Sunday, December 13, 2015

Foundations for prosperity





The World Bank recently released a paper called “Jamaica Economic Update Fall 2015”, in which it gave an update on the Jamaican economy and spoke to the necessity to achieve higher levels of growth. As stated in the report, “While the government has made important progress on the structural reform agenda, Jamaica will need to accelerate its growth in order to achieve lasting debt sustainability”.

This is a very important point to note by the World Bank, as it is saying what some of us have been saying for a long time that while the fiscal adjustment is necessary, it is far from sufficient.

This is because the fiscal reform programme has been more on the expenditure management side and there is a limitation to what can be done in expenditure management, as there is a point that you can get to where everything stops.

If we are not at that point yet, we are certainly nearing that point. We should also note when the World Bank says that accelerated growth is necessary for debt sustainability. In other words, if we do not get the growth we need then we could start to compromise our debt to GDP ratio progress.

This has always been very clear, but the fact that it is mentioned in a World Bank report shows that after two years of expenditure management, it is very important to shift our focus to accelerated growth rates.

The World Bank goes further to suggest that capital investment may be a good way of doing so, which is what the US, for example, uses to emerge from economic recessions. This stimulus will usually come through the public purse in the form of roads, bridges, etc. One could think of Highway 2000 as having provided much of the stimulus for the economy because without it the economic conditions would have been much worse.

The recent decrease in the primary surplus balance will certainly allow some room for increased government spending, but even that amount will not be sufficient to create the stimulus for accelerated growth by itself, although it will help. In addition, the fact is that the government does not have the money required for the capital investments needed and so we should examine other sources to achieve that growth.

The best way to do that, without causing a strain on the fiscal accounts, require focusing on a few options.

The first is utilising Public-Private Partnerships (PPP). We have seen PPPs in the form of JPS and Sangster International Airport for example. In addition to PPPs in the pure sense, we also need to be looking at privatising some government assets, not just to take the burden off the government but also to make the assets more efficient and increase employment. Examples include Jamaica Telephone Company sold to Cable and Wireless; NCB privatisation; Air Jamaica taken over by Caribbean Airlines; and Sugar companies divested to the Chinese, among others.

These had the advantages of (i) reducing the burden on the fiscal accounts as well as (ii) increasing competition and employment as many have got larger.

In this vein I would also propose the privatisation of bodies like the National Water Commission, and looking at PPPs to manage entities like the Registrar General’s Department (RGD).

This approach will have the effect of (i) increasing capital investments; (ii) increasing employment and earnings; and (iii) reducing the fiscal burden, while increasing revenues from assets.

Poverty rate troubling

One troubling statement in the World Bank report is about the poverty level. It states: “Between 1997 and 2007 Jamaica’s poverty rate fell from 19.7 to 9.9 per cent, but by 2012 the poverty rate had rebounded to 19.9 per cent”.

This is a very worrying figure, as higher poverty rates means that purchasing power is reduced, resulting in lower economic activity. If economic activity is reduced, then it primarily affects SMEs, which are the ones that create the most new jobs. It also means that innovation which comes from the influence of SMEs will be limited. This will result in lower employment and uncompetitiveness eventually.

One of the main foundations for prosperity, therefore, must be to reduce the poverty rate to the lowest possible levels. For this to happen we need perhaps to increase employment. In order to increase employment in the past, the governments increased the number of people employed in the public sector. The only problem is that that is not a sustainable model as we are seeing now.

Therefore, increased employment can only come through increased private sector activity. Increased private sector activity can only come through people making investments with private capital. And capital will only invest where the risk-return is the best it can get, or else it goes to a safer haven.

What this means is creating an environment to facilitate capital moving into investments in Jamaica. In this global village it is easy to move capital from one market to another. This means that policies must be created to attract capital to the country, as is done in Panama where investors’ terms under which they invest are protected by law, which allows for predictability and lower risk.

The real foundation for prosperity lies in policies geared at full employment (defined at five per cent or less unemployment). But for full employment to occur it requires capital investments, as the World Bank says.

Since the government does not have the necessary fiscal space, it therefore requires private capital investments through PPPs or private investments. This in turn requires policy action deliberately aimed at inviting capital to invest.

When this occurs (increased capital investment) then we will see increased employment, which will be the road to prosperity.


Friday, November 27, 2015

Requirements for sustainable growth

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The Planning Institute of Jamaica has reported good news that the economy is estimated to have grown by 1.5 per cent for the July to September 2015 quarter. Of note is that the goods sector has grown 4.4 per cent, with manufacturing up 9.7 per cent and agriculture up 3.3 per cent. At the same time the services sector grew 0.6 per cent, with all services growing with the exception of producers of government services, which declined by 0.2 per cent.

This performance is not unexpected, as the fiscal and legislative adjustments have had a positive impact on the macroeconomic environment, as well as the business environment. Certainly over the past year we have been seeing improved investor and consumer confidence, along with increased investments by large companies.

While we celebrate this return to growth, it is important that we set about ensuring that growth is not only higher, but also sustainable. It will therefore require an understanding of what the challenges are to sustainable growth and what must be done to fix them.

It is important to understand this, as in the past we have seen bouts of growth of around three per cent, only to slip back under one per cent, because of structural issues in the economy. The fact is that the fiscal and legislative reforms being undertaken have gone a far way to break down many of the structural issues. If we are going to have real and sustainable development it will be through deliberate policy actions.

Risk of uneven growth

The risk we run of course is that we will have growth, but that it will not be distributed evenly. In other words, the economy can grow but a significant part of the population cannot see any benefit. This is the situation we see in Haiti, for example, as growth in an economy does not necessarily translate into better income levels generally.

So, even as the economy grows, the gains can be restricted to a certain part of the population. This is a situation that we do not want to see, but we are at risk of seeing. This is because the main risk we face to sustainable economic and social development is the current state of our labour market. This is reflected in the low labour productivity numbers.

This means that even though we may see a decline in unemployment, it will primarily be with low paying jobs and it will be difficult (though not impossible) for the 100,000 jobs projected by the minister of finance to be realised.

If, however, we embark on a programme of training (eg through HEART) and labour market reform, then we can certainly see more than 100,000 jobs being created even before five years. The reason why this intervention is important is that a significant part of the labour market is not adequately trained for the more productive and higher paying jobs, and in many respects our labour market is still dependent on menial jobs.

Labour market reform will of course be necessary to attract even more long-term investors and also to promote labour productivity.

Shifting to SME growth

Secondly, sustainable growth will require a vibrant SME sector, and this means improving the ease of doing business on the ground and not just the legislative framework.

This is why although the Doing Business Report 2016 shows us moving up seven places, the Global Competitiveness report 2015-16 shows a slight decline effectively. What this means is that for us to develop a vibrant SME sector, deliberate policies must be aimed at reducing red tape and also providing a friendly legislative framework and customer service approach to facilitate the business environment.

Much improvement has already been done (and this is why confidence has been improving) but, to be globally competitive, much more needs to be done.

One of the very important things I mention all the time is a predictable environment for doing business. So even though many legislative improvements have been made, business people still have to consider that next year the finance minister could go to Parliament and impose a new tax, which is an additional cost to doing business. Or a bureaucrat could destroy their business by targeting them for audits or causing unnecessary costs from bureaucratic processes without any accountability.

I finally want to mention that sustainable growth is also very much about creating a safe and disciplined environment in which people will want to raise their families. In other words, the most stable environment for a person's family (in particular, children) will be where that business person's money finally comes to rest.

It is important to understand this point, as over the years we have seen where many people have made money through their business in Jamaica and shipped it out to other countries (namely North America), where they send their families to reside for fear of the crime rate or the general lack of discipline in the country.

So my message would be that, while we should celebrate the 1.5 per cent growth rate, we should be mindful that:

(1) if the proper infrastructure was in place we would be talking about growth of maybe three per cent, as the drought alone cost us one per cent of GDP;

(2) it is important to create an environment where we will have sustainable growth and not just acceptable growth for one or two quarters. My own view is that we are on the path to doing this, but we are still at a very delicate stage and any incorrect policy action can reverse these benefits;

(3) we must create a workforce that is equipped with the skills necessary to be more productive, and hence earn more income.

In other words, for sustainable growth to happen, we must reduce our reliance on large-scale projects and FDIs mainly, to instead concentrate on a vibrant SME market and internal investors.

