Jamaica’s growth puzzle: Trying to find some of the right pieces 

I’ve written before that I find it disturbing that Jamaica’s academic economists don’t seem to spend much time outlining to the public problems with the local economy and possible ways to fix them. 

I had an exchange with a Jamaican businessman yesterday about the exchange rate, and how it is badly misunderstood by many Jamaicans, who are fixated on the nominal rate of the J$ against the US$. He added that over many years he had ananlaysed the exchange rate trends and tried to explain them. He found many politicians, sadly, out of their depth in being able to understand notions such as purchasing power parity and the real effective exchange rate. He concluded that many Jamaicans are numerically illiterate. I agreed. 

One of the problems with that illiteracy is that people focus on the wrong variables, and do not understand what changes in variables tell us. 

Now, being a confirmed skeptic, I do not rely on politicians to be the guiding lights for much of what I think is important, except sometimes in the negativ. If a politician. says something is good, chances are it’s the opposite. Their vested interests get in the way of honest discourse. So, I’m having to listen to politicians talk about the economy and growth and productivity, and so forth, and then take a view opposite to what they say is happening. 

Right now, I’m trying to figure out why Jamaica may, one, not be growing as fast as politicians have said (just over 2 percent) and why it may be that Jamaica will grow faster than politicians have said (currently focusing on #5in4–when it’s a hashtag, it must be important :))

The slower-than-reported growth problem. GDP measures economic activity from the data on income, spending, or production. Depending on which measure is used, the story can be different. So, my argument about slower growth is about which of those measures we look at. 

I think that spending will give a truer picture in a country like Jamaica, because we know that much activity is informal and thus under-recorded. That would suggest that data on income is understated in both levels and changes, especially as more information about income means more information about taxable capacity, and people dont like paying taxes. Spending data can be captured more readily and widely, even if it’s based on household surveys. Production is harder to measure, not least because many enterprises are loath to report data, so the series are often of spotty quality and less timely.We also have the age-old problem of whether the simple units of measuring output–prices–are really capturing all we want them to, especially if quality is changing. 

So, my concern about how fast we are growing now is all about what do the three measures show. We could be at 2.3% quarterly growth, plus or minus a lot.

I also think that, flaky as it may seem, people’s sentiments about growth matter, and I think most people don’t feel that they are living with faster growth.

Will Jamaica grow much faster than 5 percent? Some people have noted, recently, that 5 percent annual growth is really a low bar for Jamaica. I am tending to agree. I think that there is more dynamism in the country than people seem to suggest. I also think that some of the faster growth will show up if we get better data about what’s going on. Now that is a taller order than many things, because data collection systems don’t just improve at the drop of a hat. But, here are areas where I think we need to look carefully.

1. Watch electricity consumption. This is often a leading indicator of what is going on, because almost everything in modern economies needs electrical power. Even if it’s being used illegally without payment or proper connection, the turbines are working and juice is going to all corners of the country.

2. Get a better handle on construction. My wife, who’s a pretty decent economist, said last night that construction is well-measured, because building work needs permits. I disagreed, because we know that much building goes on and has gone on without permits. We know, through the tragic deaths of workers, that a major hotel was being constructed in Negril without the requisite building and other permits. So, one can assume that data on this project was not being captured in official statistics. We can readily assume that a major project being derelict in its legality can be but the tip ofthe  iceberg. 

We know also that a major growth area in the corporate area, Portmore, has recently extended its building approval amnesty. So, again, we know that significant amounts of construction were going on ‘under the radar’. If we could capture that well, we could find that construction alone has been moving ahead very fast. Anecdotal evidence suggests that’s true in the corporate area, where I’ve seen over the past three years a swathe of hosuing complexes go up and also a bevy of commercial spaces being built or extended. Similar trends are evident across the island.

3. Bring more informal activity into the formal sector. Ha! Fat chance! My hunch is that this is where some faster growth may be lurking. My supposition is that, while not a ‘silicon valley’ in Jamaica, by its nature, the informal sector in its many forms has had to move faster to keep people afloat. Of course, we could find that a lot of informal activity (say, vending) is just at subsistence level. However, anecdotal stories of how people have used their ‘little jobs’ to support families, in general, and to do things like pay for children to go through schooling to university, suggests that ‘raising chcikens’ etc has provided a significant life-line. How the various activities get captured in data is a massive headache, because the incentives are strong to stay out of sight. Moves like having more taxation based on spending, rather than income, may offer a second-best way of capturing more informal activity, though. 

