Jamaica and the 'new normal'(Part 1)

The following is an excerpt from a speech delivered by Claude Clarke at the National Commercial Bank's 2010 Strategic Retreat put on by its Group Human Resources Division on July 17.

My very first day in politics began with what was to have been a spot meeting. In a state of great trepidation I was taken to a small district in the hills to introduce myself to the people there. I didn't know how I would be received so I prepared myself to make a little speech about development. As I waited in the little square, wondering if anyone would come out to meet me, and terrified about how my little speech would be received, a member of my team 'flew' open a car trunk, cut open a bag of flour, and loudly announced, "Missa Clarke bring flour fe unoo.".

Suddenly people appeared out of nowhere, brandishing pots and pans of every description. There was great celebration. Every one loved me. And I did not have to make the speech.

Unfortunately this story has epitomised the relationship between our politicians and our people for a very long time. This is what we consider 'normal'.

But this state of 'normality' has done our country indescribable harm, while the rest of the world has been moving ahead, evolving new norms to achieve forward movement.

Old vs new

The expression 'new normal' was coined after the 'dot com' bubble burst 10 years ago, but has found application again because of the seismic nature of the recent global economic crisis and the recognition that it will require an equally revolutionary change in the way global business is conducted if the world economy is to recover and if we are to ensure that the world is never shaken by a crisis like that again. Inevitably, a new economic and business landscape will emerge, and we in Jamaica are going to have to deal with it.

But it occurred to me that before the global crisis struck there was an existing global economic and business landscape (we could call it the 'old normal'), and Jamaica didn't handle that very well. We need to ask why.

That 'old normal' offered us many opportunities for success.

As we know, before the recent global crisis, the people of the developed world, particularly the USA, were consuming like there was no tomorrow. They were borrowing against massively overvalued assets in order to consume vastly more than the assets could ever support. And they piled up a mountain of debt to buy themselves the good life.

But what is most interesting is that more and more of the production to feed this consumption was taking place in the developing world. Developed countries were moving away from goods production and into high-value services, leaving activities like manufacturing to lower-cost producers in the developing world.

That wasn't all. Capital from the developed world flowed into developing countries to build factories and industrial infrastructure to produce goods. Foreign-direct investments (FDI) from the USA increased tenfold between the 1980s and 2000s.

Manufacturing employment in the USA declined by almost 20 per cent, as outsourcing of manufacturing and low-value services accelerated. Ross Perot's 'great sucking sound' was deafening. Exports from the developing world exploded (China's exports almost quadrupled in less than 30 years).

Prices of hard commodities such as alumina from developing countries almost trebled over 20 years - a reaction to the strong consumer demand in the developed countries.

The economic growth of the developing countries that benefited tripled the growth rates of the developed countries they were supplying.

That was the golden age of economic development for the developing countries that were organised to seize the opportunities of the 'old normal'. And many of those who did, like Singapore, crossed the bridge from developing to developed-country status during that time.

But what of Jamaica? We are a developing country too, and one with a very special advantage; that of sitting at the doorstep of the world's most powerful, developed country.

But Jamaica, which at our independence in 1962, was among the world's leading developing countries, saw little development during that period and ended up, in 2008, in an economic position worse than most of the developing countries around us. Again, the question is, why?

It is the answer to this critical question that will tell us whether we have any chance of benefiting from the opportunities presented by the 'new normal' and not be hurt by it.

Changing course

The 'old normal' came to an abrupt end in 2008 and it shook the world. Obviously, a new economic model had to be found to, as it were, change course.

And it is this changing of course that we in Jamaica have to understand and anticipate, ensuring that we can prepare ourselves to avoid any threats it may pose and exploit any benefits it may present.

But of one thing we can be sure, in changing course, every effort will be made by the nations that control the world economy to design changes that meet their economic goals, not ours. We can see some of them already.

Many of our Caribbean neighbours prospered under the 'old normal' by building offshore financial centres, the chief attraction of which was their status as tax havens. But, already, we have seen a determined effort to neutralise the tax benefits which give an advantage to these offshore services. And, in time, they will only be able to rely on their lower labour costs and innovation to stay attractive.

There will also be a stronger effort by governments in the developed countries to reverse the export of jobs to developing countries, pushing instead the export of goods produced in their homeland under their already-powerful international brands. This will put intense competitive pressure on the factories and farms of developing countries.

We should also not be surprised if some developed countries begin to practice financial protectionism, and use various forms of penalties and rewards to direct investment capital to their own economies, and away from more productive ends as FDIs in developing countries.

We should not be surprised, either, if we see efforts by powerful companies in developed countries to penetrate the retail and financial services sectors of developing countries, to shore up declining revenues they will be experiencing in their home markets, as consumers spend less and the freedom of the financial houses to create paper wealth is contained by government regulations.

But there will also be changes taking place that will have the positive effect of fixing flaws in the system that were exposed by the crisis.

Government regulation and control of the financial sector will be stronger than ever before. And the passage of the Finance Sector Reform Bill through the US Congress this week will be an important tool for bringing the US financial sector into a more positive and responsible mode of behaviour.

The bill has 533 new regulations and will give the government the power to ensure creation of wealth unsupported by underlying value will be contained.

While the bill is not designed to discourage financial innovation, it will discourage irresponsible credit creation, while encouraging credit established to finance activities that add real value to the economy.

In fact, the whole focus of the US economy will shift toward real value-creating activities such as energy, manufacturing, transport systems, information flow and innovations in industrial technology.

Those are some of the features I would expect to see taking shape in other developed countries as well.

But, on a global scale, there will be even more monumental changes, much of which, I think, will offer exciting, new opportunities to developing countries, such as Jamaica.

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