Friday, June 20, 2014

What are the opportunities for the Caribbean?

OVER the past two weeks I did some travelling within the Caribbean, first to Suriname and then to St Kitts. In between I was also asked to go to a South American country, but decided against it because of the amount of travelling time it would take. The itinerary would look something like, leave Jamaica at 2:30 pm and get to Suriname at 1:30 am (11:30 am Jamaica time), or 11 hours travelling time; leave Suriname to Curacao then up to Miami (three hours) and then an eight hour flight to South America; then leave South America to Miami and back to Jamaica; and then leave Jamaica to Miami (1.5 hours) and then to St Kitts (three hours) and then reverse the trip on the way home. Not to mention that it is more expensive to get to a location the same distance away in the Caribbean than it is to get to somewhere in North America.

Usually when you do a trip down to Trinidad or Barbados you curse the time it takes to get there, but don’t usually do much reflection on how much of a challenge it is for development within the region. The fact is that it is easier to get to Europe and North America than it is to travel within the region.

It occurred to me also that this is a significant reason why intraregional trade is not maximised, and the region has not developed to its full potential.

Our tourism officials have worked tirelessly over the years to ensure that we have most if not all the North American airlines coming to Jamaica.

The first issue of the lack of progress with intraregional trade and synergy is obvious. The fact is that unless we are able to improve the ease of travelling throughout the region, then regionalism, at the trade and other levels will suffer. In my view it is therefore necessary for the regional governments to get together and look at regional travel if we are serious about developing Caricom. In addition to this though, if we are truly serious about developing Caricom, then it is very important for there to be free movement of goods and people throughout the region.

It is, in my view, because of the lack of this freedom of movement and ease of travel why countries in the region prefer to look towards North America for trade and labour movement. This is evidenced by the size of the Caribbean diaspora in North America and the trade with North America.

The examples of Suriname and St Kitts show the opportunities that are available to us for development, if only we could address the structural issues of transport and movement of people and goods.

Both countries are excellent tourist destinations, and I think Suriname in particular has a lot of opportunities for development because it not only has good tourism potential, but also has other industries such as gold, bauxite, agriculture etc. St Kitts, on the other hand, because of its size can’t take advantage of industries like agriculture but has vast potential for tourism and international services, which I gather they are trying to develop. The Marriot Hotel in St Kitts in particular is an excellent product, as I was very much impressed with the service and the food. And my comparison is based on the service levels at Sandals, which is at the highest standard globally.

The disadvantage for both countries, however, is the ability to get there. This is certainly one of the advantages that Jamaica has, which we don’t realise enough. Our tourism officials have worked tirelessly over the years to ensure that we have most if not all the North American airlines coming to Jamaica, and have been opening up routes from South America, Europe, and Asia. It helps, of course, that we have an excellent geographic location and brand, but one could argue that the travel connectivity has some responsibility for our brand recognition.

It is this connectivity to the world, through airline travel primarily, why our people are able to visit and open up markets with other countries. The ability to travel easily between Jamaica and those countries has created an identification with the cultures that is essential for business. This is a challenge we have to deal with if we want to get into the South American market in a big way. It is a big market, with many opportunities, but unless we can understand and infiltrate the culture, then it is going to prove difficult to access the markets.

If we look, for example, at trade within the region, Jamaica does relatively more trade with Trinidad than any other Caribbean country, and also has strong ties with Barbados in terms of people movement. We also have Trinidadian and Barbadian companies invested in Jamaica, more so than other Caribbean nationals. The main reason for this I think is because of the connections made through the UWI, as students travel to the various campuses to complete their studies, and at the same time make lifelong connections. In other words, there is an infusion of the cultural aspects.

This trade and business relationship between Jamaica, Trinidad, and Barbados proves that as a region we can do much more together, than we are doing today, particularly with the smaller islands. Again using Suriname and St Kitts as examples, if we had easier travel arrangements with them then they would be much better vacation destinations than just travelling to Florida to spend time in the shopping mall.

My own view is that there are a lot of opportunities to be had by the region being more accessible to other countries, including the Caribbean; and if we also promoted easier movement of people. Because our primary areas of comparative advantage are tourism, added value services, and agriculture, it is even more important for our markets to be accessible. So for example, it would be foolhardy of us to try and promote tourism while at the same time having strict visa requirements. Why then do we create a perception that there is a problem with movement of nationals and goods within the region and expect that Caricom will prosper?

Therefore before we start talking about growing CARICOM as a unit, shouldn’t we address the challenges of market accessibility? That is, of course, if we are serious about it.

