, as the perception of lawlessness is still prevalent, which is easier to fix than we think if we have the will.

For me this is my Jamaica, as there is no other. This is the only place where I can truly be a first-class citizen, and we must ensure that every Jamaican feels that way through respect of human rights and severe punishment of those who violate other people's rights. My vision of Jamaica is consistent with the 2030 vision, the place of choice to live and work. But this cannot be achieved unless we permanently fix our political system, starting with the commitment by the Prime Minister to have term limits.

Value added focus

NOW that the budget debate is finished, our efforts must be focused on how to develop the country to achieve economic and social progress. Everyone had their say on the debates, most of which would have been influenced by political underpinnings, with persons espousing how great the presentation was by their political preference and not any objective assessment of what was presented.

One such person sent me a message to express disappointment in me saying that jobs were needed to move the economy forward. Instead, he said patience needs to be exercised to see the adjustment in the economy. In other words make the adjustments through painful measures that will result in job losses and people will respond by starting businesses because interest rates are falling and other adjustments are being done to create a facilitative environment. When I asked the question though of how he suggest we deal with the economy over the next six months and if he could specifically let me know how the adjustments will impact on the economy in precise terms, that question was ignored.

US government action
It seemed obvious to me, and the US government, that in order for the economy to grow that jobs need to be present. The US, for example, has a very facilitative environment for growth and business start-ups, but supposed they had ignored the declining job market and left it to spiral out of control, where would the world be today? Would Jamaica even be speaking about increased tourism or a return to bauxite if the US had allowed the job market to falter? Would there be any economic growth if disposable incomes from job losses had dwindled? I think not. But this is the myopic view expressed by many who do not understand that the economy is dynamic, and based more on confidence and expectations than macroeconomic data.

My own view is that the general direction of the budget and policies seem to be moving in the right direction. The focus on lower interest rates, a restructured debt cash flow, small businesses, tax reform, and generally an enabling environment is pointing in the right direction. This, of course, includes the commentary by the prime minister on the need for a radically reformed public bureaucracy and crime. This approach of changing the structural make-up of the economy is definitely a positive and must be encouraged, as for the first in a very long time it seems that we have properly set our sights on the direction we want to move in.

What we need to do now is bring that together into a set of specifically laid out plans with timelines attached as to when we will achieve what and where the accountabilities lie. In short what we must be doing is focus on developing a specific set of tasks to achieve a macro-objective. This macro-objective must be economic and social development (not just growth). Because of the long-running fiscal deficits we have had in this country, which has decimated our economic and social structure, we are understandably focused on the fiscal accounts as an objective. The fiscal accounts (and deficit) of course need to be a tool rather than the end of our journey, which seems to always be the main focus.

So we achieve a fiscal deficit of 6.5 per cent in 2010/11 and then what? The question is in achieving that fiscal deficit target, what will be the dislocation caused to the economy? How many persons will have lost or gained employment? What will have been the social impact of achieving the fiscal target? How many new businesses do we expect to start over the next year, as a result of the policy shifts being pursued and the stimulus being provided? How much activity do we expect to occur from the much-needed housing stimulus announced by the prime minister? What are the specific timelines for the well-needed public sector transformation being pursued?

Business interest
These are the questions which businesses need to know the answers to in order to move forward. So while we hear how great the presenters sounded -- who did not sound good, and who was being political and who not -- the question is do we have a clear picture of what our developmental plans are for the next 12 months and how the specific plans are to be achieved?' We have clearly identified the issues that need to be addressed, which was maybe best articulated in the prime minister's presentation. But at the end of the day apart from the "who done it" theme throughout the presentations do we have a clear indication of how the development plans will take shape? If the answer is yes and businesses can plan then we have had an excellent budget presentation irrespective of how the speakers sounded.

After reviewing all the speeches my own view is that the one which best identified our challenges and what needs to be fixed is the prime minister's presentation. This is the one that we can take away the most from in terms of what developmental objectives we should be focused on, as the other presentations were like a Sherlock Holmes mystery unsolved, focusing primarily on who did what, when, and where. Is that relevant in the crisis in which we find ourselves today? If it will put food on peoples' tables and money in their pockets then by all means go for it.

The prime minister's presentation discussed the main issues, but in my view he needed another hour to expand on what the specific action plans are in order to address the issues of focus. In my view, the housing stimulus through the NHT was a good move, as one of the primary sectors of growth is the construction industry and if we can get that sector revitalised along with the growth in agriculture then we will bring back much-needed economic vibrancy.

As I was saying to my friend in the message, however, we need to have some focus on creating new income (jobs) in order to ensure that the demand exists for the stimulus in order to maximise the economic benefits. As an example, before the housing stimulus could have worked in the US they had to ensure that the job losses were halted. Can you imagine if they had provided the housing stimulus with job losses increasing? The benefit would not have had the maximum impact, which is how we need to approach spending. Hence, we need to ensure that the maximum value is achieved from each expenditure or initiative.

In order to maximise the value added there are a few areas we must concentrate on. The fact is that money is tight for the for the government and the strategy must be to maximise the expenditure by focusing on the greatest value-added strategies, as we do not have, as the prime minister says, reserves available from the days of historic worldwide growth or the ability to borrow given the IMF programme we are on (which I believe the adjustment period needs to be extended whether by the Stand By or Extended Fund Facility. Which one we have is academic as long as we get the adjustment period extended).

