Friday, August 27, 2010

A practical approach to financing education

Once again we are at the start of a school year, and politics raises its ugly head in one of the most important components of our development — education. Ever since I can remember, every year the parties spar about the need for government to ensure that no student is denied access to their exam results or entry to school if they do not pay the auxiliary fees. And this sparring match has been going on for years, and the position taken depends on who forms the government. Predictably, the government side will bemoan its lack of funding, while at the same time saying that no school should deny entry to anyone who does not pay. On the other hand the opposition always says that the government must ensure that no child is denied entry because of lack of ability to pay.

What neither opposition nor government has failed to say is, if the government cannot finance the school programme and the parents don't have to pay the much needed auxiliary fees, then where is the money to come from. In other words everyone expects the school to deliver the highest possible quality of education without the necessary funding to provide the desired quality. So I am always amazed when the opposition, government, and education ministry officials stress the importance of not denying students to enter school without paying and then bemoan the inability of the government to finance the service they say must be provided.

Traditional versus new high schools
And then we wonder why there is a vast difference between the results of traditional and newly anointed high schools. We wonder why the quality of the output of schools is lacking. And we fail to recognise the link between our uttering about, and inaction towards proper education financing, and the declining productivity levels we have been seeing in Jamaica between the 1970s and 2007, as reported by the Jamaica Productivity Centre. The fact is that the world entered an information revolution in the 1970s when ideas became more valuable than machinery and capital, which resulted in Jamaica being left way behind because of our inability to develop our human capital and more specifically our education system.

The recent announcement by the Education Minister about the approach to financing the exam subsidy is a move in the right direction. The fact is that the financing of education must not be treated as a welfare programme (as it has been since the 1970s) but must be provided because there is some value added to be gained, just like any other investment. It is therefore wise to ensure that only students who maintain a certain grade point level are rewarded with the exam subsidy. This sort of approach is essential in the financing of education if we are to achieve the desired results with the very limited resources we have, and have always had.

In deciding how we finance education it is important to take a problem solving approach to the issue. First we should determine what it is that we want our education system to achieve. If the objective is to provide a welfare system that can provide a good election platform speech then congratulations we have already achieved the objective and we do not have to do anything further, because we have succeeded in ensuring education's place on that grand stage of political football. If on the other hand we want an education system that can provide a highly productive workforce that will contribute to the economic development of the country, then it is essential to ensure that we take a practical approach to education financing.

Two primary means of financing
For most schools there are two primary means of financing. These are (1) government financing; or (2) fees charged by the school. This assumes of course that we are thinking about the provision of an acceptable quality of education, which includes basic things like water, electricity, security, books, a school management programme, etc. Now if we look at it logically (that is not through a politician's eyes) it is clear that if the government cannot provide adequate funding to achieve that quality education, then it must come from the fees and vice versa. On the other hand, we can do what we have been practicing in this country and ensure that the school has access to neither avenues of funding and create another political argument that the government is not doing anything to improve the quality of education.

There is of course one other source of financing, which is available mostly to the traditional schools, and that is the contribution from past students. I am fortunate to be on the board of my old school - Jamaica College - where the funding requirements has substantially been met by the contribution of old boys. We have a vibrant old boys association and an established trust fund, where we raise much of the funds needed to improve the school's physical and education facilities. This along with the commitment of the old boys, serving as board members and assisting the school programmes, as well as the managerial skills of the principal, has seen the school transformed from one where our quality was being threatened to one which is sought after by parents.

The fact is that the government does not, and for a long time has never had, the type of funding needed to properly finance education, despite their best efforts through the ministry. In my own view therefore unless we are willing to continue to accept the sub standard education system we have, then it is going to be necessary to ask parents to fund (through auxiliary fees) a part of what is needed to ensure that their child receives a better education. The fact also is that many of the fees are in the range of J$10,000 to J$15,000 per annum, or just over J$1,000 per month. This is significantly less than what is spent on phone cards and/or at the hairdresser in one month for many persons. So why not talk a little less so you can afford a proper education for your child.

