Earl M. Bartley, Contributor
IN SOME quarters - especially among those doing better than the rest of us - optimism seems to be running ahead of realism about the conditions and prospects for the Jamaican economy.
Optimism can be defined simply as cheeriness and having expectations of positive outcomes for the future. Realism in the non-geopolitical sense, means remaining firmly grounded with what is happening in the physical and social environment, and how these are likely to evolve in the short and medium term based on known or observed, past, present or future dynamics.
If beauty is in the eye of the beholder, then reality, as the philosopher Emmanuel Kant told us, is often a matter of varying individual perceptions. Without getting into that philosophical dead end, considering the ephemeral nature of reality especially in economics, where activity is often driven by non-concrete psychological moods and expectations, to speak of optimism that is based on a reasonable assessment of present and prospective reality might seem tautological or a non sequitur.
Nonetheless, optimism cannot be divorced from reality otherwise it may be nothing more than disembodied euphoria, a drunken joyousness that is likely to lead to a depressive hangover. Unfortunately, there is a sense that what is now passing for optimism and confidence about the Jamaican economy, seems little short of disembodied euphoria. Maybe Jamaicans have been in a downbeat mood for such a long time about their economy and society that many people have been overly eager to swoon off into unrealistic optimism at the first signs of the confluence of a few positive factors. But reasonable optimism has to be based on a clear-headed assessment of what is positive in reality, and how sustainable they are; and what is negative, and the speed and degree with which the latter can be overcome. In his budget presentation Finance Minister Omar Davies continued the hype, and that is to be expected, since governments have a responsibility to promote hope and confidence in the future. But how realistic or well-grounded is the optimism of Dr. Davies and others?
BUDGET PARAMETERS
The budget for last year - 2003/04 - turned out better than expected, considering its stuttering start. It achieved its projections - for revenue, fiscal deficit and primary surplus failing only to meet its inflation target of nine per cent returning, 15 per cent instead. The budget for this year, 2004/05, could also achieve its targets. Tax revenues are projected at $155 billion in a total revenue package of J$178 billion. Tax revenues are a bit high, but achievable with tough compliance. It may be more difficult to resist the clamour for funds for under-funded essential services, which could cause Dr. Davies to overshoot expenditure targets of J$328 billion. Even if he does, by the same alchemy as last year, he might still be able to achieve the fiscal deficit target of four per cent.
The 2004/05 budget has stringent parameters, but is not incredible, and in some small respects even seems favourable. Some analysts had projected a 2:1 expenditure/revenue ratio, but Dr. Davies' projections are slightly better.
Dr. Davies also hyped a number of other positive developments. Among them 2.1 per cent economic growth last year projected to increase slightly to 2.5 per cent in 2004/05; the much ballyhooed investments in bauxite mining and tourism; a slow down in the rate of growth of the debt stock, and the Government's achieving of its fiscal targets except for inflation.
The question is - how sustainable and far-reaching are these positive developments to make them the basis for optimism?
To the degree that the expansion in bauxite mining capacity and output is tied to economic expansion in China, then the developments are likely to be sustainable in the medium to long-term and should generate the short-term benefits in construction and employment. Barring a serious downturn in the international economy in both Europe and the United States, the investment in tourism should also yield the short and long-term benefits suggested by Dr. Davies.
The bull run in the stock market appears to be cooling, however, not necessarily halting, now that the recent frenzied buying pushed up asset prices that were previously perceived as undervalued.
Most persons are agreed, however, that for these developments to be sustained they must be joined by more broad-based investment by Jamaicans in small and medium-sized businesses. Such investments, however, are likely to continue to be hampered by high domestic interest rates caused by heavy Government borrowing. Last year the government borrowed J$105 billion on the domestic market. This year it is hoping to obtain as much as J$121 billion locally, if it cannot borrow more than US$500 million overseas.
