Friday, August 03, 2007

FINSAC revisited

Last week the Observer quoted me to say that FINSAC is the worst thing that has happened to Jamaica. In particular I was speaking in relation to the economy, which I do believe, certainly as far as I can recall.

In the same week I received a call from a senior person in one of our media houses, representing a national association, to say that they had received complaints about the statement, as it was felt that this was a “strong view” being expressed and as such it could offend some people. He went further to state that they had not received any elevated complaint from any politician but that they were pre-empting any that may occur.

Threat to public expression
Now this high ranking media personality did not seek to find out first what my views are on FINSAC, but sought to take the shallow route of assuming offence to one side. Secondly, and most disappointing is that this is the position of a media leader, and leads me to wonder if the news reports from that organization are tempered to consider feelings, as they may not be allowed to have strong views on issues. And thirdly, there was no official complaint from any politician (I assumed he meant the PNP) and what I know of the politicians on that side is that they are articulate and I have not known of them being offended by any view on issues. As a matter of fact my own view is that media discussions have elevated under the PNP, and very much so under the Minister that had responsibility for FINSAC.

The implication is that the threat to public expression is greater from some of our citizens than politicians. After all I don’t think it was a politician that threatened Nationwide recently. And this is one reason why I went further to say at the luncheon that business persons need to unite around issues rather than speak out against issues that affect them individually. Isn’t this why the PSOJ and other such trade organizations were formed? So what is the big deal about saying it? The tribal nature of politics in many instances is the result of private citizens branding people as PNP or JLP, not having the ability to see things as pro-Jamaica or anti-Jamaica. Instead many of our educated do not vote on issues but are no different than the average Jamaican who votes based on the picture of the 1960s political leader in their home.

Anyway this brings me around to the issue the phone call has revived. That of FINSAC and why I say it is the worst thing that has happened to Jamaica’s economy. And again, as I said a few weeks ago, I am going to go slowly and try to inform the media especially so that they can follow what I am saying.

Now, the lesson starts with the question, what are some of the main inhibitors to Jamaica’s economic development? The main setback caused by FINSAC is not the high level of debt (over $900 Billion) that we have today. In fact in 1984 the debt/GDP ratio peaked at 212%, before it started to decline. The difference at that time was that it was on the decline after 1984 and growth rates ran in excess of 5%. So as I always say, there is nothing wrong with debt as long as the returns are higher than the cost of the debt. It was the high growth rate that caused us to be able to reduce the debt, as a percentage of GDP, at that time. The result is that, if GDP grows at higher rates than the debt then it means more money available for spending in the country.

Importance of growth
This is what the government is trying to achieve by aiming to accelerate economic growth. The position we are in today is that our productivity base has been reduced, over prior decades, while our lifestyles have increased. This means that we have had to borrow money to compensate for lost productivity.

The graph clearly shows that after the mid 1908s when we started to see growth rates in the region of 6% and 7%, the debt/GDP ratio started to decline. At the start of the 1990s, when the Jamaican economy was liberalized, the debt/GDP ratio increased, as we had to borrow more money to stabilize the economy from the effects of globalization. In 1997 FINSAC came into being, and from that point the debt/GDP ratio has increased and is just leveling off. But every five years or so we have a thing called an election and that of course always stops the progress.

So the high level of debt/GDP is nothing novel, as this trend of high levels of debt/GDP started in the 1980s. But at that time the economy was more productive and could grow at higher rates. This is the main reason why I always say that the problem with the Jamaican economy is its capacity to grow, as we have eroded the social and economic institutions that form the productive base.

Following on this then, I think it is fair to say that the main problem with FINSAC is not the high levels of debt. The main problems caused by FINSAC are (1) the erosion of an entrepreneurial mindset; (2) the lack of accountability and independence that came out of that period, which has contributed to the indiscipline today; and (3) the high involvement of government in the economy. One positive that has come out of the FINSAC period is a strong regulatory environment for financial institutions, which has been well managed by the BOJ, under the stewardship of the present governor, and the FSC, which I think is the most effective regulatory arm. Right now the global financial markets has reached a stage where creativity is moving farther ahead of regulation, but that discussion is for another time.

Fading entrepreneurialism
The reason why I think the waning of the entrepreneurial spirit is the main problem caused by FINSAC is simple. We all know that what drives economies to move forward is the small entrepreneur. It is not government spending and growth in distribution, construction, or increased debt through credit cards. In fact if we look at what is happening in the US, the domestic economy is suffering from an extension of debt to consumers and because countries such as China are looking to move away from holding US debt (treasuries). What is holding up the US economy is the entrepreneurialism that caused many US companies to invest in China, the next superpower.

