Claude Clarke, Gleaner Contributor
Last Monday night, the Government rolled out its most effective communication asset: a combination of Portia’s popular appeal and Peter’s business rapport. It was impressive – that is until it ended with an obviously contrived, gratuitous and highly inappropriate embrace that might have diminished the seriousness of the occasion.
Notwithstanding, together the two most senior members of the Government delivered a well-crafted appeal for public support of a mission to lead the country to economic viability. The delivery was polished and articulate, but the message was much less than credible, framed entirely, as it was, in the context of paying down the national debt. This, the prime minister and her minister of finance argued, would unlock the door to economic prosperity. How I wish that that were true.
The Government’s position is that our economic problems would be solved by reducing our debt-to-GDP ratio, from 140 per cent where it currently stands, to 95 per cent in seven years. To achieve this, it will appropriate resources from the national economy with a combination of expenditure cuts, new taxes (including an unprecedented raid on the NHT) and a second domestic debt-exchange programme.
These measures may very well improve government’s fiscal accounts and satisfy the targets set by the IMF. But nothing that has so far been announced will provide the means to stem the country’s continuous economic decline.
Encourage economic activities
To reverse the economy’s downward slide, Government needs to do much more than balance its books. It will need to change the structure of the economy by encouraging the growth of productive economic activities and creating opportunity for the people to uplift their economic well-being.
However, in its apparent anxiety to improve the appearance of its accounts and impress the IMF, the Government gave no indication that it had a plan to expand the economy. Nor did it exhibit any understanding of how the debt was created or the importance of addressing the economic dysfunction that caused it.
Our gargantuan debt didn’t start simply with overspending by Government. In fact, government’s Budget deficit is much more a symptom than a cause of our rising debt. Our debt is a product of a macroeconomic policy framework that encourages the growth of incomes beyond the value of the country’s productive output. These inflated incomes create ‘unfunded demand’, which could only be financed by debt.
Most destructive is the fact that escalating incomes increase costs within the economy, leaving our production stubbornly uncompetitive against foreign goods and services. Accordingly, Jamaican consumer demand has been directed away from Jamaican goods and services and towards goods and services from abroad.
Much of the foreign exchange used to support this consumption can be seen in the country’s large foreign-exchange debt and the rapid decline of our net international reserves. Our import of goods and services during the last 10 years has exceeded our exports by almost US$25 billion (more than J$2.3 trillion). And it is principally government debt that has financed this deficit.
We will never put our economy on a sustainable path to recovery until Government confronts the truth that the country, through its economic policies that consistently inflate incomes, has been living an economic lie.
However, the measures announced on Monday night ignored this macroeconomic defect and focused on strategies that could end up harming, and not helping, the economy. The presentation was entirely silent on how the economy will grow. Together, the measures, including the previously announced expenditure cuts and the subsequently revealed tax hike, will contract the economy and severely curtail economic activity. Debt reduction is to be achieved through austerity rather than economic growth and is more likely to cause pain than gain.
Contracting the economy without a reformed tax code that provides investment incentives will be harmful. The economy will also be hurt if policies to enhance competitiveness are not provided. The failure to adopt trade policies that will give Jamaican producers fair access to the local, regional and extraregional markets will also have the same negative effect. And the absence of a comprehensive solution to our energy dilemma will continue to be a millstone on the economy.
It is unfortunate that the one thing common to all the measures announced is economic contraction. Increasing taxation and extracting resources from the country’s principal source of financing for housing development will reduce economic activity.
A domestic debt exchange may reduce the cost of Government but it will also be an added cost to the private economy, because unlike with foreign debt, the interest saved by Government will be taken from the Jamaican economy, causing it to contract.
Reducing the government’s wage bill is a fiscal imperative and will benefit the country’s economic competitiveness. But it, too, will be economically contractionary in the short run.
It is for these reasons that I am surprised the Government could have presented a package of measures to fix the economy that will only sap its vitality and not give it renewed life through increased production and exports. The treatment the Government has prescribed to heal the economy might very well become the medicine that kills it.
Reducing the debt-to-GDP ratio from 140 per cent to 95 per cent over seven years without economic growth could mean that $78 billion, or 6.4 per cent of our total economic output, will be extracted from the commercial life of the country each year. Does the Government or the IMF believe that that is a workable plan? Or are they prepared to take the economy over the cliff into deep depression in the expectation that, in the end, we will rise from the ashes?
As I have said in previous articles, the basic elements required to put the economy on the path to recovery and growth are clear and indisputable. We need to:
- Reduce the outsize cost burden Government imposes on the economy, without compromising the services necessary to preserve social and economic order.
- Reform the tax code to generate revenue adequate to pay for a smaller government and to service our debt. However, the size of the primary surplus used for debt servicing should not be so big as to jeopardise the country’s social and economic health.
- Develop monetary and fiscal policies to bring competitiveness to costs within the economy.
- Provide a programme of fiscal incentives and stimuli, along clear and transparent policy lines, to attract domestic and international investments to productive activities.
- Adopt trade policies to create competitive room in the domestic, regional and extraregional markets for Jamaica’s producers, who have been handicapped by harmful government economic policies.
- End the 40-year-long jawboning of the subject of energy and institute a practical energy policy that reduces our extraordinarily wasteful consumption of energy and brings electricity prices below 15 cents per kilowatt-hour.
With which of these vital imperatives can the Government or IMF disagree? None, you might think. But the instinct of political self-preservation in our political decision makers is likely to have been the fly in the ointment preventing agreement on a development-focused plan and robbing the country of its opportunity to begin the process of turning our economy around.
The IMF could not be so foolish as to believe that weakening the country’s economy is in the interest of the creditors it represents. It is, therefore, difficult to understand why – if the Government understood what is required for economic recovery and is really serious about achieving it – it has not crafted a recovery plan that the IMF would be unable to refuse.
Live within our means
Economic order, symmetry and growth will never be ours until the practice of living beyond our means is brought to an end, and an income policy designed to align consumption with production is in place.
Today, the new IMF requires its client governments to own their programme. It is able to do this because it is the Government itself, and not the Fund, that determines the programme it will use to meet the benchmarks set to assure the Fund that the Government will be able to meet its debt-servicing obligations. The Government gets to choose the approach it will take, as long as it is credible. Whether it uses monetary, fiscal, trade or administrative tools to deliver the results is its choice.
The decision to rely on austerity instead of economic stimulation or a judicious mix of both was the Government’s, not the IMF’s. Its choice of pure austerity while trumpeting concern for the poor is not only a betrayal of the trust of the poor but a sad reflection on its lack of preparation for the mandate it received 13 short months ago.
The plan we chose to meet our obligations should not be limited to our relationship with the Fund but must look to the future of the Jamaican people beyond the IMF.
Claude Clarke is a businessman and former ministry of industry. Email feedback to email@example.com and firstname.lastname@example.org.