Friday, September 23, 2011

Restructuring Jamaica's economy

Over the past two weeks there has been much debate about jobs and Jamaica's competitiveness, thanks to the Global Competitiveness Report and the JEEP proposal. Last week I addressed competitiveness, and JEEP is a good follow-up discussion. Debate on both issues is welcome, and is the reason I have always called for national debate on all issues in the media and parliament. Whether it is a global report or a proposal from government or opposition, I am in support of as much debate as possible so that the people of Jamaica can be more aware of the details of what is affecting their daily lives.

I believe (thanks to the many commentaries, talk show discussions, and lobby groups) Jamaicans have become a lot more aware and suspicious of what politicians espouse, and are demanding more and more information, whether it be proposals like JEEP, extraditions, or deals with foreign companies. No longer can a politician just make an announcement and all Jamaica just cheers and goes along with it. Interestingly also, more party supporters are demanding more information when their respective party they support makes general announcements. This is a sign of emerging political maturity.

The flavour of the day has shifted from the request for brownings to JEEP, and more generally a discussion on what is good for Jamaica's economy. It is within this context that I want to look at what is needed to restructure the economy. It is important to understand, as many commentators have said, that what Jamaica's economy needs is not another promise of jobs or growth which will not lead to sustainable economic and social development.

Over the years we have had crash programmes (1970s), the free zone and Spring Plains (1980s), high interest rates and ICT stimulus (1990s), and promises of jobs (last election and recent JEEP). All these initiatives have come from our politicians, and that is the primary problem. When will we realise, as Tufton rightly said, that government cannot sustainably create jobs and growth without fixing the structural problems? Obama recently tried this in the US with his US$700 billion stimulus, but it was never enough to change the general economic direction of the US. The difference between the US and Jamaica is that they have money to fund such short-term programmes, or can print it. In Jamaica any attempt to create money without an increase in productivity will only lead to greater inflation or interest rates.

I am the first to agree that in a recessionary environment, government intervention is necessary to ensure that the economy does not sink further. For this reason I have always maintained that the IMF programme and tax increases were pro-cyclical and would have caused further contraction and hardship in the economy. The fact is that they did, and this in part caused some of the decline the economy saw since 2008. The major part of the decline, of course, resulted from the difficult global environment.

What we have seen, however, is that even though there has been some decline from these policies, there have been some positive structural changes, a few of which I mentioned last week. More importantly, though, is that we have seen some positive structural shifts to the GDP components, and a reduction in crime and some improvement in the culture of compliance and discipline. The most successful have been in the areas of tax administration and dealing with corruption in the police force. These are the structural issues that government should focus on and must stop trying to pick winners, which is the job of the market.

Government must therefore create an enabling environment and allow the market to work. A big part of this is of course doing away with the system of waivers, incentives, and the burden of taxes and other bureaucracy. If these remain in place, then business persons will continue to seek waivers, incentives, and try to go around the system because they can. There will be no motivation to operate in a true market environment. It is for this reason that the tax reform and administration currently being pursued by the government is a step in the right direction, and long overdue. Previously government would cherry-pick what was good for fiscal revenue, the last real attempt at progressive tax reform being in the 1980s.

So while I support the concept of stimulus, recently outlined by the opposition, the programme as crafted is flawed for the following reasons:

1. The argument of renegotiating the IMF agreement is redundant, as the agreement comes to an end in May 2012, and by the time election comes around would have either ended or already been renegotiated.

2. I disagree with the proposal that start -up businesses should get a five-year tax holiday. Every business in Jamaica would forever be a start-up. Why create a problem we will have to find a solution for? What we need is a flat tax for businesses in the first five years, which if they prove losses they can get a tax credit for. This would relieve the cost and burden also of tax administration having to go after these micro businesses.

3. Government cannot continue to seek to create private sector jobs by giving incentives. If an incentive is required to start a business or create jobs, then it means otherwise it is not competitive and does not make good economic sense, so why incentivise it (for example the recent stimulus to car dealerships)? Government needs to stop trying to create welfare programmes, which do not result in long-term economic benefits. While I agree that some form of stimulus is needed to create jobs, it must come in the form of infrastructural works, such as the JDIP, as Roosevelt did in the US after the Great Depression. What we must do is remove the politics and bureaucracy from the JDIP and allow it to work for the benefit of Jamaicans.

