Jamaica urgently needs to move beyond stability to growth, or get neither
First, the good news.
It is almost certain that Jamaica will pass the second review of its stand-by arrangement, more colloquially referred to as the dreaded quarterly IMF test. This should not be surprising, considering the starting point. As mentioned in their June 8 “letter of intent” to IMF Managing Director Dominique Strauss-Kahn, jointly written by Central Bank Governor Brian Wynter and Finance Minister Audley Shaw, “Performance under the economic programme described in our Letter of Intent (LOI) has been better than expected.” As detailed in their letter, this performance reflected a more successful than anticipated domestic debt exchange (with larger than projected savings in interest), a huge rally in Jamaican Eurobond prices (coupled with an upgrade of Jamaica’s creditworthiness by the international rating agencies), and a sharp fall in local treasury bill rates. The latter, in addition to producing further interest savings, had the welcome effect of sharply reducing the negative impact of the debt exchange on bank balance sheets.
There is, however, no room for complacency. The financial adjustments achieved so far (amounting to a kind of fragile stability in the financial markets), are not enough to drive growth in an environment of depressed local and international demand. Indeed, whilst there are some very important differences, the current stability in Jamaica is not entirely dissimilar to that achieved in the US just over a year ago, where the stabilisation of the financial sector led to a recovery in financial asset prices, but the real economy remains very weak.
This is not to echo the call for what former Merrill Lynch economist David Rosenberg calls “Keynesian short term spending quick fixes” as a solution for Jamaica’s obvious shortage of aggregate demand, as apparently demanded by some local commentators. In the first place, Jamaica is not in the same position as the United States, a still very wealthy country that issues the world’s international reserve currency and hosts the world’s most liquid bond market. Such a strategy of “stimulus” spending is simply not available to a Jamaican government that late last year almost came to the limits of its debt financing ability.
Jamaica’s carefully designed IMF programme has given us some welcome breathing space but has not fundamentally altered our economic situation. The bad news is that there are early signs that the improvement in the Jamaican economy signalled over the past several quarters (by a slowing rate of decline) may be in danger of reversing even before we get to a quarter of positive growth, already projected at a cautious one half of one percent for fiscal year 2010/2011 by the authorities in their letter. Some of Jamaica’s largest companies, including some of those involved in the distribution of key staples, are now indicating privately that they have seen a fall off in demand from early July. The vital tourism sector has also seen a decline in forward bookings since early July, after a surprisingly fast recovery from the recent events in West Kingston . This is not itself inconsistent with the strong numbers in July as most tourists would want to take the holiday that they paid for months ago. As a consequence, the JHTA is now forecasting that the coming months will be significantly weaker.
In addition to the previously mentioned fiscal stimulus, the apparent recovery in the US economy was, in the words of David Rosenberg, based on the “adoption of too big to fail strategies, initiatives aimed at bailing out delinquent homeowners, measures that actually try to prevent market forces from working, initiatives that pay people to stay off work for 99 weeks with no thought behind skills improvement and training in return, and attempts at influencing the equilibrium level of asset prices”.
As an example of what Rosenberg means, it was reported yesterday that July’s US Existing Home Sales collapsed 27.2 per cent below June’s 5.37 million annualised to an annualised 3.83 million houses (the lowest level in more than a decade), more than double the fall projected in the median Bloomberg forecast of an annualised 4.65 million rate. Notably, this was despite the lowest ever mortgage rates at near four per cent. This fall reflects the fact that July is the first month to see the full impact of the expiry of the temporary US$8,000 tax credit for US homebuyers, which like the similar programme for cars called “cash for clunkers”, artificially inflated current demand for houses at the expense of future sales. As a consequence, US ten-year treasuries have continued their rally towards two per cent , with the yield of 2.48 per cent breaking below its 52-week low of 2.55 per cent.
Rosenberg argues that for the US “the solutions lie in supply – side policies that will promote growth in the capital stock and hiring/work incentives — education, infrastructure, payroll taxes, a coherent energy strategy”. Simply put, he is arguing that the US will need to abandon what we would in Jamaican parlance call its “crash programme” strategy of trying to keep people with no jobs in houses they can’t afford.
The apparent weakening in the Jamaican economy is unsurprising in a context where a country with decades of declining productivity is forced to adjust (after having lived beyond its means for an unusually extended period as evidenced in its massive current account deficits), and that is now operating in the context of a global financial crisis that has created the least favourable international environment since the 1930s. In such a context, as in America currently, virtually no one (either in the public or private sector) gets a wage increase as they deem themselves lucky to have a job.
The only solution for a small open, structurally challenged, demand deficient economy such as Jamaica’s is to shift immediately to a policy of incentivising export led growth. Even in the current extraordinarily challenging international environment, Jamaica’s small size and negligible market shares in virtually all products, coupled with an excellent location for investment from countries such as China and India, make it possible to achieve such as shift as long as we have the will to go beyond mere words. This means, for example, that the current multilateral demand to reform incentives should be seized as opportunity to create corporate tax rates of say 10 per cent, to drive the likely job creating areas of tourism, agriculture and particularly manufacturing. Without jobs, all other social interventions, including crime, will ultimately fail.
The gains of the Jamaica debt exchange can only be sustained in the medium term with growth in income and demand. This requires that financial institutions pass on the cuts in domestic interest rates to keep their customers in business, particularly the the small businesses that drive job creation both here and in the US, even at the expense of short term profitability.
It is understandable that the Central Bank Governor, and the commercial banks that he regulates, are hesitant to lower rates, concerned as they are about the credit risk in their current portfolios. However, the only effective and constructive way to address that concern is to get the growth agenda up and running through action on the issues of access and price of capital, incentives, taxation, and export promotion that can drive sustainable job creation. It is not therefore a question of “growth versus stability”, as these are not mutually opposed, but rather, mutually reinforcing objectives.