Government, & the economy

Martin Henry, Contributor

If you listen only to the naysayers who dominate economic analysis in this country, and for whom the Government and the minister of finance can do no right, you could easily believe that the Government's borrowing relationship with the International Monetary Fund (IMF) is heading for disaster.

Well, the sheriff himself was in town for the CARICOM Summit and telling a different story. 'IMF pleased', announced The Gleaner's front page last Tuesday. Speaking to journalists the day after a meeting with Minister of Finance Audley Shaw, not the setting in which the managing director of the IMF would have felt obliged to diplomatically say just the right things, Dominique Strauss-Kahn expressed his satisfaction with the progress being made by the Jamaican Government.

"While admitting that it was still early days for Jamaica to start celebrating", The Gleaner reported, Strauss-Kahn said, "the country was on the right track with its fiscal management policy."

The country passed its first quarterly test in March, and Strauss-Kahn has virtually announced the passing of the second quarterly test to June. To achieve optimum levels of growth, he said, "the first target must be the decreasing of debt and the sustainability of fiscal management".

Belt-tightening

In this regard and much to the chagrin of naysayers including the international rating agencies, the Government has already successfully pulled off the game-changing Jamaica Debt Exchange programme which has substantially pegged down the domestic debt burden, albeit not without pain. But here is the IMF chief on pain: Strauss-Kahn cautioned, The Gleaner reported, that there was no way Jamaica's problems could be solved without the implementation of austerity measures, which would inevitably cause belt-tightening among most citizens.

This is precisely the problem that liberal social analysts have with the IMF: The fund is a source of pain. The fact is conveniently overlooked that countries go to the IMF, the IMF does not go to countries, because their economies face major fiscal difficulties which cannot be resolved without multilateral loan support, and in this case at the lowest interest rates. And there is no lender without conditions. And the weaker the condition of the borrower the more stringent those conditions have to be if the loan is to be repaid.

The reasons why Jamaica has had to return to the IMF are well known and are not the special creations of this administration, however inept it may be thought to be in however many things. Jamaica has carefully avoided consistent growth over the last four decades or so. The country has been fiscally profligate. And the economy, already weakened by the recklessness and shortsightedness of its political managers, was hit hard by the global financial and economic crises.

The IMF director told journalists that Jamaicans were the innocent victims of the global economic crisis which was not over, "We are still in a dangerous world," he warned, with no place for complacency. In that "dangerous world", the European Union and the IMF itself have had to offer the most massive bailout in history to Greece, a country with a history of the sort of reckless economic profligacy which has characterised our country, and provide fiscal support to the other PIIGS of Europe - Portugal, Italy, Ireland, Greece, and Spain.

Economy doing better than expected

While there have been 10 consecutive quarters of decline up to March this year, the Statistical Institute of Jamaica is reporting that the economy fared better in first quarter 2010 than had been estimated.

Britain is to chop severance pay for laid-off workers, an Associated Press story carried by Wednesday Business in The Gleaner reported last week. Meanwhile, Germany, the economic powerhouse of Europe which provided the biggest backing for the Greece bailout, is cutting health care spending and raising premiums on state health insurance, moves which will cut into the profits of health professionals, hospitals and drug manufactures, another AP story last week said.

Against this kind of international backdrop we find the Sunday Herald's financial editor - and Keynesian scholar - Ralston Hyman gleefully shouting, "Gov't slashes spending, pile [sic] up arrears to contain debt" because of massive revenue shortfalls , in the paper last Sunday. Difficult choices, but responsible fiscal behavior by the Government in a "dangerous world" with no room for complacency, as far as I can see. Everywhere Santa Claus governments, under pressure, are coming to their senses and imposing austerity measures.

Another thing burning the naysayers is the robust revaluation of the Jamaican dollar. The well-oiled export sector, including tourism, has rolled out the propaganda machine, trumpeting the damage which will be done to their business if the dollar strengthens. They have been quick to point out that it is the inflow of IMF dollars which is driving the revaluation, not increased efficiencies or productivity, as if the economy can or ought to be able to distinguish between IMF dollars, tourism dollars, remittance dollars, or whatever.