4. Providing a fund for small businesses is really a regurgitation of what is happening now. This government had provided $1 billion to the DBJ for small businesses. How much has been taken up? At the time I indicated it would not have made a difference because it is obvious that businesses are not motivated primarily by high interest rates or access to financing, but more importantly aggregate demand, which was already cut by the IMF programme. So even if I can get money to borrow at zero per cent, if there is no demand for my product/service it doesn't matter.

5. The suggestion to provide banks with a tax incentive to make small business loans should not even be considered. Why would we want to incentivise risky loans? If the loan is good then the only incentive the bank needs is profit. This can lead to financial sector risk and increased interest rates.

There is more I could say but space does not permit. The argument, however, is that while some form of stimulus is necessary it must be in infrastructural projects. This already is in place in the form of the JDIP, which we need to make work. The problem we face is not 12 months from now, so if we don't allow the current programmes to work and wait until election we won't just need a JEEP but a whole car dealership.

The important thing for the economy is for government to focus on fixing the structural issues of crime/discipline, bureaucracy, energy and productivity in particular. This will improve our competitiveness and economic and social well-being. Jamaica has for too long been a welfare state, and this is what is keeping people in poverty.

Friday, September 16, 2011

Examining Jamaica’s competitiveness

Recently the World Economic Forum released the 2011-12 Global Competitiveness Report, and Jamaica showed the worst ranking ever at 107 of 142 countries, coming from 95 of 139 countries in the previous report.

This really is no surprise as the seeds for this were sown from around the mid-1990s when the debt/GDP ratio started to worsen as a result of the macroeconomic policies practised during that time, more notably the prolonged high interest rate policy that led to a logical market choice to sit at the beach and earn rather than do so through productivity. The seeds of indiscipline that led to the lack of reward from productivity started in the 1970s, when the much needed social changes were taken to mean that everyone had the right to property and income even if not worked for. The result at the time was a real GDP decline of approximately 20 per cent during that decade.That period also marked our first fling with the IMF, as a result of near decimation of our economy.

The 1980s saw a return to a focus on economic growth, which resulted in an average annual growth rate of approximately 6 per cent, and by 1990 the debt/GDP ratio, had moved to 90 per cent from 212 per cent in 1984. The challenges faced by the economy in the first half of the 1980s resulted from the near collapse of the economy in the 1970s and the global recession at the start of the 1980s. The problem with the 1980s, however, was that the social side was neglected and therefore there was no emphasis on improvement of the individual but rather a hope that macroeconomic growth would lead to microeconomic benefits.

The problem with Jamaica is that the workforce consists largely of low-skilled labour, and a relatively low literacy level. Like it or not, it was the free education policy of the 1970s that caused many to be able to access higher learning and change the landscape of the workforce, but the result of a poorly implemented free education policy led to a degradation of the school system.

By the time the 1990s came around there was again an ill-conceived approach to the liberalisation of the economy resulting in an increasing trade deficit, as uncompetitive local industries, which were accustomed to protectionist policies, could not compete with the cheaper and more attractive foreign goods. So the exchange rate started to decline and inflation was rampant. In order to put a stop to runaway inflation, the government at the time employed a high interest rate regime that not only served to halt inflation but also put the nail in the coffin of most productive businesses. This was the main push that caused Jamaica to become a service-driven rather than the goods-producing economy that it was.

That period saw the continuous breakdown of our institutions which led to a decline in productivity and discipline. The slump had started in the 1970s, with a brief break in the trend during the last half of the 1980s. Since then productivity has consistently declined and our institutions and infrastructure have generally deteriorated. The only significant positive development in our infrastructure was the building of the highways during the early 2000s, which in my view was somewhat negated by the demise of the railway during that time.

In 2007 we experienced a significant global recession, which did not do us any good, as the economy was structured to be dependent on foreign loans, remittances, and foreign consumers, rather than on our own productivity and local economy.

