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Friday, August 16, 2013
Understanding economic transformation
“Everybody want to go to heaven, but nobody want to die”. These words were sung by Peter Tosh in “Equals Rights. In other words, how can we expect to go to heaven if we are still living?
This is no different from the many expectations of people who expect (i) improved finances, but do not want to sacrifice consumption; (ii) good health and nice body, but still eat poorly and do no exercise; or (iii) economic transformation but do not want to make the sacrifices necessary.
It is necessary for us to understand that transformation takes discipline, sacrifice, and a commitment to direction. In other words if we want to see the necessary transformation in any aspect of our lives then it is going to require changing the things we are used to and discipline to stay the course.
When we see, for example, the performance of our athletes, we fail to understand the sacrifice and hard work that goes into preparing for that one race. Or, put another way, that one event we see. Being someone myself who does endurance exercise, I know the discipline it takes to train, and eat the proper foods, even though you feel like throwing in the towel many times.
On the contrary, one can also work hard and make sacrifices, and never achieve the transformation you want, simply because the preparation is not done properly or you are heading in the wrong direction. So, for example, (i) it does not matter how fast you drive, if you are heading in the direction of St. Thomas, you will not get to Montego Bay; or (ii) overworking your muscles can lead to disastrous results instead of the desired strength you desire.
What these examples show is that transformation requires, first understanding what your goals are; secondly, identifying the most efficient path to get there; thirdly, getting rid of the obstacles to that path; fourthly, committing to the transformation; and then finally implementing the transformation plan.
My last couple articles have focused on what is needed for economic growth and development, which essentially is to first understand that growth can only come from the private sector, and if the environment does not facilitate private sector expansion, then capital will simply move to more efficient returns. This includes moving out of Jamaica, or investing in short term activities.
So if we truly want economic and social transformation in Jamaica, we need to first accept that transformation requires that changes will happen. This I think is one of the problems we have faced with our past economic programmes, and why we have not been able to benefit in any sustainable way from the sacrifices we have been called on to make repeatedly.
What we have always sought to do is tinker with economic activity, while maintaining the same political and social behaviour that many of us are invested in. Over the decades we have given lip service to economic and social transformation, but we have never truly done what is necessary to cement that transformation.
We have said that the private sector must lead the growth in the country, but we have never truly created an environment for the private sector to flourish, as we have never really reduced the negative effects of bureaucracy, deal with energy, or addressed law and order. So the private sector continues to be expected to perform in an environment that is not as competitive as many of our trading partners.
We have said that we want to transform the public sector, to be more efficient, but political expedience has not allowed this to happen. And we have also failed to understand that what we really need is not a reduction in the public sector, but rather an increase in efficiency of the public sector, whatever that entails. Even if we were to reduce the public sector, within the context of onerous rules and reward based on seniority, rather than performance, we would have the same inefficient system with less people.
We have said that what we really need to transform the society is greater innovation, but have failed to address the challenges facing the education system to ensure that we produce more literate persons who can create the needed innovation. So we have many youth who continue to sit on the corners, or we continue to set up some persons for success, and others for failure through the GSAT exams.
We have said that we are serious about improving tourism, but fail to address the infrastructural issues, the degradation of our beaches, and the harassment and indiscipline on the roads.
And this is why I have always said that irrespective of whatever economic and social policies we have in place, that unless we, in a very significant way, address the structural issues of energy, bureaucracy, tax reform, and law and order, we will not see the sustainable development we need. In other words, how can you build a house properly without ensuring that there is a solid foundation in place? Remember the man who built his house in the sand.
So if we truly want economic and social transformation, we must understand what is required. We must also understand that given the structural weaknesses in the Jamaican economic and social environment, that transformation means that if we do not plan properly to make the needed changes then it is going to cause some social dislocation. For example, a more efficient economy means that those who do not have the ability to innovate, or be more productive, will fall by the way side and government is going to find itself having to play a greater welfare role.
Development is always going to cause dislocations, but this can be minimized by understanding where the weaknesses are and start putting in place mitigating policies to minimize the dislocation.
In other words, if we want to go to heaven, we must first die. However, at the same time we must do what is necessary to ensure we get to heaven, when we die, instead of somewhere else.
Posted by Dennis Chung at 11:44 AM No comments:
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Friday, August 02, 2013
Productivity remains Jamaica's main problem
ON Wednesday I attended the presentation of a report by Professor Vanus James that examined the foreign exchange policy, and what is most appropriate. The study was initiated by Edward Seaga, and is a very good piece of work that seeks to bring some conclusion to the recent dialogue about which exchange rate regime is best for Jamaica.
The study concluded that the best regime is a managed floating rate, which is an argument that was put forward by myself and others, in the face of the opposing argument for a pegged, or fixed, regime. Mr Seaga and his team must be commended for this work, which is what we should expect to come from academic institutions, he being also the Chancellor of the University of Technology.
SEAGA... his team must be commended for their work, which is what we should expect to come from academic institutions
It is important for us to understand why a managed floating rate is best for Jamaica, as opposed to, say ,an unmanaged floating rate. The fact is that the exchange rate is very significant in Jamaica, where approximately 70 per cent of our consumption is imported, and we have always had a significant balance of payments (BOP) deficit. Left unmanaged, the exchange rate would depreciate at a much faster rate, resulting in significant hardships for the consumer and businesses, as long as our BOP deficit remains a challenge.
