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Good economic management necessary amid twists and turns of financial markets
Dennis Morrison
Wednesday, August 15, 2007
Over the past two to three weeks global financial markets have been hit by a degree of turbulence that we have not seen since 9/11 when they were gripped by uncertainty after terrorists launched their attack on US soil. In their efforts to restore order, central bankers in the major financial centres have been intervening and have so far pumped almost US$1 trillion by way of liquidity support into financial institutions. But stock markets still seem wobbly. The trouble is there is no clear picture as to the extent of the defaults in sub-prime loans in the US real estate market that triggered the turbulence.
In the nature of the current global economic system, the effects of the disruptions in the financial markets are bound to be felt to a lesser or greater extent across the world. After all, investors are able to move money around without hindrance in the liberalised financial system that now exists. Problems in major markets are therefore easily transmitted to other areas that are integrated into the system. Jamaica is no exception to this, and the only question is how much we can protect ourselves from the expected contagion.
The best answer is for the authorities to ensure that monetary and fiscal policies are prudent and especially that they act in a fiscally responsible manner. The price of looseness in monetary policies or laxity in the management of public finances could be quite high. Jamaica has over the past 30 years paid dearly for weaknesses in both areas. In the mid-1970s when we benefited from the bauxite levy windfall, government expenditure was expanded at an unsustainable rate. This served to undermine public finances and generate a deficit in our balance of payments that led to the devaluation of the local currency.
In the first half of the 1980s, errors were also made that caused a widening of the budget deficit. Together with the fallout in bauxite earnings, these errors contributed to a worsening of the balance of payments deficit, mounting national debt, and macroeconomic instability. More recently, the budget deficit was worsened as an attempt was made to sustain programmed capital spending while responding to the need for emergency works related to flood damage in 2002. The subsequent disruptive impact on the macroeconomy is now frequently mentioned.
We ought to have learnt important lessons from these experiences. We should not be easily swayed by proposals that involve increased public expenditure that cannot be funded by immediate matching growth in non-debt revenues. The increases in spending being proposed would lead inevitably to higher levels of borrowing or drastic cuts and shutdown in vital areas with consequential layoffs. The effect of increased borrowing would be higher interest rates. This would run counter to the commitments of both political parties to reducing the budget deficit in order to get interest rates to fall to levels that would stimulate economic growth.
Higher borrowing levels over the next two to three years would push up the national debt which would be a dangerous step and contrary to the imperative of reducing Jamaica's debt burden. It would also conflict with commitments given by the political parties in this regard. The situation is even more worrying because there seems to be an underestimation of the size of some of the spending proposals that have been put forward. Given the sacrifices made to establish stability in the macroeconomic indicators, we cannot afford any wrong moves at this stage.
The focus of economic management, particularly at this point, must be on protecting the gains made to date. By restraining public expenditure and maintaining the aggressive promotion of investment, we can speed up the rate of economic growth and create jobs at a faster pace. In the period 2000-2006 approximately 194,000 new jobs were created and the rate of job creation is accelerating, judging by the enrolment in HEART/NTA and the gaps that are appearing in the labour market. As a result, new businesses in a range of activities and construction projects are having to search harder to find workers.
Both political parties have recognised the importance of further streamlining the bureaucracy, especially relating to development approvals. This area too is one that should get priority attention because of its direct implications for the stimulation of economic growth. The new investment and development manual launched yesterday is welcome and should set the stage for further improvements in the planning and approvals system.
Dennis Morrison
Wednesday, August 15, 2007
Over the past two to three weeks global financial markets have been hit by a degree of turbulence that we have not seen since 9/11 when they were gripped by uncertainty after terrorists launched their attack on US soil. In their efforts to restore order, central bankers in the major financial centres have been intervening and have so far pumped almost US$1 trillion by way of liquidity support into financial institutions. But stock markets still seem wobbly. The trouble is there is no clear picture as to the extent of the defaults in sub-prime loans in the US real estate market that triggered the turbulence.
In the nature of the current global economic system, the effects of the disruptions in the financial markets are bound to be felt to a lesser or greater extent across the world. After all, investors are able to move money around without hindrance in the liberalised financial system that now exists. Problems in major markets are therefore easily transmitted to other areas that are integrated into the system. Jamaica is no exception to this, and the only question is how much we can protect ourselves from the expected contagion.
The best answer is for the authorities to ensure that monetary and fiscal policies are prudent and especially that they act in a fiscally responsible manner. The price of looseness in monetary policies or laxity in the management of public finances could be quite high. Jamaica has over the past 30 years paid dearly for weaknesses in both areas. In the mid-1970s when we benefited from the bauxite levy windfall, government expenditure was expanded at an unsustainable rate. This served to undermine public finances and generate a deficit in our balance of payments that led to the devaluation of the local currency.
In the first half of the 1980s, errors were also made that caused a widening of the budget deficit. Together with the fallout in bauxite earnings, these errors contributed to a worsening of the balance of payments deficit, mounting national debt, and macroeconomic instability. More recently, the budget deficit was worsened as an attempt was made to sustain programmed capital spending while responding to the need for emergency works related to flood damage in 2002. The subsequent disruptive impact on the macroeconomy is now frequently mentioned.
We ought to have learnt important lessons from these experiences. We should not be easily swayed by proposals that involve increased public expenditure that cannot be funded by immediate matching growth in non-debt revenues. The increases in spending being proposed would lead inevitably to higher levels of borrowing or drastic cuts and shutdown in vital areas with consequential layoffs. The effect of increased borrowing would be higher interest rates. This would run counter to the commitments of both political parties to reducing the budget deficit in order to get interest rates to fall to levels that would stimulate economic growth.
Higher borrowing levels over the next two to three years would push up the national debt which would be a dangerous step and contrary to the imperative of reducing Jamaica's debt burden. It would also conflict with commitments given by the political parties in this regard. The situation is even more worrying because there seems to be an underestimation of the size of some of the spending proposals that have been put forward. Given the sacrifices made to establish stability in the macroeconomic indicators, we cannot afford any wrong moves at this stage.
The focus of economic management, particularly at this point, must be on protecting the gains made to date. By restraining public expenditure and maintaining the aggressive promotion of investment, we can speed up the rate of economic growth and create jobs at a faster pace. In the period 2000-2006 approximately 194,000 new jobs were created and the rate of job creation is accelerating, judging by the enrolment in HEART/NTA and the gaps that are appearing in the labour market. As a result, new businesses in a range of activities and construction projects are having to search harder to find workers.
Both political parties have recognised the importance of further streamlining the bureaucracy, especially relating to development approvals. This area too is one that should get priority attention because of its direct implications for the stimulation of economic growth. The new investment and development manual launched yesterday is welcome and should set the stage for further improvements in the planning and approvals system.