Restructuring Jamaica's economy

Over the past two weeks there has been much debate about jobs and Jamaica's competitiveness, thanks to the Global Competitiveness Report and the JEEP proposal. Last week I addressed competitiveness, and JEEP is a good follow-up discussion. Debate on both issues is welcome, and is the reason I have always called for national debate on all issues in the media and parliament. Whether it is a global report or a proposal from government or opposition, I am in support of as much debate as possible so that the people of Jamaica can be more aware of the details of what is affecting their daily lives.

I believe (thanks to the many commentaries, talk show discussions, and lobby groups) Jamaicans have become a lot more aware and suspicious of what politicians espouse, and are demanding more and more information, whether it be proposals like JEEP, extraditions, or deals with foreign companies. No longer can a politician just make an announcement and all Jamaica just cheers and goes along with it. Interestingly also, more party supporters are demanding more information when their respective party they support makes general announcements. This is a sign of emerging political maturity.

The flavour of the day has shifted from the request for brownings to JEEP, and more generally a discussion on what is good for Jamaica's economy. It is within this context that I want to look at what is needed to restructure the economy. It is important to understand, as many commentators have said, that what Jamaica's economy needs is not another promise of jobs or growth which will not lead to sustainable economic and social development.

Over the years we have had crash programmes (1970s), the free zone and Spring Plains (1980s), high interest rates and ICT stimulus (1990s), and promises of jobs (last election and recent JEEP). All these initiatives have come from our politicians, and that is the primary problem. When will we realise, as Tufton rightly said, that government cannot sustainably create jobs and growth without fixing the structural problems? Obama recently tried this in the US with his US$700 billion stimulus, but it was never enough to change the general economic direction of the US. The difference between the US and Jamaica is that they have money to fund such short-term programmes, or can print it. In Jamaica any attempt to create money without an increase in productivity will only lead to greater inflation or interest rates.

I am the first to agree that in a recessionary environment, government intervention is necessary to ensure that the economy does not sink further. For this reason I have always maintained that the IMF programme and tax increases were pro-cyclical and would have caused further contraction and hardship in the economy. The fact is that they did, and this in part caused some of the decline the economy saw since 2008. The major part of the decline, of course, resulted from the difficult global environment.

What we have seen, however, is that even though there has been some decline from these policies, there have been some positive structural changes, a few of which I mentioned last week. More importantly, though, is that we have seen some positive structural shifts to the GDP components, and a reduction in crime and some improvement in the culture of compliance and discipline. The most successful have been in the areas of tax administration and dealing with corruption in the police force. These are the structural issues that government should focus on and must stop trying to pick winners, which is the job of the market.

Government must therefore create an enabling environment and allow the market to work. A big part of this is of course doing away with the system of waivers, incentives, and the burden of taxes and other bureaucracy. If these remain in place, then business persons will continue to seek waivers, incentives, and try to go around the system because they can. There will be no motivation to operate in a true market environment. It is for this reason that the tax reform and administration currently being pursued by the government is a step in the right direction, and long overdue. Previously government would cherry-pick what was good for fiscal revenue, the last real attempt at progressive tax reform being in the 1980s.

So while I support the concept of stimulus, recently outlined by the opposition, the programme as crafted is flawed for the following reasons:

1. The argument of renegotiating the IMF agreement is redundant, as the agreement comes to an end in May 2012, and by the time election comes around would have either ended or already been renegotiated.

2. I disagree with the proposal that start -up businesses should get a five-year tax holiday. Every business in Jamaica would forever be a start-up. Why create a problem we will have to find a solution for? What we need is a flat tax for businesses in the first five years, which if they prove losses they can get a tax credit for. This would relieve the cost and burden also of tax administration having to go after these micro businesses.

3. Government cannot continue to seek to create private sector jobs by giving incentives. If an incentive is required to start a business or create jobs, then it means otherwise it is not competitive and does not make good economic sense, so why incentivise it (for example the recent stimulus to car dealerships)? Government needs to stop trying to create welfare programmes, which do not result in long-term economic benefits. While I agree that some form of stimulus is needed to create jobs, it must come in the form of infrastructural works, such as the JDIP, as Roosevelt did in the US after the Great Depression. What we must do is remove the politics and bureaucracy from the JDIP and allow it to work for the benefit of Jamaicans.

4. Providing a fund for small businesses is really a regurgitation of what is happening now. This government had provided $1 billion to the DBJ for small businesses. How much has been taken up? At the time I indicated it would not have made a difference because it is obvious that businesses are not motivated primarily by high interest rates or access to financing, but more importantly aggregate demand, which was already cut by the IMF programme. So even if I can get money to borrow at zero per cent, if there is no demand for my product/service it doesn't matter.

5. The suggestion to provide banks with a tax incentive to make small business loans should not even be considered. Why would we want to incentivise risky loans? If the loan is good then the only incentive the bank needs is profit. This can lead to financial sector risk and increased interest rates.

There is more I could say but space does not permit. The argument, however, is that while some form of stimulus is necessary it must be in infrastructural projects. This already is in place in the form of the JDIP, which we need to make work. The problem we face is not 12 months from now, so if we don't allow the current programmes to work and wait until election we won't just need a JEEP but a whole car dealership.

The important thing for the economy is for government to focus on fixing the structural issues of crime/discipline, bureaucracy, energy and productivity in particular. This will improve our competitiveness and economic and social well-being. Jamaica has for too long been a welfare state, and this is what is keeping people in poverty.

Examining Jamaica’s competitiveness

Recently the World Economic Forum released the 2011-12 Global Competitiveness Report, and Jamaica showed the worst ranking ever at 107 of 142 countries, coming from 95 of 139 countries in the previous report.

This really is no surprise as the seeds for this were sown from around the mid-1990s when the debt/GDP ratio started to worsen as a result of the macroeconomic policies practised during that time, more notably the prolonged high interest rate policy that led to a logical market choice to sit at the beach and earn rather than do so through productivity. The seeds of indiscipline that led to the lack of reward from productivity started in the 1970s, when the much needed social changes were taken to mean that everyone had the right to property and income even if not worked for. The result at the time was a real GDP decline of approximately 20 per cent during that decade.That period also marked our first fling with the IMF, as a result of near decimation of our economy.

The 1980s saw a return to a focus on economic growth, which resulted in an average annual growth rate of approximately 6 per cent, and by 1990 the debt/GDP ratio, had moved to 90 per cent from 212 per cent in 1984. The challenges faced by the economy in the first half of the 1980s resulted from the near collapse of the economy in the 1970s and the global recession at the start of the 1980s. The problem with the 1980s, however, was that the social side was neglected and therefore there was no emphasis on improvement of the individual but rather a hope that macroeconomic growth would lead to microeconomic benefits.

The problem with Jamaica is that the workforce consists largely of low-skilled labour, and a relatively low literacy level. Like it or not, it was the free education policy of the 1970s that caused many to be able to access higher learning and change the landscape of the workforce, but the result of a poorly implemented free education policy led to a degradation of the school system.

By the time the 1990s came around there was again an ill-conceived approach to the liberalisation of the economy resulting in an increasing trade deficit, as uncompetitive local industries, which were accustomed to protectionist policies, could not compete with the cheaper and more attractive foreign goods. So the exchange rate started to decline and inflation was rampant. In order to put a stop to runaway inflation, the government at the time employed a high interest rate regime that not only served to halt inflation but also put the nail in the coffin of most productive businesses. This was the main push that caused Jamaica to become a service-driven rather than the goods-producing economy that it was.

