RBSC

**Sir X** · March 1, 2013, 04:09 PM

Friday, January 18, 2013

Jamaica's policy options

THERE are two things of importance to Jamaica that occurred over the past two weeks which will have an effect on what happens to our economy going forward.
The first is the update on the state of the International Monetary Fund (IMF) negotiations provided by the Government last Monday (January 14, 2013) and the second is the report by IMF Chief Economist Olivier Blanchard, which says that the IMF's austerity policies applied in Greece were miscalculated and made the situation worse.

IMF Chief Economist Olivier Blanchard said austerity policies applied in Greece were miscalculated and made the situation worse.
These two statements are closely related, even though they relate to two different countries. This is because based on the approach the IMF seemingly wants Jamaica to take — increase in the primary surplus from 6.3 per cent to 7.5 per cent of GDP, increased taxes, and expenditure cuts — it hints at a similar austerity policy (that did not work in Greece).
My own view is that the increased primary surplus target is going to be extremely difficult to attain, and further expenditure cuts and tax increases will only pave the way for further economic contraction. This is a view I have always espoused from the start of the recession (in Jamaica) in 2009. Since then we have had massive tax packages and the targets have not been achieved, understandably so, and, even more, the economy has contracted from the levels at that time.
Further, it was obvious that these same measures that were promoted in the 2010 IMF agreement, have had a significant effect on what is happening in Jamaica today. The fact is that the targets in that agreement was very unrealistic, and even more so today continue to be so.
This is why over the last two weeks I have written about the need to think about Jamaica without an IMF agreement, and what our alternatives are.
First let me pause to say that the update provided by the Government was a step in the right direction, as any information is better than no information for markets. People can now plan whether to forge ahead with business activity, or make plans to scale them down.
It is important for us to remember that businesses don't just plan to expand. They also plan to contract. I also want people to understand that the role of the private sector, in a properly functioning market, is to make decisions in the best interest of their shareholders. Not to act like charity organisations. When the private sector stops behaving like they should then I guarantee that economic activity will become inefficient and lead to decline. Government's role is to create the environment where when they pursue their own interests it is in the best interest of the country, and people.
These points are what should guide the Government's policies going forward. That is if the IMF policies are so stringent that they are going to contract the economy significantly, then should we go ahead with it? We must remember that when economies contract, disposable incomes decline, unemployment increases and businesses fail. The cycle then starts again as a decline into the abyss. In short, we will become like an animal feeding on itself until there is nothing left.
The second consideration is that Government needs to create the environment for businesses to do well. When businesses do well they hire more people, which creates more disposable income, and so the cycle continues to improve, as long as the appropriate fiscal policies are in place.
The fiscal challenge that the government faces is significant, and therefore one can understand the need to raise new taxes, or decrease expenditure to address the crisis. The fact, however, is that decreasing expenditure and increasing taxes will only lead to further decline unless the proper fiscal policies are put in place. I believe that the right fiscal policies will start to see results in six to twelve months, but I fear the bureaucracy will prevent us it from happening. I said this in 2008, when PM Golding at the time announced the stimulus package. Things move too slow in Jamaica.
Another statement the Government made, which is also commendable, is that they will do everything to protect the most vulnerable. Let us understand, however, that the only way to sustainably protect the vulnerable is to grow the economy. It is always the holders of capital who get the benefit of money put in the economy and if they can't get enough then money becomes inactive, which hurts the vulnerable most. So, again, if we do not do the necessary things to grow the economy then the number of vulnerable will increase and the pain will come back to them quickly.
The Government is between a rock, a hard place and another hard place. In other words, they have very tough decisions to make, and if they make the wrong decisions, or those to only improve the fiscal accounts, then we will be back in this situation very soon. Remember when the IMF agreement came in 2010 it was supposed to be the one to solve our problems, as all the other agreements before that. We need to listen to Blanchard. In short, the Keynesians have won, as they have the stimulus in China, US and Brazil as examples of success.
What we must also be aware of is that because we embarked on the 2010 agreement, and when it went into abeyance we took so long to act, then our options narrowed. There will be no way to avoid fiscal difficulties, and as far as I am concerned. Whatever path we choose the fiscal challenges will be there. Government will have to make hard choices to continue to function as needed, but making the short term decision to increase taxes and reduce expenditure could make it worse.
I have my own views on what can be done to improve the fiscal accounts, bearing in mind that at this point the fiscal accounts will have short term challenges irrespective of the path chosen. So before we see an improvement, things will get worse, but the option we choose will determine how long we remain in a tough situation. This is a time for unity and to support the Government, especially as the PM has committed to continue to speak to the people.