Ups and downs

The fact is, there are ups and downs in economies and different sectors will benefit as the wheel turns. Exporters in the exporter-biased Jamaican economy, biased in public policy and rhetoric, benefit from devaluation.

But what about the rice and chicken back and mackerel import economy? A major part of the Jamaican economy is based on importation and distribution. Not to mention that most of our raw materials, with the possible exception of agricultural raw materials, are imported. Needing fewer Jamaican dollars to buy the US dollars to pay for these things is good for the import-driven side of the economy.

Before we deal with the rice, flour, chicken back and mackerel on which poor people subsist, we note a Wednesday Business story last week, 'Blue power grows profit as raw material prices retreat'. The company, which manufactures soap, is reporting that raw material inputs for soaps has dropped by up to 25 per cent. Revaluation has the same effect of bringing down prices in terms of how many Jamaican dollars are required to buy one US dollar to pay for imports.

Jamaican staple foods and energy supplies, historically, have been overwhelmingly imported. Even the locally reared chicken, a staple of diet in whole or in part, is fed on imported grain. What the anti-revaluation people mean, and the poor and their advocates had better get this very clearly, is that the price of imported basic foods should remain where they are, rather than go down, benefiting from revaluation.

And this so that exports can thrive.

The consolation argument of the exporters is, we need to export so that the imports can be afforded and we need special privileges in order to be able to do so.

The robust counter-argument by the import-dependent should be, you look after your interest and we will look after ours and a market-determined exchange rate will equilibrate. That's what the market is about.

And the Government, from the back pocket of exporters, regularly trots out the trade deficit bogeyman: We are importing more dollar value than we export. And nobody asks the wise men how such a deficit can continue forever, as it has, without national bankruptcy. The fact of the matter is that the extra imports are paid for, at least in part, from hard currency sources not accounted for in the official export accounts. Think of ganja earnings on the illegal side and remittances not flowing through the formal banking system on the legal side.

And borrowing helps. So wringing debt out of the system as the Government is now courageously seeking to do will help to undistort the economy.

Wages are devastated by devaluation but we hear nothing from the labour unions defending workers' rights in an already low-wage economy. As the value of the Jamaican dollar declines, a static wage package of Jamaican dollars can buy less and less. So, in effect, labour is called upon to subsidise the 'benefits' of devaluation.

Everybody is now talking about the role of Government and the quality of governance. One of the most important 'national security' functions of Government is protecting the stability and integrity of the currency. In this regard, governance in Jamaica has been an abject failure but some critical efforts at making amends are being made now and should be fairly acknowledged.

one of the great puzzles

Why Government owes exporters and the tourism sector special favours, while treating shabbily the rice and chicken back import-oriented economy, is one of the great puzzles - and distortions - of economic relations in this country and at some point must be critically examined and challenged.

The tourism sector and economic naysayers have been bawling loudly about an alleged economic fallout from the Tivoli operations and the extradition case which led to it. A study conducted by some graduate students I am working with on the likely fallout impact of the Tivoli Gardens incursion, albeit done on a small-scale by beginners, found no strong negative feelings about vacationing in Jamaica in the near future and even weaker knowledge of national events on the part of potential visitors despite the intensive world coverage of recent events.

And suppose there is even short-term fallout? Reducing crime is the single biggest stimulus for the overall economy that the Government could ever provide.

The tourism sector is barefacedly asking for another stimulus package, according to reports from last week's Observer Monday Exchange. Well, I want one for the importation of rice and flour. As the economic analysts have been telling us, consumption is good for stimulating bounce back in a recessionary environment. We import most of what we consume.

Martin Henry is a communications consultant. Feedback may be sent to medhen@gmail.com or columns@gleanerjm.com.