Friday, July 20, 2007

Growth versus development

Two sayings that apply to Jamaica are 'If you don't know where you are going then any road will take you there' and 'If you do the same thing every day then you will always get the same results'.

Quite frankly, if you do not have an objective in mind and just keep going with the wind, then you don't have to know which road to take, and if you are happy with the results you are getting then there is no need to change your actions. If, however, as in Jamaica's case, you want to get to developed country status in 25 to 30 years, then it is necessary that you 'change course'. No pun intended.

Another question the young people are asking though is who is going to change the course, as illustrated by their dissatisfaction with both political parties not focusing on issues, but carrying on the same politics we developed in the dark ages of the 1938 riots.

Same cry
Is it any wonder then that if we continue to practise the same politics that we have always done, we will get nothing more than the same political campaigns and promises that are never usually fulfilled? But as I said to someone recently 'a promise is a comfort to a fool', and no doubt we have been repeat fools for believing the same promises every five or so years. But such is the literacy level of Jamaicans that we continue to be impressed by whoever speaks or looks good and then bawl out about hard times for the ensuing five years until 'feel good' time comes around again, and like fish to bait we are sucked in once again.

The so-called intelligentsia amongst us are not excepted, as their strategies for Jamaica's success flutter like a weathervane with the direction of the wind. One day they profess that Strategy A will work and when it does not, 'no problem', we just shift to Strategy B. In the meantime, of course, Jamaicans have gone deeper into debt and the masses continue to be content with the illiteracy into which they have been from the days of slavery until now.

This sort of behaviour is to be expected from those who have not had the benefit of a proper education, but when I hear people continually professing economic growth as the messiah for the Jamaican economy, year after year, I wonder if we have really grasped the problem Jamaica faces. And even though economic growth should not be difficult to achieve, it continues to elude us.

My point though is that growth is not necessarily the same thing as development, which is what Jamaica needs. It logically follows, by definition, that if we are to achieve developed country status then what is needed is development. Economic development is not the same as economic growth, and it seems to me that one of the issues we have is that we have always been satisfied with growth, when growth can be destructive to the economy. Although, if targeted properly, it can lead to development.

I say this because GDP growth focuses not on development, but rather just measuring the value of the domestically produced services and goods in an economy and comparing it against a previous period. So if last year the constant value of all goods and services produced was $100 and this year it is $102, then we have 2 per cent growth. On the face of it, this looks fine until we dig into the numbers. When we look at the January to March 2007 quarter we see that GDP grew by two per cent. Construction and installation grew by a whopping 7 per cent, Electricity and Water by 4.7 per cent, and Real Estate and Business Services by 2.4 per cent. This sounds great, as it must mean that economic activity is taking place and things must be good. The truth is that we have always seen good growth in these areas.

Growth paradox
Why then, if we are showing growth, irrespective of how minute most of the times, are we still seeing a declining dollar, galloping debt, large fiscal deficits, inflation concerns sometimes, shortages in hospital inventories, frequent industrial unrest, and people not being able to afford hospital or school fees? Not to mention the frequent power cuts that disrupt our productive base. Isn't it supposed to be consistent with the concept of growth that instead of the challenges increasing each year, people should be seeing their lives improve?

The fact is that growth is not necessarily consistent with development. The areas of significant growth pointed out above are all areas of consumption that have a high import content. When you look at the same quarter numbers, you will see the sectors that have the best potential for exports - Agriculture grew at four per cent, but all the others had dismal performances - Mining and Quarrying at 0.8 pe rcent; Manufacturing at 0.2%; and Miscellaneous Service (includes Tourism) at -0.1 per cent. It is for this reason that while we have been boasting of increased exports, we are still seeing an increasing trade deficit, which is at the heart of wealth creation. In other words, this is the measure of how much Jamaica earns versus how much it spends and is the measure that affects devaluation.