Posted by Dennis Chung at 6:48 AM 3 comments: Email This BlogThis!Share to Twitter Share to Facebook

Monday, January 14, 2013

Why can’t we get it right?

When I look at the challenges faced in the Caribbean, I have to say that the main problem we face is one of governance, which for the life of me I can’t understand why we can’t get it right. And this I say because I think the solution is so simple.
One of the reasons why I think that we have the challenges we do is because we focus on symptoms rather than real root issues, mainly because it does not serve our political ambitions to do otherwise. Political ambition not only of the leaders, and politicians, but in many cases the followers are greater political hacks than the leadership of the political movement.
This I find very worrying, as I see many young persons who are setting out on continuing the tradition of political tribalism, in the Jamaica in particular. They espouse ideas purely based on political stance rather than rational reasoning. It is apparent that although slavery ended in 1834, they still are caught in a trap of mental slavery that incapacitates their God given ability to think.
But when I look at the Caribbean I see all sorts of problems. Other countries accuse Barbados of not welcoming some CARICOM citizens, with their “abuse” of women at the airport. In Trinidad it seems commonplace for the squabbling, because of obvious political reasons, to continue, while crime escalates there like in Jamaica. In the Turks and Caicos and Cayman we have recently seen moves by the British to charge the leaders for corruption. Not to say that it is any less rampant elsewhere, its just that they have the British to watch over them. In Haiti the masses seem to be continuously oppressed by the politicians who continue to fight for “scrap”. And here in my beloved Jamaica, we see where the police have killed more people this year than number of days, political tribalism is rampant, it takes two years to report on the over 70 lives lost in Tivoli, we have a Traffic Ticket Amnesty that was a good move but the way it was organized reduces the states credibility, a justice system that does not give quick justice, and I could go on.
In addition our economies, in the main perform poorly. With the worst performing economy now being Jamaica, as even Haiti is seeing growth. We have had several debt restructures in the Caribbean – Dominica (2004); Grenada (2005); Belize (2006 and 2012); Jamaica (2010); Antigua and Barbuda (2010); and St Kitts and Nevis (2011). This is why the rest of the world looks on at us as beggars, and a really sad lot. We borrow people’s money and then we don’t pay it back.
The other problem is that we seem to focus on the wrong solution all the time. or in fact we focus on things that will not solve the problem. The main focus is not on the debt and fiscal accounts, when in my mind this is not the main problem. So we will again apply prescriptions, such as the 2010 IMF agreement in Jamaica, that well the results show what happened. And if that doesn’t work, well just tax the people more, until the whole country is in poverty.
In 2009 when I wrote my book “Charting Jamaica’s Economic and Social Development”, I started by looking at the macroeconomic numbers since 1962, hoping to find the problem with Jamaica by analyzing the numbers. My conclusion led me to the reality that the problem with Jamaica, and by extension the Caribbean, was not to be found in the numbers but rather the constitutional political system. The UK did us a grave injustice when they left us with the Westminster system of governance.
Sure it can work in the UK, but this is because they have a much larger population of tradition and morality that we do not have. So, as I said in the book, whereby the UK has some 600 Members of Parliament (MPs), where only 120 form government, all of our majority side is usually a part of government in one way or the other.
So the UK has 480 opposition and true back benchers to oppose government. We really have an impotent opposition in Parliament as the government side will always win. So in effect, the Westminster system in small island states creates virtual dictators for 5 years, or until an election is held. What’s more people in Jamaica do not give feedback on legislation going through Parliament, so they have their way all the time.
The Caribbean Countries that have done well have been fortunate to have political leaders that have chose the right path, in spite of the political system. Sandiford in Barbados and Chambers in Trinidad. They were, however, one term Prime Ministers. Simply because the people voted them out for choosing the right path.
Which takes me back to the real problem, the citizens. We as a Caribbean people are the main reasons why our countries are the way they are. We do not demand performance but rather political decisions. We do not demand a better standard of living for all but rather a bigger contract for ourselves. We do not demand justice but turn a blind eye when the abuse does not affect us. We do not demand a more structured society but give excuses for indiscipline, saying it is a part of our culture. We do not look towards the future but rather short term benefits.
We do not use our resources for productive purposes but rather for entertainment. And I single this one out because I always hear people say, but what can I do? And we always say someone else should do it. Instead we use a very powerful tool, social media, to post our political leanings or follow the “immoral” lives of entertainers. We do not realize the power we have in our hands.
So my conclusion is that, whatever happens to us we have nothing to complain about as we are the ones who tolerate and promote it. We do not use the tool of social media, as done by other countries we strive to be like, or get a plane ticket to, for the betterment of the country and our lives. We use the media in a similar fashion.
So why can’t we get it right in the Caribbean? Look in the mirror.