4. Pay more attention to what income inequality tells us. This is tricky. It’s clear that those Jamaicans who live in upscale areas have done more than get by. Large houses, more cars, private schools, foreign trip, etc, all reflect a life-style that is supported by growing financial resources (whether self-generated or through credit).  Whether they are reflective of the robustness of professional and business life, they have done much better than average in a material sense. It may be that they have both higher income/spending levels than average, and that these have grown faster than average. If that’s so, we then. Need to go to the other end of the scale to see how the ‘dirt poor’ (no value judgement) have fared. Maybe, the best we can do there is to get more sectoral information from the banking sector about deposit holder and borrowers.

So, let’s don some thinking caps and see what can be done to get a better understanding of this oh-so-important set of issues.

Economic Growth Council Signing Ceremony and Call to Action: Some thoughts on the illusion of optics

I did not attend the Economic Growth Council’s (EGC) ‘Signing Ceremony and Call to Action’, held at the Courtleigh Auditorium on November 7, but I was able to watch the Livestream video of the event, which you can watch here https://www.facebook.com/EGCJamaica/posts/275339559528471. There’s lots to applaud in how the EGC packages what it’s doing, and its slickness is one of the positives that can be taken from what they are doing. As I’ve noted before, I’m interested in aspect of the process of getting Jamaica onto a much faster growth path. Achieving that should be important in getting more Jamaicans contributing to the well-being of the island. Traditionally, high growth rates would be translated into faster and broader jobs growth, but many things have changed in the local and world economy, so that the prospect of ‘jobless’ growth is a real risk. That’s an outcome that Jamaica needs to avoid.

One thing that struck me in the presentations was how much of Jamaica seemed to matter. Now, I might not have been looking or listening with as much care as I could, but if so, please correct me. I saw only a few representatives of many of Jamaica’s important people. Who do I mean?

I mean farmers, vendors, schoolchildren, young single mothers with many children, the sick, the unemployed, the young men whom we often talk about as being disaffected or alienated.

Now, as is the way with many events, the process of ‘reaching out’ is often done hastily or incompletely. But, to me, this series of omissions is telling. When I watched the video ‘testimonials’ of young people telling me what they were expecting and hoping I heard what seemed like a narrow cross-section of those who are also yearning. Again, these ‘sound bites’ cannot be comprehensive, but they should give the impression of being broadly spread. I did not get that impression. Why do I think that matters?

One of my big concerns is that amongst the mistakes that we have made in the past and are in danger of repeating is somehow acting as if the change we want to see will be organic. Time was, when economies grew, people knew work would be created across a wide area of the country, so that no or few special measures were needed to see that flow occur. My belief is that those days are long gone, partly due to technology, but also due to the fact that the structure of the country has changed, both geographically and culturally. What that suggests, to me, is that some careful funneling needs to happen. That cannot be like in a planned economy, where you direct resources very specifically to areas and people, but it may need to be something similar.

I think the notion of inclusion is important, but do not see it happening spontaneously. My belief is that a large swathe of the country has actively excluded itself, or felt it was excluded, and so needs to be actively included

Some of those who need to be included live in the ‘shadows’ of our society, but that does not make they trivial; on the contrary. They have significant influence on many people’s lives. If crime is seen as the biggest challenge to getting Jamaica’s economy onto a much firmer footing, that cannot happen without addressing the flow of young people into crime. The motives for following that sort of life are complex, but talking about ‘opportunities’ in some glib, or amorphous way will miss the target massively. 

I do not have the answers to this problem, but I see what is happening in many areas as a sign that all cannot be well if the process does not reach deep down into daily lives. I just cite a simple set of experiences.

