Engage people in the recovery

Claude Clarke, Guest Columnist

In the midst of the expressions of satisfaction that greeted the meagre 0.5 per cent GDP growth in the third quarter of 2013, the finance minister made a telling statement that the next phase of the four-year programme with the International Monetary Fund (IMF) should focus on the growth agenda.

Implicit in this statement is an admission that the programme of fiscal consolidation and debt reduction agreed with the IMF cannot be sustained unless it is accompanied by a strategy to grow the economy.

Notwithstanding the seeming positive news on the economy, the fact is that without a meaningful growth strategy, the economy, even by the most optimistic estimates, is set to continue its pattern of stagnation. The slowdown in commercial activities resulting from the austerity-based IMF programme has begun to weaken the capacity of the economy to generate the revenue needed to meet the Government's debt-servicing obligations. And grave concern is now being expressed at the increasing underperformance of tax revenue.

Contracting economy

But no one should be surprised by this. What else could be expected if taxes are increased, government expenditure is reduced, and the resulting primary budgetary surplus is extracted from the economy?

It should not be difficult to understand that a contracting economy cannot support an expanding debt. And although it is important that we reduce our debt, it is even more vital that this is done in a manner that does not reduce the capacity to do so.

As I stated at the time the agreement with the IMF was announced, the Government's strategy should have been to weave pro-production policies into the broad fabric of the economic programme. However, in developing its programme, the Government was apparently not aware of the central importance of production to the achievement of fiscal sustainability and debt reduction. This would explain its failure to use the opportunity of reforming the tax code to create incentives to attract capital to production. Instead, it handed corporations and wealthy individuals tax breaks for simply paying their taxes on time.

There is nothing to suggest that these tax credits will find their way into productive investments within Jamaica. The factors that have made investing in Jamaican production unattractive have not changed. Production in Jamaica remains uncompetitive. The extraordinary cost burden of financial services has not been lightened. Domestic inflation has not been sufficiently contained for the depreciation of the Jamaican dollar to have made Jamaican production more competitive. And in the absence of visible ladders of economic opportunity, the Jamaican worker remains unmotivated and unproductive.

Unless these major deficiencies are addressed to improve the competitiveness of Jamaican production, rational corporate interests and wealthy individuals will not invest in Jamaican production to the extent necessary to yield the vigorous growth needed for the economic recovery we seek. It is a safe bet that, for the most part, they will continue to find it more attractive to invest in domestic services, to save and invest their money overseas, and to consume foreign goods and services.

It is not that the economic stewards are not trying, but their prescriptions for the country's recovery will always be thwarted by their misdiagnosis of the country's economic disorder.

Since 2008, incumbent administrations have found it convenient to place the blame for the economy's dismal performance on the global economic crisis.

The last Jamaica Labour Party administration was more than happy to attribute the failure of the economy under its stewardship to the global crisis and, in so doing, condemned itself to perpetuate the chronic home-grown economic crisis that predated it.

The current People's National Party administration has been more than happy to accept that diagnosis. So much so the idea has become an article of faith; and now all economic analysis begins with the 2008 worldwide recession as a predicate.

Even the IMF seems to have 'drunk the Kool-Aid', stating in its Second Review of Jamaica's Performance under the present EFF programme, "There are signs of a gradual recovery from the effects of the global financial crisis ... ."

But the reality is that the pattern of our economic performance in the four years following the global crisis is no different from that of the dozen years preceding it. Jamaica's average annual growth has been below one per cent in both periods. The fact that in 2009, Jamaica's economy was somewhat worse affected than those of our neighbours and the global economy is essentially because Jamaica's productive foundations were severely weakened by years of anti-production policies.

Stagnant performance

The world economy has largely recovered from the crisis. And despite the stagnant performance of some countries which have held doggedly to austerity over stimulus as a recovery strategy, global economic growth is close to its pre-crisis levels. However, Jamaica has remained stuck in its pre-recession rut. Why our leaders remain wedded to the idea that our present economic woes are the result of the world financial crisis and not the long-running crisis of our own making is puzzling.

This misreading of the facts could be forgiven if it didn't hold such devastating consequences. As might a doctor who makes an incorrect diagnosis, our economic planners have been applying potentially lethal prescriptions which have paralysed our economy, making recovery ever more elusive.

It is our own economic policy errors that have been driving capital away from production and depriving our people of worthwhile employment and other economic opportunity. And they must be corrected before the country can begin to recover.

The most costly result of these policy errors has been the underutilisation of our most important economic resource: our people, manifested in our rising unemployment and underemployment levels. And the challenge of any administration that is serious about economic recovery is to design economic policies that will productively engage them.

Over the last five years, our adult population grew by close to two per cent and their productive output declined by almost five per cent, clearly indicating a falling level of economic engagement. To realise our goal of economic recovery, policy must be changed to create an economic framework within which capital will be attracted to production - the only activity that can sustainably increase the economic engagement of our people.

This is the crucial missing link in Government's economic programme. I hope the prime minister and her finance minister, as members of a political movement ostensibly committed to people-based development, will recognise this shortcoming and put the policies in the upcoming Budget that are aimed at placing people at the centre of the drive for economic recovery.

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