Friday, November 20, 2015

"The law is an ass"

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This phrase originated in the Charles Dickens novel, Oliver Twist, when Mr Bumble, the unhappy spouse of a domineering wife, is told in court that "...the law supposes that your wife acts under your direction".

"If the law supposes that," said Mr. Bumble, squeezing his hat emphatically in both hands, "the law is an ass -- an idiot."

On Saturday morning at around 1:00 am I arrived in the Customs Hall at the airport. On reaching the Nothing to Declare line, a customs officer looked at my form and saw that I had declared souvenirs in the amount of US$80. He asked if I had any clothes and I said that I only had the clothes I went away with, at which point he said I should declare them. I didn't think it made sense to declare the clothes I left Jamaica with as they were not acquired abroad.

He insisted that I do so. At that point I refused as it was not practical. He insisted that I was ignorant of the rules.

I still refused to write it down and another officer who was there told me that if I refused to do so then he would send me to the room to check my luggage, even before my luggage went through the x-ray machine. I told him to come and do so, but he ignored me. He did not have the decency to acknowledge. Apparently he wanted me to just stand there and wait.

On Monday I called the Customs Office, and it was verified that the officer was the one who was not aware of the rules. In fairness to the Customs Office they addressed the matter swiftly. I should also point out that every other time I have interacted with customs officers they have always been very pleasant and have never taken that attitude, so it is a matter of two bad eggs giving the department a bad rap.

Even one incident, however, is too much, and what was of greater concern was that the customs officer was trying to intimidate me even though I was telling him the right thing. It is unacceptable for anyone in authority to deal with a citizen of Jamaica, who helps to pay their salary through taxes, in that manner.

This was not a matter of the law being "an ass". Rather it was a case of someone in a position of authority "making up" rules and trying to intimidate a citizen. I shudder to think of how they deal with people who don't have a voice. Accountability demands that those people be removed from front-line duty, and I hope the Customs Office will deal with it in this way.

What this reminds us though, is that the law must be practical and must not be an inhibition to (i) democracy, (ii) market efficiency, or (iii) personal privacy. The law also must not be discriminatory to any group. And the persons charged with enforcing the law should do so fairly and with sensitivity for the rights of the citizen.

This seems to be one of the challenges we have had with the application of laws in Jamaica, where those given authority have sought to use it to abuse the rights of our citizens. Apart from this customs incident, members of the police force have also been known to use their authority to abuse the rights of Jamaicans. We also have the situation where procurement rules may be resulting in more costs to Jamaicans, rather than reducing them -- as in my view the bureaucracy caused by these rules in fact may end up facilitating the same corruption they are trying to prevent.

Law vs its application

So the law, and its application, must also play the important role of facilitating market development and competitiveness,. But also very importantly, it must make everyone feel safe and that they have the same opportunities.

So it is not only about what laws are on the books. Their application is even more important.

A similar situation has to do with what is recognised by the Global Competitiveness Report (GCR) 2015-16, as the most problematic factor for doing business in Jamaica. Inefficient government bureaucracy is seen as causing 16.4 per cent of all the problematic factors in doing business. As a result of the challenges, the GCR actually showed an effective decline for Jamaica in 2014-15 over 2013-14. Jamaica ranked 86 for both reports, but the number of countries included this year was 140 versus 144 the year before.

Contrast this with the Doing Business Report (DBR) 2016, which shows that Jamaica moved up 7 places from 71 to 64 of 189.

The reason for the difference in the reports is that while the DBR focuses on the legislative and policy framework, the GCR looks at the implementation of the laws and policies, or how it is felt on the ground. The challenge we have, therefore, is not that the policy makers (politicians) have not been putting the framework in place -- but that the operatives, at the institutional level, are not implementing the framework in a way that impacts doing business properly.

So while it is clear that we have been driving the legislative and policy framework in a positive direction, the main challenge we have is how to ensure that the implementation is also done in a way that positively impacts the social and economic components.

This is why public sector transformation is critical to moving the needle on our development. The fact is that unless we have a structure that will allow us to efficiently implement laws and policy, then "the law will be nothing but an ass".

So for me, public sector transformation is not primarily about saving money, but rather delivering efficiency. In this regard we must ensure that those in authority do not have the ability to abuse any citizen or make up rules as they go along, and there should be accountability when things go wrong.

Friday, November 13, 2015

Accountability's importance to development

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The recent health sector saga has brought to the fore the real need for accountability in Jamaica. The fact is that this is not the first incident to highlight this deficiency, but another one that has been highlighted because of the sensitivity of the health sector and the election atmosphere.

What this incident has shown is that Jamaicans are demanding more and more accountability from our leaders, not only at the political level, but also those entrusted with the management of public assets. This is a good thing, as accountability is a very important ingredient for development, as without it there is usually an erosion of confidence and credibility in institutions and system.

It is no surprise, therefore, that there is little trust in our public institutions in Jamaica. It is because of the lack of accountability over the decades (as far as I can remember) that there is very little trust in politicians and public institutions like the police. As a result, there is constant suspicion of corruption and a heightened appetite for "scandal" news.

In other words, if there was a perception that people were held to account when things go wrong, then trust would be higher and not everything would be seen as corruption. My own experience, based on my public sector involvement, is that much of what people call corruption results from bureaucratic systems.

It is also because of the lack of systems for accountability that we have created very bureaucratic processes, such as procurement guidelines which take discretion and innovation out of the public sector, and which undermine the potential of many public sector workers. This is because our failure over the years to hold people to account has led us to introduce rules to make up for that accountability, but end up costing us more in the long run.

It is also because of this lack of accountability systems why we end up salivating each time a new so-called "scandal" breaks and calls for blood; because we finally get someone to account for the lack of accountability in all the past mishaps that we were not able to hold someone to account for. So we crucify the individuals in a very personal manner most times, with the objective of destroying them in the name of accountability.

The fact, however, is that when one exists in a culture of accountability, the focus is not on the person, but rather on the issue at hand. Accountability does not mean "crucifying" the person responsible, but rather holding the person (and the person holding themselves) to account for the execution of the function. So in a working accountable environment, it is seen as learning and a way to improve the person who might have made a mistake.

I remember reading an article when I was around 18, where a young manager in a very successful company in the US made a mistake that cost the company a substantial amount of money. When he went to the CEO and handed him his resignation, the CEO gave it back to him and said "Why would I fire you when I have paid so much for you learning a lesson, and then hire someone else who may make the same mistake?" In this example, the CEO realised that the young manager had taken accountability and was willing to learn from the mistake.

The problem we have in Jamaica is that no one wants to admit that they made a mistake so the natural reaction is to cover it up and not hold yourself or others accountable. So something as simple as saying to your stakeholders that I am sorry and made a mistake, is one of the problems we have. So, in the end, the problem stays like a sore that deteriorates without medical attention, and eventually threatens the whole.

Health sector saga

This is the problem with the health sector saga. The fact is that when Dr Dawes raised concerns, Minister Ferguson did the right thing and called for an audit. What went wrong, however, is that when the audit came back no one wanted to take accountability for it. So not being transparent and holding the operational people to account (which does not mean firing them as indicated above) resulted in the situation worsening and lives being lost. Lack of accountability creates a situation where credibility is not only lost in the system -- but also the people who manage it.

It is when that credibility is lost (because people have failed to hold themselves to account) that whether or not they can remain in the job comes into question. This would of course be the position the Prime Minister would have faced when she made the decision to remove the minister, and asked someone else to restore the credibility of the system. That was the right thing to do. The question that Minister Dalley must now ask is if the credibility of the system can be maintained if those who failed to hold themselves to account remain involved.

This does not only apply to health. We have also seen it in the police force, where the previous commissioner and INDECOM made accountability more prominent and we then started to see greater trust from the public.

What is certain is that a lack of accountability systems will stymie development, as companies or countries cannot move forward without trust in institutions and governance. And trust is not possible without accountability.

What is also obvious to me is that if people had held themselves to account earlier in this health situation, and said what went wrong and what was to be done to fix the system and restore credibility the loud calls for firings and resignations may not have happened. What is clear is that it is the lack of holding ourselves responsible that cause problems to escalate, and not the event itself.

So my plea to those charged with governance of our public sector is to be as transparent as possible. Share challenges with Jamaicans, as we were able to go through some significant economic transformation and we understand. And please take responsibility for when things go wrong and act. This is what Dr Phillips has done with the economic reform programme, through avenues like EPOC and his own utterances. Is it any coincidence then that the reform programme has been seen as successful?

Friday, November 06, 2015

Realising the objectives of governance?