So it seems that increasing exports is bad for us. The problem, of course, is that the infrastructural support for development is not there. If we want growth, we can easily achieve it by importing more than we did the year before and by borrowing money to increase salaries to increase spending power. We will not have development, but will have phenomenal growth.
It is apparent then that the emphasis must be on the things that lead to development, because if we put that infrastructure in place then development will happen. It is obvious that one of the reasons for our economic situation is because our focus has been wrong. Even after the 2.5 per cent growth we had last year, we still have a justice system that seems to wait until enough time has passed for the complainant to die or forget about the case before it comes to trial. We still have citizens complaining about police brutality with regularity. We still have a government bureaucracy that is hostile to businesses. We still have high levels of indiscipline on the roads. We still have high crime levels, including in schools. We still have roads that simulate earthquakes when one is driving.

If we are to achieve developed country status in 25 to 30 years then it is not only important that we grow at six or seven per cent, but we must address the institutions necessary for a developed society. We need an independent and corruption-free police force. We need an efficient justice system, including proper accommodations. We need to make quality education and health available to our citizens. We need to ensure that citizens' rights are protected. We need to grow local businesses instead of constantly looking for overseas investors. This is what development is about, not just increasing the value of goods or services, especially when the import content is so high.

These are the issues that persons want to hear about on the campaign trail. These issues are the ones to be discussed in the context of globalisation that will eventually leave us behind if we do not properly discuss and act. But if the objective is not about development, but just to increase the value of goods and services produced, then we are on the right track.

Wednesday, July 18, 2007

Service essential for development

A few months ago one of Jamaica’s leading entrepreneurs said to me that there is only one world-class company in Jamaica. At the time I questioned what he was saying, and suggested to him that there were about three. He was insistent that there was only one and when I enquired as to why he said so, his answer was that this was the only company that year after year received world class awards without fail, and has been doing so for a while. The company he said is Sandals.

I still believed that there were two other companies, and when I think about it now, it was only because I wanted there to be more world-class companies in Jamaica. After thinking about it for all this time I am inclined to agree with him.

A few weeks after speaking to him I went to see Butch Stewart, for what was supposed to be a 15-minute meeting, and ended up being with him for more than an hour. Among the topics I spoke to him about was his start as a businessperson and the obstacles he faced along the way. What stood out more than anything else, and what I believe is behind his success, are two philosophies he holds dear. These are (1) good customer service is the most important rule to him; and (2) his affinity to hire good people and leave them to manage.

Customer service
After all, if he did not emphasize quality customer service, then there is no way that Sandals could grow to build such an international reputation, as the company is in an internationally competitive business. He also could not succeed against the odds of the high crime levels and poor infrastructure in Jamaica. Additionally, if he did not hire good people and trust them to work, then he could not grow the business to the size it is by trying to be hands on with everything, as many Jamaican businesspersons do.

About two weeks ago I had to go to the jewelry store to replace the battery in a watch. The first, well-known, store I went into they said that they could not replace the battery as the person responsible for that function was at lunch. Amazed at this response, I asked them if they were really open for business. I went to another store and they took the watch and damaged the back when opening it, as they apparently did not have the proper tool to do so. They never said anything to me and just presented the watch and the cost of the battery. When I pointed out to them that the watch was damaged the owner said that in order to open it he had to force it open. Never mind the fact that he has damaged the watch, as he was trying to sell a J$200 battery.

Well I immediately vented my anger and told him that I would not be paying for the battery. He offered no compensation, as would have happened in developed markets, without considering that I would never set foot in that store again and would relate my experience to at least five other persons. I am sure that some other customer must have at some time suffered a similar fate. But it won’t be the six persons, including myself, that will never shop at that store again.

This incident was what got me to thinking about what make a company, and country, successful. At the heart of any efficiently running market economy is the aim of providing good customer service in order to increase profits, due to competition. Of course one is assuming that the objective of the company is profit, and that the competition provides better service. The problem with Jamaica may be that the level of service is so sub-standard that bad service is acceptable. In the case of Sandals because they have to compete with international destinations, and is already at a disadvantage with Jamaica’s image, they have to provide a world-class service and product in order to excel.

Regulatory environment
The Consumer Affairs Commission does not do much to raise the standards of customer service also, which is what I think an organization like that should be proactively doing. This is a symptom of our regulatory environment, which is not about protecting consumer rights but rather government’s interest. Case in point the OUR and RGD, which although they try communicate protection of consumer rights is really not set up for that. I also started to think about the reason why the Jamaican electorate has always been satisfied with poor service from politicians. The fact is that Jamaicans have never been used to good leadership. We are accustomed to substandard service from our leaders, from even before independence, so accepting mediocrity is our nature.

