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Life beyond the IMF
Published: Sunday | September 13, 2009
Edward Seaga
French President and war hero General Charles de Gaulle once forewarned the French people, "apres moi, le deluge" ("after me, the deluge"). He was not the first to use the phrase but perhaps he was catering to his own presumptuous superego by warning the people that after him France would be devastated. But his fateful words proved to be more of a threat than a promise.
The global community faces virtually the same conditions today. The worst [COLOR=orange !important][COLOR=orange !important]economic[/COLOR][/COLOR] devastation since the Great Depression of the 1930s ambushed the world economy in 2008 with a recession which is threatening to wipe out half the current assets of the global economy. But out of this 'deluge', a 'promise' is emerging to revamp the global financial system to create a more equitable model with greater transparency and accountability.
Just as green wood sprouts after a fire wipes out dead wood, the crisis in the capitalist system can be made to produce new regulated and equitable growth, truncating the greedy version of capitalism which has been at the root of the global [COLOR=orange !important][COLOR=orange !important]financial[/COLOR][/COLOR] collapse. If new regulations can prevent recurrence, the recession would leave behind a monument for greater trust which could promise restoration in the market system economy. The Group of 20 countries have made this the highest priority on the agenda for their meeting in Pittsburgh this month. But the more relevant question being asked is, after the recession, what next?
Greed is not the only factor promoting economic turbulence. Some countries are in a chronic state of turmoil because they have not been able to get their economic variables working together. Jamaica is one of the countries affected by this chronic dysfunctional performance as a consequence of a malfunctioning economy for virtually 35 years.
sustained pressure
Over the past three decades, the economy has been experiencing pressure on a sustained basis, except for the last half of the decade of the 1980s. The causes were grossly inappropriate fiscal and monetary policies, excessive increases in the price of oil, dramatic reduction in bauxite and alumina receipts, and a reckless political adventure in the 1970s which caused prolonged disequilibrium. This is despite the result of a far-reaching agreement between the bauxite companies and the Michael Manley government to pay a seven per cent levy on bauxite, substantially increasing previous revenue. But this huge gain was immediately wiped out by an equally massive over expenditure the following year.
During the post-independence period, fiscal expenditure was in excess of domestic revenue for 35 years and foreign exchange current outflows were greater than current inflows for every year except 1988, 1992 and 1994. This necessitated huge increases in the national [COLOR=orange !important][COLOR=orange !important]debt[/COLOR][/COLOR] to close the resulting gaps, positioning Jamaica in the exclusive category of one of the three most indebted nations in the world.
economic barometer
These are critical measures of the economic barometer of any country. In the case of Jamaica, the pattern has been one of an intractable failure to deal with domestic and external deficits, resulting in the build-up of insurmountable debt. These conditions are characteristic of a chronic recession, if not depression.
The conclusion can be drawn, then, that Jamaica has been experiencing recessionary conditions for most of the past 35 years. The current global recession is, therefore, really an overlay of these long-standing underlying past recessionary conditions. This positions Jamaica in a unique situation, in that the support from the IMF would, in Jamaica's case, only deal with the overlying crisis, not the historic underlying recession. To deal with the chronic underlying crisis, at least two major developments would have to occur:
(1) The bauxite/alumina industry would have to re-open and [COLOR=orange !important][COLOR=orange !important]resume[/COLOR][/COLOR] operations, restoring the US$800 million in external earnings which have been lost in the global recession. This would restore to a manageable condition the gap in the external account balance, which has been pushed by the recession to over US$1billion.
(2) Domestic expenditure must be savagely cut to drastically reduce the fiscal deficit of J$78 billion (7.5 per cent of GDP) in the current budget. This amount could increase significantly because of understatement of the gap and overestimation of the failing revenue. Extraordinary cuts in staffing, rescheduling of debt and reduced demand for new borrowings would be required to meet this exceedingly difficult challenge.
The current expectation is that the IMF will cover much of the deficits in the Jamaican economy for the next two years, if an agreement with the Fund is concluded. But from year three, if there are no substantial cuts in budgetary expenditure, or curtailment of debt, or if the alumina plants are not reopened, the real distress will begin. If the package of adjustment is not sufficient, then from year after the IMF programme has been completed, then three, 'aprés le IMF, le deluge'.