But it is true that the Government should be able to get easier loan terms this year, both domestically and internationally. The prices for Jamaican bonds overseas have appreciated by almost 20 per cent in the past six months suggesting foreign creditors receptiveness to Jamaican debt instruments. The domestic money market is fairly liquid at present, and the Government is slated to pump another $200 billion in principal repayments and interest into the market this year.
LIQUIDITY
With high levels of liquidity in the market throughout the year, and rising but continued low rates on U.S. dollar assets, these should provide the Government with some leverage in pushing down domestic money market rates to 10 per cent or 12 per cent on short-term instruments.
Such rates in the money market might induce some individual investors to look for investment opportunities in the real sector. But to what extent this will happen, or what effect it will have on the economy is unpredictable, considering a large portion of Government debentures are purchased by financial institutions and pension funds who are prohibited by law from certain types of real investments in the economy. Even if commercial bank rates fall by the same percentage rates as in the money market, they are likely to stutter in the mid-teens -14 to 16 per cent, which will discourage borrowing from that source by investors. So, in effect, the Government is now hoping that many individuals who have been 'clipping coupons' from Government papers for the past decade, will now turn around and lead the Jamaican charge in investing in small and medium size businesses, to generate economic growth and jobs for their fellow Jamaicans. The coupon-clipper turned entrepreneur! It is hard to imagine, but stranger things have happened.
Jamaicans generally look to the budget for how it will affect prices and employment. Regarding the prices, the Government has given its commitment under the MoU with the trade unions to keep inflation at nine per cent for the 2004/05 budget. Already several utilities water and light have applied for or have been given increases ranging from 10 to 21 per cent. These 'miscellaneous' expenses generally carry a relatively low weight in the CPI. More threatening is the rising price of oil. But at $34 per barrel, it seems that only Iraq spiralling out of control is likely to drive the price much higher. If imported food prices remain steady, and barring serious drought or flooding in Jamaica pushing up the price of domestic crops, then the nine per cent inflation target could be achieved.
EMPLOYMENT
The employment prospects raised by the budget seem the most poorly. The tourism and mining projects will generate some 10 to 12,000 construction and permanent jobs over the next five years. Known construction projects being undertaken by the Government such as Phase 2 and 3 of the North-coast Highway and Highway 2000 and other infra-structural projects could generate another 10,000 jobs over the next three years. Both of these sources combined fall short of the 45,000 jobs per year that the economy needs to create to keep pace with the incremental increase in the labour force and to chip away at the unemployed backlog.
Over the past decade, the bulk of the jobs created in the Jamaican economy has been created in distribution, transportation, personal services, and to a much lesser extent in construction, tourism, financial and business services. Agriculture and manufacturing have actually lost over 65,000 jobs between them. And now the indications are that the three leading job-creating sectors are becoming saturated. Informational technology, despite all the hype and money it has attracted, has to-date created less than 8,000 sustainable jobs. In fact, during the 1990s net employment creation has been the poorest in four decades cumulatively only 60,000 compared to 181,000 in the 1980s and 120,000 during the 1970s.
The Government has been trying to prime the employment pump, through the various schemes it has announced such as the $80 million Information Technology Loan Scheme; the US$8 Ex-Im Bank scheme for exporters; and other projects it has announced prior to now, like the $30 million tractor service project and the $500 million irrigation scheme for St. Elizabeth farmers. But these projects, while helpful, are too small to have broad employment impact.
In the next two years the onus of employment creation, therefore, will have to come from cash rich individuals and companies in the private sector looking for higher profits than the 10 to 12 per cent available on Government paper. Most other entrepreneurs will not be able to borrow at 16 per cent rates to reinvest profitably in the economy. So unless the Government can push rates down to single digits, the medium-term outlook for Jamaica is that while macroeconomic conditions are improving, and could even get better over the next two years, things have not improved sufficiently, especially with regards to lower interest rates, to enable local entrepreneurs to invest and create jobs and begin the sustainable transformation of the Jamaican economy.
Earl M. Bartley is an economist and businessman. Your comments are welcomed at adapapa@cwjamaica.com.