For those who say that the exchange rate should be left to find its true level, the fact is that the true level approaches infinity, if left unmanaged, as a result of our continuing BOP deficits. Therefore, it is necessary for us to manage our exchange rate, as long as we are unable to resolve our BOP problem. This means that the NIR and monetary policy will continue to be critical tools, and why we cannot fix the exchange rate. The result of doing so would be social challenges.
It follows, therefore, that if we are to resolve our long- term exchange rate problem, thereby causing a rise in income levels, relative to cost of living, then we must address the problem of the BOP. Resolution of the BOP issue means earning more foreign exchange than we spend, or at the very least, enough to cover our expenditure.
Some say to do so, what we need to do is live within our means, and what should be done is to reduce our imports to the level of what our foreign exchange earnings can support. This is a very simplistic argument that is based more on theory than practical application. In other words, if you need to spend $100 just to survive, and you earn $50, then it is practical to say that you can reduce your spend to bring your expenditure in line, if doing so means you are not able to survive.
Similarly, Jamaica's imports are 35 per cent fuel and 10 per cent food. And both are greater than our exports. So reducing our imports to match our exports will lead to food shortages, resulting in higher prices, and also reduced production, as there will be electricity and/or transport disruptions.
It would logically seem then that what we must do is increase our earnings. That is, reverse our BOP deficit. But in order for us to do so, we need to first understand what causes us to import more than we export, which at the base of it, I submit, is the inability to compete globally on a sufficient scale. There are some companies, like Grace Kennedy and Jamaica Producers, that have been making great strides internationally, but the problem is that many smaller companies are unable to make the transition.
This is caused, in my estimation, by our low productivity levels, which have continued to decline since the 1970s. And if we cannot improve productivity, then it is always going to be cheaper to import, and consume than produce locally and export, or consume.
Again the question is what makes it more rewarding for companies to import, or produce locally, for local consumption. In other words, why the preference to use imported content, or sell locally, rather than export.
Again, others argue that the policy should be to make it difficult for companies to survive by just selling locally, through exchange rate depreciation, reducing local income and forcing companies to export. The problem with that argument is that if you reduce local income without addressing the productivity issues, then all that will happen is that companies will close down, as we would not have addressed the productivity issue, and they will be unable to compete internationally and, therefore, have to close their doors as they will be unable to expand.
This shows that the underlying problem we face is one of productivity, and not that people necessarily want to consume imports. But what choice is there? Are we saying that while players in other economies act rationally, and their choice is based on returns, our private sector and consumers should act irrationally and buy local inputs. even though they are more expensive? While this is a short-term fix; it is not sustainable, and is a primary reason why our economy has struggled.
Therefore, if we want to solve our foreign exchange, inflation, cost of living, NIR, BOP, and other issues, then we must focus on solving our productivity issues. And to solve our productivity issues, we must focus on what makes business uncompetitive.
Thus, the emphasis on energy cost, bureaucracy, tax reform, and law and order.
Posted by Dennis Chung at 4:45 AM No comments: Email ThisBlogThis!Share to TwitterShare to Facebook
Friday, July 26, 2013
Why private sector led growth is central to development
LAST week I wrote about what the pillars of growth are. Today I want to answer a question, often asked in a roundabout way, by persons who say that the private sector has not done what is necessary to grow the economy, so why should they be accommodated with a more business-friendly environment. This is a question asked often by persons who I don't think truly understand how markets work.
It is very important to understand, as I have often said, that sustainable growth cannot, and will not, happen without private sector prosperity. This concept is sometimes elusive in the Jamaican society, where it is often felt that the "big" man just wants to exploit the "small" man and so must be doing something unethical or illegal to make his money.
There were similar sentiments against the banks in the US, after the 2008 financial crisis, but this emotion soon gave way to the practical knowledge that the poor cannot improve their lot without the growth of the "greedy" private sector. The problem we have is that this feeling is not only restricted to the so-called small man but is oftentimes perpetuated by some politicians and intellectuals in their quest to explain why market economies are bad, and instead proffer state intervention and more brimstone and fire on the rich through taxation.
Ironically, these same persons who find it convenient to put down the "capitalists" are usually very persistent in seeking charitable contributions from them, or support in some other financial matter. In fact, much of the charitable spending that happens in the society is not from government, but rather from private companies and individuals.
But why do I say that private sector-led growth is critical to sustainable economic growth?
We can answer this question by first understanding what drives economic growth. Economic growth is measured by the growth in the Gross Domestic Product (GDP), which is simply the increase in real productive value from period to period, that is adjusted for inflation. GDP growth involves private sector production and spending, as well as government spending. So one may say that government spending is a part of GDP, and therefore, why is the private sector necessary? And it is for this reason that government can play a role in stimulating economic growth, such as during a recession, as they also contribute to GDP.
The problem is that government spending is not sustainable with a stagnant, or struggling private sector. And this has been the experience in Jamaica, and we have seen a similar example in the US model coming out of the recession, as opposed to the European approach, which did not emphasise market growth. The reason why government spending is not sustainable without private sector growth is that government spending depends significantly on private sector income, through taxes. So the income taxes, customs duties, corporate tax, and consumption tax depends on activity in the private sector. Therefore, if the private sector is stagnant, or declining, then it is logical that there can be no increase in government spending.