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Recently I did a presentation to the Institute of Chartered Accountants of Jamaica (ICAJ) about whether the success of the economic programme would make Jamaica the place of choice to live. I posed this question: "If you were guaranteed 100% return per annum on your capital invested in Syria, would you move your family there?"

The answer to that question was obviously no, which is what you would expect from any rational person who cares about their children in particular.

This shows us that choosing a place to live does not depend solely on financial returns, but rather on safety concerns and the general surroundings in which you live. As an example, even in a country where you have very little crime, things like racial, religious, or gender biases are very important. And in Jamaica's case, one thing we have that many other countries envy is our record of press freedom.

Around the same time, I was having another conversation in which I was told of someone who did business in Jamaica for many years, but decided to uproot himself and his family to go and live in North America because he felt safe when his children jumped on their bicycles and rode down to the park to play with their friends.

These two instances bring home the important point that the primary objective of governance should be about creating an environment in which people feel safe to live, work, and raise their families. In other words, in alignment with Vision 2030.

So even as we discuss the various achievements under the economic programme, I am reminded that we still have not, as a country, started to discuss the real issues relating to the purpose of governance, in any serious way.

Sure, we speak about the crime rate, health and access to education (or I should say free access), infrastructure, and employment opportunities. The problem isn't that we do not discuss the issues, but the context within which we do so. When we discuss these issues we do so from the point of view of how relevant it is to securing a vote. And this has been consistent from as far back as I can remember, not only from the politicians.

Context is of course important because it guides the way the conversation and action are developed.

I have given this a lot of thought recently, and the truth is that if we are to achieve Vision 2030, it seems to me that the whole purpose of governance must focus on creating an environment to make the average citizen see Jamaica as the place of choice to live, work, do business, and raise families.

If we were to do this, then I think everything else would fall into place -- because the focus would be on creating opportunities and an environment for individuals and families to see Jamaica as their first choice of home.

So we would not just be focused on the high murder rate, but rather we would be focused on the outcome of creating positive values within the schools, discipline on our roads, eliminating noise and waste pollution, and rehabilitation at our prisons. But our focus on crime though, is more a reaction to the outcry about murders. The result is that the solutions we propose are: tougher punishment for criminals, neglect of our prisons because we see inmates as criminals rather than citizens in need of rehabilitation, neglect of the Noise Abatement Act, and solutions to detect weapons in schools rather than change behaviour.

In other words, because our objectives of governance relate more to satisfying and minimising the cries from society, we become reactive to issues.

Similarly, another issue is the matter of the abuse of our children. The abuse we see now has been around for a long time, and every now and again it becomes a topical issue and there are a lot of reactive comments and action. But if we really had the issue on our radar to improve the lives of our children, then we would be focused on ensuring that the laws relating to underage drinking and gambling are enforced, we would ensure that there is a good school bus system in place so that children are not at risk on the roads, and we would ensure that the justice system catches sexual predators swiftly.

What these examples show us is that firstly, governance should be primarily about improving the lives of people rather than just economics, if we intend Jamaica to be the place of choice to live and raise families.

Secondly, it also tells me that maybe one of the reasons that we have been chasing our tails about development in Jamaica since independence at least -- is we have never really defined what governance should be about. To some it is holding state power and to others it may be 'what can I get from it?' But there is not enough of a critical mass that wants governance to focus on improving the lives and opportunities for the majority of Jamaicans. Is it any wonder then, that the US has been at the top of global development for a very long time, when its Constitution seeks first and foremost to protect and advance the rights of its citizens?

Sunday, October 25, 2015

If Jamaicans are to excel...

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One of the things we often forget is that development of a company or a country is primarily for the purpose of advancing the lives of people, and not just measuring numerical indicators. Although companies are developed primarily to improve their returns, they should ultimately have a positive effect on the lives of shareholders. Similarly, countries should be developed to improve the lives of their citizens.

This, I believe, explains the failure of many managers and governments, in that they tend to forget that their customers are people and not financial statements or fiscal accounts, which are merely ways of measuring development, but not the purpose of development.

So while the primary objective of a manager is to meet corporate objectives, this can only be done successfully if employees are productive, and employees can only be productive if they are happy with their environment. Further, if one is successfully providing financial returns but there is no return to shareholders through dividends or capital appreciation, then the share price will suffer.

Similarly, if a government institutes policies that are geared towards meeting numerical targets, but not towards improving the lives of its people, that government will fall out of favour.

I think that this is one of the primary failures that I have seen with many people, at a corporate level, and also fiscal policies over the years in Jamaica. They have failed to keep their eyes on the goal of human development as the ultimate objective of everything they do. This also translates to a societal problem, as over the decades we have developed so many products for profit only and have forgotten about the people in the middle. This is why today many of the foods and practices we have become accustomed to create health and other societal issues.

Excelling overseas

This lack of focus on the ultimate beneficiary of policy causes us to develop policies and systems that focus on financial returns, which ultimately hurt the progress of the people. This is why many Jamaicans, for example, go overseas and excel, when they find it difficult to do so in Jamaica. It is not because they suddenly develop new skills when they migrate, but rather the environment they are placed in allows them to exploit their full potential.

So when we talk about the need for private sector (and particularly SME) growth, we must understand that businesses will only grow if the operating environment facilitates that growth. This is the main reason why we have not seen greater SME growth in Jamaica, even though we have comparative advantages that we can develop.

One of the things that comes to mind readily is the way we have designed the procurement rules, which happens not only in Jamaica, as I have spoken to many people in the region with the same problem. Unfortunately, the way our rules are designed actually reduces the productivity of public sector workers significantly and creates costs greater than those we are trying to avoid, both directly and also in terms of social costs. The objective of the rules is supposedly to eliminate corruption and improve value, but because the rules were designed without the ultimate objective of efficiency and productivity in mind, they have actually had the opposite effect of costing more. Of course, the ultimate effect is negative on taxpayers and citizens generally in terms of the cost of living.

Another failing that comes to mind is the way we design policies, with a focus more on fiscal revenues, rather than focusing on creating an environment to make the bureaucracy and tax environment better for businesses and citizens. It is because of this focus why -- over the many years that I have been following the budget -- we have always been increasing taxes, even though over that same period the cost of living has been increasing while GDP growth and productivity have been lagging.

I believe that when we implement public sector transformation, the focus should be not simply on cutting expenditure, but on creating a more efficient public sector. In other words, the success of transformation should not be just meeting the wage target as a percentage of GDP, but rather on improving the service delivered to the public.

Why, you may ask, is it so important to focus on the human element? Simply because in today's world competitiveness is a direct result of innovation conceived in the human mind. Sadly, businesses and people spend much of their time trying to resolve bureaucracy issues or interacting with the government bureaucracy and so have less time than their competitors to spend on innovation. This explains why under the Global Competitiveness Report we are unable to transition to an Innovation Driven economy, which is when real value is added.

Of course, this means ensuring that institutions such as the police force and the court system respect human rights and are efficient.

So if we want to transform our economy it means we must focus on improving the lives of our people, and finally get the news that the world no longer exists in the industrial era where capital and land created competitive advantages. We now live in the information era where people create the competitive edge, and so if we do not create an environment where our people can develop better than in other societies, then we will forever be laggards.

Caricom dilemma

Each time I travel within this region, I realise why Caricom will never achieve the purpose intended. This is travel. It is much easier to travel to North America, or in some cases to Europe, than it is to travel within the region. Not to mention the fact that it is more expensive to travel within Caricom than to North America in some instances. As if that is not enough, it takes much longer for Caricom citizens to be processed through immigration than visitors from outside CARICOM, because we allocate fewer immigration counters to Caricom citizens, resulting in longer lines.

The fact is that unless we can better accommodate the movement of people and goods within Caricom, then it will continue to be primarily of academic rather than practical application.

Saturday, October 17, 2015

Capacity restrictions to growth

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In my last article, I asked the question why is growth so elusive to Jamaica and identified some of the challenges that restrict our ability to grow. These are not new and have been with us over many years without any real attempt to address the underlying issues.

There has been much rhetoric around the symptoms of the underlying challenges. So we speak about interest rates, exchange rates, inflation rates, unemployment levels, NIR, etc, and many do not understand that these are outcomes of poor policy rather than the cause of poor economic performance.

This is why I believe that a focus on the legislative changes and fiscal discipline is important, because they both encourage behaviour that addresses the underlying problem. Only, however, if they are done correctly. In other words, many times we start with the right objective but implement it in the wrong way.