Understanding the path to development — part 2

The social entrepreneur uses business/economic strategies to solve social problems. The end product is wealth produced by persons at the base of the economic pyramid and living in harmonious, sustainable but economically integrated communities

LAST week I ended by speaking about the risk taken by many private sector investors, which is the story of many successful entrepreneurs I have spoken with, who at some point in time questioned if what they were doing was the right thing, or should they just be satisfied with the safety of a job. The truth, however, is that a real entrepreneur is not one who is driven by money as much as he/she is driven by the need to accomplish something different. If you speak to many of the successful entrepreneurs you will find this trait amongst them.

If you examine the current economic programme, what you will see is that there is a real effort to remove the structural impediments to the entrepreneurial drive. This is very important for sustainability, as what this will do is cause the private individual (entrepreneur) to develop the confidence to invest his savings in starting a business, and by so doing create jobs, and income, which will then result in even further economic activity and growth. And so the cycle continues with further confidence and growth.

So we can all agree that the only sustainable way for economic growth to occur is through private (entrepreneurs and individuals) spending and investing.

The questions that we should be asking, therefore, are what are the inhibitors to the private sector having enough confidence to invest, and also, have we created enough areas of opportunities, again by removing the barriers, for investments to happen. It is important to understand that government policy can have the effect of both creating and also reducing areas of comparative advantage, and so the one of the primary features of government policy should be to create a business-friendly environment in as many areas of opportunity as possible.

It is for this reason that the fiscal and legislative adjustments under the current IMF agreement are beneficial for economic growth. Contrast this to the previous IMF agreements where the primary adjustment was devaluation with no adjustment to the "doing business" environment, which was really just making it more difficult for persons to make purchases, but not give them the opportunity to earn more income. This is because the classical argument for devaluation is that it is supposed to make your goods cheaper, and thus more competitive globally. However, what was not considered is that if you are hampered with the inability to produce (inhibitors), then no matter how much your income is reduced, and how hungry you get, without the ability to earn income then you will not be able to earn your way out of the problem.

What this programme is aiming to do, with the adjustments being made, is to make for an easier path to production for those who are innovative and productive.

However, legislative and fiscal changes are not enough to ensure sustained economic growth. Or put another way, competitive production, or increased productivity does not result from only tightening on government expenditure and putting the legislation in place to aid the business environment.

As examples, government cannot continue to make adjustments just on the expenditure side, or increase taxes, and expect that the fiscal situation will improve. This is because, at best, government services and effectiveness will remain stagnant, or non-existent. Also, we have had many sound pieces of legislation in place that are not enforced.

Therefore, the fiscal situation, and effective government service, can only improve if the fiscal revenues improve and that can only happen sustainably if economic activity and net incomes improve. Definitely not through new tax measures, which have been in the past the only solution we have taken to improving the fiscal budget, which has always failed. And the only way that legislative changes can be effective is if they are enforced without preference or delay.

This speaks to two requirements for development. First, we must improve the "doing business" environment for investment and income growth (economic growth). Second, we must improve the discipline of enforcing legislation and justice for social development. When these two things come together, then what we will see is development, as opposed to just improving social justice or growth separately.

So then we come back to the question of what are the impediments to increased investment and employment, AND similarly, the impediments to social equity and justice? Note that social equity and justice does not mean welfare only, or distributing capital to persons who are unproductive, but rather, it means providing equal and available opportunity to all irrespective of social or income standing.

So for me the solution to development is simple.

Firstly, we need to focus our efforts on creating a "doing business" environment that encourages investments and employment, particularly in export industries. Secondly, it means creating a social environment where everyone has the same opportunity and will succeed based on talent and productivity.

These inhibitors include (i) an efficient and accountable public sector bureaucracy; (ii) ease of paying taxes and greater tax compliance to reduce tax burden across the board; (iii) increased societal discipline and reduced incidence of crime; (iv) lower energy costs; and (v) improved citizen-police relations.

If we remove these obstacles, in addition to the reforms under the IMF programme, then the result will be (i) increased business and consumer confidence leading to (ii) increased consumer spending, investments, and employment leading to (iii) increased production and exports / import substitution leading to (iv) increased income levels leading to (v) increased fiscal revenues. And so the cycle will continue, each time leading to expanded growth and developmental opportunities for all.

This is because the effect of removing the inhibitors will be the exploitation of our best talent and most productive resources. It is for this reason that I am somewhat optimistic about the current economic programme. But while necessary it is far from sufficient for sustainable development.

Tuesday, June 03, 2014

Understanding the path to development (Part 1)

Dennis Chung says, much more than economic growth, development means the general improvement in opportunities and standard of living of the average citizen, which can be summed up in the Jamaica 2030 vision as “the place to live, work, and raise families”.