The other approach is similar to the minister's approach to the exam subsidy. The government has to look at the value added being gained from how the limited resources are being spent, and more precisely target spending to areas that will give it the greatest return. So for example, at a recent seminar I presented at on Education Financing, I asked a ministry official if they had any numbers on how many accountants, doctors, lawyers were needed for the next ten years, and the answer was no. So how do we target our expenditure in the best way if we do not know how many professionals are needed in order to achieve the country's development, and particularly the 2030 vision. There must be a link between how we finance education and the national development plan. In other words, the person who wants to study the DNA of a raindrop should not be given the same level of subsidy as one who wants to become an accountant or doctor.

Another way is to also encourage companies to finance the education of some of their employees, eg through tax incentives. There are a lot more ways I can think of but it would take a lot more time to discuss. The point is that if we truly are concerned about education's role in the country's development then we must take a practical approach to its financing and not see it as a welfare programme.

The definition of madness
Einstein defined madness as doing the same thing repeatedly and expecting different results. Leading up to and even right after, the recent Tivoli incident, there were many people singing praises of the security forces and the need to support them. I cannot recall any other time in recent memory, where the security forces were so well supported by the Jamaican people from all walks of life. It was very refreshing and I thought that we were about to turn the corner, where the relationship between the security forces and the people of Jamaica developed that needed trust to tame the crime monster we have become so accustomed to.

Then came the secrecy surrounding the Tivoli episode, then Buckfield, and finally the killing of the 15 year old in Tredegar Park. And it seemed as if the police were retreating to their old ways with each incident. The irony is that I know there are some police that are trying their best to overcome the image of the past. But if this was not a wasted opportunity then I don't know what was.

Friday, August 13, 2010

Why won't interest rates come down?

FOR years I have listened to many people discuss why the banks won't reduce interest rates, even going as far as saying how cruel the banks are, and even referring to them as extortionists. This sort of argument has received traction from not only the man in the street but even supposedly intelligent persons who should better understand what determines interest rates.

More recently the Government, through the Minister of Finance, has been pursuing policies to create a more facilitative environment to encourage the reduction of interest rates generally. After all, talk alone was never going to do the trick, as the banks were faced with a choice of (1) lending (at a risk) to the private sector -- in the face of high crime, decreasing real income, relatively high inflation, etc; or (2) placing money on government paper, at a relatively high return (with little risk). The choice for any prudent person would have been obvious.

Breaking the cycle
So the only way to have broken that cycle was to effectively reduce the return on government paper, which could only have been done by (1) in the short term, restructuring government debt; (2) in the medium term, sustaining that restructured debt by focusing on prudent fiscal management; and (3) in the long term, causing economic development to happen. The first one was easiest to do -- and was necessary although many could not see it at the time; the second is easy in the short run, but more challenging to sustain; and of course, the third is always going to be very challenging. In order to succeed in all three, a set of economic and social policies would have to be put in place or else we would see short-term gains followed by more severe pain. But this is not the topic being discussed so I will move on.

Shaw and his team have been doing all that they can in the drive for lower interest rates. All they can realistically do is create the environment for reduced interest rates, but can do no more besides plead with the banks to reduce rates at a pace they would like to see. Well, there is one more thing they can do, which is to encourage greater competition in the lending market. This has its own inherent risks, but my own belief is that a well managed and thought-out strategy would have the desired effects while reducing the inherent risks.

Interest rate determinants
Back to the question at hand, though — why won't interest rates come down? The truth is that we have started to see interest rates coming down; however, it will not be at the pace we would like for a number of reasons:

1. The first is that our lending market is not competitive enough, and I believe that this is a policy that government must pursue: (a) to enable the consumer to get the best price for money and (b) to enable further development of the capital market. This must, however, be carefully managed and implemented;

2. Interest rates are the price of money, and are determined by demand and supply. Even though rates offered on government instruments have come down, there is still a relatively high demand for funds by the government. The solution to this is to either increase the supply of money or reduce the demand for money by government. The first has other risks associated with it and the latter takes time;

