Friday, June 20, 2014

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.


tyrone said...

As you speak on the matter of tax enforcement and compliance I have come to recognize that no matter what kind of legislative framework is designed tax evasion and avoidance will continue to impact government revenue intake. Paying taxes in Jamaica is not the easiest, most comforting experience. Standing in long lines, watching and listening to tax office workers abuse their power to make it harder for you to do business with tax office and impacting on the experience. While we recognize the importance of goods and services as value areas I don't believe we understand the values associated with a good customer experience. If you believe doing business is hard check out paying taxes. So while looking at the inhibitors we also may want to look at the incentives to doing business. I say so because I believe this too can change behavior and encourage spending beit in the form of cash or credit. Nothing happens without spending. Incomes don't go up without spending, social programs don't get supported without spending and fiscal revenues don't increase without spending. So what are the economic triggers to incentivise spending and build confidence (certainty): (i) appropriate consistent government policies treating on energy and public safety (ii) a solid result based customer experience mindset across all government sponsored entities (GSE)and (iii)a discipline, trusted, talented workforce. These economic triggers are where the opportunities are. Those are my thoughts, take a look.

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