Wednesday, November 22, 2006

A more productive environment

Last Wednesday, the Gleaner reported two items, which I think should be mentioned, given the persons the news surrounds and the importance to Jamaica’s productivity. The first has to do with a statement attributed to Dr. Davies that “Remittances encourage dependency over productivity” and the second is Mr. Golding saying that the JLP would (1) remove education and HEART taxes, and (2) consolidate statutory payments into a single social security deduction.

The importance of these two statements is because they come from two individuals who have the ability to affect the changes. First of all, Dr. Davies’ statement that remittances encourage dependency is not only true, but is quite a revelation coming from an administration that has always relied on remittances as a part of bolstering the Balance of Payments. The up surge in remittances beyond tourism as the number one foreign exchange (FX) earner occurred during this administration. The fact that Dr. Davies has now admitted that ways should be found to funnel this remittance money into productive activities is therefore very refreshing.

Cause of remittances
The fact though is that remittances came to prominence as a FX earner because the environment was not conducive to productivity, and not a fall in productivity because of remittances. The fact that Jamaicans left to seek employment elsewhere is because the environment did not allow them the opportunities they needed to make a decent living and enjoy it in a crime controlled environment. Thus many had to go overseas, leaving their beloved country, so that they could afford a decent living for themselves and family members, who they would send remittances to. In the process we ended up destroying the family structure, affecting values and attitudes, and sending away some of our most productive minds. The result of course, is not only a society lacking productive thought, but also a degradation of values resulting in indiscipline and crime.

Of significance in creating this dependency syndrome, is not only remittances, but the high interest rate regime. High interest rates had the effect of creating a dependency syndrome for the rich, as well as stagnating any investments in productive activities. The fact is that companies and individuals who could afford to would purchase high yielding government paper and earn virtually risk free returns equivalent to, or more than, the hassle of risky productive enterprises. So that while the remittances of the small man was money from overseas, the equivalent for the rich man was high interest rates.

In order to channel remittances into productive activity then what we need to do is create an environment where people will want to invest in these activities because it creates better opportunities for them. This has been the way of the market economy for centuries and there is no reason for it to change for Jamaica.

This leads to the promises by the JLP that they will slash education and HEART taxes, replacing them with low interest loans, and also consolidate all statutory payments into one social security tax. While I agree with the latter, I think the promise to slash the taxes and replace them with low interest rates loans would be the incorrect thing to do. In addition I don’t know how practical this would be as the need for HEART and education taxes is recurring, that is we will need this funding every year. This fiscal year, for example, we budgeted to rake in $9.7 billion from Education Tax, and HEART would be a similar amount. So effectively what Mr. Golding is saying is that we would borrow an additional $20 billion per annum, which would mean adding to our debt stock each year, instead of reducing it as we should.

My opinion is that debt should only be for a specified period, as it relates to operational expenses, and one off expenditures that will provide a return greater than the cost of the debt. It is because we have been using debt for operational purposes over the years why we are in the debt crisis we are today. I think it would be therefore impractical to slash these taxes unless we can replace them immediately with other non-debt revenue sources, and so in my mind this amounts to nothing more than an election promise.

A more efficient tax system
On the other hand the promise to consolidate the statutory payments into one statutory deduction would be an excellent move. As Mr. Golding rightly says, this would simplify the business operations of companies, and would be especially beneficial for small and medium sized businesses. This would be a move in the right direction, and should be looked at in the context of a wider move to restructure the whole tax system for efficiency, and bring productivity to the highly bureaucratic public sector. The fact is that the tax system is burdensome and inefficient for businesses and is in dire need of restructuring. As I illustrated two weeks ago, even after working through the computations one sometimes faces the difficulty of paying the tax.

I again would like to remind us all of the recommendations of the Joe Matalon Report two years ago, which highlighted the need for a reformed tax system, with certain recommendations being made. As usual, however, we only implemented the part of the report that was beneficial to the fiscal accounts, forgetting that bringing efficiency to the private sector also means greater government revenue.

These two statements bring to the forefront the need for the creation of a more investment friendly environment, which of course includes the further reduction and control of crime. Two nights ago I was watching TVJ news where it was reported that the police are going to concentrate their efforts to ensure that crime is kept at a minimal during the Christmas season. The fact that we even have to talk about keeping crime low during Christmas is in itself a problem. Shouldn’t it be expected right throughout the year that this is the norm. Shouldn’t it be expected that the Noise Abatement Act applies throughout the year. If we have to make a special effort to control these during Christmas then it means that we do not have control over indiscipline.

PSOJ
The need for a more productive environment brings to mind also a very important race that is currently underway, that is the Presidency of the PSOJ. Many Jamaicans may ignore this race but it is very important for Jamaica. If we are serious about growing this economy then it means that there must be proper private sector representation to bring the various associations under one umbrella group to lobby as a unified voice.

It is small businesses that will primarily bring back vitality to the economy. It is therefore going to be very important that the private sector representation bats for these small groupings. This is going to require a personality that will foster trust, as this is going to be a difficult task, but one that is necessary. It is also going to be very important for the leader of the PSOJ to be willing to criticize the country’s governance, as any complacency to do so can lead to a break down in the investment climate.

All these considerations, therefore, point to the need for fundamental change in our investment environment rather than focusing on the symptoms as we normally do.

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