ALMOST daily I get questions on what will happen to the Jamaican economy and whether or not we are moving in the right direction. Or sometimes, get a comment that my expressed cautious optimism is misguided, as things are difficult in the economy. I can understand the frustration of many persons as we have been promised prosperity if we tightened our belts for the past 40 years, and we have not seen the results of the belt tightening. So, many Jamaicans are understandably cynical about the expressed optimism.

Some persons even ask why I am cautiously optimistic when in the past I have been very critical of the policies, to the point where persons have seen some of us (including Ralston Hyman) as pessimists, and today even he seems to be cautiously optimistic.

Could it be that we are just getting old and can't bother anymore, is there something wrong with us mentally, or are we able to see something that many others don't see? I remember that on many occasions we were chastised similarly for saying things like there was a need to go to the IMF or that debt restructuring seemed like the only way. But that is history, so let's look at a reasoned approach as to what may lie ahead for the economy, and what is an appropriate path for development.

Being in darkness, or a painful position, can mean that either you are about to see daybreak (or a better result, as darkness and pain can come before light and progress) or it can mean that you are falling deeper into a hole.

How then do you determine if you are actually in the darkest hour before the dawn or if you are plunging further into an abyss? The answer lies in understanding the context of the darkness. So the sophisticated investor knows that the best time to buy is when everyone is selling (or panic) and the best time to sell is when everyone is buying (or too much optimism).

The fact is that it is the analysis of the context, and understanding when there is further value, or losses ahead, that determine if one buys or sells. Analysis is something many seem to be short on, especially with the advent of instant media, as much of the debate is sometimes driven by emotions rather than reason. And this emotion is on both sides of the argument for optimism and pessimism, as arguments go overboard on either side sometimes.

I will attempt to then put forward a reasoned approach to understanding what is needed for Jamaica's economy to develop, in summary, as one or two articles can never do enough justice.

The first thing we need to do is understand what the objective of development is. In my view, development is much more than economic growth, or even increase in per capita GDP, but means the general improvement in opportunities and standard of living of the average citizen, which can be summed up in the Jamaica 2030 vision as "the place to live, work, and raise families". If we can achieve this vision for the average person, then we can truly say that we have developed as a country.

Once we have defined that vision though, then we need to assess whether we are there, and if not then what is preventing us from getting there. In other words, if we understand where the finish line is (objective), where we are in the race (200 metres in a 400 metre race), and what is preventing us from finishing the race, and we can remove the obstacle then maybe we can complete the race. But of course this assumes that we possess the capacity to do a 400 metre run instead of a 200 metre run, which we have had a better advantage in.

Therefore in removing the obstacles to the objectives, we needed to understand what our potential was. So it makes no sense saying that we want to be as well off as Canadian citizens in 20 years, if our realistic potential is that in 20 years we can only achieve what they have in Barbados. This translates to understanding our comparative advantage and what value can be realistically had.

So when I look at Jamaica, I think that we have a potential to be much better off than we are today in terms of Tourism, Agriculture, ICT, Energy, and Manufacturing. I think that we have the potential to grow in excess of the elusive three per cent, that since 1972 we only saw between 1987 and 1990. And the fact is that if we could have done it between 1987 and 1990, what is stopping us from doing so now that we have a much better brand, athletes, more accepted music, and we are more interlinked with the global marketplace.

This leads us to the question then, if we are capable of growing in excess of three per cent, or the world average, then what prevents us from doing so.

The first thing to do is understand what are the drivers that will cause us to grow beyond three per cent, because even if we remove the obstacles and we do not empower the drivers of growth then we will still not have the growth. So if I provide a clear path for a car but not have a working battery in the car then even with the path cleared the car still won't be able to go, simply because it may have been sitting in a still position so long that the battery is dead.

So while moving the obstacles I also have to ensure that the engine of growth is ready to go. And we have to find out what is required for that growth engine to go. So many have said that now that the obstacles to growth have been removed that the private sector must now come forward and start to grow the economy. I remember someone saying that to me at a seminar, and when I asked if he didn't consider himself the private sector, and if he would invest his pension in a business and start the growth, he said no that he wouldn't risk his life savings. This is exactly what the private sector does, particularly at the SME level.

So the question is, what do we have to do to make people feel safe to risk their hard earned savings, which is what will result in growth. In other words, what would motivate them to have the confidence to invest money that otherwise could have gone to provide for their family, and in particular future income, or pension? The fact is that this is the decision that many entrepreneurs face, and it is therefore not a matter of just saying that some of the obstacles are being removed so now the private sector must invest, as much of the "abstract" private sector many persons love to speak of are ordinary individuals who take extraordinary risks, which amounts to a gamble of their family's well-being.