Jamaica and the new normal - Part 2

The following is the second part of an excerpt from a speech delivered by Claude Clarke at the National Commercial Bank's 2010 Strategic Retreat, put on by its Group Human Resources Division on July 17.

The creation of the G-20 marks the beginning of a change in the economic relationship between the traditional economic powers and the developing world. The global crisis has led the developed countries to realise and accept that they can no longer dictate how the world economy is organised and that they must share the shaping of global economic decisions with countries of the developing world.

Jamaica is not part of the G20, but we will now have countries in the loop with interests similar to ours, who can represent us as part of our common interests.

And it is clear that the balance of economic power has already changed. More and more, the source of investment capital will reside in developing countries like China, which has almost two and a half trillion US dollars of reserves, and are anxious to build strategic links with the developing world. And we can see evidence of that already, with the recent investments in sugar and coffee in Jamaica.

Building opportunity

With goods production becoming more attractive to capital, developing countries will now have a new opportunity to build productive capacity for economic growth.

But perhaps the most exciting change to come out of the new economic relationships in the world is the shift that has begun to occur in the shape of the global consumer market.

The size of the market, which tracks the size of the middle class, is expected to treble in the next 20 years. The interesting thing is that most of this growth will be taking place in the developing world, mainly in Asia, but also in Latin America and the Caribbean. By 2030, more than 90 per cent of the global middle class will be in the developing world.

The shift in global economic power is moving decidedly toward the industrialising developing countries.

Unfortunately, Jamaica is not one of them. Unlike those countries, Jamaica has, for the past 20 years, pursued policies that not only caused us to miss the great opportunities for development that existed before the crisis, they now represent the greatest obstacle to us benefiting from the opportunities emerging after the crisis.

Almost half of Jamaica's factories no longer exist and our capacity to rise with the tide of industrial growth in the developing world has been severely set back.

Jamaica has never lacked opportunity for greatness. We have been blessed with many natural resources. But we have managed our opportunities and resources in a manner that has left us poorer, not richer.

These failures did not happen by accident, or because of bad luck. They happened because of deliberate policies of our governments that were designed largely for political gain, rather than for the country's upliftment. And they have left our economy chronically uncompetitive and our people poor.

Currency management

One of the clearest examples of this is the way in which we have managed our currency.

Twice, during the 1990s, we deliberately sharply revalued the Jamaican dollar, without economic justification, to great public applause.

And while the public celebrated, our producers and exporters were forced into uncompetitiveness. Our exports contracted, our imports exploded and our country was plunged into a debt, which has left our economy gasping for breath. The International Monetary Fund praised our financial management then, just as it is doing today.

But it is worthy of note that the governments of the world, which make development their first priority, countries like China and Chile, deliberately kept their currencies competitively valued and their production competitively priced. Their people had jobs as a result, their societies were peaceful and their economies grew.

The present Jamaican administration, unfortunately, seems unwilling to learn from history and is now basking in the glory of its own recent revaluation - a revaluation that has nothing to do with economic performance.

What has, in fact, happened is that the combination of Government's 15 per cent budget cut, and its $21 billion dollar tax increase, have combined to reduce domestic demand by as much as 10 per cent of GDP. This happening at the same time that there is a surge of foreign-exchange inflows from multilateral loans creating a demand-and-supply imbalance that has caused the price of our dollar to rise.

But an overvalued currency will only lead to a further contraction of the economy, because it will depress production. In fact, all that we have seen so far of Government's economic policy is pointing to economic contraction, and not the expansion which must be our aim in this post-crisis situation.

Financial institutions are already beginning to feel the effects of the contraction. Banks are tripling the size of their bad-debt provisions while their loan portfolios have remained stagnant.

Now I am aware that the Government is trying to bring discipline and order to its fiscal affairs and, in so doing, it has reduced interest rates. For this, it is to be commended.

Economic policy

But the Government must realise that, as an economic policy, this one-note samba of low interest rates is not sufficient to lead the economy to health and sustainability. What is needed is a full symphony of economic strategies to stimulate and encourage productive economic activity, employment and growth.

The Government must recognise that its primary economic responsibility is to create an environment in which the production of economic value within Jamaica can take place.

For this to happen, two things are necessary. The first is that a macroeconomic framework must be created, which will make the inputs into the productive process competitive. The second must be that trade and fiscal polices be developed to direct Jamaican demand and as much export demand as possible to Jamaican production. If we think about it carefully, we will realise that neither of these objectives is possible without a currency that is competitive.

One thing is sure. In the new normal environment, currency valuation will, more and more, become an important tool used for achieving the goal of competitiveness. Developed and developing countries, alike, will use it. China has been using it for years, the developed economies have used it periodically, and it was the factor that restored the competitiveness of Far East economies during their crisis in the late 1990s. But Jamaican governments have consistently shunned this tried, tested and proven strategy, opting instead for the short-term, feel-good effects of an overvalued currency.

This is easy to understand. It makes flour temporarily cheaper and, as we know in Jamaican politics, flour is always more powerful than development. And government in Jamaica has been about power, not people.

And that brings me to the most important issue - the undervaluation of our people. They hardly factor in the equation when government is designing economic policy. This is particularly unfortunate at this time because the experience of Adam Smith's law of 'one price' is now demonstrating that, as an economic factor, people represent the greatest opportunity for a developing country like ours to succeed.

