How discipline, clarity and trust can turn around JaWednesday, September 25, 2013
BY KEITH COLLISTER
In his presentation as keynote speaker for the PSOJ economic seminar last Thursday, international economist Dr Peter Blair Henry summarised the three key lessons of his book Turnaround — Third world lessons for first world growth for advanced economies, namely the need for discipline, clarity and trust, which he clearly believes also apply to his native Jamaica.
The first lesson, discipline, does not necessarily mean fiscal austerity, although in Jamaica it does, but vision and flexible values for the country as a whole rather than just individuals. In the US and Europe it does not mean fiscal austerity but should mean structural adjustment, particularly of the labour market.
The second lesson, clarity, means understanding where third world countries found themselves when the leaders generated a change in direction.
The third lesson, trust, is what happens after discipline and clarity. Together they create trust." Business happens at the speed of trust".
Just as Mexico's inability to pay its debt signalled the beginning of the third world debt crisis in August 1982, it was a speech by James Baker in October 1985 "The programme for sustained growth", a laundry list of topics including fiscal discipline and openness to trade which was codified by John Williamson years later as the so called Washington Consensus (ten items) that signalled the point at which the prospects for a turnaround began. However, the Baker plan became a dirty word internationally as the whole process was seen as the US just wanting to help its banks.
Henry advises us not to look to him for a view, but to what markets believe works, so that the definition of "discipline" becomes what markets think will create value. It is markets that will best identify the key bottlenecks to growth, not a laundry list of ten things to do all at once. Essentially, one needs to take the items most critical for generating growth, and then implement change and stick to that strategy. When a country does this, the stock market will respond positively saying this will create value. Reforms that are good for the private sector, and improve stock market valuations, are generally good for workers, improving wages as economic growth improves.
His favourite example of discipline comes from Chile, where Finance Minister Andres Velasco was burned in effigy by students as he ran up budget surpluses in 2006. However, in the financial crisis of 2008, Chile was able to finance a tax cut and other counter cyclical measures as it had saved in good times for a rainy day. Unfortunately, Jamaica as a small highly indebted open economy doesn't have the fiscal space to do likewise.
His most interesting example comes from Barbados in 1991, drawn to his attention by Professor Alvin Wint and former Bajan Central Bank Governor Dr Courtney Blackman. Barbados was running out of foreign exchange reserves, and the IMF told them they needed to devalue (effectively a back door wage cut without the workers consent) as they had become uncompetitive (meaning unit labour costs got too high). Barbados said no, and proposed a viable alternative, namely a wage cut that had the same effect in restoring internal competitiveness. The then and now labour leader Sir Roy Trotman said the workers can't agree to the size of the cut. At that point, the leaders of the private sector said we will open our books to the workers, and they will share in future productivity gains. It was this willingness to share the pain that allowed the agreement to hold. The stock market went on a tear, but the Prime Minister was deposed and the party did not return to power for 14 years. Asked about it later, the Prime Minister said, "It was a small price to pay to save the country."
Turning to Jamaica, Henry advised it had been seven years since he wrote a little paper on Jamaica in 2006, but not much had changed in his analysis. Jamaica, then as now, has very little room for fiscal and monetary policy, and will have to rely on reforming the structural side of the economy. Jamaica has recognised in a very "visceral" way the need for discipline, however, discipline is not enough.
Critically, Henry notes, Jamaica's structural impediments interact negatively with one another. If one uses the World Bank Doing Business Report of 2007, the overall cost of tax payments was over 50 per cent, and Jamaica had one of the highest taxes on transfers of property in the world at 13.5 per cent, near the bottom, compared with the US, at 0.5 per cent. From his personal experience, the consequence is to drive a lot of transactions underground.
The consequence is if the entrepreneur wants access to credit, there is no public credit record. Without proper registered title to lend he has no collateral. Small and medium sized enterprises (SME's) have real issues in getting access to credit, which is a problem when research suggests that much productivity growth is driven by the entrance of new firms. The end result is a series of mutually reinforcing "detriments" to growth.
Jamaica has already done the really hard changes, for example, moving the primary surplus from three per cent to 7.5 per cent.
A lot of what needs to be done, for example, improving the registration of property, does not require a great deal of money in a fiscal sense, but is a management challenge and not a resource challenge.
What needs to happen in Jamaica is non-partisan, and is about leadership. The role of leaders is to define reality and give hope. Reality has already been very clearly defined, so the challenge is now to give hope. In giving hope, communication is critical. Policies are implemented by people. Progress is made at the micro level , so one needs to get positive stories out. If something positive happens in a Ministry, a positive interaction with a customer, make sure the story gets out. Singapore is always at the top of the Doing Business Index for a reason.
Trust is something that is taken for granted until it doesn't exist. It is about ethics, but ultimately it is about cutting transaction costs. In Barbados, discipline and clarity allowed them to maintain their fixed exchange rate, creating the trust in their social partnership. Competitiveness is the key, but this means driving up productivity. A good idea is to start with quick material wins by finding where there is agreement, and get them done. The key question is what sacrifices are Jamaican's willing to take to make to be disciplined, and to think about growth in a positive sense rather than as a zero sum game.
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