For the capital exporting countries, the recession is moving into a different and more personal phase. The financial system is stabilising as the balances of the stimulus packages are applied to patch out the financial potholes. But consumers have not yet fired up their demand which is necessary to generate new growth in [COLOR=orange !important][COLOR=orange !important]commerce[/COLOR][/COLOR] and industry. Hence, unemployment will continue and economic recovery will proceed at snail's pace.
foreign exchange earnings
This has implications for the recovery timetable of a range of lesser-developed countries. In Jamaica's case, foreign exchange earnings are almost entirely from the sectors of the economy which are directly consumer driven: tourism is dependent almost entirely on the personal decision of consumers. So, too, are the remittances from Jamaicans working overseas, linked to family bonds. Aluminium sales are about 20 per cent driven by the manufacture of consumer products. As consumer demand increases in the major industrial economies so, too, will production and economic recovery. But until consumer spending bounces back Jamaican recovery, and that of other reliant economies, will lag.
This scenario presumes that no other intervening dislocations will occur in the global economy which would depress consumer demand. There is no assurance of this. US President Barack Obama seems determined to launch his domestic programmes comprising health care, educational transformation, public works expansion and energy diversification, while fighting an expanded military engagement in Afghanistan.
The hunt for money to finance these attractive, over-ambitious programmes is provoking cause for deep concern among other nations which are rushing to the global market to find funds for their own purposes, including funds for their stimulus packages. This heated competition could very likely drive up interest rates to levels requiring intervention by central bankers to control inflation by reducing consumer spending.
If the US fiscal deficit reaches 10-12 per cent of GDP in the process (roughly double the present level), as some estimates indicate, a whole new round of economic constraints will begin which will restrain consumer spending and worsen the recessionary slump. President Obama has to be convinced that this is not the time for a 'starry-eyed' president. It's a time to consolidate and stabilise.
Beyond this threatening scenario there is at the root cause of this entire epochal meltdown, the grievous problem of severe disequilibrium among the global trade and financial blocs which is causing malfunctioning in the global system. China is symbolic of that group of surging economies whose time has come to emerge as global economic powers.
These are the BRIC countries (Brazil, Russia, India and China) which are growing rapidly. China, in particular, is now exerting superpower economic strength by its growing dominance of world trade in consumer products which is driving American goods off the market, and its accumulation of massive foreign exchange reserves. This worsens the already huge negative US balance of trade and weakens the sliding US dollar.
redress of the imbalances
This imbalance between the surplus earnings and savings of China and the deficits of the US economy is not sustainable. It will require a redress of the imbalances to create a new equilibrium which can only be achieved if Americans are willing to reduce their costs to meet the competition, or the Chinese currency is revalued to make Chinese goods more expensive. This dilemma was prominent in the last presidential campaign with Barack Obama vowing to save US jobs, courting retaliation by the Chinese government, which holds US$700 billion as treasury investments in the US which it can readily manipulate.
The gauntlet has been thrown down but the choices of effective weapons are limited to two options: Will President Obama pick it up? Will he tell the American people that the only way out of this crisis for them, on a sustained basis, is that they have to work harder, cut wages, produce goods more cheaply to compete better and improve earnings at home and abroad, from which they must save more in order to borrow less so as to strengthen their currency, failing which the value of the dollar will continue to slide until and, like it or not, the United States will no longer be the largest, strongest, most powerful economy in the world, but a second-rate economic power? Would he be prepared to say that the American dream, as they have known it, is now ending? A lower level of living is inevitable? This would be a cultural shift of oceanic political dimensions.
To restore global balance to this cultural disequilibrium would require many years to stabilise the world economic condition. It required a dozen years for the government of the United States to pull the economy out of the disastrous level of the Great Depression, and it took the mega production resulting from the US entry into World War II to do that.
This global crisis is deeper than others and the period of time needed to restore global stability to the world economy will be unlike others, because it will require the balancing of competing and contrasting deep-rooted world cultural orders which govern the lifestyles of eastern and western civilisation. This balancing act will not be easy because it will be unbalanced repeatedly by aftershocks of the worst financial earthquake in three quarters of a century. Edward Seaga is a former prime minister. He is now the Pro-Chancellor of UTech and a Distinguished Fellow at the UWI. Email: odf@uwimona.edu.jm.
