Thursday, April 17, 2008

A tale of two approaches

Over the past two weeks we have all been engrossed in the budget debates and the developments in the Cash Plus saga. As usual the presentation by Audley Shaw took place and the response came later from Omar Davies, and there were criticisms for and against both presentations. While both presentations had their fair share of politics, and also highlighted some very salient points, I believe that the overall response from the public and media has been lacking in quality.

As usual we tend to keep judging the quality of the presentations based on (1) how well it was delivered, and (2) how much more expenditure was allocated to critical ministries and how large, or small, the tax package was. My question is, isn’t this the same way we have been assessing every budget? Hasn’t every budget each year sought to give more money to the police and education? And what has been the result of this traditional approach to budgets? It certainly has not resulted in any rates of growth to speak of, as we continue to feel special when we eke out a 2% growth rate. The increased expenditure on security over the years has not served to reduce crime.

Wrong approach
This to me implies that there is something seriously wrong with the way we have approached the creation of budgets over the years. It seems to me that the problem we have had with the crafting of budgets had more to do with the philosophical approach rather than the amount of money we allocated to one project or another. The last time we have seen any respectable growth level was in 1990, when growth was at 5.5%. Since then we have been lucky to see growth in excess of 2%, even while we have budgeted (and spent) significant increases on security and education, and imposed significant tax packages on the Jamaican people. The result of all of this has been more hardships, higher crime rates, and no growth.

It seems to me therefore that there was something philosophically wrong with our budget approach. The fact is that our budgets were focused on controlling expenditure and paying off the debt. For a very long time budgets have not been focused on creating a platform for growth, which is the only way that we will get out of this now $1 Trillion debt level that Jamaica is burdened with. Increasing expenditure on security, education, and health by itself will not provide us with the platform needed for growth.

In any event this criticism of whether the budget is realistic or not is more an attack on the technocrats, who were the main architects of the budget rather than the politicians who really just set the framework for what the budget should look like. This is the difference between operations and policy. The latter is responsible for setting direction, and the former for making recommendations about that direction.

This I think is at the heart of the difference between the two approaches to the budget. The opposition spokesman on finance has chided the finance minister for an unrealistic budget. This is an attack on the same technocrats he worked with in preparing past budgets rather than on the finance minister. The fact is that the finance minister would be the one who would set the course but the technocrats would sail the ship.

Therefore any criticism of the finance minister should have been on the philosophical direction of the budget rather than (1) the amount of money allocated to ministries, which would have been submitted by the various departments; and (2) the level of inflation and growth, which would have been provided by the technocrats responsible for projections. I am therefore yet to see any constructive criticism of the real essence of the finance minister’s responsibility which is the philosophical approach of the budget.

A foundation for growth
The fact is that this year’s budget is fundamentally different in its approach in that it seeks to lay a foundation for growing an economy rather than just seeing how much more we can tax Jamaicans to pay debt or how much more expenditures can be increased, e.g. road infrastructure where the massive amounts spent in the past seems to have been spent incorrectly as the quality of the roads fixed only a few years ago leave little to be desired.

The budget this year addresses some fundamental issues that were not much of a concern in the past, which centre on preparing the Jamaican economy for growth, which is the essential ingredient that we have lacked over the years. This can be seen from a few initiatives such as:

1) Tax amnesty programme that seeks to formalize the informal players. It seems as if the only thing we have done in the past about the informal sector is to brag about how large it is;

2) A symbolic gesture to the taxpayers of this country that more money will be placed in their hands for expenditure – reduction in transfer taxes/stamp duty and an increase of the threshold. Although small this is a move in the right direction;

3) A desire to spend within our means and bring efficiency to the use of funds – so that budgets are not just increased for the sake of spending more money this year over last but a targeted approach is taken to spending and reducing the burden of loss making entities on Jamaicans such as Air Jamaica;

4) An emphasis on encouraging lower oil consumption – the increased taxes on motor vehicles should be seen as an encouragement for people to curb spending on a severely escalating energy bill. What we need to ensure now is that through the JUTC a very efficient public transportation system is provided; and

5) Addressing the cost of tobacco on our health system by taxing this nuisance more so that more money will be available for persons who fall ill as a result of this scourge.

This I think is the difference in the approach to the budget, and what should be highlighted. It is not just about how much more money is spent this year over last. But rather how will I more properly spend the money that the Jamaican tax payer has worked so hard to pay. It is not about how will I increase tax revenues this year above inflation levels, but rather what uncollected taxes are out there to be paid and what do I have to do to collect it and level the playing field. It is not just about raising taxes to raise money to pay debt but rather how to use taxes as a means to drive behaviour and encourage growth. It is not just a matter of borrowing money to finance the budget but rather putting debt to work productively.

I do agree with Omar Davies that the greatest challenge this year will be that of food security and is a matter that must be addressed going forward. The government has shown its commitment to addressing this by allocating $1 Billion for subsidy support his year, following on the $500 million last year, which I will admit came too late. We could successfully argue that it is not enough but a time must come when we start to live within our means. The way we approach this will be critical for Jamaicans and the contribution of the Agriculture Minister will be very important in solving this looming crisis.