Thus, in the final analysis, GDP growth at every level depends on private sector activity. Therefore, the logical conclusion is that if we want to see robust growth in the economy, then we need to have robust private sector growth.
It would seem logical, then, that fiscal and monetary policy should have as its primary goal, the facilitation of growth in the private sector. Put another way, which Obama and Bernanke understands very well: the role of government policy must not only be full employment, but also high- value employment through constant innovation. On the contrary in Europe, and particularly Greece, the focus of policy was not on private sector facilitation but rather, fiscal consolidation. The result of both scenarios is there for all to see.
This is important for us to understand, not just in Jamaica, but also the Caribbean. This is because the Caribbean has a tendency towards a government dependency syndrome. Add to that the culture of a lack of embracing of private sector success, and you have a compounded negative effect.
The market economy may not be a perfect system, but the truth is that it's the best. If we want to improve the quality of life for everyone, including the most vulnerable in society, then it is essential that private sector growth be robust.
So as we continue the implementation of the IMF agreement and structural policies, we need to continue to bear in mind that at the heart of it must be the facilitation of a business environment that encourages private and corporate prosperity. So, as an example, the concepts companies of lower tax rates for PAYE and companies, lower energy rates, more efficient government bureaucracy, and improved law, order, and justice system are all critical to supporting that private sector growth.
Our focus of policy must be on encouraging investment and spending through competitive return on investments or feeling secure about one's future. Our focus must be on businesses and individuals feeling safe, and respected by the justice system. It is this focus that will make Jamaica experience robust growth and become the place to live, work, and raise families.
Posted by Dennis Chung at 7:22 AM No comments: Email ThisBlogThis!Share to TwitterShare to Facebook
Friday, July 19, 2013
Identifying Jamaica's growth pillars
MY last article looked at how we can increase competitiveness in the tourism industry, which is critical for Jamaica because tourism is our highest foreign exchange earner, and the area in which we have always had the greatest comparative advantage. The same challenges that affect tourism can be seen right across the social and economic landscape, and are the main inhibitors of growth.
The IMF agreement has been heralded as one of the last chances we have of saving ourselves from economic disaster, and whether so or not, it certainly is a significant effort to bring fundamental changes to the economy. In itself the implementation of the agreement is going to be disruptive to the economy and society, as we know it, simply because there is so much fundamentally wrong with our economic and social arrangements. Any change we try to make for the better will of necessity be disruptive.
What we must ensure is that
(1) the disruption is carried out with consultation. So that even if some persons do not agree with some things, they will at least understand. Failure to do so could end up with an outcome that nobody wants to own or participate in.
(2) the disruption must not be too radical, or else we could replace inefficient earnings with nothing in its place. This includes ensuring that when certain adjustments are done, that prior to those being done, something new, and more efficient, is put in place to substitute.
(3) the outcome must be measured, and be one that will bring greater benefit. One challenge we have had as a country is that there have been too many disruptions implemented without the desired outcome, for many reasons, but nonetheless ending up not adding any value.
One thing that we must figure out is: What are the pillars of growth? It is important for us to understand this, as failure to do so will only cause the economic plight of the country to deepen.
The first thing we must realise is that sustainable growth can only come from the private sector. While Government can stimulate economic growth, it cannot be sustained. If we do not understand this, and act in a manner that encourages private sector growth, then we will not achieve sustainable economic growth.
Secondly, it is impossible to maintain low debt/GDP, low interest rates, stable exchange rates, and a current account deficit. In the short run, we may be able to use monetary and fiscal policy to achieve all these at once, but this is not sustainable. What it does is lead to black markets, as we saw with the exchange rate in the 80s and 90s. Irrespective of what type of political system and ideology is in place, markets will react, either through the formal or informal system, which is one reason why Jamaica has such a large informal sector.
Finally, the business environment must be one that encourages businesses, and individuals, to prosper. One of the reasons that the US economy has done so well, and is easy to rebound from economic crises, is precisely because people and businesses have the opportunity to flourish to their potential within the formal environment. If this environment is not present then (1) an informal economy, and society, will develop and (2) capital and human resources will not fully participate in the economy, and may even go to another economy, through migration and business relocation.
It is very important for us to understand these underlying pillars of growth as we move forward under this IMF agreement. In the past I have found that there has been too much preoccupation with focusing on the fiscal solutions, not understanding that everything that happens on the fiscal side depends directly on what happens in the market economy. Because, if the market economy does not grow, then fiscal revenues and the balance of payments will suffer. And if fiscal revenues suffer, then the debt/GDP and foreign exchange rate will suffer. What this will do is create a vicious circle that puts the economy into a downward vortex.
In an attempt to salvage the fiscal downturn, what will happen is that Government will administer more taxes, or more debt, which will again lead to a further downturn.
The only way to break this cycle is to create an environment in which businesses will flourish, and this may also mean providing incentives for foreign exchange earners, in particular. This in turn will increase GDP, and improve the balance of payments, leading to greater earnings for businesses, which will then increase employment, causing greater spending, greater profits, and greater fiscal revenues. This is the only sustainable model. Anything outside of this will be temporary, and will only mean that macroeconomic stability will only be temporary, and can only be artificially held.
