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.


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