Posted by Dennis Chung at 5:54 AM No comments: Email This BlogThis!Share to Twitter Share to Facebook

Friday, January 11, 2013

Avoiding economic and social decline

JAMAICA is once again at an economic crossroads. Only this time it is more critical that we take the correct path, as the wrong one today leads over a precipice.
The last time we were here was in 2009, when we chose the route of the International Monetary Fund (IMF) and the Jamaica Debt Exchange (JDX). What we failed to do, though, is make the lasting adjustments necessary to ensure that we did not arrive at such a crossroads again.

Consumerism fundamentally makes for vibrant economic activity, says Dennis Chung.
I will once again make some suggestions about what our alternatives are, to which I once again expect criticism. Just as in 2009, I remember both Ralston Hyman and I saying we needed to go to the IMF, restructure the debt, and when the IMF agreement came that it would not work. We received much criticism and comments to the effect that we didn't know what we were saying. But I will once again give my views and welcome the criticisms that may come, as the contention of ideas is what drives innovation.
The first thing to do is understand what fundamentally drives real economic growth and what kills it. Once we understand this, then it is fairly easy for us to determine which path we want to take based on the roadmap that is laid before us for either path. The approach needs to be similar to when assessing an organisation and determining the main structural issues on which success depends.
The first thing to understand is that there is fundamentally one thing that makes for vibrant economic activity, and that is consumerism. This, in turn, depends on disposable incomes and employment levels. So the higher the levels of disposable incomes, the greater will be the level of economic activity and the wealthier a society will be. This is why the focus of the US during the recent economic crisis has been on unemployment, housing and retail consumption. The better these indicators then the more businesses will invest and the greater GDP growth.
Secondly, investments are always attracted to economies that are easier to do business (bureaucracy) and have predictable rules (law and order). If these are compromised then what we will get are investments that look for quick returns and low levels of capital investments. I have discussed this in great detail before, and therefore it is the first matter of consumerism that I want to focus on.
As we analyse various paths available for us to get out of the current economic quagmire, we need to understand the effect, and associated risks, on the fundamental building block of economic growth of consumerism. This is the basic argument behind stimulus versus austerity theories. The argument for stimulus is that, if the economy totals $100 and the government accounts for $50 and the private sector $50, then in an economic recession, if the private sector production reduces to $30, and if government spending reduces to $30, it will mean that the economy will shrink to $60.
Similarly, if the Government increases taxes, in such an economy, then it will mean that the consumer (private sector) will have less money to spend, and this will reduce economic activity. The result will be less company profits, increased unemployment, lower disposable income, and consequently lower "real" fiscal revenues. Let me also add that any significant reduction in disposable incomes will result in business failures.
Therefore, as we look at the alternatives, we must understand this effect of consumerism on the economy. This means that any solution we agree on implementing, must consider that employment is increased, disposable income is protected, and productivity increased.
It is for this reason that I do not support accepting anything the IMF dishes out to us. If, for example, they demand that we implement a significant tax package, say upwards of $30 billion, and/or implement JDX2, are we willing to accept this, even though we are well aware that it more than likely will have a significant negative impact? This is why I say it is always prudent to ensure that there is an alternative to any path. In other words, while we continue to negotiate with the IMF to get the best deal for Jamaica, let us also think about alternatives. That is just plain common sense. In 2010 we accepted an IMF agreement which we said was impractical. Where are we today? Further, suppose the IMF agreement is not reality until March, does this mean we don't think of alternatives.
I am personally in support of the statement by the finance minister that he will not accept just anything thrown at us.
Secondly, we must understand that new taxes will only cause further contraction. The tax packages we have introduced since 2010 is evidence of this. Since we love to follow the US so much, just look at the reaction of the market when they thought that they were heading for the fiscal cliff, and also when they believed that the Fed was not going to provide further stimulus.
Let us assume, however, that we will be able to negotiate a great deal with the IMF. The fact is that if we do nothing else, we will find ourselves back in our current predicament in a year or less. In 2010 we had the JDX and an IMF deal. Today, we are in a worse situation. This is because we failed to take the needed actions.
What we must also understand is that the longer we take to act then the more difficult the choices will be. This is why the IMF deal has become so important. Because of this delay, even if we implement what is necessary, then there is going to be some short-term pain. What is important for us to know, however, is how long the pain will be and how quickly we can reverse it.
I agree that the IMF deal will lessen the short-term impact, but that again depends on what the terms are. The choices we face are:
* IMF terms are too strenuous, and result in both short and long-term challenges.
* We go without the IMF, and implement the correct fiscal policies, then we will have short-term difficulties and good medium to long-term prospects.
* The IMF terms are favourable, and good accompanying fiscal policies, we will have a temporary reprieve and good medium to long-term challenges.
* The IMF terms are favourable, and no fiscal policy initiatives, then we will have a temporary reprieve and a worse long-term challenge. These are the choices we face, and must seriously consider.

