More dark clouds amid economic turbulence

Dennis Morrison, Contributor

While the unprecedented downgrading of US long-term debt by Standard & Poor's on Friday was not entirely unexpected given the political-economic conundrum in Washington, its symbolic significance is bound to be felt when financial markets reopen after the weekend. The implications are unclear but the first response will come tonight our time when trading begins on markets in the Asia-Pacific region.

Before the downgrade, the plunge in the New York stock market following bad news on the US economy sent a warning signal to Caribbean countries that they still face a steep and turbulent climb to get out of recession. On our 49th anniversary of Independence, Jamaicans would have wished for more encouraging news as they struggle with the heavy toll that the recession has taken on our social and economic conditions.

Basically, the latest reports show that the US economy has slowed to a virtual standstill and job growth remains anaemic. Meanwhile, consumer confidence has slipped and this is bound to be reinforced by the huge loss of wealth resulting from the recent dive in stock markets. For our tourism-dependent economies which rely so heavily on American visitors, these readings point to further weakening of the demand for travel and increased pressure on tourist operators to offer bargains to woo US travellers.

Europe's deepening financial crisis and the steep fall in stock markets there are also worrying for the Caribbean as it is a source of large numbers of tourists. Consumer confidence is on the decline across the continent, even in Germany, the region's strongest economy, and this will likely have a negative effect on spending. Even before this latest setback, tourist traffic to the Caribbean had begun to falter under pressure from rising airfares as oil prices jumped. This pressure should ease at least in the short term.

Economic recovery

The blow to Caribbean economic recovery is not just by way of the likely fall in consumer spending on travel. There is, too, the dampening effect which volatile financial markets have on investment. Before last week's turmoil, there were indications that tourism investment delayed by the recession was being looked at again. But anticipating a slowdown in the travel market both regional and foreign investors may adopt a more cautious approach to increasing their exposure.

This would have serious implications for Jamaica and most other Caribbean countries since tourism investment is a big driver of economic activity in the region. Nonetheless, there are investors, mostly foreign ones who are prepared to continue investing in the downside of the economic cycle because capital is cheap, construction costs are attractive and they are confident of timing their investments to catch the market on the upturn. Our investment promotion agencies will have to work smarter and harder to find these opportunities in this difficult climate.

While they intensify the investment push, should we be expecting that things will turn around overnight? In a word, no! The American economy was badly damaged by the near collapse of its financial system and massive loss of wealth. Consumers over-borrowed, the housing bubble generated excess building and has left a high level of foreclosures. The construction sector, one of the main drivers of US employment, is therefore going to take time to recover unless US legislators are persuaded to moderate their emphasis on budget cutting by pushing through an aggressive infrastructure investment programme.

Prospects

Investment in infrastructure, in our case energy, is also an essential part of the response that can make a difference to Jamaica's economic prospects. As I have pointed out over and over again, high energy costs are the biggest burden on consumers and businesses and therefore we must mobilise investment capital to modernise our electricity generating capacity while diversifying the fuel sources. We cannot afford to burn expensive oil to produce electricity and all long-term forecasts suggest oil prices are going to remain high.

The investment phase of such a programme would create construction activity and jobs while new plants based on coal and/or natural gas would increase our energy efficiency and reduce costs. Alongside this shift, significant cost savings can be realised if businesses can get access to low interest money lying idle in our financial sector to invest in retrofitting their energy systems. In our 49th year of Independence, are we still lacking the initiative to put local capital to work on such an obvious and low-risk venture? Do have to wait for a foreign investor to take this on?

In last week's column, I wrote of the proud achievements of our track athletes that have come from a model of blending talent with hard work, consistency, investment in sports education, voluntarism, powerful role models and, ultimately, a culture of success. I overlooked the resources mobilised through the Sports Development Foundation, an initiative of Michael Manley, to upgrade infrastructure and support the work of sporting bodies. Also not to be ignored was the mobilisation of the Social Development Commission at the grass-roots/community level - an area in which we may be slipping.

The model they have developed should not be confused with claims about the power of yam and bananas. Rather, as we reflect on the last 49 years, we should be drawing on the lessons that can guide the transformation of other areas of our society.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com