1. Putting The Economy On The Right
Track
I have been fascinated by trains all my life. I recall with nostalgia
the famous steam-driven train Engine 38, with its billowing clouds
of steam and smoke floating backwards over the caboose and the
attached coal car, while the sweating engineer and driver tended
the behemoth of a machine as it shunted from one track to another
in the May Pen trainyard of my boyhood days.
This train and the trainyard are immortalised in the movie Dark of the
Sun, which was shot in Jamaica. The train's external moving parts were
exciting to watch as the mechanism flexed and groaned as it turned the
wheels of the train, at first ever so excruciatingly slowly and then,
gradually, faster and faster as it clattered, belched and roared off into the
distance. It carried passengers in coaches and, in the ugly wooden-
railed boxcars reserved for produce, cattle and those who couldn't afford
a seat in the coaches. Life in the boxcars was hard, especially when it
rained.
Trains have an aura of inevitability. One thing was always certain:
whatever track the train took, it would eventually arrive with certainty at
the prescribed destination, because that's where the tracks led. The
choice of track and direction was, therefore, as important as the
stationmaster who controlled the track's mechanical switches that were
turned to make the train follow a different pathway and thereby arrive at
a different destination.
To the dismay of passengers, much time was always lost in switching
from one track to another. Contrast this with modern, high-speed trains
that cover large distances at the pace of a speeding bullet, transporting
thousands of passengers swiftly to their destination, an efficient use of
time, resources and technology.
As a metaphor for national development, trains provide profound
imagery. Economies cannot move forward in fits and spurts, but by
steady and consistent application of appropriate and well-sequenced
policies and strategies designed to move the sluggish and bloated

2. economy on a linear and smoothly accelerating path to growth and
prosperity. No matter how fast the train is made to go, if it is on the
wrong track, much effort and valuable time is wasted as it will either
arrive at an unintended destination, or worse yet, run off the track with
deadly consequences. In the same way, the selection of economic
policies must remain consistent with the long-term goals of the country
and the desired outcomes expected for its people.
Growth-inducement strategies that rely mostly on infrastructural
spending and not on a holistic restructuring of the country's productive
capacity and cost structure are doomed to fail in the long run, as like
trains, all the moving parts of the economy have to participate in the
economic recovery for it to be sustainable.
And what of the welfare of the passengers on the old steam train of
which I speak? Those passengers who could afford to pay the fare and
travel in the coaches were relatively comfortable, notwithstanding the
jolting and jerking coming from the connections between cars, as Engine
38 boldly traversed the dangerously winding narrow tracks across the
island. The poor and the hard-working farmers and higglers travelling
with their produce in the boxcars did not enjoy the same fate and must
have wondered if they were indeed on the same train as the others who
enjoyed its comforts.
Divisions in society
Some similarity to this situation can be perceived in the context of the
Jamaican economy, as it is widely believed that the favoured few travel
in the comfortable coaches, garnering all the economic benefits
comingfrom government largesse, while all the rest of Jamaica, including
the hard-working middle class and the small and medium-size
enterprises are relegated to the boxcars, where privileges are few and
there is no pleasure in the journey. Such has been the description of the
recently concluded 2011-2012 Budget exercise. Clearly, there is a need
to upgrade the condition of those in the boxcars, or at least equitably
share the rewards and perils between all travellers on the train, because
if the train derails, all travellers are potential casualties, regardless of
where they choose to ride in the train.

3. Jamaica is again at the crossroads of economic policy as we are about
to enter a renewed two-year borrowing relationship with the IMF and
should expect continuance of pro-cyclical economic policies, imposed by
the GOJ, to meet IMF conditionalities. These austerity measures
squeeze the lifeblood out of the Jamaican economy and severely affect
Jamaican households and small businesses. What have we really
gained? In IMF mode, we have racked up a formidable $1.6-trillion
external debt that will take generations to repay, not to mention the
billions owed to the public sector and others.
Notwithstanding a slight and welcome uptick in gross domestic product
in the past quarter, it is a volatile economic situation, as another
important element of economic management, the balance of payments,
and its key component, the balance of trade, remain in serious deficit.
We continue to import and consume far more than we export, and
structural adjustment to our economy is required.
This is further complicated by weakness in trade policy as we remain
reactive to the realities of world trade, whose rules favour countries best
able to understand the technical details of international trade
agreements and have the skills and capacity to negotiate effectively with
trade partners, without creating unnecessary conflict. Jamaica's weak
capacity to negotiate trade agreements and to formulate and implement
appropriate policies to grow the country's export sector and provide
improved access to foreign markets needs to be addressed with
urgency, in order to place the economy on a better long-term economic
track.
PERMANENT DAMAGE
In evaluating the choice of financing strategies and the role of
multilateral agencies in our development, despite the negatives, the IMF
conditionalities currently provide some external discipline on an
administration that may seek to borrow money and spend in an election
year. However, conditionalities do severe and permanent damage to
vulnerable sectors of the economy, particularly small businesses and
consumers. Countries that rely on the private financial markets, as we
have done in the past, also face market discipline of the private

