Monday, September 22, 2014
If the economy is to growBy Dennis Chung
I constantly hear commentators talk about the lack of growth in the Jamaican economy since the 2008 "great recession", as if this is something new. In fact, of the approximately 94 per cent growth between 1962 and 2010, about 68 per cent was between 1962 and 1971, and 15 per cent between 1982 and 1991. So for the rest of the 29 years accumulated growth was only around 11 per cent.
This shows a lack of understanding of what our real challenges are and the structural issues. I am amazed at how persons speak in a vacuum, as if the only thing needed to achieve growth is to apply the IMF pressure, stabilise interest and exchange rates, and eliminate poverty. These are all outcomes and it is the lack of our inability to focus on the real structural problems that keeps us chasing our tails, and ending up going around in circles.
Of all economic commentators out there, there are a few that I think really get the issues we face. Let me start first with Gene Leon, who I think really understands the cultural and social linkages with economic development in Jamaica. The others are Ralston Hyman (who we do have disagreements with but at least this leads to a rational discussion), Dennis Morrison, Damien King, Denzil Williams, Al Edwards, and although I haven't heard her for a while, Anne Shirley. There may be one or two more I have not named.
So if the economy is to grow it is necessary that we understand the fundamental environmental and cultural concerns that must be addressed. Interest rates, exchange rates, and inflation levels are only just symptoms of the outcome, and are not a panacea to our solutions.
What we also need to understand is that it is not the point in time measurements that determine growth and development, but rather the expected trend and solution of the underlying issues. So we should never believe that because we are experiencing high poverty levels or high inflation at a point in time that this means that the future is bleak. Similarly, not because we are experiencing lowering debt to GDP or an improved primary balance does it mean that the economy will improve in a sustained manner, or that because murders are reduced that crime will decline in a sustained manner. In fact, I believe the current policies will allow for a stronger economy to emerge, as the real problem for me is really the pace.
In 1984, the debt to GDP ratio was 212 per cent, before declining to 90 per cent in 1990, and the economy growing by average six per cent in the last half of the 1980s. Similarly, we saw some growth in the 1990s to 2000s, but debt was increasing along with crime and indiscipline, which I think indiscipline caused more damage to the economy than anything else. So we can also say that while lower interest rates and a stable exchange rate is necessary for planning and growth, it is not sufficient, as is seen by the lack of take up of productive loans. This is primarily because confidence of the future (human behaviour) is always going to be more important than symptomatic macroeconomic numbers.
If I were in charge of policy, I would focus on the following three areas, (i) energy cost -- just imagine what it would do for productivity if the industrial sector saw a 30 per cent reduction in energy cost and consumers had more disposable income; (ii) bureaucracy -- public sector workers can be as productive, and are as talented, as the private sector but lack the environment and compensation system to innovate and show initiative; and (iii) crime -- this can only be solved by addressing disciplinary issues in the society.
The government has made some good moves towards that restructuring, but there are some deep-rooted cultural issues that need to be addressed, such as understanding that government is there to serve the people and not the other way around. If this was understood then the tax reform green paper would not say that the most important objective of the reform is to raise revenue for the fiscal accounts. And this has been the philosophy of taxation for as far as I can remember, and is the reason why only certain things were cherry-picked from the Matalon report in 2005.
I say all this to really lead up to what I want to address, which is the IMF programme. When the programme was revealed in 2010, I remember saying along with Ralston Hyman that the targets were not realistic, given the social and other issues in Jamaica, and that there would need to be a relaxation of the targets. This was done.
We are now at a point of negotiation with the IMF to resolve the current economic projections, and it is good that both the IMF and government is discussing this, as it shows a commitment on both sides to come up with a credible economic programme going forward, and this intent is very important. I also hear the argument coming from government, opposition, IMF, and some parts of the private sector (so everyone is at one on this) that what we need is (i) maintaining fiscal discipline, (ii) economic growth, (iii) stable exchange rate and reduced interest rates, and (iv) reduced debt to GDP ratio. My own view is that all these cannot happen at once, and this is why we have not been able to iron out a credible economic programme going forward.
And this has nothing to do with economics; it is a straight mathematical formula. That is if X + Y = Z, then it is not possible for (X-1) + Y to equal Z. In other words, if X represents GDP growth (global and domestic), Y represents reducing the debt to GDP ratio, and Z represents the previous fiscal targets, then if GDP growth expectations (globally and domestically) changes then one of the other variables must change. My own feeling is that the one that must change is Y, which means that a short-term higher debt to GDP ratio is inevitable to achieve the fiscal and growth development targets, just as Seaga did in the 1980s
This is already the case, as even though we have achieved our fiscal targets to August, the debt is $33 billion higher than projected. If in the other hand we had stuck to the debt then maybe we would have had a social situation, which would have frustrated revenues and the target.
Debt is not bad as long as the marginal revenue exceeds the marginal cost, which means we need to borrow money to develop capital and infrastructural projects, not to pay recurrent expenditure as we have done in the past. But I am just an accountant so I stand to be corrected.
Dennis Chung is a chartered accountant and the author of "Charting Jamaica's Economic and Social Development - A much needed paradigm shift". His blog is dcjottings.blogspot.com
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