File photos
From left, Prime Minister Bruce Golding, Don Wehby, Minister without Portfolio in the Ministry of Finance and the Public Service, and Dr. Omar Davies, Opposition Spokesman on Finance.

Don Robotham, Contributor

What had to come has come. In his momentous press conference last week, the Prime Minister, his two Ministers of Finance silent and nowhere in sight, finally and officially embraced the low-inflation economic model pursued by the former Minister of Finance Dr. Omar Davies. Indeed, so total was the capitulation that all mention of one of his pet proposals for a legislated deficit reduction vanished without a trace.

It's only five months but feels like a lifetime since that slick Jamaica Labour Party (JLP) manifesto promised in paragraph 5.2 to "impose a constitutional limit requiring that the fiscal deficit must not exceed three per cent of GDP except in times of specified emergencies, and only with the approval of a two-thirds majority of both Houses of Parliament". Now deficit reduction, along with all the nonsense about 'driva' and 'bus', has been 'postponed.'

JLP manifesto postponed

The constituency allocations too have been 'postponed'. Likewise for the stillborn and unlamented mega agency for export promotion. In fact, the entire JLP manifesto seems to have been stamped 'postponed' and tossed where it belonged - into the dustbin of political propaganda.

The deficit target has been pushed up to 5.5 per cent - but who knows where all this will end come April? Inflation is chasing 17 per cent, interest rates bounced back above 13 per cent, and the debt burden is increasing substantially. Business confidence is declining. Public sector borrowing is to increase by J$6 billion. That infamous transfer from the poor to the rich which Mr. Golding lamented when he was in the Opposition will transfer even more now under his own stewardship. Mr. Golding is trying hard to get significant new investment but in light of current realities, his projection of huge declines in public debt in the future is purely speculative.

Gradual or drastic?

As usual, we preoccupy ourselves with scoring political points as to who is to blame for our economic dilemma. The much more fundamental point of what approach the country is to take to the growing deficit is being ignored, by the People's National Party (PNP), in particular. Mr. Golding gave a hesitant justification for a gradual approach to the reduction of the fiscal deficit last Wednesday. He ruminated aloud on the merits and demerits of his gradualism as if he was debating with his own Cabinet, his private sector backers and himself.

Indeed, the silence of Mr. Wehby is particularly telling. In several statements after coming to office, Wehby made it clear that he was a man with a calling. His mission was to cut the deficit without delay - with private sector fearlessness.

But now Mr. Golding has declared that the public sector wage bill is to be 'contained', not reduced. It is clear that the Wehby line has been rejected and gradualism has won the day. But is that a correct position?

This is the crucial policy issue before us because it will determine the entire course of economic, social and political development over the next five years. Should we take a gradual approach to deficit reduction or should we take a drastic approach - allowing even for inflation rises in the short term while pursuing medium- and long-term reduction?

This is an old policy dilemma for Jamaica (and many other countries) which has been debated inconclusively for decades. It has to be debated again by the whole of civil society. Both the JLP Government and the PNP Opposition have to stake out credible public positions on this basic issue and attempt to arrive at a definite consensus.

A sine qua non of a drastic approach to deficit reduction, in particular, is that we have political consensus across party and social lines. That is why the Vale Royal talks are so crucial.

Davies - 'Dr No'

In the past, Dr. Davies revelled in his reputation as a financial 'Dr. No', the archetypically heartless Finance Minister who takes morbid pleasure in imposing financial discipline on his profligate and economically illiterate colleagues. But this criticism was wide of the mark on several fronts.

The real critique of Omar came from a different angle. The charge was that he was too soft - playing fast and loose with the fiscal side while standing firm on monetary policy.

In effect, Mr. Golding's embrace of a gradualist policy is a return to the earlier Davies line. It means that we will be stumbling along over the next five years with the debt burden being where it is and little or no economic growth - less than three per cent, according to a downcast Mr. Golding.

Indeed, the outcome of pursuing such a gradualist course is likely to be even worse this time around, given the rapidly deteriorating international economic environment. Our social conditions - crime in particular - are likely to be very seriously aggravated by this gradualism as it will mean little reduction in unemployment.

The case for a more drastic approach to deficit reduction is fairly clear. It would cut our debt service charges, lower interest rates and inflation in one fell swoop. This would then end the crowding out of the private sector, end the paper chase after government securities and lead to much stronger investment in the real economy.

The upshot would be higher rates of growth, a rapid reduction in unemployment and substantial resources for expenditure on health, housing, education and security. No jam today but jam tomorrow. It is hard to fault this argument on economic grounds. The problem is how to do it.

The proponents of the drastic line focus on the public sector wage bill as the key link in the chain. They rightly point out that the size of our public sector is grossly inflated by any standard and likewise for our expenditure on public sector wages and salaries. In the light of this, as one private sector leader recently proposed, the public sector wage bill should be settled at a 'sub-inflation' level, as a first step to getting out fiscal house in order. Mr. Golding has rejected this approach for the same reasons as Mr. Patterson did - fear of the inevitable political and social crisis. The memory of the gas price riots of April 1999 have yet to fade away!

Root of problem

But this objection to cutting the public sector wage bill is a purely political one without any economic merit. Moreover, it does not get to the root of the problem. The root of the matter is that the deficits which show up on our national accounts are merely accounting expressions of deficits in the real economy. We have an economy of low levels of productivity, low levels of value added and with a very limited product range. In today's globalised world, such an economy must develop prolonged deficits no matter who is in power - JLP or PNP. Our weakness is a structural one throughout the entire economy for which all of us share responsibility. It is a result of our low levels of technology and our related low levels of education.

The proposal to 'sub-inflate' public sector salaries is in practice directed at only some sectors of Jamaican society - nurses, teachers, policemen and others. But our economic deficit is a national one for which these groups cannot be held solely or even mainly responsible. In fact, a sound argument can be and has been made that the greater responsibility for our economic deficits rest with our inefficient private sector.

Deeper weakness

It is its inefficiency, low productivity and infatuation with easy pickings in commerce and finance which are the root causes of our economic deficit ... All that happens is that this deeper weakness shows up most vividly in the weak revenue streams into our national accounts, but in practice it originates elsewhere. Sub-inflating the nurses, teachers and policemen would not only be unfair, it would be ineffective for it attacks only symptoms not root causes.

If there is to be sub-inflation, then it must be across the board - aimed at the private as well as the public sectors. What is the private sector willing to put on the table in return for sub-inflation sacrifices from the public sector? This question must be answered loud and clear and in hard cash not only for social cohesion and fairness. It is also vital in purely economic terms. In practice, this raises the question of inequality, increased productivity and taxation - especially of upscale real estate and financial services - as well as the matter of price gouging.

One last thing. As was the wont of previous JLP administrations, Mr. Golding seems to be driven to take unto himself the mantle of a kind of super-duper Finance Minister.

All those moves to build up economic planning functions at Jamaica House are very unwise - they are only likely to further fuel economic uncertainty as to who really is in charge of the economy. These are fruits of a lingering JLP statism and are highly questionable. We already have three ministers in the Finance Ministry. We don't need a fourth.