Public law and order
So I am heartened by the report in the newspaper about the focus of the police commissioner on dealing with law and order issues such as (1) night noise; (2) traffic violations; (3) safe public transportation; and (4) littering. My only question is why did it take so long to realise these need to be focused on? I only hope that this time we are serious about it, as restoring public law and order is the best method to deal with our crime monster. I only hope that the New Kingston police post becomes active and the people who stop along Knutsford Boulevard, while someone goes to buy food, are dealt with as parking in the roads by the police who seem to ignore them. Commissioner you will find that restoring public law and order will lead to other serious crimes being reduced, which I say based on logic rather than any policing experience.

The other areas, which I believe needs focus if we are to create a development environment, are:

* Public sector bureaucracy -- big impediment to business but the way that the prime minister outlined to deal with it is not adequate. There is a fundamental change that needs to take place, which I will not mention here.

* Energy costs -- critical is we are to become competitive in capital intensive investments and resolve our balance of payments problem. The main focus initially should not be on developing LNG plants, but should be a focus on public transportation investment and development and retail consumption. While the NHT facility for households is good, it suffers from bureaucracy and is not facilitative enough. The benefits of addressing these two areas are great and would not only increase competitiveness but also improve living standards and significantly reduce the trade deficit.

* Tax reform as mentioned by the finance minister is critical to development. The December tax package was not good for economic development. One thing I must commend the Minister for is his willingness to look at what has and has not worked and make the changes. The move to simplify taxes for small businesses is a good move. I would go further to agree with Ethlyn Norton-Coke that we must move towards indirect taxation, which would ensure greater compliance and a greater multiplier effect throughout the economy.

If we focus our resources and energy on these areas then this is where we can achieve the greatest value added. Now that the budget debate is over, and the investigations into "who done it", we should now solve the mystery of economic and social development by outlining a detailed plan of action.

Public bodies and their roles

The Government must be commended for placing before the parliament, and by extension the people of Jamaica, the revenues and expenditure estimates for public bodies. This is significant as the expenditure estimates for these bodies amount to approximately 72 per cent of the central government expenditure and, importantly also, these public bodies expect to commit taxpayers to an additional J$36 billion in loans for fiscal year 2010/11.

This should accelerate the steps towards International Public Sector Accounting Standards (IPSAS), the public sector equivalent to IFRS. If we are to properly assess and address our economic challenges we must be fully aware of all government commitments, both cash and accrued expenses. This will force governments to put all the cards on the table and cease the long-standing practice of meeting fiscal deficit targets by just not paying bills, which in the end harms the economy more than not having known what the true deficit position is.

Myopic views
I am constantly amazed at the myopic view taken of public bodies by elements of our public and private sector leadership, as well as those professing to be knights in shining armour who come flying in on one of the many airlines to prescribe what is "good for us" and fly back home to watch the events unfold on CNN in the luxury of their homes.

The view put forward is that public bodies are costing the Government a lot of money so we need to just cut them out totally, and given the chance, they would do so immediately without any regard for the immediate negative effect on the economic and social conditions of the country. I will agree that some public bodies should be divested and the Government is making the right moves to deal with these bodies.

For example, the Government has either taken steps or stated its intention to divest itself of Air Jamaica, the Sugar Company, Wallenford Coffee and Caymanas Track Limited, among others. And the Government is spot on about the need to get its tentacles out of these businesses, as by their very definition, bureaucracies should not be involved in trying to compete in the market economy. They will always lose.

On the other hand, there are certain bodies which are critical to the economy and the public infrastructure. One such is the JUTC. These bodies should not be targeted to reduce losses without considering the opportunity cost of such an action. So when people say to me that the JUTC costs too much money and we should just do away with it, I have to ask myself what banned substance were they just partaking in, or is it that they are so blinkered in their views that border on being ignorant.

It is very important not to approach the operation of public bodies, or the fiscal deficit, with a narrow- minded approach. This dangerous way of thinking could lead us to not have any proper public infrastructure a few years down the line if we approach it in this way. The purpose of public bodies, and fiscal policy for that matter, should be to target economic and social growth and development. One of the reasons why we have failed to develop as a country is that we have had this long-standing obsession with monetary policy and applying fiscal policy with a view to increasing government revenues rather than addressing it to macroeconomic objectives we lay out year after year without being successful in meeting them. The bottom line is that if we intend to go down road X but we take the path that leads us down road Y, then how can we expect to reach to the end of road X, unless it runs into road Y? Similarly, the approach that we take to fiscal policy will only lead us to our macroeconomic objectives by what Jamaicans call "buck up". Targeting the fiscal deficit as a policy decision, for example, ignores the need for development in the economic and social environment.

Questions to ask
So while the Government is totally on the right path of not wanting to compete with private sector interests in coffee, air transport, and horse racing (can you believe government is involved in this?), there are some public bodies that are critical to an efficient economy. Another argument for government not competing in the industries mentioned is, how fair is it for Government to own interest in a sector that it also regulates? This seems like a serious conflict of interest and one that the private sector should be concerned about.

On the other hand, places like the JUTC should not be assessed according to profit or loss, but rather the following questions need to be asked:

1. What need is the public body fulfilling?

2. What would be the effect on the economy and public order if the body fails to deliver service, or not provide service at a certain minimum standard?

3. How can implementing the service bring efficiency to the economy or save the country much-needed foreign exchange?

4. How can I improve the movement of persons throughout the country, and what is the expected benefit to productivity?

5. What is the most efficient cost structure for carrying out the needed operation?

These are just some general questions that must be asked when assessing the need for a public body, and the question about cost should always be after determining the expected benefit to the economy. So, for example, if we were to have an efficient and safe public transportation system, then we could save billions of dollars from (1) oil imports; (2) productivity increases; (3) freeing up of traffic; and (4) implementing access charges to business districts, just as in Manhattan or London. Before this can be properly implemented, however, we need to have a well-run, and very importantly, safe public transportation system. In the end all of our misfortunes come back to the crime monster.

