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There's a hole in the bucket
Published: Sunday | March 3, 2013
Claude Clarke
Finance Minister Peter Phillips
1 2 >
Claude Clarke, Contributor
It may be that some things are just too simple for brilliant minds to grasp. How else can one see inconsistency between a position that a country should live within its means and a view that a programme that will have the effect of shrinking the economy should be combined with measures to increase our means? And only those blessed with the sharpest mental acuity could reduce the vast range of economic options that may be employed by a government to the confines of binary thinking.Thankfully, the Jamaican Govern-ment of the late 1980s was not so gifted. Edward Seaga was not prepared to limit his economic options to either fiscal discipline or stimulus but crafted instead an economic policy framework that combined fiscal compression and economic stimulus that resulted in a period of growth that averaged more than five per cent per annum in the five years beginning in 1987. Seaga may have had more bargaining room than is available to the present administration, but the IMF was then a much more doctrinaire and far less flexible organisation than it is today.
IMF'S POWER
The IMF is vested with enormous power to influence the decisions of multilateral, bilateral and private lenders. But it is not so intoxicated with its own power as to stultify its own ability or that of international creditors to get paid. It understands, as does any bank, that a financially growing customer is a far more reliable debt servicer than one that is shrinking. And if presented with a choice between a programme that encourages growth while enforcing fiscal responsibility, and one without growth, will invariably opt for the one that assures growth.
The Simpson Miller administration has been engaged in talks with the IMF for more than a year and has had ample opportunity to present a proposal with the essential ingredients of a growth strategy combined with fiscal discipline. If the Government presented a programme of increased spending labelled as economic stimulus, the IMF would correctly have rejected it, because what is required to stimulate the economy is not additional government spending but sensible reforms to our taxation, monetry and trade policies that can foster economic competitiveness.
I have always believed and have said that Jamaica's best option is a relationship with the IMF. In fact I have stated in several articles that Jamaica's economic performance might have been far less dismal had we not chosen in 1995 to say bye-bye to the fiscal responsibility required by the Fund.
This is the essential value of an IMF Programme: to keep a government that tends toward dysfunction and indiscipline, as Jamaica's has demonstrated it is, in check. The IMF is less useful as an architect of economic development. The initiative for that must be taken by Government.
The recent experience of the world's two largest economic blocs, the United States and the Eurozone, has put empirical weight behind the view that the IMF's main strategy, austerity, is a less effective strategy for reversing economic decline than economic stimulus, the preferred approach of Keynesians. The Eurozone is now on the cusp of a triple-dip recession, dragged down by the austerity it adopted in the wake of the international financial crisis. The US administration, which despite strong political opposition employed expansionary strategies, even while it struggled to correct its fiscal imbalance. Unlike the Eurozone, it succeeded in coming out of its deep recession which in 2009 had shrunk the economy by 2.6 per cent.
no economic growth
The weakness in the Jamaican Government's recent IMF package is that while it removes an average of 7.5 per cent from the country's economic output, it will do nothing to create economic growth to at least partially offset the resulting contraction.
There is a presumption that Jamaica's economic problems can be solved solely by balancing the Government's books. But the imbalance in the private economy is no less responsible for the failure of the economy to perform. This does not absolve the Government of blame: quite the contrary. The private economy's sluggishness is the result of the macroeconomic conditions created by government policy that leads to the creation of demand that bears no relationship to the country's productive output. This is the gaping hole in the country's economic bucket that hampers our capacity to produce and export.
The Jamaican economy is severely misshaped, with a structure that favours consumption, particularly of imports, over production and exports. This is a structure that cannot achieve or sustain economic growth. Government, therefore, has as much of a duty to correct this economic malformation as it does to meet its obligations to the IMF. These two responsibilities are not mutually exclusive. But the outcome of negotiations with the Fund would suggest the Government did not carry a sufficiently strong development brief.
For example, the Government could use a comprehensive incomes policy as was employed by Jamaica in the late 1980s and by Barbados, under Erskine Sandiford, to compress internal production costs. These strategies had the effect of putting a brake on the growth of upper-end incomes and taking pressure off the demand for imports. Jamaica's trade deficit declined to under US$700 million by 1991. But the distortion of the economy since then saw the deficit rise to more than US$6 billion by 2008.
Again, the Government could employ one of the most effective tools at its disposal for reshaping the economy, tax reform. Nowhere is there a tax measure to incentivise investments in production and discourage consumption of imports. The White Paper on Tax Reform does very little more than focus on increasing tax revenue.