Posted by Dennis Chung at 5:06 AM No comments: Email This BlogThis!Share to Twitter Share to Facebook

Tuesday, January 08, 2013

Organized chaos – behind Jamaica’s governance

One of the most important requirement for a country, or business, to move forward is that those who govern must organize a structure that engenders trust and provides a framework for development. That framework must be predictable and allow citizens, or workers, to plan their own progress within the country or organization. If this framework is absent then more than likely you will be left with participants who not only thrive on chaos, but also assist in creating it.
So in a country, if indiscipline, and lack of the rule of law, is perpetuated by the state then the “structured” citizen will soon either migrate or fade into the background and allow the unethical and criminal elements to come to the fore. In the case of an organization, the worker who is good at sabotage or victimization will soon become management, as they feed off the example of the CEO.
The result will be lower levels of productivity and eventual demise of the company, or social and economic challenges in a country. Whenever you see a company, or country, with financial and social challenges it is usually because they have failed to organize themselves in a structured way to thrive. Even when a properly organized company has to close down there is usually some order to it.
Our beautiful island, Jamaica, is no different. It is this organized chaos by the state that in my view is primarily responsible for the economic and social challenges we have continued to face over the years. The state has continued to perpetrate oppressive and unfair treatment on its citizens, which if it were done by a private citizen, or company, they would at the very least face civil action. Well if done in a civilized and structured society that is. In our case one of the organized state led chaos is the lack of structure in the justice system that usually ensures justice is so significantly delayed that it results in the victim’s long suffering.
The following are examples.
The failure of the financial system in the mid 1990s was caused primarily from the policies pursued by the government, and then the improper distribution of the assets, by the government agency FINSAC, exacerbated the problem. This in no way excuses the poor management of banks and businesses, as playing a significant part in the collapse, but even so it was poor management of the regulatory system by government authorities that allowed banks and businesses to flout with what was to become death for many. This is similar to the 2008 crisis in the US.
[And let me make a very controversial statement and not comment any further in this post. Even though I disagree with the policy at the time I believe that today Omar Davies would make a good finance minister. This explanation is for another time.]
In the last administration it was the state that was responsible for the disruption and fear that arose out of the Tivoli “invasion” and all the matters surrounding it. It was the way it was handled that caused so much lost productivity and loss of lives, in my view. Not to mention the reputation crisis Jamaica faced at the time.
It was also because of how governments have managed the economy over the years that has resulted in our flirtatious relationship with the IMF, and also resulted in exchange rate depreciation, relatively high interest rates, and the need to restructure the debt. These have resulted in many lost investments and losses to current investments, and to the decimation of the manufacturing sector that was so vibrant in the 60s to 80s.
It is the lack of inaction, and bureaucratic process, of the state that has resulted in us having such a high energy cost to grapple with and the the relatively high levels of poverty that we see in the country.
It is because of our politics why we have seen the existence of garrisons, which have resulted in the victimization of many, the abuse of children, and the decay of many of our communities and real estate resources, which result in higher costs of living for areas that have not been yet affected by “ghettoization” but which Jamaica, as a whole is in danger of becoming. We only have to look at the way that the state has allowed chaos to rule in communities through allowing noise (Noise Abatement Act in my view promotes noise) and commercialization in residential communities. So once thriving residential communities have descended into a pit of confusion.
[Let me once again pause to say that I welcome to moves on zoning announced recently but hope it is not just an announcement. It is long overdue and could significantly improve investment values']
It is the state that has supported over the years the wanton abuse of citizens by the police. Again though there are moves by the commissioner and the setup of INDECOM by the last administration to address these issues and they have been working. Also the DPP has in my view acted professionally in aiding the process. But we must ensure that these arms of the law are not inhibited and given the needed resources. The emergency powers that the police had for many years, since the 70s, and the crime bills that were introduced a few years ago, however, were in my view further oppression on the people. I am therefore happy to see the work of the various law agencies today, as I believe that there is a greater sensitization about the rights of the people.
The final one I want to look at is the embarrassing way in which the Traffic Ticket Amnesty was handled. Only in Jamaica, and some other backward country, could the state perpetrate such an oppressive situation on the citizens. The burden of proof was shifted from the accuser to the accused and this was done with a system that even the accuser admitted was not in good condition (the database). And after inconveniencing the citizens for weeks, and losing productive hours way in excess of the $340 million collected, then seek to remedy the situation. I agree 100 percent that those with outstanding tickets must face the full force of the law but the state has a responsibility to ensure that the system of proof, or evidence, is first flawless. It sounds like when the police round up a whole community of men and arrest them to find one person. In fact I am appalled that one man could accumulate over 1,000 tickets and still be allowed to even sit in a motor vehicle. Again it was the organized, or disorganized, state system that has allowed this to happen.
And more disappointing to me is that they got my favourite, and one of the most hard working policemen, caught up in this. SSP Lewis.
This as far as I am concerned is nothing but organized chaos, and a primary reason for our economic and social challenges. It is only when we change from state organized chaos to proper structures based on equity and fairness will we start to see a shift in economic and social behaviour for the better.