There are also some public bodies that should be merged, as they provide basically the same function. Some of these include (1) the Betting, Gaming, and Lotteries and Racing commissions; (2) JIS and PBCJ; (3) MIDA and the Self-Start Fund; (4) DBJ and EXIM Bank, and there are many others. This move may not only save the Government hundreds of millions in expenditure but would also create a more efficient service delivery to the market.

While we are going through these necessary consolidations and eliminating what needs to be removed, we must recognise the importance of some public bodies to growth and development. For example, if the JUTC even cost $2 billion to run per annum, if it was saving us 50 per cent of the oil bill related to transportation and getting people to work in a more productive state of mind, or easing the traffic congestion leading to less need for road development and repair, then it would have been $2 billion well spent, as opposed to spending $500 million and not maximising on the benefits of such a public body.

The budget’s role in development

As far as I can remember, every year the government goes to parliament and outlines the expenditure and revenue estimates for the upcoming year. And you can be sure that as night follows day that some new taxes or fees are to be added to the overall economy. Even if something is given to the citizens, be assured that it is going to be taken back elsewhere.

The questions we must ask is why do governments come to the Jamaican people year after year for more but we still see no real development in the country. There are some that will argue that Jamaicans drive better cars, live in better houses, and carry two or three cell phones so the citizen must be better off. While we enjoy natural developments, as a result of the technological advances, the fact is that (as I pointed out in my book) in1975 we were ranked in the top 39 percent of countries surveyed in the Human Development Index (HDI), while in 2005 we moved to the 57 percentile. So relatively speaking Jamaica has declined in HDI ranking.

Governments are parasitic
For years Government has been parasitic, just like the mosquito which sucks blood from the body without replacing it, waiting instead for it to be nourished by other sources before it starts its blood sucking again. The problem is that at some point in time that constant sucking of blood without any adequate replacement will make the person ill and eventually lead to their death.

Add to that the fact that the person is very sick already and what you do is hasten the process of death. So compare that to an economy that is in recession and you will understand why new taxes will only serve to shrink the economy further. Can you imagine if the US in 2008 chose to increase taxes in order to reduce the fiscal deficit? The global economy would have crashed and cause devastation.

So we can understand the effect on the fiscal accounts from the tax package introduced in December 2009.The February fiscal numbers show this. Cursory looks at the fiscal numbers do not reveal the true picture, as the fiscal deficit and tax revenue is distorted by the JADEX. And so one would be misled to utilize those numbers for any assumptions without making the adjustments to smooth out that extraordinary item as accountants would do.

If one were to adjust out the extraordinary items caused by the JADEX, the normalized fiscal deficit would in fact be approximately $121.3 Billion and not $135.6Billion, or 12% of GDP rather than 13%. No doubt the IMF took this into consideration. On the other hand as it relates to the tax revenues, they actually underperformed in January by 19.47% ($4.3 Billion) if normalized. This is because one would have to remove the tax effect of the JADEX in order to arrive at what the normalized tax would be, which I estimate at $17.8 Billion compared to a budget of $22.2 Billion.

The tax revenues is what I am more concerned with than the fiscal deficit target, as it measures how healthy an economy is. And remember that this is in the context of the December tax package. Moreover this does not include the GCT on electricity bills and increased property taxes, which I think will have a further contractionary effect on disposable incomes, which is the blood supply of economies.

The problem with our budgets therefore is that there has been no real alignment between our budget process and the desired economic developmental objectives. So even while we set targets for economic growth, inflation etc., the fact is that our budgets have not been configured around our macroeconomic objectives. So we will inevitably end up missing our targets on that basis.

Budget philosophy
While this budget has made some improvements in that philosophy, I do not think that it has gone far enough to compensate for the negative consequences of the budget. The Minister of Finance has correctly recognized:

(1) the need for restructuring the debt cash flows – this is something I have touted for a while to much ridicule from most persons, even some who know embrace it as the best thing since sliced bread. As a matter of fact the much anticipated downgrades I was told would happen if we discussed it too much, all happened before it was discussed and after it was done and discussed we got upgraded. The Finance Minister has taken a very bold step in doing this and I think is consistent with his overall philosophy on the necessary adjustments that need to be done. While I welcome the restructure, my own view is that the pace of the restructure carries significant risks and means that other revolutionary changes must happen to minimize the JADEX risk, with some amount of social fallout. I also believe that the government is going to have to seek other loans like the China road loan to mitigate this risk;
(2) the need to rationalize and bring efficiency to the bureaucracy of government - among these efficiencies is one that I think is one of the most significant developments in recent times because of its positive effect on business costs and private sector efficiency. That is the efiling rolled out by the Tax Administration. I would certainly recommend this project for special recognition at an event like Business Leader or Jamaica Chamber of Commerce awards because of the efficiency it brings to businesses; and
(3) the need to reduce discretionary expenditure to only what is necessary and adds value.

So the overall philosophy of the Finance Minister is I think moving in the right direction. The problem is that the actions of the Finance Minister need to be supported by the other policy arms and actions of the bureaucracy. So that while the Finance Minister is pressing ahead there are other aspects that are weighting down his initiatives. Not least among them is crime, which I have been at pains to point out will only frustrate any financial effort made to turn the fiscal around, as even if the Shaw and his team get interest rates down to zero percent, no one will make any real productive long term investments in a socially decadent environment. The other factor is that we must settle the dispute between the government and teachers/nurses so as to avoid all the resulting unproductive time.