Also, China's spectacular success in practising a competitive currency strategy has obviously made no impression on the Government. The Chinese never left their currency to simply depreciate in an unstructured way as has been happening in Jamaica for more than 20 years. The management of the renminbi had the specific purpose of keeping Chinese productive output internationally competitive. It did so not simply through a competitive exchange rate but with compatible policies that contained money supply and inflation.
I have expressed the view that trade treaties that are not beneficial to us must, at the very least, be put on hold to allow what's left of our productive engine a chance to restart, and grow production and jobs.
None of these strategies is inconsistent with a programme of financial discipline that would allow the Government to honour its obligations to the IMF.
achieving the best result
However, for some, economic management must be black or white, although both experience and logic have shown that a judicious mix of several shades of grey achieves the best results. Austerity is not an objective in and of itself. Had the Government's programme included strategies for improving competitiveness and incentivising investments in production, it could have opened economic opportunity for ordinary Jamaicans, even while they bear the burden of austerity.
The new and expanded economic activity created would act as a counterweight to Government's extraction from the economy to satisfy debt servicing. The economic burden of debt servicing would be progressively lightened. And there might then be justification for imposing the pain of austerity on the Jamaican people.
Reannouncing large and sometimes uncertain government projects as growth measures is a false and deceptive promise. Infrastructure development is important and large projects are helpful; but they are not what make an economy grow. Highway 2000, the Port Antonio Marina, the Trelawny Multi-purpose Stadium, the Falmouth Cruise Ship Pier and the Montego Bay Convention Centre, among others, have all been built while the economy was declining and could well be defined as economic elixirs that failed to improve the patient's condition.
What drives the growth of an economy is the ferment of small, medium and large private productive efforts stimulated by a competitive economic environment.
Gov't error
The Government's error is to believe that bringing its books into balance is the solution to our economic dilemma. But the gaping hole in our economic bucket created by policies that encourage demand beyond our productive output must be plugged. No amount of IMF assistance will change that.
Government was not elected to do the IMF's bidding. It has a duty to ensure the economic health of the Jamaican people. The belief that we are impotent to satisfy the Fund's goal of fiscal compression and debt servicing, as well as the country's need for development, is not supported by either evidence or logic.
Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.
Published: Sunday | March 3, 2013
Claude Clarke
Finance Minister Peter Phillips
1 2 >
Claude Clarke, Contributor
It may be that some things are just too simple for brilliant minds to grasp. How else can one see inconsistency between a position that a country should live within its means and a view that a programme that will have the effect of shrinking the economy should be combined with measures to increase our means? And only those blessed with the sharpest mental acuity could reduce the vast range of economic options that may be employed by a government to the confines of binary thinking.Thankfully, the Jamaican Govern-ment of the late 1980s was not so gifted. Edward Seaga was not prepared to limit his economic options to either fiscal discipline or stimulus but crafted instead an economic policy framework that combined fiscal compression and economic stimulus that resulted in a period of growth that averaged more than five per cent per annum in the five years beginning in 1987. Seaga may have had more bargaining room than is available to the present administration, but the IMF was then a much more doctrinaire and far less flexible organisation than it is today.
IMF'S POWER
The IMF is vested with enormous power to influence the decisions of multilateral, bilateral and private lenders. But it is not so intoxicated with its own power as to stultify its own ability or that of international creditors to get paid. It understands, as does any bank, that a financially growing customer is a far more reliable debt servicer than one that is shrinking. And if presented with a choice between a programme that encourages growth while enforcing fiscal responsibility, and one without growth, will invariably opt for the one that assures growth.
The Simpson Miller administration has been engaged in talks with the IMF for more than a year and has had ample opportunity to present a proposal with the essential ingredients of a growth strategy combined with fiscal discipline. If the Government presented a programme of increased spending labelled as economic stimulus, the IMF would correctly have rejected it, because what is required to stimulate the economy is not additional government spending but sensible reforms to our taxation, monetry and trade policies that can foster economic competitiveness.
I have always believed and have said that Jamaica's best option is a relationship with the IMF. In fact I have stated in several articles that Jamaica's economic performance might have been far less dismal had we not chosen in 1995 to say bye-bye to the fiscal responsibility required by the Fund.
This is the essential value of an IMF Programme: to keep a government that tends toward dysfunction and indiscipline, as Jamaica's has demonstrated it is, in check. The IMF is less useful as an architect of economic development. The initiative for that must be taken by Government.
