PUBLIC AFFAIRS: Where's the beef?

Claude Clarke, Contributor

Three years after being turned out of office, the People's National Party (PNP), at its 72nd annual conference, has given the Jamaican people their first glimpse of the party's economic plan, should it be returned to office. Remarkably, it addresses none of the obvious policy failures that wrought such destruction on the productive capacity of the economy during the party's last term in office. Instead, it sets out a grand list of desirable economic objectives and outcomes.

But such an exercise is not new, and requires little more than pen and paper. Previous similar efforts have fizzled for lack of implementation-ready policies capable of achieving the stated goals. The PNP's Progressive Agenda is no different. Sadly lacking are the macroeconomic, strategic, and structural changes needed to transform Jamaica's lifeless and chronically uncompetitive economy into one of vitality and competitiveness. There is nothing capable of producing the economic output required to pay our way in the world and provide our people with economic opportunity and an acceptable quality of life. Regrettably, (although we are told there will be further consultations), so far, the long-awaited "Agenda" gives no sign of anything remotely resembling progress in terms of a new economic policy direction for the country.

There is no beef.

Earlier this month, Finance Minister Audley Shaw, in delivering the 2010 Shirley Playfair Lecture, presented us with a statement of the Government's approach for the way forward. Aside from the now-inevitable self-adulatory representation of the Jamaica Debt Exchange (JDX) and its beneficial results, Mr Shaw could advance no more significant a prescription for development of the economy than an appeal for cooperation, and an adoption of the worn-out mantra of the last PNP administration: "going for growth". That's it.

No beef!

Our goose is cooked

In the wake of the worst recession the world has seen since the Great Depression, if this is the best our two political parties can offer as a way out of our protracted economic nightmare, our national economic goose is properly cooked.

Jamaica's economy has been in productive disequilibrium for a very long time. It began with the sustained high interest rate regime of the 1990s, which created a massive financial sector bubble that had to be shrunk before the economy would have a chance of being restored to productive balance. The JDX, which removed over $40 billion of economically unjustifiable interest income from the financial sector, in the process of relieving considerable pressure from the Government's overburdened budget, was the first meaningful step taken to address this problem.

For while it is true that a healthy financial sector is essential for an economy to be successful, the sector's success cannot be allowed to shackle the productive sector to failure, and to condemn the entire economy to ruin. The mettle of the finance minister will be tested by whether he allows the banks to find new ways to reinflate the ruinous bubble he has successfully begun to shrink and ensure that in the future, cost compression and improved efficiency are the principal means by which they should be able to maintain their high profit levels. The country cannot afford a reversal of any economic gain made at this stage.

The Government is already guilty of waking up too late to the depth of the economic crisis the country faced. Additionally, for over a year, it handicapped the finance minister with two Cabinet ministers shadowing him in his ministry - and he didn't seem to gain his footing until they were removed. Very few reasonable people would deny that since then, he has acquitted himself comparatively well and has so far averted the twin-headed economic disaster of the situation he inherited and the world economic meltdown, both of which he was very late in recognising.

He eventually recognised that the economy could never develop with the national debt, which by 2009 had reached $1.3 trillion, hovering at 130 per cent of GDP. The burden that servicing it placed on the Government's budget and the economy as a whole could not be sustained. The JDX relieved some of that burden, but the lesson of its success has not been applied to the broader debt.

The success of the JDX has been that it replaced very expensive debt with less expensive financing and saved tens of billions of dollars of cost in servicing the same size liability. But it was confined to the local debt, and unless the same results are achieved with our similarly expensive foreign debt, the unbearable burden of debt servicing will continue to strangle the Government and our economy.

Our new International Monetary Fund (IMF)-facilitated access to cheap multilateral credit is valuable and most welcome. But we must recognise that although cheap, this soft money does not reduce our debt-servicing cost unless we are somehow able to leverage it to replace some of our very expensive foreign debt.

And although the purpose of the multilateral credit is specific to projects, it appears to be sufficiently flexible to assist in budgetary support as well. In this regard, the best purpose to which this low-cost credit could be put is to help to retire our excessively expensive stock of foreign debt. For, as with our domestic debt, a strategy must be devised to relieve the burden that foreign-debt servicing places on our budget so that the Government can have the fiscal flexibility to do some of what is needed to stimulate the economy to vitality and growth. The real challenge facing the Government now is how to use the fiscal breathing space provided by the cheaper multilateral loans to ultimately phase out our expensive foreign debt as time and circumstances allow.

The finance ministry's planned re-entry into the international commercial debt market with the aim of replacing expensive double-digit debt with less-expensive new loans at under eight per cent is a start. But the dire economic circumstances created by our heavy debt-servicing costs, which has been as much as 23 per cent greater than our total revenue, require more aggressive action.

Not enough

Although the finance minister's success in managing interest rates down is undeniable, the Government cannot allow itself to believe that that is nearly enough to achieve an economic turnaround, and it must not lose sight of the real purpose of its economic stewardship: the growth and development of the economy to improve the lives of the people of the country.

As we address the debt burden, we must also recognise that the capacity of the economy to service its debt is the ultimate determinant of the country's viability. And that it is not only necessary to reduce our debt in relation to our GDP; we must also strive to increase our GDP relative to our debt. The Government must, therefore, realise that the contraction of the economy which has resulted from its new revenue and expenditure arrangements are achieving the very opposite results.

While reducing the cost of our unproductive government apparatus is an absolute essential for economic development, care must be taken that in doing this, the aggregate demand needed to maintain vitality in the economy is not diminished. It was, therefore, necessary that in reducing expenditure and increasing taxes, the Government should have adopted measures that would stimulate alternative economic demand through increased private economic activity.

Domestic economic output

A few weeks ago, I cited the tax concessions in the Junior Stock Market as an initiative with the potential to generate new economic growth. There are many other opportunities open to Government to replace cuts in state-generated demand, with genuine stimuli to private economic activity capable of driving domestic economic output.

If the Government does not pursue these opportunities, it won't be long before it finds that after the economy has been squeezed to meet its budget-deficit targets, the GDP will have shrunk to a size so small, and our debt risen to a level so high, that our economy's ability to service its debt will be significantly lower than it was before the IMF came in to rescue us.

The necessary reduction in the cost of government and the financial sector must be met urgently with stimulative action on the productive side of the economy. Rather than deliver vague exhortations about growth, the Government needs to develop bold and insightful policies to achieve development and economic vibrancy.

And after three years of waiting, the people are entitled to more from the Opposition than interesting intentions - no matter how sincere they are and what label they bear.

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