What will the Jamaica Debt Exchange really achieve?


Wednesday, January 27, 2010    

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THE first thing to note is that the Jamaica debt exchange (JDX) does not by itself solve Jamaica's problems, but hopefully marks the beginning of a long tough road of reforms required to turn around Jamaica's economy, many of which are outlined in Jamaica's letter of intent to the International Monetary Fund (IMF).

This really is, as Minister Shaw said in presentation last week in Parliament on Jamaica's IMF letter of intent, Jamaica's own economic programme. Furthermore, there is absolutely nothing in the letter of intent of which the broad outlines are not already in the public domain. Virtually all the proposed reforms were also targets or initiatives of the previous government, in many cases stretching back for more than a decade, making it difficult to comprehend why the Parliamentary debate could not take place last week as planned. The key difference with what has gone before is the Prime minister's strongly expressed commitment for him and his government to be held accountable for their performance, not just by the IMF but by the Opposition, the media and the public at large. In short, there is an enormous emphasis on implementation.

The only really new item in the planned IMF agreement is the exact configuration of the Jamaica Debt Exchange, and perhaps the precise details of the proposed fiscal responsibility laws. Even the latter is not a new issue however, having been part of the JLP election manifesto, although it may deserve its own debate.

The three pillars of the economic programme are fiscal consolidation, reforms to strengthen the financial system, and finally the debt management strategy of which the Jamaica Debt Exchange is a critical part.

Structural fiscal reforms include the rationalisation of the public sector and public sector bodies, tax reform, and improvements in public sector management, including the establishment of the previously mentioned fiscal responsibility framework, and the implementation of a central treasury management system.

The goal of reforming the public sector in its current incarnation is at least a decade old, and it can be argued that one of its core elements, reducing bureaucracy, is a never ending quest. In this regard, a useful Parliamentary Debate would be the role of the state, particularly what it should and should not seek to do. Not only is the goal of reducing the wage bill as a percentage of GDP far from being new, the target of reducing the wage bill to around 9.5 per cent of GDP in the medium term has been expressed many times by the prime minister.

There is also nothing new about the divestment of commercial entities (what used to be called privatisation), the merger of government entities to improve efficiency, and the winding up of inactive entities. One of the disappointments of the attempt at social partnership at the end of 2003 was the inability to get an accelerated divestment programme to reduce our high cost internal debt. There now appears to be a welcome sense of urgency, expressed as quantifiable targets in the IMF letter of intent, which refers to 20 parastatal entities to be divested, and more than 50 inactive enterprises being closed over the next three years. This target is still not aggressive enough however. One option that needs reviving would be to float a number of state shareholdings on the Jamaica Stock Exchange, starting with the 20 per cent the government owns in JPS, and a stake in the Port Authority of Jamaica (a number of international Port Holding companies could be invited to underwrite the transaction as part of a potential strategic investment). Unlike similar privatisations in the 1980s, this should include a conscious plan to target the diaspora.

Tax reform is also a key part of the letter of intent. Again there is absolutely no shortage of studies on tax reform over the last five years, ranging from the broad consensus reached in the Matalon report in early 2005 to the Blueprint for taxation reform in Jamaica prepared last July with a large degree of private sector input as part of the National Planning Summit initiative.

The issue of a central treasury management system was first raised in late 2003 as part of a list of suggested reforms by the social partnership initiative called partnership for progress in late 2003, so it must be hoped that this will be operational by the end of this year as suggested in the IMF letter of intent.

In terms of financial sector reforms, the interest rate shock of 2003 made the risks to the securities dealer sector abundantly clear at the time, and were further detailed in the IMF/World Bank Financial Sector Assessment Programme (FSAP) of 2006. Jamaica has been waiting for almost a decade for the removal of structural impediments to the mutual fund market, promised by December 2010.

The only policy issue in the IMF letter of intent that is new from a policy perspective is the terms of the Jamaica Debt Exchange, which appears to be a skilful compromise where the government and the IMF have essentially agreed to split the difference between the absolute imperative to shift to policy of low interest rates, and the need to avoid damaging the financial sector.

