Friday, May 26, 2017

Fake flooding

Just over a week ago, sections of the island suffered massive infrastructure and other damage as a result of torrential rains which lasted for several days. It is estimated that the direct damage caused by the floods could be in the region of $700 million, and if one were to assume GDP conservatively at $1.3 trillion, then we could easily add lost productivity that would approximate a further $1.7 billion.

This means that the cost of the rains could be upwards of $2.5 billion, and some suggest it could be as high as $4 billion.

Of course, this does not take into account the negative social impact which will result from people having to recover from tremendous personal losses.

The devastating effect of the rains, however, is no real surprise, as for many years now we have been neglecting our capital infrastructure. This neglect has been somewhat expedient, as our attempts to recover from our deep economic woes left us with little option but to reduce capital expenditure, among other things, in order to balance our fiscal accounts.

During this period, some of us warned that by neglecting our infrastructure, we were running two grave risks:
(1) incurring serious damage - as we have just witnessed, and
(2) scaring off potential investors.

But although the neglect of shoring up our infrastructure is the primary cause of the recent flood damage, the irony is that the real reason does not lie in spending copious financial resources. The real reason is the culture of indiscipline that we have developed in this country — a culture which has resulted from a serious lack of leadership by those in authority, and the fact that we fail to implement accrual accounting in our fiscal accounts.

This culture of indiscipline is reflected in many areas, but the following stand out: the proliferation of informal settlements (where an amazing 40 per cent of Jamaicans are squatting); lack of proper zoning plans and approvals for developments; and practices like incorrect disposal of solid waste, which ends up blocking our drains and gullies. As a consequence, flood rains invade homes and businesses as the water has nowhere else to go.

All of these practices are attributable to successive administrations over the past 40-plus years, and no one can take full credit for it, but all who have been in government (especially at the local government level) must accept responsibility.

Both Prime Minister Holness and Dr Phillips have recognised this, and have said so publicly, with Dr Phillips stating quite bluntly that all those who have been in government must accept responsibility.
Holness has also said that illegal construction on river banks must stop, and I think he should go further and say that illegal settlements must also stop.

The Government must now give a timeline for remedying this situation of poor local government control over planning and zoning, what measures will be put in place to prevent illegal settlements, and how our population of squatters will be properly housed.

Apart from the severe threats to the infrastructure, it is inhuman to have a society where so many people must resort to squatting. What this speaks to is a failure of governance. But I guess this is what people vote for, and so there is some personal responsibility; just as the Trump supporters must now face the consequence of lost health care and other benefits.

Although there must be consequences for people who continue to live in illegal settlements, or to make a living from illegal vending, we also have to drive policy that creates alternatives. So if we are going to tell people not to vend or squat illegally, then we must also ensure that there are properly maintained markets (again a local government failure) and available housing solutions.

So we can't, for example, proclaim with great fanfare the construction of new hotel rooms without announcing accommodation for workers, as is the case in Montego Bay.

Funds from the NHT should be used to provide housing solutions and help to grow the economy, instead of being used to support the fiscal accounts.

We also must pass appropriate legislation and regulations for the revised anti-litter law, which will see a significant increase in fines for people who illegally dispose of their solid waste. If citizens insist on this practice, then they must pay heavily for it.

The second point made about accrual accounting may not seem like much to most readers, but as an accountant, I believe that failure to do this leads us to have a false sense that our financial house and assets are in order.

Accrual accounting addresses this by making provisions such as depreciation, so that when it comes time to replace the asset, you would have provided for the full cost after its useful life. So if you buy a new car today for $5 million, and it has a useful life of five years, you would provide in your accounts for it by putting aside $1 million per year for five years, thus ensuring that at the end of the five years you have the $5 million to replace the asset. This, of course, is a simple example, as one has to consider inflation, etc.

Contrary to this though, our fiscal accounts are prepared on a cash basis, so at the end of the fiscal year, the fiscal accounts do not consider assets to be replaced or monies owed to suppliers of government.

So one way that we famously balance the budget is by (1) not spending on our infrastructure (spending less capex than budgeted), and (2) not paying vendors when they supply goods or services.

As an illustration, I went to a gas station where there was a sign reminding the staff not to accept Advance cards from the Government.

The result of not using accrual accounting gives us a false sense of security about our finances and capital infrastructure.

So in my view, the recent rains resulted in what I call “fake” flooding, because the flooding is really just a symptom of what over the years has been poor governance, or one could say “fake” leadership, which we now have an opportunity to address based on the utterances of both Holness and Phillips.

