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New PIOJ head explains ‘Why growth has eluded us as a nation’ - Part 1
By Keith Collister
Friday, October 01, 2010
At the PSOJ's Chairman's Club last Tuesday, newly appointed Director General of the Planning Institute of Jamaica (PIOJ), Gladstone Hutchinson, cut to the heart of the question "Why growth has eluded us as a nation?".
Stating that "no one hires me to protect the status quo", his presentation, entitled "From the IMF Programme to Sustained Private Sector-led Growth within Vision 2030 Jamaica," was one of frankest analyses from a Jamaican economic policy official in recent times.
He began by admitting that growing an economy like Jamaica's whilst reducing the fiscal deficit is "tricky business", even before the added complications of a deep world recession. If one adds what he calls "the internal misalignment of economic resources and history of sup-optimal public policy in Jamaica", then, as Mr. Hutchinson himself says we are left only "with the narrowest and messiest of paths to success."
Whilst he believes "the evidence is clear that this transformation is doable," it rests squarely on whether "the private sector can discover resilience, robustness and elasticity in entrepreneurship and business development and practices."
For this to happen, the most basic, necessary condition is that both markets and the private sector must be fully convinced that "our country is irreversibly committed to this new private sector led economic paradigm", otherwise the transformation will be a failure.
He argued the May 2010 security operation in West Kingston demonstrated that the country urgently needed to pursue the goals of Vision 2030, particularly its first two goals of empowerment and justice. It had graphically "exposed a malady of difficulties and challenges" in the 100 most vulnerable communities across the country, including crime and violence, illiteracy, anti-social behaviour, low self esteem, unemployment, poor housing, poor infrastructure, weak community governance and a lack of coordination of social intervention programmes.
Neither the goals of Vision 2030 Jamaica, which require substantial wealth creation, nor our IMF Fiscal Consolidation Programme, are achievable without the transformation of our economy into a private sector-led one.
The IMF programme, which helped to "pull our economy back from the brink of collapse" is growth inducing if it credibly reduces "government inefficiencies", the "tax-price" of the provision of government services, perverse incentives and government "crowding out" of the private sector through competition for resources.
This leads to expansion in the private economy because of the "perception" that long-term permanent wealth and income will increase as a result, which encourages an increase in expenditures and growth in the economy.
Fiscal consolidation stabilizes the macro-economic environment through low inflation, a stable exchange rate and a low interest rate, thereby facilitating private investment.
For the private sector to expand, fiscal reform has to be credible, signalling that the government will be smaller, more efficient, complementary, and provide services at a lower tax-price.
This requires positive psychology and expectations by households, workers and firms that the fiscal consolidation programme is credible (rational, timely, sustainable and irreversible) for economic agents to extend their rational expectations beyond the short term and imagine a rise in their permanent wealth and income.
Under this scenario, the failure (of private sector expectations to improve) means the economy will experience macroeconomic decline (falling output) and the deflation typical of fiscal consolidation, compounded by the shock of the global recession, and the structural rigidities clogging interest rate and price transmission mechanisms in the economy.
Hutchinson noted however, that the IMF programme is aggressively "pro-cyclical", being implemented at a time when the economy is in a recession, thus exacerbating the downturn and delaying the recovery.
For him, this is evidenced by the decline in private sector demand for credit (despite the lowering of nominal interest rates), the accompanying reduction in the demand for the US dollar, and a decline in output in most industries. As a further consequence, unemployment has increased, and there has been a reduction in the household demand for credit.
Additional challenges include the longer than anticipated global recession, shrinking fiscal space (e.g. unprogrammed expenditures associated with the May 2010 Security Operations in West Kingston), and the loss of wealth and liquidity in the private economy from the collapse of unregulated financial organisation's (e.g. OLINT, Cash Plus). The other Ponzi scheme that has ended (with the Jamaica Debt Exchange) was "the high returns, low risk one that the government used to give."
Jamaica's high debt to GDP ratio has prevented the Jamaican government from running countercyclical policy to stimulate the economy during the recession, forcing it to reduce discretionary (non-debt expenditure), and limiting the government's ability to spend on growth enhancing areas such as education, infrastructure, and security.
With the intensification of the impact of the global recession on the Jamaican economy, loans to the productive sector have fallen as a result of a 'wait and see' approach adopted by the business sector in light of the uncertainty of the extent of future job cuts and its impact on aggregate demand.