This problem of support can also be implied from the budget numbers, where there are significant real cuts in the budget for the public defender, OCG, auditor general, and courts. My opinion is not based on any detailed knowledge of the programmes but what we need is to get a clear indication of what will the resources allocated to these agencies do to improve the objectives and further serve as a stop to the excesses they seek to prevent. So the budget exercise must not just be a focus on how much is spent this year versus last or how much we can reduce the fiscal deficit by but must focus primarily on what are the deliverables expected in relation to the overall economic targets and whose accountability will it be for certain specific targets to be met.

Unless we understand this inextricable link between the budget and the behavioural aspects of the society we will continue to focus on how much we spend in relation to last year, in a very narrow financial way as I have heard some commentators do, which will only result in us going through the same ritual next year without any real benefit.

As I indicated though, I think the overall philosophy of the budget is changing for the better but we must improve its alignment with the overall economic objectives by taking a much more detailed view of the deliverables in relation to expenditure. That requires a certain shift, which I will not comment on here.

JAMAICA'S ENERGY OPPORTUNITY (PART 2)

AS a result of the numerous responses to last week's article, I thought it would be good to do a part 2. This is also based on my very firm belief that a focus on the efficient use of energy could be the single most beneficial economic activity for Jamaica. As I indicated, a mere 30 per cent reduction in our energy bill could eliminate our trade deficit within four to five years, and so a focus on a comprehensive energy policy would be most beneficial to the country.

In response to a comment from Omari last week:

(1) I agree that it would be more beneficial to focus on an overall energy project but one could argue also that as long as the cost of even a small project is less than the operations it makes sense. Prudence would dictate, however, that the most effective approach is used, as the rest of the world is exploring energy options and if their projects are more cost-effective then although our own may cost less than what currently exists, relative costs will be higher; and

(2) The payback period is typically six to eight years, but the way I implemented the system will cut my payback in almost half. Remember it is not just access to capital that is important but how it is used, which is why professional financial assistance is always prudent.

One other person indicated to me that he used grid-tie technology where the system runs on solar entirely from panels, but the excess produced by the panels not used is pushed back to the grid by turning the JPS metre back. He therefore indicated that he just used JPS at nights and does not invest in batteries. Apart from being illegal, if the numbers are worked out then there is no real benefit as what you push back in the day you use (and more) at nights. A battery backup would allow less JPS use and increase in the payback period, while having the convenience of electricity at night if the JPS supply goes. I guess the emotional thought of beating JPS has trumped the financial logic.

There are two other issues I wanted to address. These are to do with the way in which GCT is computed on the JPS bills and look at what may be an overly optimistic oil cost projection in the IMF projections. The latter is very important because oil is such a substantial cost to the country.

JPS GCT
The first thing is that the JPS is known to estimate many of its monthly bills. Therefore if they are going to charge GCT on consumption above 200KWH per month, then effectively what they are doing is levying estimated tax assessments on the public. This leads to another concern with the computation of the GCT component, and the JPS (and OUR) may want to tell the public how they will deal with what could be an overestimation of tax.

The table above shows two scenarios, based on an actual consumption over three months of 650KWH. In the first case there are two estimated bills of 150KWH each, based on prior consumption patterns, and in the second case three actual readings. The assumption of a $30 per KWH is used, and shows in case 1 where GCT comes out at $450, while the actual readings show GCT of $150, which is what the customer is actually liable for. So because the JPS does not provide an accurate reading per month the consumer is overtaxed by 200 per cent.

The question therefore is how the consumer is going to be protected against this possible overcharge of tax on their bill, which effectively is an overestimation of tax. The truth is that unless the JPS does actual readings each month then it cannot guarantee against this happening. The other policy that needs to be understood is how they will adjust GCT charges on bills that are erroneously sent to customers, as it is very easy to misread the analog metre.

There needs to be some policy direction from the OUR and JPS on this. I would hope that the OUR gave some thought to this. It doesn't affect me, though, as my consumption is less than 200KWH per month.

IMF oil projections
The other concern is the oil price projections in the IMF document, which projects oil price to average (barrel) - US$77.30 (2010/11); US$79.90 (2011/12); US$81.50 (2012/13); and US$83.40 (2013/14). These prices seem to be optimistic given the global energy realities as outlined by the International Energy Agency (IEA) and that oil is currently close to $80 per barrel ahead of 2010/11 and with the world still facing economic challenges.

The IEA states the following:
* Oil demand and price will peak in 2025, and until then oil prices will be on the increase. China and India will account for the steepest increases;
* The greatest demand increases will come from coal, followed by oil and then natural gas;

* Oil supply into 2030 will be mainly from "Fields yet to be developed and found". It goes on to state that the cost of finding oil continues to rise (a higher break-even price) and that there is a declining investment in new oil fields (declined by 19 per cent in 2009); and

* Demand is increasing at a faster pace than supply. Output from existing fields will drop by almost two-thirds by 2030. IEA states "Additional capacity of around ...four times current Russian capacity, is needed by 2030 -- half to offset decline at existing fields and half to meet increased demand".

These arguments also do not include any geopolitical concerns that may arise. It seems very likely therefore that next fiscal year oil could average between US$80 and US$90 per barrel and increasing until 2025, or until new sources of energy are found. The problem is that trends show a steady reliance on fossil fuels.

The question then is how we address our own energy policy going forward. The Green Paper on Jamaica's Energy Policy states that energy use is approximately 98 per cent from fossil fuels and the main users are bauxite/alumina processing (36.6 per cent); Electricity generation (24.7 per cent); and Road transportation (23.5 per cent). These three account for 85 per cent of Jamaica's energy use.

