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.