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.

Wednesday, April 03, 2013

The role of government in market economies

My mother used to say of children, it is sometimes better to be seen and not heard. These were of course in the days when parents ruled children, and not as it is today. So it should be or governments in market economies. That is it is always better for the market to realize that the government is always present to ensure equity, opportunity, and protection of the poor and most vulnerable exist.

In other words the government should be like a referee in a football match, who ensures that the game runs smoothly according to the rule governing football, but never interfering with the play by becoming an active participant. If the referee even gets in the way of a pass, even unintentionally, it can change the whole complexion of the game significantly.

This is what governments need to understand about how market economies run. This is because the government, amongst all the stakeholders, is the least efficient when it comes to allocating productive resources. Put another way, the referee is usually the one on the field with the least footballing ability, at the moment even if he/she used to be a very skillful player.

So what happens when the referee gets involved is that they, even if inadvertently, cause an unfair advantage for one side over the other. So this could mean that the better side loses the match because of an interference by the referee. The referee may for example give an unwarranted penalty against the better side, causing its players to become demotivated or even causing it more difficulty in obtaining the three points they deserve.

The result is a result that does not reflect the true potential of the teams, which will in turn affect the quality and integrity of the tournament, and if this happens too frequently will cause the spectators to stop attending matches, or even cause discontent among supporters and sponsors, which will eventually lead to financial failure and collapse of the tournament.

So those single episodes of interference by the referee can ultimately result in the demise of the tournament.

So too the inability of the government to stick to its defined role in a market economy can ultimately lead to the decline in economic activity and the failure of the market to operate efficiently and result in poverty and decline.

My own view is that this is a role that the US governments have understood very well, and Caribbean governments have not. This is primarily why the US economy and society has done so well, and Caribbean economies and societies have not done so well. The fact is that (maybe because of our colonial and slavery past) Caribbean governments have preferred to act as “social workers”, dishing out welfare, rather than the referee who ensures fair play in the market and society.

This is the primary reason, in my view, why our economies seem to develop this dependency syndrome on governments, and why our economies have done so poorly, when compared to the rest of the world.

The fact is that we have become accustomed to a situation where market, and personal growth, depends on the welfare capacity of our governments. So if the government is not able to spend as used to, in the economy then we face economic decline. And instead of trying to fix the problem permanently, by allowing the private sector to take charge, while government bureaucracy steps back, instead governments taxes more, thereby further restricting productivity and innovation, and distributes more welfare in order to solve unemployment problems.

The result of course is that private investors hold on to capital, or invest it where the environment is more friendly (which is why people were investing in the US at negative interest rates), and ultimately the poor gets poorer, and in order to keep up with the plan of more welfare, and state interference, the country borrows more money.

And guess who is most burdened with the debt, economic, an social challenges.  And guess who ends up paying all the tax increases in the long run. None other than the poor, and most vulnerable, they are trying to protect.

On the other hand, guess who ends up getting all the welfare money eventually. None other than the owners of capital they are trying to tax.

So if we are going to play the market economy game, one of the first things to do is understand the most effective role that governments, and the private sector, has. In other words don’t play the goalkeeper in the forward’s role.