What is needed is an energy policy that targets these areas in specific ways, so that if we can secure policy-based loans to reduce usage by 30 per cent to 40 per cent by 2014, we could save up to US$791 million in 2014 alone. But this needs a multi-policy approach. For example, the bauxite/alumina sector should be looking at coal, wind and hydro; businesses and residences should be looking at solar and wind; and road transportation should be looking at investing in bio-fuels as well as providing more investment to develop the infrastructure and discipline in the public transportation system.

Although many think that natural gas is the way to go I am not a big fan of that approach. My own belief is that based on the demand-supply equation, coal will continue to be a cheaper option, and that coal technology will get better and provide cleaner coal. But that is just my own view based on the cost versus the financial benefit.

What is clear, though, is that the price of fossil fuels will continue to increase over the next 10 to 15 years, and as a poor country we will be negatively impacted. The IEA is very clear on its projections and we should make every effort to ensure that we use some of that sunshine we sell to tourists.

JAMAICA'S ENERGY OPPORTUNITY

WHENEVER I am interviewed about the Jamaican economy, I usually come to the conclusion in my book that the only way for Jamaica to come out of our present downward spiral is to make a fundamental structural shift in our economic and social arrangements. The truth is that there is no other way, as illustrated by a house that is built on a structurally weak foundation. Even if one were to put a fresh coat of paint on the house every year, the foundation would still remain very weak and susceptible to damage.

When I look at the projections in the recent IMF programme, it gives the impression that much of what will be done is tinkering with the numbers and hoping to recover based on the same structural foundation on which we have been unsuccessfully trying to develop the country over the past 20 years.

Fiscal sustainability
In fact it seems as if the main focus by the IMF was to ensure fiscal sustainability so that they can get their money back, and there was not much concern for the development of the Jamaican economy. One cannot really blame the IMF for this myopic view on the economy, as all they really are is a bank to the world. And we all know that the main concern bankers have is to get a return on investment, no matter how caring the marketing sounds. All you have to do to find out is not be able to pay the credit card or loan they throw at you when you are debt-free.

A review of the numbers projected in the IMF paper shows that the fiscal budget balance is projected to move nicely from minus J$106.7 billion in 2009/10 to minus J$10.8 billion in 2013/14. The primary balance is projected to move over the same period from J$66.9 to J$143.4 billion, implying lower real expenditure in the Jamaican economy. But at the end of the day this will assure the IMF repayment.
When one looks, however, at the balance of payments and macroeconomic projections, it shows a difficult ride for the economy, as apart from the lower spending, real growth is projected at an accumulated 2.9% between 2009/10 and 2013/14, or an average of 0.58% per annum. Much of this is caused by our having to pay back for the loans we have been living off in the past.

But one must also examine projections to determine if we can always do better, and my own cursory examination of the numbers leads me to believe there is a significant opportunity for improvement. Unlike the IMF I am looking at the numbers from the point of view of economic development, and so I will see a different path. The irony is that this may even provide greater security for the IMF also.

The table shows extracts of the balance of payments, GDP, oil prices, and exchange rate assumptions of the economic programme. The exchange rate projection is arrived at by taking the 2008/9 GDP from the MOF website, and computing J$ GDP using the nominal GDP growth rate (IMF numbers), and dividing the total by the US$ GDP in the IMF numbers.

The numbers clearly show the following:
* Trade balance is expected to worsen, even with exports growing more than imports. Implication is that not much change is expected in the import content. This is an area of opportunity to be explored.

* The current account balance improvement is heavily dependent on growth in tourism and remittances. The implication is that the economy will remain highly dependent on services and not see much productivity increase (evidenced by remittances, fuel, and import content).

* More importantly, and an area of great opportunity, is that fuel imports are expected to move from 14% to 15.4% of GDP between 2009/10 to 2013/14. This stands out in the projections, and implies that we are projecting a more inefficient use of energy, even though we don't seem to be projecting any real growth in manufacturing, implying most of the use is consumption. This situation I think will be worse than projected as the assumption of oil prices seems overly optimistic. As an example, current oil price (before any real global recovery) is over US$81 while the IMF numbers project an average of US$77.30 in 2010/11.

All about energy
My own view is that focus on more efficient energy remains a significant opportunity for Jamaica. If we were to create energy projects and investments that decrease our energy use by 30 per cent on average, this could create (1) an import bill savings that would wipe out the current account deficit by 2013/14; (2) greater efficiency in manufacturing and service delivery, which could improve our international competitiveness and export earnings; (3) increase available opportunities for investment and ultimately fiscal revenues; and (4) act as a stabilising force for the exchange rate, positively impacting inflation and interest rates. This would certainly start a positive cycle of development.

The question may be asked about the possibility of this happening, and I use my own example. I have been for a while thinking of using solar energy at home, and after doing the research finally did so recently. This is especially as I expect energy costs to increase as a result of oil price increase, devaluation, and the GCT on JPS use over 200 KWH. Of course you have to ensure that you use a company which understands the technology and will be around, as one of the first companies I was looking at went out of business and the costs were higher based on the configuration. You also have to work out the cost-benefit analysis, which I did myself. The company I settled with, which I continue to work with, is Gormann Corporation.

Based on how I implemented and my cost-benefit analysis I expect a four-year payback period. And this does not include the new GCT charges or future increases. My JPS energy consumption fell by over 50 per cent immediately, and more importantly there is no maintenance, and the panels last up to 40 years, and batteries 12 to 14 years. What has not been factored in my computations is the cost benefit of no power outage or risk of equipment damage from JPS even if Jamaica were to see a six to eight-year payback period from the energy bill that could positively impact our future development.