The late 1980s to the 1990s saw a lot of Jamaicans come to the fore in terms of new business ventures. Many manufacturing and financial institutions were being headed by Jamaicans, which is the organic growth that drove the economy during this period. This meant that we were relying less on foreign investments, and certainly did not need imported police and teachers, which would be a return to colonialism. We had our own self made Jamaican entrepreneur and as this example spread, more and more Jamaicans saw the possibilities of starting their own business. Then came the high interest rate environment and FINSAC in 1997.

The high interest rate environment saw many existing variable rate loans ballooning overnight, and logically companies would not be able to service these loans. The high interest rates were used as a means to control devaluation, which also would have had a devastating consequence on the poor. The problem though was that monetary policy (high interest rates) was used for too long a period, when what was needed was fiscal policies, and the roll back of monetary policies.

The problem was not solely that of government policies however, as we did not have the regulatory framework to properly monitor the financial institutions, and so the poor risk management practices within many institutions contributed to the situation. Even before the government intervened the financial institutions should have called the loans long before they got to the point where the security could not cover the loan balances. If this were done then the high level of FINSAC intervention would not have been necessary. And it is because of the good regulatory environment today that I do not believe another FINSAC will occur.

But the end result of all of this is that the Jamaican entrepreneur went into hiding and has only recently started to emerge. This is why it was so necessary for Omar Davies to stabilize the macro environment to bring back confidence to the Jamaican economy, for local and international investors alike, an accomplishment he can claim. Being the ones burnt, though, the Jamaican entrepreneur had a longer recovery period, as markets are driven primarily by perception and confidence.

Lack of accountability
The FINSAC debacle has caused so much pain and yet still the level of accountability is low. This has contributed to the attitude that if people can get away with causing billions of dollars in damages, then why do I have to conform. The belief is that politicians will protect their “big friends”. I don’t know of any protection, which may have possibly happened knowing Jamaica, but certainly in the main the problem was not caused from this. We have seen where the government has pursued many persons but have been unable to get too far, after many years. The main problem is with the judicial and regulatory systems, which is why our institutions are critical in the development equation. At the time of the crisis the regulation and legislation were weak, and so it was difficult to get accountability in the time desired. Additionally, the need to call in forensic auditors meant that it was a web of documentation that needed to be sifted through.

This lack of accountability, no doubt, has contributed to the wider problem of indiscipline. Since that time much of the legislation has had to be updated, as Jamaican laws really did not have much teeth until recently. An example is the Companies Act that prior to 2006 was last updated in 1965.

Government bureaucracy
We all know that government is probably the most inefficient player to have in the economy. After FINSAC government got caught owning many private companies that no private investor wanted to touch, because of the FINSAC experience, resulting in foreigners buying our assets. This meant that government had become a major player in the economy, and became the main engine of economic growth.

There is definitely a problem when an organization founded on bureaucracy is the major player in the economy. Our government is no different from any other around the world when it comes to bureaucracy, as it is necessary for governments to have bureaucratic structures because of their size. As a matter of fact, this is one reason why even private companies in the US break up into pieces after attaining a certain size. The smaller you are then the less bureaucratic you have to be to maintain controls and the more nimble you can be.

When government found itself owning all these private companies, and being a major player in the economy, they truly did not know what to do. They did what they knew best, which was to apply bureaucracy to the control of these companies. The result of course is that productivity declined, and companies and the economy became less efficient. This inefficiency has now become engrained in the Jamaican culture.

So to my friends who were following me, and were able to understand what I have said, the problems with FINSAC were far reaching and way beyond any issue of debt. What made the situation bad was that the Jamaican environment was not prepared to deal with this situation, and the management of the crisis (both in the private and public sector) was handled poorly. Whilst I believe that government intervention was necessary, I believe that (1) it came too late, as the writing was on the wall long before; (2) not everyone should have been bailed out to the extent they were; and (3) they should have found a way to allow the private sector to carry on with the companies immediately instead of creating FINSAC to manage them for so long. There is a lot more that can be said about the FINSAC era, and it needs public discourse to avoid any recurrence and educate those amongst us that should know.


Anonymous said...

A very good article except for the comment " And it is because of the good regulatory environment today that I do not believe another FINSAC will occur". If we had a poor regulator and the monetary policies were unfavourable to business, we would still have a FINSAC as business will fold in the industry. The converse then is that businesses with poor risk management would fail not the industry. herein lies the difference.

We have to get beyond the point were government actions recklessly destroys industry. Until then we cant say there will never be another FINSAC.

Garfield Edwards

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