I drove across the middle of Jamaica on Sunday, from the tourist hub in Montego Bay, through our Trelawny agricultural heartland that grows sugar cane and yam, into the capital. I saw many men and women doing what they do almost daily: 

  • Sitting playing dominoes, or drinking and eating; 
  • Standing at water pipes or walking with drums on their heads to and from water tanks;
  • Living in homes that are barely fit for purpose;
  • Putting piles of produces onto roadsides, hoping for sales;
  • Getting into overcrowded taxis to head to their activities;
  • Begging on the road, at traffic lights;
  • Walking along potholed roads, long distances, to their activities;
  • Making phone calls to people on a list, plying them for money.

I just cite those snippets because they are representative of what many people are doing.

The idea of moving from ‘third world to first’ is attractive, but what does it mean, and is it something that means that people’s lives will be transformed dramatically AWAY from some of these daily activities within the next four years?

If the answer to those questions is to mean anything, those people need to know what will change in their lives and what they need to do to make it happen faster and look likely to be a permanent feature of their lives. 

What’s the exchange rate telling Jamaica?

What determines the level of a country’s exchange rate? Traditional economic theory focuses on a set of financial variables, plus some ‘contextual’ characteristics of a country, all of which go into setting the relative advantage of one currency over another. These variables are well set out as follows: 

1. Inflation differentials: Generally, a country with a consistently lower inflation rate has a rising currency value, as its purchasing power increases relative to other currencies. Countries with relatively higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. This is also usually accompanied by higher interest rates.

2. Interest rate differentials: Interest rates, inflation and exchange rates are all highly correlated. By adjusting interest rates, central banks or monetary authorities can influence over both inflation and exchange rates; changing interest rates affects inflation and nominal currency values. Lenders in an economy with higher interest rates get a higher return relative to other countries. So, higher interest rates attract foreign capital inflows and pur pressure on the exchange rate to rise. However, the effect of higher interest rates is mitigated, if inflation in the country is much higher than in others, or if additional lower interest rates–i.e., lower interest rates tend to decrease exchange rates.

3. Current account deficits: The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. A current deficit shows the country is spending more on foreign goods and services than it is earning, and that it is borrowing capital from foreign sources to cover that deficit. Hence, the country needs more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country’s exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.

4. Public debt: Countries use deficit financing to pay for public sector projects and governmental funding. The borrowing stimulates the domestic economy, but nations with large public deficits and debts are generally less attractive to foreign investors. Why? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real foreign exchange in the future. In the worst case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through domestic means (selling domestic bonds, increasing the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations. Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country’s debt rating (as determined by Moody’s or Standard & Poor’s, for example) is a crucial determinant of its exchange rate.

5. Terms of trade: This ratio compares export prices to import prices, and is related to current accounts and the balance of payments. If the price of a country’s exports rises by a faster rate than that of its imports, its terms of trade have improved. Increasing terms of trade shows greater demand for the country’s exports. Consequently, this results in higher export revenues, which provide increased demand for the country’s currency (and an increase in the currency’s value). If the price of exports rises by a lower rate than that of its imports, the currency’s value will decrease in relation to its trading partners.

6. Political stability and economic performance: Foreign investors prefer stable countries with strong economic performance in which to invest. A country with these positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil may cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

The exchange rate of the currency in which a portfolio holds the bulk of its investments determines that portfolio’s real return. A declining exchange rate obviously decreases the purchasing power of income and capital gains derived from any returns. Moreover, the exchange rate influences other income factors such as interest rates, inflation and even capital gains from domestic securities. Exchange rates are determined by numerous complex factors that often leave even the most experienced economists baffled.

The modern popular portrayal of the Jamaican dollar is of an ailing body:

While that may appeal to the fancy of the media, it needs to be put into context.

In recent years, Jamaica’s government has done much to repair decades of damage to its finances. With support from the IMF, the so-called ‘economic fundamentals’ are on a sounder footing. That should help the exchange rate avoiding being dumped at a rapid rate. However, while inflation is down, debt stock is down, and debt payments are being made on time, the economy is far from fixed. For example, the debt-to-GDP ratio is falling, but still well over 100 percent. No right-thinking person, especially one thinking of investing in Jamaican assets would regard the Jamaican economy as fixed. 

The economy remains ‘misaligned’, as economists would say, on several other fronts. An indicator of that is the continued negotiations that have to take place over the size of the public service, which is deemed to be a drag on economic performance. Things that drag the economy, like a bloated public service, have a negative effect on sentiment towards the exchange rate.