Using this approach, if the government were to secure policy-based loans for cheaper energy projects, it would have the benefit of (1) stimulating jobs and the economy during and after the implementation period; (2) make Jamaican products more competitive; and (3) a 30 per cent import bill savings would reduce energy as a percentage of GDP from 14 per cent to 10.8 per cent. More importantly, it would also have the effect of improving standards of living.

A portion of those loans should be made available for customers with a good payment history at the JPS, to access security-free low interest loans, and those with a poor payment history to require security. An improvement of the public transportation to encourage use over private transportation would also have a significant positive effect on the energy bill, and is an argument for greater subsidy and investment in public transportation. In implementing these projects, however, the objectives must be very clear and the implementation carefully managed to meet the goals.

This illustrates that a focus on energy can have substantial benefits for the country. Maybe the IMF NEEDS to sharpen its pencil and re-examine the projections, as a focus on development rather than just monetary juggling will not only benefit the county but add greater security for their own payback.

A model for development

OVER the past two to three years, I have been involved with two organisations that one can deem successes in their own right. The first is the Jamaica College (JC) School Board and Foundation, led quite ably by the Hon R Danny Williams, and the second a board I have chaired since 2007, and which was recently reported on, Jamaica Ultimate Tyre Company Limited (JUTCL).

In the case of JC, I have had the privilege of working with a group that includes old boys (or they would prefer the term 'past students' to hide their chronological ages) and staff who have been nothing but focused on the development of the institution. At the helm of the operations has been a thoroughly devoted principal, Mr Ruel Reid.

High levels of indiscipline
When the Danny Williams board took over at JC, we were faced with high indiscipline and poor academic performance. Today, I am proud to have played an active role in the transformation of JC into one of the more sought after schools and a place where I would recommend that any parent send their child based on the current development plans. Of course there are problems, but this is mainly as a result of the societal influences. JC is truly living up to its motto, Fervet Opus in Campis: Work is burning in the fields.

In the case of JUTCL, when the three-man board took over the company in 2007, we were making a loss of approximately J$1 million per month. Today, through very strategic policy and operational decisions, we are making a profit of some J$1 million a month. Other decisions are also being taken by the board and management to improve on that profitability in short order. One thing we are very proud of is that we do not get any subsidy from the Government and are current with all our taxes and regulatory requirements. A source of pride for me, also, is that we hold board meetings every six weeks, which averages two hours per meeting, and we restrict refreshments to sandwiches.

I think that both cases hold an invaluable lesson for Jamaica's own development, and are consistent with the view for development I referred to in my book. The path to development is conceptually the same for any institution and despite their differences, the organisations mentioned above both took conceptually the same approach to development.

In both, there was some amount of inefficiency and indiscipline to deal with. The first task in both cases was to carefully assess what the challenges were, and specifically put in place actions that would address those specific problems. In both cases also, the leadership of the organisation was the first thing that we looked at, as this is the most critical part of any transformation.

Similarly for Jamaica, my own view is that the main problem we face is one of the social arrangements and the respect of fundamental human rights. I also believe that Dwight Nelson is suited for the job of security minister, given what I know of his focus, and also the changes I have seen taking place in the police force.

Once the leadership was determined to succeed at both organisations, the next task was to ensure that the supervisory level was in place, to support the policies of the board and the operational objectives of the CEOs. In the case of JC, the principal, with the support of the board, made sure that the teaching staff was disciplined and efficient. This is important as many schools seek to deal with their problems by disciplining the students and ignoring the indiscipline of the teachers: This is a receipe for failure. The same thing was done for the JUTCL, ensuring that the CEO had the support needed to put the action plan in place.

Ministers responsible for policy
Similarly, as a public we must understand that ministers are responsible for policy direction but must ensure that the operational leadership is efficient and focused on the policy objectives, and they must have the latitude to ensure this or else they will ultimately fail. In my case (JUTCL), I continue to work with a minister (Mike Henry) who is very focused on profitability, efficiency, and service and who receives support from the Ministry.

The next task was to set specific operational goals and define the results we wanted to achieve, and by when. In the case of JC, the board and management designated targets for funding, academic, sporting, and development objectives. Timelines were placed on these, and three years later, I can say that most of these targets were achieved. In the case of JUTCL, we recognised that the pressures faced by JUTC would weigh us down if we continued to have them as our main customer, and so took a strategic decision to ensure within one to two years ensure that most of our business came from commercial customers, which we achieved in the timeline set.

For Jamaica, we need to ensure that the macroeconomic programme that we set out is achieved. There can be no wavering, and the risks must be carefully analysed and managed along the way. The biggest challenge the fiscal accounts continue to face is the revenue side, and this can only face further challenges if there is any attempt to raise new taxes. This is supported by the fact that the January 2010 revenue variance from budget is the largest for the fiscal year, even with the December 2009 tax package. The policy direction is correct, but the risks need to be carefully managed.

One very important operational activity was that we examined every single decision as a stand-alone. No decision was taken just based on the fact that we had excess in the system and therefore could afford to do it. It was measured against the objective, and if it did not add any value it was dropped. Certainly in the case of JUTCL, where the objective was profitability and provision of the best retread tyre, every decision whether to replace or upgrade machinery was supported by a cost-benefit analysis. If it was profitable then we would start the process. If not, then it was dropped until it could be proven so.

Of course, at any time an organisation is subject to risks and external forces, and the fortunes can change. What we must do is ensure that we manage the risks that we can control and those we can't, then we have to hope for the best. If, for example, energy costs go through the roof, then the operations of the JUTCL would be highly compromised.