One of the reasons why many companies are unable to provide good service is because they are so consumed with poor back office operations that they don’t have the focus of good customer service. This is a major contrast between US and Jamaican companies. Local companies do not like to spend money on proper systems and good people. And if you do not have proper systems then it is very difficult to deliver good service and compete, as information is not readily available.

How then does poor customer service prevent national development? Well f we accept that economies are driven by the private sector, then it is fair to assume that the more efficient the private sector is then the more successful the economy will be. If we accept that private companies are the ones behind exports, therefore providing Jamaica’s foreign exchange, then we see where those with poor customer service may have a problem competing internationally. Poor service will drive inefficient businesses, which may mean relatively greater costs per production unit.

Another major reason also is that our regulatory environment does not seem to encourage competition. The first reason for regulations in Jamaica always seems to be restrict rather than monitor. So we tend to make the process for coming under regulations so difficult that many persons get frustrated, and would rather stay in the informal economy. One example of course is the TCC process.

The US market, on the other hand encourages new ideas, and so frequently new products and services come to the fore. A case in point is a new financial product in the US called “Death Bonds”. As the name implies it is a bond on someone’s life. If, for example, I am the holder of a $1 million life policy and need cash, I could sell the rights today to receive the premium when I die, to an investor. The bet by the purchaser is that I will die within a specified timeline, and the earlier I die the more profit he/she makes. The purchaser may, for example, decide to take the risk on someone who smokes and does not exercise that they will die in a specified amount of years and decide it is a good risk to take. Such a product may be taking it too far, as the US always seems to do, but it is this sort of innovation that leads to development of markets. And lets face it two things are certain in life, death and taxes, especially in Jamaica.

So in order for economies to develop they must be driven by companies. In order for companies to grow they must provide good customer service, which if not done is negative for international competitiveness. The plea to companies is to realize how important it is to deliver good customer service, in order to build a company and nation.

Friday, July 13, 2007

The problem of capital allocation

I have always maintained that one of the main problems causing Jamaica’s debt problem is that we use our capital incorrectly, whether debt or equity. The fact is that much of the $1 Trillion debt has been used in consumption activities with no hope of providing a return in excess of the cost of the debt, directly or indirectly. We see also that many Jamaicans would rather borrow money to purchase motor vehicles and big houses rather than start businesses.

This is one is one of the same problems facing the great US. Consumers, and investors, are so highly leveraged that any increase in interest rates could cause a breakdown in consumer spending, which drives the economy. Already we have seen the effect on the housing market of interest rate increases from previous lows. The problem the US faces because of this debt problem is that they have a very high trade deficit and has to contend with higher interest rates globally, causing depreciation in the US dollar. One big difference between the US and Jamaica though is that much of the retail leverage is for higher yielding investments.

Free education and health
This matter of capital allocation brings to mind the recurring debate on how the JLP can afford to fund free education and the PNP free health care. Of course being in the silly season, we expect politicians will not be responsible for what they say as they are caught up in the euphoria of the moment and will make all sorts of promises and uncharacteristic statements. Such is the nature of our politics and we are to blame as the ones that get excited by the music, promises and numbers that play a critical role in political rallies. Even the police get caught up as they ignore the traffic laws and allow political supporters to travel on buses with protruding bodies. So during election all sense of rationality is forgotten and even the most law abiding and educated amongst us get hypnotized.

Recently some otherwise rationale persons called me to ask, how the JLP will find money to fund education to the tune of just over $1 billion. When I pointed out that there could be an allocation of our funds to do so, the answers were that but there is no money in our $380 billion budget. When I pointed out that we spend billions of dollars each year on Air Jamaica, JUTC, sugar, and recurring projects such as cricket world cup and lift up Jamaica the response is well that money has been spent already so where are the additional funds going to come from. I even got the response from a radio host one morning to forget the money spent on world cup and let’s find a way now to recover the funds.

Even after I pointed out the excesses on Air Jamaica et al, and persons agreed with me that education and health were more important for productivity and development, these persons still argued that it would be hard to find the additional funds. Of course they forgot the important need to efficiently allocate capital, implying of course that we should continue to spend our capital inefficiently but question spending that will help to move our country forward. So I have to conclude that election is a very special time every five years where educated, and otherwise rational persons, are allowed to plunge themselves in political diatribe irrespective of how silly the argument is.

