Debt crisis and short-term tinkering vs developmental policy
By Wilberne Persaud, Financial Gleaner Columnist
In this second decade of the 21st century Jamaica faces yet another crisis of debt and its strangulation of possibilities for government budgetary initiatives in activities with developmental impact.
This perennial condition is like a rancher who is also a farmer, having to neglect critical elements of his farming practice to be continually attending to bush fires that threaten the viability of his herd.
We continuously have to put out fires with small-bore hoses and low-pressure water flow. Dependent as we are upon the International Monetary Fund (IMF) for its imprimatur we follow their advice or if you prefer, dictates, regardless of whether evidence from past experience points to low probability of success.
So much of our effort is focused here that we seem to neglect the bigger picture. Admittedly, we face binding constraints, yet surely there are actions that might make a difference. It's interesting to consider an historical parallel of sorts that takes up a considerable part of today's discussion of measures to deal with the great recession following the Wall Street meltdown of 2008. Devastation occasioned by the great depression of 1929-30s and its persistence despite the initial belief it would be self-correcting, lead to a rethinking.
An important if not actually dominant view immediately prior to Keynes decade-long attempt to debunk it, held that depressions were like the period of physical recovery after a binge. Rest followed by exercise and rehydration with healthy fluids all make their impact.
Another example of the power of belief or ideas is the former West Indian after-summer-break-purging most schoolchildren endured for back-to-school September. This regimen persisted long after its efficacy was questioned. The senna leaf, pod, or castor oil purge was mandatory - just like new exercise books or a school bag.
As the purging from senna leaf or castor oil was thought beneficial for all regardless of need, so too a market economy after a boom - regardless of the cause of the downward cycle - needed purging. Depressions were thought to be the result of booms, greed, extravagance, risky behaviour - in a sense they were retribution. Inevitable, if painful, depressions ultimately provided a beneficial service to a market economy gone off the rails. Adjustments in prices, deployment of capital and appropriate twinning of labour to different newly targeted capital expenditure would ensue once inventories were depleted.
Keynes first figured monetary policy with lower interest rates could do the trick. The great depression then forced him to consider what he called the liquidity trap - the condition in which even at rates that were effectively negative, the investment required to curtail unemployment did not emerge - today's rates in the US are zero or close to it, with similar effect.
In the earlier depression, the discipline of economics was truly in tatters. Debunking Say's Law once and for all required recognition of what in the blinding clarity of hindsight seems to require no hard thought - while production generates income to the exact value of output, some of the income thereby generated is saved. This means producers have unsold inventory they need to sell in order to realise profits. Once, for whatever reason, entrepreneurs become unwilling or unable to match the level of saving with investment a downward spiral begins. One of Keynes' students, Richard Kahn, provided the mathematics (the multiplier) to integrate these ideas into the 'General Theory … ' which gave us a coherent and empirically testable version of how income was actually determined. Prior to this, the measures we now recite every day - GDP, GNP and so on did not exist. These were generated by rendering the concepts used in this theory as quantifiable measures from the functioning of real economies.
So after all this, what do we say of Jamaica, its perennial debt crisis and government policy? First, the current measures haven't been working. Seems to me they are partial and really short-term fixes.
Second, underlying problems are not merely economic. But we've not done the reappraisal necessary to come to grips with the development problems underlying our performance. Take for example crime and indiscipline. Consider the revealed need for security guards giving out admission cards at the plazas in Liguanea. Apart from being unhygienic - an excellent means of distributing germs, so pray we don't have some epidemic disease - this is a symptom of a problem badly in need of a fix. Have we assessed the impact of our policies of support for the tourism industry, waivers of taxes and granting of incentives generally? What is the payback period of capital expenditures on say the cruise facility in Trelawny? Do these things matter?
Today, we must address our pension arrangements. Do we consider the philosophical, moral and contractual bases of what went before and obtains now? What is the link between education policy, its funding and employment possibilities? What of innovation and the mindset of the Jamaican entrepreneurial class? We've provided no answers but note the solution begins with asking the right questions! Some of these, and they're merely a few, badly need to be addressed for our next 50.
Keynes said, "The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." The power of ideas means they persist long after their relevance has been questioned by new and changing conditions. We need to consider the ideas underlying policies we embrace.
Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'. Email firstname.lastname@example.org