Friday, December 27, 2013

Staying the course in 2014

AS we move towards 2014, it is natural for us to not only reflect on 2013 but also think about what we must do in 2014 to improve our lives. This should not only be on a personal level, but also at a country level. I can't really remember us ever doing that as a country, but rather we always get some message about the great potential we have as a nation, and that we should be considerate of the less fortunate.

But have we seriously thought about what our objectives are, and what specific strategies we need to employ to meet those objectives? We do that at a company and personal level, with some amount of success, but have never really done so at a national level. And we also see that individuals who fail to do so usually end up not being successful.

I believe that for the first time I can ever remember that we are close to doing that, and it is based on the strategy and timeline included in the Economic Programme, otherwise known as the IMF agreement. The fact is that if we have the commitment to stick to the fundamental reforms in the programme, then it is my view that the economy will become competitive, and the business climate will improve. However, while these reforms are necessary, they are far from sufficient to cause the fundamental transformation needed in the economy.

The reality is that unless we can solve the crime and bureaucracy challenges, then we will be hard pressed to see the sort of economic and social development we want and need. Sticking to the path we are on not only means that the government should ensure the reforms are implemented to cause greater competitiveness but it also means that government needs to do nothing to slow down the return of the much needed confidence. This is because confidence is necessary for capital to move into real investments and the reality is that the only way that we can see economic growth of any substance is if private capital returns to real investment.

It is important to understand this, and to implement the necessary policies to ensure that capital is confident enough to go into real investments. The chain result of increased confidence, and a more competitive economy, is that jobs will be created, consumer spending will increase, government revenues will increase, and the cycle (called the multiplier effect) will continue. This will no doubt cause an increase in real GDP growth, which will then lead to a reduction in the debt to GDP ratio.

So if we want to see sustainable economic growth and development, then it can only happen with private capital being confident enough to commit to real investments in the economy.

It would follow therefore that policies must be implemented which satisfy the requirements for business and consumer confidence to improve. If business confidence improves, then new investments will take place, leading to higher profits, employment, and fiscal revenues. If consumer confidence improves then more money will be spent in the economy, and the economic multiplier will increase. In both cases credit will also rise.

For this to happen, though, we must stick to the transformation plan. If we allow ourselves to swerve from our objectives and implementation plan, then we could derail the improvement. One thing is sure: the government cannot take the path of previous administrations and seek to tax our way out of the problem, as this will only lead to short-term fiscal gain and long-term loss. This has been the path chosen in the past and it has not worked.

The legislative reforms that have been done so far, under the programme, will add to the enabling environment we need. However, this can only be complete where bureaucracy and crime are tackled. As an example of the stifling effect of bureaucracy, the development approval process takes too long and at best may take around nine months. Estimations are that reducing that nine months to six months could unleash approximately $30 billion into the economy, which also means increased employment. An effect of crime is that it prevents maximising capital because of the prevention of running more than one shift, for example.

Therefore, while I believe that it is necessary for us to stick to the tasks outlined in the economic programme, it is also important to not take steps to negatively affect confidence, to stick to the programme plan, and to address the problems of crime and bureaucracy.

I cannot express enough the importance of reducing bureaucracy and crime, as these have a crippling effect on economic and social development. Failure to do so will cause any recovery to be long and painful.

I also would like to take this opportunity to thank all who read my column and to wish you happy holidays. The cry from the retailers is that this Christmas is the worst they have seen in a very long time, and it is not unexpected, as once we started with the IMF programme it was unavoidable. I believe that this is part of the transformation in the economy, where productivity is going to be key to survival. However, we must have the conviction to see the programme through.

I expect that the first quarter of 2014 is going to be the real test of our conviction, but if we are able to make it through that period then we could start seeing some real benefits (assuming that crime and bureaucracy are addressed).

Irrespective of what happens, though, individually we must all take steps to improve individually. Happy New Year.

Friday, December 06, 2013

Transforming Jamaica's productivity

LAST week I referred to what I think is Jamaica's biggest risk (that of the unproductive human resources) and also addressed my belief that the economic programme is on the right track, given the accomplishments to date under the economic programme, and signs in the macro indicators.

As expected, I have had persons asking if I really meant it, as they are facing very difficult times in business still. Additionally, it is true that consumers are not spending as they used to, and a big part of that reason is because there are many people who are out of jobs.

A man on a roof appears to be making an illegal connection to Jamaica Public Service Company wires in Kingston. Indiscipline among Jamaican residents is one of the issues that needs to be urgently addressed, says Dennis Chung. (File)

However, any sophisticated investor knows that the best time to buy is when everyone is selling, and vice versa. In other words, not because things are bad does it mean that they are not improving. If you wait until things have got back to where they were before the recession then you would have lost out on the best returns, and this is the reason why some people are busy looking at investments now.

There are, for example, some listed companies that are underpriced on the stock exchange, and are good buying opportunities. This is especially so with the advantages to be gained under the new tax rules, and I must once again applaud Minister Phillips and his team for taking the bold steps that have long been required to transform the business environment, not just tinker with it as we have been guilty of doing for too long.

What I want to address though is, what are some of the ways that we can improve our productivity issues, and in particular labour productivity, which is a significant setback to competitiveness. I say this against the background that I believe the unproductive nature of our labour force, and all it brings, is the major inhibitor to development.

Some may say that bureaucracy and crime are the greatest inhibitors to development, but the reality is that how efficient a bureaucracy is, or how bad the crime situation is, has everything to do with labour productivity. So the fundamental problem we face is one of the competitiveness of our labour. In other words, it is the failure to productively mobilise our people that is at the root of our developmental issues.

How do we therefore transform our country from the low levels of productivity, to a high productivity one.

The first thing we need to do is truly understand what causes our low productivity issues, and secondly demonstrate that we have the will to deal with it. I believe that we have always somewhat been able to understand the causes, but have had very low commitment to dealing with the issues. Of course, because much of the causes go against the grain of what political parties have as their objectives, which is to retain, or gain state power. I must say that there are efforts to address some of these issues under the current economic programme.

After we have identified the inhibitors, then the obvious next step is to remove them. Some of the glaring inhibitors to productivity are indiscipline (which includes crime), energy costs, bureaucracy (including an archaic legislative framework, which includes labour laws), and a workforce under-trained for global competitiveness.

The economic programme I think adequately addresses bureaucracy, as it seeks to bring greater efficiency to the public sector, and includes legislative changes in tax reform, insolvency, collateral (access to credit), etc. -- the only challenge is timing. More importantly the tax reform framework removes the discretion of politicians to grant waivers, which creates a more level playing field for businesses, as there is no longer any competitive advantage from political connections. One aspect that must be addressed immediately is that of the development approval process, which prevents billions of dollars from finding its way into the economy, for no apparent reason but just  lazy and inefficient bureaucracy.

I am also confident that energy costs should reduce for industrial use even before the 360 MW plant, as the trend is for companies (and some individuals) to seek their own energy solution. The areas which need focus are indiscipline (which comes down to enforcement of laws and respect of citizen rights) and making the workforce more competitive.

On the discipline front, this implies that the security and justice ministers and the police commissioner must bring this in line. More specifically, despite the spike in crime, the police cannot ignore citizen rights in an attempt to solve crime, as it only leads to protest action and distrust, which contribute to non-productivity; the justice minister must of necessity not just put legislation in place but must move to ensure that the justice system moves quickly and is fair (in other words trials must be completed in good time and ordinary Jamaicans must not be allowed to languish in jails without a trial); and the security minister must ensure a policy framework that supports the security force in the lawful execution of their jobs.

Very importantly also, the government needs to move quickly to see to the transformation of our labour force to a productive one. I am all the time approached by people who want jobs, and if we do not put steps in place to assist with that transformation to a productive labour market, we could see even more people without jobs. This means a "joined up" approach to government, where education, industry and commerce, labour, and finance ministries will sit and determine what our labour needs will be (e.g. the logistics hub) and allocate resources to training for that demand.

Very importantly we must enact policies to move the public sector workers in particular to performance based reward. I have seen too many instances where reward is based on seniority and tenure, and not productivity. This measure for me is more important than the number of public sector workers, for if this is implemented then the public sector will be right sized (either up or down). What it causes in many instances though is for talented public sector workers to become frustrated and underperform or leave.

Without this transformation we could see a more productive economy with labour being left behind. All that will do is widen the gap between the haves and the have-nots, which is not an appropriate way to develop. Just ask Haiti.

Finally I am of the view that the economy will start to improve as we see confidence improve, but it would be prudent to have some project that will kick start the economy. This could be the road works, logistics hub environment, or monetary policy but something is needed to get money in the hands of the consumer to escalate the build-up of confidence.

Friday, November 29, 2013

Jamaica's big risk

WHILE walking, or cycling, I often see people who ask me many questions relating to the economy, finances, or issues about my second book. In the last few weeks, though, I notice that the majority of questions focus on the difficulty people are facing in the economy.

My own view is that with the fiscal adjustments, which we were forced to do under the IMF agreement and that Finance Minister Peter Phillips and his team have been seeing through, I believe that the necessary reforms will be to the economy and market that we have needed for a long time. This adjustment is also buoyed by the Economic Programme Oversight Committee (EPOC), which was a very good initiative put in place by Phillips. The truth is that the EPOC initiative may have been the most important element in the agreement, as it brings a certain amount of confidence and oversight to the economic programme, which has never existed before, and Phillips must be congratulated for that.