The IMF agreement and economic programme does include initiatives that can create this winning equation. These include comprehensive tax reform, insolvency legislation, financial sector legislation, labour market and public sector reform, and financial support for businesses. And these are very good initiatives, but we must be careful to ensure that the initiatives are implemented with reference to what I described above as the pillars of growth.
Therefore, as we move forward in the IMF programme, it is very important for us to understand that the main risk lies in not building on these growth pillars, as failure to do so will certainly result in short-term gain and long-term failure.
Read more: http://www.jamaicaobserver.com/busin...#ixzz2ZUfWmJPB
Posted by Dennis Chung at 7:23 AM No comments: Email ThisBlogThis!Share to TwitterShare to Facebook
Saturday, June 29, 2013
Increasing Jamaica's tourism competitiveness
EACH time I am away, I can't help but do a comparison between the country I visit and Jamaica. In particular, I always look at the main industry of the country and contrast it against Jamaica, if it is an industry that Jamaica competes in also.
Over the past few days, a delegation from Jamaica participated in a Caribbean Growth Forum, which was put on by the IDB in conjunction with partners such as the World Bank. The forum's focus was to look at what can be done to enhance the economic growth potential of the Caribbean region. The forum was opened by the Prime Minister of Bahamas, and included significant participation from government ministers from Trinidad, Bahamas, Barbados, and other islands, and included the governor of the Eastern Caribbean Central Bank, president of the IDB, and other senior financial players within the region and even as far as Canada. Of note, Jamaica did not have any government participation, with the exception of Colin Bullock from the Planning Institute of Jamaica.
Tourists sunbathe along a beach in Nassau, Bahamas. (PHOTO: AP)
The discussions which happened offline, resulted in financing opportunities for small and medium-sized companies, in particular, that everyone was keen to be a part of.
I will discuss this, and some other elements of the forum, in later articles, as I want now to make a comparison between tourism in Nassau against Jamaica. Nassau, with a population of only 180,000, and which has to import water, and is much more expensive than Jamaica, has much larger hotels and is humming with tourist activity. The type of activity seen is a distant memory of what I remember used to happen in Jamaica.
The irony of this is that as far as I am concerned the overall hotel experience in Jamaica is ahead of that where I stayed in Nassau. Especially if it is compared with Sandals (which I think is the best hotel experience in Jamaica) but even when compared to the other hotels such as RIU and Sunset Resorts.
The advantages Jamaica have include service levels (our people are more natural when it comes to delivering service) and the operations management at the Jamaican hotels (especially Sandals) is way ahead of the Bahamas experience. The people in Bahamas are very nice, but the service side is not as natural as it is in Jamaica. This is compounded by the poor operations management of the hotel. I don't think the physical infrastructure experience of the Bahamas hotel is superior than the Jamaica experience, but the food in Jamaica is much better.
The number of attractions in Jamaica is also much more, and as far as I am concerned much more attractive. One unique thing about Jamaica also is that we have a very unique culture, and our music and sports, are far more appealing than most other tourist destinations in the world, including Bahamas.
Why then does Nassau seem to have so much tourist activity going on, and certainly more than what you would see at a Jamaican hotel. It certainly is not that our local players are not competitive and creative, because as far as I am concerned, our local tourist players have done wonders, given the lack of environmental support for the tourism product.
The main problem is that tourism service delivery is primarily within the hotel, and is not supported well by the country. It is not that people do not realise the value of tourism to Jamaica, but outside of the players in the industry, the country still has not realised what true tourism delivery is.
So we continuously seek to reduce our competitive edge in tourism, in various ways. And these are the advantages that somewhere like Bahamas has over us, and why the average spend from their tourist is higher than ours.
These include better infrastructure, such as roads, and the fact that everywhere in the Bahamas is clean. In Jamaica when you drive outside of the property you are confronted with a filthy environment, tourist harassment, touts on the beaches, high taxes (in Bahamas there is no income or consumption taxes), and general indiscipline on the roads. In addition to these challenges, we also have allowed our beaches to be degraded because of our poor environmental management, unlike the Bahamas where the beaches are pristine.
This is why an all-inclusive room sells for US$250 double occupancy in Jamaica, while a similar room in Bahamas or Miami sells for US$300 or more just for the bed. If you need internet access, meals, or entertainment you pay additional. In other words we are quickly eroding our comparative advantage in tourism because of poor management.
What we must understand is that a country's comparative advantage is not static and changes based on what other countries are doing, so we need to constantly innovate and properly manage our existing comparative advantage. And it is important that, while we still have a comparative advantage in tourism, we take care of it.
It is necessary for us to ensure that not only the hip strip in Montego Bay looks good, but it must extend to downtown Montego Bay. We must enforce litter laws and ensure that proprietors maintain a certain standard in terms of how their properties look. We must ensure that there is discipline on the roads and must not have so many peddlars in the streets. Tourists, and residents, must also feel safe to walk on the road at any time during the night.
It is these things that matter for tourism, and irrespective of how much more you can offer, if you cannot offer a peaceful and restful vacation then you will not be competitive. Having to lock away tourists is not a vacation. It is an adventure, and that is not what people want to do on their vacations. This is why in Bahamas another vibrant activity you see are the number of buses carrying people on tours. And we have much more to show but do not have that sort of activity.
So if we are really serious about tourism, then we must act on the things that matter and ensure that our time is not preoccupied with matters not related to development.