Most important, though was the commitment of the personnel at the organisation. In the case of JC, the support of staff, students and old boys was critical to the success they see today. In the case of JUTC, the staff played an invaluable role. In 2008, when we recognised that the recession would affect us, and we were still making a small loss at the time, we went to the staff and asked them to produce the same amount of work in four days that they did in five. So we closed the plant on Fridays, to reduce overhead costs. We could not have done it without them and so the buy-in is extremely important.

This is the final point I want to make: if Jamaica is to move forward, then the buy-in from all citizens, not simply JLP or PNP, is important. Again I say that this is one ship, and both ends will go down or rise together. So everything must be done to ensure that all share in the vision for development, and not only those of us who are involved in the 2030 objective. The best way to do so is to ensure that the Jamaican citizen is at the centre of any developmental objective for the country.

WANTED FOR DEVELOPMENT - A CIVILISED COUNTRY

When I wrote my book last year, I started out looking at the economic numbers and tried to analyze the challenges and why Jamaica did not over 47 years achieve any real development. After looking at the numbers I concluded in the last two chapters that in order for Jamaica to achieve the elusive development, we must of necessity first see a new political and social order.

Included in this new order "must of necessity... [be]...a focus on developing the human capital across society". The fact is that Jamaica will never be ready for any real development unless we address the social and political challenges that face the country. Sure we may be able to eke out isolated bouts of three percent economic growth occasionally, but that is not development. In fact the growth we have seen, and what is being projected in the IMF programme, has come and will continue to come from international begging...I mean remittances.

Fading productive base
The truth is that the productive base of Jamaica will never grow until we address the social ills facing the country. Until then the truth is that the only real economic systems that will service Jamaica well are feudalism and slavery, which effectively is disguised by political independence. But if you tear away all the hoopla surrounding so called independence, we still have a significantly oppressed citizenry (controlled in the new feudal farms called garrisons) and we still rely on developed countries for debt and aid. So are we truly independent.

Modern day economics of course assumes that a civilized society exists, and does not consider the type of widespread corruption and high crime rates Jamaica has. So development and market theory does not assume a significant cost of business as extortion or that government will consistently run fiscal deficits in order to satisfy a political rather than economic motive. Economic theory assumes that the self correcting mechanism of the market will be allowed to operate and that governments will work in tandem with the market but will intervene in order to allow a smoothing out effect, thus eliminating any violent market reactions that will dismember the working class.

These assumptions do not hold in Jamaica, and therefore our relentless pursuit to practice an efficient market economy is futile.

Last week I wrote about the massive gun find in Mountain View, and said then that the economic recovery will of course depend on how the Commissioner of Police addresses the fight against corruption and crime. I also mentioned that resources were being wasted dealing with issues that should not occur in the first place such as Armadale and Horizon. The week after of course the Armadale report was revealed, which even more frightening to me than the report was the fact that the authorities had it in their possession for well over a month.

So to me the real horror of police brutality, horrendous prison conditions, and neglect of children's rights is not the fact that they occur, but that the authorities over the years have neglected to do anything about it. I am of course horrified by Armadale but let's be honest these things have been occurring consistently over the years. The only difference this time is that some children died and more importantly credit must be given to the Prime Minister for immediately setting up the commission of inquiry. I mean over the past few weeks the Child Development Agency (CDA) had been running these nice sounding ads that anyone who knows about child abuse and does not report it is guilty of an offence. Of course this seemed to me to be nothing but PR, as in plain sight children continue to be abused every day. When children are allowed by their parents to spend the day at traffic lights wiping windscreens or selling on the roads isn't that abuse in plain sight. So what has the CDA or any child protection agency done about it? Give me a break. This does not require resources.

If being cynical you could say that when you look at the animated picture of children on the CDA website they look like they are in strait jackets. So go figure.

When police are accused of brutality against citizens what is done about it, and what is done about the simple things like night noise and blatant traffic violations. The police can't tell me that they need any special investigative arm up setup to deal with these two in your face but important law and order situations.

In May 2008 I wrote an article called 'Déjà vu", where in reaction to the public and leadership outcry against the assassination of a young lady in York Plaza, I indicated that the public outcry seemed like déjà vu as every time there is a crime upsurge everyone speaks out only for nothing to be done to correct the systems. Similarly when Armadale happened last year there was a big outcry and if Nationwide and the Observer did not carry the report everything would have been "no problem". So what will change after we all get tired of talking about this instance and a few people resign? Again déjà vu.

Threat to the economic programme
So while the Finance Minister is busy trying to get interest rates down and manage the debt and fiscal accounts, other parts of the bureaucracy are ensuring that all his efforts come to nil. It is like the finance department trying to control costs and the marketing department making as much contacts as they can but when the customer comes to the organization for service they are abused by the operations personnel. So the Jamaica Debt Exchange (JDX) will be put in place and the interest rates will be immediately lowered, and provide a significant fiscal boost, but the operational people will ensure that the economic programme for improvement is not maintained.

This is because investment decisions are more driven by the need for social stability and economic predictability. People use these factors to determine risk and return on investment more than interest rates. So we have projected that the rate of devaluation will be about four percent per annum, and one can get approximately four percent on US$ deposits. So why invest in Jamaican dollar assets at 10 or 12 percent when one can realize 8 to 9 percent on US$ assets if your money is going to be at risk from the social and economic instability in Jamaica.

This is the real risk to the JDX as no amount of monetary policy can work in a country where citizens are not geared towards productivity either because of the new feudal farms (garrisons), they are crying out for justice from police brutality, or they are being turned into criminals by the state when they go to correctional institutions.

If you look at Jamaica's social development over the years we have fallen behind many other countries. Again quoting from my book - "...of 101 countries surveyed [Human Development Index Report] in 1975, Jamaica ranked 39th or in the top 39 percent...By 2005, however, Jamaica was ranked 101st of 177 countries...or in the top 57 percent." Clearly although our ranking may have improved absolutely we have fallen behind many countries.