Friday, May 12, 2017

Structural limitations on Jamaica's growth potential

The Prime Minister recently spoke to the need for sustainable growth that is equally shared by all, and specifically where the average Jamaican can share in that growth. We can, for example, mention many countries where there has been significant growth over sustained periods, and yet still they suffer from social and developmental challenges.As an example of this, Professor Hilary Beckles spoke to the situation in Trinidad, where for years they have seen high levels of growth and economic activity as a result of oil, but when the oil prices plummeted, the lack of social development was evident. Today Trinidad has a very high murder rate, as well as infrastructure which does not reflect the type of economic growth they have had.

This is no different from what happened in Jamaica after the cushion of the bauxite money left us. What it showed in both cases was that the authorities did not focus on economic and social development. Everyone knows that the best time to prepare for a hurricane is before it comes, not after it strikes. That is what the failure of governance in both these cases has demonstrated.

This type of preparation can only happen if a very deliberate and systematic approach is taken. This is also the type of approach that is needed for growth targets to be met. My impression is that we don't really apply a scientific approach to reaching growth targets, but rather we just “do some things” and hope that the target will be achieved.

Because of this we haven't really taken a serious approach to understanding and attempting to remove the structural deficiencies that prevent growth from happening. In fact, growth imperatives take second place to any political expediency, and as a result if we “buck up” on growth we are quite happy, but I can't honestly say that any deliberate and urgent approach is taken toward economic and social development, as it is much more than just growth.

For example, in December 2014 I wrote an article titled “Great need to transform Jamaica's labour force”. The article ended by saying that real sustainable growth “is only possible if we transform our labour force into a highly productive one, which means taking the necessary steps to do so.”

To date, however, not much has been done in terms of implementation. As a result of this, last week an article appeared in the newspaper, lamenting the fact that employers are finding it difficult to find sufficiently qualified workers. We also know that the BPO sector is limited to some extent because of the inability to find suitably qualified labour.

If I could see the need for transforming the labour market for growth from 2014, then I cannot for the life of me understand why our policy makers have not been able to do what is necessary to ensure that we would have met our growth requirements in 2017.

Or is it that although we projected growth, we really didn't believe that it would happen?

If unemployment is such a significant problem, why have we taken so long to take the necessary steps to train people for the jobs the economy will need, and by doing so create higher value employment and improve their earning power?

This shows that we don't really have an unemployment problem. What we have is a problem of the failure of leadership, as regards policy and execution, to create opportunities for people. Unemployment is merely a problem of that leadership failure.

The other challenge with our labour force is that our labour laws create lower levels of productivity. So the biggest problem that private sector companies complain to me about is the Industrial Disputes Tribunal (IDT).

This for me is a significant contributor to preventing increased productivity, because company owners have said that even if they have evidence of theft by employees, the company will still lose the case when they go in front of the IDT. The problem with this is that employers will shy away from long-term contract employment, and use technology to replace labour where possible. In the end the labour force suffers.

In addition to the structural problem of our labour force and its attendant legislation, we also underestimate the limiting factor of the indiscipline and general level of lawlessness.

I cannot for the life of me understand why we have not approached this with greater urgency, as major crimes can only thrive in an environment like this.

I also do not think they read the IDB report a few years ago, which stated that traffic congestion is the number one limiting factor of productivity in Latin America and the Caribbean region.

If we were serious about it, why for example have we taken so long to pass the new Road Traffic Act?

The approach to achieve high levels of sustainable growth seems very straightforward to me. It is a matter of going to the Planning Institute of Jamaica, and asking them what it will take to sustainably achieve economic growth of five per cent and above, in addition to addressing the social development issues. The PIOJ has a model that can provide some answers as to what would need to be done.

Once those strategies are identified, then what we should do is put initiatives in place to focus on the high-impact areas that will give us the greatest growth impetus. This may mean new legislation or some displacement of people and structures, but if we plan properly we can help people to transition to higher-value employment, and put in place much more efficient structures and institutions.

If this had been done in 2014, or before, we would not now be talking about the 12 per cent unemployment and high crime levels, while at the same time having employers report that they are having a difficulty finding suitably skilled and qualified workers.

Friday, May 05, 2017

Jamaica's poverty of the mind

Last week, members of the private sector met with Dr Alvaro Uribe, former president of Colombia, who was invited to Jamaica by the Economic Growth Council (EGC). At the meeting he said two things which resonated with everyone present, and which indicate the significant headwinds that have challenged our development.

