Friday, January 31, 2014

Discipline’s role in development

LAST Wednesday I was driving to work when I saw a man throw an orange peel and another item on the road. The confidence with which he seemed to do it implied that he thought that everything was right with what he was doing. He had no consideration for the fact that it would make the streets look unclean, could possibly be a health hazard, and that this sort of action is what contributes to increased costs to clean the streets and gullies.

If enough of this type of behaviour is multiplied then you can see the effect on the budget, cleanliness, flooding, and other environmental and health hazards.

What we have failed to recognise as a country is the impact that our own indiscipline has on development. One of the first things is the attitude towards time. We make a joke of it, and accept it, by saying, for example 1:00 pm Jamaica time, which is supposed to mean that even though the meeting is supposed to start at 1:00 pm, we accept that, because we are in Jamaica, then it may start an hour or so later. So when people are invited to an event that is supposed to be between 6:00 pm and 8:00 pm, some people turn up at 8:30 pm and ask why it has ended already.

This disrespect for time is one of the things I hate most, as it is not only a total disrespect for the time of the other participants, but is a very inefficient way for us to organise ourselves. And we will all accept the concept of “Jamaica time” but then fail to understand why our productivity is so low. Logically, if in another country a meeting that is supposed to start at 1:00 pm starts at 1:00 pm, while in Jamaica it starts at 2:00 pm, then doesn’t it mean that they are going to be more productive with their labour, as we sit around doing nothing for a hour waiting for the 1:00 pm meeting to start at 2:00 pm?

These examples of time management, and the attitude littering the streets are an indication of the rampant indiscipline in this country.

A few years ago a multilateral organisation did a study which showed that the greatest inhibitor to productivity in Latin America and the Caribbean is traffic congestion. So if you multiply the traffic delays caused by indisciplined driving, by taxis and buses in particular, you will see how much productive time is lost in traffic and the cost of the additional gas resulting from those traffic delays.

The problem with this sort of individual behaviour is that the general attitude in Jamaica is that everything is OK as long as it doesn’t affect me. So we have a problem when the person in front of us causes traffic delays because the person is on their phone, and we curse the person, but when a call comes in we do the same thing, and then when the person behind us blows in disgust we ask if they can’t have patience.

The fact is that if we look at the developed countries which we emulate and seek to use their economic models as examples, we will realise that they have well ordered and structured societies. For example, we want our oil bill to be reduced but we fail to ensure discipline in our transportation system, so that it is attractive to everyone to take it. We also want to ensure proper development of communities but fail to ensure that houses are not left abandoned, or ensure that commercial activities are not allowed in residential areas. And if you call and make a report to the authorities, then that is like a wasted phone call, which the only thing it has ended up doing is costing you for the telephone call.

This lack of accountability because of the reluctance, or slowness, of the authorities to act is at the root of the problem. As a result of the low level of risk that you will be held accountable for indisciplined behaviour, which breaches the law, then persons do not feel the need to obey the laws, as they can get away with doing what they want.

So the abuse of the night noise act continues, because there is no significant penalty for keeping citizens awake so they can’t be productive the next day because of lack of sleep. If the police go and lock down the music, then the only loss is to the patrons who can’t get more enjoyment for their admission fee. There is no penalty that prevents persons from trying to breach the act again, so the same person might do the same thing the following week knowing fully well that there is a high probability that no action will be taken. And as someone who rides my bicycle from home at 5:30 am some mornings, I hear the music at that time sometimes, within close proximity to a police station.

Apart from the productivity loss that indiscipline causes, we also fail to understand the influence that this indiscipline and lack of accountability has on major crimes, such as murder. No one starts off being a murderer, but rather grows into a hardened criminal because they have grown up in a society where there is no accountability for breaches of the law, and therefore feel confident graduating to the major crimes.

So the young boy who grows up not feeling the necessity to adhere to not drinking when driving, or being at parties until 4:00 am with the music blaring, doesn’t feel that when he gets into gang-related activity that it will be any different. Eventually, that gang-related activity leads to major crimes and before you know it, enough of these acts lead to crime being a big problem for doing business.

It is therefore important for us, as a country, to recognise that if we want to realise the economic and social development we desire, then we must do something about the level of indiscipline in the society. This must not only be through accountability being enforced by the authorities, which must be fairly applied, but must also include each of us taking personal responsibility for our actions.

So hopefully that gentleman in the silver Nissan Tiida (licence number withheld) will think twice about treating the streets like his personal garbage bin.

