Friday, October 13, 2017

Establishing a foundation for development

Over the past couple of weeks traffic congestion has been unbearable on the roads, and has revealed a lack of proper governance.
The recent traffic pile-ups have been caused, in my view, by:

(1) poor road work in the past, which has led to “craters” on the roads as soon as it rains;

(2) indiscipline on the roads, primarily from taxi and bus operators who think they can do whatever they like, and the authorities do nothing to address it; and

(3) the National Water Commission working on the roads all over the Corporate Area, causing traffic congestion, with no apparent thought to coordinating the activities so that they don't significantly affect traffic flow. And then when they are finished, not repaving the roads quickly.

In 2015, the Inter-American Development Bank started a dialogue on the cost of traffic congestion in Latin America, and concluded in the report that it was the number one factor inhibiting productivity in Latin America and the Caribbean.

This is not difficult to understand, as, if we assume that people on average spend even an additional one hour on the road every day because of traffic and multiply that by a working labour force of one million, we lose one million productive hours each work day. Assume 200 work days for the year conservatively, and we get 200 million productive hours lost per year to traffic congestion.

A simple computation (assuming GDP of $1.7 trillion, one million labour force, 200 days per year and one-hour workday) shows that traffic congestion, causing a one-hour loss per day, is costing us around $200 billion in lost GDP opportunity per year.

Wouldn't it be better to spend $10 billion to $20 billion per year on an efficient public transportation system, including a safe and efficient school bus system to prevent daily pick-ups, which adds to the $200-billion annual loss?

But traffic congestion is just one element of a weak foundation we have developed.

The recently released Global Competitiveness Report (GCR) 2017/18 shows that Jamaica still grapples with the issues of crime and theft, inefficient government bureaucracy, tax rates and corruption, as major inhibitors to doing business in Jamaica. I have omitted access to financing, which features in the top four this year, because the historical data show that these four issues have been consistently the main inhibitors.

Between 2014/15 and 2017/18, the GCR shows that these four factors above accounted for an average of 51.85 per cent of the challenges to doing business in Jamaica. In 2014/15 they were at 55.40 per cent; 2015/16, 54.20 per cent; 2016/17, 50.80 per cent, and 2017/18, 47.00 per cent.

The numbers show that they have been decreasing, but still remain around 50 per cent of the challenges to doing business in the country. No doubt there have been some improvements in the bureaucracy, which has caused the change, as evidenced by the fact that inefficient bureaucracy now ranks fifth, and in the years 2014/15 to 2016/17, was always in the top two challenges. Inefficient government bureaucracy still remains, however, at a significant 9.20 per cent perception as posing a challenge to doing business.

Among the inefficient bureaucracy is the matter of our regulatory environment, which includes the restrictions we place on the use of capital. Over the years of high government borrowing, legislation was put in place that effectively forced pension funds, and other financial institutions, to place most of their funds in government paper and a large amount also sitting down idly doing nothing.

This has caused us to lock away billions of dollars in capital, which could be working for local entrepreneurs, and which would cause lower interest rates, lower transaction costs, and greater wealth for LOCAL entrepreneurs.

Instead, fiscal policy has sought to lock away the capital (earning very minimal amounts), and has been pushing FOREIGN Direct Investments in preference to LOCAL investments. The fact also is that more local investments mean that more of the profits will stay in Jamaica. The fact also is that if capital was allowed to work, instead of being locked away, then more local people would have access to cheaper capital and our GDP per capita would increase.

So if we were to look at the conservative cost of traffic congestion ($200 billion), the approximate four to six per cent GDP loss from crime and bureaucracy ($85 billion), the capital losses because of uncompetitive tax rates and corruption (no estimate computed but assume conservatively two per cent of GDP - $30 billion), and the opportunity cost of capital locked away because of the regulatory environment, it would seem to me that we could easily get close to another $500 billion in GDP output, or another 29 per cent of GDP. This may not be in one year, but even over five years we are talking about six per cent growth per year additional.

This does not include the productivity losses as a result of our labour regulations, or losses from our procurement issues.

This shows that Jamaica's challenge for growth and development comes down to a poor foundation for development and growth. It also shows that the reason we are struggling with low growth, and our people are not productive and have low income levels, is primarily because we keep shooting our-selves in the foot. The fact is that Jamaica's challenges are more internally than externally generated.

So, given our limited resources, wouldn't it be better to just focus on these four or five areas to stimulate development and growth in Jamaica?