Putting the economy on the right track
Ralph Thomas, Contributor
I have been fascinated by trains all my life. I recall with nostalgia the famous steam-driven train Engine 38, with its billowing clouds of steam and smoke floating backwards over the caboose and the attached coal car, while the sweating engineer and driver tended the behemoth of a machine as it shunted from one track to another in the May Pen trainyard of my boyhood days.
This train and the trainyard are immortalised in the movie Dark of the Sun, which was shot in Jamaica. The train's external moving parts were exciting to watch as the mechanism flexed and groaned as it turned the wheels of the train, at first ever so excruciatingly slowly and then, gradually, faster and faster as it clattered, belched and roared off into the distance. It carried passengers in coaches and, in the ugly wooden-railed boxcars reserved for produce, cattle and those who couldn't afford a seat in the coaches. Life in the boxcars was hard, especially when it rained.
Trains have an aura of inevitability. One thing was always certain: whatever track the train took, it would eventually arrive with certainty at the prescribed destination, because that's where the tracks led. The choice of track and direction was, therefore, as important as the stationmaster who controlled the track's mechanical switches that were turned to make the train follow a different pathway and thereby arrive at a different destination.
To the dismay of passengers, much time was always lost in switching from one track to another. Contrast this with modern, high-speed trains that cover large distances at the pace of a speeding bullet, transporting thousands of passengers swiftly to their destination, an efficient use of time, resources and technology.
As a metaphor for national development, trains provide profound imagery. Economies cannot move forward in fits and spurts, but by steady and consistent application of appropriate and well-sequenced policies and strategies designed to move the sluggish and bloated economy on a linear and smoothly accelerating path to growth and prosperity. No matter how fast the train is made to go, if it is on the wrong track, much effort and valuable time is wasted as it will either arrive at an unintended destination, or worse yet, run off the track with deadly consequences. In the same way, the selection of economic policies must remain consistent with the long-term goals of the country and the desired outcomes expected for its people.
Growth-inducement strategies that rely mostly on infrastructural spending and not on a holistic restructuring of the country's productive capacity and cost structure are doomed to fail in the long run, as like trains, all the moving parts of the economy have to participate in the economic recovery for it to be sustainable.
And what of the welfare of the passengers on the old steam train of which I speak? Those passengers who could afford to pay the fare and travel in the coaches were relatively comfortable, notwithstanding the jolting and jerking coming from the connections between cars, as Engine 38 boldly traversed the dangerously winding narrow tracks across the island. The poor and the hard-working farmers and higglers travelling with their produce in the boxcars did not enjoy the same fate and must have wondered if they were indeed on the same train as the others who enjoyed its comforts.
Divisions in society
Some similarity to this situation can be perceived in the context of the Jamaican economy, as it is widely believed that the favoured few travel in the comfortable coaches, garnering all the economic benefits coming from government largesse, while all the rest of Jamaica, including the hard-working middle class and the small and medium-size enterprises are relegated to the boxcars, where privileges are few and there is no pleasure in the journey. Such has been the description of the recently concluded 2011-2012 Budget exercise. Clearly, there is a need to upgrade the condition of those in the boxcars, or at least equitably share the rewards and perils between all travellers on the train, because if the train derails, all travellers are potential casualties, regardless of where they choose to ride in the train.
Jamaica is again at the crossroads of economic policy as we are about to enter a renewed two-year borrowing relationship with the IMF and should expect continuance of pro-cyclical economic policies, imposed by the GOJ, to meet IMF conditionalities. These austerity measures squeeze the lifeblood out of the Jamaican economy and severely affect Jamaican households and small businesses. What have we really gained? In IMF mode, we have racked up a formidable $1.6-trillion external debt that will take generations to repay, not to mention the billions owed to the public sector and others.
Notwithstanding a slight and welcome uptick in gross domestic product in the past quarter, it is a volatile economic situation, as another important element of economic management, the balance of payments, and its key component, the balance of trade, remain in serious deficit. We continue to import and consume far more than we export, and structural adjustment to our economy is required.
This is further complicated by weakness in trade policy as we remain reactive to the realities of world trade, whose rules favour countries best able to understand the technical details of international trade agreements and have the skills and capacity to negotiate effectively with trade partners, without creating unnecessary conflict. Jamaica's weak capacity to negotiate trade agreements and to formulate and implement appropriate policies to grow the country's export sector and provide improved access to foreign markets needs to be addressed with urgency, in order to place the economy on a better long-term economic track.
In evaluating the choice of financing strategies and the role of multilateral agencies in our development, despite the negatives, the IMF conditionalities currently provide some external discipline on an administration that may seek to borrow money and spend in an election year. However, conditionalities do severe and permanent damage to vulnerable sectors of the economy, particularly small businesses and consumers. Countries that rely on the private financial markets, as we have done in the past, also face market discipline of the private institutional creditors. But these are less onerous and burdensome than those of the IMF.
The self-inflicted conditionality of the IMF places the Government in handcuffs, when dealing with important wage settlements and other policy actions or economic stimuli. The jury is out on whether the trade-off between economic flexibility and control in favour of lower interest rates was necessary or is really worth it in the long run.
As we examine the role of multilaterals, it is interesting to note that a World Bank team headed by Dr Badrul Haque, special representative, is currently conducting broad consultations in Jamaica on a proposal to change that bank's investment lending policies and add a third borrowing mechanism, the Programme For Results Lending, to its offerings. This new lending instrument would disburse funds in increments, based on measurable evidence that targeted results of the programme are achieved at different stages before additional disbursements are made.
The accountability for the use of the funds would not be driven by procurement policies at present governing such lending, where the Government simply provides evidence of expenditures to justify the amount to be lent and World Bank disbursements are made regardless of whether or not economic results are achieved. This new proposal to lend based on performance achievements has the laudable objective of ensuring that borrowing countries obtain meaningful and observable benefits resulting from World Bank borrowing.
Too often countries like Jamaica incur large amounts of external debt through multilateral borrowing, but have no results to show for it. This may occur because of corruption and wasteful expenditure, or because the projects financed are dependent on other necessary factors that are not put in place simultaneously and, therefore, the economic benefits of the projects do not show up in improved macroeconomic results.
Countries wishing to borrow from the World Bank will continue to access the two existing programmes: Develop-ment Policy Lending, which supports policy and institutional reforms such as the recently concluded JDX and provides budgetary support; and the Investment Lending programme, which funds major infrastructural projects. Borrowers would now have a third option the P4R, if it is approved and implemented by the board.
The downside to the P4R programme is the necessity for negotiating agreed performance targets against which disbursements would be made. This has implications that are not dissimilar from the complaints made about IMF conditionality. It is, therefore, critical that Jamaica develop its negotiating capacity at different levels of public administration to ensure that when the time comes to discuss such loan agreements, our representatives will be on equal footing to their counterparts at the World Bank, IMF and other institutions and achieve the best deal consistent with our national objectives.
The theme of accountability and responsibility and its link to integrated solutions and achieved outcomes, instead of spending, is a new paradigm that should be adopted by Jamaica. This principle should apply to all elements of public expenditure ranging from the Constituency Development Fund, Jamaica Social Investment Fund and JDIP expenditure; as a more efficient way of disbursing scarce resources and achieving the expected results of Jamaica's long-term development plan, Vision 2030.
Ralph S. Thomas is a senior teaching fellow and joint appointee of the Mona School of Business and the Department of Management Studies, UWI. He is a financial consultant and was a vice-president of the Bank of New York-Mellon. Email feedback to email@example.com and firstname.lastname@example.org.