Friday, February 28, 2014

Holding back the reform agenda

ANYONE who has been reading or listening to my recent commentaries would realise that I am fully in support of the reform agenda otherwise known as the IMF programme.

Similarly, anyone who has been listening to my commentaries in the past will also realise that I was not in favour of the prior IMF programmes, because I never thought they would have worked.

The reason why I think this current programme stands a better chance than the prior ones, is that I think that the approach this time is a fundamental shift.

The previous programmes focused on providing funding support to prop up the balance of payments and fiscal accounts, without undertaking any structural changes to the economic and social order. In fact, the main theory under those programmes is that if we just devalue the dollar then everything will be OK after that. What occurred in those cases is that one had significant knee damage and got some steroid injections to keep running.

Under this current programme, before we get the steroid injections, we have done the corrective knee surgery to address the damaged ligaments and put a graft in to ensure that the damage is fixed. The IMF has said after you surgically fix the knee, then we will provide you with the steroid shots you need (funding), so that you can not only run but outperform the competition.

So I think we stand a very good chance at recovery, but there are some significant risks we face. So while we are better prepared to face the competition and finish the race, the fact is that our productivity is low because our muscles have been at rest for too long, and the shoes that we have are way past their useful life, so unless we change the shoes (support structures) we will only start the process of damaging our knee again, and maybe not finishing the programme successfully.

I have mentioned before that the significant risks to not realising our goals are no longer with the fiscal side, but rest outside of the Ministry of Finance (the only other monetary situation that was causing significant challenge is the liquidity problem which the BOJ has sought to address). The main challenges we face today rest in three main areas.

These are:

(1) Energy costs. Here, a lot rests on the 360 MW project, and therefore, the management of it by the OUR. Energy is a significant challenge for manufacturers, and is certainly one of the reasons why we have seen growth in agriculture, construction, mining, and tourism and a decline in manufacturing in the last quarter. High energy costs inhibit Jamaica from moving from a producer of primary to secondary products.

(2) Crime. Indiscipline is the major contributor to our fundamental problem and hinders productivity. Crime and indiscipline lead to low productivity of labour and capital, otherwise called total factor productivity (TFP). Jamaica's TFP has declined at a rate of approximately 1.5 per cent annually on average since 1972. An example of indiscipline can be seen in an article I wrote about a few weeks ago concerning Jamaican timekeeping and meetings, road indiscipline and night noise. Unless we get serious about this, then productivity will not be positively affected. Our current attitude sees us unable to successfully compete and everyone grows at a faster rate than Jamaica. I want to also mention in particular the demise of societal values and the failure to protect our children from abuse . This all leads to an even more unproductive work force.

(3) Bureaucracy. This is probably the biggest challenge facing businesses and results in low productivity. I recently had an example, which illustrates that while the Government is trying to pull in one direction (to move the economy forward) its functionaries of government are pulling in the other direction. In the past week I have had two instances that remind me of this. The first is being stopped by a policeman to say he was carrying out a spot check (no reason other than that) and then proceeding to seek to extract something from me, which I refused to do because I told him it was not right.

The second instance, however, is a situation where I had to go to the rent board to resolve a matter, even though the tedious process already set me back two months as that is the time period they gave to me to deal with the matter. So if you are unable to afford to be without the income for two months, then you will lose your property before the rent board deals with it.

After waiting for the two months, though (trying to follow the rules) I get a call the day before the matter is to be dealt with, saying it has to be delayed because the person handling the matter was unavailable, and I would be advised to select another date. After a few days I called to complain about the situation and eventually had to report it to the parent ministry (Transport). I then received a call the day after for a hearing to be set, which date was inconvenient, but then again I had to seek a remedy outside of the rent board, as I might have grown too old waiting on them.

The question, therefore, is what is the purpose of the rent board, as they were supposed to have made the process easier, but only succeeded in supporting the violation of the rights of a property owner, ensured that the Government loses tax revenue because no income is collected during the period, and maybe their delay has caused others to lose their property, and has caused rental costs to be more expensive for future renters as one will now have to demand enough security deposit to compensate for the delay of the rent board.

So, while the government is pressing ahead with the reform agenda in many respects, there are other forces pulling in the other direction.

