By HUBERT EDWARDS
Founder and Consultant
Next Level Solutions
Regardless of the outcome when all this is over, the one clear thing is that no other event in modern history has laid bare the interconnected world, uncovering the vulnerabilities of certain countries and regions. COVID-19 has also provided a window through which we can look, and more clearly examine, national leadership across the globe. This health event, which is driving global economic upheaval, is showing in very important ways how fundamental leadership is to national life - a matter of life or death in some instances. The contrasts are glaring, and the results pronounced. The big issue on many minds is, when this is all over, will we learn the lessons and emerge as a better world more focused on embracing our interdependencies; gentler and kinder in our interaction with others; and disciplined and responsible in discharging our obligations of leadership. Will the world be better for having experienced this health disaster, or will we soon forget and quickly get back to business as usual?
The ongoing COVID-19 pandemic has shown how geopolitics and economics control our lives every day without us taking too much notice. China is the production juggernaut of the world. The advent of the virus in Wuhan, China, created a significant double-sided play that underlines its significance. Almost immediately, supply chains were radically disrupted. For the first time, many became acutely conscious of the ubiquity of China’s involvement in providing finished products, raw materials or component parts for the world’s consumption and productive output. Its aggressive approach to the pandemic, essentially locking down cities, created immediate spill over for the rest of the world. The fact that the virus started in China carried a uniqueness that most countries will not replicate. In one swoop, it disrupted global supply and cut off a dominant source of demand.
Based on 2018 numbers, China is responsible for 14 percent of the world’s gross exports, 11 percent of its gross imports, and accounts for about 20 percent of world population and 19 percent of Gross Domestic Product. That same year, China exported $2.49tn in goods while importing $2.13tn. Add to this the fact that it is one of the world’s strongest growing economies at around five to six percent a year, and you have a clear appreciation of how extensive the disruption was. COVID-19 is projected, early in 2020, to cut expected world growth by as much as half to around 1.7 percent from earlier projections of 3.3 percent. Economically, there could not have been a worse starting point for this COVID-19 virus.
China has undoubtedly demonstrated serious and committed leadership in moving to contain the spread. Its approach, unfortunately, contrasts with the shaky start demonstrated by the US, which poses a great risk to many in the Caribbean region, and ever-increasing risk should it get its response wrong. With 300m potential cases sitting on the doorsteps of the region, as we noted before, the US’ success is our success and their failures could be our long-term catastrophe. Despite the alacrity displayed, the one thing we must appreciate is that with displacement of workers, shuttering of factories, slowdown in cash flows and backlogs of orders, restarting and repairing the disruption to supply chains will not be quick or easy. It therefore means that China will continue, at least over the near term, to contribute significantly to the supply side shock or this health-turned-economic event. As noted, this will continue to have a debilitating impact on world trade and economies.
In a world that was already grappling with great uncertainties and economic headwinds, this could not have come at a worse time. The global trade wars, prosecuted between China and the US especially, were already making the economic ship unstable. Brexit added a significant level of uncertainty, both economically and geo-politically, with the angst between the UK and the European Union. Here, again, the issue of leadership looms large with larger-than-life personalities, who consistently attract questions of competency, sitting at the centre of these critical world developments.
Countries such as The Bahamas, therefore, which is still coming to grips with the impact of Hurricane Dorian, are faced with the daunting fact that they are likely to see their tourism economy drastically curtailed immediately as a result of COVID-19. The sad but unfortunate truth is that the hospitality and travel industry, while taking the biggest hit upfront, is likely to see a long tail drag as both the airline and cruise ship sectors grapple with the challenges of righting their path over the next few months. It is a reality that we fervently wish does not materialise. This is certainly one of those moments when we hope the tea leave projections are all wrong.
Jamaica, flying high on its recent successes in making positive changes to its economic fate, is faced with making earlier-than-anticipated moves to stimulate and keep the country chugging along on the path to desired prosperity. It, too, will take a beating in tourism and across other sectors. Fortunately, maybe, fiscal measures foreshadowed in the recent speech from the throne seem to be right on time and should have a positive impact on the efforts there. The Bahamas, on the other hand, being a bit further away from the budget presentation and concerned with the after-effects of Dorian, will now need to look seriously at what treatments, fiscal or otherwise, it will apply should this event have a prolonged impact.
The US central bank cut its reference rate twice recently to end at a range of 0 to 0.25 percent. This is a signal of an expected recession, and has all the hallmarks of 2008 again minus the slowdown. In this instance, it is a dramatic disruptive, uncertain stop. For those living in The Bahamas, a casual walk along historic Bay Street will provide sufficient evidence. Many of the major countries believe the world is in for a recession, as evidence by their fiscal and monetary responses. We cannot, therefore, hold on to uninformed faith that this will be short. While the world and the region would desire a V-shaped recovery, this is an unlikely proposition and, from our vantage point and understanding, a more U-shaped recovery seems the likely prognosis. Here, again, leadership is playing an important role. While, refreshingly, across the region we see admirable efforts by leaders both on the health and economic side, it is clear that what happens over the next few months have little to do with what is in our control and more so what happens primarily in China, the US and Europe.
