Archive for the ‘Economic Policy’ Category

Economic outlook - Part I, the PNP

Tuesday, August 28th, 2007

Following the national election debates The Gleaner asked both main parties to provide documents expounding upon their economic policies. Part II saw the Jamaica Labour Party (JLP) respond to our request. What follows in Part I is the response of The People’s National Party (PNP)

Balancing the Books, Balancing Lives

The People’s National Party (PNP) remains unapologetic in its commitment to creating a quality society in which Jamaicans co-exist in peace and are afforded opportunities to attain their full potential. It is the reason we strive for prudent management of the economy and progressive realisation of the quality society in which every Jamaican deserves to live. This is a society, which must be truly democratic in its processes, allows equitable access to resources, and assures citizens of their rights. In this people-centred quality society:

- We have a clearly defined sense of ourselves as a family with a shared vision that inspires everyone to strive for the best for self and country.

- The rule of law is observed and human rights and justice are guaranteed.

- Public resources are managed with transparency and accountability.

- High quality education, health care, and other social services are accessible to ALL, and

- People take personal responsibility for their lives.

As a diverse family, energised by mutual love and respect, we shape a future in which we conquer divisiveness, injustice, prejudice and poverty. This society cannot be wished or ‘promised’ into existence and we most certainly cannot achieve it in a climate of economic uncertainty. It requires an enabling environment comprising visionary, inspirational and committed leadership; a sound macro-economic framework; stable, safe and secure social conditions; strong social, cultural and human capital; and, mechanisms by which citizens can access services.

For the purposes of this article, we focus on the economic environment, especially as it relates to our pledge to fight poverty through the policies and programmes outlined in the manifesto. A central aspect which we explore here is the commitment to bringing people from the periphery into the economic net by providing opportunities through which they can be empowered to improve their lives.

The Economic Environment

The PNP believes economic policies and strategies should be focused on improving the lives of people – we cannot talk in any serious manner about guaranteeing people’s interests where economic uncertainty exists. We do not seek economic growth and stability as ends in themselves; we strive to achieve them so as to ensure we can better serve our people, especially the poor and vulnerable among us. That is why we focused first on creating stability, as this created the confidence that has led to record levels of local and foreign investment. Indeed, the unprecedented investment flows now provides Jamaica with the platform for rapid growth and job creation.

Strong Leadership for Real Challenges

While the base has been laid for the economy to thrive, there remains a major challenge – the reduction and subsequent elimination of the budget deficit. Contrary to the view of others, we believe deficit financing of social expenditure is unsustainable as it leads to higher interest rates and inflation. Higher interest rates increase the burden of servicing the national debt and squeeze the business sector, slow down economic growth and job creation. In practical terms, there is only one-way to achieve the objective: contain public expenditure within revenues. This allows interest rates to fall, thereby reducing interest payments, which in turn leads to improved funding availability for social interventions. Reduced interest rates also stimulate economic growth further by encouraging businesses to invest and in so doing facilitate job creation.

One of the most critical ways to get to the desired budget surplus is through increased ownership and participation of Jamaicans in the economy. While liberalisation of the economy has broadened participation, we acknowledge that it has not gone far enough to fully include average Jamaicans. Beyond liberalization, we intend to pursue democratisation of participation in the economy. This is consistent with a people-centred society and aims to broaden the range of Jamaican investors, owners, operators, and employees in the various industries. This is a critical aspect of our economic planning and is the basis on which we Jamaicans have painstakingly made the sacrifices, which have led to the solid macro-economic conditions we now enjoy. To this end, it is imperative that all the gains won to date be preserved.

In our early years in government we asked Jamaicans to “hold strain”, to be patient while we try to establish the foundations for a solid macro-economic programme. We had inherited an economy from the 1980’s with negative net international reserves of US$875 million; a fictitious foreign exchange market with an artificial exchange rate; and, the inability to borrow except from the multilateral financial institutions with the associated harsh conditions. Our reform of the sector included a market driven foreign exchange system, reflecting a true rate of exchange. At the same time inflation was tamed: seven of the last ten years inflation was under 10 per cent, dropping to a historic low of below 5.8% in 2006. This, like the current confidence in the Jamaican economy, credit worthiness, low interest rates, adequate financial reserves, and record levels of foreign direct investments, hold significant benefits for all segments of our society.

As we broaden participation in the economy, we broaden the producers and owners of wealth as well as sources of revenue for the economy. One will readily notice our manifesto’s emphasis on developing micro, small and medium businesses and the creation of a creative economy as two ways in which we will achieve economic democratisation. Correspondingly, this broadened participation in and ownership of wealth will contribute to the reduction in poverty to which we are committed.