Understanding economic transformation
“Everybody want to go to heaven, but nobody want to die”. These words were sung by Peter Tosh in “Equals Rights. In other words, how can we expect to go to heaven if we are still living?
This is no different from the many expectations of people who expect (i) improved finances, but do not want to sacrifice consumption; (ii) good health and nice body, but still eat poorly and do no exercise; or (iii) economic transformation but do not want to make the sacrifices necessary.
It is necessary for us to understand that transformation takes discipline, sacrifice, and a commitment to direction. In other words if we want to see the necessary transformation in any aspect of our lives then it is going to require changing the things we are used to and discipline to stay the course.
When we see, for example, the performance of our athletes, we fail to understand the sacrifice and hard work that goes into preparing for that one race. Or, put another way, that one event we see. Being someone myself who does endurance exercise, I know the discipline it takes to train, and eat the proper foods, even though you feel like throwing in the towel many times.
On the contrary, one can also work hard and make sacrifices, and never achieve the transformation you want, simply because the preparation is not done properly or you are heading in the wrong direction. So, for example, (i) it does not matter how fast you drive, if you are heading in the direction of St. Thomas, you will not get to Montego Bay; or (ii) overworking your muscles can lead to disastrous results instead of the desired strength you desire.
What these examples show is that transformation requires, first understanding what your goals are; secondly, identifying the most efficient path to get there; thirdly, getting rid of the obstacles to that path; fourthly, committing to the transformation; and then finally implementing the transformation plan.
My last couple articles have focused on what is needed for economic growth and development, which essentially is to first understand that growth can only come from the private sector, and if the environment does not facilitate private sector expansion, then capital will simply move to more efficient returns. This includes moving out of Jamaica, or investing in short term activities.
So if we truly want economic and social transformation in Jamaica, we need to first accept that transformation requires that changes will happen. This I think is one of the problems we have faced with our past economic programmes, and why we have not been able to benefit in any sustainable way from the sacrifices we have been called on to make repeatedly.
What we have always sought to do is tinker with economic activity, while maintaining the same political and social behaviour that many of us are invested in. Over the decades we have given lip service to economic and social transformation, but we have never truly done what is necessary to cement that transformation.
We have said that the private sector must lead the growth in the country, but we have never truly created an environment for the private sector to flourish, as we have never really reduced the negative effects of bureaucracy, deal with energy, or addressed law and order. So the private sector continues to be expected to perform in an environment that is not as competitive as many of our trading partners.
We have said that we want to transform the public sector, to be more efficient, but political expedience has not allowed this to happen. And we have also failed to understand that what we really need is not a reduction in the public sector, but rather an increase in efficiency of the public sector, whatever that entails. Even if we were to reduce the public sector, within the context of onerous rules and reward based on seniority, rather than performance, we would have the same inefficient system with less people.
We have said that what we really need to transform the society is greater innovation, but have failed to address the challenges facing the education system to ensure that we produce more literate persons who can create the needed innovation. So we have many youth who continue to sit on the corners, or we continue to set up some persons for success, and others for failure through the GSAT exams.
We have said that we are serious about improving tourism, but fail to address the infrastructural issues, the degradation of our beaches, and the harassment and indiscipline on the roads.
And this is why I have always said that irrespective of whatever economic and social policies we have in place, that unless we, in a very significant way, address the structural issues of energy, bureaucracy, tax reform, and law and order, we will not see the sustainable development we need. In other words, how can you build a house properly without ensuring that there is a solid foundation in place? Remember the man who built his house in the sand.
So if we truly want economic and social transformation, we must understand what is required. We must also understand that given the structural weaknesses in the Jamaican economic and social environment, that transformation means that if we do not plan properly to make the needed changes then it is going to cause some social dislocation. For example, a more efficient economy means that those who do not have the ability to innovate, or be more productive, will fall by the way side and government is going to find itself having to play a greater welfare role.
Development is always going to cause dislocations, but this can be minimized by understanding where the weaknesses are and start putting in place mitigating policies to minimize the dislocation.
In other words, if we want to go to heaven, we must first die. However, at the same time we must do what is necessary to ensure we get to heaven, when we die, instead of somewhere else.
Posted by Dennis Chung at 11:44 AM No comments:
Email ThisBlogThis!Share to TwitterShare to FacebookFriday, August 02, 2013
Productivity remains Jamaica's main problem
ON Wednesday I attended the presentation of a report by Professor Vanus James that examined the foreign exchange policy, and what is most appropriate. The study was initiated by Edward Seaga, and is a very good piece of work that seeks to bring some conclusion to the recent dialogue about which exchange rate regime is best for Jamaica.
The study concluded that the best regime is a managed floating rate, which is an argument that was put forward by myself and others, in the face of the opposing argument for a pegged, or fixed, regime. Mr Seaga and his team must be commended for this work, which is what we should expect to come from academic institutions, he being also the Chancellor of the University of Technology.
SEAGA... his team must be commended for their work, which is what we should expect to come from academic institutions
It is important for us to understand why a managed floating rate is best for Jamaica, as opposed to, say ,an unmanaged floating rate. The fact is that the exchange rate is very significant in Jamaica, where approximately 70 per cent of our consumption is imported, and we have always had a significant balance of payments (BOP) deficit. Left unmanaged, the exchange rate would depreciate at a much faster rate, resulting in significant hardships for the consumer and businesses, as long as our BOP deficit remains a challenge.