Friday, January 24, 2014

Just do it

A Nike shoe is shown on display in Niketown. The Nike tagline “Just do it” means that we shouldn’t just sit around thinking about what we can or should do.

Probably the best known sporting brand, Nike, has a very simple tagline — "Just do it". If you think about it, the tagline simply means that the only way to get results is to act.

I have heard many people say that they have bought expensive exercise machines but have not used them, as if somehow the act of purchasing the latest equipment or the latest Nike shoe, or in my sport of choice, purchasing the most competitive bicycle is enough to cause a result. The fact is, most times the result you can get with action and inferior equipment is much more than you get with the best equipment and little action. So as I tell persons who express interest in cycling and who ask me what is the most important part on the bicycle, I tell them the rider.

This is a problem I find with people also. That is they are afraid to just take a decision. So they end up investigating and arguing a point that is really a very irrelevant part of what they are supposed to do. In other words, they fail to see the big picture because they are preoccupied with the small stuff, and end up losing more because they focus on the small items while the opportunity cost of not focusing on the bigger picture is greater than the cost they are focusing on.

This is the primary reason why external audits don't focus on every single transaction, and use risk- based assessments. That is because to focus on every single transaction would mean a never-ending costly audit where no audit opinion would be passed.

This lack of "just do it" attitude, or implementation, is something that Jamaica has suffered from as far as I can remember. As a country we must hold not only the world, but universe, record for having the most studies which have not been acted on. So I find that there have been many analyses and studies about what has been, and continues to be wrong with Jamaica's social and economic environment. And in most cases they have all been correct, and have some well laid out action plans. The problem is that they have failed to "just do it". So most of these studies sit on shelves and are either lost or ignored, and so we end up having another study, similar to the previous ten, which arrive at the same conclusion.

This in my view is the fundamental difference between the current IMF agreement and the previous ones. If you look at all the previous agreements, I am sure that they will have all outlined the same problems for Jamaica. But for the first time it seems as if we are "just doing it". And I will admit that it is early days yet, but the fact is that we have shown that we are willing to take the risk to meet the fiscal targets and legislative reforms. This has been demonstrated by the removal of the waiver discretion from the minister, the passing of the tax

incentive legislation, security in personal property legislation, introduction of the super form, and tabling of the insolvency act. There is still a lot more to come, least of which is not the fiscal rules and overall tax reform, but at least we have seen a commitment to meet the fiscal targets (through expenditure reduction) and pass the legislative reforms as projected.

In fact, what this is doing is changing the environment to ensure greater competitiveness, so that risk and reward is now driven by market forces rather than by government directive. This is the significant game changer that I wrote about in my first book, Charting Jamaica's Economic and Social Development, in 2009, where I concluded that in order to change our economic fortunes we had to change the political system, as the Westminster model concentrates too much power in the hands of the governing party.

What we will see with the implementation of the fiscal rules, and already the removal of the waiver discretion from politicians, is tantamount to a shift in the power under our political system. So instead of changing the political arrangement, what we have done is remove the power from the politicians to abuse the budget, or influence the market, through legislation. This is the same effect as changing the political system to one where less power rests with government. This supports the view that the problem with the economy has been our political arrangements, and more specifically too much political influence concentrated in one set of hands.

This is why I believe that today we stand a better chance of changing our economic fortunes than in the past. There still, however, remain significant risks. However, with the implementation of each new piece of legislation, and ultimately the fiscal rules, the risks decrease. The two biggest ones to be addressed now are crime and bureaucracy.

While we must commend the government for taking this action, we must also continue to demand that as a country we stick to the programme, and just do it.

Speeding police and salvation

Last weekend a group of us were riding from Ewarton, and were on Mandela Highway approaching the merged lane where the highway comes onto Mandela. On almost arriving at the intersection (we of course had the right away) a speeding Salvation Army van hastily drove in front of us in order to avoid having to wait until a small group of cyclists properly went by before proceeding. Or maybe the Salvation Army van was trying to ensure that we got to heaven early, avoiding the economic and social conditions in the country at the moment, for which we maybe should be eternally grateful.

Having only around two seconds to recover from the gesture of the Salvation Army bus, and almost reaching the intersection, a blue minivan with a policeman behind the wheel decided that he would also do the same, but by this time he had run out of road (without hitting us) and rode on the soft shoulder, almost hitting the trees, and in the process throwing up a rock and hitting one of the cyclists on his ankle, who rightly showed more concern for his bicycle before assessing his own damage.