While greater economic growth could see a decrease in the unemployment rate, from the current 16 per cent, the quality of the employment created may not create the needed middle class, says Dennis Chung.

This in my view is the only time I personally have any confidence in an IMF programme being implemented by the Jamaican Government.

In answering the many questions on the economy, I tell people that we will see negligible growth towards the end of 2013, but I expect that growth will improve in 2014.

My reason for saying that is primarily that I believe the biggest factor for lack of growth, after the IMF agreement, has been lack of confidence, and uncertainty. And this was borne out in the last confidence numbers, which showed the dismal perception and uncertain expectation of what will happen in the economy. As a result, capital naturally moved from the riskiness of investments in the Jamaican economy, to the safety of the US$. It is for this reason that the dollar has kept sliding, more than any scarcity of the US$. So no matter how much we try to address the sliding dollar with monetary policy attempts to tighten liquidity, it will not stem the slide of the dollar.

The reason why I say that the consistent dollar slide has more to do with confidence and uncertainty more than the shortage of US dollars is as follows. The fact is that we have always had a balance of payments (BOP) shortage, and even with the loans that we have had, we still were not able to adequately cover the BOP deficit. Even so, we were still able to hold the exchange rate and interest rates relatively stable. Some may say that this was facilitated by the higher interest rates and increasing debt. And to some extent, yes, but the fact is that much of the debt was in local currency, which would not help the BOP problem, and the main reason for the debt was not for BOP support but rather to close the fiscal deficit.

It is true that relatively higher J$, to US$, interest rates would have caused a preference for J$ instruments. Today we have J$ rates moving higher, and we also have an improving fiscal and BOP situation, but still we have a consistent slide in the exchange rate, and I highlight consistent because this is what I am saying is caused by a lack of confidence, and uncertainty.

I also am of the view that as confidence and certainty creep back into the system with each passing of the IMF test, then we will start to see that reversal from holding US$ assets to J$ investments. It is, however, important for this positive fiscal adjustment to be accompanied by transparency and equity in governance, and importantly an improvement in the security situation. If these situations do not improve, then we are not going to be able to maximise the benefits from the fiscal, and legislative, adjustments under the economic programme.

Even if we assume, though, that we see an improvement in the governance and security (which of necessity must include improved relations between the police and citizens), there is still one big risk that the country faces going forward, and it is growth that is restricted to a certain group of people, thus increasing the risk of a decreased middle class, which is necessary for sustainable development.

This has nothing to do with any dictates under the economic programme (note: I have refrained from calling it the IMF programme), but rather, it is a wider social and cultural problem that we have.

The fact is that while greater economic growth could see a decrease in the unemployment rate, from the current 16 per cent, the quality of the employment created may not create the needed middle class. In fact, many of the jobs could be casual jobs, which are seasonal or low-paying. The reason is that there is a critical mass of persons in the country, particularly among the younger labour force, that is not properly educated/trained and/or productive enough to face a more market-driven and competitive environment.

This is the big challenge (and risk) that the Jamaican economy faces, and which, quite frankly, we have not done enough to deal with. If you think about it, as investors get more confident, then what you will find is that they will start shifting from US$ assets to J$ investments, which will necessitate a sell of the US$ currency to the market. The exchange rate will not see any great revaluation, if any, but at the current exchange rate, the ROI is minimal compared to investment opportunities, in an economy where confidence is strong.

The problem is, because of the low productivity levels of this critical mass of the labour force, quality re-employment of the unemployed is not going to be maximised.

The challenge the government faces is how to transition this unproductive work force to a globally competitive one. It is a task that must be undertaken by the Jamaica Productivity Centre, and HEART in particular, and must receive the support of the ministries of industry, education, labour, and finance.

A failure to address this problem could result in some growth returning to the economy, but without the mass benefit needed. This would serve to stymie the growth of the middle class, which would not be a sustainable model for development.

Friday, October 25, 2013

Policy's role in creating an enabling environment

Presentation to The Rotary Club of St Andrew on October 22, 2013

OVER the past few weeks, I have been approached by many persons who ask the questions: What is happening to the economy? Is Jamaica headed in the right direction? Is it time for me to migrate?

These questions have been influenced by the continued devaluation of the Jamaican dollar, increasing prices, difficult bureaucracy, indiscipline on the roads, and a general feeling of insecurity. One could say that the people who ask the questions have a right to be concerned, as they want to ensure their future is secure.

These conditions have now been further compounded by the recording of the lowest levels of business confidence since 2009 and consumer confidence in 12 years. This supports the pessimistic views behind the questions.

The question we need to ask ourselves, therefore, is: Are we on the right track with the current policy initiatives, in terms of the economic, legislative, and social programmes? In my view, it is very important to understand this and ensure that we do what is in the best long-term interest of the country, as it is highly unlikely that we will get another opportunity to bring us back from the brink, if we are not there already.

In order to do a proper assessment of this, we need to understand why we are here and what can actually bring us to a better tomorrow.

The first thing to understand is that the reason why we continuously suffer from low growth and deteriorating social conditions is the result of spending more than we earn. So in our over 50 years since Independence we have run a fiscal surplus, maybe six times, which means that for over 45 years we have been borrowing money to live. If that happens in your own household, then you will soon lose everything and become indebted to creditors.

The other thing to understand is that this predicament has resulted from governance that seeks to satisfy political party die-hards, which see politicians seeking to please persons through handouts rather than encouraging them to work. So, for most of our independent history, the budget has been

crafted around welfare-type programmes rather than creating policy initiatives that will encourage production and productivity.

The irony is that it is not the Government that ultimately pays for this welfare, but the productive class, which has resulted in:

* The economic decline of the 1970s;

* The debt increases from the 1980s to present;

* The financial crisis of the 1990s; and

* The two debt exchanges.

In other words, when government runs into fiscal problems, all they do is impose a tax (one way or the other) on the productive class in Jamaica, in order to continue the support of those who are least productive.

The result is that we developed an unproductive society, where capital and other resources are not allocated to where they are most productive, but rather, allocated based on political and other governmental policy decisions.

This fundamentally is the reason our economy and society are where they are. That is because we have failed to create a policy environment that encourages the factors of production (capital and labour) to move towards where it is most productive. So capital, for example, was concentrated in government paper, because it was the best value-added return and crime was a turn-off for real investments, and labour moved to where it was more protected than productive, or we failed to lend money through the Students' Loan Bureau with any link to development.

The problem we face today is that if we want to, in a sustainable manner, positively develop our economy and society, there will need to be a fundamental shift in policy and values. This is directly linked, in my view, to our legislative framework and policies (economic, fiscal, and monetary). In other words the framework, or environment, that Government puts in place will determine if capital moves from the sidelines (eg in US$ assets) to real investments and if people find it more productive to work, or find it more profitable to be in crime or other non-productive ventures.

For example, because Jamaica is well-known for music and sports, and because of the demand, a lot of money is made from it, then naturally youngsters look towards music and sports as viable careers to pursue.

What it means is that, in order to change the economic and social situation in the country, we will have to do the necessary policy adjustments that will change the way we behave when it comes to allocation of capital and labour, and how we interact with each other socially.

This is what is being attempted with the current IMF-influenced economic programme and the legislative reforms taking place. I am of the view that the fiscal and legislative reforms under the IMF-programme are the right way to go. Many may wonder how I can say that if the result is economic hardship, particularly the continued slide of the dollar. But the fact is that the Jamaican economy has been inefficient for so long, and the resources so misallocated, that any form of adjustment is going to cause some pain. What we do know is that the fiscal adjustments being carried out by Peter Phillips are necessary, because if we continue to spend more than we earn, then the result is going to be catastrophic. The adjustment that we are seeing is a shift of our resources from unproductive to productive purposes. So we are seeing more companies looking towards export, and we are seeing more young persons starting their businesses.

What we are also seeing is greater economic hardships, a devaluing dollar, and higher interest rates. So the question is: How do we do the necessary adjustments and at the same time minimise the pain, and dislocation, that the necessary adjustments cause?

What we must understand is that the only way the economy will grow is if the private sector, and in particular the SME sector, becomes more vibrant. So large companies (that have matured in the Jamaican market) will inevitably turn towards other markets, as this is the best value added for them. The greatest growth, however, is going to come from facilitating SMEs to start and grow into large businesses, just as in the

US where we see small businesses through the stock exchanges, have grown into international businesses. This is the way to reduce unemployment and create greater economic activity.

This, however, is only possible if we have a business climate that encourages capital, and labour, to move towards establishing new SMEs. This means an environment where SMEs can flourish and grow. It does not mean handouts, but rather, providing cheaper electricity, more efficient bureaucracy, a more efficient justice system, transparent governance, and improved law and order.

It is my view that much progress has been made in this area, but it needs to be faster in order to compensate for the inevitable decline we see in economic conditions because of the necessary fiscal adjustments.

In other words, because of the fiscal adjustments and reform programmes, we have seen capital move out of government paper and that capital is going to find a home that gives the best value for risk. At the moment, what we are seeing is that capital is shifting to US dollars, which is what is causing the rate to move.

