Clarke

Most reasonable people would agree that more than any other nation in our region Jamaica has underperformed and failed to meet the expectations, not only of our own people, but of others who have admired us and even some who may have looked at us with envy.

Our economic performance in the 1950s and '60s outstripped nearly all the world's developing countries and no one would have imagined then that a time could have come when Jamaica would fall so close to the bottom of the economic and human development ladders in the Caribbean.

The global economic crisis and a no-doubt sharp dose of economic reality received from the International Monetary Fund (IMF) have awakened the new administration to our dire economic situation. But based on its public pronouncements so far, the administration seems to be settling on a recovery strategy no greater than reducing the cost of government on the national budget. While this is an important objective, merely decreasing government expenditure as a cost category on the Budget will not move the country off the ruinous macro-economic track on which it has been stuck and set us on a path to economic development and prosperity.

The objective of reforming government should not simply be to balance the budget but to bring its cost in line with the economic value of the services it provides. Government now takes from the economy almost four times the value it contributes. Creating fee-levying executive agencies and handing off necessary government services to be operated as private monopolies, as seems to be the plan, will not change this.

sustainable approach

Unfortunately, what is being overlooked in the rush to cut the size of government is that growing the economy is the most sustainable approach to reducing its burdensome cost. But ironically, government itself, through its poor management of the economy, has been the greatest impediment to economic growth. Its handling of economic policy has imposed costs on production which have forced Jamaican producers into uncompetitiveness. Its borrowing practices over the years has left us with an accumulated debt of almost $1.3 trillion, which today attracts interest charges of nearly $160 billion per annum, the equivalent of 15 per cent of our economic output. Because to a large extent the debt was not used to create economically valuable assets, the cost of servicing it hangs like an albatross around the necks of the country's producers and goes to the cost of all the goods and services produced within the economy.

The source of the debt is especially harmful to the country's economic vitality because of its distorting effect on the local credit market. The lion's share of both the domestic and external commercial debt is held by Jamaican interests. This has not only driven up domestic interest rates, but more significantly it has denied local businesses access to credit. The government having sucked up the bulk of available domestic capital, local small and medium-size businesses, from which growth must ultimately come, has been left with severely limited access to credit. This is because local assets have little or no liquidity outside our shores and are therefore virtually worthless as collateral for overseas financing.

highest priority

It is, therefore, a matter of the highest priority that government removes itself from the local credit market and return our domestic capital to the service of Jamaican production once again. This must be carried out through a comprehensive debt restructuring arrangement aimed at converting its expensive locally owned commercial debt to cheaper foreign multilateral debt. Taxing the interest on the debt or rescheduling it as recently proposed by former Russian Finance Minister Alexander Livshits will reduce the net cost of debt servicing to the Government's Budget, but will do nothing to address the destructive distortions it has created in the domestic credit market.

Livshits' reference to a London Club solution does not recognise the fact that the principal holders of our foreign debt reside in Kingston. His proposal, which would more properly be called a 'Kingston Club' solution, would still leave the bulk of Jamaica's domestic capital tied up in the wasteful and unproductive hands of government and away from Jamaican productive enterprises where it really should be.

Whatever action we decide on must result in replacing the expensive locally owned commercial debt with low-cost multilateral and bilateral foreign-owned debt. This will not only reduce debt servicing cost to Government but will make desperately needed, affordable capital available to Jamaican enterprise. This is what the government should now be talking to the IMF about.

Perhaps the most deleterious effect of government's massive debt on the competitiveness of the economy has been the spawning of a free loading culture in the financial sector - a culture nurtured on low-risk and excessively high-profit margins. Under the presumption of a free market, a decidedly anti-market environment has been created and sustained by the protected nature of the Jamaican financial market, made possible by the inconvertibility of the Jamaican dollar. It provides a closed market for Jamaica's domestic capital and creates an oligopoly among the small number of large players which remain in the system after the sma-ller more aggressive players (which not surprisingly were the institutions least involved in government debt) were driven out of business.

This is what makes it possible for the few remaining banks to maintain interest spreads unheard of elsewhere in the world and create the contradiction of super-profits being extracted from our super-poor economy.

The removal of government from the local credit market will no doubt create a rush of funds for lending in the local economy. This should have a marked positive effect on interest rates. Competition among banks to finance development should increase and the long-sought-after low and internationally competitive bank lending rates would be achieved. However, should the banks resist this natural market outcome and continue to maintain the unjustified spreads they have been applying to their loans, the Government should act to regulate the interest rates and fees they charge.

Jamaica cannot afford to have its productive engine handicapped by the unquenchable appetite of its financial houses for super-profits. The interest of the economy and the people demands that a much higher priority be placed on the productive, real wealth-creating sectors of the economy than is accorded the sectors whose proper role is to serve them.

misguided management

The cumulative effect of this misguided management of the country's financial system by government is that Jamaican production has become too uncompetitive to attract demand from either local or foreign consumers. Today, Jamaican citrus is unable to compete against concentrate from Belize and packaged juices from Trinidad, in our own market. It is for reasons like this that investment in Jamaica's production is discouraged, as capital will only go where there is profitable demand for the production in which it will be invested.

Our production is uncompetitive largely because of the economic burdens placed on it by government's management of the financial affairs of the country, including its management of monetary policy. This is the reality we must face and correct if we are to have any hope of returning our economy to growth.

The countries, which have succeeded in spurring rapid economic growth, including the high performers in the Caribbean and Central America, have all confron-ted this reality. The critical policy tools which were used to promote the competitiveness of their economies have involved, managing the competitiveness of their currencies and containing the growth of domestic inflation. However, our government has continued through successive administrations to manage our currency to satisfy import consumption rather than to achieve productive competitiveness and our economic managers appear to be motivated more by political objectives and misplaced national pride than by economic pragmatism.

Government's failure to address this central issue of competitiveness has left us producing mainly low-value goods and services that many other developing countries have left behind and goods which are protected from foreign competition by their short shelf life or taxpayer-financed subsidies. This situation has encouraged inefficient production and adds relatively little net value to the economy. This is no way to build a future deserving of our children's worth and their dreams.

Our political leaders have either been too poorly informed, too power focussed, or too weak to act to give our economy the life and vigour it needs. In the harsh reality of a globalised economy and in the wake of the seismic impact of the international economic crisis, the call to competitiveness is now greater than it has ever been. In the past, we have been challenged to 'export or die' and to 'grow what we eat'. But we will neither be able to export or grow enough to eat, if we cannot compete. Today's reality is that without competitiveness, economically we will die.

Claude Clarke is a former trade minister and manufacturer. Feedback may be sent to columns@gleanerjm.com.