After the fall — the state of the economy

BY KEITH COLLISTER

Wednesday, September 01, 2010

Last weekend 110 central bankers and economists, including most of the Federal Reserve's top officials gathered at the annual Jackson Hole symposium in Wyoming to debate the state of the world economy.

The star attraction was a new paper entitled "After the fall" by Carmen M Reinhart, an economist at the University of Maryland and authority on the history of financial crises, and her husband Vincent Reinhart.

The almost biblical message of the paper was that the decade of relative prosperity prior to the 2007 US financial crisis was fuelled by an expansion in credit and rising leverage, and historical experience suggests that the US and other advanced economies may face a lengthy period of retrenchment (nearly a decade of slow growth and high unemployment) that lasts almost as long as the credit surge.

Whilst in many ways Jamaica is an excellent example of Reinhart's thesis, namely a country paying dearly for the aftermath of a credit boom and the associated financial crisis, our problems clearly go much deeper. Our credit boom in the early 1990's was relatively short lived, whilst we appear to still be paying for the associated financial crisis in the mid 1990's.

Deutsche's Jason Abrahams, commenting on yesterday mornings breakfast club, argues the key issue is not whether there is a double dip in the US, but the risk of falling into deflation, which he believes to be unlikely with Federal Reserve Chairman Ben Bernanke on watch.

Abrahams argues that the success of Minister Shaw's Jamaica Debt Exchange (JDX) has "blown expectations away", and commends Governor Brian Wynter for his skilful handling of the domestic markets, which have "remained remarkably calm, with no capital flight".

However, Abrahams argued that although he would have liked the government to have been more aggressive on the debt exchange, fixing more of the domestic debt, the key issue now was to make tackling the issue of corruption our number one priority.

Last week, the UNDP released a paper suggesting that Jamaica's recent domestic debt exchange did not go far enough, and that a broader debt restructuring (including the external debt) would have been preferable. This report was picked up by the Gleaner in a Monday editorial, entitled "Debate the foreign debt". Commenting on the UNDP report last Friday, Oppenheimer's Dr Carl Ross observed that "We believe that the government has no intention whatsoever to restructure the external debt. It believes that the domestic debt exchange, combined with the IMF program and economic reforms, have provided the positive confidence shock that is sufficient to get the debt dynamics on a sustainable path." It could also be added that it would be unfair, even irresponsible, to advocate that the banks should be passing through the post JDX interest rate cuts if there was a prospect of an additional hit to their capital, as it is the local financial sector that owns virtually all the Eurobonds.

Later on in the same breakfast club programme, Jamaica's hard working IDB representative, Gerard Johnson, newly promoted to General Manager for the Caribbean region, observed"The stability that is being experienced really shouldn't be taken for granted." Late last year, we were "heading for a crash", and just six months later interest rates are falling and the exchange rate is rising. He argued that the current economic programme was "about avoiding a crash, not a growth programme" although growth is essential. Fiscal stimulus was inconsistent with the IMF programme, with a key deficit target that has to be met. He observed, however, that "Jamaica needs some easing on the fiscal side whilst staying within the IMF programme".

Very aggressive supply side measures need to be implemented immediately if Jamaica is to avoid the full impact of another international downturn, and ease the social pressure currently building from our weak economy.

Hesitation in creating a Hong Kong type economic strategy is no longer an option if we are to avoid another lost decade. To use just the single area of the corporate bond market within the much larger issue of access to capital, if a Jamaican company issues a bond to investors on the capital markets, any subsequent transfer of the bond can trigger an aggregate transfer tax/stamp duty exposure of up to seven per cent of the bond value. This makes issuing the bond (and therefore the project financed) uneconomic, and stifles competition for lending (a corporate bond is just a securitised loan) for all but the larger enterprises that are able to borrow overseas.

Jamaica also needs to urgently reform its corporate tax and duty rates for productive enterprises in manufacturing, tourism and agriculture so that foreign investors no longer require incentives or waivers to set up here as part of a strategy of export led growth. The recent brouhaha over incentives could have been avoided if "The Blueprint for Tax Reform", prepared over one year ago as part of the National Planning Summit, had been implemented. In every country, the need for incentives just means that our corporate tax rate is too high. The growth of just one new industry, health tourism, could be a bigger foreign exchange earner than bauxite for Jamaica, and would generate additional tax revenues. Our poor policy environment continues to stifle the growth in this area.

Finally, the government needs to be absolutely ruthless in ensuring the redevelopment of downtown Kingston, which must become a model for other deprived communities in Jamaica. Any planned Prime Ministerial tour of the country should be a listening tour focussed on getting direct feedback from our citizens on what is required to redevelop their area, in the manner of former Columbian President Uribe. Dead capital, in the form of government owned land and disused buildings, should either be privatised or mobilised through public private partnerships involving real equity capital, not debt. A good start would be to prepare an Initial Public Offering for the redevelopment of downtown Kingston, targeting overseas as well as local Jamaican investors.

Did you watch American football's Super Bowl on Sunday?
	Yes, but just for the advertisements
	Yes, just for the game itself
	Yes, for both the game and advertisements
	No, I did not watch the Super Bowl.

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After the fall — the state of the economy