Edward Seaga, Contributor
THE ELECTION of the new president of the People's National Party (PNP) is over. The newly elected President will eventually be called by the Governor-General to accept appointment as Prime Minister as soon as the present Prime Minister demits the office in a few weeks.
This is not a constitutional change. The Constitution of Jamaica does not make provision for any change of Prime Minister except by general election. As a result, the two political parties have devised methods of calling on special groupings of party members to make the change. This avoids going to the electorate for new general elections in the instance that a Prime Minister demits office.
Now that this is over, attention can, and indeed must, be turned to the really critical issue at hand, rebuilding the economy of Jamaica, which, like Humpty Dumpty has fallen off the wall. The question now is how to put Humpty Dumpty together again.
During the presidential campaign a great many promises were made. For the most part, the promises were undertakings to make improvements or solve problems which have been intractable for the past 15 years and, in some cases, longer. The futility of all this rests on the inescapable fact that there are far from enough funds to provide real solutions to the deep-seated problems.
The only meaningful undertaking which should have been given would be to find the solution to an economy which has ceased to produce any meaningful growth over the past 15 years. The average growth over this period has been a meaningless and stagnant 0.8 per centper annum, the fourth lowest in the entire Latin American and Caribbean region. If this problem was solved, some of the promises would have some hope of fulfillment.
But the candidates all stayed away from committing themselves to finding an economic solution. The closest they would venture is that Jamaica is on the "verge of a take-off" to generate meaningful growth. We have been on this "verge" for years and still there has been no 'take-off'!
There is great urgency to deal with this situation now without further delay. A change in the leadership of government usually brings fresh enthusiasm and expectations of much improvement. But changes in the past have not accomplished this and there can be justifiable fear that failure this time might really destroy hope and push the country deeper, beyond the point of recovery.
If the economy is where the fundamental problem exists, then a new way has to be found to tackle the deep-seated, intractable stagnation which has mired the Jamaican economy. More of the same did not work in the past, and cannot work in the future.
More economic investment won't work unless it is sufficient to create many more jobs, for there are many more people;More educational investment won't work unless it means laying new foundations for education, beginning at the beginning. More of the same will only mean an accumulation of more ignorance;More policing and intensified security will not work to deal with crime and violence because there will still remain more of the same conditions which will only produce more criminals;More is not a strategy for anything more than more of the same.
LITTLE AVAILABLE CAPITAL
The reason is that there is very little available capital investment to finance a strategy of more.
Virtually all the available capital that exists for public sector investment is already being consumed in expenditure which cannot generate more growth;
95 per cent of the budget of the Ministry of Education is spent on salaries, pensions and housekeeping expenditures;
93 per cent of the entire national budget is spent on salaries, housekeeping expenditures and interest payments.
This is the general pattern in the ministries, leaving little leeway to generate new growth or provide new and better services. In these circumstances, the public sector has limited impact as an instrument of investment and growth because the present economic model is not producing more resources for investment to create the public revenues for growth.
The wider economy suffers the same short-coming of inadequate investment. Capital formation data show up an inadequacy of investment to create meaningful growth. Over the last five years of the 1980s, capital formation, which is the measure of investment to produce growth, averaged a very robust 30.36 per cent of GDP. In the five years, 1999-2003, when investment was at its highest for the past decade, "the average capital formation was a weak 22.16 per cent of GDP. This tells the story as to why there is inadequate revenues and too few jobs.
The failure of the economy commenced with the massive devaluation of the exchange rate which started in 1990 and has continued until today, though not as dramatically as before. This has resulted in 12 times more Jamaican dollars being required to buy the value of goods and services of one US dollar today than in 1990. The increased resources generated by the economy in the 1990s, have gone in good part, in one way or the other, to finance this bigger foreign exchange burden.
What is more, dealing with the accumulated foreign exchange burden involved a massive increase in debt to world leading levels which still has to be paid over the years to come. Hence, 53 per cent of all revenues must go to pay interest for debt. As pointed out before, virtually all the rest is for salaries and housekeeping. This has created a trap for the Jamaican economy from which it will be very difficult to emerge. But emerge it must, if there is to be a future.
LIMITED OPTIONS
There are only limited options available to escape the trap. The three solutions involve:
Generation of more revenue by greater taxation. But the country has already reached its taxable limit. Substantial shortfall in the revenues this year confirms this. At the end of December 2005, revenue collection had fallen behind projections by an alarming $15 billion. This has ensured that despite another year of effort to achieve a budget surplus, there will be another year of deficit this year, the eleventh year in a row.Cut expenditure. This could yield much savings which could be used to provide greater investment and better service. But the only area of saving which could be substantial is a drastic reduction in the staff levels of the civil service, and public bodies. Although this was done in the mid-1980s when the JLP government faced the same problem, and although the savings were substantial enough then to enable a decisive jump in GDP growth in one year, and a turn around of the economy for the rest of the decade, it is unlikely that a PNP government would follow that route;Li> The only other option is to cut bank lending rates in half. This would dramatically lower inflation and interest rates, reduce interest payments of government debt, creating considerable savings for use otherwise. This, as a consequence, would increase private investment substantially. More than anything else, this strategy of investment friendly interest rate would dramatically increase economic activity, generate growth, revenue, and create jobs. Best of all, results would flow within one year.
To adopt this solution, decisions would have to be taken to peg or fix the exchange rate. 30 of 36 countries in this region have followed this route for years. All have much higher standards of living and better per capita incomes for their people than Jamaica. Despite the attractiveness of this solution, it is still being resisted as the economic model most suitable for Jamaica, in favour of the IMF model which has had very limited success over the past eight years.
BREAKING THE STRANGLEHOLD
For the new president, to be later installed as Prime Minister, this is an opportunity to break out of the economic stranglehold of the past. To satisfy those in doubt, a study should be commissioned to compare the fixed or pegged exchange rate strategy, used by the great majority of the countries of the region, with the present IMF model, used by very few, including Jamaica. To those who do not believe in the successful application of a pegged or fixed rate of exchange, there may be comfort for them from our own experience. When the exchange rate was pegged by me in 1986, the economy made a stunning turnaround averaging 5% growth to the end of the decade.
Jamaica's future hangs in the balance now. This should no longer be the case. A solution is at hand. A new leader is on hand. All the ingredients are now there to mix the right solution. It is the quickest and perhaps, the only route to rebuild Jamaica. There is no more time for creeping and crawling towards a solution. It is time now to run with it.
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the University of the West Indies. E-mail: odf@uwimona.edu.jm.