So here we are today looking at a competitiveness report that shows us as ranking 107 from 142 countries, and within that global ranking even more dismal numbers are represented. Some of these are fundamental pillars on which economies are built as follows (rankings shown at right):

o Public trust of politicians - 112

o Favouritism in decisions of government officials - 121

o Burden of government regulations - 123

o Business costs of crime and violence - 140

o Organised crime - 135

o Reliability of the police service - 101

o Quality of railroad infrastructure - 113

o Macroeconomic environment factors - between 106 and 140 (overall ranking of 142)

o Quality of primary education and enrolment - 108 and 126

o Total tax rate, % of profits - 108

o Redundancy costs, weeks of salary - 99

o Pay and productivity - 114

o Ease of access to loans and Venture capital availability - 124 and 127

When one examines these individual factors, and not just the global rating it is obvious, that where we are today and how we are perceived is a direct result of the decades of neglect. The result is that we celebrate 50 years with this perception of how we have progressed. So all those who have been involved in governing Jamaica since the 1970s, take a bow, you have reaped what you have sown.

On the other hand, we must remember that this rating is a review primarily of the year 2010/2011, when we would have been seeing a significant lingering effect from (i) the global environment; and (ii) our slowness to react because of policy and the politics we have played while the country was burning. So our preoccupation since 2008 has been with politics rather than economic fixes. Much like what happened recently in the US.

But if one takes a look at what has been happening (outside of the politics), there are some positive trends taking place. The economy is still very fragile but there are some positive structural changes happening that will bode well for the economy, if continued. There are also some positive social initiatives taking place. And so even while people like me continue to point out the areas that need improving (because I think if we eliminate weaknesses then all that will be left are strengths), the fact is that some of the structural fixes we need to correct the years of structural abuse are taking place. One other thing to remember is that when structural changes are taking place, as with the global economy, things are going to seem worse than they are.

For example, when one gets a cut and the disinfectant is applied, it is initially uncomfortable and hurts. But then it means that it is preventing any further infection. So it goes with economic adjustment, which is why it is important for governments to smooth out the effect of painful adjustments, as promoted by Maynard Keynes and more recently Christine Laggard (note the international references as promotion of this idea by locals is not credible because of our "browning and foreign" culture). However, because of the decades of neglect of our economic and social environment, we have built institutions around inefficiencies, and it will take some time to see the fruits fully grown.

Some of these structural reforms we have seen include:

o Charter of rights - finally passed after almost 20 years of debate

o Decrease in the murder rate and greater accountability in the police force - more needs to be done in terms of road discipline, though. Can't understand the inability to deal with this

o Enforcement of the building code by the KSAC - don't see much happening in the other parishes. Previously people were allowed to build whatever and wherever they wanted

o Greater vigilance by the OCG, Public Defender, INDECOM - even though sometimes there is loss of credibility from the perception and the final rulings

o Tax reform green paper - good move but still mentions that primary objective is tax revenues and not economic development

o Road improvement works through the JDIP - we need to get past the political rhetoric, though

o Moves by the new Justice Minister to address the court administration

o Divestment of loss-making public sector entities and public sector rationalisation

o Fiscal responsibility framework

The biggest bugbears remain (i) indiscipline and crime; (ii) energy costs; and (iii) bureaucracy. If we were to speed up the initiatives that are geared towards addressing these, then I believe there would be significant improvement in our economic and social variables.

So even though the report has rated us at 107 of 142 countries, a closer look shows that some of the initiatives on the table will address some of these issues and therefore when compared to say Greece, Jamaica is not such a bad investment climate for future growth. However this is dependent on a continuation and strengthening of some of these initiatives aimed at fixing the structural challenges faced, not so much a focus on the macroeconomic indicators that are symptoms of the underlying problem.

Friday, September 02, 2011

A practical approach to Jamaica's challenges

One of the questions that I get a lot when discussing how to solve Jamaica's challenges is, if we all know the answers then why can't we solve the problems? This is a very important question, as it focuses attention on the real issue that Jamaica faces in resolving the challenges before us. It is no different from the challenge faced by companies, and why some companies, with an apparently similar business model, succeed while others don't.

After all, Jamaica, of all Caribbean countries (with the exception of Guyana, which is not really in the Caribbean) has the most diverse mix of natural resources and opportunities available. Even though Trinidad may have oil, we have tourism, bauxite, agricultural products, sports, and music. Our music and sports are probably our greatest assets because of the future value created in the brand of which we have not even scratched the surface.

