Presentation to The Rotary Club of St Andrew on October 22, 2013
OVER the past few weeks, I have been approached by many persons who ask the questions: What is happening to the economy? Is Jamaica headed in the right direction? Is it time for me to migrate?
These questions have been influenced by the continued devaluation of the Jamaican dollar, increasing prices, difficult bureaucracy, indiscipline on the roads, and a general feeling of insecurity. One could say that the people who ask the questions have a right to be concerned, as they want to ensure their future is secure.
These conditions have now been further compounded by the recording of the lowest levels of business confidence since 2009 and consumer confidence in 12 years. This supports the pessimistic views behind the questions.
The question we need to ask ourselves, therefore, is: Are we on the right track with the current policy initiatives, in terms of the economic, legislative, and social programmes? In my view, it is very important to understand this and ensure that we do what is in the best long-term interest of the country, as it is highly unlikely that we will get another opportunity to bring us back from the brink, if we are not there already.
In order to do a proper assessment of this, we need to understand why we are here and what can actually bring us to a better tomorrow.
The first thing to understand is that the reason why we continuously suffer from low growth and deteriorating social conditions is the result of spending more than we earn. So in our over 50 years since Independence we have run a fiscal surplus, maybe six times, which means that for over 45 years we have been borrowing money to live. If that happens in your own household, then you will soon lose everything and become indebted to creditors.
The other thing to understand is that this predicament has resulted from governance that seeks to satisfy political party die-hards, which see politicians seeking to please persons through handouts rather than encouraging them to work. So, for most of our independent history, the budget has been
crafted around welfare-type programmes rather than creating policy initiatives that will encourage production and productivity.
The irony is that it is not the Government that ultimately pays for this welfare, but the productive class, which has resulted in:
* The economic decline of the 1970s;
* The debt increases from the 1980s to present;
* The financial crisis of the 1990s; and
* The two debt exchanges.
In other words, when government runs into fiscal problems, all they do is impose a tax (one way or the other) on the productive class in Jamaica, in order to continue the support of those who are least productive.
The result is that we developed an unproductive society, where capital and other resources are not allocated to where they are most productive, but rather, allocated based on political and other governmental policy decisions.
This fundamentally is the reason our economy and society are where they are. That is because we have failed to create a policy environment that encourages the factors of production (capital and labour) to move towards where it is most productive. So capital, for example, was concentrated in government paper, because it was the best value-added return and crime was a turn-off for real investments, and labour moved to where it was more protected than productive, or we failed to lend money through the Students' Loan Bureau with any link to development.
The problem we face today is that if we want to, in a sustainable manner, positively develop our economy and society, there will need to be a fundamental shift in policy and values. This is directly linked, in my view, to our legislative framework and policies (economic, fiscal, and monetary). In other words the framework, or environment, that Government puts in place will determine if capital moves from the sidelines (eg in US$ assets) to real investments and if people find it more productive to work, or find it more profitable to be in crime or other non-productive ventures.
For example, because Jamaica is well-known for music and sports, and because of the demand, a lot of money is made from it, then naturally youngsters look towards music and sports as viable careers to pursue.
What it means is that, in order to change the economic and social situation in the country, we will have to do the necessary policy adjustments that will change the way we behave when it comes to allocation of capital and labour, and how we interact with each other socially.
This is what is being attempted with the current IMF-influenced economic programme and the legislative reforms taking place. I am of the view that the fiscal and legislative reforms under the IMF-programme are the right way to go. Many may wonder how I can say that if the result is economic hardship, particularly the continued slide of the dollar. But the fact is that the Jamaican economy has been inefficient for so long, and the resources so misallocated, that any form of adjustment is going to cause some pain. What we do know is that the fiscal adjustments being carried out by Peter Phillips are necessary, because if we continue to spend more than we earn, then the result is going to be catastrophic. The adjustment that we are seeing is a shift of our resources from unproductive to productive purposes. So we are seeing more companies looking towards export, and we are seeing more young persons starting their businesses.
What we are also seeing is greater economic hardships, a devaluing dollar, and higher interest rates. So the question is: How do we do the necessary adjustments and at the same time minimise the pain, and dislocation, that the necessary adjustments cause?
What we must understand is that the only way the economy will grow is if the private sector, and in particular the SME sector, becomes more vibrant. So large companies (that have matured in the Jamaican market) will inevitably turn towards other markets, as this is the best value added for them. The greatest growth, however, is going to come from facilitating SMEs to start and grow into large businesses, just as in the
US where we see small businesses through the stock exchanges, have grown into international businesses. This is the way to reduce unemployment and create greater economic activity.
This, however, is only possible if we have a business climate that encourages capital, and labour, to move towards establishing new SMEs. This means an environment where SMEs can flourish and grow. It does not mean handouts, but rather, providing cheaper electricity, more efficient bureaucracy, a more efficient justice system, transparent governance, and improved law and order.
It is my view that much progress has been made in this area, but it needs to be faster in order to compensate for the inevitable decline we see in economic conditions because of the necessary fiscal adjustments.
In other words, because of the fiscal adjustments and reform programmes, we have seen capital move out of government paper and that capital is going to find a home that gives the best value for risk. At the moment, what we are seeing is that capital is shifting to US dollars, which is what is causing the rate to move.
Therefore, what we need to do is create an environment where business and consumer confidence is such that capital will want to move to real investments. This means that policy initiatives must be focused on creating an environment of efficient and friendly bureaucracy, competitive energy cost, law and order, and important reforms, such as a competitive tax environment. Unless we make the changes to create a competitive environment for businesses, then we will not be able to create sustainable growth and development.
So, in concluding, I can say that the direction of the reforms under the IMF programme is the correct way to go. We must, however, be careful about how we manage the transition and ensure that we create the environment to encourage the allocation of capital and labour to productive investments.
Dennis Chung is a chartered accountant and the author of the books Charting Jamaica's Economic and Social Development AND Achieving Life's Equilibrium. His blog is dcjottings.blogspot.com