Therefore, what we need to do is create an environment where business and consumer confidence is such that capital will want to move to real investments. This means that policy initiatives must be focused on creating an environment of efficient and friendly bureaucracy, competitive energy cost, law and order, and important reforms, such as a competitive tax environment. Unless we make the changes to create a competitive environment for businesses, then we will not be able to create sustainable growth and development.

So, in concluding, I can say that the direction of the reforms under the IMF programme is the correct way to go. We must, however, be careful about how we manage the transition and ensure that we create the environment to encourage the allocation of capital and labour to productive investments.

Friday, October 11, 2013

Development can only happen with trust

IN my article last week, I looked at the role that behaviour plays in economic growth. This week I will focus on the critical nature of trust, or confidence. As I have stated on many occasions, economics is all about how we interact with each other, which means that economies, and ultimately economic development, are the outcome of the behaviour of people.

Similarly, whether a company is successful or not really depends to a great degree on the interaction between its employees and other stakeholders. In other words, it would be very difficult for a company to progress if the employees did not trust the boss, and there were no rules governing how persons should behave towards each other. This not only relates to how we work with each other, but also how we interact socially outside of work.

People have no obligation to interact with each other outside of work, but the truth is that it can assist significantly with productivity if persons working together develop a healthy social relationship outside of work related activity. This is something I say to younger professionals all the time, using the example of men who went to the same high school or have always played sports together.

What this social interaction around school or sports does is create an element of trust and commonality between individuals. So the person I attended high school with over 30 years ago, or the person I trust to ride in front of me when I am going at over 30 mph, is naturally someone I will be very comfortable dealing with in a work environment. This is referred to professionally as networking, but really goes beyond networking. It really is developing a deep confidence in someone whom you must in other important aspects of your life.

So in the cycling example above, if every week that I ride with someone, I trust that they are going to point out any upcoming obstacles in the road (pothole or oncoming car), or trust that they won't be slowing down in a manner that will cause a fall, then what this does is develop a belief in what that person says to me. In addition, if every week we have a common purpose of surviving the ride unharmed, then when it comes to work the relationship will be much enhanced.

This is why I think that being involved in sports (especially team sports) at an early age in school is so important to professional and social development. Team sports teach you to rely on, and trust, others. This interaction also teaches you whom to trust. This, of course, is something that I find has been missing from schools, as many parents focus their children on academics only, without understanding the importance of sports to social development, and also physical development.

This supports the argument that one of the most important policy initiatives that recognised the importance of relationships in economic and social development were the Values and Attitudes and PALS initiatives that were developed under the PJ Patterson administration. My own view as to why they didn't have the intended impact is simply that they were not enough of a priority for most of us, but rather just seen as a Band-Aid solution.

It would seem to me, though that this is a fundamental challenge that Jamaica, and the world, faces. We only have to look at what is happening in Washington where grown men (and I mean men as I don't really see any women involved) are unable to arrive at a consensus. The result is that many of the citizens who elected them are being negatively affected, and more importantly, the fragile global recovery is being threatened. What is amazing is that both sides want the same objective - an improvement in economic and social conditions - but are still unable to arrive at an agreement. And this same scenario has been playing out every year.

Contrast this to when Gingrich was the speaker of the House and Clinton was president. They both said they were able to resolve the matter because even before the lockdown at the time, they constantly dialogued with each other.

In other words, in the latter case, there was greater trust between both parties, and so they felt a greater confidence in what they were saying to each other. In the current case, however, there seems to be a total breakdown of trust, when you listen to the commentaries.

This of course is no different in Jamaica, where everyone is labelled either PNP or JLP, or even within the parties, where once there is a challenge of ideas there is a total breakdown of relationships between persons who were allies the previous day. This also can be seen in the relationship between trade unions and management, in both public and private institutions, or even more critically, the relationship between citizens and the police force. And we then wonder why we are unable to solve the crime plague.

This lack of trust of everyone has even found itself into our public sector rules, where, because of the lack of trust, we have managed to set up rigid procurement rules and then have seen the need to set up more than one level of managing the rules because we don't necessarily trust one organisation to oversee the process. So we have the OCG, NCC, and Cabinet all overseeing the procurement process.

The result of this lack of trust is that there is always suspicion of everything that is done in this country, and so when political parties change they dismantle even good programmes because they do not trust anyone who wears a different colour shirt. We therefore create layers of control (bureaucracy) to compensate for our lack of ability to work together, just as would be done in a company where there is a breakdown of trust between workers and management.

The consequence of this is, of course, that we spend many unproductive hours trying to discredit each other. Then we wonder why we are unable to make any progress.

Friday, October 04, 2013

Behaviour's role in economic growth

LAST Saturday I was with my cycling group for the ride out to Palisadoes and back. After getting to the airport roundabout we usually turn and go back to Harbour View before heading back to the airport.

While going around the roundabout, a man who was on a bicycle, heading towards Port Royal, also started to go around the roundabout. He, however, went around from the right side, while the approximately 20 cyclists correctly went from the left to go back to Harbour View. On seeing the 20 cyclists approaching him, at a pretty quick speed, he started to curse us, using some words that cannot be mentioned now, for fear of the Broadcasting Commission.

One of the greatest challenges we face as a country is how we hold the human resources accountable for their action, says Dennis Chung.

If he had followed the rules set out by the road code, then there would not have been any encounter, and he would not have had to utter such words, which could have led to further confrontation. In other words, if he had followed the rules, then there would have been perfect order, and peace would prevail.

However, in true Jamaican style, he chose to verbally abuse us although he was wrong and we were right.

I am sure that we can all relate to that situation in Jamaica, where persons breaking the rules abuse the other party. So, for example, you are driving and going within the 30 mph speed limit, but you are going too slow for the taxi man behind you who calls you all sorts of names while overtaking above the speed limit and where there is an unbroken white line. Or, as many young men can attest to, someone claiming to be the police wants to get information from you and you ask for identification and you are abused, even though the law requires that it is produced.

More commonly we can refer this to a situation where you walk into a tax office and while you are waiting in line, the person at the counter is on the phone speaking (obviously not work-related) or is chatting casually with a fellow employee.

All these instances are cases in which laws and processes are in place to ensure that there is order and that things are done efficiently, but the behaviour of the persons charged with the responsibility of carrying out the function, according to law, cause the inefficiency.

I believe that this is one of the fundamental challenges being faced by the bureaucracy in Jamaica today. It is not that we need more laws, or that processes are not in place, but rather that they are just not followed. So it seems to me that one of the greatest challenges we face as a country is how we hold the human resources accountable for their action. Which, of course, speaks to the problem of enforcement.

One glaring example of this, which may cost the country approximately one to two per cent of GDP growth, is the development approval process. Recently, I was alerted to the fact that development approval takes approximately nine months (at best) to process. This is not because there are not processes in place, such as a computerised tracking system, but rather because of the lethargy in ensuring that the approvals happen in a timely manner.

In fact, my understanding is that there are many millions of dollars in economic activity tied up in the bureaucracy of the approval process. This of course is at a time when there is fiscal tightening happening, causing a contraction in economic activity, which has resulted in six consecutive quarters of negative growth, and the highest unemployment levels in 16 years. And all we have to do to ease some of this pain is just to ensure that the already existing tracking system and processes are used, which could see the average approval time reduced from nine to three months, which is where it can easily end up.

This of course is not just a Jamaican problem, as we see in the US where grown men, knowing that the citizens of the US and the world are depending on them to reach a compromise, for their livelihood, cannot do so because of egos. We, of course, need to be careful of how we criticise them as we behave the same way all the time. It is estimated that if this continues for another week it could cost about one per cent in GDP growth, or even worse, if not resolved within two weeks, could lead to a global economic problem.

These examples illustrate the direct impact that behaviour has on economic growth. Many times we forget that economics is really about human behaviour, and that the macroeconomic measurements we like to speak of, are really nothing more than the outcome of how we behave.

Understanding this, it is therefore very important for us to consider the behavioural effect of policies on economic outcomes. I say this because when we sit down to think about the reform programmes being implemented, we should not keep our eyes fixed just on financial targets but on, more importantly, behavioural targets, which in turn affect financial targets.

So, that tax reform will only be successful when they encourage capital to move from the sidelines, or from overseas, to real investments in the country. Law enforcement is only successful when it causes orderly and compliant behaviour, which results in the citizens holding the enforcers of the law in high esteem and confidence.

So as we consider our economic future, let us look towards the current stand-off in the US as a behaviour we do not want to adopt, as it is clear that economic growth depends critically on influencing behaviour in the direction of greater productivity.

Friday, September 06, 2013

A butu in a Benz

The following is from an address to the Lions Club of Kingston on September 4, 2013

PROFESSOR Rex Nettleford is quoted as saying "butu in a Benz is still a butu" or as Jamaicans say, "You can take someone out of the country but may not be able to take the country out of them".

Goat Islands are being seriously considered for the site of a logistics hub to be built by the Chinese. Large amounts of foreign investments, government spending, or legislation alone won't affect the change needed, if we do not address the structural challenges facing our economic and social environment, says Dennis Chung.

