When completing my first degree in economics at The University of the West Indies (UWI), a favourite topic of the professors was the theory related to economies of scale. Such views highlighted a business approach to achieving an efficient output by proportionally decreasing costs. This situation occurs when costs are spread over a more considerable outlay of goods and services.

But, alas, in those non-globalisation days, students weren’t adequately prepared for the ‘economies of war’ theory.

Here, global financial and commodity markets react to warfare by spreading fear over a broad spectrum of economic activities.

The seemingly unnecessary conflict between Russia and Ukraine is a case in point.

The fallout of this war will put the entire global economy to the sword. This is especially so given that the novel coronavirus pandemic has already ravaged the world’s economies.

This new European war will negatively impact the world’s gross domestic product (GDP) and eventually drill down to individual countries and people, and the price of certain products will increase dramatically to match the ramped-up costs of the factors of production.

Variables related to sanctions and trade will have a tsunami-like effect on the economies of the so-called First World and will significantly challenge the frail economic structures of lesser-developed countries. As the economies of the US and Europe take a nosedive, one can expect a similar downturn in the fragile economy of Jamaica and others in the Caribbean region. This situation, coupled with the ongoing novel coronavirus pandemic and its attendant supply chain issues tees up a recipe for disaster.

Indeed, there are dark economic days ahead for the Third World. Jamaica’s small island economy will be affected explicitly by many factors that will hobble the country’s post-COVID-19 recovery.

They say that when America sneezes Jamaica gets a cold.

America has been sneezing from the beginning of the pandemic, and this recent European conflict should upgrade its condition to the common cold. So what happens when America catches a common cold? Does Jamaica get a severe fever?

The expectation is that the global bauxite industry will be affected in the short term due to extensive sanctions against Russia by the US and Europe.

Russia is a significant player in the bauxite industry, and one foresees a fall-off in bauxite trading and product price increases, which will dampen the market. Globally, aluminum/bauxite plants may be idled, primarily Russian-owned companies.

The Russian company UC Rusal operates plants in Australia, Guinea, Ukraine, and Jamaica. The concern is that these never-before-seen sanctions of the West will cripple the operations of the Jamaican plant in Ewarton.

This potential for a cessation of activities at US Rusal Windalco will undoubtedly affect the livelihood of a broad cross section of the company’s workforce. Layoffs will impact administrative, plant, mine pits, trucking, and railroad operations.

Additionally, if the plant closes, it will hamper the economic growth in the communities of Ewarton, Linstead, and Bog Walk, among others, and the multiplier effect of the income loss suffered by these workers will directly affect these local economies.

Likewise, the expected simultaneous rise in the cost of living will lead to further depressive conditions.

Jamaica earns approximately US$1 billion annually from bauxite, and a global slowing down of this industry would be catastrophic and may impact operations throughout the island.

Not a good look.

Tourism is one of Jamaica’s largest income-earning industries, with annual revenues of approximately US$1.4 billion. One can easily imagine that this Euro-Russian conflict will result in an economic fallout which will negatively affect this critical sector.

Jamaica’s largest market, North America, is being stumped by rising oil prices. As a result, Americans will have less money to spend on vacation-related activities. Consequently, the fall-off in travelling and tourism expenditure will adversely affect Jamaica.

And the news out of Europe is no better. Europeans will soon be facing rising fuel and other costs that will curtail foreign vacation travel. So Jamaica, with its impressive array of hotel solutions and majestic tourism products, will have decreased earnings from this otherwise buoyant industry.

Added to this are global inflation expectations, which will run roughshod over Jamaica’s already-reeling economy.

Moreover, Jamaica’s energy dependency will drastically affect the price of local consumer products. As a result, local tourism concerns will need to be on the front foot with innovative marketing strategies to entice wary travellers. Such plans must include heavily discounted hotel rooms.

The bottom line is that the longer this conflict goes on, the greater the eonomic fallout for Jamaica. We only hope there is no worsening in crime.

Again, not a good look.

Jamaica will be hard hit by the rising price of energy, with the price of oil predicted to increase to US$120 a barrel in the near term.

The Jamaican economy has always been susceptible to rising energy costs. One remembers how oil prices in the 1970s derailed our already-floundering economic system. The predictive exponential increase in energy costs will run amok in all sectors of the Jamaican economy. Moreover, with the US cutting off gas imports from Russia, and its allies expected to follow suit, gas prices will reach astronomical heights.

Import/export dislocation is made worse by the Organization of the Petroleum Exporting Countries’ (OPEC) reluctance to increase oil production in the short run. The resultant increases at the pump will negatively affect transportation, businesses, and households.

The immediate and significant increases in transportation and gas prices coupled with increased unemployment will significantly impact wage earners. Similarly, higher gas prices will ultimately lead to spiralling inflation and reduced tax revenues to the Government’s already porous coffers.

