Clarke

Few would have imagined that a mere 20 years after the Thatcher-Reagan free-market revolution sent socialism into retreat, that the free-market system itself would be put under threat with the near collapse of the world financial system. Capitalism, founded on the capacity of value of accumulate and multiple in a free environment, has been something of a magic elixir to world economic output and prosperity.

Confidence in and speculation on this ability of capital to multiply, lay the basis for an almost limitless range of financial products creating a seemingly boundless expansion of wealth.

These financial products, largely based on the creation and pricing of debt, have, over time, evolved into extraordinarily complex products on only notional value, packaged, bundled and repackaged ad infinitum in a largely unregulated environment. Products have been developed to create wealth out of a decline in real value.

Activities like these have led to a mushrooming of paper returns far beyond the capacity of underlying real economic value to support. As long as earnings created in this way are primarily directed at expanding the productive base for the creation of additional value within an economy, rather than merely increasing consumption of goods and services produced elsewhere, this phenomenon can be economically beneficial.

However, what happened in the US was that the bubble created was not invested in new, productive capacity within that economy, but served to feed an orgy of import consumption. It was only a matter of time before this economic incongruity would collapse upon itself.

JAMAICA'S EXPERIENCE

Jamaica encountered a similar crisis in the 1990s. Although the complex financial products at the centre of the crisis in the US were never a part of the Jamaican scenario, the fundamental problem was the same. In Jamaica, a massive debt burden was created through compounded and capitalised, usurious interest charges which overwhelmed the value of the assets on which they were based. Instances of assets tied to or securing debt 10 times their value were not uncommon. What followed was unserviceable debt, overburdened, insolvent companies and net disinvestment in productive capacity. On the other side of the coin, the inflated interest charges and compounded principal balances credited as earnings to creditors and account holders created a gigantic bubble, which only contributed to an unsustainable expansion of imports while production contracted. Collapse was inevitable. But the Government's solution made the situation considerably worse.

RESPONSE IN THE 1990s

With the creation of FINSAC, the flow of credit to important wealth-creating businesses which needed it most was frozen. Many productive businesses were starved of capital and found their ability to survive in an increasingly hostile and competitive global environment severely compromised. As a result, valuable productive assets went into rapid decline and eventually, many were destroyed. Some were sold as scrap metal and exported. We not only exported jobs, we exported the means of providing jobs.

However, by purchasing the debt at face value, the Government faithfully preserved the oversized wealth bubble, which was responsible for creating the crisis in the first place, at its inflated size and charged every dollar of the debt, estimated at some $140 billion, to the Jamaican taxpayer. And as if they thought it necessary to provide an insult to accompany the injury, ownership of Jamaican assets was transferred from Jamaicans to foreign interests.

It is no wonder that 13 years after the introduction of the FINSAC 'solution', the economy is in a deeper hole than it was before.

first priority

It is hardly possible to avoid noticing the striking difference between the approach being proposed to deal with the crisis in the US and the approach which was taken to deal with the Jamaican crisis in the 1990s. In the US, the first priority seems to be the preservation of the economic assets which create real wealth and sustain economic activity.

Central to this objective is ensuring the flow of credit to the productive and commercial engine of the economy. The policymakers appear to recognise that the objective of any action they take must be the preservation of the engine of production and commerce.

They seem to have accepted that the overblown wealth bubble will have to be contracted and that in the process, losses will have to be absorbed by the owners of the paper wealth contained in that bubble.

But there is an even more important difference in the way the Jamaica crisis was approached. The debate, analysis and public discussion, so much a part of the approach to the US problem, were completely absent from the Jamaican experience.

Decisions were made and actions taken with no discernible input from the public or even the Parliament, presumably because those invested with power were also imbued with far greater wisdom than the rest of us. Luckily for the US, their government does not believe it is so generously endowed.

likely global action

The administration in the US and other developed economies are now recognising that a significant contributor to the current crisis was the failure to regulate effectively the creation of notional wealth. So, there is no doubt that a central feature of the solution they will employ will be regulations, which will prevent the unrestricted growth of wealth above the value of underlying real assets and a much greater role for the state in the practice of capitalist economics.

Although the market has begun to impose a savage contraction of the wealth bubble, with stock markets around the world tumbling, governments have also started to reimpose their controlling influence on the financial sector. And I believe this is likely to extend to a prominent and permanent role for government in the debt markets specifically, and more generally, in the practice of capitalism across the globe.

It is clear that in the immediate future, free-market orthodoxy will be pulled back and tempered with a healthy dose of government regulation to act as a brake on runaway greed, which the present crisis has exposed to be a natural consequence of unbridled capitalism.