Friday, January 10, 2014

Effect of crime and bureaucracy on development Pt 2

Spanish hotel chain Riu recently opened its fifth hotel in Jamaica. Fixing the problem of crime and bureaucracy would drive investment into the country, says Dennis Chung.

THIS week I am going to look at the positive impact we can have on development if we were to fix the crime and bureaucracy challenges. I will once again do this by looking at the same example and assume that we have finally managed to make the bureaucracy more efficient, and finally we have tamed the crime monster and people feel safe and businesses are no longer subject to extortion.

Let's assume that the committee set up under the chairmanship of Peter Knight, manages to bring the development approval process down to three months, and that the security minister and Commissioner of Police have managed to eliminate corruption and extortion.

The same investor then comes to Jamaica after the processes have been fixed, still wanting to invest US$100 million, and is still very impressed with the potential Jamaica has and the good job that the Jamaica Tourist Board and Jampro have done of selling Jamaica.

The investor makes his application for the same development, and instead of waiting two years for an approval this time he gets the project approved in three months. He was able to set-up his office and hire all his employees, and the business is up and running and exporting from month five. So this means that he does not realize after nine months that he has to lay off his staff and, in fact, by month nine has already expanded to another market and has hired new staff.

In the example last week the result was that after waiting nine months he could no longer afford to keep the staff and had to lay them off, so at that time the investment was actually pulled from the economy, awaiting approval. So unemployment would have gone up in month nine and, importantly, there would have been a contraction in GDP rather than an increase from the expansion in the example this week. The result is that there is greater disposable income in the economy and a higher multiplier effect, which inevitably expands real GDP. Because of the GDP expansion, government gets greater fiscal revenue, and is able to reduce the fiscal deficit with increased revenues rather than debt or taxes.

This time also he does not have to pay any extortion to any "area leader" because the police have eliminated the gangs, having the benefit of being supported by the anti-gang and DNA legislations, and the courts are disposing of cases within weeks rather than years in the previous example. In addition, the parish councils are now using the AMANDA system and there is no longer the ability of any corrupt-minded individual to take money in exchange for ensuring that approvals are done quickly, as the system now ensures that everyone can track the status of approvals.

The result of the reduction in extortion and corruption on the investor is that he has a lower cost structure, and hence makes greater profits. He can therefore compensate his workers more (because of the greater productivity) and has a higher taxable income. The government therefore increases fiscal revenues from PAYE and corporate income taxes. Another effect is that the economy becomes more productive because persons are no longer receiving funds (through extortion or corruption) for services that do not add any value to the GDP, but rather has the opposite effect of reducing the GDP.

As a result of the positive experience the investor has in Jamaica, he tells his friends in other markets and also looks to new businesses and expansion. The result is greater employment and increasing GDP. Soon the economy is growing at a rate of four per cent to five per cent, rather than the 0.5 per cent to one per cent previously celebrated by the government, when the standard error in the GDP statistics is 0.5 per cent.

Increased business activity also means that labour is in short supply and workers can now demand higher income levels because of the greater productivity. This increased income level feeds into more discretionary spending which drives even more business ventures and a higher quality of life generally, which results in a higher Human Development Index rating by the UNDP. In addition the Doing Business Report has Jamaica in the top 10 countries to do business and the Global Competitive Ranking shows Jamaica as an Innovation led economy.

Everyone now wants to do business in Jamaica and finally we are realizing our full potential from our music, sports, culture, and tourism, as Jamaica is the place to not only do business but vacation.

The above example is the Jamaica that we can achieve if we are able to deal with the bureaucracy, crime, and energy challenges we have faced for the past 50 years. This is because Jamaica has a lot of untapped advantages that we are not able to maximize because we have been unable to maintain discipline and efficiency. We have suffered from poor governance for too long and must change it, and I believe that we are at a point where that change is possible.

The fact is that at this time of our economic history the only feasible option available to us is significant growth through the private sector. The government no longer has the ability to ignore private sector-led growth, as we have postponed what is needed too long and gone instead for living on debt, inflating the economy, and then taxing the inflation growth. This has led to a spiraling inflationary economy, which has translated into lower real incomes for Jamaicans. This option is no longer available to us.

We have made good progress last year, particularly in the areas of tax reform and energy to some extent, but have not realized the benefits as yet and must stay on top of it and see it through.

We now need to focus on crime and bureaucracy, and this means starting with discipline, respect for human rights, and the development approval process.

If we are able to do these things then I am confident that Jamaica will be the place of choice to do business, live, and raise families.