That period saw the continuous breakdown of our institutions which led to a decline in productivity and discipline. The slump had started in the 1970s, with a brief break in the trend during the last half of the 1980s. Since then productivity has consistently declined and our institutions and infrastructure have generally deteriorated. The only significant positive development in our infrastructure was the building of the highways during the early 2000s, which in my view was somewhat negated by the demise of the railway during that time.

In 2007 we experienced a significant global recession, which did not do us any good, as the economy was structured to be dependent on foreign loans, remittances, and foreign consumers, rather than on our own productivity and local economy.

So here we are today looking at a competitiveness report that shows us as ranking 107 from 142 countries, and within that global ranking even more dismal numbers are represented. Some of these are fundamental pillars on which economies are built as follows (rankings shown at right):

o Public trust of politicians - 112

o Favouritism in decisions of government officials - 121

o Burden of government regulations - 123

o Business costs of crime and violence - 140

o Organised crime - 135

o Reliability of the police service - 101

o Quality of railroad infrastructure - 113

o Macroeconomic environment factors - between 106 and 140 (overall ranking of 142)

o Quality of primary education and enrolment - 108 and 126

o Total tax rate, % of profits - 108

o Redundancy costs, weeks of salary - 99

o Pay and productivity - 114

o Ease of access to loans and Venture capital availability - 124 and 127

When one examines these individual factors, and not just the global rating it is obvious, that where we are today and how we are perceived is a direct result of the decades of neglect. The result is that we celebrate 50 years with this perception of how we have progressed. So all those who have been involved in governing Jamaica since the 1970s, take a bow, you have reaped what you have sown.

On the other hand, we must remember that this rating is a review primarily of the year 2010/2011, when we would have been seeing a significant lingering effect from (i) the global environment; and (ii) our slowness to react because of policy and the politics we have played while the country was burning. So our preoccupation since 2008 has been with politics rather than economic fixes. Much like what happened recently in the US.

But if one takes a look at what has been happening (outside of the politics), there are some positive trends taking place. The economy is still very fragile but there are some positive structural changes happening that will bode well for the economy, if continued. There are also some positive social initiatives taking place. And so even while people like me continue to point out the areas that need improving (because I think if we eliminate weaknesses then all that will be left are strengths), the fact is that some of the structural fixes we need to correct the years of structural abuse are taking place. One other thing to remember is that when structural changes are taking place, as with the global economy, things are going to seem worse than they are.

For example, when one gets a cut and the disinfectant is applied, it is initially uncomfortable and hurts. But then it means that it is preventing any further infection. So it goes with economic adjustment, which is why it is important for governments to smooth out the effect of painful adjustments, as promoted by Maynard Keynes and more recently Christine Laggard (note the international references as promotion of this idea by locals is not credible because of our "browning and foreign" culture). However, because of the decades of neglect of our economic and social environment, we have built institutions around inefficiencies, and it will take some time to see the fruits fully grown.

Some of these structural reforms we have seen include:

o Charter of rights - finally passed after almost 20 years of debate

o Decrease in the murder rate and greater accountability in the police force - more needs to be done in terms of road discipline, though. Can't understand the inability to deal with this

o Enforcement of the building code by the KSAC - don't see much happening in the other parishes. Previously people were allowed to build whatever and wherever they wanted

o Greater vigilance by the OCG, Public Defender, INDECOM - even though sometimes there is loss of credibility from the perception and the final rulings

o Tax reform green paper - good move but still mentions that primary objective is tax revenues and not economic development

o Road improvement works through the JDIP - we need to get past the political rhetoric, though

o Moves by the new Justice Minister to address the court administration

o Divestment of loss-making public sector entities and public sector rationalisation

o Fiscal responsibility framework

The biggest bugbears remain (i) indiscipline and crime; (ii) energy costs; and (iii) bureaucracy. If we were to speed up the initiatives that are geared towards addressing these, then I believe there would be significant improvement in our economic and social variables.

So even though the report has rated us at 107 of 142 countries, a closer look shows that some of the initiatives on the table will address some of these issues and therefore when compared to say Greece, Jamaica is not such a bad investment climate for future growth. However this is dependent on a continuation and strengthening of some of these initiatives aimed at fixing the structural challenges faced, not so much a focus on the macroeconomic indicators that are symptoms of the underlying problem.

A practical approach to Jamaica's challenges

One of the questions that I get a lot when discussing how to solve Jamaica's challenges is, if we all know the answers then why can't we solve the problems? This is a very important question, as it focuses attention on the real issue that Jamaica faces in resolving the challenges before us. It is no different from the challenge faced by companies, and why some companies, with an apparently similar business model, succeed while others don't.

After all, Jamaica, of all Caribbean countries (with the exception of Guyana, which is not really in the Caribbean) has the most diverse mix of natural resources and opportunities available. Even though Trinidad may have oil, we have tourism, bauxite, agricultural products, sports, and music. Our music and sports are probably our greatest assets because of the future value created in the brand of which we have not even scratched the surface.

Why, then, in rankings such as the Human Development Index are we only ahead of Haiti, and even in the growth projections put out by the World Bank, why do we fall behind Haiti? The solutions put forward in political campaigns and commentaries seem logical, so why can't we resolve the challenges we face and become the country we can be? The answer I believe, lies in my mind in the way we approach our challenges. Quite simply put, we get too involved with the emotions of the challenge rather than what is the most practical long-term solution.

Some examples include the following:

o The argument made by some, including myself, to (i) widen the tax base; (ii) reduce the rate of GCT; and (iii) target the tax to be received on previously zero-rated items to the less fortunate, has been shot down as oppressive and not caring for the poor. This is an entirely emotional response for the following reason : if tax foregone on cornmeal was say $100 and if 50% of cornmeal is bought by the rich to feed their dogs, then it means that $50 of the tax benefit goes to the rich man and his dog. Wouldn't it be better to charge the $100 tax on the cornmeal and use $75 to target funds paid directly to the poor? Everyone wins as the poor would get $75 (instead of $50 tax credit); and the government would get $25 tax (instead of the $0 before). And the rich man pays the $50 if he still wants to feed cornmeal to his dog.

o The recent demonstration against JPS (by wearing black or turning off electricity for a day) was really impractical. So what happened after the demonstration? Did the bill go down? It has come to this because the OUR is a useless organisation and also government policy over the years has procrastinated too long on this very important issue of energy. But the more practical thing to do is to wean ourselves individually off JPS power. I always find it amazing how persons find it easier to argue that borrowing the money to purchase a car (loans have gone up) is more acceptable than borrowing money to add renewable energy solutions to their homes. The argument is always that the cost of the system is too high. But if you think about it, if one can get a loan (say from NHT or the bank) to invest in a solar system, and the monthly payment on the loan is less than the savings on the JPS bill, doesn't it make practical sense?

o Another impractical call is that GCT on electricity should be removed as it is oppressive to the poor, when in fact most poor persons do not consume the 200 KWH where GCT starts to accrue. Apart from the fact that the low- income earners do not pay GCT on bills it would be much more practical to call on the government to maintain the GCT on the 30 per cent who pay it and that it should be "ring-fenced" and given as a credit to compliant taxpayers who invest in renewable energy solutions. This way consumers would not only avoid GCT but would also reduce their JPS consumption.

o The final thing I want to mention is the emotional response to relatively higher salaries paid to public sector workers, which started with the "Fat Cat Scandal" and which continues today. At the same time that we raise hell over any salary levels deemed to be too high, we also ask for the productivity levels to be increased in the public sector and are mystified that we do not attract the brightest minds, resulting in waste and sometimes even corruption. We talk about Singapore but do not realise that one of the things Singapore did was to hire the best persons in the public sector and compensate them accordingly. How do we expect to increase our value added and productivity if we do not pay persons based on their delivery?