Concomitantly, we have committed to the following as additional ways of improving our economy and ensuring improved management of resources:

1. Improve the level of efficiency of government ministries, statutory bodies, and public sector companies

2. Simplified, efficient and equitable tax system and a “wider” tax net.

3. Consolidated deductions from both employers and employees for NIF, NHT, HEART/NTA etc.

4. Provision of incentives for investments in the Creative economy, and emerging technologies in Agriculture and Energy diversification

5. Incentivising and building capacity for entrepreneurship among youth.

Fellow Jamaicans, let’s use our heads – nothing in life is free. The challenges faced by the Jamaican economy will not be met by leadership, which promises to spend more to solve each problem identified, even while lamenting the high national debt. Certainly the current global economic conditions will not find favour with the Opposition’s proposed approach and the implications for Jamaica’s debt.

Let’s work together in a practical, visionary way to shape our future together to maximise the solid base established for the growth, jobs and momentum we all desire for our country – advancing to the quality society.

Economic outlook - Part II, the JLP

Tuesday, August 28th, 2007

Following the national election debates The Gleaner asked both main parties to provide documents expounding upon their economic policies. Part I saw the People’s National Party (PNP) respond to our request. What follows in Part II is the response of the Jamaica Labour Party (JLP) …

Wealth creation versus poverty alleviation

The JLP believes that wealth creation as measured by an increase in GDP per capita is the primary means by which to judge economic development in Jamaica. This view does not trivialize other important benchmarks such as poverty, literacy, income inequality, life expectancy, etc. but rather is based on the principle that these metrics can only be addressed sustainably through economic growth. Dr. Davies is on record as saying that poverty is the primary benchmark through which he judges development. Under such a regime, poverty alleviation achieved by the expansion of remittances or social welfare systems is acceptable. While the JLP believes any instance of poverty reduction is cause for celebration, it strongly believes that the long-term increase in standard of living of the Jamaican people can only be achieved by an obsessive focus on growth.

Macro stability is necessary but not sufficient

Both parties have committed themselves to maintain fiscal restraint and macroeconomic stability. The PNP’s economic model however reflects a “market fundamentalist” ideology. Despite the PNP’s false assertion that the JLP wishes to return Jamaica to the policies of the IMF, it is their total faith in the market that is ironically in total agreement with the Washington Consensus. With the exception of a pure floating exchange rate, Dr. Davies has in fact mirrored exactly the policies the IMF would suggest: high primary surpluses, massive cuts in real social spending and high taxes. The only thing he hasn’t done is accept the cheap money that usually comes with these onerous polices. Dr. Davies policy seems to be “the worst of both worlds.” In addition, it is also reflective of a now outdated paradigm in the international economic community that existed in the 1990s. This view has since fallen out of favour, particularly regarding the development of middle-income nations.

The JLP’s model on the other hand is based on the belief that macro stability is necessary but not sufficient for economic growth. In addition to macro economic stability, a responsible and aggressive industrial policy is required to increase total factor productivity and ultimately generate growth. This view is not an endorsement of a “statist” economic model or an attempt to revive the ISI (Import Substitution Industrialisation) or the “picking winners” polices of the past. Rather it is based on a new notion in the international economic community that the government must play an active role in setting industrial policy. For example, the Governments role in helping to overcome specific coordination failures that prevent new industries from starting and which cannot, by definition, be solved by private actors. These industries are those that are export oriented and in which Jamaica is globally competitive. The JLP manifesto not only identifies these industries, but also lays out a less bureaucratic and more pro-active approach to investment promotion in keeping with this ideology.

Are high primary surpluses the only way to reduce the debt burden?

Dr. Davies has said that the only way to reduce debt is to continue to incur onerous primary surpluses. While the JLP agrees that primary surpluses are the main means to reduce debt in the short term, it believes that legal and alternative approaches exist to quicken the pace of debt reduction. The JLP has placed a creative debt management strategy at the heart of its economic model. This strategy consists principally of capping the debt and deficit, using the proceeds of Petrocaribe and securitizations as debt fighting tools, using multilateral financing for specific projects and attempting to forge an agreement with the private sector to lower interest rates. Both parties concede that reducing the debt burden will be difficult, but the JLP has stated definitively that it is the biggest challenge facing the economy and refuses to take any options off the table.

Good governance is an economic issue

The JLP has placed good governance at the heart of its Manifesto. It believes that good governance is not solely a legal issue but is an integral part of economic policy in three clear ways. First, it frees up resources by reducing waste and corruption in the public sector. Second, it insulates monetary policy from politics through the creation of an independent central bank. Third, it reduces Jamaica ’s political risk premium in the international capital markets and therefore lowers interest rates on its external debt. The PNP has a less focused good governance agenda and approaches the issues through a purely legal lens.

Education and healthcare are investments not expenses

The JLP believes that education and health are not merely social expenditure items but are investments in human capital. It believes that the cost of waiting to make these investments at some point in the future is significantly more expensive than the budgetary costs of making these investments in the short term. Since the return on these investments exceeds our cost of financing they should be pursued. This point is especially true if they are financed by multilateral and long dated financing sources. This principle governs financial theory and private capital budgeting decisions and should govern public policy as well. As a result, education and health are viewed as investments designed to generate revenue to the central government and not as social charges. The PNP believes that social spending is an expense to be spent when and if the government can afford to distribute resources.