These sayings refer to someone who seeks to improve his/her social standing but does not understand that class acceptance has more to do with behaviour than the symbols of wealth. So they purchase an expensive car or a house in an upscale neighbourhood, in order to try to fit in but still have the same boorish behaviour that defined their previous standing.

The reality is that, the label "butu" or "ghetto" has more to do with behaviour, and a way of thinking, rather than clothes.

This is the same for an economy and society. While growth and investments are necessary conditions for economic and social development, the truth is they are not sufficient. So when we have massive amounts of foreign investments but still can't understand why growth is anaemic, we must understand that merely covering up the economic and social challenges with money does not deal with the underlying problem.

So, as in the case of the butu in the benz, large amounts of foreign investments, government spending, or legislation alone won't affect the change needed, if we do not address the structural challenges facing our economic and social environment. We will still be considered just a developing nation.

One of the major structural economic challenges, which has been an underlying factor in our dismal economic performance since the 1970s, is labour productivity. The question has been asked many times: Why has Jamaica seen so much foreign direct investment, and capital investment, and debt of $1.7 Trillion, but has failed to see a response in our growth rates?

The problem, as I outlined in my book, can be blamed on the declining labour productivity since the 1970s (declining at an average annual rate of 1.3 per cent between 1973 and 2007, according to the Jamaica Productivity Centre -- JPC).

The JPC 2009 report also states the following:

* Between 2001 and 2005 the rate of the labour productivity decline increased to 1.8 per cent

* Total factor productivity between 1973 and 2005 declined an annual average 1.74 per cent

* Trading partners and neighbours in the Caribbean saw labour productivity increasing by over 1.5 per cent since 1972

* "...not only has the country lost competitiveness as a result of declining labour productivity but workers have gotten poorer in real terms".

The sad truth is that this continues today because we have failed to address the structural issues that have negatively affected labour productivity. We have failed to implement the necessary policy changes that will cause labour, as a primary factor of production, to become more productive. Instead of allowing the market to determine the value of labour, we have relied on welfare interventionist policies.

In other words, labour, like capital, is most efficient when it is subject to market conditions. So when government employs persons because of political alliance, when labour is paid based on seniority rather than performance pay, when persons are not able to access education and training, then what happens is that labour becomes unproductive, as it is not rewarded based on performance. So there is no incentive to produce.

In other words, if you work for two hours and get eight hours' pay, then why work the full eight hours?

This also explains why despite the high levels of FDI we have been unable to achieve much growth.

The JPC 2009 report shows that between 1973 and 2005 we have seen growth in physical capital every year. Yet between 1973 and 2005 the economy has grown an average 0.5 per cent per annum, which betrays the high levels of investment and debt.

My view is that the primary problem is labour productivity. In order to maximise value from capital, you also need maximum labour productivity. The fact is that we have not been able to apply productive labour to capital and so it is cheaper to import than produce. So the same unit of input in Jamaica, as in another country, will end up having less real value, because when labour is applied to it, it minimises the capital value.

Therefore even when foreign capital is invested, it goes into purchasing imported finished goods as inputs rather than purchasing raw materials and using labour to convert the raw materials to finished goods. And even when high value labour is needed it is imported because of our relatively low literacy levels.

The result of this is that imports are high because either (1) they are cheaper; or (2) because of lack of the required labour input.

Therefore as we move forward with the necessary adjustments, and try to find sustainable economic solutions, it is important to consider the impediments to high labour productivity; if we solve this, then we will not only drive the Benz but have the social behaviour to go with it.

Before we look at what are the practical solutions, it is important to understand that labour productivity measures the amount of goods and services produced by one hour of labour.

Since 1973, labour has been on average 1.3 per cent less efficient each year. Literally this means that in real terms, $100 labour output in 1973 equates to $65.79 today. Is it any wonder then that (1) we have not been able to see any growth from the significant capital investments, or (2) why we have seen the exchange rate move from where the US$ was J$0.90 to where the US$ is now valued J$102.10.

And even though labour productivity kept declining, governments primarily supported low productivity by expanding public sector employment, and implementing rules that contributed. And they were able to do so (unlike a private business) by borrowing and taxing. This ultimately burdened the private sector to the point where investments were only attractive with incentives, resulting in the non-productive regime of waivers and incentives we are trying to do away with today.

This cannot be solved by tinkering with macroeconomic variables and is the reason why we have had 13 previous unsuccessful IMF agreements, and is why this IMF agreement is so critical, and the social and economic transformation is not going to be easy.

For us to properly address the problem this requires much more than what any IMF agreement can accomplish.

Some of the initiatives that must be undertaken include:

* Addressing public sector inefficiency, a major inhibitor to growth and facilitator of low labour productivity. This cannot continue while taxing the productive sector to pay for it, as it will only result in further economic decline.

* Legislating laws that ensure the rights of workers are protected (which is critical to ensure labour works efficiently) but at the same time aren't burdensome to employers.

* Education system must be improved for better results. And our scarce public resources must be targeted towards developing skills needed for our economic transformation.

So while we seek more FDIs, and implement the reforms under the IMF programme, it is important to understand that the root cause of our challenge is declining labour productivity, and at a deeper level the things that support it, such as political expedience.

Therefore as we transform the economy for sustainable development, we need to look at how we do things, and not just focus on macroeconomic targets. Just like businesses will invest capital for the greatest return, labour will do the same.

In other words, our economic problems are really social problems.

And as Nettleford implied, having the Benz is not enough if you do not change your behaviour. Are we prepared to do this?

Friday, August 16, 2013

Understanding economic transformation

“Everybody want to go to heaven, but nobody want to die”. These words were sung by Peter Tosh in “Equals Rights. In other words, how can we expect to go to heaven if we are still living?

This is no different from the many expectations of people who expect (i) improved finances, but do not want to sacrifice consumption; (ii) good health and nice body, but still eat poorly and do no exercise; or (iii) economic transformation but do not want to make the sacrifices necessary.

It is necessary for us to understand that transformation takes discipline, sacrifice, and a commitment to direction. In other words if we want to see the necessary transformation in any aspect of our lives then it is going to require changing the things we are used to and discipline to stay the course.

When we see, for example, the performance of our athletes, we fail to understand the sacrifice and hard work that goes into preparing for that one race. Or, put another way, that one event we see. Being someone myself who does endurance exercise, I know the discipline it takes to train, and eat the proper foods, even though you feel like throwing in the towel many times.

On the contrary, one can also work hard and make sacrifices, and never achieve the transformation you want, simply because the preparation is not done properly or you are heading in the wrong direction. So, for example, (i) it does not matter how fast you drive, if you are heading in the direction of St. Thomas, you will not get to Montego Bay; or (ii) overworking your muscles can lead to disastrous results instead of the desired strength you desire.

What these examples show is that transformation requires, first understanding what your goals are; secondly, identifying the most efficient path to get there; thirdly, getting rid of the obstacles to that path; fourthly, committing to the transformation; and then finally implementing the transformation plan.

My last couple articles have focused on what is needed for economic growth and development, which essentially is to first understand that growth can only come from the private sector, and if the environment does not facilitate private sector expansion, then capital will simply move to more efficient returns. This includes moving out of Jamaica, or investing in short term activities.

So if we truly want economic and social transformation in Jamaica, we need to first accept that transformation requires that changes will happen. This I think is one of the problems we have faced with our past economic programmes, and why we have not been able to benefit in any sustainable way from the sacrifices we have been called on to make repeatedly.

What we have always sought to do is tinker with economic activity, while maintaining the same political and social behaviour that many of us are invested in. Over the decades we have given lip service to economic and social transformation, but we have never truly done what is necessary to cement that transformation.

We have said that the private sector must lead the growth in the country, but we have never truly created an environment for the private sector to flourish, as we have never really reduced the negative effects of bureaucracy, deal with energy, or addressed law and order. So the private sector continues to be expected to perform in an environment that is not as competitive as many of our trading partners.

We have said that we want to transform the public sector, to be more efficient, but political expedience has not allowed this to happen. And we have also failed to understand that what we really need is not a reduction in the public sector, but rather an increase in efficiency of the public sector, whatever that entails. Even if we were to reduce the public sector, within the context of onerous rules and reward based on seniority, rather than performance, we would have the same inefficient system with less people.

We have said that what we really need to transform the society is greater innovation, but have failed to address the challenges facing the education system to ensure that we produce more literate persons who can create the needed innovation. So we have many youth who continue to sit on the corners, or we continue to set up some persons for success, and others for failure through the GSAT exams.

We have said that we are serious about improving tourism, but fail to address the infrastructural issues, the degradation of our beaches, and the harassment and indiscipline on the roads.

And this is why I have always said that irrespective of whatever economic and social policies we have in place, that unless we, in a very significant way, address the structural issues of energy, bureaucracy, tax reform, and law and order, we will not see the sustainable development we need. In other words, how can you build a house properly without ensuring that there is a solid foundation in place? Remember the man who built his house in the sand.

So if we truly want economic and social transformation, we must understand what is required. We must also understand that given the structural weaknesses in the Jamaican economic and social environment, that transformation means that if we do not plan properly to make the needed changes then it is going to cause some social dislocation. For example, a more efficient economy means that those who do not have the ability to innovate, or be more productive, will fall by the way side and government is going to find itself having to play a greater welfare role.