These are just a few recent examples of the impractical way that we have approached our challenges over the years. It is therefore our approach to resolving issues that have kept us back, not that we do not know what to do, but by the time the political and emotional sentiments are placed in the equation, what we do is take the road that is most popular rather than the one that is in the best long-term interest of the country, as emotions trumps good sense.

This would be similar to acceding to your child's crying not to go to school, not thinking about the long-term consequences.

Problem of road indiscipline

As the murder statistics fall it seems that we are now trying to kill people with cars instead of guns. I really can't understand the inability of the police to deal with the road indiscipline problem that we face. There is no real effort being put into dealing with the carnage on the roads. And we fail to understand that a priority for choosing Jamaica as the place to "live and raise families" is feeling safe when driving, walking, or cycling on the roads.

What this requires is enforcement and not the PR campaign that the National Road safety Council has launched. I fail to understand why (i) I am driving and a taximan stops in the middle of the road and a police car drives by as if it is acceptable; (ii) there are persons out there (including people licensed to transport the public) who have multiple tickets outstanding; (iii) the police do not employ creative strategies to deal with persons who drink and drive, such as waiting on the outside of parties and night clubs and arresting persons who go behind the wheel after consuming alcohol.

And all the Road Safety Council can say is that they are hoping that the number of persons killed in motor vehicle accidents will fall below the 300 mark. Is this another OUR in the making?

Dealing with a second recession

IN September 2009 my article was titled "Risk of a double-dip recession?" in which I stated that despite the fact that many persons believed that the global market was recovering, "the risk of a double-dip recession is a very real possibility given the underlying fundamentals that still exist. The fact is that markets never move in a straight line, whether up or down, and what is needed for a full recovery is still not present in the major economies."

This seems more likely than ever, and in large part is due to the lack of effective leadership from politicians, which was exacerbated by the circus in the US capital some two weeks ago. The fact is that the US does not have a credit problem, what it has is a political problem. That is a crisis of confidence in governments. One positive sign coming out of this is the call by our own finance minister for all hands to come on deck, and all ideas to contend, irrespective of the source. He must be applauded, as this is the type of maturity that is needed in leadership. After all, wherever a good idea comes from it does benefit all Jamaicans.

We must now follow through and create a committee of the best minds to address the economic issues we face, which we failed to do in the 2008 recession, instead choosing to up the ante in the political arena.

What is evident, though, is that if we were to have another recession confront us it would be devastating. When, for example, a boxer starts a fight his legs are good and he can easily take a few punches. But after ten rounds of fighting it takes a lesser blow to knock him out. So is the similarity with the Jamaican economy, as after the recent recession our economy is that much more fragile. What this means is that even if the world does not slip back into the deep recession of 2008, even a slight dip could be devastating to the US consumer, and consequently Jamaica.

So how do we prepare for the possibility of a second recession?

Firstly, we must embrace and hold to account the call by Shaw for everyone to work together and all ideas to contend. It is important, however, that the best ideas come to the fore, as implementing a bad idea can be just as bad as not taking any action. In the 2008 recession there were a lot of ideas that were being put out there that did not turn out to make sense. There were others, however, that turned out to be the most appropriate even though they were shot down at the time. Need I say more?

Secondly, we must take seriously the need to put together a committee of the best ideas that can help the government to implement the best solution. I have always maintained since 2008 that this was necessary just as the US did at the start of the recession, which did prevent further damage to the US and global economy.

Thirdly, one of the first things that we need to do immediately is a SWOT analysis of the Jamaican economy, in light of the possible double-dip recession. Between January and February this year, I did a three-part piece outlining the approach needed in a SWOT analysis of the Jamaican economy. This is important for us to understand the challenges and the strengths and formulate our policies and strategies on this basis. My own analysis, which can be viewed at my blog, is just a sample of what needs to be done. This would be the first assignment that I would give to the committee.

It is obvious that any stagnation or slowdown in the global economy will affect our revenue flows. Remittances, tourism, and bauxite earnings primarily will be negatively affected. This is because any global slowdown will first affect the middle to lower income class of the US economy,for example, which are the persons from whom our revenues come. This means that we have to recognise the possible revenue impact and see how we can mitigate this and also substitute imported inputs with local inputs. In other words, we need to create greater vibrancy in the local economy.

We cannot, however, force businesses or consumers to buy local inputs if they are more expensive, especially as their own revenues will be negatively impacted. What we must do is take the steps to ensure that we become more productive and our costs cheaper. A case in point is the recent settlement of the public sector wage bill, which resulted in a greater fiscal crisis for the country, and will negatively impact everyone, including the public sector workers even more than the monies received. I am firmly of the view that they should be paid what is due to them but I think greater creativity was needed in how we satisfied that debt.

It means that we have to move expeditiously to deal with our energy and indiscipline crises. It is important also to address our institutional structures, such as our bureaucratic process as well as our courts. These two institutional issues are necessary for new and continuing investments to take place, and are necessary if we are to compete for a larger share of the world FDI flows.

Very importantly also is the need to address the declining labour productivity issues. Labour must be rewarded based on productivity and outcome, and not just time spent at the workplace. My own experience at Jamaica Ultimate Tyre Company Limited is that workers at the lowest level will embrace compensation based on productivity as long as it is transparent and fair. While other public sector workers were clamouring for increases, these workers were busy improving their productivity to which their compensation is linked, resulting in a tripling of the profits last fiscal year.

The last thing I want to mention, but by no means least or the final thing we must do, is that it is prudent for us to restructure the IMF agreement, in order to get the needed extension and relaxation of the targets. Going into a second slowdown of the global economy it would also mean that our fiscal revenues will slow down and economic pressures will increase. It is not going to be enough to go after numerical targets without considering the people and lives behind those targets.

So as the risk of the recession has increased, it is necessary for us as the finance minister has said, "to wheel and come again". This recalibration of our policy strokes should be entered within the context of the new and mature approach being taken by the minister.

Jamaica's economy and the new world order

Last week into this week the US politicians sought to create a man-made crisis, which Jamaican politicians are experts at doing. At the end of it all, it seems as if it was all just political grandstanding with little or no result to show for the pain caused. If Jamaica had thought about it we should have copyrighted that type of political behavior and earn some money from it.

The deal that was finally agreed, however, doesn't seem to either

(i) Have what it takes to properly address the deficit, as the real expenditure that matters -- entitlements — was not addressed. And all that was done is that the can was kicked down the road to some obscure committee; or

(ii) Add any hope for the economy. In fact this expenditure reduction has a high probability of causing further sluggishness in US GDP and employment growth. The recent US GDP and jobless claims numbers show an economy that is struggling.

So what was all the drama about that sparked fears of a global crisis, if the US defaulted, and caused the US so much credibility. If nothing else what it has done is ushered in a new economic order, which was already on the cards. It was always clear that the US economy, and dollar, was always going to lose some prominence, but this was supposed to have occurred over many years if the economic and fiscal structure is not addressed.