4. institutional creditors. But these are less onerous and burdensome than
those of the IMF.
The self-inflicted conditionality of the IMF places the Government in
handcuffs, when dealing with important wage settlements and other
policy actions or economic stimuli. The jury is out on whether the trade-
off between economic flexibility and control in favour of lower interest
rates was necessary or is really worth it in the long run.
As we examine the role of multilaterals, it is interesting to note that a
World Bank team headed by Dr BadrulHaque, special representative, is
currently conducting broad consultations in Jamaica on a proposal to
change that bank's investment lending policies and add a third borrowing
mechanism, the Programme For Results Lending, to its offerings. This
new lending instrument would disburse funds in increments, based on
measurable evidence that targeted results of the programme are
achieved at different stages before additional disbursements are made.
The accountability for the use of the funds would not be driven by
procurement policies at present governing such lending, where the
Government simply provides evidence of expenditures to justify the
amount to be lent and World Bank disbursements are made regardless
of whether or not economic results are achieved. This new proposal to
lend based on performance achievements has the laudable objective of
ensuring that borrowing countries obtain meaningful and observable
benefits resulting from World Bank borrowing.
Too often countries like Jamaica incur large amounts of external debt
through multilateral borrowing, but have no results to show for it. This
may occur because of corruption and wasteful expenditure, or because
the projects financed are dependent on other necessary factors that are
not put in place simultaneously and, therefore, the economic benefits of
the projects do not show up in improved macroeconomic results.
Countries wishing to borrow from the World Bank will continue to access
the two existing programmes: Develop-ment Policy Lending, which
supports policy and institutional reforms such as the recently concluded
JDX and provides budgetary support; and the Investment Lending

5. programme, which funds major infrastructural projects. Borrowers would
now have a third option the P4R, if it is approved and implemented by
the board.
The downside to the P4R programme is the necessity for negotiating
agreed performance targets against which disbursements would be
made. This has implications that are not dissimilar from the complaints
made about IMF conditionality. It is, therefore, critical that Jamaica
develop its negotiating capacity at different levels of public administration
to ensure that when the time comes to discuss such loan agreements,
our representatives will be on equal footing to their counterparts at the
World Bank, IMF and other institutions and achieve the best deal
consistent with our national objectives.
The theme of accountability and responsibility and its link to integrated
solutions and achieved outcomes, instead of spending, is a new
paradigm that should be adopted by Jamaica. This principle should
apply to all elements of public expenditure ranging from the Constituency
Development Fund, Jamaica Social Investment Fund and JDIP
expenditure; as a more efficient way of disbursing scarce resources and
achieving the expected results of Jamaica's long-term development plan,
Vision 2030.
Reining In Jamaica's Fiscal
Management
In everyday life, we assume many risks, beginning from the moment we
awake to the moment we go to sleep and throughout the night. The fact
that we get out of bed safely without breaking a leg, or cross a busy

6. street without getting hit by a motor car, does not mean that these risks
did not exist. Risks are often invisible and continuous, and, when
identified, are not to be simply ignored, but managed 24 hours per day
and seven days per week. Our ability to act normally and avoid disaster
is predicated on habits developed over a lifetime, to recognise possible
dangers and to take evasive or other actions to avoid the risks becoming
a reality. Similarly in conducting a business, survival and success is
dependent not only on recognising risks and taking defensive action, but
on profitably managing the identified risks. Those businesses that do a
better job of risk management are more likely to survive and thrive in the
long run.
In developed countries, the essence of good management requires that
highly trained professionals who fully understand the risks they are
undertaking on behalf of the enterprise be put in charge of critical
decision-making that can make or break the business. Risk management
and the related capability to properly execute treasury-management
transactions to offset risk are trainable skills that are in short supply in
Jamaica and is a factor affecting our ability to grow our economy.
Risk and treasury functions are not jobs for amateurs, no matter how
highly placed the individuals are in the enterprise. Persons who are
employed in jobs that place them in decision-making positions involving
financial and other risks must be properly qualified and possess the
necessary expertise, experience and sound judgement to make
decisions that can potentially create multimillion-dollar losses. Guessing
is never good enough.
Risk-strategy decisions
In the public sector, there is an evident need to equip high-level persons
with the necessary skills and capabilities to rigorously apply the tools of
risk analysis and make informed risk-strategy decisions. Alternatively,
such individuals must be quickly replaced with capable persons who are
able to properly carry out the functions at this critical stage of our
development. The complex and specialised world of risk management
involves not only putting the correct policies in place, but also
successfully executing the transactions necessary to accomplish the