For those who say that the exchange rate should be left to find its true level, the fact is that the true level approaches infinity, if left unmanaged, as a result of our continuing BOP deficits. Therefore, it is necessary for us to manage our exchange rate, as long as we are unable to resolve our BOP problem. This means that the NIR and monetary policy will continue to be critical tools, and why we cannot fix the exchange rate. The result of doing so would be social challenges.
It follows, therefore, that if we are to resolve our long- term exchange rate problem, thereby causing a rise in income levels, relative to cost of living, then we must address the problem of the BOP. Resolution of the BOP issue means earning more foreign exchange than we spend, or at the very least, enough to cover our expenditure.
Some say to do so, what we need to do is live within our means, and what should be done is to reduce our imports to the level of what our foreign exchange earnings can support. This is a very simplistic argument that is based more on theory than practical application. In other words, if you need to spend $100 just to survive, and you earn $50, then it is practical to say that you can reduce your spend to bring your expenditure in line, if doing so means you are not able to survive.
Similarly, Jamaica's imports are 35 per cent fuel and 10 per cent food. And both are greater than our exports. So reducing our imports to match our exports will lead to food shortages, resulting in higher prices, and also reduced production, as there will be electricity and/or transport disruptions.
It would logically seem then that what we must do is increase our earnings. That is, reverse our BOP deficit. But in order for us to do so, we need to first understand what causes us to import more than we export, which at the base of it, I submit, is the inability to compete globally on a sufficient scale. There are some companies, like Grace Kennedy and Jamaica Producers, that have been making great strides internationally, but the problem is that many smaller companies are unable to make the transition.
This is caused, in my estimation, by our low productivity levels, which have continued to decline since the 1970s. And if we cannot improve productivity, then it is always going to be cheaper to import, and consume than produce locally and export, or consume.
Again the question is what makes it more rewarding for companies to import, or produce locally, for local consumption. In other words, why the preference to use imported content, or sell locally, rather than export.
Again, others argue that the policy should be to make it difficult for companies to survive by just selling locally, through exchange rate depreciation, reducing local income and forcing companies to export. The problem with that argument is that if you reduce local income without addressing the productivity issues, then all that will happen is that companies will close down, as we would not have addressed the productivity issue, and they will be unable to compete internationally and, therefore, have to close their doors as they will be unable to expand.
This shows that the underlying problem we face is one of productivity, and not that people necessarily want to consume imports. But what choice is there? Are we saying that while players in other economies act rationally, and their choice is based on returns, our private sector and consumers should act irrationally and buy local inputs. even though they are more expensive? While this is a short-term fix; it is not sustainable, and is a primary reason why our economy has struggled.
Therefore, if we want to solve our foreign exchange, inflation, cost of living, NIR, BOP, and other issues, then we must focus on solving our productivity issues. And to solve our productivity issues, we must focus on what makes business uncompetitive.
Thus, the emphasis on energy cost, bureaucracy, tax reform, and law and order.
Posted by Dennis Chung at 4:45 AM No comments:
Email ThisBlogThis!Share to TwitterShare to FacebookFriday, July 26, 2013
Why private sector led growth is central to development
LAST week I wrote about what the pillars of growth are. Today I want to answer a question, often asked in a roundabout way, by persons who say that the private sector has not done what is necessary to grow the economy, so why should they be accommodated with a more business-friendly environment. This is a question asked often by persons who I don't think truly understand how markets work.
It is very important to understand, as I have often said, that sustainable growth cannot, and will not, happen without private sector prosperity. This concept is sometimes elusive in the Jamaican society, where it is often felt that the "big" man just wants to exploit the "small" man and so must be doing something unethical or illegal to make his money.
There were similar sentiments against the banks in the US, after the 2008 financial crisis, but this emotion soon gave way to the practical knowledge that the poor cannot improve their lot without the growth of the "greedy" private sector. The problem we have is that this feeling is not only restricted to the so-called small man but is oftentimes perpetuated by some politicians and intellectuals in their quest to explain why market economies are bad, and instead proffer state intervention and more brimstone and fire on the rich through taxation.
Ironically, these same persons who find it convenient to put down the "capitalists" are usually very persistent in seeking charitable contributions from them, or support in some other financial matter. In fact, much of the charitable spending that happens in the society is not from government, but rather from private companies and individuals.
But why do I say that private sector-led growth is critical to sustainable economic growth?
We can answer this question by first understanding what drives economic growth. Economic growth is measured by the growth in the Gross Domestic Product (GDP), which is simply the increase in real productive value from period to period, that is adjusted for inflation. GDP growth involves private sector production and spending, as well as government spending. So one may say that government spending is a part of GDP, and therefore, why is the private sector necessary? And it is for this reason that government can play a role in stimulating economic growth, such as during a recession, as they also contribute to GDP.
The problem is that government spending is not sustainable with a stagnant, or struggling private sector. And this has been the experience in Jamaica, and we have seen a similar example in the US model coming out of the recession, as opposed to the European approach, which did not emphasise market growth. The reason why government spending is not sustainable without private sector growth is that government spending depends significantly on private sector income, through taxes. So the income taxes, customs duties, corporate tax, and consumption tax depends on activity in the private sector. Therefore, if the private sector is stagnant, or declining, then it is logical that there can be no increase in government spending.
