Friday, February 19, 2010

POLICING THE ECONOMIC RECOVERY

LAST week, the Government secured the much-needed approval from the IMF board for some US$1.3 billion to be loaned to Jamaica for balance of payments support. More importantly though, this paved the way for the Government to secure the necessary financing from the other multilateral organisations.

For me, however, the greatest impetus to economic recovery last week was not the IMF loan, as the loan does not ensure economic recovery but simply provides a halt to the decline of the economy which will continue if the appropriate policies are not implemented. The greatest impetus to economic recovery last week was the arrest of the police seargent and others in the gun and ammunition find.

Why people invest
My reason for saying this is that the salvation of Jamaica does not rest solely in the way the macroeconomic numbers or fiscal accounts are managed. While the management of the numbers is very important (and being an accountant I know that), it is more important for us to remember that economics is a social science and people invest more because of social stability, predictability and confidence, rather than macroeconomic numbers or interest rates.

As an example, in 2008 global investors were accepting a negative return on US treasuries while other markets and instruments were giving positive returns. This was so because of the prevailing uncertainty in global markets at the time, and the first thing that investors want to secure is their original capital. If you can maintain your original capital then you can live to fight another day, but if you can't, then you have no other opportunity to invest if the current one fails. And failure must always be seen as a possibility.

In fact, when investing, the management of risk and minimising loss are always more important considerations than how much profit you can make. The reason for that is if you can minimise your downside risks, then it means that the number of times you have to win in order to get ahead does not have to be very high in order to be profitable.
If, on the other hand, you take a decision to go for broke and you fail, then more than likely you will be wiped out in one go. So when making decisions about investments, investors usually find the best balance between risk and reward.

It is therefore important for us to understand how the potential investor thinks about the risk element of the investment. Investments take place in all types of environment. In Afghanistan and Iraq, for example, people do make investments, but these are investments that have a relatively short payback period. A rational investor would not, for example, seek to establish a business such as an online book store or an agro-processing plant in Afghanistan, even if he is getting money to borrow at zero per cent. Instead, he may seek to do some trading business where there is a quick turnaround on the investment.

Similarly in Jamaica, there are many people who would want to invest more in agriculture but refrain because of the high incidence of praedial larceny.
It is therefore very important for the investor to see (1) a stable social environment; (2) a predictable system of justice and fair play; (3) maintenance of law, order, and discipline; (4) a favourable industrial climate; (5) reduced bureaucratic structure and impediments; and (6) appropriate legislative protection. After all these are in place, then we will start to see serious investments taking place in the country.

Sure we will see some investments taking place, but they will only be in the form where investments are relatively quickly recouped. As examples we will see investments in financial institutions and services, where other people's money is used as capital while enjoying high returns, or we will see investments in trading and services, which have low capitalisation and quick returns. This, in fact, is the way that Jamaica's economy is structured for the most part, and the reason for that is because of all the impediments faced by potential investors. So if we want to see real long-term investments taking place we have to address those issues.

Efficient, corrupt-free police
At the heart of this drive for recovery, therefore, is the need for a corrupt-free and efficient police force. In the largest economy in the world one can't drive 100 yards without seeing a police car, and do not dare try to bribe any of them, or else you will certainly end up on the wrong side of the law. In the US also, while there are predictable and very efficient laws in place to ensure discipline, protection of human rights, and equity, these laws are not overbearing and do not require that everything that happens in the country has to go through a bureaucrat or the minister in charge. What they do is lay the foundation and guidelines for all to follow.

In Jamaica, for example, I can never understand the system of the Tax Compliance Certificate (TCC), which starts off by assuming that everyone is a criminal. Why does the person who has never been a problem have to go through the same process as the person who has had multiple run-ins with the authorities? Wouldn't it be more efficient to have a system where everyone is assumed innocent and if you have problems with the authorities then you are blacklisted and required to go through the process?

In Jamaica also we do not have much respect for human rights. As I keep saying, if people always have to be crying out for justice, then what time do they find to be productive? So once again, because of the way our bureaucrats operate, we waste a lot of productive time and resources dealing with issues such as Armadale and the Horizon Remand Centre, whereas if we had ensured that the rights of these people were being protected in the first instance we wouldn't have to waste time and money on these matters.

The people who are responsible for this should be asked to pay back the monies spent by the state in investigating. I am heartened by the prime minister's response to the announcement by the public defender that his office was denied entry to the Remand Centre. That is disgraceful for a country that calls itself civilised.

And how can any investor have confidence in the police's ability to solve murders and deal with extortion if they can't even control the night noise or the taxi drivers on the road? It would seem to me that these are basic aspects of discipline that any state should be able to maintain. The police seemed to have been making some effort to do so, but as usual when something starts in Jamaica it is kept alive for about... nine days. So once again people are parking (or stopping for a long while) in vehicles on Knutsford Boulevard to go into the food places thus obstructing traffic while all the policemen stationed at the Knutsford Police Post are holed up in the office trying to enjoy the air-conditioning, I assume.

If we are really serious about economic recovery, then while interest rates and other fiscal and monetary policies are important we can never really see real development occurring without first ensuring that we behave like a civilised society. Because as far as I am concerned, our society is far from civilised. In this age of globalisation there are far too many options available to investors other than Jamaica, so we must compete aggressively. For me, therefore, Owen Ellington is going to have the most pivotal role to play in 2010 in policing the economic recovery of Jamaica.

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