What this drama has done though is raise the debate once more between those for and against Keynesian economic theory. My own position is that I am a supporter of this theory, and this may have been obvious in my call last year for fiscal stimulus funds to promote the Jamaican economy. I think it became obvious that those funds were needed, as reflected by the accommodations in the IMF programme, as well as the JDIP and PSOJ growth inducement strategy. This was contrary to some who espoused textbook type budget cuts, which would have created more hardships for the Jamaican people. I think all in Jamaica can applaud the government for the relaxation of the hardships through these fiscal stimuli.

So the US is following the same anti-Keynesian policy that was done during the Great Depression of the 1930s. What they have done is again raised the probability of a double dip recession, as is argued by Nobel Prize winner Paul Krugman and others. The difference between Jamaica and the US is that when the latter sneezes everyone catches pneumonia. When Jamaica sneezes the IMF takes out the fly swat. So the probability is high that this anti-Keynesian type of policy adopted in the debt ceiling plan will result in lower disposable income in the pockets of the American citizen we depend on for tourism, remittances, and alumina.

But if that happens then we can't with any conscience criticize them for doing so, as we took the same approach. So we will all have to just keep quiet and soak it up, or alternatively we could ready our economy for any shocks that could result.

The question is, how can we do this, especially with our economy as fragile as it is. While we can accept that there are some structural shifts happening, such as a greater focus on agriculture production, improvement in roads and transportation (better JUTC and the limited railway service), a greater focus on entrepreneurialism, lower interest rates and a move for better support services in the public sector; there are still some significant challenges.

The two low hanging fruit, which we have failed to address for as far as I can remember, are (i) our energy use; and (ii) lack of law and order. These two issues take more will and thought to fix than resources. I have discussed these issues a lot and won't go into any detail here, but just to say that on the matter of crime, we will never fix this in any sustainable way until we address the matter of discipline on the roads. Criminals graduate to harsher crimes because there is a culture of indiscipline around them.

When one looks at the general structure of the economy, however, even though there has been some improvement, it still remains much the same it was before the recession. This is not an easy fix, but what we must do is focus on where the greatest vulnerabilities are. And this is best addressed by looking at first our Balance of Payments (BOP), and then our fiscal accounts. The Finance Ministry has been doing a good job managing the fiscal deficit, but at best this sort of management can only be a short term reprieve. The real meat of the matter (long term sustainability) lies in the BOP. If we run current account surpluses then it will mean that we become richer as a country, but if we run deficits (as we have been forever) then we only become poorer, which is our experience.

When one looks at the recent BOP numbers (March 2011) it shows a worrying sign as expected. The current account deficit worsened by US$172.6 million, driven by a worsening of (i) the trade deficit by US$165.7 million, (ii) services by US$11.1 million, and (iii) income by US$25 million. Net transfers (primarily from remittances) improved by US$29.1 million. So it shows that once again we will be counting on the non-productive income of remittances to save the day. The hope, as was mentioned above, is that the structural changes will continue and improve this situation.

When one looks closer we see that even though bauxite and alumina exports improved, oil imports negated that improvement. Again expected because we have not changed our energy mix. Of interest also is the fact that the decline in the income category is due to higher profits repatriation. This could be driven by a need for cash by the head offices or the reluctance to reinvest because of a lack of positive ROI opportunities.

In this new world order, hastened by the US last week, we must focus even more on the BOP, and seek to improve it significantly. The obvious points to address are (i) oil imports; (ii) food imports (agro-processing); and (iii) profits repatriation (through more local entrepreneurs and better institutions and investment environment). If we were to focus on these three areas then we would see a significant turnaround in our BOP and the wealth of the country.

It is generally expected that the global economy will be in a slump for a while, as the US economy has significant structural problems and Europe has its own debt crisis. We may talk about emerging economies such as China and Brazil, but these economies depend on the fortunes of the US. From our own point of view we are even more plugged into the US economy, so any downturn would affect us quicker.

Where is the US leadership?

Arianna Huffington said it best on Piers Morgan tonight..the debt ceiling plan is akin to taking the gas tank out of a stalled car (the economy) when what is needed is a jump start.

I have watched the charade in Washington unfold over the past few days and can only agree with Paul Krugman, in the NY Times column, when he said that Obama has shown considerable weakness. Obama has not provided the leadership necessary in these troubled times for the US. Even George Bush would have shown strength and character and do what he thought was best for the US in crisis, whether he was wrong or not. Just as he went to war in Iraq. Mr. President, the electorate out you there to lead,and it was expected that the transformational leadership you promised would be strongest in this trying time.

Normally I wouldn’t be concerned about what another country does, but this is the US – the world market leader and their actions affect everyone. So what they have been involved in over the past few days has been irresponsible, as they have held world markets to ransom.

Obama should have listened to Clinton and invoked the 14th amendment. The US needs a Clinton now, with all his wandering eyes, he is a strong leader and always stands for the right thing for the economy and the world.

I don’t know what they are thinking but in a stagnant economy spending cuts will continue the economic sluggishness. Bye bye jobs improvement. The argument that increasing taxes on the wealthiest Americans will slow down the economy is just ridiculous. This is not like taxes on the middle class. It is taxes on the wealthy where most of that is savings anyway, and so will not find its way back into the economy. It’s a difference between taxing expenditure and taxing savings.

So the sluggishness will continue. And by the way spending cuts is a tax on the poor and middle class, and will mean less demand in a sluggish economy. We have seen that in Jamaica with the IMF plan.

Anyway, maybe we should all stop being critical and just make some money from this…long term US dollar weakness?

Jamaica's continuing energy crisis

In July 2006, I wrote an article titled "Oil - Jamaica's main external threat". At the time our use of fossil fuels (oil) was 96 per cent of our energy needs, and the oil price was US$78 per barrel. In February 2008, I wrote another article titled "Oil - still Jamaica's main external threat". At that time oil was trading at US$100 per barrel, and fossil fuels were still just about 96 per cent of our energy usage. Today oil is trading at just under US$100 per barrel and our energy usage is just about 96 per cent per barrel.

Does anyone see anything wrong with this picture? This energy crisis started from the 1970s, and as a country we have been talking since then about the need to rationalise our energy usage, and move towards cheaper forms of energy. After almost 40 years of talk, I think we can safely say that this is the longest-running talk show in the history of the country. Recently, even the City of New York announced an initiative to introduce significant numbers of solar panels, as a solution to high energy costs and future supply.

I find it very difficult to understand why it has taken so long for us to address this issue, as today energy is the biggest threat to production and industry in this country. Running close behind is the scrap metal industry and for the record I support the move to indefinitely ban the industry until a solution can be found. Hopefully a solution can come before next year, but any announcement of a temporary ban will only cause the hoodlums to continue to stockpile.

For the past two years approximately, we have seen the Balance of Payments (BOP) perform better than prior year comparative periods, as a result of the weak global demand, and hence the fall-off in oil prices. Still oil imports were approximately 25 to 30 percent of imports during that period. I had indicated at the time that this was just a respite and sooner or later oil prices would start to climb again, especially as global demand starts to pick up. Add to that now the crisis in the US, which is causing a quicker than expected depreciation of the US dollar, and a run to commodities, particularly gold.