Friday, January 03, 2014

Effects of crime and bureaucracy on development

AS I stated in my last article, I believe that Jamaica can start seeing positive economic and social development with the current set of legislative and fiscal reforms we are seeing. However, for this to happen in any serious way we must address the issues of crime and bureaucracy.

I see that we are about to embark on the public sector efficiency programme, and in particular the emphasis being placed on the development approval process. Also the statement from the national security ministry that there will be measures against indiscipline and corruption in the police force is welcome news. We now need to see it happen.

An aerial view of the New Kingston commercial district in Jamaica. Crime and bureaucracy is affecting the island’s development negatively, says Dennis Chung.

I want to now look at an example of the way crime and bureaucracy affect development negatively, and next week look at the possible development path if we were to address these issues.

Let us assume that as a consequence of the economic reforms (lower effective tax rate, new insolvency laws, omnibus incentive act, etc) an overseas investor decides that he wants to invest US$100 million in the cultural and construction industries. He is excited about Jamaica because of the recent good news about the performance to date under the International Monetary Fund programme, the performance of Tessanne Chin, and the recent listings on the Junior Stock Exchange.

He starts making plans to come to Jamaica, and invests quite a bit of time and money on due diligence and establishing residence here. After the due diligence and the promises by Jampro about the potential in Jamaica, and the welcome extended by authorities, he feels that this is a good place to do business.

He decides that he will set up a local company and decides to register the company and finds that it took him two weeks, and he had to get a local law firm to assist because it was not a very user-friendly process. Already having a company in New Zealand, he wonders why it took so long, when in New Zealand it took him one day. He shrugs it off as just one of those things that happen and was very pleased with the service provided by the law firm, even though he didn't think it should have been necessary.

He then starts to mobilise his people and office, and then applies for a development permit, thinking that it will take him three months at most to get approval, so that his staff and office can start construction plans. After around six months of waiting, he decides to check with the authorities to find out why it is taking so long, and is anxious because it is costing him significant sums he would not have incurred if he had known the process was so lengthy. He would have checked before, but was busy dealing with his electricity connection, which took him over 90 days to sort out. He is told that the file was sent from the parish council 60 days after the application was made and NEPA needs another 60 days to do its due diligence, so he is looking at another 30 days before it gets back to the parish council for other checks to be done.

At this time he has to think about reducing his staff complement and the size of the operations, as he cannot afford to indefinitely carry the cost without the certainty of a start date. While conversing with his auditors he finds that one of his staff members defrauded some funds and he moves to dismiss the person but is faced with a ruling from the Labour Ministry to say that he can only send the employee on paid leave while it is being investigated. Finally, it ends up taking six months, and legal fees to be represented at the IDT, which the ruling is in the employer's favour but he is unable to get any compensation for the ruling as the employee decides to drop the case just before it gets to court.

During the time that he has been waiting on the development approval, he has had to downsize his operations and rented out the premises to a tenant who has not paid any rent or the associated utilities for three months, and he is unable to ask them to leave because the law requires that commercial tenants need to have one year's notice. He has filed an action with the Rent Board, and was successful, as the Rent Board moved quickly, but the tenant got the court to allow the tenancy to continue for another six months unpaid. The investor is left with the mortgage payments, without any rent revenues.

Finally, after eight months, he checks with the parish council to see where the development approval is, and is met by an employee who says that there is a lot of backlog but if he talks to him he can see what he can do to get it to the top of the pile. Not understanding what he means the investor says he has been talking to people for the last five months, and when he finally understands, refuses to pay anyone to fast-track the process.

The result is that he eventually ends up waiting for another year to get the development approval. What's more is that he has had to explain to the tax authorities why he has filed nil returns after being in Jamaica for over a year, and why he started paying payroll taxes initially but stopped paying it, and if he has proof that he has laid off the people he once employed.

Finally, after two years, and much cost without any revenue, he starts up the operations again. When he thinks that things will now get underway he receives a call from someone who describes himself as an area leader, who says that if he pays a certain amount of money each month he can ensure that he is not affected by crime. He thought this was the role of the police, he tells the so-called area leader, and is told that it is an arrangement that most business people have in the area.

By this time, his friend who invested in another country had his business up and running three months after his application, and has been earning foreign exchange since then. The Jamaican investor is over two years into the process and all he has are costs and brushes with corruption and extortion to show.

He is now wary of the pace of expansion because of his experiences, but still chooses to press on with the operations, when he is listening to the radio and hears someone say that the private sector needs to put more capital into new investments as they are not playing their part in the development of the country.