The US presidential election looms large. Like 2008, the US airline industry has already started the chorus for bail-outs as a kind of leading indicator of what is to come. The reason the US election is so important is that the performance of the economy represents a significant positive factor for the incumbent president. Many would readily agree that the administration’s performance to-date in leading the health response to COVID-19 raises many questions. One can expect that there will be further unsettling of the markets in that country. Recovery of investor confidence, therefore, could lag and consequently contribute to the economic fall-out even in the face of a contained health response by, say, the end of the second quarter. Our fortunes here in the region rest in a large way with our neighbour and friend, the US. Again, we recognise that their successes will be our successes. We must therefore hope that their efforts in managing the health situation and the economic recovery, which will follow, are as clinical as possible and effective. To the leaders of our region, though, we would implore them to keep their powder dry, and develop clear and cogent immediate, short term and long-term responses. Be ready for the long haul.
How vulnerable are our economies? This is an oft-echoed question with a familiar and well-practiced refrain. The reality is that in largely tourism-dependent economies such as The Bahamas and Jamaica, with the latter having the extra wrinkle of being highly dependent on remittances, the vulnerabilities are real. Some natural outturns from this health and economic event are rising unemployment in the countries from which we get visitors, which leads to a reduction in disposable and discretionary income, and therefore a reduction in demand for vacations. Adjusting for the health element here, we could see arrivals fall significantly from their robust peaks in recent years. This does not auger well for both countries.
The Bahamas enjoys a direct contribution of approximately 50 percent from tourism, with allied earnings taking it as high as 75 percent depending on which day you ask and whom you ask. Jamaica, with a more diversified economy, enjoys a tourism contribution of around 35 to 40 percent. Research shows that visitor expenditure accounted for approximately 50 per cent of Jamaica’s foreign exchange inflows for 2018
Allied earnings is likely to take that output close to 50 percent, at least. Despite being more diversified, Jamaica will not necessarily fare much better as remittances, which account for approximately 16 percent of GDP, could also take a significant hit. This is collectively 51 to 66 percent of the economy. The potential hit to tourism together with the fall-out from disruptions in supply chains, which could also affect its manufacturing and export sectors, will also cause some bother for Jamaica. What will be the response for The Bahamas, given current challenges and low growth? How will Jamaica seek to continue its impressive 20 consecutive quarters of anaemic growth of less than 2 percent?
Both political and private sector leadership will be important determining factors. This, after all, is another financial crisis and it will come with opportunities to pave a path for a better future, but only if there is bold and smart leadership. Both countries will be looking especially to their ministers of finance. Beyond the immediate response (phase one), what manner of economic wizardry will they be able to conjure up in the face of a potential global recession/depression? Fiscal stimulus, public sector spending; monetary policy treatments (for those who have one); forward contracts taking advantage of cheap oil; continued tight fiscal management with an eye on debt-to-GDP and the creation of future fiscal headroom? Or will their powder need not be exposed? On the other hand, will current leadership choose the moment to tap into our collective genius, inspiring us to advance together, or will we tinker with the chance of showing the world what is possible when national leadership effectively harnesses the common national consciousness?
For The Bahamas, COVID-19 is placing a bright light on the need for at least one more well-developed industry. The traditional two-pronged economy is not sustainable. While the current arrangement has served the country reasonably well, the need for reducing reliance on single sectors and finding ways of positively impacting the welfare of a growing citizenry is urgent. We do not propose to have the answers, but we are convinced that a deliberate effort is needed in restructuring the economy, causing it to be at least a more balanced ‘three-legged stool’. Jamaica, on the other hand, must become more insulated from the vagaries of remittances and engender deeper local economic expansion if it is to create substantive value for the wider populace. With its economic appetite whetted in recent times, the outlook and vision must be for growth that is more robust.
How will this be achieved? A maintenance of the status quo will certainly not achieve any marked change, and this holds true for both countries. Does agriculture hold any fortunes for The Bahamas? Are there opportunities for horizontal integration in the marine and fisheries sector? Or is there really a trillion dollar opportunity in natural resources available to be exploited for national gain? Can Jamaica find growth in lagging sectors, fix agriculture and grow its exports to better leverage the current value of its currency? Wherever the answers are they must be found, and open-minded leadership will play a significant role in this. Leadership must challenge our thinking and impress up on our minds the need to become more innovative, more productive and therefore more resilient in the face of cataclysmic disruption like COVID-19.
Interdependencies are real and necessary in our global digital village, but they render us highly vulnerable - especially when the economy is not sound. Leadership is fundamental to the economic fortunes of any country. As we observe the world’s response to COVID-19, we are undoubtedly appreciating the importance of effective leadership and lauding all instances where it is observed. On the other hand, we cringe at the pronouncements and actions of those who are otherwise. This moment demands the former, and as a region, we must proactively fight against the latter. In the face of this economic crisis, are we prepared to take the bull by the horns, act decisively, move intentionally and fix the issues that are in our control but with a firm eye on the longer-term future? We must. It is no longer sufficient to sign the refrain of vulnerability, no longer appropriate to question the quality of leadership. It is not enough to acknowledge our lack of productivity or competitiveness. Now is the time to fix the things that ail us. Now is the time to take responsibility for the things in our realm of control. With our known weaknesses violently exposed again, now is the time to start down the path of making our circumstances that much better, such that when we are again faced with the like of a COVID-19 or Dorian we are better funded to weather the storms that they throw at us.
In our next piece, we will look at the measures already announced by The Bahamas and Jamaica and explore specific ideas that we think should be given consideration.