Development is always going to cause dislocations, but this can be minimized by understanding where the weaknesses are and start putting in place mitigating policies to minimize the dislocation.

In other words, if we want to go to heaven, we must first die. However, at the same time we must do what is necessary to ensure we get to heaven, when we die, instead of somewhere else.

Friday, August 02, 2013

Productivity remains Jamaica's main problem

ON Wednesday I attended the presentation of a report by Professor Vanus James that examined the foreign exchange policy, and what is most appropriate. The study was initiated by Edward Seaga, and is a very good piece of work that seeks to bring some conclusion to the recent dialogue about which exchange rate regime is best for Jamaica.

The study concluded that the best regime is a managed floating rate, which is an argument that was put forward by myself and others, in the face of the opposing argument for a pegged, or fixed, regime. Mr Seaga and his team must be commended for this work, which is what we should expect to come from academic institutions, he being also the Chancellor of the University of Technology.

SEAGA... his team must be commended for their work, which is what we should expect to come from academic institutions

It is important for us to understand why a managed floating rate is best for Jamaica, as opposed to, say ,an unmanaged floating rate. The fact is that the exchange rate is very significant in Jamaica, where approximately 70 per cent of our consumption is imported, and we have always had a significant balance of payments (BOP) deficit. Left unmanaged, the exchange rate would depreciate at a much faster rate, resulting in significant hardships for the consumer and businesses, as long as our BOP deficit remains a challenge.

For those who say that the exchange rate should be left to find its true level, the fact is that the true level approaches infinity, if left unmanaged, as a result of our continuing BOP deficits. Therefore, it is necessary for us to manage our exchange rate, as long as we are unable to resolve our BOP problem. This means that the NIR and monetary policy will continue to be critical tools, and why we cannot fix the exchange rate. The result of doing so would be social challenges.

It follows, therefore, that if we are to resolve our long- term exchange rate problem, thereby causing a rise in income levels, relative to cost of living, then we must address the problem of the BOP. Resolution of the BOP issue means earning more foreign exchange than we spend, or at the very least, enough to cover our expenditure.

Some say to do so, what we need to do is live within our means, and what should be done is to reduce our imports to the level of what our foreign exchange earnings can support. This is a very simplistic argument that is based more on theory than practical application. In other words, if you need to spend $100 just to survive, and you earn $50, then it is practical to say that you can reduce your spend to bring your expenditure in line, if doing so means you are not able to survive.

Similarly, Jamaica's imports are 35 per cent fuel and 10 per cent food. And both are greater than our exports. So reducing our imports to match our exports will lead to food shortages, resulting in higher prices, and also reduced production, as there will be electricity and/or transport disruptions.

It would logically seem then that what we must do is increase our earnings. That is, reverse our BOP deficit. But in order for us to do so, we need to first understand what causes us to import more than we export, which at the base of it, I submit, is the inability to compete globally on a sufficient scale. There are some companies, like Grace Kennedy and Jamaica Producers, that have been making great strides internationally, but the problem is that many smaller companies are unable to make the transition.

This is caused, in my estimation, by our low productivity levels, which have continued to decline since the 1970s. And if we cannot improve productivity, then it is always going to be cheaper to import, and consume than produce locally and export, or consume.

Again the question is what makes it more rewarding for companies to import, or produce locally, for local consumption. In other words, why the preference to use imported content, or sell locally, rather than export.

Again, others argue that the policy should be to make it difficult for companies to survive by just selling locally, through exchange rate depreciation, reducing local income and forcing companies to export. The problem with that argument is that if you reduce local income without addressing the productivity issues, then all that will happen is that companies will close down, as we would not have addressed the productivity issue, and they will be unable to compete internationally and, therefore, have to close their doors as they will be unable to expand.

This shows that the underlying problem we face is one of productivity, and not that people necessarily want to consume imports. But what choice is there? Are we saying that while players in other economies act rationally, and their choice is based on returns, our private sector and consumers should act irrationally and buy local inputs. even though they are more expensive? While this is a short-term fix; it is not sustainable, and is a primary reason why our economy has struggled.

Therefore, if we want to solve our foreign exchange, inflation, cost of living, NIR, BOP, and other issues, then we must focus on solving our productivity issues. And to solve our productivity issues, we must focus on what makes business uncompetitive.

Thus, the emphasis on energy cost, bureaucracy, tax reform, and law and order.

Friday, July 26, 2013

Why private sector led growth is central to development

LAST week I wrote about what the pillars of growth are. Today I want to answer a question, often asked in a roundabout way, by persons who say that the private sector has not done what is necessary to grow the economy, so why should they be accommodated with a more business-friendly environment. This is a question asked often by persons who I don't think truly understand how markets work.

It is very important to understand, as I have often said, that sustainable growth cannot, and will not, happen without private sector prosperity. This concept is sometimes elusive in the Jamaican society, where it is often felt that the "big" man just wants to exploit the "small" man and so must be doing something unethical or illegal to make his money.

There were similar sentiments against the banks in the US, after the 2008 financial crisis, but this emotion soon gave way to the practical knowledge that the poor cannot improve their lot without the growth of the "greedy" private sector. The problem we have is that this feeling is not only restricted to the so-called small man but is oftentimes perpetuated by some politicians and intellectuals in their quest to explain why market economies are bad, and instead proffer state intervention and more brimstone and fire on the rich through taxation.

Ironically, these same persons who find it convenient to put down the "capitalists" are usually very persistent in seeking charitable contributions from them, or support in some other financial matter. In fact, much of the charitable spending that happens in the society is not from government, but rather from private companies and individuals.

But why do I say that private sector-led growth is critical to sustainable economic growth?

We can answer this question by first understanding what drives economic growth. Economic growth is measured by the growth in the Gross Domestic Product (GDP), which is simply the increase in real productive value from period to period, that is adjusted for inflation. GDP growth involves private sector production and spending, as well as government spending. So one may say that government spending is a part of GDP, and therefore, why is the private sector necessary? And it is for this reason that government can play a role in stimulating economic growth, such as during a recession, as they also contribute to GDP.

The problem is that government spending is not sustainable with a stagnant, or struggling private sector. And this has been the experience in Jamaica, and we have seen a similar example in the US model coming out of the recession, as opposed to the European approach, which did not emphasise market growth. The reason why government spending is not sustainable without private sector growth is that government spending depends significantly on private sector income, through taxes. So the income taxes, customs duties, corporate tax, and consumption tax depends on activity in the private sector. Therefore, if the private sector is stagnant, or declining, then it is logical that there can be no increase in government spending.

Thus, in the final analysis, GDP growth at every level depends on private sector activity. Therefore, the logical conclusion is that if we want to see robust growth in the economy, then we need to have robust private sector growth.

It would seem logical, then, that fiscal and monetary policy should have as its primary goal, the facilitation of growth in the private sector. Put another way, which Obama and Bernanke understands very well: the role of government policy must not only be full employment, but also high- value employment through constant innovation. On the contrary in Europe, and particularly Greece, the focus of policy was not on private sector facilitation but rather, fiscal consolidation. The result of both scenarios is there for all to see.

This is important for us to understand, not just in Jamaica, but also the Caribbean. This is because the Caribbean has a tendency towards a government dependency syndrome. Add to that the culture of a lack of embracing of private sector success, and you have a compounded negative effect.

The market economy may not be a perfect system, but the truth is that it's the best. If we want to improve the quality of life for everyone, including the most vulnerable in society, then it is essential that private sector growth be robust.

So as we continue the implementation of the IMF agreement and structural policies, we need to continue to bear in mind that at the heart of it must be the facilitation of a business environment that encourages private and corporate prosperity. So, as an example, the concepts companies of lower tax rates for PAYE and companies, lower energy rates, more efficient government bureaucracy, and improved law, order, and justice system are all critical to supporting that private sector growth.

Our focus of policy must be on encouraging investment and spending through competitive return on investments or feeling secure about one's future. Our focus must be on businesses and individuals feeling safe, and respected by the justice system. It is this focus that will make Jamaica experience robust growth and become the place to live, work, and raise families.

Friday, July 19, 2013

Identifying Jamaica's growth pillars

MY last article looked at how we can increase competitiveness in the tourism industry, which is critical for Jamaica because tourism is our highest foreign exchange earner, and the area in which we have always had the greatest comparative advantage. The same challenges that affect tourism can be seen right across the social and economic landscape, and are the main inhibitors of growth.

The IMF agreement has been heralded as one of the last chances we have of saving ourselves from economic disaster, and whether so or not, it certainly is a significant effort to bring fundamental changes to the economy. In itself the implementation of the agreement is going to be disruptive to the economy and society, as we know it, simply because there is so much fundamentally wrong with our economic and social arrangements. Any change we try to make for the better will of necessity be disruptive.

What we must ensure is that

(1) the disruption is carried out with consultation. So that even if some persons do not agree with some things, they will at least understand. Failure to do so could end up with an outcome that nobody wants to own or participate in.

(2) the disruption must not be too radical, or else we could replace inefficient earnings with nothing in its place. This includes ensuring that when certain adjustments are done, that prior to those being done, something new, and more efficient, is put in place to substitute.