Published: Sunday | September 13, 2009
Edward Seaga
French President and war hero General Charles de Gaulle once forewarned the French people, "apres moi, le deluge" ("after me, the deluge"). He was not the first to use the phrase but perhaps he was catering to his own presumptuous superego by warning the people that after him France would be devastated. But his fateful words proved to be more of a threat than a promise.
The global community faces virtually the same conditions today. The worst [COLOR=orange !important][COLOR=orange !important]economic[/COLOR][/COLOR] devastation since the Great Depression of the 1930s ambushed the world economy in 2008 with a recession which is threatening to wipe out half the current assets of the global economy. But out of this 'deluge', a 'promise' is emerging to revamp the global financial system to create a more equitable model with greater transparency and accountability.
Just as green wood sprouts after a fire wipes out dead wood, the crisis in the capitalist system can be made to produce new regulated and equitable growth, truncating the greedy version of capitalism which has been at the root of the global [COLOR=orange !important][COLOR=orange !important]financial[/COLOR][/COLOR] collapse. If new regulations can prevent recurrence, the recession would leave behind a monument for greater trust which could promise restoration in the market system economy. The Group of 20 countries have made this the highest priority on the agenda for their meeting in Pittsburgh this month. But the more relevant question being asked is, after the recession, what next?
Greed is not the only factor promoting economic turbulence. Some countries are in a chronic state of turmoil because they have not been able to get their economic variables working together. Jamaica is one of the countries affected by this chronic dysfunctional performance as a consequence of a malfunctioning economy for virtually 35 years.
sustained pressure
Over the past three decades, the economy has been experiencing pressure on a sustained basis, except for the last half of the decade of the 1980s. The causes were grossly inappropriate fiscal and monetary policies, excessive increases in the price of oil, dramatic reduction in bauxite and alumina receipts, and a reckless political adventure in the 1970s which caused prolonged disequilibrium. This is despite the result of a far-reaching agreement between the bauxite companies and the Michael Manley government to pay a seven per cent levy on bauxite, substantially increasing previous revenue. But this huge gain was immediately wiped out by an equally massive over expenditure the following year.
During the post-independence period, fiscal expenditure was in excess of domestic revenue for 35 years and foreign exchange current outflows were greater than current inflows for every year except 1988, 1992 and 1994. This necessitated huge increases in the national [COLOR=orange !important][COLOR=orange !important]debt[/COLOR][/COLOR] to close the resulting gaps, positioning Jamaica in the exclusive category of one of the three most indebted nations in the world.
economic barometer
These are critical measures of the economic barometer of any country. In the case of Jamaica, the pattern has been one of an intractable failure to deal with domestic and external deficits, resulting in the build-up of insurmountable debt. These conditions are characteristic of a chronic recession, if not depression.
The conclusion can be drawn, then, that Jamaica has been experiencing recessionary conditions for most of the past 35 years. The current global recession is, therefore, really an overlay of these long-standing underlying past recessionary conditions. This positions Jamaica in a unique situation, in that the support from the IMF would, in Jamaica's case, only deal with the overlying crisis, not the historic underlying recession. To deal with the chronic underlying crisis, at least two major developments would have to occur:
(1) The bauxite/alumina industry would have to re-open and [COLOR=orange !important][COLOR=orange !important]resume[/COLOR][/COLOR] operations, restoring the US$800 million in external earnings which have been lost in the global recession. This would restore to a manageable condition the gap in the external account balance, which has been pushed by the recession to over US$1billion.
(2) Domestic expenditure must be savagely cut to drastically reduce the fiscal deficit of J$78 billion (7.5 per cent of GDP) in the current budget. This amount could increase significantly because of understatement of the gap and overestimation of the failing revenue. Extraordinary cuts in staffing, rescheduling of debt and reduced demand for new borrowings would be required to meet this exceedingly difficult challenge.
The current expectation is that the IMF will cover much of the deficits in the Jamaican economy for the next two years, if an agreement with the Fund is concluded. But from year three, if there are no substantial cuts in budgetary expenditure, or curtailment of debt, or if the alumina plants are not reopened, the real distress will begin. If the package of adjustment is not sufficient, then from year after the IMF programme has been completed, then three, 'aprés le IMF, le deluge'.
