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.

3 comments:

tyrone said...

Horse business or Jockey business?

tyrone said...

Horse business or Jockey business?

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