Why, then, in rankings such as the Human Development Index are we only ahead of Haiti, and even in the growth projections put out by the World Bank, why do we fall behind Haiti? The solutions put forward in political campaigns and commentaries seem logical, so why can't we resolve the challenges we face and become the country we can be? The answer I believe, lies in my mind in the way we approach our challenges. Quite simply put, we get too involved with the emotions of the challenge rather than what is the most practical long-term solution.

Some examples include the following:

o The argument made by some, including myself, to (i) widen the tax base; (ii) reduce the rate of GCT; and (iii) target the tax to be received on previously zero-rated items to the less fortunate, has been shot down as oppressive and not caring for the poor. This is an entirely emotional response for the following reason : if tax foregone on cornmeal was say $100 and if 50% of cornmeal is bought by the rich to feed their dogs, then it means that $50 of the tax benefit goes to the rich man and his dog. Wouldn't it be better to charge the $100 tax on the cornmeal and use $75 to target funds paid directly to the poor? Everyone wins as the poor would get $75 (instead of $50 tax credit); and the government would get $25 tax (instead of the $0 before). And the rich man pays the $50 if he still wants to feed cornmeal to his dog.

o The recent demonstration against JPS (by wearing black or turning off electricity for a day) was really impractical. So what happened after the demonstration? Did the bill go down? It has come to this because the OUR is a useless organisation and also government policy over the years has procrastinated too long on this very important issue of energy. But the more practical thing to do is to wean ourselves individually off JPS power. I always find it amazing how persons find it easier to argue that borrowing the money to purchase a car (loans have gone up) is more acceptable than borrowing money to add renewable energy solutions to their homes. The argument is always that the cost of the system is too high. But if you think about it, if one can get a loan (say from NHT or the bank) to invest in a solar system, and the monthly payment on the loan is less than the savings on the JPS bill, doesn't it make practical sense?

o Another impractical call is that GCT on electricity should be removed as it is oppressive to the poor, when in fact most poor persons do not consume the 200 KWH where GCT starts to accrue. Apart from the fact that the low- income earners do not pay GCT on bills it would be much more practical to call on the government to maintain the GCT on the 30 per cent who pay it and that it should be "ring-fenced" and given as a credit to compliant taxpayers who invest in renewable energy solutions. This way consumers would not only avoid GCT but would also reduce their JPS consumption.

o The final thing I want to mention is the emotional response to relatively higher salaries paid to public sector workers, which started with the "Fat Cat Scandal" and which continues today. At the same time that we raise hell over any salary levels deemed to be too high, we also ask for the productivity levels to be increased in the public sector and are mystified that we do not attract the brightest minds, resulting in waste and sometimes even corruption. We talk about Singapore but do not realise that one of the things Singapore did was to hire the best persons in the public sector and compensate them accordingly. How do we expect to increase our value added and productivity if we do not pay persons based on their delivery?

These are just a few recent examples of the impractical way that we have approached our challenges over the years. It is therefore our approach to resolving issues that have kept us back, not that we do not know what to do, but by the time the political and emotional sentiments are placed in the equation, what we do is take the road that is most popular rather than the one that is in the best long-term interest of the country, as emotions trumps good sense.

This would be similar to acceding to your child's crying not to go to school, not thinking about the long-term consequences.

Problem of road indiscipline

As the murder statistics fall it seems that we are now trying to kill people with cars instead of guns. I really can't understand the inability of the police to deal with the road indiscipline problem that we face. There is no real effort being put into dealing with the carnage on the roads. And we fail to understand that a priority for choosing Jamaica as the place to "live and raise families" is feeling safe when driving, walking, or cycling on the roads.

What this requires is enforcement and not the PR campaign that the National Road safety Council has launched. I fail to understand why (i) I am driving and a taximan stops in the middle of the road and a police car drives by as if it is acceptable; (ii) there are persons out there (including people licensed to transport the public) who have multiple tickets outstanding; (iii) the police do not employ creative strategies to deal with persons who drink and drive, such as waiting on the outside of parties and night clubs and arresting persons who go behind the wheel after consuming alcohol.

And all the Road Safety Council can say is that they are hoping that the number of persons killed in motor vehicle accidents will fall below the 300 mark. Is this another OUR in the making?