For all that Jamaica is seeing increasing tax revenues and a streamlining of tax affairs, plus a shift to try to broaden the base of tax payers by moving away from direct to indirect taxation, Jamaica remains severely burdened by too many people avoiding their share of the tax burden. Put that differently: our informal way of doing many things, though full of convenience at a personal level, leaves the country poorly placed to pay for its many services and obligations. Though it may be impossible to write an equation that measures that aspect, it is the sort of thing that weighs negatively on the mind of people thinking of holding Jamaican dollars.

We have seen that Jamaica is divided politically, as demonstrated by a tight national election and the winning party having the slimmest of margins–one seat. For some, that demonstration of sound democracy also opens the door to a unknown world of political fragility. Such uncertainty has a negative effect on the exchange rate.

Many signs suggest that Jamaica has serious problems with corruption, despite hardly any cases going to court or people being imprisoned. The smell of corruption lingers. Investors wont come flocking to countries with such a smell. So, while some capital may flow in to be risked on projects in Jamaica, most ‘well-thinking’ investors are avoiding the country. That has a negative effect on the exchange rate.

These elements are part of what I would call a ‘risk premium’ that plays on the exchange rate, despite the good economic policy. How much? Good question. But, that premium is being demanded, and the declining exchange rate is a flashing warning light. I would say it’s amber, not red, which is better than it was or could be. But, it’s there, whatever politicians may want to tell you. It’s the same kind of warning light that the pound sterling has had blipping over its head since the referendum vote to leave the European Union. The UK did not suddenly become a basket case, but its prospects seemed to worsen and the heightened uncertainty has seen sterling take a pounding–sorry for the obvious pun. 

But, the exchange rate is only one indicator of what people think about Jamaica. If I were a Jamaican politician, I’d think about what some other composite indicators are telling me about my country. 

The Jamaican stock market outperformed the world in 2015 (read Bloomberg report) and continues to perform strongly.  That feature, and the results of various surveys, national and international, suggest improving confidence in Jamaica and improvement in many economic areas. Now, the stock market is more limited in its picture than the foreign exchange market, but its array of companies are generally the stronger and larger ones in the economy, whose performance drive many economic indicators. What the stock market tells me is that betting on Jamaican companies is seen as smart. In other words, the sky is not falling. 

But, what the exchange rate tells me, in its vague and hard to measure way is that ‘contextual’ problems that afflict Jamaica continue to exact a price of all of us, via the declining value of ur money. Those problems are well-known: corruption (stop pretending it’s not there and widespread); violent crimes (if you thought you might need to flee in a hurry, would you prefer to have your assets in Jamaican dollars or in US dollars?); slow implementation and a still-too-prevalent ‘no problem’ approach to that. Odd though it may seem, one of the worse examples of that last point is how politicians and public agencies go about what they do:

  • Look at how Parliament runs itself. Do you think that politicians who seem to slack off on their work sends a positive image to the world? Do you think that people rush to hold currencies of countries whose politicians routinely do everything late, including attending Parliament?
  • Look at how some public agencies seem to constantly find themselves in financial hot water. They may not understand that in the mind of traders, these are signs of a sick country and must be negative for the exchange rate. People don’t generally like to hold currencies where lots of it keep disappearing into black holes. 

The last IMF staff report (see box 4) informed us that Jamaica is becoming more dollarized (my stress): ‘June 2016, with more than 45 percent of deposits denominated in US$, Jamaica’s deposit dollarization is one of the highest in the region, accompanied by dollarization of investment portfolios too. Likewise, the three-year-long freeze of the domestic bond market, which resulted in greater reliance on external capital markets resulted in higher dollarization of public debt.’ So, government action forced portfolio managers to hold more foreign assets (buy more foreign exchange). So, understand who is forcing this process and putting pressure on the exchange rate: it’s the financial sector and government. So, when Finance Minister Audley Shaw sits down with the working group he’s established to ‘deal with the devaluation’ of the Jamaican dollar against the US dollar, I hope he understands at whom fingers need to point. The Jamaican government made the J$ a one-way bet! Traders love to make easy money 🙂

Ordinary Jamaicans don’t seem to be running towards the US dollar. I base that on a few anecdotal experiences that all point to general indifference to holding greenbacks: I’ve sometimes no J$ to hand and have asked if the person I need to pay would like US$, and they often say ‘No thanks!’ Whatever the US$ attraction, maybe the transaction costs outweigh other features. Then again, ‘ordinary Jamaicans’ are consumers, rather than savers and investors, so the currency of preference for consumption remains the J$. We still do not see US$ pricing as a standard feature in Jamaica–aside from in parts of the tourist business. I take that as a positive.