Friday, February 07, 2014

Understanding the mechanics of growth

A few days ago I was on a radio interview where the question was: Who was responsible for growth, government or the private sector? This question, I think, is of fundamental importance if we are to understand how to achieve growth. This is particularly as I have heard many persons in Jamaica repeatedly say that the private sector must deliver growth.

My own view, which I have

consistently said, is that this conception that the private sector is responsible for growth is one of the reasons we have not been able to understand what is needed for growth to occur.

In fact, when asked the question as to whether the government or private sector is responsible for growth, my answer was that the private sector is responsible for their own interest and the government's responsibility is to provide the environment to channel that private sector selfish interest in such a manner that it creates sustainable growth for the economy. In other words the government's main responsibility in the growth agenda is to create an environment that encourages private sector growth, and specifically in a direction that creates a surplus on the balance of payments and fiscal accounts.

An example: if a horse is in the gates awaiting the start of the race, he will not run out until the gates are open. If in addition to being in the gates the horse is tied to the gate, he still will not be able to leave the gate and start running the race. Still another consideration is that if the gate is open, he is untied, but does not wear blinkers then the possibility is that he will run off the track or in the path of another horse and be disqualified.

This example explains the difference between private sector and government role in economic growth, and I use the term role as it is a much better description than responsibility. The private sector is like the horse and the government the facilitators (trainer, jockey, stewards, etc).

In other words, if the government creates legislative and tax reform, but does nothing about the bureaucracy and lack of efficiency, then this will prevent the private sector from being able to “jump out of the gates” and start doing business. So the lengthy development approval, TCC, or NCC processes place a stumbling block in the way of businesses even being able to start when projected. The result is that even with the best legislative and tax framework, businesses are still left standing in the gate, even after the gate is purportedly open, because the bureaucracy still keeps them tied to the post.

So while the role of the private sector (the horse) is to create profitable and sustainable businesses (in other words win the race like the horse), it can start to do so if it is not prevented from “starting” through the removal of barriers to entry or an inefficient bureaucracy. This clearly defines the fundamental role of the private sector in growth, which is to make as much money for its shareholders as possible (pursue personal interest), and the role of the government is to ensure that the private sector is not prohibited from doing so.

But even after the horse is let out of the gate and untied, or the government has removed the bureaucratic and other obstacles, we cannot allow the private sector to just run with no direction. If the horse runs without a jockey, race track, blinkers, and without the jockey having a whip, then it could end up running away from the finish post, in the path of another horse, or even if it gets to the finish line it could do so by walking or in a very inefficient route.

So while the private sector must be allowed to easily enter and play in markets, the government must ensure that it lays down the rules and policies that will guide the private sector actions so that it gets to its profitability goals while respecting labour rights, not doing anything illegal, and in a manner that provides the best possible returns for the investment. This is being done while the government also ensures that the appropriate handicaps are placed on the horses based on their capacities, so that there is a level playing field and fair competition.

If everyone in this horse race does what they are expected to do, that is, the trainer ensures that the horse is properly trained and fed, the jockey is familiar with his mount and ensures the race stewards see that the race is fairly run and there is no doping, the race organisers ensure that the track is appropriately maintained, and the owner/trainer ensures that the horse has blinkers if needed, then the end result will be fair competition and the best horse will win.

So while we are all fully aware that growth can only be efficiently achieved through the private sector (the horse stands a better chance to win the race than the jockey alone), it is also very important to understand that the private sector can only invest and be efficient if the government ensures that the best environment exists for them to operate in competitively.

It is also important for the government to not only provide an environment, but also to create policies that will encourage private sector investments in areas that contribute to the sustainable growth and development of the country. As an example, if we want to create a balance of payments surplus, then we must make it easier to export than import, or manufacture with local rather than imported inputs. One specific example is that we must deal with crime and high energy costs, which result in our local inputs being much more expensive than the imported ones.

I hope that the above clearly defines the roles of the private sector and government in growth, as if we do not properly define the roles then what will happen is that the jockey will end up carrying the horse and the stewards will want to train the horse, while the trainers end up self policing themselves for doping offences. The result being that we end up with very slow races, filled with a lot of doped up horses and stewards who don't know the front from the rear end of the horse.