7. risk-management strategy. Indeed, treasury products once reserved for
large multinational companies operating across the globe, such as
derivative products, currency and interest-rate swaps, option contracts
and other esoteric products are now widely used by corporations and, of
necessity, the Government of Jamaica in its debt management and other
programmes.
These instruments of treasury management are very effective in
managing interest rate and foreign exchange risks when properly used
by experts, but can prove as deadly as a loaded gun in the hands of a
child, when used by persons without the required training and expert
knowledge.
It is in this vein that I again raise the issue of the bungled attempts by the
GOJ to hedge the foreign-exchange risks arising from a €204-million
loan extended by Venezuela's BancoDesarollo y Social de Venezuela
(BANDES bank) in 2008, to the Government of Jamaica, through the
Development Bank of Jamaica (DBJ). Reportedly, the financial losses on
the ill-fated attempts to hedge the loan and change its denomination
from euros to US dollars through a foreign-exchange swap, a type of
treasury product, exceeded US$50 million. This is not a trivial sum if you
translate this amount into how many lives could have been saved in our
hospitals with better funding, the number of students that could be
educated, policemen equipped to improve our security, or roads built or
jobs created to alleviate unemployment.
If ever there was a case study for bungling and making the worst
possible choices at the worst possible time, this is it. The scenario is
very simple: a loan denominated in euros, the widely traded currency of
the European Union, is placed on the books of the DBJ by the
Government, the proceeds of which were intended to be used to support
the national road programme. At some point it was noticed that the trend
in exchange rates between the euro and the US dollar, to which the
Jamaican dollar is aligned, was one where the euro was strengthening
rapidly against the greenback. The consequence of this movement in
exchange rates was that a large gap was developing that would, if it

8. continued unabated, result in the debt repayments and the actual debt in
Jamaican dollars being increased significantly.
Ill-timed trading
The decision-makers conducted a series of inappropriate and ill-timed
trading and debt-management transactions to hedge the debt that left
Jamaica out in the cold, when the direction of euro to USD exchange
rates again moved in the opposite direction from the previous trend,
locking in huge financial losses for the GOJ. The irony is that if no action
had been taken, the trend in the financial market would have quickly
reversed itself and it may have cost significantly less to repay the original
loan in Jamaican-dollar terms.
Other transactions followed that compounded the initial mistake, as the
interest rate on the loan obligation saw an increase from 7.25 per cent to
some 8.29 per cent when a one-year US$ loan was put in place,
followed by a bond issue to replace this loan with longer-term financing.
The actual costs, if they were to be calculated, would include the fees
paid by the GOJ to various counterparties for arranging hedging
transactions, the swap losses that accrued and the differential in cost
resulting from refinancing the debt on worse terms than originally
agreed, such as the inclusion of the requirement for a GOJ guarantee,
when none was attached to the original loan. To this must be added the
opportunity cost of a 'do-nothing strategy', which meant that if the
GOJ/DBJ did nothing, they may have actually made some money for
Jamaica.
It shouldn't take a well-trained professional to observe that markets go
both ways - sometimes they go up and sometimes they go down - and,
therefore, hedging strategies should never only deal with one direction of
movements of rates, but both up and down oscillations and seek to limit
losses within a band of values reflecting the risk tolerance of the GOJ.
The art of the game is to so position oneself in the market by appropriate
trading and hedging, that whichever way the market moves, whenever it
moves and in whatever direction it moves, the trading position of the
government institution remains neutral and protected from the
consequences of exchange rate losses. Had this been done properly, in