This is one of the reasons why we have failed to see any consistent growth levels above one per cent. The fact is that irrespective of how many policies we implement, if they are not geared at improving capacity to grow, then despite our best efforts we will hit a growth ceiling.

As an example, this Saturday will be the annual Kingston to Negril charity ride, and many cyclists have been training for it. The training, of course, includes many long rides leading up to the big ride, which are geared towards building your capacity for enduring long rides. So then, irrespective of whether you have the best bicycle and equipment in the world, if you the rider do not have the capacity to do a 158-mile ride, then the best equipment in the world will never help you to complete it.

What the quality of the equipment does is add that competitive edge over someone else who has similar capacity as you do, and makes it easier for you to compete. So I always say to fellow cyclists that I have found the most important upgrade on a bicycle is for the rider to get fit.

Similarly, Jamaica has seen massive amounts of FDI and billions spent on projects such as SME development. Irrespective of this, however, we continue to see growth averaging less than one per cent. So from a return on investment point of view, we have done very poorly. This problem will persist as long as we fail to address the capacity issues, irrespective of who is managing a country or organisation.

I have always found that the most sustainable way to build an organisation is to first address the issues that restricts its capacity; whether this be a human resource issue, infrastructure issue (such as IT), or the business model needs tweaking. Unless this is addressed, then the organisation, just like the country, will find its growth will hit a ceiling and not be able to move to the next level.

This, I think, is what has happened to Jamaica. For too long we have been trying to grow the economy without addressing the capacity issues,which has restricted our growth to an average of less than one per cent.

So, as an example, we currently have a capacity restriction caused by our poor water infrastructure. This may not have been a capacity issue a few years ago because the rainfall patterns were more predictable. But with the effects of climate change and the increase in residential communities, our water infrastructure has now become a capacity constraint.

Similarly, inefficient bureaucracy, crime and indiscipline, uncompetitive tax rates and corruption have been identified by the Global Competitiveness Report as the four top constraining factors to competitiveness and growth. In other words, unless we address these recurring issues, we will never be able to see the growth levels that we need to drive the economy forward.

One item that was a greater constraint on capacity a few years ago, compared to today, is energy cost. It has somewhat lessened, but still remains a problem, primarily because the pump prices are constraining spending in the economy, which are windfalls for other economies. So then, even though oil prices have fallen dramatically, the price from Petrojam have not adjusted accordingly and continues to be a constraint on our capacity to grow the economy and increase disposable income.

The problem, therefore, is that despite our best efforts over the years to achieve high levels of growth, the fact is that our failure to address the factors that constrain the economy has resulted in us hitting a growth ceiling and finding it hard to break through.

What is needed, therefore, is an identification of what the capacity-constraining factors are and deliberate policies to remove these constraints to growth.

Kingston to Negril 2015

As I mentioned above, this Saturday is the annual Kingston to Negril charity bicycle ride, where the proceeds this year will go to the Epilepsy foundation — an organisation I have a special place for.

Last year 150 riders started, and most finished, with many coming from overseas to participate. Included in the ride are people who participate for special reasons, and this year a local cyclist --Mike Johnson -- will be doing the ride in honour of his brother, who recently passed from cancer.

It is a growing sport, and recently Jamaican Marloe Rodman won the Tobago Calssic, following the tradition of greats like Peter Aldridge and David Weller. This is why I can't understand the statement made a few months ago that the only cycle track at the stadium was being destroyed to create more seats in the stadium, without an alternative.

Much respect to all those who line up on Saturday, and the organisers, who both do so for health and charity.

Monday, September 14, 2015

Why has growth been so elusive for Jamaica?

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SINCE the early 1970s, Jamaica has suffered from an anaemic growth rate of less than one per cent per annum. This despite many prescriptions and attempts by various governments, and promises by politicians, as to what needs to be done for growth to happen.

Once again we are in the season where many prescriptions will be made, and many discussions will take place on this elusive growth and how to achieve it. Once again there will be many recommendations, from both sides, that government should increase spending in order to boost growth in the economy. Much of this has been done in the past but really to no avail because we have not managed to achieve the elusive growth despite billions of taxpayers' money being spent

One reality that we must start to confront is that sustainable growth cannot be done by the public sector. In the past we have become used to a situation where we expect that government can drive sustainable growth. But that shows a lack of understanding of how to achieve sustainable growth.

Sure, government can put projects in place that can create a stimulus for growth, as most governments will do when a country is in recession -- as espoused by economist Maynard Keynes. But real sustainable growth comes from private sector development, especially when there is vibrant SME activity.

This is a significant philosophical problem we have had and in many respects continue to have. And this has guided policy in the wrong direction. So instead of encouraging competition and SME development, the policies implemented by various governments have caused greater public sector involvement, which effectively kills a competitive environment.

Gridlock

So we have created a bureaucratic structure to involve government in every aspect of business and personal life. And if that is not enough, we have created gridlock in the government processes by implementing a procurement process and culture that assumes that everyone is guilty until proven innocent -- which is in many respects perpetuated by a "gossip" culture.

The result is that businesses, and particularly SMEs, become inefficient. Bureaucracy is one of the major inhibitors to doing business in Jamaica, as reported by the Doing Business report for many years.

Also, because of the welfare politics that we have practised for as long as I can remember, we have also created an unproductive labour force. The result is that labour productivity has consistently declined in Jamaica since the 1970s.

It is this practice by our political system that has in my view resulted in the persistent poverty of our labour force as, instead of teaching people to fish, we continued to give them a fish. The irony is that our ability to give the fish has got less and less -- to the point where the state is not capable of doing so anymore. The result is a significant part of our labour force finds it difficult to fend for themselves in any meaningful way.

So the biggest risk we face to economic growth and development today is the state of our labour force. Even if the economy grows 100 per cent per annum, because many in the labour force are not equipped to be high-value producers and earners, they will not benefit.

Organisations like HEART must have a national mandate to retrain our labour force with much needed vocational skills for a successful logistics environment, for example. If we fail to retain the labour force, then we will only have growth without any real social development.

Fiscal policy has never really been engaged in facilitating a more friendly business environment, but rather has been primarily focused on raising revenues to feed the voracious appetite of government welfare programmes. The problem with this is that what we have been doing is transferring, through fiscal policy, productive funds to unproductive uses.

In fact since 2004, of all the tax measures put in place, only one has achieved the revenue targets. This has served to cause inflation because the fiscal policy effectively reduces productivity.

IMF programme

So far this year it seems as if the tax measures will be met. I am hopeful that they will be, and I remain optimistic about the positive changes from the economic and fiscal programme. I say this because the IMF programme we are under represents the first time I am aware that we have sought to tackle the legislative issues that have hampered a competitive business environment. And it is the first time I can remember where we are seeing all the macroeconomic indicators trending in the right direction.

One question though is, why have we not seen the exchange rate stop moving, even though the balance of payments is improving? The reason for that is because even though the legislative and fiscal changes made are positive, the fact is that some fundamental structural issues exist which we have not dealt with as yet. Because of this there is still a strain on productivity issues, as evidenced by falling exports.

The next step therefore must be to make the necessary structural shifts that will complement the legislative and fiscal reform process. That process must continue, but is not sufficient for growth.

In this regard we must address the issue of public sector transformation, not just from the point of view of the wage bill, but more importantly on how we can make bureaucracy more productive and supportive of businesses.

In other words, how do we change the culture?

We must also ensure that fiscal policy is not just geared towards getting more revenue for government, but rather look at the bigger picture -- of facilitating a better business environment to encourage more economic activity and to lead to a lower tax rate with increased revenues.

Until we fix these structural issues, growth will remain elusive to us, and we will forever be surviving with an average of one per cent growth.

This takes collaboration between the private and public sector, which I must say has improved significantly and is moving in the right direction -- but much more needs to be done.

Monday, August 10, 2015

Time for economic independence

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ON August 6, 1962, Jamaica gained political independence, and many people watched the Jamaican flag raised while the Union Jack was lowered for the last time. This symbolised Jamaica's new-found political independence and was indeed cause for celebration.

Over the 53 years since then, Jamaica has achieved a great deal and, personally, I have seen much development in infrastructure and other areas (although I wasn't around in 1962).

However, one thing that has eluded us is economic independence.

So although we were given the right to govern ourselves, we have never truly experienced what it is really like to be a prosperous country. And so we have changed from being told how to manage our economic affairs by our colonial masters, to now being told how to do so by the holders of our debt stock.