The effect on Jamaica's BOP has been that the current account deficit has started to worsen again, and businesses and individuals will continue to be under immense pressure from rising energy prices. So we once again have not taken advantage of the lull in oil prices. But as I had indicated when oil prices were on the way down, we would forget about the urgency needed to address this, added to the bureaucracy involved, and it would only come to the fore again when prices started to go back up.

So here we are once more, fighting with the JPS and a worsening current account, which will no doubt affect our future demand of US dollars if not addressed expeditiously.

What is happening currently? I saw an ad on television this week where the NHT seems to have expanded its offering of solar panel loans. And this is a good move and one I have been pushing for a while. I hope that the level of bureaucracy that existed a few months ago has been improved, as it was way too onerous for someone to access a loan. No doubt this bureaucracy existed because of the need to protect government funds, but we should have found a way to protect the funds and at the same time disburse the loans, as the cost of high energy bills for Jamaica far outweighs any loss that could occur from increased risk in the lending practices for this purpose. In fact I still maintain that the GCT on the electricity bills should be used to credit compliant taxpayers who introduce renewable energy solutions at their homes and businesses.

I also see that the argument surrounding the JPS distribution monopoly has shifted to being impractical to break up because of the size of the country and cost of doing so. I think what is needed here is some out-of-the-box thinking. I totally agree with the position of the Energy Minister, when he says that the control of the distribution would have to remain with the JPS. The fact is that it would be much too costly and difficult to monitor otherwise, as JPS has the infrastructure to do so.

This, however, does not prevent competition in the market. And vibrant competition at that. This can be done in the following ways.

1. Competition will occur by persons generating their own energy needs, as this will reduce the demand for the electricity produced by JPS. I have been using solar panels at home for over one and a half years, and it is still going strong. My average cost of energy has been significantly reduced, and I expect a four-to- five year payback timeline. I also am not impacted in a significant way by JPS rate hikes, and power cuts don't affect me. In addition, at this payback period this amounts to a 15 to 20 per cent return on investment (if one considers depreciation), with no withholding tax.

2. We need to move immediately to net metering, as net billing is still not cost-effective for greater investments to take place.

3. We should allow independent electricity generators to establish themselves, and be charged by JPS a regulated distribution fee. These independents would then sell the power they generate directly to the customer, and not have to sell it to JPS for them to on-sell. This is where the OUR would be valuable in regulating the cost of the distribution (to ensure a standard and reasonable charge) and also to assist in monitoring how many credits each distributor puts on the system and can sell. The more cost-effective one would obviously sell their supply first. This way JPS also collects for the distribution, but competition will be introduced.

The other solution to significantly reduce demand is to invest in a much more efficient and safe public transportation system. Right here we have to commend the efforts of Mike Henry in getting the limited train service going. This will not only reduce the demand for energy but also ensure that competition forces the other operators into greater discipline and efficiency.

Note that none of these initiatives involve any significant project like the LNG, which is required for industrial production, but these alone could save 30 to 40 per cent in energy cost. If this happens it means greater disposable income and revenues for businesses.

Jamaicanisation of the US

The debt crisis debacle happening in the US is pointing towards the Jamaicanisation of that country. I never thought the day would come when I would see US politicians behaving like Jamaican politicians, where politics and party come before country. It is a sad day for the world when the world's leading economy starts to behave in that way, and we are seeing how destructive politics can be. In Jamaica we have long known about the destructive nature of politics as evidenced by our low growth rates, relatively worsening productivity and human development index, and increasing poverty.

I think after the irresponsible behaviour of US companies that led to the 2008 financial crisis, and the current debt impasse, the US is showing the whole world why it no longer deserves to be the world's reserve currency or benchmark for financial transactions. It is still the greatest country in the world for me right now, but is fast self-destructing.

Development can only occur if there is law and order

WHENEVER we discuss the various models for development (Ireland, Singapore, and Russia), we tend to focus on economic stability, interest rates, stock exchanges etc. We always speak about economics as if it is an exact science, not realising that economics, as a social science, depends on human behaviour. Perhaps more important than interest and exchange rates is consumer confidence. After all, economic development is driven by consumer demand and markets, not macroeconomic stability or low inflation.

For this reason one can always predict whether an economy is going to do well or not, because unless consumer confidence and spending is on the rise then an economy cannot develop. We only have to look at the largest economies in the world, led by the US and China. It is the rise in consumer spending and confidence that has allowed those markets to develop, not a few technocrats sitting in a room determining how to achieve stable exchange rates, low interest rates, and low inflation. In fact, a focus on macroeconomic stability, without developing consumer confidence, is only a short-term fix, and will lead to what we have seen for the most part in Jamaica — spurts of growth followed by longer periods of slump.

It would seem logical, therefore, that if we want a market to show innovation and develop, then we must encourage consumer confidence and spending. This means that market policy should always focus on more jobs, greater real income levels, and greater competition. There is justification for why the Caribbean GDP growth (less Trinidad) rate lags behind the rest of the world, as our markets are less developed. In particular, there is a reason why 2007 real GDP per capita and productivity in Jamaica was less than in 1972. The problem is that as a country we have for the most part focused on the outcome rather than the underlying problem, which our governors have failed to properly understand.

If, therefore, market development depends on consumer confidence and spending, then it's logical that we should pursue policies that will ensure consumers feel confident and have enough money to drive higher expenditures. And if this is accepted as the logical thing to do, shouldn't we then be identifying what is needed to drive that behaviour (remember economics is a social science)? The next logical set of questions then would include, how we expect consumers (or businesses) to feel confident about spending if there is rampant indiscipline and a general lack of law and order, and our institutions such as our courts and police force seem deficient. Even if the institutions are not deficient, a perception that they are is enough to stymie confidence.

For example, the way the police handled the Mais killing is an example of how not to communicate (even though, in my opinion, it was handled properly). The argument that social media is an inhibitor to policing and that ways must be found to curtail the use of social media is showing a bankruptcy of ideas. Shortly after hearing this comment locally, I heard an international report where it was being said by the police that with the growth of social media, the police now had to find more innovative methods to work alongside the new order, not to say it should be limited as we chose to do.

When will we realise also that the first thing to do in solving crime is to create a culture of discipline and law and order, as was done in Singapore? So if we truly want to see a sustained reduction in murders and other crimes then we must first address the general perception of law, order, and discipline. If this is not done then we may not see a sustained reduction. We only have to look at the recent killings. And it is this breakdown of law, order, and discipline that has been the biggest failure of governance in this country since the 1970s, which deteriorated at a much more rapid rate in the 1990s and 2000s.

So neither pedestrians, cyclists, nor motorists are safe on the road from reckless drivers. Only last week a cyclist was riding out at the Harbour View roundabout, for his morning exercise, and was mowed down by a speeding motorist, leaving a wife and a 15-month-old son. When that driver leaves prison he should be forced to support the child until age 18. But will that ever happen in Jamaica? More than likely not. And what about the persons who continuously ignore the Noise Abatement Act, and prevent persons from getting the rest they need to be productive the following day? I also continuously see cases where taxis stop in the middle of the road to let out someone, and a police car just drives past as if it is nothing.

It is not enough for the police to just set up a speed trap and expect to solve traffic violations that way. There needs to be more out-of-the-box thinking. For example, why aren't the police seizing the equipment and gate proceeds from persons who violate the Noise Abatement Act (which this Act already supports indiscipline as crafted)? Why don't they wait outside of clubs and parties to see who is staggering to the driver's seat and administer a breathalyser test on the spot? This would also certainly improve the revenue intake.