3. Because of the reduction in real and disposable incomes, and the hardships being faced by many businesses, the risk associated with lending has increased. Therefore, even though people may be demanding money, the bank needs to assess the risk to ensure they can be paid back over the life of the loan. So it is a chicken and egg situation, in that while the loans are needed to jump-start the economy, the fact is that the risk is high because income has declined. One of the ways to deal with this is for equity to be injected initially by government, for example, in terms of direct equity stake or interest subsidies. One other major determinant of risk is predictability about government policies and crime;

4. Many people also have sound ideas but do not have the proper due diligence evidence, for example, projections and a business plan. Banks assess projects based on independent assessments. So a business plan done by a well-known and independent accountant, for example, carries less risk than one done by a connected party;

5. Interest rates are determined also by the relative value of currencies. So to see lower interest rates we might have to see a stronger Jamaican dollar versus the US dollar, all other things being equal, but this also depends on the balance of payments situation, as currency values can only consistently improve if productivity and the trade balance improve. If these factors get relatively worse then it means the currency will depreciate and the way to maintain stability may be to increase interest rates;

6. Within the financial institutions themselves, I do not believe that they have yet made the skills set transition. Many of the ads that come out still focus on non-productive loans -- for example, it seems a bit futile to me to be promoting motor car loans when that market is destined to decline. Why swim against the tide? [There is one financial institution that has made a transition, and I think now is the time to buy their shares]. Another indicator to me is that, unlike in the US, there is not a great emphasis on the skills set to be able to analyse and predict what will happen in the economy. In the US, for example, banks invest a lot in the resources that can predict what will be the likely out turn in the economy. If you can reasonably predict economic outturn then you can prepare your company for the future. I am aware of some companies that have done that, but I don't see the public display of it by the local banks.

This is by no means an exhaustive list but it illustrates the factors that go into determining interest rate levels. What this shows, though, is that there is very little that the Government can do besides create an environment to encourage interest rate reduction. The Bank of Jamaica and the Ministry of Finance could reduce interest rates to zero if they wanted to; the fact is that this does not necessarily translate into lower commercial lending rates. This was clearly demonstrated in the US, where the Federal Reserve decreased interest rates to near zero, but even then yields and commercial rates were still relatively high.

I believe that from the fiscal management point of view that environment is already emerging from the policies being implemented. And I say 'emerging', as the key to the fiscal management programme is going to be sustainability, and government will have to demand less money, even at lower rates. The next most effective government policy is the encouragement of greater competition in the market. After all, it is this sort of effect that has caused banks to be reducing interest rates, not because they care about their customers. Default on your loan and you will see how far that "care" takes you. And there is nothing wrong with that. The private sector should be motivated by profit, not benevolence.

So when the question comes up again, why won't interest rates come down? The answer must be that it is because there are many determinants to interest rate levels, and that it is really nothing more than the price of money. So anyone who believes that the price of money is too high, then maybe they would not be averse to reducing the price on their own goods, as, given the reduction in disposable income, the price of goods has also become too high.

Friday, August 06, 2010

Crime's enormous economic curse

Last week I was horrified, like every other well-thinking Jamaican, to see the video tape of the killing of a Jamaican citizen with no apparent justification. The act was committed by members of an organisation that has sworn to "serve and protect" the same citizens whom have been accusing them of brutality for decades. The irony is that the police force, which has been trained to investigate and solve crimes, has been unable for decades to properly investigate and solve accusations of extra-judicial killings. At the very least that smacks of incompetence by an organisation trained to do just that.

Is it any wonder then, if the police cannot deal with the disorganisation within their ranks, that they have been unable to deal with the crime monster that has torn this nation apart? In my experience, however, there are some very good and hard-working policemen and women, and I am sorry that they have to be tainted by this sort of incident.

I am even more disgusted by the barbarism of some of the citizens gathered around, who were cheering on the police, and even some of those from whom I have heard comments from in the media and on places like FaceBook, who say that the "alleged" murderer deserved what he got. What these people fail to understand is that societies and organisation have to live by rules in order to develop and thrive.