This is similar to a young man attaining adulthood, but still having to live under his parents' roof and abide by their rules, simply because he wasted his opportunities at school.

In my view, however, today we have a great opportunity to change that path of dependence and move towards economic independence. It has taken us 53 years to get here, but I think the opportunity exists now more than any other that I have been conscious of.

And I say this because the economic and fiscal programme we are pursuing allows us to change our fortunes.

The macroeconomic indicators are all trending in the right direction, and confidence -- both local and international -- is high. In addition, all of this is happening within the context of a recovering global economy and greater opportunities for Jamaica. Importantly, for the first time since 2004 we have recorded a surplus on our current account balance.

On the other hand, we also have the grand opportunity to once again snatch defeat from the jaws of victory, as we have done so many times in our past -- which is why we are involved in our 13th IMF agreement.

Economic stagnation

We are at a point where we can either do the right things to make the economy grow, or we can watch the economy stagnate. Stagnation of course means continuing economic dependence, and I don't think there is anyone who wants that to happen.

In order for us to realise the growth needed to lead us to economic independence, we must do certain things -- especially leading up to a constitutionally due election. That will require focused and strong leadership.

Both the prime minister and the minister of finance have stated their commitment to the economic programme.

The irony is that by making the right choices we can also improve the living conditions of most Jamaicans. I say most, as there are some people who will no longer benefit from being connected -- because the market will distribute rewards instead of connections. This process has already started with the legislative and fiscal reforms we have already undertaken, and so I expect it will continue.

The prime objective of any government must be to improve the lives of all its citizens. In order to do so, however, we must establish the framework for proper governance, finances, and behaviour -- just as is done in an organisation.

Here are a few things that must happen:

First, the government must have policies that facilitate greater opportunity and growth for both individuals and businesses. Fiscal policy, especially, must be geared towards that. In many respects fiscal policy in Jamaica still has the objective of revenue collection rather than economic facilitation. There is too much emphasis on penalising businesses and people for the slightest of errors, with no attempt being made to expedite their progress.

Secondly, if we are to move this country forward (even with the best fiscal policies) we must ensure that there is law, order, and discipline. We cannot continue with the mantra of "Jamaica No Problem", which everyone interprets as "Do whatever you want". So road discipline and respect for the peace and quiet of others must be at the top of the list.

The third thing in support of a disciplined society is that any progressive society must have a properly functioning justice system, from enforcement by the security forces all the way to the court system. Without enforcement, discipline does not work as justice delayed is justice denied.

Drought of action

But before we can see any serious improvement on the fiscal and competitive sides, the culture of the public sector must be transformed to one of efficiency. This is by far the biggest complaint in doing business. This has been on the table for far too long without action, and the irony is that unless we address this, then no meaningful economic development will come any time soon. This must include accountability for inaction, such as that which has led to the effects of another drought.

Leadership is of course going to be critical. Leadership will have to do the right thing for the country irrespective of the opposition or the political expediency. The country is crying out for leadership at all levels, and without it we all will continue to suffer.

All these factors are related and must be done together if we are to achieve real economic independence. Importantly, we must change the way we think and stop looking at short-term objectives while sacrificing the long-term benefits. Only then will we be truly on a path to sustainable development and prosperity.

The question is, are we committed to doing what is necessary and right to improve the long-term prospects of the Jamaican people? This is not just a responsibility of government, but for all of us to think about after 53 years of trying.

Friday, July 24, 2015

What is the correct primary surplus target?

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THE primary surplus on the fiscal accounts can be defined as what is left to service debt after the government considers its revenues and expenditure on running the country. So wages, social programmes spending, and general spending on maintaining the country is taken out of revenues, and what is left is called the primary surplus.

This has been the topic of debate over the last week after five US lawmakers wrote to President Obama and asked him to lobby the IMF to ease up on the primary surplus requirement of 7.5 per cent of GDP. The purpose of lowering the target from 7.5 per cent to around 6.5 per cent would have the impact of allowing for more expenditure in the economy, which implies that there would be more money available for programmes, capital expenditure, and wages. The argument, of course, is that it would help to cushion some of the hardships being experienced by many Jamaicans.

Some people have suggested that lowering the primary surplus requirement from 7.5 per cent to around 6.5 per cent of GDP would also result in greater growth. They have pointed out that Jamaica has the largest primary surplus requirement globally, and that even Greece is not required to run such a large primary surplus, which effectively reduces the amount of government spending in the economy.

But what is the truth about the primary surplus and its effect on growth, and consequently reducing the hardship being experienced by many? Will it also allow the Government to provide greater wage increases, as some have argued? And more importantly, what is the best solution to the primary surplus that will ensure sustainable growth and development? The most important consideration is that of sustainable growth and development, and not just to think about short-term impact solely.

Letter to Obama

Last week, I was on a radio programme discussing the primary surplus level and if there was any merit in the letter sent to Obama by the legislators. The point I made is that even if the primary surplus is reduced from 7.5 per cent to zero per cent of GDP, this by itself does not guarantee growth, and, in fact, in the past we have run primary surpluses which are much lower than 7.5 per cent, and with much higher fiscal deficits. After doing that for many years we still have not seen sustainable growth rates, and since the 1960s the only respectable levels of growth we have seen occured from 1986 to 1990.

So between 1972 and 2014 (42 years), we have seen only four years of any sustained growth above say four per cent. And over those four years this was influenced primarily by a debt to GDP that climbed to 212 per cent in 1984. There is therefore no evidence that allowing greater funds for government expenditure will guarantee any sustainable levels of growth, and in fact it has worked against us as we have funded the increased government spending through debt, which has put us where we are today.

Even if we were to reduce the primary surplus requirement today, it would mean that we would have to do so either by:

1) increasing tax revenues (through compliance measures or increased economic activity). In other words, not really decrease the absolute primary surplus amount but increase the fiscal revenues; or

2) increasing debt.

Option 2 is certainly not desirable, as it would mean a reversal of what we have achieved so far and would result in a longer period of adjustment and potential hardships.

Option 1 is therefore the desirable one, and is where we need to focus.

Increasing tax revenue through compliance measures is the preferred option, especially as we see that the Greek problem is significantly caused by a low level of tax compliance; which is why what they are doing now will not work until they address the tax compliance problem. This is something that the TAJ has been working on. But the problem is that the tax policy has been more focused on targeting already compliant taxpayers and asking them to pay more -- not going after those who are not in the tax net. That policy has only served to discourage capital and new investments, which in effect has resulted in low growth levels.

The focus on squeezing more and more out of investors that are already tax-compliant ends up discouraging capital investments and causing growth stagnation.

This makes revenue from increased economic activity difficult. We have seen that every tax package introduced since 2004, with the exception of one, has not achieved the targeted revenues. The reason is simply because policy is geared at increasing revenues from those who already pay taxes, rather than expanding the net and encouraging capital investments. The result is a largely service economy with capital outflows greater than inflows over the last 42 years.

Lack of water hitting GDP

Another example of the lack of accountability that has caused loss of GDP growth is the management of the water situation by the NWC. Everyone knew from last year that the drought would be worse this year, and even with that knowledge the NWC failed to plan to address the situation. The result is that this year the drought may cost us about one per cent of GDP, as it did last year.

Therefore increasing fiscal expenditure by reducing the primary surplus requirement can actually cause us to reverse our gains if we do not change the way we look at policy, how we spend, and accountability.

There is an argument for increasing government expenditure to provide short-term stimulus, and therefore one could argue for a relaxation of the primary surplus target. But this must be done in a controlled environment and with the understanding that sustained growth will only come through increasing productivity and changing the way we look at policy. In fact, changing the attitude to capital (with policy), public sector accountability, and value for money fiscal spending will all have a greater impact on growth, even without changing the primary surplus percentage.

At this time of the programme, however, there is an argument for relaxing the primary surplus percentage as this would provide the short-term stimulus needed to drive economic activity. The impact of this, however, will have less effect than if it had been built in at the start of the programme, as it means pulling activity up from a lower level than it was before.

Friday, June 26, 2015

Productivity at the centre of economic and social success

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AFTER twelve previous IMF agreements, Jamaica is once again at a crossroads. We are once again at a place where we are having a debate about how much pain is being inflicted by the agreement, with some saying that we must stay on the path of fiscal reform and others saying we must renegotiate the agreement and allow for more fiscal space for greater expenditure. Allowing for more fiscal space is of course code for a higher fiscal deficit and an increased debt to GDP ratio.