The proposal goes beyond merely reversing the impact of last years sharp rise in domestic interest costs that made the debt unsustainable, as the extension of debt maturities provides Jamaica with some limited breathing room to shift our economic strategy.

Instead of discussing issues over which there is basic agreement, Jamaica needs to review its fundamental economic strategy.

A good place to start would be the Jamaica Chamber of Commerce's National Economic seminar that took place on two half days on October 13, 2009 and Tuesday, October 14, 2009.

The key presentation was by Professor Donald Harris "Towards an Export -led Strategy for Jamaica : Lessons from Experience with the National Industrial Policy"

The paper can be summarised as calling for change in our decades long policy of high interest rates, what he calls Jamaica's "debt propelled" economy, and seeking to favour (or at least not adopt polices that actively discourage) the productive sector, particularly exports, thereby implementing a strategy of export led growth.

In a section of his paper entitled, explaining the "economic" muddle, Harris explains that for most of the past two decades, "The explicitly declared policy-priority of the government was what it called "macroeconomic stability" which boiled down to a single-minded focus on defending the nominal exchange rate through high interest rates. He describes this as a basic contradiction (or policy inconsistency) "if the instrument you are using to defend the exchange rate is also destroying the objective of export growth."

He further argues that only a strategy of export-led growth can break Jamaica out of its debt trap.

Many economists now believe "you are what you export". High growth countries are those able to make a rapid transformation from low- productivity "traditional" to high productivity "modern" activities. These "modern" activities are largely tradeables. While the term has traditionally thought of as referring only to manufacturing, tradeables include non-traditional eg high-productivity agriculture and particularly internationally traded services e.g. call centres. Jamaica needs to accelerate the movement of resources into modern activities, which will only occur if their profitability improves. As the economy learns, it can diversify into other, more difficult, related areas. This is not a new insight, as this strategy was effectively followed by Japan, the NICS, and most recently China, amongst others. This is not even new to Jamaica. Resources moved into all inclusive tourism in the 1980's, and Jamaica developed some indigenous, world competitive chains.

The key question is how to incentivise the production of tradeables, or what might be called pro-production policies. In other words, what do manufacturing, non-traditional agriculture and the traded services sector need to increase their production?

The simplest way for the government to mobilise Jamaica's business sector for export is to increase the profitability of tradeables through the tax system. Despite various incentives still being on the books, very few have been granted over the last few years with the exception of the Spanish groups entry into the Jamaican tourism industry, and there are no "flagship" brands in Jamaica other than Ritz (which appears to be in the process of leaving Jamaica), Sandals and Superclubs. The simplest solution is to remove the power to grant individual incentives from the government in favour of an across the board 10 per cent "incentive" tax rate for the productive sectors which they don't have to apply for, but just report in their tax return. This should be the strategy for the reform of tax incentives by September 2010, of which there are more details in the Blueprint for Tax Reform Document.

A pro private sector government policy is a key additional missing input that goes well beyond simply building factories in an attempt to subsidise production. The government needs to be able to find out what are the missing public inputs required for private sector investment on an individual industry basis to create the appropriate policy framework for growth. The level of detailed information required to do this is very high, so a key question is how can the government get access to this information. For example, to fix a problem in tourism could require the intervention of three separate ministries other than tourism, reducing the tourism minister to saying "I feel your pain". Further, it must not only identify the problem but have a solution acted upon by a public entity. The public, private partnership of the National planning summit initiative should be ideal to drive this process of information acquisition and needs to be revitalised.

The traditional role of the development bank has been to provide cheaper finance than the banks for the productive sector. Development banks in Jamaica need to transform themselves into venture capitalists, seeking high return for high risk through equity participation in the creation of new industries, rather than their current principle of high risk, low return (this is outlined in my paper " A new approach to development banking in Jamaica"). Cheaper and better finance can offered to attract the interest of entrepreneurs, such as Jamaican professionals in the diaspora, to put forward business plans on the possibilities of new industries for Jamaica. This allows the development bank to learn about new opportunities, as well as identify the requisite public sector inputs required to "crowd in" investment in new industries.




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