Audley Shaw: Man on a mission Part II
In the first part of this article, the Minister of Finance Audley Shaw gave an account of his recent trip to Washington to meet with multilateral officials where he gave a comprehensive update of Jamaica’s economic progress to date. He made it clear that his objective was to attain a level of stability before focusing on growth and that after a year of doing so, it is now time to set in motion a plan to grow the Jamaican economy.
Anyone will tell you that when a patient is chronically ill the first thing to do is stabailise all vital organs before endeavouring on a full recovery. This is Shaw’s thinking and to date there are evident signs of progress. The economy is not where it should be yet – there is still high unemployment. Poverty levels have increased, consumer spending has been reduced, but at the same time the Jamaican dollar has revalued, interest payments have been reduced, interest rates have fallen and inflation is trending downward. Shaw is adhering to a defined strategy, that is clear to see, What is also patently clear, is that Jamaica could not continue on the trajectory it has been on for the last two decades – high debt, low productivity and no growth. Bold measures had to be taken and the country’s economic plight addressed.
Austerity packages are the order of the day
Earlier this week, the British coalition government announced an austerity package which sees the largest public spending cuts since World War II. Britain, the sixth largest economy in the world, has a budget deficit of 109 billion pounds which is 11 per cent of its GDP. It has now taken the decision to slash 490,000 public sector workers and raise the pension age to 66 by 2020. It has made cuts of 83 billion pounds up to 2015, cutting the police force budget by 16 per cent and that of the foreign office by 20 per cent. Why ? Because the UK’s debt is rising to 100 per cent of GDP and it is now paying 120 million pounds a day on debt interest payments, an untenable situation which Jamaica can relate to. The country has to swallow a bitter pill now in hope of better times tomorrow and there has to be consensus on this.
In Jamaica many have balked at the measures taken, citing that there has been a drastic reduction in consumer demand, and that the less fortunate among us will feel the most pain. The unions are up in arms and cannot be appeased by talk of wage restraint for the good of the country. But it is better to have a job this year than no job next year. So what does Audley Shaw make of the protestations and his detractors saying that the economy cannot adjust to these drastic measures all at once?
Swallowing the bitter pill
“A Cabinet public sector monitoring sub committee has been formed which will be chaired by myself. We will meet on a quarterly basis and it will include all relevant stakeholders. The sub committee will comprise of myself, the Minister of Labour, the Minister of Education, the Minister of Health, the Minister of National Security and the Attorney- General. What we want to stress to the public sector groups is that we are not out of the woods yet, and in order for us to have sustained stability and give the country a chance to grow, we are going to have to suppress our demand and appetite for wage increases. Instead we will have to concentrate on productivity gains in the near and medium term. Once you get productivity gains wage increases will follow. One of the things coming out of Jamaica is the poor performance of students and it is suggested that this is attributable to the poor performance of teachers. Now that may be a controversial subject but the truth is, and I share the opinion of many teachers here, it is a problem of socialisation. In many instances, there is a lack of family support and a sense of community. Now what I am saying is that the end game of a more productive student population ends up with the ability of a society to be more productive and therefore to be more wealth creating. Once you are more wealth creating, then you earn more and then the government earns more in taxes and then it can payout more in wages and salaries.
“The truth is many countries abroad are cutting wages and jobs. We can’t continue to believe that we in Jamaica are on a fiscally irresponsible excursion where we can continue to grant wages increases ad infinitum without seeing any growth in the economy or without seeing any productivity. It doesn’t work that way. But we will keep the dialogue going and be as accommodating as possible. I entered an agreement with public sector workers before Tropical Storm Nicole and I will do my best to honour that agreement. Here we will start with the remaining outstanding balances in allowances owed to some critical public sector groups.This amount comes to J$2.9 billion. We will honour half that amount by December. Some of that will go to nurses and midwives by the end of this month. The other half will be honoured in the first quarter of the next fiscal year. I think this is a reasonable proposal, “said the Minister of Finance, speaking with Caribbean Business Report from the St. Gregory Hotel in Washington DC.
A partnership for growth
There are those that say there is no aggregate demand in Jamaica and that the revaluation of the dollar is an artificial aberration . Furthermore, that next year when the IMF money is no longer in the system, the economy will find itself in a terrible state. Shaw maintains that the next step from stability is investment and growth. The question he poses is how do you create aggregate demand in your own country? The way he sees it, first one has to build the earning power of the country by creating jobs. This is done in turn by attracting investments.
“We need a partnership for stability but we also need a partnership for growth. When people are productive and have jobs, that generates disposable income which in turn creates aggregate demand. We have to use the IMF Standby Agreement as the platform to launch an aggressive investment programme. That has become a preoccupation of this government, putting in place drivers of investment. We have been talking about the Chinese road programme and it is about to start now but the rains have militated against that and has set us back there. Once we get the road programme going it will accelerate the start of many other programmes which are all public sector investments. We have the development of the cruise ship pier together with the revitalisation of downtown Kingston, both projects that should generate many jobs. It is an incremental process that needs to be speeded up, in my opinion, ” said Shaw.
Private sector must now step up
With some 80,000 jobs being lost over the last two years, it was hoped that the private sector would step up to the plate and play its part in boosting the economy. It has been pre-occupied by tax reforms but the collection of taxes presupposes that there are jobs and opportunities to collect revenue from. It cannot stand by the sidelines and watch the parade go by. Shaw is of the view that the private sector needs to take some bankable projects to the bank and don’t leave until they get some low interest money.
“If the banks have a problem with their business plans they should sit down with businesses and work it out. Everyone with a viable project should demand a special rate from the banks. We have to now push the commercial banks into a more competitive pricing mechanism.. In fact I will be inviting more competition into the commercial banking arena. There are a couple of applications on my desk as we speak and they will have to go through a due diligence exercise initiated by the Bank of Jamaica.”