For the capital exporting countries, the recession is moving into a different and more personal phase. The financial system is stabilising as the balances of the stimulus packages are applied to patch out the financial potholes. But consumers have not yet fired up their demand which is necessary to generate new growth in [COLOR=orange !important][COLOR=orange !important]commerce[/COLOR][/COLOR] and industry. Hence, unemployment will continue and economic recovery will proceed at snail's pace.
foreign exchange earnings
This has implications for the recovery timetable of a range of lesser-developed countries. In Jamaica's case, foreign exchange earnings are almost entirely from the sectors of the economy which are directly consumer driven: tourism is dependent almost entirely on the personal decision of consumers. So, too, are the remittances from Jamaicans working overseas, linked to family bonds. Aluminium sales are about 20 per cent driven by the manufacture of consumer products. As consumer demand increases in the major industrial economies so, too, will production and economic recovery. But until consumer spending bounces back Jamaican recovery, and that of other reliant economies, will lag.
This scenario presumes that no other intervening dislocations will occur in the global economy which would depress consumer demand. There is no assurance of this. US President Barack Obama seems determined to launch his domestic programmes comprising health care, educational transformation, public works expansion and energy diversification, while fighting an expanded military engagement in Afghanistan.
The hunt for money to finance these attractive, over-ambitious programmes is provoking cause for deep concern among other nations which are rushing to the global market to find funds for their own purposes, including funds for their stimulus packages. This heated competition could very likely drive up interest rates to levels requiring intervention by central bankers to control inflation by reducing consumer spending.
If the US fiscal deficit reaches 10-12 per cent of GDP in the process (roughly double the present level), as some estimates indicate, a whole new round of economic constraints will begin which will restrain consumer spending and worsen the recessionary slump. President Obama has to be convinced that this is not the time for a 'starry-eyed' president. It's a time to consolidate and stabilise.
Beyond this threatening scenario there is at the root cause of this entire epochal meltdown, the grievous problem of severe disequilibrium among the global trade and financial blocs which is causing malfunctioning in the global system. China is symbolic of that group of surging economies whose time has come to emerge as global economic powers.
These are the BRIC countries (Brazil, Russia, India and China) which are growing rapidly. China, in particular, is now exerting superpower economic strength by its growing dominance of world trade in consumer products which is driving American goods off the market, and its accumulation of massive foreign exchange reserves. This worsens the already huge negative US balance of trade and weakens the sliding US dollar.
redress of the imbalances
This imbalance between the surplus earnings and savings of China and the deficits of the US economy is not sustainable. It will require a redress of the imbalances to create a new equilibrium which can only be achieved if Americans are willing to reduce their costs to meet the competition, or the Chinese currency is revalued to make Chinese goods more expensive. This dilemma was prominent in the last presidential campaign with Barack Obama vowing to save US jobs, courting retaliation by the Chinese government, which holds US$700 billion as treasury investments in the US which it can readily manipulate.
The gauntlet has been thrown down but the choices of effective weapons are limited to two options: Will President Obama pick it up? Will he tell the American people that the only way out of this crisis for them, on a sustained basis, is that they have to work harder, cut wages, produce goods more cheaply to compete better and improve earnings at home and abroad, from which they must save more in order to borrow less so as to strengthen their currency, failing which the value of the dollar will continue to slide until and, like it or not, the United States will no longer be the largest, strongest, most powerful economy in the world, but a second-rate economic power? Would he be prepared to say that the American dream, as they have known it, is now ending? A lower level of living is inevitable? This would be a cultural shift of oceanic political dimensions.
To restore global balance to this cultural disequilibrium would require many years to stabilise the world economic condition. It required a dozen years for the government of the United States to pull the economy out of the disastrous level of the Great Depression, and it took the mega production resulting from the US entry into World War II to do that.
This global crisis is deeper than others and the period of time needed to restore global stability to the world economy will be unlike others, because it will require the balancing of competing and contrasting deep-rooted world cultural orders which govern the lifestyles of eastern and western civilisation. This balancing act will not be easy because it will be unbalanced repeatedly by aftershocks of the worst financial earthquake in three quarters of a century. Edward Seaga is a former prime minister. He is now the Pro-Chancellor of UTech and a Distinguished Fellow at the UWI. Email: odf@uwimona.edu.jm.
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