By Keith Collister
Friday, October 01, 2010
At the PSOJ's Chairman's Club last Tuesday, newly appointed Director General of the Planning Institute of Jamaica (PIOJ), Gladstone Hutchinson, cut to the heart of the question "Why growth has eluded us as a nation?".
Stating that "no one hires me to protect the status quo", his presentation, entitled "From the IMF Programme to Sustained Private Sector-led Growth within Vision 2030 Jamaica," was one of frankest analyses from a Jamaican economic policy official in recent times.
He began by admitting that growing an economy like Jamaica's whilst reducing the fiscal deficit is "tricky business", even before the added complications of a deep world recession. If one adds what he calls "the internal misalignment of economic resources and history of sup-optimal public policy in Jamaica", then, as Mr. Hutchinson himself says we are left only "with the narrowest and messiest of paths to success."
Whilst he believes "the evidence is clear that this transformation is doable," it rests squarely on whether "the private sector can discover resilience, robustness and elasticity in entrepreneurship and business development and practices."
For this to happen, the most basic, necessary condition is that both markets and the private sector must be fully convinced that "our country is irreversibly committed to this new private sector led economic paradigm", otherwise the transformation will be a failure.
He argued the May 2010 security operation in West Kingston demonstrated that the country urgently needed to pursue the goals of Vision 2030, particularly its first two goals of empowerment and justice. It had graphically "exposed a malady of difficulties and challenges" in the 100 most vulnerable communities across the country, including crime and violence, illiteracy, anti-social behaviour, low self esteem, unemployment, poor housing, poor infrastructure, weak community governance and a lack of coordination of social intervention programmes.
Neither the goals of Vision 2030 Jamaica, which require substantial wealth creation, nor our IMF Fiscal Consolidation Programme, are achievable without the transformation of our economy into a private sector-led one.
The IMF programme, which helped to "pull our economy back from the brink of collapse" is growth inducing if it credibly reduces "government inefficiencies", the "tax-price" of the provision of government services, perverse incentives and government "crowding out" of the private sector through competition for resources.
This leads to expansion in the private economy because of the "perception" that long-term permanent wealth and income will increase as a result, which encourages an increase in expenditures and growth in the economy.
Fiscal consolidation stabilizes the macro-economic environment through low inflation, a stable exchange rate and a low interest rate, thereby facilitating private investment.
For the private sector to expand, fiscal reform has to be credible, signalling that the government will be smaller, more efficient, complementary, and provide services at a lower tax-price.
This requires positive psychology and expectations by households, workers and firms that the fiscal consolidation programme is credible (rational, timely, sustainable and irreversible) for economic agents to extend their rational expectations beyond the short term and imagine a rise in their permanent wealth and income.
Under this scenario, the failure (of private sector expectations to improve) means the economy will experience macroeconomic decline (falling output) and the deflation typical of fiscal consolidation, compounded by the shock of the global recession, and the structural rigidities clogging interest rate and price transmission mechanisms in the economy.
Hutchinson noted however, that the IMF programme is aggressively "pro-cyclical", being implemented at a time when the economy is in a recession, thus exacerbating the downturn and delaying the recovery.
For him, this is evidenced by the decline in private sector demand for credit (despite the lowering of nominal interest rates), the accompanying reduction in the demand for the US dollar, and a decline in output in most industries. As a further consequence, unemployment has increased, and there has been a reduction in the household demand for credit.
Additional challenges include the longer than anticipated global recession, shrinking fiscal space (e.g. unprogrammed expenditures associated with the May 2010 Security Operations in West Kingston), and the loss of wealth and liquidity in the private economy from the collapse of unregulated financial organisation's (e.g. OLINT, Cash Plus). The other Ponzi scheme that has ended (with the Jamaica Debt Exchange) was "the high returns, low risk one that the government used to give."
Jamaica's high debt to GDP ratio has prevented the Jamaican government from running countercyclical policy to stimulate the economy during the recession, forcing it to reduce discretionary (non-debt expenditure), and limiting the government's ability to spend on growth enhancing areas such as education, infrastructure, and security.
With the intensification of the impact of the global recession on the Jamaican economy, loans to the productive sector have fallen as a result of a 'wait and see' approach adopted by the business sector in light of the uncertainty of the extent of future job cuts and its impact on aggregate demand.
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