While an organisation is small, it is easy for the leadership to be involved in every decision taken and to control that decision to his/her liking, but if it is to grow then strict rules must be established and stern sanctions imposed for breaking those rules. This has been Jamaica's problem: our desire not to be "shackled" by rules and consequences. I believe that this is at the root of our crime problem and that there is a tremendous economic opportunity from our crime challenge. The opportunity lies not in perpetuating the crime monster but in recognising the gains that can come from dealing with it effectively.

The World Bank has stated in the past that crime robs us of about four per cent of GDP. And this is obvious for even the blind to see. Let's take the example of what happened in Buckfield recently. Think about the effect this one incident has had on the confidence and action of overseas and local investors. Why would someone want to invest in a country where the basic concept of human rights is abused by the very same people who are sworn to protect it? If this basic rule is not kept, then what about the more complex ones like commercial cases in court? Think about the devastating effect on the productivity of the workforce from lower-income communities who live in fear of the police. Think about the future scientist growing up whose only thoughts are focused on a chance to leave Jamaica and establish his profession in another country. Think about the real estate value that is locked away in crime-ridden communities.

Now think about the accumulated effect of all this negative behaviour on Jamaica's economy. What our leaders have failed to understand since independence is that at the basic level economies grow because of the behaviour patterns of the smallest denominator in a country: the citizen/consumer/worker/investor - whatever you want to call them. Economics is a social science focusing on behaviour. Not about the fiscal and monetary policies governments and bureaucrats dream up. And the economic evidence in Jamaica shows that we have got it wrong since independence 48 years ago.

Therefore (and I want the leaders to follow my logic), if economies react to the behaviour of individuals, then wouldn't it seem logical that the best way to make economies grow is to positively influence the behaviour of the market players? If we create an environment where people feel good about investing and spending, then it follows that the economy will grow and governments could garner more revenue without imposing more taxes. But regrettably we do not think that way and it is our failure to do so that has led us to where we are today, after 48 years of disgraceful treatment of our citizens.

This is the way enlightened countries like the US (where we all desperately want to go to) develop their economies. If the US did not have this philosophy, then "dog nyam we supper" when it comes to the global economy, because some of the policies in Europe are surely not helping.

What are the opportunities?
So what opportunities can we garner from solving this crime problem? By way of analogy, if you are responsible for rearing a recalcitrant child, do you beat him into submission or do you try to reason with him no matter how frustrating that task might be? You might even have to impose sanctions. If your answer is the former, then you represent the leadership that Jamaica has seen since independence. If your answer is the latter, then you are fitted for leadership in the US.

The point is that Jamaica has for decades tried to control crime by using a big stick, which simply creates behaviour that stymies the development of our economy and society. So if we continue beating that child (Jamaican citizens), then we should not be surprised when he turns to a life of crime and wants to be a criminal instead of a scientist, doctor, or any other progressive professional.

If we are to quell the crime monster and reap the tremendous economic benefits from doing so, then the continued policy of physical assault against the citizen must change. Policing must be geared towards encouraging good behaviour rather than beating into submission those who are alleged to commit crimes. That is for the courts to decide and why we have a constitution and every time we breach it we disrespect our founding fathers.

So solving crime has more to do with instilling discipline than using force. And while force is necessary sometimes, it is only warranted when it prevents a greater evil from being committed. The focus should be on things like (1) greater community policing - working with children specifically in communities; (2) ensuring that the police have respect for the citizens and their RIGHT to contest the accusation of any police member; (3) dealing with the flagrant traffic violations that occur every day (cameras could be used to catch those who violate traffic laws and tickets sent to the registered owner of the vehicle); (4) similarly charging persons who litter and destroy the environment, or those who violate building codes; and (5) dealing with environmental noise, from dances or churches, at any time of the day. Our current laws assume one shift and weekday work only, which encourages that to play out.

Finally I would like to add that we need to equip our policemen and women for efficiency. I am always appalled that in this day and age (where we spend billions of dollars on roads and other such things) that we have police still taking notes in books, instead of equipping our police personnel with computers, which should be attached to databases. Policemen and women asked to do proper investigative jobs should have the latest technology - computers, digital cameras and recorders, postpaid cellphones, etc. If cost is the explanation for not providing these essential tools to the police, then we truly do not understand the economic benefits of reducing crime.