Public affairs: No basis for hope

Claude Clarke,  GUEST COLUMNIST

By Einstein's definition of insanity, Jamaican governments have been operating for many years like raving lunatics. For the better part of 40 years, they have diligently prepared annual Budgets, heavy on bookkeeping detail and popular fiscal and economic measures, but devoid of the structural economic strategies required for real economic development. Every year they have told us to expect growth. But predictably, it is economic decline that has resulted. Yet year after year, they have returned to this failed routine asking us to expect different results.

Although it compares favourably with recent Budgets, this year's effort bears all the traits of Einsteinian lunacy. This is disappointing as, with the readiness of the multilateral and bilateral funding agencies to support its efforts, there is a clear opportunity for the Government to be as bold as necessary to correct the structural defects that have restricted our economic development.

The relatively simple act of juggling Budget figures and introducing ad hoc fiscal and economic measures aimed at assisting particular sectors cannot lead to economic success. We have been assisting sectors, industries and firms for four decades and have no economic progress to show for it. Not that assistance to valuable areas of the economy is not important, but after 40 years of unsuccessful reliance on this strategy, it ought to have occurred to someone that something else might be required.

Unstable nations

Economic Research Service data reveal that during these 40 years, Jamaica's real per-capita GDP has contracted and is today 15 per cent lower than it was in 1972. During the same period, the per-capita income of Trinidad and Tobago, and the Dominican Republic, rose by 180 per cent. Antigua's increased by 325 per cent and St Kitts-Nevis' by a stunning 404 per cent. Joining Jamaica as the only countries in the hemisphere experiencing decline were the war-ravaged or politically unstable nations of Nicaragua, Venezuela and Haiti. For almost 40 years, our governments' economic stewardship has pulled our people backward, rather than moved us forward.

During the colonial era, we were an economy exporting primary agricultural produce and importing manufactured goods. As we attained universal adult suffrage and moved into internal self-government and Independence, we pursued a strategy of industrialisation and began to change the pattern of trade to one more conducive to economic development. This was reversed by the economic policies of the 1990s, and today, our exports, when adjusted for inflation, are less than they were in 1987, nearly a quarter-century ago. We now need five times the value of our exports to pay for the goods we import.

And as the economy has declined, crime has predictably exploded. Today, our country suffers the degrading distinction of being among the world's murder capitals, largely shunned by owners of capital as a country unsuitable to live, work and raise families.

The descent of our economy to the bottom of the hemisphere's performance ladder has been the result of a recurring refusal by our governments to acknowledge and address the most important prerequisite for economic health: the competitiveness of the national economy. The Jamaica Productivity Centre's 2009 report, which reveals an annual decline in labour productivity of 1.3 to 3.4 per cent over 35 years, is testament to this fact.

If economic development is our objective, the central concern of Government must be the competitiveness of the national economy. Without it, nothing that is produced in Jamaica will be competitive. We will have no internationally competitive sectors, industries or firms. And there will be no niche industries that can overcome that uncompetitiveness.

Competitiveness is fundamental to economic viability. But contrary to the simplistic line usually taken by many who have commented on the issue, competitiveness does not begin with the worker, the firm, the industry or with an economic sector. Economic competitiveness begins with the national economy, which is shaped by key macroeconomic variables being brought into competitive alignment. Without it, workers, firms, whole industries and sectors can only survive if they are operating in a protected market environment, free from foreign competition. But like inbreeding, which diminishes a species, an economy that feeds on itself will die.

But our greatest failing has been not to learn the lessons of the past. During our four-decade-long wander through the wilderness of economic decline, there was one oasis of success that could provide important clues to our economic planners for solving the economic problems we face today. Between 1983 and 1986, the Government of the day did what was necessary to bring competitiveness to the economy. Working with the IMF, it effected a 68 per cent correction to our massively overvalued currency. At the same time, effective economic policies were used to hold domestic inflation and other competitiveness - undermining conditions in check.