(3) the outcome must be measured, and be one that will bring greater benefit. One challenge we have had as a country is that there have been too many disruptions implemented without the desired outcome, for many reasons, but nonetheless ending up not adding any value.

One thing that we must figure out is: What are the pillars of growth? It is important for us to understand this, as failure to do so will only cause the economic plight of the country to deepen.

The first thing we must realise is that sustainable growth can only come from the private sector. While Government can stimulate economic growth, it cannot be sustained. If we do not understand this, and act in a manner that encourages private sector growth, then we will not achieve sustainable economic growth.

Secondly, it is impossible to maintain low debt/GDP, low interest rates, stable exchange rates, and a current account deficit. In the short run, we may be able to use monetary and fiscal policy to achieve all these at once, but this is not sustainable. What it does is lead to black markets, as we saw with the exchange rate in the 80s and 90s. Irrespective of what type of political system and ideology is in place, markets will react, either through the formal or informal system, which is one reason why Jamaica has such a large informal sector.

Finally, the business environment must be one that encourages businesses, and individuals, to prosper. One of the reasons that the US economy has done so well, and is easy to rebound from economic crises, is precisely because people and businesses have the opportunity to flourish to their potential within the formal environment. If this environment is not present then (1) an informal economy, and society, will develop and (2) capital and human resources will not fully participate in the economy, and may even go to another economy, through migration and business relocation.

It is very important for us to understand these underlying pillars of growth as we move forward under this IMF agreement. In the past I have found that there has been too much preoccupation with focusing on the fiscal solutions, not understanding that everything that happens on the fiscal side depends directly on what happens in the market economy. Because, if the market economy does not grow, then fiscal revenues and the balance of payments will suffer. And if fiscal revenues suffer, then the debt/GDP and foreign exchange rate will suffer. What this will do is create a vicious circle that puts the economy into a downward vortex.

In an attempt to salvage the fiscal downturn, what will happen is that Government will administer more taxes, or more debt, which will again lead to a further downturn.

The only way to break this cycle is to create an environment in which businesses will flourish, and this may also mean providing incentives for foreign exchange earners, in particular. This in turn will increase GDP, and improve the balance of payments, leading to greater earnings for businesses, which will then increase employment, causing greater spending, greater profits, and greater fiscal revenues. This is the only sustainable model. Anything outside of this will be temporary, and will only mean that macroeconomic stability will only be temporary, and can only be artificially held.

The IMF agreement and economic programme does include initiatives that can create this winning equation. These include comprehensive tax reform, insolvency legislation, financial sector legislation, labour market and public sector reform, and financial support for businesses. And these are very good initiatives, but we must be careful to ensure that the initiatives are implemented with reference to what I described above as the pillars of growth.

Therefore, as we move forward in the IMF programme, it is very important for us to understand that the main risk lies in not building on these growth pillars, as failure to do so will certainly result in short-term gain and long-term failure.

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Saturday, June 29, 2013

Increasing Jamaica's tourism competitiveness

EACH time I am away, I can't help but do a comparison between the country I visit and Jamaica. In particular, I always look at the main industry of the country and contrast it against Jamaica, if it is an industry that Jamaica competes in also.

Over the past few days, a delegation from Jamaica participated in a Caribbean Growth Forum, which was put on by the IDB in conjunction with partners such as the World Bank. The forum's focus was to look at what can be done to enhance the economic growth potential of the Caribbean region. The forum was opened by the Prime Minister of Bahamas, and included significant participation from government ministers from Trinidad, Bahamas, Barbados, and other islands, and included the governor of the Eastern Caribbean Central Bank, president of the IDB, and other senior financial players within the region and even as far as Canada. Of note, Jamaica did not have any government participation, with the exception of Colin Bullock from the Planning Institute of Jamaica.

Tourists sunbathe along a beach in Nassau, Bahamas. (PHOTO: AP)

The discussions which happened offline, resulted in financing opportunities for small and medium-sized companies, in particular, that everyone was keen to be a part of.

I will discuss this, and some other elements of the forum, in later articles, as I want now to make a comparison between tourism in Nassau against Jamaica. Nassau, with a population of only 180,000, and which has to import water, and is much more expensive than Jamaica, has much larger hotels and is humming with tourist activity. The type of activity seen is a distant memory of what I remember used to happen in Jamaica.

The irony of this is that as far as I am concerned the overall hotel experience in Jamaica is ahead of that where I stayed in Nassau. Especially if it is compared with Sandals (which I think is the best hotel experience in Jamaica) but even when compared to the other hotels such as RIU and Sunset Resorts.

The advantages Jamaica have include service levels (our people are more natural when it comes to delivering service) and the operations management at the Jamaican hotels (especially Sandals) is way ahead of the Bahamas experience. The people in Bahamas are very nice, but the service side is not as natural as it is in Jamaica. This is compounded by the poor operations management of the hotel. I don't think the physical infrastructure experience of the Bahamas hotel is superior than the Jamaica experience, but the food in Jamaica is much better.

The number of attractions in Jamaica is also much more, and as far as I am concerned much more attractive. One unique thing about Jamaica also is that we have a very unique culture, and our music and sports, are far more appealing than most other tourist destinations in the world, including Bahamas.

Why then does Nassau seem to have so much tourist activity going on, and certainly more than what you would see at a Jamaican hotel. It certainly is not that our local players are not competitive and creative, because as far as I am concerned, our local tourist players have done wonders, given the lack of environmental support for the tourism product.

The main problem is that tourism service delivery is primarily within the hotel, and is not supported well by the country. It is not that people do not realise the value of tourism to Jamaica, but outside of the players in the industry, the country still has not realised what true tourism delivery is.

So we continuously seek to reduce our competitive edge in tourism, in various ways. And these are the advantages that somewhere like Bahamas has over us, and why the average spend from their tourist is higher than ours.

These include better infrastructure, such as roads, and the fact that everywhere in the Bahamas is clean. In Jamaica when you drive outside of the property you are confronted with a filthy environment, tourist harassment, touts on the beaches, high taxes (in Bahamas there is no income or consumption taxes), and general indiscipline on the roads. In addition to these challenges, we also have allowed our beaches to be degraded because of our poor environmental management, unlike the Bahamas where the beaches are pristine.

This is why an all-inclusive room sells for US$250 double occupancy in Jamaica, while a similar room in Bahamas or Miami sells for US$300 or more just for the bed. If you need internet access, meals, or entertainment you pay additional. In other words we are quickly eroding our comparative advantage in tourism because of poor management.

What we must understand is that a country's comparative advantage is not static and changes based on what other countries are doing, so we need to constantly innovate and properly manage our existing comparative advantage. And it is important that, while we still have a comparative advantage in tourism, we take care of it.

It is necessary for us to ensure that not only the hip strip in Montego Bay looks good, but it must extend to downtown Montego Bay. We must enforce litter laws and ensure that proprietors maintain a certain standard in terms of how their properties look. We must ensure that there is discipline on the roads and must not have so many peddlars in the streets. Tourists, and residents, must also feel safe to walk on the road at any time during the night.

It is these things that matter for tourism, and irrespective of how much more you can offer, if you cannot offer a peaceful and restful vacation then you will not be competitive. Having to lock away tourists is not a vacation. It is an adventure, and that is not what people want to do on their vacations. This is why in Bahamas another vibrant activity you see are the number of buses carrying people on tours. And we have much more to show but do not have that sort of activity.

So if we are really serious about tourism, then we must act on the things that matter and ensure that our time is not preoccupied with matters not related to development.

Friday, June 21, 2013

Playing cricket on a volleyball court

ANYONE who knows the game of cricket would know how difficult it would be to fit all 22 players, both umpires, and both sets of stumps on a volleyball court. It would of course be possible to do so, but would be very uncomfortable and would upset the free flow of the game.

It would, for example, be very difficult for the batsman to make any runs, even though the boundary may seem so close, because he would be surrounded with fielders, and the hard surface of the volleyball court would make it difficult to bat on.

Indians play cricket at the University ground in Ahmadabad, India. (Photo: AP)

This reminds me of what Jamaica has been like for businesses and the PAYE worker. It just seems as if from the start we may have designed Jamaica to be a difficult place to do business and find opportunity. In other words, is Jamaica designed for failure rather than success? Is this the main reason why Jamaicans go to other countries and seem to do so well, while the same Jamaicans struggle here? Is it that we are all trying to play cricket on a volleyball court, where we can see the boundary but can't make the runs because of the myriad of obstacles in the way.

We have debated for a very long time that a big part of the challenge to our economic and social progress are the structural obstacles that are in our way. These are very well identified as (1) the cost of energy; (2) the need for tax reform; (3) the cost of the lack of law and order; and (4) the imposing and inefficient bureaucracy.

The fact is that if this economy is to grow it can happen only through private sector effort. And if we are going to see a significant private sector impact, then we must ensure that not only the playing field is level for all but that we have the right playing field for the game that we are playing.

So, for example, if we want to continue the growth in tourism, then we must of necessity protect our natural environment (including our beaches) and deal swiftly with law and order generally, and tourist harassment specifically. If we are going to get into the agro processing in a big way, then we must deal with the issues of energy costs and praedial larceny. If we are to encourage the proliferation of new business ventures, then the bureaucracy surrounding company formation and paying taxes must be improved significantly.