Another sector that will be negatively affected is that of manufacturing. The manufacturing industry is the largest in Jamaica after tourism, making up approximately 30 per cent of the country’s GDP and is another US$1-billion or more foreign exchange earner.

Jamaica has always been at a disadvantage in manufacturing when compared to countries like Trinidad and Tobago mainly because of the latter’s access to cheaper fuel and natural gas sources. Again, increased prices in the retail and wholesale trade will dig directly into the pockets of the ordinary person who is just resurfacing from the ill effects of COVID-19.

As prices increase simultaneously with a decrease in the production of goods and services, one can expect inflationary trends. Therefore, arresting inflation is more likely to be the major determining factor in the Jamaican Government’s ability to steer the economy into safer waters. Otherwise, the onrushing economic tidal waves will crash on the shores of the Jamaican economy in a way never felt before.

The economic future of Jamaica is indeed looking grim.

And what about the country’s agriculture sector, which, although underperforming, contributes almost 10 per cent to Jamaica’s GDP? Agriculture has always lagged behind its true potential, especially in food security for the Jamaican population.

There is fear on the horizon that the Euro-Russian spectacle will also impact the agriculture sector. Input costs and the price of wheat and flour will be affected, especially when two of the largest producers of these products are at war.

Once again, the increased sectorial cost will gradually drill down into the manufacturing and wholesale/retail sectors and affect the ordinary man. Keep in mind that the price of chicken has already been increased, with similar increases expected in the immediate future.

I would be remiss not to mention the benefits to the Jamaican economy of its highest-earning (non-earning) sector — remittances.

Remittances lead the list of foreign exchange inflows, with a whopping US$1.6 billion, approximately, surpassing all other legitimately classified economic activities. However, we can expect remittance flows to slow down in the near to medium term.

As the price of goods and services increase, Jamaicans will feel the pain of reduced remittance flows. A significant segment of the population depends on this currency inflow for survival. Once again, a fallout in this sector will impact the ordinary person and small households dramatically. It’s going to be a ‘ban you belly’ situation.

I genuinely don’t envy the Government.

Of course, the predicted global meltdown will affect several other sectors and subsectors. Economists predict that world GDP will decrease by up to two per cent. One can therefore imagine that Jamaica’s GDP will take a beating.

Telecommunications, construction, food processing, and essential services will not escape the onrushing economic onslaught, neither will our banking and insurance sectors.

The banking system may be upended in the short run by the myriad, confusing financial sanctions levelled on the Russian banking system. At the same time, insurance companies will experience reduced inflows and an increase in lapsed policies.

The war in Europe may be far away, but one sees that Jamaica will come face to face with the economies of war. It will reach down into our pockets and hold us hostage. The Jamaican people will, once again, be at the mercy of global economic reversals. Fifty years ago it was the oil crisis, today it’s a war in the European theatre.

Jamaica will have to fall back on another economic term that I fancied in my economic classes — the theory of comparative advantage.

Jamaica needs to begin to concentrate its efforts on areas where the opportunity cost of producing particular goods or services is competitive globally. Therefore, Jamaica has to restructure its economy in the immediate term to wade through this valley of the shadow of economic collapse.

We seem to have an advantage in our tourism product, which is one area where innovative applications are needed. Also, we have an abundance of solar power, but energy applications need maximisation. Jamaica can also balance its wage differential via structured Free Zone-type operations with First World partners to take advantage of investment opportunities.

But, most important, we have a marked advantage in a line of agricultural products that appeal to the global market. These products include coffee, cocoa, ginger, castor oil, and pepper, as well as the tremendous potential of Jamaican cannabis and cannabis-related products.

On a lighter note, it seems Jamaica also has a comparative advantage in poultry, especially as prepared by KFC. The KFC stores in Jamaica have been continuous world-beaters in sales. The general consensus is that Jamaica’s KFC offerings are the best globally.

Hmm…maybe we should start exporting our fowls. Just saying.

In the meantime, we hope that this European military confrontation between family members quickly passes and allows the world time and space to reset. The images of the destruction and terror being experienced by the citizens of Ukraine are unsettling and should cease in short order. But, unfortunately, the despicable acts of violence among members of humanity are once again on display.

War, as conducted today, is indeed ugly.

Hopefully, the leaders involved will come to their senses, check their egos at the door, and get back to the art of living. Unfortunately, there will be no winners in this contest. Everybody loses, including the uninvolved.

The Government of Jamaica, its citizens and supporting Diaspora have to be aware and prepared for the anticipated grim economic future ahead. A lack of adequate policies to address the fallout from COVID-19 and the expected war-propelled economic storm is a potential recipe for unrest.

It has never been an easy road for Jamaica, but in this, the 60th year of our Independence, we will once again put our back to the wheel and not be the definition of, “Fire deh a muss muss tail him tink a cool breeze.”

Rohan M Budhai is a tax consultant, writer, and history enthusiast. Send comments to the Jamaica Observer or mariobudhai@yahoo.com.