My own view is that we have been here before. In fact, since the 1970s all we have done is to postpone prudent fiscal and economic management, so that we can play the populist game and feed the welfare addiction of our political process. By doing so, we have changed the attitude of the people from one of independence to one of being hooked on welfare through government spending -- thereby creating a political culture where the supporters of the party in power get all the benefits through their party's control of the fiscal resources.

Neo-colonial dependency

In fact, our political and social arrangements have moved us from the hopefulness of independence in 1962, to a culture of dependence on government, and the government's own dependence on foreign governments and agencies. Our irresponsible actions have moved us into a neo-colonial dependency, where our constitution is merely an illusion of independence.

All of this is because we have failed to address the root of our economic and social issues -- the continuing decline in labour productivity since around 1972 (there was a brief period of marginal improvement in the 1980s). As a result we have sought to improve our standard of living by either "begging" (through grants) or borrowing. We have never really paid back our debt but have just transferred our debt from one creditor to the next. By doing so we have created one big Ponzi scheme, where what we have done is rely on geometrically expanding those who will lend us money to pay back those we borrowed from before.

This trend is unsustainable, as we are now finding out, and we have come full circle -- borrowing in the 1970s from multilaterals, then from the capital markets, and now back to the multilaterals. Throughout this whole process we have never controlled our own economic destiny, but have always been marching to the orders of foreign creditors.

Change needed

The question we must now ask ourselves is, do we want to continue this trend -- thereby mortgaging the lives of our children the way we have done with our own lives? If the answer is yes, then we can continue to ignore the issues of productivity and needed behavioural change. If the answer is no, then we must do what is necessary to change our behaviour.

Whether it is your own personal life, a company, or a country, we can only make changes to our financial outturn by changing our behaviour patterns. This is something that as a country we have failed to do, just like many companies and individuals. We cannot change a company's fortune by working diligently at expanding the operations if the business model is no longer viable. And Jamaica's business model needs change.

This is the reasoning behind the fiscal and legislative reforms under the current economic programme, and why I personally an hopeful that it will work this time. Because in the past there has been fiscal and economic reform without legislative reform. This is the first time we are seeking to change economic and social behaviour through legislation such as the Insolvency Act, Tax Harmonisation Act, Fiscal Rule, and other criminal legislation such as DNA and Plea Bargain legislation.

This will ensure that as we apply fiscal reforms to bring about more responsible financial management, we will be ensuring behavioural change for greater competitiveness. If done properly, this will have the effect of increasing productivity for labour and capital, and will result in improving our external accounts, which is at the heart of our problems.

This adjustment is not going to be easy, primarily because we have delayed it for so long and built up a lot of "adjustment pressures". But if not done, then it is gong to cause much greater dislocation in the very near future. But the adjustment is not restricted to labour and capital, as government bureaucracy also needs to make the adjustment in how they think.

I refer specifically to government's addiction to taxes, and its current struggle to change its addiction habit. This is seen in the way taxes are introduced, which focuses on earning fiscal revenue rather than encouraging private sector and economic expansion. So, we have seen, and continue to see, new tax policy that is devoid of the link between economic activity and fiscal expansion, rather than focusing on fiscal expansion at the expense of economic activity. This type of behaviour will result in continuing the downward spiral and cause the sacrifices already made to be in vain.

We must remember that we live in a global village and capital has no obligation to one territory.

So while we ask labour and capital to change their behaviour, the change must also take place in policy. To the credit of the policy makers though, I have found that this attitude is changing and they have opened the door of dialogue to a greater degree than I have ever seen before, and this dialogue is taking place not just at the level of the policy makers but the executors also.

This needed change, however, is not only at the policy level but in the way we socially interact. So things like indiscipline on the roads and persistent night noise have deleterious effects on productivity. As an example, if we had proper order and control of crime, people would find it more palatable to use public transportation, or ride bicycles, which would cut into the more than US$2 billion spent on oil each year, and increase the spending power of labour to improve their standard of living. Or if we were to dispose of our garbage properly it would improve our health environment and reduce the money we spend on health care.

This is a conversation that we need to continue, as anything we do that does not include increasing labour and capital productivity (Total Productivity Factor) will only cause pain without benefit.

Friday, June 05, 2015

Public sector wages — what are the real options?

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ONCE again the public sector wage negotiation is the main topic of the day. This was also the case in 2004, when the first round of wage freezes was agreed. Then, just like today, I didn't see a public sector wage freeze as a long-term solution. In fact, the 2004 agreement never saw it as that either, as it proposed actions that included retraining public sector workers and preparing them to transition, voluntarily, to start their own businesses or seek employment in the private sector.

So what we are seeing today is not a new problem. It is just worse because we have delayed solving the underlying problems. And even if we were to get another wage freeze, or lay off workers, it still would not solve the underlying problem by itself and we would be back in this same situation within another two to three years.

What is really needed is proper public sector reform that results in performance related-pay measurements and labour market reform. It is our failure to do this, and just talk, that has led to where we are today. And if we do not carry out this reform effectively, we will still find ourselves back where we are today, because at the heart of the problem is the matter of productivity.

The approach to public sector reform in 2010 (through the centralised PSTU at the OPM) was never going to work. When I indicated that in 2010 I was told that I didn't know what I was talking about. The approach today is somewhat better, based on what I have seen, but the centralised approach is still too bureaucratic and will not have any short-term impact. The best solution is to decentralise the reform process. But that is for another article, as I want to look at the immediate options to resolve the current impasse.

Emotional responses

The response from many on the public sector wage dispute is emotional. I have heard many people say that the government should pay the public sector workers significant increases, or more than 25 per cent. When I ask them to put forward their immediate solution, bearing in mind that new taxes won't work and debt is not possible, they speak to medium-term solutions such as tax reform, public sector reform, and reducing wasteful expenditure.

One person, when pressed, even went as far as to say that people over 55 should be forced to retire and the other workers should be given an increase of at least 25 per cent. In other words, lay off other workers as long as it does not affect me. But there's no mention of keeping the most productive, or of paying based on performance.

What these responses show is that they are not supported by any thought-out solutions. One man I heard on the radio, when asked for a solution, said that the government can raise taxes -- which betrays a lack of understanding of how the economy works. That solution would cause even further hardship, not only on businesses, and SMEs in particular, but for the same public sector workers.

Let us be clear that I empathise with public sector workers, and in particular the police, nurses, and teachers. Even though these groups have demonstrated their willingness to go the extra mile, in general, the fact is that both productive and non-productive people have been grouped together, in relation to the negotiations. The result is that you apply the same compensation amounts to people with varying degrees of productivity, and the productivity level as a whole will fall.

So, because of our failure to properly address public sector reform, we are in the same place, or worse, than we were 11 years ago when the first wage freeze agreement was inked. Resolving this, however, is a longer-term solution and the chickens have now come home to roost.

The fact is that the options available to the government today are very limited. There are only two options (i) accept the government's offer, within its ability to pay, or (ii) as Minister Dalley said, if the demands are met then it means 10,000 to 15,000 jobs will be lost. Or else there will be an inability to pay.

The private sector seems to be profitable today, and the truth is that they are improving, but they are still far from where they were pre-recession. This success, however, came after much pain in the private sector, as they suffered from two debt swaps and also lost a significant amount of jobs, when the unemployment rate went close to 20 per cent. Many businesses also closed, and even today many are struggling. Every week, I get many requests from people seeking employment -- even for a job way below their training.

So what has happened in the private sector is that the market has adjusted, and as a result organisations are becoming more profitable. This is just as it happened in the US market, where job losses and business closures were rampant, and after a few years of pain the market is recovering.

This adjustment never happened in the public sector, however, resulting in the difficult situation we are in today. The fact, however, is that sooner or later the market will demand that the adjustment either be made, through public sector reform, or the suffering will continue for a much longer time. And it would have happened earlier had we not gone out and borrowed money to cover up for our inefficiencies.

Just as in 2009 myself and Ralston Hyman said (i) the debt needed to be restructured and (ii) the government would have to turn to the IMF, and we were told that we didn't know what we were saying. Approximately three months later, however, we signed an agreement with the IMF and the debt was restructured. The point being that the way to deal with the fiscal problem must be looked at practically, and not from an emotive position.

