Growth options for Jamaica
STATIN'S final estimate of the 2012 second quarter growth, shows that the economy declined by 0.2 per cent, when compared to the similar 2011 period. This was as a result of declines in the Goods Producing and Services sectors of 0.2 and 0.1 per cent, respectively, and was the second consecutive quarter of decline being registered.
The truth is that this decline was always expected, given the fiscal consolidation measures, the resulting decline in employment, and the fact that the transport projects have not yet come on stream fully. This is also in light of the fact that the global market has weakened, and the IMF has even downgraded its projection for global growth, which forecast has been impacted by the continuing Euro zone crisis and the impending "fiscal cliff" in the US. If the latter is not resolved soon, then we could be looking at even further declines in the global market.
What do these scenarios hold for Jamaica's immediate future? This is especially in light of the pending IMF agreement. The reality is that the IMF agreement, whenever it comes, is really just a band-aid solution on a really bad cut. All it will do is slow down the haemorrhaging, but cannot solve the challenges we face. In order to get on to a path of sustainable development, we must deal with our structural issues. My own view, is that it is because of these fundamental structural issues, coupled with the global slow down, why the IMF has recently downgraded the growth forecast estimates from one per cent to negative 0.5 per cent.
My opinion, however, is that Jamaica, even now, has the capacity to grow even beyond the initial one per cent projection if we were to aggressively adopt the correct fiscal policy options. If we will do it depends on execution, which we have not been accustomed to in Jamaica as far as I can remember.
The first thing we must do is realise that our long-standing focus on the fiscal, to the detriment of the trade, side of the equation is a primary problem we face. The reason for this is that the country's economic challenges come primarily from the fact that we have had a continuous balance of payments deficit, which has resulted in the following:
* Exchange rate depreciation
* Increased debt
* Relatively high interest rates
* Relatively high unemployment rate
* Relatively high inflation rates
* Continued fiscal deficits
These in turn result from crime, low productivity, bureaucracy, and relatively inefficient taxation systems.
Therefore it would seem obvious that if we do not apply policies that fix the challenges of productivity, crime and bureaucracy, then we will not be able to increase the needed competitiveness of our production in order to reverse our BOP fortunes. Without fixing these issues then it is only a temporary solution to get another IMF agreement. We have been flirting with the IMF since the 1970s, and our economic performance has been much less than adequate.
It would seem to me therefore that the policies that we have pursued over the decades have not supported sustainable economic development. The only way for us to deal with this situation is to earn more than we do externally. The logical approach therefore is to resolve the issues of productivity, law and order, bureaucracy, and our tax system. The latter is being dealt with through tax reform but will not be meaningful unless the other structural weaknesses are addressed to a significant measure. This of course if we want to see true economic development take place.
My own view therefore is that the forecast of negative 0.5 per cent is only realistic if we do not address the structural issues. If, however, we take steps to address the structural problems then growth of above one per cent is very probable.
The straightforward BOP areas that can give us those benefits are energy and food. These account for 45 per cent of imports, and therefore it would seem logical that driving policies, within the context of scarce resources, must focus on dealing with these BOP areas. The question therefore is what is causing these imports to be so high. How can we reduce our energy cost and food import bill? This is the question we need to address.
I have on many occasions gone through the strategies we need to adopt to reduce the energy and food import bill, and so will not address here again. Suffice it to say if we reduce these costs by 30 per cent then it would eliminate the trade deficit and solve our fiscal and macroeconomic challenges. The fact also is that this is a path of lesser resistance than trying to deal with challenging external competitiveness head on, as this requires for us to deal with our internal competitiveness, which is necessary before we can even start to think seriously about external competition.
My own computations indicate that if we are to effectively address these structural issues, then you could see an effect of approximately $100-billion improvement in the GDP. The big question, however, is will we seriously challenge these structural issues, having not done so effectively before.
The need for this is even more evident, given the study of debt by the IMF recently that concluded that fiscal consolidation without policies to drive growth will only result in economic stagnation.
So my view continues to be that Jamaica can see growth in excess of the previously projected one per cent, but only if we approach fiscal policy from the angle of addressing certain structural deficiencies.
Dennis Chung is a chartered accountant and the author of "Charting Jamaica's Economic and Social Development — A much-needed paradigm shift". His blog is dcjottings.blogspot.com