If one looks at the development of the US, Singapore, and Ireland (countries we love to look at as models), they have been based on a culture of discipline and the enforcement of law and order, that rewards productivity rather than in our case where we reward connections and strength. So in Jamaica we don't know how many Usain Bolts or Bob Marleys we could have produced because we either kill them when they are young or never allow them the opportunity to develop.

So, as I have always maintained, in no economics book I have read is there an assumption of the lack of law and order. On the contrary, economic development assumes a certain structure and culture of discipline. The Global Competitiveness report, for example, points out that before development can occur in a country, the institutions have to be functioning properly and there has to be access to good health care and primary education. Otherwise, any effort at development is only a lesson in futility.

So as we approach 50 years of independence as a country we need to understand that without discipline on our roads and an enforcement of law and order, we will never get around to achieving sustainable economic development, let alone get to being the country of choice to live and work. All we will do is create one big ghetto called Jamaica.

PS: I want to commend the direction being taken by the new minister of justice of focusing on the courts and backlog of cases, which the DPP has been saying for a while is a reason for the poor delivery of justice. I also want to commend the minister of national security for the introduction of the electronic monitoring for non-violent offenders, as all our prisons have done is create more hardened criminals.

Make the roads safe please

Just this morning a recreational cyclist was reportedly mowed down by driver, who apparently was drunk, and was reportedly racing another driver near the harbour view round about. The impact was so great that the car was badly damaged. He leaves a two year old child without a father.

A few months ago another recreational cyclist was mowed down by a car at port royal, where it was reported that the driver fell asleep. He also left fatherless a young child.

These drivers were coming from a night out on the town, where more than likely they were drinking.

This rubbish must stop, as motorists drive without any order, and also cyclists and pedestrians use the road without any order. Because of the lawlessness on the roads, neither pedestrians, cyclists, or motorists are safe. Approximately two weeks ago this lawlessness reached a new high when 17 year old Mais was killed by a lunatic. His actions are similar to the motorist who uses his car, because of irresponsible driving because of DUI or even being distracted because they are texting, talking on the phone, or even eating. And while doing all of that they are speeding.

When will the police realize that if they really want to assist in making Jamaica the place of choice to live and work, that discipline on the roads, and safety of all users on the road, is essential. Are reckless motorists any different from the murderers who in cold blood kill people. In both cases they have no regard for human life.

If this is contained then Jamaica will definitely be a better place to live, and crime overall will come down once there is a semblance of discipline. The lack of law and order is slowly killing us. How do we want to encourage a more healthy lifestyle but then persons who ride, run, or walk on the road are under siege. It seems logical that we have to arrest the perception of law and order if we truly want law and order.

My own recommendation is that those caught driving under the influence, or texting etc. should be charged, fined heavily, and have their licence immediately revoked. If they cause the death of a person or destroy property they should be arrested and put in jail immediately. The police have to get serious about this. It is very important.

If the police can’t deal with this then we must once again force them through the voiceof civil society, as it seems that this is the only way we get action.

Lessons from the ICAC conference part 2

Last week I looked at the presentation on the Singapore model, done by Professor Ghesquiere at the annual conference of Caribbean accountants. I want to now focus on the other two themes of the conference. Those of (i) Energy as a tool for success; and (ii) the role of competition in market development.

Energy

By energy I don't mean oil, gas, and electricity, but rather the effort that goes into productivity. This was the focus of a presentation done by Andrew Deutscher of the "Energy project" group. The main theme around the presentation is that it is not how long you work that is important but rather how you work. In other words, productivity does not mean long hours of work, and the fact is that the longer your hours of work is the greater the risk that you become less productive. He went on to say that not balancing your life to include exercise, time to think, and spend with family actually leads to less productivity.

I have always maintained that when you see someone working long hours then more often than not those are the more unproductive persons. If someone has to be working ten to fourteen hours a day to achieve a task then it either means that (i) the technology or human resources are insufficient for production; or (ii) the person is unproductive and not innovative. It actually costs the company more to have persons working longer than regular hours, because it means more utility bills; greater risk of errors, as people tire and productivity falls; greater risk of fraud, as the person working long hours becomes frustrated and too in control of the systems; increased risk of higher health premiums for the company; higher risk of absenteeism from fatigue and health-related issues; and other such indirect factors. The problem is that many managers are not able to see the opportunity cost of an action, and love to see persons spending all sort of hours at work.

Isn't it more efficient to have a worker who gets tasks A and B done in four hours, than one who spends eight hours doing the same tasks? If we think even further then couldn't we also see the benefit to the company of having persons work from home rather than go to the office? The company would have more productive time available to it, as the worker would always have their computer and work environment with them (as BlackBerrys have done); there would be less use of stationery and utilities for the company, so expenses would decline; the worker would be more productive, as they don't have to deal with traffic and spend time getting ready for work; and there would be less demand for employee benefits long term as worker expenses would decline. This is actually a growing trend in the US, but in Jamaica we love to physically see someone drag themselves to the office, even though when they get there they go sit around a computer and never have a conversation with anyone until they are saying goodbye when they depart for home.

So the presentation says that what we need to focus on is not the amount of time someone spends at work but rather how much value they produce. We could also extend this to the national debt, and as I have always maintained, it is not the amount of debt the country has, or the debt to GDP ratio, that is important but what value do we get from the debt.

It seems to me, therefore, that one of the main problems we have with productivity in this country (at the national and company level) is not the fact that Jamaicans don't work long hours, as some espouse, but rather that our managers and leaders do not set objectives and outcomes. The result is that people end up working long hours but really do not have a value-added outcome to match it against. So an accountant who spends seriously long hours working in many instances, do not produce the financial statements in a timely manner anyway, and more importantly the accountant does not understand the link between what he/she does and the value added for the company. So if there is a change in the value added he/she does not know what to alter to produce information that can bring it back in line.

So the energy project says create an environment that will allow greater productivity (as opposed to long hours) and have a way of measuring that productivity, because what really matters is how much energy is put into the outcome.

If we had applied this concept of "energy" and outcome to compensation for public sector workers then we would have (i) a more productive and better paid public sector; and (ii) we would not have had the recent opportunity cost of the protracted wage stand off. This is because we would have had a measurable outcome to reward persons based on and the more productive would naturally earn more, rather than everyone getting the same outcome irrespective of productivity level.

So the real take away for me was that one of our main problems with productivity is that there is not a great focus on outcomes and value added in Jamaica. This is the main reason why our productivity, and ultimately GDP per capita lags behind other countries.

Competition

The other theme is that of competition. The presenters were Michael Fairbanks, who looked at some of the benefits of competition, and yours truly, who looked at a competitive analysis of the region.

The essence of the presentations was that it is the lack of competition that has held back market development in Jamaica and the region. The fact is that there is no country that has seen sustained high levels of growth without a competitive environment. Governments cannot efficiently pick winners or drive markets efficiently. This we saw coming out of the FINSAC era, where many private companies were under the control of the government. Although some may argue that we had growth after that era, the fact is that growth was driven by increased national debt and was relatively weak compared to the region.

We saw a very good example of what competition has done for the consumer and market development when the telecommunications industry became competitive, when Digicel entered. This is a microcosm of what can happen if we encourage competition in our markets, rather than continue with protectionist policies. The Caribbean is amongst the least competitive regions worldwide, and when one removes Trinidad and Tobago from the equation is probably the least competitive.