The global competitiveness report, for example, ranks us as 163 out of 185 countries, with respect to ease of paying taxes. Where we spend over 360 hours per year paying 72 different tax types, while Singapore spends 86 hours per year paying four different tax types.

One of the more significant challenges we face is the inefficiency and low levels of productivity in the public sector bureaucracy. If we are to address this then it requires that we rethink the way that we operate the public sector. The current system of rules do not facilitate efficiency, value added thinking, or cost optimisation (more important in the public sector than profitability, as the public sector should not be geared towards profitability but rather service). To solve this problem, we need to change the rules and compensation system to allow the creativity of the people in the public sector to come to the fore and for productivity to be rewarded, rather than tenure.

The problem we face today, is that from the start of independent Jamaica, we lay the foundation for failure. I had to say to someone yesterday that it is more important to rely on systems, for control, rather than people. In other words in our daily operation there should not be an emphasis on personality. We should not design laws around personalities, such as our current laws which refer everything back to a minister. We also need to have a system of governance that ensures checks and balance, rather than the current system we have where it is a first past the post who gets everything. This is the total contrast in the US where the whole governance process has many checks and balances.

The question therefore is, did we design Jamaica to fail from the start, and if we are to really see the growth and development that we so desperately need, then should we not be looking at some of these structural issues that prevent us from realising our potential. The IMF agreement does attempt to address many of these structural issues, through the timeline surrounding the passing of certain legislation, such as the insolvency act and the omnibus tax incentive act. And while we seek to address many of the structural changes we also need to be very careful that when we implement these that a clear value added is identified, so that it moves us to a cricket pitch, rather than just add some painted lines to the volleyball court.

In other words, we must ensure that any structural changes that we make that they actually cause the revolutionary change needed, rather than cause pain for nothing more than a different perspective of the same situation.

So, if we want to be competitive in the global market, and change the fortunes of the last 50 years, of our business community and citizens, we need not upgrade just the volleyball court but change the cricket match to a proper cricket pitch.

Friday, June 14, 2013

Example of excellence in the public sector

TWO weeks ago I wrote about the effect of culture on economic growth and development, and want this week to follow up with an example of a public sector company that has excelled during the recession. The company is Jamaica Ultimate Tyre Company Limited (JUTC2), a subsidiary of JUTC, which I have written about before, but want to do so now as I am about to demit office as chairman after six fulfilling years.

JUTC2 is an example of what a culture shift, performance reward, good management, and supportive governance can do. It is an example for not only other public sector bodies to follow, but also what can happen in Jamaica if we develop an enabling environment for businesses.

Jamaica Ultimate Tyre Company has not suffered from any political influence, says Dennis Chung, who has served the company through two transport ministers — Mike Henry (left) and Dr Omar Davies.

It was incorporated in 2001, and I became chairman in 2007, under then Transport Minister Mike Henry. At the time the company was losing approximately $1 million per month; and as a small subsidiary of JUTC and not very important on the national agenda, we were uncertain about getting financial support. In fact, the company was really not afforded much attention.

The first thing the new board did was to look at the business model, and determined that it could not work as it was, as the JUTC (which was cash strapped at the time) was the major customer accounting for 65 per cent of production, and was the main challenge of the company's cash flow and profitability.

The first decision therefore was that we needed to change that ratio, and focus on expanding the commercial base thereby reducing JUTC's impact on the business. Second, we determined that there were five key principles on which we were going to manage the business, which included a value-added approach to every decision made in the company. Third, we had to manage our balance sheet carefully to ensure that we could finance the strategy without any external debt or capital injection. And finally, we ensured that the proper personnel were in place based on what we wanted to achieve.

We also had to deal with the audited statements being six years in arrears, and therefore did not have properly audited numbers we could rely on. One of the first orders of business therefore was to get the audited statements up to date, as information is critical to analysis and management. This is a lesson the Jamaican economy must learn. One of the advantages the US economy has is that they have every type of data you can imagine, and it is very timely, even if not 100 per cent accurate. The important lesson is that relevance and timeliness of information is just as important as accuracy — a very important principle of accounting. For the past three years we have filed the audited statements with the ministry within the statutory period of 120 days, and all our statutory payments done on time.

By 2009 we were able to show a profit, and more important JUTC was no longer the majority of our production sales, and today represents just 30 per cent of production. Profitability continued to grow, where it peaked in 2011/12 to over $30 million, but fell last year as the economy declined. Since 2009, however, we have consistently made profits.

What is it that contributed to this performance, which the country can learn from?

First, the company did not suffer from any political influence. Under Mike Henry, the Transport Ministry was very supportive of our direction and gave us strong analytical support. When Omar Davies took over as minister I explained to him what we were trying to achieve, and indicated to him that I would be willing to stay on for two years to complete a project we were working on to make the company stronger. He asked me to stay on and never one day interfered, and the strong support continued from the ministry. This is illustrative of what needs to happen generally in the country, and is a tribute to both ministers.

Second, the board members I worked with (under both administrations) were business-focused, and gave significant support to the direction. Again this is a tribute to the ministers who appointed people who were well qualified, with their only agenda being good governance.

Third, while the board focused just on policy direction, the management executed the operational strategy efficiently. This relationship between the board and management was critical, where board members never interfered in operations. Management was made aware that their employment depended on profitability, as that was the only way to ensure the company remained open.

Every decision we made was based on a careful value- added approach. If it was not financially prudent, even if the activity was a part of the operations from the start, it was discarded. Everything we did had to have a value proposition attached to it.

Finally, the workers were a big part of the transformation. In around 2010, the management wrote to the finance ministry and got them to approve 10 per cent of the audited profits to be distributed to the employees. This caused the workers to defend jealously the profitability of the company, and in fact when a new worker was found attempting to help himself, the workers gave him up, and effectively terminated him.

I want to pay tribute to the ministers, board members, management, and workers for the tremendous job they have done and hold them out as an example to be followed. The company has been featured in international, as well as local media. It is not any one of the high profile loss making entities, but just a set of workers trying to increase their compensation through their own efforts.

Can Jamaica learn from this? You decide. What I will say is that if we do not improve the environment for doing business in Jamaica, then how can we expect companies, and workers, to excel internationally?

Friday, May 31, 2013

Culture's effect on economic progress

CULTURE can be defined as the characteristics of a group of people, including language, cuisine, social habits, arts, music etc. The culture of a people influences to a very large degree how they behave in relation to economic activity, and can have a significant impact on how economically successful they are also. We have heard many references to the Chinese and Jews made by Jamaicans who say that they are "mean", which really means frugal, or as one caller to Perkins Online said "One Chinese do five somebody work", which means that they are more productive.

These references are used by many Jamaicans to explain why the Chinese or Jews seem to accumulate more wealth than the ones making the reference, and in fact it was a part of our culture that accumulating wealth is sometimes referred to in disparaging terms. So our emphasis is always on how we can take from the "rich" to help the "poor" rather than how we can make everyone rich. This is in contrast to the US where they speak of the American dream, which is a reference to the belief that in the US anyone can become rich if they work hard enough.

A man buys vegetables from a street vendor in Shanghai, China. (PHOTO: AP)

So these examples illustrate the effect that cultural belief can have on economic progress. In fact, I have often heard reference to the view that one of the reasons for Trinidad's greater focus on manufacturing than Jamaica, is that while we were buying new motor vehicles, they were buying new machinery and equipment.

Whether these references can be proven or not, the fact is that we have long recognised the impact of cultural practices on economic progress. This is not strange to economic theory, as we often forget that economics as a social science means that the base of its influence is individual behaviour, or microeconomics. We tend to focus more on macroeconomics. But macroeconomics is really just an outcome of what happens at the microeconomics level. So the appetite of Jamaicans for car loans impacts negatively the NIR, as we do not produce cars, so that our individual desires for motor vehicles means that we must find the foreign exchange to purchase those cars.

This would not be a problem if we earned enough money to pay for those car imports, but the problem is that another part of our cultural behaviour is that we do not place a great degree of emphasis on productivity. This is reflected in the industrial disputes we see sometimes; the labour laws; and the public sector employment rules which emphasise longevity in the job over productivity. This also works against the public sector workers themselves, because they do not gain from being more productive. So what is the incentive to be more productive?

This behaviour then translates into the inability of the government to pay the public sector more, because without greater productivity we face inefficient bureaucracy, which affects private sector profitability and activity, which in turn negatively affects fiscal revenues and exports, resulting of course in the need to finance our culturally driven consumption appetite for foreign goods, which we can't afford because of low productivity, hence leading to the need for debt and a high debt to GDP ratio.

So this vicious circle shows us what effect the behaviour of each individual has on the state of our economy. Our economic and social behaviour is driven by what we have grown up learning from our cultural practices, unlike the Chinese and Jews. When I was growing up I was accused of belonging to the former group. Hence we come back to the explanation by some Jamaicans that the Chinese and Jews are better off than they are because of cultural practices which are taught in the home or at school.

This need to change our cultural habits is recognised by the minister of finance. In a presentation about two weeks ago (which was repeated by him the following week) he stated in no uncertain terms (in fact it was the main focus of the presentation) that if we are to succeed with the IMF programme and change our economic fortunes, then it can only work if we change the way we do things. In other words, focus on productivity, consuming what we produce or what we can afford to, and develop a disciplined society.