Firstly he said that, if a Government does not create wealth, then the only thing they can distribute is poverty. This we are only too familiar with, as for the past 40-odd years, Jamaica has not created any wealth, even though our politicians have continuously sought to redistribute income from the most productive to the least productive. These failed “welfare” policies have resulted in fiscal deficits, low growth, trade deficits, devaluing currency, high crime, etc. This is the proof that our fiscal policies over the years just have not worked.

Secondly, he said he once had a conversation with Hugo Chavez, who told him that Venezuela does not need the private sector as they have oil. Well, we see where they are today, and to a much lesser extent this attitude against capital has also been a challenge for Jamaica.

Because of the desire to look like Robin Hood, many of our political decisions and policies have centred on “taxing the big man to give the small man a break”. What we have not realised, until recently, is that policies built on that principle will only cause everyone to become a small man. In other words, such policies will lead to impoverishment for all of us. This is what has happened to Venezuela, and the main reason for that is that we have not yet found any more efficient ways of creating value than the market forces.

In addition to those comments, we heard the minister of security say recently that an amazing 40 per cent of Jamaicans are squatting, and a recent editorial dealt with the high percentage of students who cannot cope with secondary or tertiary-level education because of poor grounding at the primary and early childhood levels.

Last week when I wrote about the lack of structure and degradation of the Hip Strip in MoBay, one person sent me an email to say that I am fighting against the small man who is trying to make a living. Obviously this person is caught up in a mentality of impoverishment, as he cannot understand that the way to “prosperity” is not to keep people at almost subsistence levels of living, but to expand the opportunities and teach everyone to take advantage of them.

The Prime Minister hit the nail on the head when he recently spoke to the fact that economic growth without social development is undesirable. And Hilary Beckles agreed by saying that this is what has happened in Trinidad, because while they were seeing high levels of growth, they failed to develop the social infrastructure, and so many were left behind with very low moral standards on top of it. Sounds like how we have developed in Jamaica, doesn't it?

As I reflected on these things, I compared it to conversations I have had with many successful business leaders, such as Hon Dennis Lalor, Hon Butch Stewart, Don Wehby, and Butch Hendrickson. These are people I enjoy speaking to and working with, as when you speak with them you get a different perspective on development, than for example the email I received about fighting against the small man on the Hip Strip.

And I would extend that even to some politicians, who suffer from the same “poverty of the mind” as the person who sent me the email.

This “poverty of the mind” is in fact what is holding back Jamaica. I have always maintained that poverty is more defined by how we think than the physical assets we own. When you listen to the stories of many of the very successful business people in Jamaica today, who were by societal standards economically poor, what you pick up is that even though initially they did not have material wealth, their minds were very fertile and prosperous, and that is what allowed them to become successful.

The irony also is that many people who say the rich should be taxed to help the poor man don't realise the difficulties they had to overcome to reach where they are. One trait I find among all the moguls mentioned above is that they never thought they were entitled to anything they didn't work for.

A serious problem that we face in Jamaica is a culture of entitlement that is ingrained in some of us. I saw a woman with nine children on the TV news one night, saying that she is suffering and the Government has done nothing to help her with her nine children.

Or we can even look at middle-class people who are in jobs and think that the employer owes them a favour, and so if they do what they are employed to do they must be compensated, or feel an entitlement to extend a long holiday weekend. And if the employer should dare to dismiss them, then they simply take the company to the IDT, where most times they will win.

Of course, this culture of entitlement receives strong support from political platforms, and is supported through legislation such as our labour laws which encourage unproductive behaviour and informal employment.

Over the years many have been mystified by the fact that despite Jamaica's obvious competitive advantages, such as in music, sports, bauxite, tourism, etc, we are still unable to develop as a country. Blessed with all these natural advantages, why are we still a poor country? Little Antigua boasts GDP per capita of US$18,000, while a much larger, resource-rich country like Jamaica is struggling at a mere US$5,000.

Or we wonder why indiscipline runs rampant in Jamaica, along with crumbling infrastructure and high crime. Why are we able to produce some of the best musical artistes in the world and the best athletes globally, yet with all of that we are still poor and struggling with economic and social challenges?

The problem is that we suffer from a poverty of the mind, which has been fed by the direction of some of our leaders over the years. The comment by the PM is to me a signal of this recognition, and must now be backed up by action.

If we are to move forward - one example being the development of the Hip Strip - it can only happen if we change our mindset, and stop thinking about poverty as our priority (such as what we can do for the poor) and start thinking about wealth creation (such as how we can make everyone better).