Is it any wonder then that as a region we have lagged behind most regions of the world in terms of economic growth and GDP per capita?

There were some good lessons coming out of the conference and the accountants have managed to show their readiness to provide the leadership necessary for regional development. The hope is that they will continue to implement some of these recommendations.

Lessons for Jamaica from the ICAC conference

LAST week the Institute of Chartered Accountants of Jamaica (ICAJ) hosted the annual conference of Caribbean accountants. This was the most successful one to date, with over 900 delegates registered, and more importantly for me, the theme, "Third to First [World] — going the distance", was superbly handled.

The conference did not focus on traditional accounting topics, but rather illustrated the fact that accountants are now a lot more than just the perceived book-keepers, representing in fact the most rounded professionals in a country. The theme we used as the basis of a presentation made by Professor Ghesquiere, from the Lee Quan Yew School, which focused on the Singapore success story. In addition to this presentation, Andrew Deutscher made a very informative presentation on "The Energy Project", which focuses on the role of energy rather than just attempts to get things done; while Michael Fairbanks and yours truly did a presentation on competitiveness in the region.

There were also many other enlightening presentations, but I think that these themes of (i) The Singapore experience; (ii) Energy as a tool for success; and (iii) the role of competition in market development captured the essence of the theme.

There were numerous lessons for Jamaica coming out of the conference, and those not in attendance really missed out on a very educational experience. It's not that what was presented was anything novel, as many other commentators have been proposing these solutions over time, but the interconnectivity of all that was said placed a special perspective on the recommendations.

Professor Ghesquiere did a fantastic job explaining the main factors that led to Singapore's success. The first thing he mentioned was that Singapore had exceptional leadership that focused primarily on economic development and growth, rather than the constant political power plays that we are used to in this region.

In fact, he was at pains to point out that Singapore and Jamaica had the same GDP per capita and level of development in the 1960s. The major difference was in the choices made by both countries. While Jamaica chose to focus more on social and political issues, Singapore, under the exceptional guidance of Lee Quan Yew, made economic growth and development their primary objective. So while we fought among ourselves for political and social supremacy, all of Singapore's policies and actions were geared towards economic development for the entire country.

He also pointed out, as many of us have been saying, that a very important part of Singapore's success was the fact that there was respect for law, order, and authority. He did point out that Singapore benefited from being a one-party state. In my view, in Jamaica sometimes we confuse indiscipline for liberty. For example, the argument that persons need freedom of expression so they must be allowed to play music at any volume, at any time, ignores the fact that the liberty of those being disturbed and offended by the noise is being disrespected. So we tolerate indiscipline and call it liberty. What we don't recognise is that for companies, countries, or even people to grow successfully, there must be rules and structure, otherwise it becomes a "free for all".

In Singapore labour and capital worked together for the development of the country. So during the recent recession, labour understood the need to take a pay cut in order to minimise job losses and to ensure that the country weathered the recessionary storms well. So while Singapore saw a harmonious working relationship between labour and capital during the short-lived recession there, in Jamaica we continue to see the stand-off between the government and public sector workers. And as a result of the inability of politicians, labour, and capital to work together, we have experienced thirteen consecutive quarters of GDP decline. So who wins in our case? Nobody.

What was also evident from the presentation was that an essential ingredient of Singapore's success continues to be trust between leaders and the people. What we find from the recent study about trust in Jamaica, however, is that amongst the least trusted are the police and the politicians. What is ironic about this is that these are the persons who are supposed to provide everyday leadership. The fact is that if there is no trust, then irrespective of how good your intentions are, no one will follow willingly. On the other hand, if the trust level is high then even when you have bad intentions people will follow until they wise up. It would therefore seem to me that repairing the breach of trust between our leaders and citizens should be a top priority.

Singapore also focused on economic growth rather than pursuing political objectives. This is critical to understand, and while many of us talk about economic growth and development, it is somewhat different to actually make it your primary objective. The fact is that much of the talk about economic growth and development in Jamaica is shrouded in the greater priority of politics and individual reward. Economic development for Jamaica will always be good for politicians as long as it helps them to remain in power. So even though we may realise that certain types of expenditure can derail an economy's development, we do it anyway because it is necessary to keep the party in power. Even though we know that duty waivers are not in the best interest of the country, we will support the policy only as long as it doesn't affect "me". This is where it is necessary for exceptional leadership to do what is good for the country and not any special interest group.

The last thing I will mention from the professor's address is that of the need to live within our means. For too long Jamaicans have consumed 90 per cent of the money we have borrowed. We have actually been borrowing to support a lifestyle that we cannot afford. There is no way that we can continue on that path, as countries like Greece have seen. Those who argue that while we were borrowing in order to consume, the economy was actually getting better, fail to realise that we were actually getting better, fail to realise that we were actually digging our own graves. What we must do is cut our suit to match the cloth we have. On the other hand, though, I don't think this means that we must stop borrowing or spending, and I somewhat disagree with the notion that debt is bad. As long as the marginal return of debt exceeds the marginal cost, then debt is good. What we must change is the way we spend money: we must ensure that we spend it in such a way that we receive a value added in excess of the cost. This would include, for example, infrastructure spending to support industries such as tourism and agriculture. A country where the tourist capital is separated from the national capital by a single-lane bridge over a river that is impassable when rains fall, while having a debt to GDP ratio of 129 per cent, cannot be serious about development.

Next week I am going to look at the other two themes I found very interesting at the conference, those of energy and competition. Until then I urge us all to think about these things that the professor has brought from his experience and reflect on why Jamaica is in its current position, after having been the model Singapore looked at favourably in the 1960s.

Competition's essential role in development

Two weeks ago I spent a weekend at Jamaica Grande with my son. I forgot to take my camera with me and therefore asked one of the roving photographers to take a picture of us, so that we could have a record of our time there. When leaving I went to the photo shop (not operated by Jamaica Grande) and asked for two copies of the pictures to be placed on a compact disc (CD), so that I could have a digital copy. To my surprise the attendant informed me that that could not be done, and I would have to purchase printed copies, as the policy is that only if you purchase five or more copies could it be placed on CD.

I wondered to myself who in this day and age keeps printed copies of pictures, and secondly if the problem is the cost of the CD why not just tell me that I would have to pay for the CD, which surely costs under J$100 and I think would cost less than the printing and paper cost. Instead the attendant was adamant that it could not be done. I therefore left without purchasing the copies, and the photo shop ended up with digital copies that they didn't recover any cost for.

This is reminiscent of the way Cable and Wireless behaved when they were the sole mobile provider. Those old enough will remember the days when to call another cell phone was like taking out a mortgage on a house: what is more, the person receiving the call would pay also. Even before that time, for those even older, I remember when one applied for landline service a woman could have two children before the phone service was connected.

When Digicel entered the market in the 1990s it changed the whole landscape. Finally there was competition and there was no need for any regulations for consumer protection, as competition and the drive for market share and profitability ensured that the consumer became king. It is therefore logical that if the market is open to even further competition, through number portability for example, the consumer will benefit even more. Additionally the market will grow as more money will be spent on advertising and infrastructure development.

We have similar situations where (1) the JPS is the monopoly distributor for electricity; (2) NWC is a monopoly; and (3) the banking sector is effectively closed and does not allow for more flexibility in fees and interest charges. The result of the lack of adequate competition in these areas means less benefit for the consumer, or in the case of the JPS or NWC, you either pay for the service or do without.