The one-price law holds that with the free movement of the factors of production, their prices will eventually be the same everywhere.

Of the three main factors, commodities and capital have already achieved near-price alignment because there is free movement of goods and capital around the world. There is an international market for capital and there are international markets for every commodity under the sun.

However, the third factor, labour, remains unevenly priced, globally.

There is no such thing as an international labour market, and national politics and xenophobia ensure that immigration policies will never allow genuinely free movement of labour across the globe. This allows developing countries, with their lower labour costs, to outcompete developed countries with their high labour costs. This differential in the price of labour is what has accounted for the phenomenal success of some developing countries in recent years, from China to India to Brazil.

But cheap labour does not guarantee that there will be productivity and competitiveness of the output of labour. To achieve this, a country has to ensure that people are motivated and organised to be productive.

The late Rex Nettleford spoke about the ‘smadification’ of the Jamaican people. This is what I believe he meant by it, not simply the feeling of being liberated from the cane piece.

‘Smadification’ must be a demand of and an acceptance by our government that they must create that enabling environment for our people, in which they can be at their productive best and be everything they can be.

No matter what the new normal environment throws at us, we can meet it, and benefit by it, if we can truly liberate the Jamaican people.

We are now so far behind, that there is almost limitless scope for us to progress. Today, maybe as many as half the able-bodied adult population are either unemployed, under-employed, or not interested in employment. Those who are employed are operating at a level of productivity far below that of our global competitors, the result of 35 years of declining productivity.

So any economic policy that addresses these human-development issues would revolutionise our economic fortunes. We could more than double, and perhaps triple, our GDP by simply employing our people and lifting their productivity.

I don’t think many of us realise the potential of our people. The inherent worth of our people is no less than the inherent worth of the people of any other country. The lifetime economic output of the average person in the world’s richest countries exceeds US$4 million, and the potential output of a Jamaican is the same. The proof of that fact is easy. Put a Jamaican to work in any developed country and he will produce as much as, or more than, any national of that country. But, in Jamaica, the average Jamaican’s lifetime output is only about US$300,000, less than eight per cent of the average output in the developed countries.

Leadership failure

However, as we have seen, the difference is not the capacity of the Jamaican to produce, it is the failure of our leaders to organise our economy and society so that the potential of the people is developed, and not stifled as it is today.

To develop that potential, our leaders must create a social order that can provide an environment of efficiency and civility.

Such an environment demands respect for each other and the supremacy of the rule of law. We must develop social cohesion and harmony and, in so doing, we will build that extraordinary economic asset called social capital.

Social capital is a relatively new concept to economics but its economic power cannot be denied. Economists have not yet been able to agree on a single definition for it, or how to measure it, but, to paraphrase former US Supreme Court Justice Potter Stewart, in trying to define pornography, “You know it when you see it.”

Social capital is what makes people trust each other and work together in mutual confidence. It exists in an environment of order, mutual respect and civility. Government works for the people, efficiently and reliably. Corruption is almost nonexistent. Laziness and indiscipline are alien. Public services, like transportation, are dependable and affordable. This is what Singapore is like.

The presence of high social capital keeps the cost of economic transactions low and production competitive. Successful countries like Sweden are distinguished by its strong presence. Unsuccessful countries like Zimbabwe are characterised by their absence. Jamaica, too, can build social capital and be prosperous.

We can build a society in which every one is seen as valuable to the well-being of the whole. A society in which we are not set up, individual against individual, community against community, party against party, uptown against downtown and sector against sector. In the now-famous words of Rodney King, “Why can’t we all get along”?

Our adversarial attitude toward each other has caused us to demonise important parts of our society and for some sectors to become insensitive to the interests of others to the detriment of the health of the whole.

Common sense

Common sense will tell us that every sector is important and all are interdependent. The financial sector, for example, has been demonised in recent times. But no one can argue that it is not of catalytic value to the economy, as a mobiliser and allocator of capital. It exists in a symbiotic relationship with the producing and consuming sides of the economy. And its success rests heavily on that of its productive customers, who create the value from which income in the country flows.

It is, therefore, of the utmost importance that the financial sector establishes a close bond with its productive customers to build and sustain their growth and development, and in so doing ensure its own sustainability.

A firm like Best Buy in the US was able to survive where others failed by changing the culture of the workplace and getting its people to recognise that work is not ‘a place you go [to]’ but rather ‘something you do’ and, by adopting a “results-only work environment” in which workers are given targets and left to achieve them by their own means.

Best Buy’s approach is no different from that which is required for Jamaica – respect and trust the individual to be able to perform, if given the correct environment and motivation. It is a common thread that runs through all the workable solutions to Jamaica’s economic and social problems, as well as the problems of the firm in meeting the challenges of the ‘new normal’ environment.

It is the recognition of the enormous value of the human being and the bountiful rewards that await us, if only we can find the way to harness it.

Jamaica has had opportunities for greatness before and failed to seize them. And many may be sceptical of our ability to ever succeed. But I believe the ‘new normal’ environment offers us a fresh opportunity to achieve, if we place our faith in our people. Because, as Jesse Jackson once said, “if the mind can conceive it, and the heart can believe it, I know we can achieve it.”