It’s a sad reality for highly-indebted countries that they are their own worst enemies, from start to finish. Getting out of the debt bind forces things to happen to seem to make matters worse before they get better. The declining exchange rate is one such effect, and it’s as much arithmetic as anything else. 

Finally, what the exchange rate is also telling me is that the promise of better economic prospects has not yet materialized and that must be reflected in the tendency of the J$. Simply put, countries that do not appear to be growing tend to have weaker exchange rates, so decades of anemic growth has built up lots of antipathy towards the J$. However,if  the latest data on quarterly GDP growth showing the best results for 14 years is the start of a trend in that direction, I would expect the exchange rate to stop suffering as much. 

Where is the Jamaican economy’s ‘Donkey man’?

The Moscow 2013 World Athletics Championship saw the birth of a new Jamaican superhero. Javon Francis, an 18 year-old high schooler at Calabar, who hails from Bobo Hill. He unleashed an explosive last leg gallop in the final of the men’s 4×400 meters relay, which catapulted the Jamaican team from 5th place to 2nd, then held off a fast-advancing Russian for dear life to win his team a silver medal.20130822-172105.jpgAt the end of the race we had the now iconic image of one of his team mates shaking his legs while he lay on his back, trying to shake the lactic acid out of the limbs and revive his body. Soon, the world learned that this youth was nicknamed ‘Donkey man’. The story is that a coach at Calabar once set him to catch another younger star athlete, and when Francis was asked why he’d not caught that gazelle, he answered “I’m not a donkey.”

Today, the IMF mission reported that Jamaica had passed the first test under the latest arrangement, so should be eligible for a disbursement once these results are confirmed by the IMF Executive Board. Starting programs well is normally not a major problem: they are designed to have reachable near-term targets, which are easier to hit. The real test, like in the passing of a relay baton, is whether the country can go the full course, hanging on to get the prize, like ‘Donkey man’.

Analysts and politicians often speak about an economy’s engines of growth. To my mind, Jamaica has a real short- term problem, because the economy does not appear to have any robust or reliable engine that could pull the Jamaican train out of the terminus and head to some destinations along the train line.

The IMF program is meant to lay foundations for growth. It discusses several areas. Measures will be introduced to improve the business climate. Labour market reforms will be made to improve flexibility in the job market and reduce mismatches between training and job opportunities. The government will aim to improve public sector operations, including fiscal reforms, and enhance the courts system. Measures will also aim at lowering the cost of energy. Planning is underway to make Jamaica a logistics hub. The government will develop micro, small and medium enterprises. Small farmers will be helped with the introduction of nine agro parks to help establish an agricultural supply chain. Other measures will aim to improve the resilience of rural communities at risk from climate change and natural disasters.

Laudable though they are, I see no ‘donkey man’ in that set who will run from a losing position, screech past the crowd ahead, and continue driving its economic legs and financial arms to the finish line, to rousing applause from national and international onlookers.

The cynics out there hold a natural fear that Jamaica will not make any major changes and the economy will continue to limp along in its seemingly casual ‘business as usual’ state. Growth numbers will remain anaemic.20130822-181646.jpg We will perhaps see some signs of newness, like with the uniforms for the last major championships, but much of what is underneath is the same tried and tested.

I’ve not seen or heard much recently about the engines whom some thought could–creative industries, information and communication, agriculture, construction. Have they withered and died, like many other green shoots? Or, were they never really as muscular as some suggested?

Finance is a necessary lubricant to this whole exercise and the IMF money is an important part of that. More funding is needed, but its not enough. The PM’s current visit to China may see her bring back a few crocus bags filled with funding, and she will roll off the jet like the market women on the jitneys to Kingston, ready for a new day’s business.

Of course, none of it may matter because the whole thing is wrong and can’t work without some fundamental changes, from top to bottom.