The recent experience of the world's two largest economic blocs, the United States and the Eurozone, has put empirical weight behind the view that the IMF's main strategy, austerity, is a less effective strategy for reversing economic decline than economic stimulus, the preferred approach of Keynesians. The Eurozone is now on the cusp of a triple-dip recession, dragged down by the austerity it adopted in the wake of the international financial crisis. The US administration, which despite strong political opposition employed expansionary strategies, even while it struggled to correct its fiscal imbalance. Unlike the Eurozone, it succeeded in coming out of its deep recession which in 2009 had shrunk the economy by 2.6 per cent.
no economic growth
The weakness in the Jamaican Government's recent IMF package is that while it removes an average of 7.5 per cent from the country's economic output, it will do nothing to create economic growth to at least partially offset the resulting contraction.
There is a presumption that Jamaica's economic problems can be solved solely by balancing the Government's books. But the imbalance in the private economy is no less responsible for the failure of the economy to perform. This does not absolve the Government of blame: quite the contrary. The private economy's sluggishness is the result of the macroeconomic conditions created by government policy that leads to the creation of demand that bears no relationship to the country's productive output. This is the gaping hole in the country's economic bucket that hampers our capacity to produce and export.
The Jamaican economy is severely misshaped, with a structure that favours consumption, particularly of imports, over production and exports. This is a structure that cannot achieve or sustain economic growth. Government, therefore, has as much of a duty to correct this economic malformation as it does to meet its obligations to the IMF. These two responsibilities are not mutually exclusive. But the outcome of negotiations with the Fund would suggest the Government did not carry a sufficiently strong development brief.
For example, the Government could use a comprehensive incomes policy as was employed by Jamaica in the late 1980s and by Barbados, under Erskine Sandiford, to compress internal production costs. These strategies had the effect of putting a brake on the growth of upper-end incomes and taking pressure off the demand for imports. Jamaica's trade deficit declined to under US$700 million by 1991. But the distortion of the economy since then saw the deficit rise to more than US$6 billion by 2008.
Again, the Government could employ one of the most effective tools at its disposal for reshaping the economy, tax reform. Nowhere is there a tax measure to incentivise investments in production and discourage consumption of imports. The White Paper on Tax Reform does very little more than focus on increasing tax revenue.
Also, China's spectacular success in practising a competitive currency strategy has obviously made no impression on the Government. The Chinese never left their currency to simply depreciate in an unstructured way as has been happening in Jamaica for more than 20 years. The management of the renminbi had the specific purpose of keeping Chinese productive output internationally competitive. It did so not simply through a competitive exchange rate but with compatible policies that contained money supply and inflation.
I have expressed the view that trade treaties that are not beneficial to us must, at the very least, be put on hold to allow what's left of our productive engine a chance to restart, and grow production and jobs.
None of these strategies is inconsistent with a programme of financial discipline that would allow the Government to honour its obligations to the IMF.
achieving the best result
However, for some, economic management must be black or white, although both experience and logic have shown that a judicious mix of several shades of grey achieves the best results. Austerity is not an objective in and of itself. Had the Government's programme included strategies for improving competitiveness and incentivising investments in production, it could have opened economic opportunity for ordinary Jamaicans, even while they bear the burden of austerity.
The new and expanded economic activity created would act as a counterweight to Government's extraction from the economy to satisfy debt servicing. The economic burden of debt servicing would be progressively lightened. And there might then be justification for imposing the pain of austerity on the Jamaican people.
Reannouncing large and sometimes uncertain government projects as growth measures is a false and deceptive promise. Infrastructure development is important and large projects are helpful; but they are not what make an economy grow. Highway 2000, the Port Antonio Marina, the Trelawny Multi-purpose Stadium, the Falmouth Cruise Ship Pier and the Montego Bay Convention Centre, among others, have all been built while the economy was declining and could well be defined as economic elixirs that failed to improve the patient's condition.
What drives the growth of an economy is the ferment of small, medium and large private productive efforts stimulated by a competitive economic environment.
Gov't error
The Government's error is to believe that bringing its books into balance is the solution to our economic dilemma. But the gaping hole in our economic bucket created by policies that encourage demand beyond our productive output must be plugged. No amount of IMF assistance will change that.
Government was not elected to do the IMF's bidding. It has a duty to ensure the economic health of the Jamaican people. The belief that we are impotent to satisfy the Fund's goal of fiscal compression and debt servicing, as well as the country's need for development, is not supported by either evidence or logic.
Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.
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