Posted by Dennis Chung at 5:03 AM 23 comments: Email This BlogThis!Share to Twitter Share to Facebook

Older Posts Home

**Bricktop** · March 1, 2013, 04:10 PM

Why whenever they talk about solar they show the solar panels? That is the cheapest part of the system

**Sir X** · March 2, 2013, 07:22 PM

In 2009 when I wrote my book “Charting Jamaica’s Economic and Social Development”, I started by looking at the macroeconomic numbers since 1962, hoping to find the problem with Jamaica by analyzing the numbers. My conclusion led me to the reality that the problem with Jamaica, and by extension the Caribbean, was not to be found in the numbers but rather the constitutional political system. The UK did us a grave injustice when they left us with the Westminster system of governance.

**Sir X** · March 2, 2013, 07:25 PM

It is for this reason that I do not support accepting anything the IMF dishes out to us. If, for example, they demand that we implement a significant tax package, say upwards of $30 billion, and/or implement JDX2, are we willing to accept this, even though we are well aware that it more than likely will have a significant negative impact? This is why I say it is always prudent to ensure that there is an alternative to any path. In other words, while we continue to negotiate with the IMF to get the best deal for Jamaica, let us also think about alternatives. That is just plain common sense. In 2010 we accepted an IMF agreement which we said was impractical. Where are we today? Further, suppose the IMF agreement is not reality until March, does this mean we don't think of alternatives.
I am personally in support of the statement by the finance minister that he will not accept just anything thrown at us.
Secondly, we must understand that new taxes will only cause further contraction. The tax packages we have introduced since 2010 is evidence of this. Since we love to follow the US so much, just look at the reaction of the market when they thought that they were heading for the fiscal cliff, and also when they believed that the Fed was not going to provide further stimulus.
Let us assume, however, that we will be able to negotiate a great deal with the IMF. The fact is that if we do nothing else, we will find ourselves back in our current predicament in a year or less. In 2010 we had the JDX and an IMF deal. Today, we are in a worse situation. This is because we failed to take the needed actions.
What we must also understand is that the longer we take to act then the more difficult the choices will be. This is why the IMF deal has become so important. Because of this delay, even if we implement what is necessary, then there is going to be some short-term pain. What is important for us to know, however, is how long the pain will be and how quickly we can reverse it.
I agree that the IMF deal will lessen the short-term impact, but that again depends on what the terms are. The choices we face are:

**Sir X** · March 2, 2013, 07:28 PM

This as far as I am concerned is nothing but organized chaos, and a primary reason for our economic and social challenges. It is only when we change from state organized chaos to proper structures based on equity and fairness will we start to see a shift in economic and social behaviour for the better.

**Willi** · March 2, 2013, 07:50 PM

The simple things...renewable domestically sourced energy, rain water connection, basic water heating using black rubber tubes/ black plastic barrels and Jamaican sunshine.

Step up would be concentrating the solar energy into collectors with magnifying glass and sourcing the battery ingredients from the red mud lakes.

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