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.

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