What is really wrong with the Jamaican economy — Part 4Sunday, September 15, 2013
BY KEITH COLLISTER
LAST year, in response to a Bloomberg article about a comment by Prime Minister Simpson Miller, I wrote an article saying that Jamaica is not Greece, and as a follow up, corrected some factual errors in a Chicago Tribune article calling Jamaica the Greece of the Western Hemisphere in January.
However if I had to write the same article today, it might be entitled Jamaica is not Greece, but getting closer every day. The first point to note, as I made clear in all my articles comparing Jamaica and Greece, is that Greece does not have its own currency, having adopted instead a fixed exchange rate called the Euro. Secondly, before the crisis, Greece had a huge fiscal primary deficit, and has just about managed to run a very small primary surplus (fiscal surplus excluding interest costs), despite a huge adjustment effort, whereas Jamaica is targeting a massive primary surplus of 7.5 per cent of GDP in this financial year.
Those are the main differences, and they are important. Another key difference is that most of Greece's debt was owned by foreigners, a longer topic already discussed in my previous articles.
However, at this point, the similarities are becoming more stark. According to one of the major UK papers, the direct tourism industry in Greece is around six per cent of GDP, with its indirect impact around 20 per cent of GDP, very similar in fact, albeit slightly lower, to numbers produced by Oxford Economics for Jamaica's tourism industry of 7.3 per cent and roughly 25 per cent of GDP respectively.
Greece's problem, like Jamaica's, is that it has very little in the way of manufacturing industry (less for export), and has had an economy based more on consumption, the expansion of a very expensive and inefficient government, and of course real estate investment. In short, despite Greece being a seafaring nation from ancient times, its tradable sector is undeveloped and it was living beyond its means with borrowed, often German money. Greece also has substantial remittances, reflecting a significant overseas population that emigrated for better opportunities abroad.
During Greece's economic crisis, the IMF (and the European Union) consistently underestimated the negative impact of the austerity they imposed on Greece (the size of the miss in terms of their projections was also unusually large), probably because they didn't take full account of the issues of competitiveness and the critical difference between Greece's traded and non-traded sectors. Greece's main foreign exchange earners are tourism (all the riots didn't help them last year), shipping, and some agricultural exports.
As Friday's Gleaner headline "Austerity gamble" hinted, referring to PSOJ President Chris Zacca cautioning against the risks of over-performance on the IMF programme, the current programme runs the large risk of being excessively austere for what I call Jamaica's "deformed" economy. What that term means needs a longer conversation, but I invite all interested readers to download Professor Harris's 2010 paper "Jamaica's Debt - Propelled Strategy : A Failed Economic Strategy and Its Aftermath" and you will understand what I mean.
In summary, Greece's problem was that, unlike Ireland, it couldn't rebalance its economy fast enough from non -tradables to tradables (exports) to offset the massive negative economic impact of austerity on its debt dynamics, requiring multiple debt restructurings to offset the large austerity-induced contraction in its GDP. For our purposes, austerity means the sharp reduction in government spending and the fiscal deficit to be achieved by cutting expenditure and raising taxes. At its core, an IMF programme is to correct a balance of payments problem, a somewhat mechanical process meaning you either grow exports, or cut imports, or both. Greece's very weak industrial base, compounded by the negative effect of the social turmoil on its tourist industry, has meant that it therefore had to cut imports through a huge contraction in the domestic economy, and kept increasing taxes to offset the revenue fall-off from those taxpayers who were actually compliant, further depressing the economy.
The bottom line is that Jamaica appears to have signed up for a very austere IMF programme without having taken any measures so far to encourage exports, meaning that all the adjustment to come will likely be on the import side reducing everybody's standard of living. Indeed, such policy measures that have been taken so far have increased taxes on the tourism industry and businesses generally (or created general confusion in areas such as the customs administration fee), and the one positive measure, the reduction in the corporate tax rate for non-regulated businesses, was largely reversed.
The inescapable conclusion is that with a current account deficit that has averaged over 10 per cent of GDP, Jamaica now faces a "great squeeze" on businesses, the general population and domestically driven asset classes (such as real estate) to reduce this deficit to a level acceptable to the IMF. Part of the adjustment was clearly programmed (basically unavoidable) to come through a reduction in demand as our fiscal deficit is reduced (there is reason to question the speed of the fiscal adjustment, however), but it is a policy matter as to how aggressive a pro -export policy we adopt, in areas such as tourism and manufacturing. For this reason, my first piece of advice is that it is now extremely important to update very quickly Professor Harris's 1997 book "Jamaica's Export Economy : Towards a Strategy of Export Led Growth", and adopt the principles therein, again a longer conversation. The current deflationary economic trends are very clear, and no measure has yet been taken to offset the aforementioned "great squeeze", and neither have we seen a return of private sector confidence following the national debt exchange. The time to act is now, perhaps using the recently signed social partnership agreement for a true "Programme for National Recovery" that actually makes competitiveness job one. We have run out of other options, and if we don't adopt this approach, then the next four years will be ones of terrible pain for Jamaica, perhaps ultimately rivalling that inflicted on Greece.
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