Friday, October 21, 2011

Economic impact of culture

At a recent meeting of the Jamaica College board, it was reported that the discipline had significantly improved, even over the improvement that we had seen before. Today at board meetings the major talk around indiscipline has more to do with dress code than the violent conflicts that existed at the school as recently as two years ago.

The improved discipline has led to continuing academic and sporting improvement. This is a prime example of how the change in culture of an organisation or country can positively affect the desired outcome.

It is this relationship between social behaviour and economics that we have never seemed to understand in this country. And the irony is that if we paid more attention to changing behaviour patterns through policy measures, then we would be more able to achieve our economic objectives of growth and development. It is as if all the persons who learned about economics have forgotten that it is a social science, and is really nothing more than the study of how people in a society interact in their pursuit of prosperity.

This is why I have always said that the approach by tax administration is commendable, as they have been trying to change culture/behaviour through their education programmes and the way taxes can be filed (technology). This will no doubt have a positive impact on compliance going forward and has already started to show.

It would seem logical to me that if we truly want to see economic development, then we need to try and understand what causes the behaviour we desire and put measures in place to influence that. It is this lack of understanding that has resulted in our inability to create sustainable improvement in our fiscal and trade deficit positions. As far as I can remember, government policy (fiscal and monetary) has been geared not towards influencing behaviour patterns to encourage sustainable local investment and growth, but rather has encouraged corruption, inefficiency, and short-term profit approach.

Some examples of these include the following:

1. Tax policy over the years has not been aimed towards creating an enabling economic climate for businesses, but rather towards raising money for the fiscal accounts. This incorrect approach is found in the current green paper on tax reform, and stated explicitly in paragraph 1.2, where it says that most importantly the measures are intended to raise money for the fiscal accounts. This communicates to stakeholders that the interest of businesses and people is secondary to government raising the required revenue and this leads to compromise from stakeholders in securing tax measures that first satisfy government revenue and then the business environment. The result is that stakeholders settle for less than what is required to create a competitive country environment. Is it any wonder that taxation remains the third most inhibiting factor in the global competitiveness report?

2. We say that we are serious about solving crime, but as I have always maintained, our success with reducing murders will be short-lived if we do not take the necessary steps to change behaviour towards indiscipline. So while we celebrate reducing murders we have not successfully dealt with road indiscipline, night noise, littering, and zoning laws. The result is that we might have short-term successes only in fighting major crimes as our society is still extremely very undisciplined.

3. Heavy-handed bureaucracy leads to inefficiencies because it does not encourage innovate thinking in the public sector. So I have seen where because of the procurement rules, one government company gave up more revenues than the cost of rectifying a problem because of the delay in approval while another entity was spending more than $120,000 per month to monitor a cost of $120,000. We also remember the situation where the Accountant General's Department reported that because the purchase of a telephone system was not approved, the payment was withheld, even when the AG and FS directed it be paid, resulting in a two-year delay and the cost of the system doubling because of the delay.

These are just a few examples of the ways in which policy has negatively affected culture/behaviour and ultimately has had a negative effect on sustainable economic development and productivity. So the truth is that unless we introduce policy directions that are geared towards influencing behaviour in the direction that will result in increased productivity and business and consumer confidence, then sustained economic and social development will only be things that we read about. And by development I don't mean where we measure against ourselves, but relative to other countries.

It is because of this failure to introduce policies with this intention (to the contrary we have always maintained policies that do the opposite) that we have not been able to create the environment needed to increase our competitiveness and create sustainable development. In short, the policies that we have pursued as a country have caused a culture of mistrust, low productivity, corruption, and the preference of short-term over long-term objectives. It makes no sense to about economic targets and policies within the context of this type of culture.

This is the main reason, in my view, why the IMF programme was not achievable in the time projected. When setting out an economic programme for a country like Jamaica, we cannot assume that the changes will take place as quickly as in a country like even Barbados. It is important when projecting for a company or country to consider the culture. So the emphasis on say the wages to GDP coming down to 9 percent is really not a practical target, given Jamaica's environment, and I am also trying to understand what is the magic about 9 per cent.

Similarly, it is not possible to achieve the original fiscal targets set out and maintain the same debt to GDP target, which in my mind is not important as an absolute anyway. This is borne out in the August 2011 fiscal outturn, which shows that in achieving the fiscal targets we have had to borrow $33 Billion more than projected.

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