Sun | Apr 30, 2017

Why the economy can’t grow now

Published:Sunday | April 26, 2015 | 4:00 AMEdward Seaga

In recent months, there have been repeated cries for growth to be added to the International Monetary Fund (IMF) austerity agenda. The IMF agreement requires creating as much revenue as possible (taxes, etc), spending as little as possible and using the surplus to pay down the enormous debt, which is some 135 per cent, or more, of GDP.

The degree of indebtedness, one of the highest globally, is a great strain on the economy, because after payment of debt, very little remains to build infrastructure and provide services, both of which are very important to the operation of government. With little attention to roads, health care, education and the control of crime, no wonder the outcry is becoming sharper by the month. Two more years of this stringent life will leave the people shouting louder for growth to ease the suffering.

We are now approaching the end of the second of the four years of the IMF extended fund facility. That is, we are near the halfway mark. At the end of the four-year period, the country will be able to present budgets that will be more satisfying to the public if it can manage to follow the course to the end.

Those who knew what to expect are promising growth this year, 1.7 per cent increase in GDP. Unfortunately, 1.7 per cent won't ease the sorrows. It will take at least twice that to be felt in terms of better pay, infrastructure and services.

The problem is that growth requires investment funds, of which the Government has little, having pledged its surplus to reducing the huge national debt substantially. There is no second way of doing this. The debt must be reduced, and significantly so, or the country would still have to obtain excessive loans to operate in the future when the IMF resources, now keeping the economy going, have been fully used. Without a viable economy, Government will find it impossible to attract new lenders after the IMF leaves unless the debt problem is resolved; nobody will want to lend to a country that cannot manage its debt. In other words, the Jamaican economy must improve markedly over the two final years of the IMF agreement to prevent an inevitable economic regression because of the incapability of the economy to perform.

The only alternative to this is for considerable investment funding from non-governmental sources. This, of course, means the private sector. But the private sector depends for its own viability on consumer spending and that gets weaker with every austerity move by Government to bolster its own side of the economy by extracting more taxes from the consumers. It becomes a tug of war between the private and the public sectors as to which can extract how much from beleaguered consumers. This sets up a conundrum, which only a bigger economy can unravel.

The argument is back to square one then if Government has little investment finance to provide growth while the private sector, which is expected to play the role of investor, can hardly do so because Government is extracting from consumers the same funds that the private sector requires for its own growth. The consequence is almost a deadlock, as at present, it is only the little that can be squeezed from the tug of war that can add perceptible growth.

rewarding turnaround

However, should the private sector achieve the promised tourism expansion and the logistics port benefits the Jamaican economy impressively, a rewarding turnaround could materialise by year four.

A good part of the squeezing of the economy comes from the Bank of Jamaica, which adds greater pressure by its own policy of devaluation of the value of the currency, resulting in a good part of the commercial value of the economy being used to pay the higher price of imported goods and to pay for increased debt. This additional outflow reduces what is left for growth.

The talk about growth is inaccurately stated. There is growth, but from the beginning of the 1990s, that growth has been subjected to unnecessary devaluations squeezing out additional costs with the GDP getting 'what lef'. It is not true to say then that there is no growth. There is growth in GDP, but it has to be used to pay the higher price for consumer goods and debt, reducing the value of the GDP to little or nothing.

The IMF strategy of devaluation is designed to reduce the standard of living of the country to a lower level of living at which point revenue and expenditure will balance out, allowing future growth to take place.

The argument for the policy of devaluation to reduce the standard of living is both futile and fruitless. It is intended to make exports cheaper for external currencies (like the dollar) to be able to buy more Jamaican goods and services, thereby increasing the much-needed export earnings. But is this what is being accomplished?

An examination of the data for the past 24 years indicates that with the exception of three years leading up to the recession year 2008, devaluation is accompanied by increased imports expenditure and relatively little, if any, additional export earnings. The reality is the opposite of the increased earnings which devaluation is expected to accomplish.

This argument is not based on the complexities of rocket science. It is straightforward and simple. Can we now, therefore, hold the exchange rate of the Jamaican dollar steady to allow the economy to grow? The answer will be no, despite the fact that there is little left of the manufacturing sector, which is the only sector with possible increase in exportable goods, and that won't happen until the sector gets cheap funds to modernise equipment like Trinidad, and likewise cheaper power. Meanwhile, there is little or no export functioning sector to protect by devaluation.

awaiting the full story

I am awaiting the result of a study that I have commissioned to determine, among other things, how much of the GDP (growth) of Jamaica has been lost to higher costs in increased prices and debt payments between 1990 and 2014. Then the full story will be told on why the economy is not growing and whether, with devaluation as a strategy, the economy can appreciably grow in the two remaining years of stringent IMF strategy, or would have to further tough it out.

For those who want to know how I handled the same IMF programme in the 1980s, I took the bitter medicine 'up front' in two years, not four, and growth began immediately after that in year three. Make no mistake about it, this strategy was bitter, but the country came out of its downward spiral and resumed its upward path by year three.

The ability to absorb suffering and wait for blessings will determine the outcome of the Jamaican economy for the near future.

- Edward Seaga is a former prime minister of Jamaica. Email feedback to