Thus, in the final analysis, GDP growth at every level depends on private sector activity. Therefore, the logical conclusion is that if we want to see robust growth in the economy, then we need to have robust private sector growth.
It would seem logical, then, that fiscal and monetary policy should have as its primary goal, the facilitation of growth in the private sector. Put another way, which Obama and Bernanke understands very well: the role of government policy must not only be full employment, but also high- value employment through constant innovation. On the contrary in Europe, and particularly Greece, the focus of policy was not on private sector facilitation but rather, fiscal consolidation. The result of both scenarios is there for all to see.
This is important for us to understand, not just in Jamaica, but also the Caribbean. This is because the Caribbean has a tendency towards a government dependency syndrome. Add to that the culture of a lack of embracing of private sector success, and you have a compounded negative effect.
The market economy may not be a perfect system, but the truth is that it's the best. If we want to improve the quality of life for everyone, including the most vulnerable in society, then it is essential that private sector growth be robust.
So as we continue the implementation of the IMF agreement and structural policies, we need to continue to bear in mind that at the heart of it must be the facilitation of a business environment that encourages private and corporate prosperity. So, as an example, the concepts companies of lower tax rates for PAYE and companies, lower energy rates, more efficient government bureaucracy, and improved law, order, and justice system are all critical to supporting that private sector growth.
Our focus of policy must be on encouraging investment and spending through competitive return on investments or feeling secure about one's future. Our focus must be on businesses and individuals feeling safe, and respected by the justice system. It is this focus that will make Jamaica experience robust growth and become the place to live, work, and raise families.
Posted by Dennis Chung at 7:22 AM No comments:
Email ThisBlogThis!Share to TwitterShare to FacebookFriday, July 19, 2013
Identifying Jamaica's growth pillars
MY last article looked at how we can increase competitiveness in the tourism industry, which is critical for Jamaica because tourism is our highest foreign exchange earner, and the area in which we have always had the greatest comparative advantage. The same challenges that affect tourism can be seen right across the social and economic landscape, and are the main inhibitors of growth.
The IMF agreement has been heralded as one of the last chances we have of saving ourselves from economic disaster, and whether so or not, it certainly is a significant effort to bring fundamental changes to the economy. In itself the implementation of the agreement is going to be disruptive to the economy and society, as we know it, simply because there is so much fundamentally wrong with our economic and social arrangements. Any change we try to make for the better will of necessity be disruptive.
What we must ensure is that
(1) the disruption is carried out with consultation. So that even if some persons do not agree with some things, they will at least understand. Failure to do so could end up with an outcome that nobody wants to own or participate in.
(2) the disruption must not be too radical, or else we could replace inefficient earnings with nothing in its place. This includes ensuring that when certain adjustments are done, that prior to those being done, something new, and more efficient, is put in place to substitute.
(3) the outcome must be measured, and be one that will bring greater benefit. One challenge we have had as a country is that there have been too many disruptions implemented without the desired outcome, for many reasons, but nonetheless ending up not adding any value.
One thing that we must figure out is: What are the pillars of growth? It is important for us to understand this, as failure to do so will only cause the economic plight of the country to deepen.
The first thing we must realise is that sustainable growth can only come from the private sector. While Government can stimulate economic growth, it cannot be sustained. If we do not understand this, and act in a manner that encourages private sector growth, then we will not achieve sustainable economic growth.
Secondly, it is impossible to maintain low debt/GDP, low interest rates, stable exchange rates, and a current account deficit. In the short run, we may be able to use monetary and fiscal policy to achieve all these at once, but this is not sustainable. What it does is lead to black markets, as we saw with the exchange rate in the 80s and 90s. Irrespective of what type of political system and ideology is in place, markets will react, either through the formal or informal system, which is one reason why Jamaica has such a large informal sector.
Finally, the business environment must be one that encourages businesses, and individuals, to prosper. One of the reasons that the US economy has done so well, and is easy to rebound from economic crises, is precisely because people and businesses have the opportunity to flourish to their potential within the formal environment. If this environment is not present then (1) an informal economy, and society, will develop and (2) capital and human resources will not fully participate in the economy, and may even go to another economy, through migration and business relocation.
It is very important for us to understand these underlying pillars of growth as we move forward under this IMF agreement. In the past I have found that there has been too much preoccupation with focusing on the fiscal solutions, not understanding that everything that happens on the fiscal side depends directly on what happens in the market economy. Because, if the market economy does not grow, then fiscal revenues and the balance of payments will suffer. And if fiscal revenues suffer, then the debt/GDP and foreign exchange rate will suffer. What this will do is create a vicious circle that puts the economy into a downward vortex.
In an attempt to salvage the fiscal downturn, what will happen is that Government will administer more taxes, or more debt, which will again lead to a further downturn.
The only way to break this cycle is to create an environment in which businesses will flourish, and this may also mean providing incentives for foreign exchange earners, in particular. This in turn will increase GDP, and improve the balance of payments, leading to greater earnings for businesses, which will then increase employment, causing greater spending, greater profits, and greater fiscal revenues. This is the only sustainable model. Anything outside of this will be temporary, and will only mean that macroeconomic stability will only be temporary, and can only be artificially held.