Increased demand

The result was a more competitive and stable national economy. It led to increased demand for Jamaican production as our goods and services became more competitive. Production and employment increased to meet this boost in demand, and greater economic activity and prosperity followed. The outcome was strong growth. The five-year period 1987-1991 saw an increase of more than 25 per cent in real per-capita income, according to Economic Research Service data.

Unfortunately, subsequent administrations, including the present Government, have veered radically away from the policies that created that growth and have, instead, followed a path that seems to be informed by a belief that economic stability is possible without economic competitiveness. It is not.

It is easy to create the appearance of stability in the short term, but it will always be transient. Before long, uncompetitiveness will cause demand for domestic production to fall. Exports will decline and domestic demand for local production will give way to an increase in imports. Balance-of-payments deficits will grow and instability will again take root.

But our leaders have found the political rewards of illusory economic stability too attractive to resist. Because the economic decisions needed to create a competitive national economy are often unpleasant and offer no short-term political benefits, a new culture of 'patriotic pragmatism' will have to emerge for this course to be taken.

However, should we miraculously find such leadership today, it would repeat the economic reconstruction done by Edward Seaga in his second term as prime minister in the 1980s. That reconstruction restored the competitiveness of the national economy. But today, much more needs to be done.

First, the entire fiscal framework must be reformed to remove every dollar of taxation borne by local production, if similar costs are not carried by foreign products against which they compete at home and abroad.

Second, the problem of our unacceptably high energy costs must be speedily solved. We cannot wait for the three or four years it will take to construct and commission new, efficient electricity-generating plants before power rates are brought to competitive levels. As I pointed out in my article, 'The heavy burden of government', published in The Sunday Gleaner on January 17, 2010, there are financing models that can front-end the cost-saving benefits of the new plants, allowing the country to enjoy competitive electricity rates in the short run. Combined with an intelligent motor-vehicle policy to curb our appetite for petroleum, this would make energy an asset for development, instead of the debilitating liability it is today.

Third, we must address the problem of marketing. Production will only increase when there is reliable demand for it. Even with competitive costs, there must be markets from which demand can be attracted. However, Jamaican governments have pursued trade policies and entered into trade agreements that have denied our producers access to markets, including our own, from which demand for their products could be reasonably expected. Given the chronically uncompetitive state of our economy, the Economic Partnership Agreement (EPA) and the CARICOM Single Market and Economy (CSME) have left us at a disadvantage in our own market. These agreements are sapping our lifeblood and must be renegotiated without delay.

But perhaps the most pressing need Jamaica has to be competitive is action that will link our economy with the abundant and competitively priced capital available in the world. Financing costs in Jamaica are as much as three times what they are in other parts of the region. We can never be competitive on this basis.

Squeeze profits

I support the recommendation of former Prime Minister Seaga to peg the Jamaican dollar to the US dollar to enable foreign capital to become active in the Jamaican debt market. The inconvertibility of the Jamaican currency has allowed the local financial sector to charge interest rates and fees for their services several times the levels of financial institutions in jurisdictions all around us. It also enables them to squeeze profits from our impoverished economy, higher than those earned by some of the world's most powerful banks. Thus the economy has struggled, while the financial sector has prospered.

The Government has heaped praise upon itself for the appreciation of the Jamaican dollar against the US dollar, and, by extension, the Bahamian dollar, which is pegged to the US dollar. But home mortgage rates in The Bahamas are half the levels that now burden Jamaican homeowners. The prime lending rate of 15.75 per cent being heralded by one of our leading banks as a great achievement almost triples that in The Bahamas, where it is 5.5 per cent. Meanwhile, the Jamaican economy suffers as interest rates and bank fees hobble businesses and retard their ability to expand and increase employment.

Finance Minister Audley Shaw addressed none of these essential issues in his Budget. Yet now that the IMF agreement is to be extended, he has the opportunity to separate himself from the failure of his immediate predecessors by incorporating these economy-transforming strategies in his plans. He will then be able to break with the recent history of insane economic management and at long last give the people a basis for the hope his predecessors have failed to provide.

Claude Clarke is a businessman and former minister of trade. Email feedback to columns@gleanerjm.com.