Medicine not bitter enough

Bruce Golding, Guest Columnist

Below are excerpts from an address by former Prime Minister Bruce Golding at a Jamaica Chamber of Commerce awards dinner.

For several months, we have been waiting to exhale as we manoeuvre our way towards a new International Monetary Fund (IMF) agreement that the Government expects to be approved by the executive board before the end of this month.

It is puzzling and cause for some concern that late on Tuesday evening, it was posted on the IMF website that Jamaica's case would be considered on March 29, which happens to be Good Friday here but is not a public holiday in Washington.

On Wednesday, Jamaica was removed from that agenda and replaced by the Philippines. The two remaining days in March happen to be Saturday and Sunday, when it is unlikely that the board will convene.

The suspense and agonising that have attended these negotiations bring with them a tactical hazard: we may be inclined to comfort ourselves that concluding a new IMF agreement is the ultimate goal - the end of a long, difficult struggle.

We face another tactical hazard: not knowing what this new IMF agreement will mean for us as a country, and what it will mean for each of us as entrepreneurs or individuals in our respective circumstances.

It is not possible to determine that until we know all the conditions that will be attached to the new agreement and the specific measures that will be taken to fulfil them.

We do know that:

• We must achieve and maintain a primary surplus of 7.5% of GDP starting this year;
• The fiscal deficit must be eliminated over the next three years;
• The public-sector wage bill must be reduced to 9% of GDP over the same period;
• The public debt is to be reduced to 95% of GDP by 2020.
• These are targets, not actions. In order to achieve them:
• Bondholders will again take a cut in their agreed interest income;
• Public-sector wages are to be frozen for the next three years;
• Forty-five billion dollars is to be drawn down from the NHT over the next four years;
• Additional taxes of $16 billion have been imposed.

Beyond that, we know very little, and even within what we know, there is a lack of specifics as to how these overarching targets will be achieved. The measures announced so far will not be sufficient. Possibly, more will be disclosed in the forthcoming Budget Debate.

The uncertainty that prevails is compounded by occasional pronouncements by the Government that appear to be running counter to these measures, for example, Minister Bunting's recent announcement that 5,000 additional police and soldiers are to be recruited over the next four to five years. It is incongruent with the target of reducing the relative cost of the public-sector wage bill.

Fulfilling the stipulations

There is a third tactical hazard that we face: the widely held assumption (even by the IMF itself) that fulfilling the stipulations it has laid down and even achieving the targets on which it insists will, by themselves, lead us to economic recovery and growth. IMF strategies have not changed much despite all the evidence, including the origin and impact of the global financial crisis, that its prescriptions are far from foolproof.

The IMF is principally concerned with financial stability - expressed another way, our ability to pay our external bills and repay our external debts so that the integrity of the international financial and trading system is preserved. Economic growth is not its overriding priority. That is left to us.

I will return to that issue before I close.

Given the perilous (some may say, parlous) state of the Jamaican economy, it can't be business as usual. Strong, bold, even drastic, steps need to be taken.

Andrew Holness was right when during the election campaign he warned of the bitter medicine that the country would have to accept. It no doubt cost him some votes, but who, least of all the Government, would now contest that declaration?

Jamaica is not alone in this predicament. All across Europe and among even powerful industrialised countries that are normally resilient to economic stress, painful corrective measures have had to be taken. These have included imposing new taxes, reducing social-welfare benefits, cutting public-sector jobs and salary reductions for public-sector workers; even pensions have been cut in some countries. Germany, the most powerful economy in Europe found it necessary to cut public-sector jobs and reduce social welfare entitlements. Spain mandated a 17% reduction in the budgets of all government departments; Britain ordered a 19% cut.

The jury is still out as to whether these really tough austerity measures are the only way, or even the best way, to secure sustained economic recovery.

A country whose recovery strategy is being hailed as a model to be adopted is Latvia. Although six times the size of Jamaica, it has a slightly smaller population. Prior to the global crisis, Latvia was recording double-digit growth; its national debt was only 9% of GDP. Yet, in the first two years, its economy shrank by 25%, forcing it to borrow heavily, pushing that debt to 45% of GDP. Unemployment rose from 7 to 23%.

What it did in the face of the crisis was to embark on a tough, painful adjustment programme:

• Cutting public-sector jobs by 15%;
• Applying an average 18% pay cut across the public sector;
• Cut public-sector pensions by 10% - a measure that was subsequently struck down by its constitutional court;
• Imposed new taxes;
• Increased social security deductions;
• Capped social-welfare benefits.

Within two years, the Latvian economy recovered and is now the fastest-growing economy in Europe with a 5% growth rate over each of the last two years. It has been able to repay its IMF loan ahead of schedule.

I mention the case of Latvia because the medicine that it appears is being administered here in Jamaica, as harsh as we like to claim it is, can be considered modest compared to what other countries with far more robust economies have chosen or have had to apply.

Fix our problems

Of course, no two economies are identical. They each have economic, political and cultural peculiarities, and what may have worked successfully in one country is not necessarily replicable in another. But we must ask ourselves: Is the medicine that is being administered sufficient to fix our problems, and if it isn't, is the Jamaican patient strong enough to withstand the heavy dose of chemotherapy that may be needed?

A former finance minister, Queen's Counsel Hugh Small, once declared that Jamaica was suffering from "adjustment fatigue". That was 20 years ago during the Budget Debate of 1993! That fatigue must certainly be more severe today. Yet, the choices open to us are so stark and so few that we cannot afford not to get it right this time. We must do what is necessary to get us back on our feet or be content to remain bedridden.

Our problem is not just the difficult economic experiences we have for so long endured. It is even more so the de-energising of our will to persevere, to be able to be confident in the hope that we will turn the corner - that things will, indeed, get better.

Both historical and contemporary experience show that timid, half-measures not only do not fix the problem but they make that fix more painful in the future. Cyprus rejected the tough austerity measures that were being adopted in countries like Greece only now to have to contemplate taxing bank accounts.

It is clear that the actions enunciated so far will not put us on a path to economic growth, even if they may meet the conditions embodied in an IMF agreement.

I have cause for concern:

• The comprehensive tax-reform proposals that were taken to Parliament in 2011 and which were designed to broaden the tax base and lower the tax rate have been so adulterated that what is being implemented are a mere shadow of what was originally conceived.
• The reform of government pensions, also taken to Parliament in 2011, has been deferred for three years. Pension costs doubled in the last five years and will perhaps double again in the next three.
• The Public Sector Rationalisation Programme, designed to merge the functions of several government agencies and departments and reduce the size of the public sector by some 10,000 over five years, has been dealt a severe blow by the Government's undertaking that there are to be no lay-offs in the public sector.

I think the Government wasted its best opportunity immediately following the last elections that it won with a 2:1 majority. But it's not too late. I've been there, and I know the hard choices that confront the Government. I empathise with the prime minister because she has the lonely job of providing the leadership and direction to navigate through these turbulent seas.

She has to hold the hand of the finance minister and shield him from the naysayers and faint-hearted even within her Cabinet and her party. The Opposition will be breathing down her neck. Some of her own will say to her, "We're damned if we do and damned if we don't. It's better we don't." I say to her: Don't listen to them!

It is, indeed, crunch time. Let us crunch the time and give ourselves, perhaps, our last chance.

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