The IMF agreement and economic programme does include initiatives that can create this winning equation. These include comprehensive tax reform, insolvency legislation, financial sector legislation, labour market and public sector reform, and financial support for businesses. And these are very good initiatives, but we must be careful to ensure that the initiatives are implemented with reference to what I described above as the pillars of growth.
Therefore, as we move forward in the IMF programme, it is very important for us to understand that the main risk lies in not building on these growth pillars, as failure to do so will certainly result in short-term gain and long-term failure.
Read more: http://www.jamaicaobserver.com/busin...#ixzz2ZUfWmJPB
Posted by Dennis Chung at 7:23 AM No comments:
Email ThisBlogThis!Share to TwitterShare to FacebookSaturday, June 29, 2013
Increasing Jamaica's tourism competitiveness
EACH time I am away, I can't help but do a comparison between the country I visit and Jamaica. In particular, I always look at the main industry of the country and contrast it against Jamaica, if it is an industry that Jamaica competes in also.
Over the past few days, a delegation from Jamaica participated in a Caribbean Growth Forum, which was put on by the IDB in conjunction with partners such as the World Bank. The forum's focus was to look at what can be done to enhance the economic growth potential of the Caribbean region. The forum was opened by the Prime Minister of Bahamas, and included significant participation from government ministers from Trinidad, Bahamas, Barbados, and other islands, and included the governor of the Eastern Caribbean Central Bank, president of the IDB, and other senior financial players within the region and even as far as Canada. Of note, Jamaica did not have any government participation, with the exception of Colin Bullock from the Planning Institute of Jamaica.
Tourists sunbathe along a beach in Nassau, Bahamas. (PHOTO: AP)
The discussions which happened offline, resulted in financing opportunities for small and medium-sized companies, in particular, that everyone was keen to be a part of.
I will discuss this, and some other elements of the forum, in later articles, as I want now to make a comparison between tourism in Nassau against Jamaica. Nassau, with a population of only 180,000, and which has to import water, and is much more expensive than Jamaica, has much larger hotels and is humming with tourist activity. The type of activity seen is a distant memory of what I remember used to happen in Jamaica.
The irony of this is that as far as I am concerned the overall hotel experience in Jamaica is ahead of that where I stayed in Nassau. Especially if it is compared with Sandals (which I think is the best hotel experience in Jamaica) but even when compared to the other hotels such as RIU and Sunset Resorts.
The advantages Jamaica have include service levels (our people are more natural when it comes to delivering service) and the operations management at the Jamaican hotels (especially Sandals) is way ahead of the Bahamas experience. The people in Bahamas are very nice, but the service side is not as natural as it is in Jamaica. This is compounded by the poor operations management of the hotel. I don't think the physical infrastructure experience of the Bahamas hotel is superior than the Jamaica experience, but the food in Jamaica is much better.
The number of attractions in Jamaica is also much more, and as far as I am concerned much more attractive. One unique thing about Jamaica also is that we have a very unique culture, and our music and sports, are far more appealing than most other tourist destinations in the world, including Bahamas.
Why then does Nassau seem to have so much tourist activity going on, and certainly more than what you would see at a Jamaican hotel. It certainly is not that our local players are not competitive and creative, because as far as I am concerned, our local tourist players have done wonders, given the lack of environmental support for the tourism product.
The main problem is that tourism service delivery is primarily within the hotel, and is not supported well by the country. It is not that people do not realise the value of tourism to Jamaica, but outside of the players in the industry, the country still has not realised what true tourism delivery is.
So we continuously seek to reduce our competitive edge in tourism, in various ways. And these are the advantages that somewhere like Bahamas has over us, and why the average spend from their tourist is higher than ours.
These include better infrastructure, such as roads, and the fact that everywhere in the Bahamas is clean. In Jamaica when you drive outside of the property you are confronted with a filthy environment, tourist harassment, touts on the beaches, high taxes (in Bahamas there is no income or consumption taxes), and general indiscipline on the roads. In addition to these challenges, we also have allowed our beaches to be degraded because of our poor environmental management, unlike the Bahamas where the beaches are pristine.
This is why an all-inclusive room sells for US$250 double occupancy in Jamaica, while a similar room in Bahamas or Miami sells for US$300 or more just for the bed. If you need internet access, meals, or entertainment you pay additional. In other words we are quickly eroding our comparative advantage in tourism because of poor management.
What we must understand is that a country's comparative advantage is not static and changes based on what other countries are doing, so we need to constantly innovate and properly manage our existing comparative advantage. And it is important that, while we still have a comparative advantage in tourism, we take care of it.
It is necessary for us to ensure that not only the hip strip in Montego Bay looks good, but it must extend to downtown Montego Bay. We must enforce litter laws and ensure that proprietors maintain a certain standard in terms of how their properties look. We must ensure that there is discipline on the roads and must not have so many peddlars in the streets. Tourists, and residents, must also feel safe to walk on the road at any time during the night.
It is these things that matter for tourism, and irrespective of how much more you can offer, if you cannot offer a peaceful and restful vacation then you will not be competitive. Having to lock away tourists is not a vacation. It is an adventure, and that is not what people want to do on their vacations. This is why in Bahamas another vibrant activity you see are the number of buses carrying people on tours. And we have much more to show but do not have that sort of activity.
So if we are really serious about tourism, then we must act on the things that matter and ensure that our time is not preoccupied with matters not related to development.