Don Robotham, Contributor
LAST WEEK we received a bitter but perhaps necessary lesson in economics. In true Jamaican fashion, we refused to cut our money wages to reflect our really lower level of productivity in the real economy relative to that of our main trading partners. We used all our lawyerly skills to put forth all manner of arguments about why we couldn't and why we wouldn't and why we shouldn't cut expenditure more rapidly. The market therefore cut it for us with a sharp devaluation. End of story.
In a single stroke the 'social deficit' for all Jamaicans was brutally increased, earnest statements from politicians notwithstanding. This devaluation of the Jamaican dollar should be a wake-up call for us all. What it is shouting at us is this: Our standard of living cannot be maintained by political means. Nor can it be maintained by borrowing. Either we actually produce and export what people in other countries are willing to pay serious money for, or we shall not be able to consume what others produce. Economics rules politics.
At one level, many Jamaicans grasp this simple reality. What is rare is to find a person who draws the practical conclusion which follows inescapably from it. Either we reduce our standard of living by deliberate public policy or the market will reduce it for us. Either we increase our production to a level that can pay for our consumption, or consumption will have to be cut.
SPECULATORS AND PATRIOTS
We prefer to blame speculators. Of course, there has been speculation. Arguments made by some that speculation is 'natural' in a market economy are rightly dismissed as self-serving hypocrisy. Of course, speculation is morally reprehensible and socially despicable. In fact I would go further: if one read the newspapers carefully last week one would have had to have been blind indeed not to notice who some of these very big fish were. Such persons, some of whom seem to imagine that they can cover their tracks by well-publicised acts of philanthropy, have no idea of the fire that they are playing with. I would suggest that they spare a little time from high finance and read a bit on the tumultuous history of Jamaican slave revolts and 20th century upheavals.
Equally, an unmistakable feature of the situation last week is worthy of careful note: this People's National Party Government, indeed Jamaica as a whole, was saved last week by the patriotism of key sections of our big private sector. It is no secret that this group is not by nature PNP. Yet without their firm economic and political support the speculators could not have been isolated and the run on the dollar could not have been halted, NIR notwithstanding.
Jamaicans should take note that the much-maligned group of black, brown and white Jamaicans - Clarkes black and white! played an absolutely decisive role last week. The country, especially the Government, has much to thank them for. Once again, the point has been proved that, despite our social and racial divisions, there is a peculiar love of country which all Jamaicans share and which both Capleton and Sean Paul articulate, each in their own way. Perhaps this experience will cure the PNP and others of anti-big man, Two Jamaica rhetoric for life!
There can, of course, be no excuse for speculation which plays with the living standards of all Jamaicans. Yet in the end, this moral outrage against the well-heeled speculators is beside the point. For speculators have to have something with which to speculate. We gave him the opportunity and he took it.
That opportunity was the continued excess demand in the economy. This excess demand springs from the failure to cut the budget deficit sufficiently rapidly. At the heart of this failure has been the failure to cut public expenditure sufficiently rapidly. That, in turn, is a reflection of the high public sector wage bill. The central Government wage bill is 12 per cent of GDP.
The entire public sector wage bill is about 14 per cent of GDP. Despite the feeling of many in the public sector that they deserve more, the fact is that in the last five years this wage bill has increased more rapidly than the economy has grown. It has also increased more rapidly than inflation. In other words, these increases have been real.
It was this excess demand which made it possible, as Deon McClellan pointed out in a fascinating article (The Gleaner, May 21), for imports to grow two per cent to US$3.14 billion last year, while exports fell seven per cent to US$1.34 billion. The current account deficit probably continued to worsen in the first quarter of this year, increased tourist arrivals notwithstanding.
We cannot afford this. We have to cut and cut now. This has nothing to do with what people deserve. From a moral and social viewpoint, we all deserve high salaries and a comfortable life. But we are dealing with economics here, not morality. That is the sobering lesson from the devaluation. Either we cut by rational policy or the market will cut for us brutally. Time is of the essence. We cannot dilly-dally on this anymore.
CUTTING FROM $54 BILLION
The real question before us, therefore, is not whether to cut but how. And this is urgent. We cannot wait until September to cut (forget next year!). We have to cut now-in May-as you read this article. It doesn't matter what expenditure is budgeted. The Ministry of Finance must simply hold down on the warrants now. Just cut the disbursements now.
We currently have 71,700 central Government employees. If we add to this the employees in public entities (National Water Commission, National Housing Trust, Jamaica Urban Transit Company, Scientific Research Council and so forth) we can estimate the total at about 80,000. The total cost of this wage bill is $54 billion! We need to shave off at least $4 billion (or about one per cent of GDP) from what we spend in this area to keep devaluation at bay. And we have to do this now, not next week.
It is easier to call for a cut than to figure out how to do it. The reasons are the following. Of the total budgetary expenditure, 65 per cent goes to pay debt. Of the remaining 35 per cent, as much as 65 per cent goes to pay wages and salaries. This is how the wages expenditure breaks out approximately: 25 per cent goes to education; 17 per cent goes to security; and 10 per cent is spent on health. In other words, there is no way to make significant cuts in public expenditure without cutting education, security and health. These are the big ticket items.
Are the moral and social objections to cutting these areas, raised most forcefully by the Prime Minister, without merit? Of course, these objections have great merit. In fact, they are shared by the vast majority of Jamaicans. There is not one person with whom I have raised this issue who does not reject cuts in these areas out of hand.
HOBSON'S CHOICE
Yet the sad fact is that we have no choice. These are precisely the areas which have to be cut and restructured (especially education). The question is how?
Some propose the laying off of thousands, the abolition and consolidation of ministries and public entities (about 10,000 would have to go to hit the $4 billion target). No doubt abolition and consolidation are essential. However, as a policy tool, lay-offs have the disadvantage that they require huge payouts of redundancy money. In the short-term this would therefore cost more not reduce expenditure. While pursuing the near term goal of consolidation we need an immediate cut in expenditure, beginning this very month.
The only way to achieve this immediate reduction in public expenditure is by an immediate salary cut. This has the advantage of bringing an immediate reduction in demand. It also is not as harsh as layoffs and potentially shares the burden more justly. Here then would be my proposal.
We should establish four bands for cuts with immediate effect. All persons receiving public sector emoluments above $2 million would take a 25 per cent cut. All those receiving $1 million but less than $2 million would take a cut of 15 per cent. All those receiving $500,000 but less than $1 million would take an eight per cent cut. Those below this level would not be cut.
There are three things to note here. First, the cut must be based on total emoluments (including the cost of leave and other benefits) not just salary. Second, this cut would be temporary. It would run until the end of this financial year. During that period we would use the breathing space to more efficiently restructure our entire public sector operations. Third, obviously such a policy would require great political courage, public explanation and, above all, leadership by example. The politicians would have to take the first and deepest cut.
NOT THE FINAL WORD
Of course, these are only suggestions to set us thinking along the necessary direction. Others will no doubt have other and better proposals. We should welcome and discuss these. Detailed figures on the distribution of the wage bill would be needed to assess the viability of different proposals. Whatever the proposals may be, simple honesty requires us to admit that there is no painless way out of our economic problems. The question is how to share the pain. Nor is there any quick fix we face a long road ahead. But last week proved, that, with all our problems, in a crunch we still have to capacity to find the unity of purpose to pull through.
Don Robotham is an anthropologist who specialises in development issues in the Caribbean and West Africa.