If Shaw is looking to entice companies to invest in Jamaica , he would be wise to offer some feasible incentives in order to ensure that happens. He may well want to start by lowering corporate tax from say 33 per cent to 15 per cent. Here he says some special incentives will be created, citing in particular an urban renewal factory relief initiative which will provide a differential in terms of the corporate tax rate. He further added that a comprehensive review off all the incentives and waivers regimes is now underway.
“One of the things I want Jamaicans to appreciate, is that it takes political will to demand taxes will be paid. It is not a popular thing. What I have noticed is that those who pocket vast sums of money without paying taxes to the government are the same ones that go to North America or England or Canada are the first ones to stand in line and file their returns. What I am saying to them is pay your share and be a proud member of a community that pays taxes and helps the country.
Let us not forget that we are a government that was willing to subject itself to international scrutiny on a scale never seen before by any other government in the history of Jamaica. The IMF, World Bank, CDB, IDB , the EU – we submitted our economy and budgetary processes to a scrutiny that means we have lifted the bar
of the governance of the financial and economic affairs of this country.
“I dare say, if we had done so many years ago we would not be suffering with the large debt that has become an albatross around our necks today. But it is not the debt burden alone that is the albatross around our necks. The other albatross is the years of postponing a return to production and productivity. Also the years of thinking we could get by, by going cap in hand to the international capital markets and borrowing money at 12 per cent,” declared Shaw.
Down the wrong path for far too long
The Minister of Finance clearly lays the blame for the devastation of the Jamaican economy at the feet of the previous administration who he says adhered to a high interest rate policy that not only decimated the financial sector but created an insurmountable debt mountain that will take generations to clear.
Shaw’s detractors point to the fact that the economy has contracted too quickly causing high unemployment, a widening trade deficit and poor performances from the listed companies. He in turn counters that a degree of stability must be maintained before growth can take place and that if the country stuck with the same old high interest rate policies, it would render Jamaica an even worse economic basket case than it is today. A game changer was needed.
“For far too long interest rates have been too high in Jamaica and that served to kill the economy. During the nineties the average commercial bank interest rate was 53 per cent. Now that is not right and it could never have succeeded. You don’t need to be an economic guru to see that! That thinking could never produce a productive or wealth creating society. What that did was form the basis of a society based on hustling , short term gains and Ponzi schemes. That is why the Ponzi schemes became popular. The biggest Ponzi scheme was the previous government’s own economic programme of high interest rates!
“When I ran businesses, at one time penalties and charges on overdrafts went up to 120 per cent. Now when commercial banking rates can average 53 per for a decade then that is a Ponzi scheme. What we are trying to do now is realign the thinking of Jamaica that there is no gain without pain. We have to come in line with the rest of the world as to what are the fundamentals of a market economy. We have to go back to basics, we have to go back to production, we have to think smart and invest smart. Right now is a great opportunity for Jamaica. We have to get our young people into a productive thinking mind set. It is not a case of just getting them jobs and making them productive, we also have to imbue in them a sense of responsibility. Be a responsible father, take onto yourself a wife, form and look after your family. When you have families that’s when you build the social organisation of a a civilised society. That’s how you give the children of the family the best opportunity to go forward and be successful citizens,” said Shaw.
Will Shaw throw his hat in the ring?
For years it was said that Shaw could not hold a candle to Dr. Omar Davies and that he did not have the former finance minister’s international stature. A portent of things to come, was seen at the election televised debate back in 2007. The Prime Minister, Bruce Golding didn’t repose total confidence in him, initially assigning two other ministers of finance to check “his perceived excesses.” Today Shaw has acquitted himself well, sticking to the task at hand.
Politics is a funny old game. With the Prime Minister’s credibility shot to pieces and the young turks jockeying for the ultimate prize, Shaw is now being mentioned as a replacement for Golding with his credibility serving as his calling card. Does he think he was underestimated and will he throw his hat in the ring if the leadership of the JLP is to be contested?
” I can say that in my opinion I acquitted myself well while in opposition and so in regard to being underestimated, I don’t think that was necessarily the case. My performance in opposition was an indicator going forward of what my capabilities were. What I suffered from was the sustained propaganda attacks on me by people who claim to be financial analysts but do not have a clue about the very basics of finance and economics but are good at quoting long dead economists who prognosticated or “posited” on industrial economies. They are not financial analysts, rather they are politicians in disguise. The perception of me was clouded by political thinking and not objectivity. I was always confident in my abilities and as they say” time longer than rope.” The first thing you need in a job like this is a vision of where you want to go and that’s what Omar Davies didn’t have. He didn’t have a vision of where he wanted to go, so it didn’t matter to him when he picks up a phone to Bear Stearns and says “Bring me US$200 million and I don’t care about the interest rate. That’s living for today, not living for tomorrow. Right now because of that thinking we have US$400 million due next May which we have to pay. But until we pay it, we are having to service the interest payment on that sum at 12 per cent. That’s the legacy I have to be dealing with.
“The intractable problems we face as a country have to be guided by a vision and steely will. Yes, you must have priorities but you have to accept that all those priorities will not be accomplished all at the same time. From the increments of our earnings we will be able to better deal with more of our problems on an expeditious basis. My focus is to bring stability to the economy and set it on a path to growth and that will take up all my energies.We had targeted modest growth of 1 per cent for this financial year but with Nicole hitting us that may well set us back. The IMF partnered with us in our efforts to bring greater stability, now I want the multilaterals to partner with us in bringing greater economic growth.”