Even this situation will demonstrate that it is not how much money that is thrown at it that is important but the approach to solving the problems of the country. To continue on the path of just cutting expenditure or throwing money at problems would have had us continue on a road to certain destruction.

Thursday, April 03, 2008

The loss of thought

While growing up, I have always heard people say that the younger generation does not solve problems as well as the older generation had. This is something I have found myself saying, as it seems that our ability to solve problems just keep getting worse with each passing year. On the other hand economies such as the US seem to be getting better at resolving issues, and a prime example of this is the way they have dealt with the current subprime crisis compared to the way in which Jamaica handled the 1990s financial crisis. I will not delve into this comparison, however, as I have exhausted this comparison at a lecture I did last week and have some amount of fatigue from that. But I use this as a real example to show the distinction between how we deal with problems versus the rest of the world.

Growth deficiency
And this is the reason why in 45 years (1962 to 2007) we were able to grow at only an accumulated 97.7% or an average of only 2.17% for each of those years. What is even more frightening is that 1962 to 1972 accounted for some 69% of that, so that over the last 35 years we have managed to grow an accumulated 28.7%, or an average of 0.82% each of those 35 years. When broken down into decades we see the following comparisons:

- 1962 to 1971 - 69.0%
- 1972 to 1981 - ( 9.0%)
- 1982 to 1991 - 18.5%
- 1992 to 2001 - 9.5%
- 2002 to 2007 - 9.7%

This if course is the underlying economic problem that Jamaica has, and there is a fundamental reason for this problem. But the reason is not to be found in numbers but rather in behaviour and more importantly the type of leadership that we have had at the helm of this country.

When one examines our leadership, and the statement that each generation thinks less, one would see that the statement is not entirely true. It is true that younger persons do read less and generally do not reason as well as their older counterparts but this has more to do I think with the leadership that has destroyed the learning institutions in this country. Just as we export goods the same way today as we did 30 years ago, it is the same way that we seek to teach children to learn the in the same way they did 30 years ago. And all of this in a world that has changed in a very revolutionary way.

If one examines the leadership in this country over the years then you will see that there was a fundamental change in the leadership structure coming out of the 1960s but since the 1970s until now we have fundamentally maintained the same leadership structure. Now we are seeing another round of fundamental change in our leadership structure over the past two years or so, and those that have been part of the structure that has caused our dismal growth record over the past 35 years need to stay away and allow the new leadership to take charge and delver to us what they could not.

This leadership problem of course has resulted significantly from the fact that over the years we have appointed persons to leadership positions based on their political allegiance rather than their ability to think and solve problems. And this is not only at the political level but also the administrative level. This attitude has resulted in a cadre of leadership that is unable to think past the length of their noses when taking decisions, so the long term effect of decisions are not carefully thought out. So while the decision may resolve the current situation, in the long term it creates havoc. Such was the effect of the decision surrounding the 1990s financial crisis.

Monopolistic threat
But more recently I see where the Broadcasting Commission seems to be falling into that category also. There are two decisions they have made that really seems very short sighted and leaves me no option but to question how well they think about what they are doing, as both seems to me to be a question of solving short term problems and to heck with the longer term effects.

The first has to do with the cavalier way with which they dismissed the question of a possible monopoly developing in the cable market. This has nothing to do with the acquisition of their latest kill, Entertainment Systems, but the very real possibility of a monopoly developing in that market. I myself am a customer of FLOW but would love the option to switch to any other competitor in the market place if I feel the need, especially as I believe that their customer service has been consistently deteriorating. The Broadcasting Commission seems to be forgetting the “not too far in the past” monopoly position of Cable and Wireless, that has constantly proven itself to be a very inflexible monolithic structure.

By the looks of the persons on the commission they do not seem young enough not to remember the days of the single land line and cellular service from Cable and Wireless where they held us Jamaicans to ransom by “phone point” and extracted every dollar they could from us. Thank God for Digicel that rode in and saved us from the Cable and Wireless monstrosity, even though their own customer service has deteriorated, demonstrating the need for constantly having new entrants.

Similarly if the commission does not carefully monitor the FLOW situation then we could end up with a situation where the smaller players are forced out of the market and we could end up in a JPS type relationship. But being the forward thinkers they are they seemed to have dismissed this matter where as in the US it would have been a matter of public debate led by the regulators, as the consumer is always given precedence to the preferences of the corporation.

Instead they have sought to focus on some comments made by a radio personality, which nothing is wrong with, but have recommended the drastic action of suspending the radio station’s licence. I can only conclude that they must be mixing up the two cases and really meant to take drastic action in the FLOW case and not the latter one, as it would seem to me that they have confused the long term effect of both. In the case of the radio station they are sending a clear signal to the market that they can suspend freedom of the press at any time they so desire.

When, for example, Imus made his racial comments on US television was their a call for the lock down of the television station or disciplinary matters against Imus. The commission needs to be careful about the solutions they recommend else they could end up losing more credibility than they already have.

On the other hand they must be wary of the monopolization of the cable industry. Already I do not believe that we have enough competition in the market, and we have seen the benefits of competition in the cellular market. This is a prime example of the lack of clear thinking that has affected our development and growth over the years and especially in the last 35, which has resulted from a leadership deficiency.