Economic development
When I hear these arguments then I wonder if anyone thinks about what is really needed for economic development. And I say development because we have always been speaking about growth, which can happen without development, as all we have to do is put up some buildings and expand the distributive trade of imported products. Never mind that our trade deficit is running away. Never mind that the average Jamaican is getting poorer or suffering more at the hands of the police. Never mind that the courts take upwards of five years to dispose of a case. These things don’t matter because we have growth.

Even though we are in the heights of the silly season I am going to go slowly and ask that these persons follow my reasoning. First, in order for us to experience economic development there are certain things that we must place priority on. The fact is that Jamaica is in a global market and has to compete with other countries. It is therefore unacceptable that in a global market where knowledge is key to development we have a literacy rate of 80 percent while our competitors show in excess of 95 percent. It is unacceptable that while developed countries, which we are trying to be like in 30 years, have free health care for the poor we have a system where if you don’t pay, well you know.

It is unacceptable that while our competitors have interest rates of less than 6 percent we have rates of 11 percent. It is unacceptable that the inefficient bureaucracy in Jamaica frustrates businesses. It is unacceptable that justice is either absent in some cases or the process moves so slowly that the criminal seems to win. I trust that we can all accept that these are the things that we need to change in order to achieve economic development and developed country status.

As an example, two prominent businessmen told me recently that they had hundreds of acres in mango and ackee production only to find that despite hiring security they did not see any produce from their efforts while persons on the roadside were selling in abundance the same crops. One of them even caught on camera persons stealing the crops and after four years in the court the case was thrown out because the photographs were not admitted. Well they pulled out and went into government paper.

If we accept the need for these changes then the next logical step is to say, how can we allocate capital to these areas? In other words where the return is highest, not in areas such as Air Jamaica which give us national pride and greater debt. If we also accept that in today’s global environment knowledge is essential for a competitive edge then we must ensure that our citizens have access to quality education. If we accept that human resources are critical to productivity then we must ensure that justice and proper health care is in place.

The issue for me therefore is not whether we can afford to fund education and health but rather how can we find the funding? How can we more effectively direct our capital to productive areas? If we had properly utilized our capital in the first place then we could more than afford the national pride of a loss making airline. These are the issues that need discussion instead of who gave what to the constituents and therefore deserve to win. While watching Trevor Munroe on CVM’s Direct the other night his line of reasoning gave me some hope that all is not lost.

Loving Jamaica
In all my years, last weekend I heard Reverend Al Miller give the best description of love. He said that love is not about feelings or emotions but doing the right thing all the time just because it is right. In other words if you love your child then you will not succumb to feeling and give in to their desire when it is wrong to do so. The question then is, all those persons who claim to love Jamaica, who do not do what is right, do they really love our country.

Friday, July 06, 2007

Jamaica: not serious about development

Last week 'Butch' Stewart made a commitment to invest US$100 million in a Portland hotel, but cited the lack of proper infrastructure and the need for the reopening of the Ken Jones aerodrome. Dennis Morrison stated that the Ken Jones aerodrome was not suitable for development, and that the needed J$2 billion would not be spent as the development of the highway would solve the access problem. My own view is that even with the highway an airport may be necessary if we want to go for the high-end tourists.

I had to take a drive down to Portland and was appalled at the poor road infrastructure. Even with the prevalent potholes the parish is still the most beautiful part of the island and the neglect is representative of the way in which we have ignored the development of the country. It seems as if Jamaica is not open for development. Even though we love to blame the government, a part of the problem is that very few members of the private sector are committed to real development instead of paper returns.

A big problem is the high levels of bureaucracy to get a project under way. It is said that in New Zealand, for example, one can set up a company in half an hour. In Jamaica it takes days going into weeks. Even after that, try to get a tax compliance certificate (TCC) or a licence. The TCC process is a symbol of the mindset of bureaucracy, as it treats everyone as a criminal, and fosters corruption. I mean, wouldn't a business-friendly environment be one that uses negative assurance in the process rather than requiring that everyone have a TCC? It would be better to blacklist those out of favour with the tax laws instead of requiring a TCC from everyone. Instead everyone is treated as suspicious, and the process creates inefficiencies and costs for legitimate businesses.