In short what Jamaica must first become if it is to achieve the necessary economic and social development to move forward is a civilized society.

POLICING THE ECONOMIC RECOVERY

LAST week, the Government secured the much-needed approval from the IMF board for some US$1.3 billion to be loaned to Jamaica for balance of payments support. More importantly though, this paved the way for the Government to secure the necessary financing from the other multilateral organisations.

For me, however, the greatest impetus to economic recovery last week was not the IMF loan, as the loan does not ensure economic recovery but simply provides a halt to the decline of the economy which will continue if the appropriate policies are not implemented. The greatest impetus to economic recovery last week was the arrest of the police seargent and others in the gun and ammunition find.

Why people invest
My reason for saying this is that the salvation of Jamaica does not rest solely in the way the macroeconomic numbers or fiscal accounts are managed. While the management of the numbers is very important (and being an accountant I know that), it is more important for us to remember that economics is a social science and people invest more because of social stability, predictability and confidence, rather than macroeconomic numbers or interest rates.

As an example, in 2008 global investors were accepting a negative return on US treasuries while other markets and instruments were giving positive returns. This was so because of the prevailing uncertainty in global markets at the time, and the first thing that investors want to secure is their original capital. If you can maintain your original capital then you can live to fight another day, but if you can't, then you have no other opportunity to invest if the current one fails. And failure must always be seen as a possibility.

In fact, when investing, the management of risk and minimising loss are always more important considerations than how much profit you can make. The reason for that is if you can minimise your downside risks, then it means that the number of times you have to win in order to get ahead does not have to be very high in order to be profitable.
If, on the other hand, you take a decision to go for broke and you fail, then more than likely you will be wiped out in one go. So when making decisions about investments, investors usually find the best balance between risk and reward.

It is therefore important for us to understand how the potential investor thinks about the risk element of the investment. Investments take place in all types of environment. In Afghanistan and Iraq, for example, people do make investments, but these are investments that have a relatively short payback period. A rational investor would not, for example, seek to establish a business such as an online book store or an agro-processing plant in Afghanistan, even if he is getting money to borrow at zero per cent. Instead, he may seek to do some trading business where there is a quick turnaround on the investment.

Similarly in Jamaica, there are many people who would want to invest more in agriculture but refrain because of the high incidence of praedial larceny.
It is therefore very important for the investor to see (1) a stable social environment; (2) a predictable system of justice and fair play; (3) maintenance of law, order, and discipline; (4) a favourable industrial climate; (5) reduced bureaucratic structure and impediments; and (6) appropriate legislative protection. After all these are in place, then we will start to see serious investments taking place in the country.

Sure we will see some investments taking place, but they will only be in the form where investments are relatively quickly recouped. As examples we will see investments in financial institutions and services, where other people's money is used as capital while enjoying high returns, or we will see investments in trading and services, which have low capitalisation and quick returns. This, in fact, is the way that Jamaica's economy is structured for the most part, and the reason for that is because of all the impediments faced by potential investors. So if we want to see real long-term investments taking place we have to address those issues.

Efficient, corrupt-free police
At the heart of this drive for recovery, therefore, is the need for a corrupt-free and efficient police force. In the largest economy in the world one can't drive 100 yards without seeing a police car, and do not dare try to bribe any of them, or else you will certainly end up on the wrong side of the law. In the US also, while there are predictable and very efficient laws in place to ensure discipline, protection of human rights, and equity, these laws are not overbearing and do not require that everything that happens in the country has to go through a bureaucrat or the minister in charge. What they do is lay the foundation and guidelines for all to follow.

In Jamaica, for example, I can never understand the system of the Tax Compliance Certificate (TCC), which starts off by assuming that everyone is a criminal. Why does the person who has never been a problem have to go through the same process as the person who has had multiple run-ins with the authorities? Wouldn't it be more efficient to have a system where everyone is assumed innocent and if you have problems with the authorities then you are blacklisted and required to go through the process?

In Jamaica also we do not have much respect for human rights. As I keep saying, if people always have to be crying out for justice, then what time do they find to be productive? So once again, because of the way our bureaucrats operate, we waste a lot of productive time and resources dealing with issues such as Armadale and the Horizon Remand Centre, whereas if we had ensured that the rights of these people were being protected in the first instance we wouldn't have to waste time and money on these matters.

The people who are responsible for this should be asked to pay back the monies spent by the state in investigating. I am heartened by the prime minister's response to the announcement by the public defender that his office was denied entry to the Remand Centre. That is disgraceful for a country that calls itself civilised.

And how can any investor have confidence in the police's ability to solve murders and deal with extortion if they can't even control the night noise or the taxi drivers on the road? It would seem to me that these are basic aspects of discipline that any state should be able to maintain. The police seemed to have been making some effort to do so, but as usual when something starts in Jamaica it is kept alive for about... nine days. So once again people are parking (or stopping for a long while) in vehicles on Knutsford Boulevard to go into the food places thus obstructing traffic while all the policemen stationed at the Knutsford Police Post are holed up in the office trying to enjoy the air-conditioning, I assume.

If we are really serious about economic recovery, then while interest rates and other fiscal and monetary policies are important we can never really see real development occurring without first ensuring that we behave like a civilised society. Because as far as I am concerned, our society is far from civilised. In this age of globalisation there are far too many options available to investors other than Jamaica, so we must compete aggressively. For me, therefore, Owen Ellington is going to have the most pivotal role to play in 2010 in policing the economic recovery of Jamaica.