So while public sector and policy reform, is necessary for a long-term sustainable solution, the fact is that an immediate solution is necessary. In my view, the best solution for the country now, is for the government's offer to be accepted. I don't subscribe to the selfish view that we should retire the older people so that the younger ones can benefit. I know that people are having a difficult time, but trust me when I say that any significant increase, without the accompanying productivity increase, will only lead to increases in inflation and the depreciation of the exchange rate, and make it even much worse for everyone.

However, while accepting the offer, it is important for both parties to sit down and arrive at a win-win long-term solution for all. This will of course require an improvement of the trust factor between both parties, as the lack of trust for me is the most divisive factor in these negotiations.

Friday, May 15, 2015

Long-term view to solutions necessary

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Recently, I said to someone that one of the challenges we have as a country is that we are too focused on immediate gratification, and not on the long-term effects of our actions. As a consequence we react to what people, or the media say, and throw out our long-term, well-thought-out plan in order to conform with the popular opinion of the moment, or to prevent the public saying anything negative about us.

This is not only a fault with our politics, but in many instances occurs in private companies also. Managers will often listen to the office talk and act based on that, rather than properly investigating and applying an objective process to finding a solution.

So, as I said to the person, it is not the best thing to manage your affairs based on what is being said, but rather manage based on whatever well-thought-out plan and long term objective you have, and ensure that you apply the right principles. You might not be "popular" in the immediate term, but that is only important if you are in a beauty contest. One of the primary responsibilities of being a leader or professional, is to always do what is right even in the face of being unpopular.

Economic climate

At the current time there is much debate about what are the right economic and fiscal policies to pursue, as there is no doubt that the economic climate is difficult for many in the labour force and some businesses. It seems paradoxical that many in the business community, buoyed by the business and consumer confidence numbers, are saying that the programme is going well and they see improvements, expecting a better economy. While there are others, and rightly so, who question the path we are on because it has become very difficult for them. Included amongst them are many well-qualified professionals.

I don't doubt that, as I have seen and heard about such situations. And I empathise with them, as there has been a significant change in the economic environment.

What we must not do, however, is bring about any radical change that will affect the long-term viability of our plan. I have seen many times in the past where at the first sign of criticism we falter and throw out all the accomplishments we have achieved. This is what leads to the view by many that new governments abandon all the good programmes and policies that are in place because of politics.

But, as I said, this is not unique to the country's governance, but also private sector companies which may have the wrong leadership; because I have found that when it comes to success, leadership is first, second, and third.

Great business leaders

And I know what it is like to come under severe criticism by people who either can't see the long-term vision, or those with different agendas. I have also had the experience of working with some great leaders, who have always looked at the bigger picture and don't worry too much about the immediate criticism.

Two such people, whom I worked very closely with on the Air Jamaica divestment, were Dennis Lalor and Don Wehby. I remember during that process that there was severe criticism from many, including comments also that we were securing financial reward for ourselves from the transaction. The irony of it is that none of the directors even received the normal stipend, and in many instances the bills were taken care of by Lalor.

In the face of the criticisms, however, these gentlemen would say to me that we have a job to do and we have to think about the long-term objective. Is it any wonder that both GraceKennedy and ICWI are very successful companies that have been around for a very long time.

I remember also when I was on the board on the Betting, Gaming and Lotteries Commission, and being much younger then I received a very important lesson from the chairman at the time, Gordon Robinson, who said to us that irrespective of what people say out there we will do the right thing -- even if it means that we will eat bun and cheese for the rest of our lives.

The fact is that credibility does not come from being popular. It comes from doing the right thing all the time.

This doesn't mean that as you go along the journey you don't make adjustments. In fact, having the flexibility to make adjustments is very important. Richard Byles always says that the economic programme is like driving to MoBay. You may change your speed or may get a flat along the way and have to fix it, but you should never forget that you are still driving to MoBay.

So we are at a critical juncture of the economic programme, and the change in the economic competitiveness, and reduction in government programmes is taking a toll. And I think we need to make adjustments where necessary but we should not make any decision that will cause us to be thrown off the long-term objectives. Any action that causes that will only lead to even greater hardship, as has happened in this country over the past 40 years.

What it will require is strong and visionary leadership. Leadership that must be able to communicate effectively -- not only what we are doing -- but the long-term objective and path to get there. Leadership that can sell this vision to the country so that they also are fully engaged.

One of the things I have always warned against, which we must not be tempted to do, is to install taxes as a short-term gap for the fiscal accounts while hurting the long-term objectives. I have seen us do that too many times, which ends up causing even greater fiscal challenges.

As citizens we also have a responsibility to engage constructively with the government. Criticism and disagreement is good but it must be done in a constructive and respectful manner, while in the long run doing what's necessary to achieve our objectives.

Friday, May 08, 2015

Public sector wage dilemma

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One of the issues that has to be resolved, as we move forward with our economic programme, is the matter of public sector wages. Over the past three years, the workers have accepted a wage freeze.

Over this period the exchange rate has moved from approximately J$88:US$1 to over J$115:US$1. Also, inflation would have totaled approximately 30 per cent, which means that public sector wages would have been significantly reduced in real terms. What this means is that public sector workers would have seen a decline in living standards. This is not exclusive to the public sector, as private sector workers have not only faced wage freezes, but also job losses.

This sacrifice by the public sector workers has contributed positively to the the fiscal accounts. Over that period we have successfully completed eight quarterly IMF tests and, more importantly, the fiscal deficit balance has been significantly reduced to near balance. This has resulted in lower inflation rates, lower interest rates, increased business confidence, reducing debt to GDP ratio, and significant slowdown in the depreciation of the exchange rate.

Indicators point up

These numbers are significant, because for the first time that I can recall all indicators are moving in the right direction all at the same time. Previously we would have a combination of either (1) stable exchange rate, high inflation, high interest rates, and deteriorating debt to GDP ratio; (2) devaluation, high inflation, lower interest rates, and deteriorating debt to GDP ratio; or (3) all indicators worsening.

Another positive effect of reducing real wages has been the improvement in the balance of payments, as a result of reduced imports, caused by reduced demand.

One can therefore sympathise with the public sector workers, as significant sacrifice has been made resulting in lower living standards. The other challenge that public sector workers would face is that because of a lack of emphasis on performance compensation, persons who add greater value and go the extra mile still get the same compensation as someone in a similar pay grade who is much less productive. In the private sector this productivity is considered in compensation, for example incentive payments.

The March 2015 fiscal quarter shows that although the more important primary surplus percent target has been met, the amount was some $4 billion less than target. The implication being compressed expenditure, especially on infrastructure, in order to meet targets. This also means that in order to meet our targets at this time, the greater reliance is on expenditure management rather than revenues.

This news comes at a time when the public sector is negotiating for a wage increase and is demanding up to 15 per cent each year for the next two fiscal years. At the same time, the Government is correctly advising that this would threaten the fiscal targets and could result in us jeopardising future IMF tests.

The dilemna

The dilemma is: Do the workers have an argument for double digit increases, or is the Government correct in saying that more than 5.0 per cent would jeopardise the future targets? In the past, for example, when faced with pressure from the public sector unions, the Government would provide the increases demanded and then we'd start the whole process all over again, which is why 53 years after independence we are still in an economic quagmire.

My own view when the budget was presented is that an increase of between four and eight per cent was to be expected. This is simply because any amounts above that would jeopardise the fiscal and economic programme. Too high an increase would (i) eliminate any capital expenditure on infrastructure; and/or (ii) cause a lower primary surplus and higher deficit.

It is for this reason that the best option may be for public sector workers to compromise with the Government's position this fiscal year. This is because any increase that causes us to regress in the fiscal accounts will result in only very short-term benefits, but within a year that would be followed by higher inflation, increased debt, and greater devaluation. In very short order purchasing power would quickly be eroded. In fact, I think any misalignment now may cause even greater hardships than before.

This doesn't mean that public sector workers should continue to sacrifice indefinitely, and what I would do, if I were the union, is get a commitment from the Government that accepting the proposed increase in this fiscal year means that certain things will be put in place to ensure growth, and hence improved tax revenues.

One of the things that has resulted in this impasse, as well as the difficulty faced by public sector workers, is the failure of administrations over the years to adequately address public sector transformation. The focus of course is not on job cuts, but rather transforming the public sector into a much more productive unit, which will facilitate private sector productivity. This will of course result in greater revenues for the fiscal accounts. Bear in mind that a part of this also is to ensure that there is greater emphasis on tax compliance by persons outside of the net.