Looking at Portland I have to wonder if we are really serious about development. This, the most beautiful parish, is languishing for need of adequate infrastructure. From Kingston it took over three hours to get to Portland, avoiding the sea of potholes. This is a country that has its most productive foreign exchange earnings coming from tourism. I say productive because remittances are not productive earnings. If we are serious about developing tourism and jobs, why have we for so long neglected the most beautiful parish and left the youngsters to languish and a possible investment in the lurch?

Last week a government official called me to advise that 'Butch' Stewart receives the same tax benefits as overseas hotel investors, and what I wrote last week could be misconstrued as saying the contrary. I am happy to know this because incentives for local entrepreneurs must be applauded. These concessions will never be enough, though, if the infrastructural support is not present, as at the end of the day it is not concessions that drive investment decisions but returns.

It may have been better to spend Air Jamaica's annual J$10-billion loss on Portland so that the economy can develop and foster prosperity. Isn't it better to spend the money where greater value can be created? I really would love to know about the country's development plan. If I were spending the funds the first question I would ask is, which projects can I underwrite that will create long-term developmental value and which ones are easiest to attack? I doubt that Air Jamaica would be in the top 10, but I stand to be corrected.

We must spend our scarce funds so that the country's long-term viability is not sacrificed. And it is not only the economy that is threatened but our unique culture and environment also. These two are integral to the tourism product and we continue to deplete them. Increasingly we chip away at the uniqueness of the Jamaican tourism product until shortly we will lose the competitive advantage.

Vote Jamaica
Last weekend someone said to me that this election we should not vote JLP or PNP but for Jamaica. In other words, we should not be voting based on charisma, polls, who gives bun and cheese, free health or education, but rather on what are the best developmental policies being offered. It was within this context that I was heartened by the live broadcast of the JLP rally last Monday, where I thought Bruce Golding spoke to the real issues to be addressed. But what I found most heartening was his commitment to constitutional reform of a system that places so much power in one set of hands. I am happy to see that he will once again make the separation of powers a focal point. It is important that we hold him to this, as this is the primary reason why in the year 2007 we are still killing each other over politics. The US campaigning continues in earnest but at the same time the capital markets show record highs. In Jamaica while we await the election date everything comes to a standstill. Golding properly addressed the failing of our institutions, such as the public health and judicial systems. I hope that all politicians will start to discuss the issues and stop disrespecting the intelligence of Jamaicans.

Wesley Hughes stated recently that the lack of talent is the main crisis Jamaica faces. If we are moving towards developed country status then we need talent and properly functioning institutions. Democracy, protection of human rights and development cannot happen without these. Until we develop proper institutions and hold on to our most talented, then it makes no sense talking about development. If we really want to create jobs then we must start by developing our country rather than bringing one-time projects. One-time projects only provide temporary jobs, not development. We have to bring out the value in the assets that give us our competitive advantage. We have to develop areas such as Portland that have the greatest tourism potential. We have to reorganise our agriculture away from small farm plots to one where economies of scale can be realised. We have to protect the rights of the citizens and give them opportunities for education to the highest level. We have to improve our public transportation systems such as roads.

These are things that need to be done if we are to develop. We shouldn't feel happy growing at just over two per cent per year, which will most certainly be reduced this year.

So if I were a foreign businessman looking at Jamaica for long-term investment I would say that this country is not serious about development and find another country to put my money. Not just because of government bureaucracy, but because the focus of the private sector has been mostly about paper and not real investments.

Speaking about development, Mirant has really given us a bad deal. After all the "hoopla" when they came on the scene and what they were going to do, here we are a few years later.

Mirant has made hundreds of millions of dollars on the backs of poor Jamaicans. The island wide power cuts over the past few days really demonstrate that nothing has been done to improve the electricity infrastructure. It couldn't be that they are sabotaging the government in favour of the JLP.

In all seriousness, though, in a country that is paying billions daily to service debts, and has a problem with productivity, we should never tolerate this sort of situation from JPS, which has nothing more to offer than PR cover-ups. It's time for the authorities to pull a power cut on them.