9. the case of the BANDES loan, losses, if any, would have been
minimised and contained within acceptable levels.
Future conduct
This debacle evidences the continuing absence of a robust capability to
utilise treasury products to manage financial risks in the affairs of our
Government. Could this fiasco happen again? Yes, I believe it could!
Have we learnt any lessons that can inform the future conduct of the
financial affairs of the Government on behalf of the people of Jamaica?
What steps have been taken to strengthen our risk-management
capabilities? Have the inept decision-makers been replaced with
competent persons? Have the necessary risk-management policies
controlling risk tolerances been created? Were these policies written by
the same individuals that made the mistakes? Have state-of-the-art
technical and computerised market and risk-valuation systems been put
in place to support future decision-making in similar circumstances, to
avoid repetition of the BANDES blunder?
These and other questions should be publicly debated to ensure that the
necessary follow-up is done to improve our risk and treasury-
management capabilities. It is of national importance that the decision-
making processes by which the bad decisions were arrived at are closely
examined and the contributing factors be dealt with to prevent
recurrence of similar financial disasters
Modern businesses in various industries embrace a new and expanded
version of risk management, referred to as enterprise risk management
(ERM). I would argue that governments such as ours in emerging
economies must embrace the practice of ERM, as the operation of many
aspects of government now involves the same types of risks and
decisions faced by other types of institutions. Advisers on significant
transactions must not benefit from trade execution based on their advice,
as this is a conflict of interest. Since various elements of risk are
sprinkled throughout our public-sector institutions, there is need for
consolidated identification and oversight of such risks and the
fragmented institutional resources to manage those risks must be
brought under a unified command, staffed by highly skilled professionals

10. and backed by the necessary execution capability to prudently manage
the risks of the Government of Jamaica.
Clear policies for risk governance and risk tolerance must also be
developed and implemented by the GOJ in a consultative process with
those with the insights, experience and skills to contribute meaningfully
to the debate, across party lines, locally and with the underutilised
diaspora.
Framing the IMF debate
I have often thought that the International Monetary Fund (IMF) is the best friend of Third-World
governments. Not Third-World people, who have laboured under its stringent 'conditionalities',
but Third-World governments.
That's because the fund, unlike the World Bank, has never maintained much of a public relations
department. It's filled with technocrats who think that good economics speaks for itself. So, governments
forced to run cap in hand to Washington find that they can blame inconvenient decisions on the fund,
knowing that nobody will call them out.
However, comparative research has shown that in many cases where governments blame the IMF for
decisions thrust upon them, they actually made the decisions independently. In a surprisingly high
number of cases, IMF conditions have simply been ignored by borrowing governments. And, of course,
there are governments which have avoided the fund's embrace altogether, by manag-ing their finances in
ways that prevent them facing the sort of crisis we face.
Instructive experiences
Our own experiences with the IMF are instructive. When Jamaica turned to the IMF in the 1970s, it faced
a choice. Michael Manley's economic advisers had crafted an economic blueprint which involved, among
other things, a sharp reduction in imports. Manley judged it impractical, and opted to go the IMF. It might
have been a most unpleasant choice, but it was a choice.
Today, we wouldn't need IMF help if we all stopped driving, using cellphones, watching cable television,
or air conditioning our offices. Oh, and a few other lifestyle adjustments. To date, though, I haven't seen
queues in village squares as everyone returns to story-telling as entertainment. We can't eat our cake,
and have it.
There's nothing wrong with wanting cake. But we have to pay for it. At the moment, we aren't. Our
economy isn't generating enough in foreign earnings to cover our import bill. So we must either cut our

11. spending - which, given an island economy's natural import-preference, necessarily involves foreign
spending - or we must produce and sell more. That, in turn, means harder work, higher savings, lower
relative wages ... at least until we get the economy on track.
Now we can make that choice ourselves, and go it alone. Or we can make that choice, and see if the fund
will support it. Either way, we have a bitter pill to swallow.
IMF change
Has the IMF changed? A bit, inasmuch as the fund's experiences in the 1980s taught it that structural
adjustment programmes must be tailored to minimise their hardest effects on the poor, lest the
programmes become politically unsustainable. But we'd be fooling ourselves if we think a kinder, gentler
fund will turn the other way while we continue to spend more than we earn. The IMF is like the world's
banker of last resort. No banker worth trusting is going to allow any client to run up ever larger debts
without eventually cutting up the credit card.
Is the IMF an imperfect institution? Most definitely. It actually needs more, not less, power, so that it can
discipline not only debtor but creditor nations, thereby helping manage global trade. I would also argue
that it was, in the Clinton years, manipulated by the US Treasury to advance American interests. But the
issue being debated is principally whether the IMF demanding conditions is a bad thing. It's neither good
nor bad; it's just the way the world works.
The IMF did not bring us to this economic impasse. Nor do we have no choice about whether we turn to
the IMF to get us out. But anyone who declares that there is an alternative solution that doesn't involve a
whole lot of pain, is lying.