Friday, July 25, 2003

The Necessity for Established Rules

I have often thought of the potential Jamaica has for meaningful development. This idea has consistently been echoed by various commentaries. Ever since my awareness of current affairs, I have always heard references to Jamaica’s potential for tourism, agricultural crops, reggae music, etc. This has led me to think about why we have not been able to realize this “much talked about” potential and why we always seem to be on the brink of a breakthrough but never attaining it. There is no denying that Jamaica is truly blessed with natural resources and a resilient people and could easily be first class in areas of natural competitive advantage.

In my experience, the development of a country can be easily related to that of a company. Why do some companies succeed to become large national or multinationals and yet there are others that are not able to expand beyond medium to large size? The development of a company to national or multinational status depends primarily on two things:

1) People and
2) Established rules and procedures.

Multinationals usually have strict policies and procedures that must be adhered to and rewards are usually based on set performance criteria and not left to the subjectivity of any one person. Companies that always seem to be on the brink of national growth but never attaining it, usually have a dominant personality who seeks to direct everything and stifles the initiative of others. This dominant personality is usually instrumental in the start and initial development of the company but restricts the company from growing further because no action can be taken without his/her input.

Similarly with a country, established laws and rules are needed to allow the players to exercise their initiative in their own areas. Importantly, however, the rules must be stable. In other words, the players must be able to make long-term projections without fear of any changes to the rules of the game while they are playing. The consequences of actions also need to be predetermined so that the potential outcomes are evident. In addition, rules must be relevant to the objectives that one is trying to achieve.

It seems to me that this is one of the primary problems we face as a country. This problem did not begin with this Government but has always been in existence. In fact, in my opinion, the present Government has made a far greater effort to update the antiquated colonial laws than any other but still faces an uphill task because of the long period of inaction in this area. In short, the problem that we have suffered from is that our antiquated laws have no relation to the objectives that we are trying to achieve as a country.
Many of our laws still refer to the discretion of ‘the Minister’ and so the development of industries usually relies on the mood or will of an individual. Many years ago, this was acceptable but today this reliance on an individual leads to a bottleneck for progress.

It is for this very reason that multinationals and first world countries have established rules that apply to everyone. It would be impossible for their own control and survival to rely on anything less. This is a consequence of development, that is, less reliance on individuals and more on systems and controls, which is the only way to monitor and reward progress.

Jamaica suffers immensely from this problem. On the one hand, we desire economic growth and ever so often it seems as if we are about to but we are restricted because we do not allow private sector initiative to flourish. Too often, the rules change at the drop of a hat. There is no certainty about what will happen after its occurrence and so we plan for the short-term aware of the fact that we could be playing by different rules later. The consequence is that many companies experience a difficulty in making long-term plans and commitments.

No one will invest seriously in Jamaica unless they are assured of stability. For that reason we will attract persons seeking to make quick profits in the services or trade industries or seeking to make a quick return from our relatively high interest rates but no serious investments in capital goods.

The present regime has sought to provide some form of stability in the market and has been fairly successful in doing so in the areas of inflation and exchange rates. The Government must be applauded, as these are very important to corporate planning. The problem, however, has been that this has been achieved at the expense of maintaining relatively higher interest rates than our international competitors.

The effect of the high interest rate policy is two-fold:

1. High interest rates prevent entrants with little or no capital, which either comes from equity or debt, as they will not be able to afford debt financing. The result is a restriction of the entrepreneurial initiative; and
2. High interest rates encourage low risk interest bearing deposits, thus discouraging productive investment.

These two factors have combined to cause the erosion of our productive sector and made us primarily a service and trade-oriented economy. These factors have been compounded by the uncertainty of the legislative and social environment, resulting in uncertainty in the economic environment. This is the primary reason for the continued decline in investments in capital goods by private entrepreneurs.

Businesses already have to grapple with the uncertainty of markets and consumers and so will shy away from countries with high political and economic risk. The political and economic risk can only be minimized by assuring investors of the relevance and stability of the rules by which they will be governed. In today’s global environment, we cannot afford the luxury of this type of uncertainty. We must conform to global practices and ensure that we develop and maintain a business environment that will provide the type of long-term stability that investors require.

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