This is one of the most important presentations I have heard, as it recognises the real source of our economic problems. As I have always said, our economic problems have cultural roots. Unless we change the way we produce and consume, then all we will be doing is kicking the can down the road.

I remember when Ronnie Thwaites was the host of Independent Talk, he always said that if we want to see this country improve then we must place a check on our consumption patterns and Parliament must make sure that when the expenditure budget is presented we go through the items with a fine-tooth comb to ensure value for money.

One of the primary roles of fiscal policy is to ensure that the economic behaviour of companies and individuals result in economic prosperity. In other words, fiscal policy (in particular tax policy) should be developed based on how it impacts economic behaviour, rather than how much money it can raise for government. Tax reform is not just about adhering to an IMF agreement, but rather what sort of economic behaviour it causes. This was the aim of the PSWG submission, and is also the intent of the current tax reform proposal being developed by the government.

So the next time someone says that another person is "mean" or wants to take away someone else's work by "doing five somebody work", remember the literal translation in another culture is "frugal" and 'productive".

Friday, April 19, 2013

If we are to solve our crime problem...

Jamaica is really an amazing place. Over the last week, while we have all recognized the need to get economic and social development going, and in a week when we are expecting the Finance Minister to tell us how he will finance the fiscal expenditure, we have been bombarded with discussions of toilet paper, markets, and divine intervention.

These are important issues, and correctly are discussed by the media. But what we really need is a society where when these matters come up they are dealt with immediately, so that we have an agreeable solution.

A distressed looking storeowner in front of her ransacked store on Red Hills Road, during unrest in the nation’s capital after an extradition request was made for convicted crime lord Christopher ‘Dudus’ Coke in May 2010.

The issues surrounding the need for divine intervention, however is a very important one. Crime robs us of an estimated four percent of GDP, or approximately $60 billion, and in doing so inhibits a lot of the productive capacity and competitiveness of the country. For example, the main reason for the high cost of agricultural production in Jamaica seems to be Praedial larceny.

It is therefore very important to deal with the crime monster, as if we are unable to do so then it means that anything else we do to attempt to make the economy, and society, better, will amount to futility.

So why have we not been able to deal with this crime problem. I have some views, which are by no means based on any expertise in crime fighting, but a logical approach to problem solving.

Let me first say that I think that the police force, under Commissioner Ellington, has done quite a lot to help bring back some amount of confidence in the police force, but still has a long way to go. Especially when they keep reversing some of the progress with actions that cause disruption in community relations.

In order for us to get a handle on crime, the first thing we must do is understand that we cannot sustainably solve the problem if we do not have a disciplined and orderly society. In other words it is difficult to create order within an environment of disorder. So if the parents in a household carry on with unethical behaviour in front of their children, then more than likely the children will act out what they see rather than what they are told.

So it is always going to be difficult to solve crime if we do not deal with the indiscipline on the roads, the violations of the noise abatement act and the zoning laws, and the littering of the roads. These are simple things to deal with but unless we address them then it will be like expecting someone to emerge from a mud lake without any mud on them.

A second point is that justice must be swift and low cost. If we are serious about taming the crime monster, we cannot have a situation where the police make an arrest, carries someone to court, and the case takes five years to complete. We also cannot have a situation where jurors go to court and don't even get lunch money, or transportation costs, reimbursed. And then if they do not turn up they get in trouble with the law. Imagine being asked to preside over the life or death of an accused, and you can't concentrate because you are hungry, or thinking about how you are going to get home.

The police needs to treat all crimes as equally violations of the law and act speedily in all cases. So when someone reports domestic violence or Praedial larceny, it is important for the police to treat all those cases as urgent. Don't wait until the petty thief, or the domestic violence accused, graduate to more serious crimes to act. In other words, if you do not act decisively when a young child tries to always get their own way, then you will have to deal with a bigger problem when they are older and may have to apply even more stringent measures.

The law also needs to be applied equally to everyone. And in this case I am not talking just about the person with connections, but also when we give someone leeway because you think they are among less fortunate. So the sentiment is normally to give the small man a chance. Soon you find out that you have a reason for giving everyone a chance and eventually corruption flourishes.

It is also very important that before any charges are brought against someone, or any accusations are made public, that proper investigation takes place before. There have been many cases of people being charged, or accused, of wrong doing which either proves false, or lacks sufficient evidence. This negatively affects the credibility of law enforcement.

The recent example of the traffic ticket amnesty is an illustration.

The last point, but by no means least, is that the enforcers of laws, such as the police, cannot be seen to disobey it. It is very important, that the credibility and authority of those persons in charge of enforcing the rules are intact.

So if we are to solve the crime problem, we cannot just focus on the outcome (such as murders). But we must of necessity, address the root causes of the problem, of which the main one would be a disciplined and orderly society.

Friday, April 12, 2013

Bureaucracy's effect on productivity and growth

FINALLY we can celebrate that we have an IMF agreement again. The real importance of the agreement is that it will bring with it a certain amount of confidence and multilateral support for the fiscal accounts. Importantly also, it will arrest the slide in the NIR.

However, unless we address the structural issues of law and order, energy, and bureaucracy, this will be like any of the past agreements we have had over the past 39 years. That is, nothing but additional debt, with no sustainable improvement in our economic or social situation.

Dennis Chung says he spent two hours in the line at the Constant Spring tax office on Monday, as there were only two cashiers working, while there were six empty stations.

Having discussed energy and law and order many times before, today I will examine the effect of bureaucracy on productivity and growth. What I will do is use an example relating to my recent experience at the tax office.

The 2013 Doing Business Report shows that out of 185 countries, Jamaica ranked 163 in relation to paying taxes. This means that in the category of how easy it is to pay taxes, we are better than only 22 of 185 countries. Is it any wonder then that tax evasion is rampant, and fiscal revenue targets cannot be met?

It is important to recognise (I believe because of the efforts of the TAJ) that we moved up 11 places from 2012, when we were ranked at 174. Despite the improvement, however, and the good work that the TAJ has been doing, the fact is that the bureaucratic nature of our tax system still creates a host of missed opportunities and leads to low productivity.

A real example is my recent experience with paying two types of taxes, over the past three weeks.

First, let me say that the recent online filing and payment of my annual returns went quite well. The customer service experience on the phone was great, and here I have to single out Taneka Newell, who way into the evening called me back to see if everything worked out all right, as I was having some difficulties navigating and recording the online payment because of the number of persons online.

A few days later, however, this excellent customer service was to be negated. I had reason to visit the King Street tax office, and while there sought to ascertain my property tax liability. When I asked the cashier to check it online, she indicated she couldn't because they had no access to the system. So I had to go to another location, and wait in another line. I had to leave because of time constraints, thus delaying the inflow of much-needed taxes to the government coffers.

The second experience came a few days later at the Cross Roads branch, where again I made an attempt to ascertain my property tax liability, so that I could pay it online. This was not to be, as there was a line extending outside the door, and the door was being manned by a security guard, determining who went in (note, not a customer service person). I indicated to him that I just wanted to go to the information desk to find out how much I owed. He told me that I had to join the line to find out how much I owed, and then join again to pay the taxes. That process could easily have taken two hours. Again, I opted to leave, as I figured that the government needed the tax more than I needed to pay it.

The next day I went to Constant Spring tax office where I explained my problem to an employee. He was good enough to ascertain on a computer the amount I owed. He was very pleasant, and was from the large taxpayer office. He also told me that I could have gone online to find out what was owed, even though the notice sent said that I should visit a tax office, and a similar thing was told to me by the cashier at King Street.

I went home and paid online quite easily.

While driving out of town last Friday, a policeman stopped me to do a random check, and when he saw my road licence, he told me that I was in the grace period. It was a good thing he stopped me, because I thought I had another month.

I went to pay it at the Constant Spring office on Monday. I spent approximately two hours in the line, as there were only two cashiers working, while there were six empty stations. The supervisors said they were not able to help, as they were short-staffed.

This meant that the 100 or more persons who were there, while I was in line, spent at least two hours trying to pay their taxes. And it is important to remember that the taxes have been increased significantly. The authorities are telling us to pay more taxes than we did last year, while they cut back on their staff to add to the pain of our experience.

The important point to note here is that there is significant productivity loss. We can compare the savings to the productivity loss as follows.

The saving from the empty work stations is approximately six salaries, which we can put at maybe $20 million per annum. However, this means that 1,000 persons per day will have to wait an extra 90 minutes to pay their taxes, resulting in a daily loss of productive time of 90,000 minutes, 1,500 hours, or 187.5 working days each day.

If we assume a straight-line contribution to GDP, 240 working days per year, a GDP of $1.3 Trillion; and an employed labour force of 1,000,000, then the average daily GDP per person is $5,417 ($677 per hour). The computations therefore show that the lost GDP value per year, from the 1,000 persons per day, at just this one location, is $243.8 million, and a tax (fiscal revenue) loss from that of $73.1 million.

So to save $20 million annually in salaries, we may be giving up $73 million in fiscal revenues. This is why a value-added approach to policy is essential. When you multiply this example by the number of public sector locations with this problem, then you can see the negative effect of bureaucracy on growth and productivity.