While Jamaica would be well advised to adopt similar strategies, we must understand that until stability and steady growth are restored to the global economy, our domestic economy will experience severe setbacks, which, if not properly handled, could have disastrous consequences.

The substantial erosion of confidence and consequent contraction of consumer demand in the US will lead to a major slowdown in global economic activities. The frenetic pace of industrial expansion in the emerging markets, which was the main driving force behind the increase in demand for and price of all hard commodities, including aluminium, has already begun to slow. Several smelters are likely to close and closure of the least competitive alumina plants will follow.

alumina plants in jeopardy

Unfortunately, at least two of Jamaica's alumina plants fall into that category and are clearly in jeopardy. Additionally, poor management of government commercial holdings in the sector could lead to even greater losses than were recently revealed.

Nothing is more likely to be affected by the slowdown in consumption in the developed economies than expenditure on foreign vacation travel.

All across the Caribbean, from The Bahamas to Barbados, the slowdown has already begun to be felt. It is going to be a fight for increased share of a contracting market. This could be devastating to our tourism industry with our recently increased room capacity unless the stewards of our industry can pull off a miracle.

The general slowdown in worldwide demand will naturally result in an overall slump in Jamaica's exports. At the same time, it could lead to a surge in imports, as international producers look to export markets to replace sagging sales in their weakened domestic markets. Jamaica is now particularly vulnerable following the depletion of our industrial and agricultural productive base in the 1990s. Our open market will allow huge waves of market- seeking manufacturing and agricultural products to drive what is left of our crippled productive sector out of business. What will replace it?

THE REAL THREAT

Unlike the experts, I do not expect the flow of remittances to slow. I am not convinced, as most of us appear to be, that this 'blessing' of remittances is all-representative of the generosity of hard-working Jamaica emigrants. Someone needs to explain its dramatic growth from US$160 million in 1992 to nearly US$2 billion in 2007, an average growth six times greater than the growth rate of the US economy, and the coincidence of murders moving from just over 400 in 1992 to over 1,600 in 2007, an annual growth rate of 10 per cent.

The records will show that the growth of remittances has never reflected economic fortunes in the US. Remittances from the US grew 19 per cent in 2001, the year of the 9/11 tragedy, and 20 per cent the following year. The economic fallout following 9/11 seems, if anything, to have given remittances a boost.

Obviously, the activity which really drives remittances is highly inelastic and, therefore, has little to do with the health of the US economy. The demand for drugs is by its nature, also highly inelastic and the need for the trafficking and money-laundering services which support it will continue to thrive. Jamaica plays an important part in providing these services to the drug trade and until we can identify how these services are paid for we cannot be confident that what is now classified as remittances is all attributable to clean money coming from hard-working Jamaicans oversees.

My fear is that with the expected decline in earnings from legitimate economic activities resulting from the global crisis, the income classified as remittances will play an even more dominant role in our economy. To the extent that any of this is connected to criminal activities, the increased dependence of the economy on it will strengthen the role of criminality in the society, and the social disorder, murder and mayhem associated with it will continue to grow.

crime

I don't know why our policymakers have not been prepared to recognise the obvious fact that it is the increasing dependence of our economy on the proceeds of crime that is causing the explosion of crime in the country, and that the present efforts at crime fighting will have little effect. The solution must necessarily be primarily economic. The contraction of real economic output, while import consumption continues to rise, can only be explained by the inflow of resources not earned by this economy. While legitimate remittances could be responsible for some of this, it cannot be true that it is responsible for all.

We turn a blind eye to this reality at our peril. There has been a tendency in this country to accommodate activities harmful to our long-term national interest as long as short-term personal interests are satisfied. This happened in the case of the economic crisis of the 1990s when we were prepared to allow taxpayers' money to be used to buy massively overpriced debt from the financial institutions at face value and drive real wealth-producing enterprises into the ground. We have also been prepared to let crime take control of our lives while we celebrate the growth of criminally originated 'remittances', pretending that we are not aware of what it really is.

The way to deal with this problem is not to go after the remittance, but to recognise that we must step up our productive economic activities to provide more legitimate economic opportunity for our people. Only this will reduce the necessity for our people and our economy to depend on the proceeds of crime for economic sustenance and the influence of criminals over our lives.

The growth in remittances cannot all be explained by legitimate business enterprises only.- file

THE GREAT OPPORTUNITY

The silver lining to this gloomy outlook is the opportunity we now have to persuade a now more-cooperative group of multilateral and bilateral lending institutions to restructure our enormous, expensive commercial debt. Relieving the burden of debt servicing on our taxpayers and releasing capital for the country's development would provide an incomparable boost to our economic fortunes. The finance minister is to be commended for initiating this process even before the storm of the global economic crisis could have been anticipated.

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