It is clear to me that any sustainable solution to public sector wages, for the benefit of both the workers and the fiscal accounts, can only happen if there is greater public sector productivity and workers are compensated based on their value added, rather than just seniority.

So I will end with what I also said when the first set of wage freezes started (I think in 2007). Wage freezes are not a sustainable solution to the fiscal accounts and will only delay the inevitable and during that time cause unnecessary suffering. If we want to see better circumstances for public sector workers and the fiscal accounts then public sector transformation must happen.

It is our failure to do this that has once again resulted in the public sector workers seeing declining real wages without any permanent solution to the fiscal accounts.

Friday, April 24, 2015

What does economic and social change look like?

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PERHAPS the question I get asked most frequently is about the economy and the prospects for it. One of the things I hate the most is when people engage you on the economy and ask about the prospects, but then don't give you a chance to answer and then go on to curse everyone who is living and dead, about the difficulties in the economy. They then go into the history of our economic mismanagement and then naturally their argument progresses to placing blame on one political party or another. All of this before I have answered the question, which always leads me to wonder why they don't call a talk show to vent rather than ask the question.

Many times, however, people will have doubts about where the economy is going, and whether we are seeing any benefits from the economic programme, as admittedly things are not easy. I will be the first to admit that the past few years, since 2009, have been very challenging for some businesses and individuals.

So when I say to them that I am optimistic about the changes being made and where I see the economy going, they are surprised. Some even go as far as to say that when analysts like us speak that way, we are being spin doctors for the government. However, when we say things are not going well, under both administrations, they cheer you on. It seems they just want to hear bad news all the time. I can only imagine how such an attitude affects one's perspective.

Hope

The truth, however, is that we need to develop the ability to recognise when there is hope and when there is not. That ability helps make a successful entrepreneur, one who might be having a difficult time in their business but can still see the forest and not just the trees.

Not everyone has this ability, but what everyone can do is try to develop an open mind to see other people's reasoning. It is this tolerance of opposing views that enables us to develop our own thoughts.

The question to be answered is: are we making progress under the current economic programme? My view is yes we are, and, as I have said many times before, this time we stand a better chance than under prior IMF programmes.

Why do I think so? Because for the first time we are making necessary legislative changes to accompany the fiscal changes. And, as various analysts have said many times in the past, the only way any fiscal or economic reform can work is if it is accompanied by structural changes. The legislative agenda has provided the opportunity to change the structural environment to create a more competitive economy. So I don't think that anyone would disagree that this programme includes the much needed structural reforms.

There is also no doubt that the economic environment is getting more competitive and more challenging for many businesses and individuals. The reason for this is that as a country we were used to operating in an economy with less competitiveness, with many people and businesses benefiting from contacts and government welfare. When those avenues lessened it inevitably became a more challenging environment.

The role of bodies like the PSOJ is to help with that transition to a more competitive economy, where the playing field is level for all and the bureaucracy and societal conditions do not stand in the way of innovation or economic activity.

Recognising positive change

What we must ensure, however, is that while we acknowledge the difficulties, and the things that still need to be improved, we must also be able to recognise when positive changes are happening and the direction we are moving in. In other words, how do we recognise when an economy is positively transforming even while challenges are there. For example, in the two years after 2008, the US economy was still going through significant challenges, and the instinctive reaction globally was to move to austerity measures as Europe did. But the US administration, however, stuck to its guns, even in the face of opposition, and the end result is that the US economy is now the locomotive of the recovery.

It is also going to be very important for us not to prevent our own development, in the face of the immediate challenges, by deviating from the path we are on. Many times in the past we have embarked on fiscal and economic reform programmes, and at the first sign of difficulties we start running fiscal deficits and restart the process of decline all over again. This is how we have ended up where we are today.

I recognise the difficulties we face but all the indicators are showing me that we are on the right path. These include (i) much lower inflation and interest rates, with the difference between US$ and J$ interest rates much reduced; (ii) reducing balance of payments deficit; (iii) a more stable exchange rate; (iv) near zero fiscal balances; and (v) increasing business and consumer confidence.

But even with this, we must still recognise the challenges we have and must address. These include bureaucracy, crime, and governance. What we must do is address these challenges constructively, deliberately, and together. In other words, let us criticise each other, as this is good for progress, but let us do so rationally and constructively.

So what we must be able to do is understand that any transformation, including economic and social, to a better model, will always cause dislocation. What we must do though is forge ahead with any plan we have properly thought out, and be able to see the long-term outcome while at the same time dealing with the challenges that occur on the way to that desired outcome.

Friday, April 17, 2015

How we think impacts our development

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ONE of the things I encourage my staff to do is feel free to be critical of me as CEO of the Private Sector Organisation of Jamaica (PSOJ), which leads to having an environment where we can all be critical of each other.

We therefore have an open atmosphere where we can all speak to each other about; ideas for growth: what areas we think someone can improve in and, importantly, to recognise achievements. This creates an atmosphere where everyone feels comfortable about contributing to the progress of the organisation.

I see the same philosophy with many private sector leaders I have worked with -- such as Dennis Lalor and Don Wehby -- who always ask for feedback before making any comments whenever we discuss any issue. I find that the present PSOJ officers, led by William Mahfood, are also always interested in feedback. This philosophy is what makes for their own success in many respects, as the ability to listen, especially to suggestions for improvement, is probably one of the most important traits you will see in any successful leader.

In fact, I have found that many persons who have failed have an inability to constructively accept criticism. In other words, they usually end up "shooting down" the messenger and not listening to the message. This, of course, results in them only attracting "yes men" -- when nothing could be more damaging to that person's development.

While that criticism may come across as harsh, it may be necessary given the circumstances. I we want to develop, we have to learn to listen to the criticism, rather than just the form in which it is delivered. That is not to say that criticism must not be respectful and constructive, but even that is sometimes essential for overall development.

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One instance I can think of when harsh criticism is necessary is when a group of us are cycling. There may be a group of 20 to 30 people all moving at upwards of 25 mph and just 6 to 12 inches behind each other's wheel. In those circumstances, we can understand when we do something wrong and the person behind us tells us two "choice words". While we might tell them one back, we realise that any error can cause serious physical damage. In such a situation no one is offended by what they are told.

Party colours

This inability to accept constructive criticism is one of the things that has held back the development of our country. The emails I receive about governance issues are always the same, no matter which political party is in power. What is amazing is that the same person can have two very different thought processes on the same issue depending solely on which party is in power. This is one of the primary roadblocks to our own development as a people and country.

It is strange that the politicians themselves are much more receptive to the constructive criticism than the people who follow them. And it is not that the politicians tell them to think that way. In fact, it is much easier and acceptable for me to sit down with the politicians and give them my own views -- which they accept -- than to have a discussion with some other people who are supposedly intelligent thinkers.

This says a lot about our level of development as a people.

I must admit, however, that there has been much improvement since the 1970s and 1980s, for example, when we used to kill each other over our individual political views. The irony is that many of those who would want to go back to that way of thinking do not understand how much people suffered during those times, as they were either not born yet or were not old enough. I was young during the 1970s, but I can remember those days very well, and so people like me will appreciate the need for the constructive dialogue that many have sacrificed for.

Vision 2030

If we are to develop as a country and to achieve the elements espoused in Vision 2030, then we can't focus only on infrastructural and economic development, but we must also change how we think and communicate with each other.

The economic reform programme is an example. My own view is that the economic agenda, as outlined by Minister Phillips, is certainly the direction that we want to move in. Fiscal and legislative reform is essential and is a necessary ingredient to form the basis of any economic and social development. It might not be sufficient, but I don't think that there can be any argument about the need for these reforms.

There is also a need for public sector transformation, skills training, and focusing on certain strategic investment decisions, such as the Agro Parks, KCT, highway development etc.

But even though all agree that there is a need for public sector transformation and efficiency, there is disagreement when initiatives under the reform are being undertaken, without any rational explanation for the disagreement or any alternative being offered. So the question is, what is the difference to someone agreeing that greater efficiency and better management is needed in the public sector and recognising that same need for management around ChickV and the Riverton Fire -- which both cost the country hundreds of millions of dollars?

The short answer is that the only difference is our inability to accept criticism constructively, which is really what places us at a disadvantage.

On the other hand, there are some of us who will also criticise any policy put in by a government that we do not support -- even though we would support it if put in place by a government that we support. And this disease seems to be contagious as it is also affecting the US now.

If we want to move forward and develop as a country, we must be able to accept good and bad criticisms, and look at the message not the messenger.