Decline, stabilisation or growth
Robert Buddan, Contributor
Portia Simpson Miller had clearly anticipated the prime minister's Budget presentation the week before he gave it and attacked the thesis that the Jamaican economy had stabilised and that policies were right for growth.
Golding's Budget presentation sought to build on Finance Minister Audley Shaw's speech, titled 'From Stability to Growth'. The title itself confirmed that the Government's undeclared strategy was really to proceed on two alternative fronts - stability and growth. However, on closer inspection, these two fronts are not necessarily mutually compatible. The Government-written Throne Speech spoke of a strategy of stabilising the economy. But the prime minister spoke of growing the economy.
The truth is that the International Monetary Fund ((IMF) thinks we have to stabilise the economy before growth will be possible. The Government's strategy is to go for growth now. It feels that there has been enough stabilisation and that the economy needs a growth stimulus. Bear in mind, too, that we are entering an election cycle, Golding's leadership is under serious pressure, and the private sector is impatient for business. Domestic circumstances are pressuring for growth.
IMF-GOJ strategy to stabilise the economy is not designed for immediate growth. So, the Government had established a second front with the Planning Institute of Jamaica (PIOJ) and its private-sector partners to design what they call a Growth-Inducement Strategy (GIS).
In its stabilisation strategy, the IMF pursues demand management. If wages and salaries are kept low and demand for goods and services is, therefore, contained, prices will be depressed and inflation will come down. This will make the value of the currency more stable and the business environment more predictable. Interest rates will come down and money will be cheaper to borrow. Investments will take off.
A growth strategy, in contrast, depends on stimulus policies. Growth depends on expanding demand. Jobs and earnings strengthen spending power, and they buy goods and services which stimulate business growth. When people can afford housing, for example, this stimulates demand in the construction and other sectors. It triggers demand for concrete, board, nails, paint, tiles, electrical wires, water supply, roadways to new schemes, and so on. This, therefore, helps the economy in many ways.
Economics of Demand
Simpson Miller believes that people's social and economic situations had been declining, not stabilising, and this did not give much hope that past and current policies would allow them to have the spending power to spur demand and stimulate growth. The growth-inducement document actually confirms this.
It projected poverty to reach 20 per cent in 2010. The more poor people you have, the less they can buy. The GOJ-IMF tax package of December 2009 would, the document said, "contribute to a decline in purchasing power". The Jamaica Debt Exchange (JDX) of 2010 would reduce income from interest, thereby "reducing purchasing power". Uncertainty over job cuts in the private and public sector caused people to save more and spend less, thus depressing economic activity. The loss of 100,000 jobs between 2008 and 2010 undermined purchasing power.
Note what is being said. The tax packages, JDX and public-sector rationalisation plans which the Government, IMF and private sector had championed or defended were now deemed to be bad for demand and for increased economic activity. The private sector had, it seemed to me, encouraged the Government to engage with the IMF; the Government had allowed the debt to get out of control, reaching $1.5 trillion before it finally did engage, thinking that the recession would have little impact; and the IMF has pursued its usual demand-management policies to depress, rather than stimulate, the economy. They all must take responsibility.
The GOJ-PIOJ-private sector GIS document concluded that if Government cut wages and salaries to a targeted level now, "Approximately 22,400 persons would transition into the ranks of the unemployed. This would lead to i) a further reduction in purchasing power; ii) reduction in demand for goods and services, thus leading to a further contraction in output; and iii) a decline in the short-term economic outlook. These negative effects, in the current economic climate, may lead to a slowing of the recovery or a double-dip recession."
The PIOJ recommended delaying the implementation of job cutting in the public sector. Instead, it wanted implementation of specific growth-inducement projects to generate employment and spur demand, thereby building consumer and business confidence.
It was this thinking that caused Golding to hold off on public-sector layoffs last Tuesday. But Golding's Budget presentation strangely omitted any reference to the GIS plan. It omitted any reference to the pillars on which that plan was founded. The major pillar was the Chinese-loan funding of the Jamaica Development Infrastructure Programme (JDIP). This was the centrepiece of the GOJ-PIOJ-private-sector plan. JDIP was the major plank for stimulating spending and jobs. It would have fit in timely with Government's hope for re-election too. Instead, we wonder if Government has backed away from this plan and returned to the orthodox IMF-type formula for stabilisation now and growth later.
In the IMF formula, focus would be on tax incentives, low inflation and low interest rates. It would be the owners of capital in the private sector who would be provided with the environment for investing. Government would be limited to its minimal role. It would not try to drive economic activity with large spending, even though in this recession-hit era, this is exactly what many other governments have been doing. Word is that the IMF has stepped in to clip Government's wings because there might be huge holes in the Budget that it needs to plug.
Portia Simpson Miller and her party believe that Golding's presentation lacked a role for the main drivers of the economy, chief among them being energy, agro-processing, technology, manufacturing, infrastructure and health. Indeed, PricewaterhouseCoopers (PwC), in its analysis of the Budget presented by Audley Shaw, said it could not discern any economic drivers around which growth would take place. PwC titled its analysis, 'From Stabilisation to Growth?', questioning whether the absence of economic drivers and waivers on luxury cars made sense.
Rather than investing in the real economy, the GIS plan had revolved around a $14.4-billion spending plan, mostly on road rehabilitation to be funded out of the Chinese loan. Not only must Government, the private sector and the IMF now take responsibility for confused or dogmatic thinking about how to achieve growth, but government must be held accountable for the cost to the economy of the events surrounding the Tivoli invasion one year ago. This has cost the economy $18 billion. This is more than the Chinese loan is worth. How we could use that to stimulate the economy now?
A recent study of the IMF's impact on the economy is critical. The Washington-based Center for Economic and Policy Research has concluded that the IMF has put the country in a straightjacket. It said, "Jamaica needs debt cancellation and economic stimulus to get out of its long slump, and it has not got either of these." We must create jobs and reverse poverty to stimulate economic activity.