What we have failed to realise as a country, however, is that the way to solve the plight of the consumer, when it comes to monopolies, is not to regulate, regulate, and regulate, but rather to open up the market to competition. So in the 1930s the great USA realised the problem with monopolies and they passed the Sherman Act, which controlled monopolistic tendencies. Or across Europe and the USA when two large entities seek to merge they first have to get the blessing of the authorities, who will not approve the merger if they believe it will lead to monopolistic tendencies .

In Jamaica, however, we never seem to try to solve market distortions by creating more efficient markets through competition. Rather what we do is seek to regulate it. So instead of trying to assist consumers suffering from high electricity or telephone rates we talk about giving more power to the OUR, rather than spending our energies discussing how to create a more competitive market and greater market efficiency. It seems that even though we talk about the benefits consumers have gained from the liberalisation of the telecommunications market, we don't seek to emulate it. Is it any wonder then that we have suffered from economic stagnation since the 1970s or significant fiscal and trade deficits?

The only way for economies to develop is through competition. Even communist China has realised this, and is the fastest-growing economy in the world and one of the most competitive.

Competition, of course, should never be unbridled but should have oversight. If left unchecked we could end up with another global economic crisis, but it is important that as many players as possible be allowed to participate. The regulators should act as referees in a football match who do not interfere with the free flow of play but who ensure fairness.

This need for market efficiency through competition is one of the primary reasons why Jamaica has failed to realise its full market potential. During the 1960s we had a lot of development, not because government picked winners (as we have sought to do since the 1970s) but rather because the enabling environment was created and we watched the private sector expand the economy. It seems, though, that since the 1970s our governments have had a socialistic tendency towards economic management.

When I spoke about the need for a paradigm shift in my book, it wasn't only a shift in government policy, but rather the need for a cultural shift and the way that we approach market development. Jamaica will never truly develop until we allow for an environment where greater competition is allowed and the best companies are allowed to survive and the worst ones to fail, as they should. Otherwise what we have is market distortion, which leads to a stagnant economy and finds its way into fiscal and trade deficits.

So at the end of the day, to go back to the example I started with: if there were two photo shops beside each other, what would have been the possible outcome of the interaction I had with them? In my view the story would have had the following outcome.

Both would first ensure that they had well trained photographers with the best cameras, taking pictures of all the guests. They might then go further in marketing the pictures to the guests by creating some link to display the pictures to the television sets in the guest rooms and offering some kind of package actively. They might even offer that the payment could be made through the internet and the pictures delivered electronically. One thing is sure: is they would never set a minimum purchase before one could get digital copies on CD.

So at the end of the day we would have (i) a better trained work force; (ii) a better paid workforce; (iii) greater market activity and efficiency; (iv) greater infrastructure investment; (v) more market information; (vi) increased corporate profits; and (vii) higher standard of living and consumer satisfaction. All from a little competition.

Jamaica’s telecommunications industry

THIS week CNN reported on an article titled "WHO: Cellphone use can increase possible cancer risk". I think that this is something that many persons suspected, before but coming from the World Health Organisation this cements the belief in people's minds. I wonder how this will affect cellphone usage going forward.

This got me thinking about Jamaica's telecommunication sector, which has made a valiant attempt to keep pace with what is happening in a developed market such as the US, but with the coming merger between Claro and Digicel and the consistent losses being shown by Cable and Wireless (trading as LIME), it seems as if this sector could fall back into one where competition is all but absent.

I had long thought that this day was coming, and remember advising someone a few years ago that C&W shares at J$1.60 at the time was a bad buy, even though that price was a 52-week low, because I felt that the share price would fall considerably. It is now trading at approximately 20 cents. I also expect that the share price will fall further as when I look at the way the company is presently structured I don't see how it will emerge from the black hole it finds itself in. There are a few reasons for my thinking this way, which I will briefly outline. Before I do so, I think that given this situation it is important for the regulators to look at the situation and see how best the consumer can be protected going forward.

The truth is that given the nature of the business and the market, I wouldn't be surprised if Digicel is having a difficult time also, which cannot be assessed because of the lack of financial information.

The industry itself is one where significant capital infrastructure investment is consistently required, and with the decline in disposable income across Jamaica, it should be extremely difficult to recover. So like the airline industry, the greatest amounts of money are not made by the service providers, by the agents, or those that do business with the service provider. The main issue of course is the capital investment cost. The Jamaican market is just too poor for maintaining a sustainable competitive environment in telecommunications development.

As a result the regulators will have to be proactive in protecting the consumer.

C&W financials

The recently published audited statements for C&W show a company that has significant challenges, and I think the mistake that management has consistently made in that company is not recognising the need for a paradigm shift. Maybe the current management will make that change given their ability.

The group continued to show significant losses, and losses attributable to stockholders increased from J$3.3 billion to a whopping J$6.1 billion in fiscal year ended 2011. Further analysis on the Group Income Statement showed that the gross margin declined year over year (YoY) from 65 per cent to 57.6 per cent, reflecting the deteriorating market conditions and competition from Digicel. Although the group managed to reduce operating expenses by over $2 billion, a careful look showed that the reduction was due to a non-cash item, depreciation and amortisation, which does not add cash flow and also suggests that the equipment is ageing and will need to be replaced soon, especially if it is to keep up with Digicel, which already has over 70 per cent of the market. The group shows an improvement in the operating loss before net finance cost line, from $3.0 billion to $2.6 billion, but when one removes the depreciation consideration, it shows that the cash-generating activities worsened, as is reflected in the cash flow statement, which shows that net cash provided by operating activities declined YoY from $4.9 billion to $1.2 billion. This suggests that the group is facing a tighter liquidity situation and is supported by a cash injection from group companies of $5.6 billion.

It is important to note, though, that the group is still very liquid and is still generating cash from operations. The main concern is that going forward it will need cash resources to upgrade infrastructure.

LIME at the crossroads

One of the things that the group may have to look at in restructuring the operations is the charge of the interest to C&W from advances from other group companies. If this debt is taken into consideration ($19.9 billion), the group has a debt to equity ratio of 3.7, but if the internal debt is removed the debt to equity is 0.12. The majority of the interest paid is also within the group. The suggestion is that one way the group could significantly turn around the fortunes of the company is to capitalise the debt. This would significantly reduce the burden on the company and improve the operating position.

The challenge they will continue to face, however, is capital replacement going forward and competition from Digicel. As I had stated in an article a few weeks ago, this big bother about the Digicel-Claro merger is really a red herring. Even if the merger does not take place C&W is in danger of extinction without any significant restructuring, or unless the regulators introduce portability of numbers.

This operating challenge is also evident in the current ratio, which stood at 0.72 on March 31, 2011, and where the Trade and accounts payable is twice the Accounts receivable balance.

The numbers do tell a lot more about the group, but lack of of space and time does not permit a much more comprehensive report. Suffice it to say that C&W is at the crossroads and must make a fundamental shift in order to preserve the competition in the local marketplace. There is of course a logical action I think either Digicel or C&W can take to increase profitability, which I am sure they have thought about already. The group still has significant liquidity, despite the decline, and I am hopeful that with the management team that is there it will overcome this obstacle for the benefit of Jamaica's telecommunication industry.

That FINSAC issue

IT seems as if the Finsac issue will never settle down, as it has been debated by both sides of the political divide and civil society since the 1990s. This is why I strongly supported the need for some study/ commission, as it is necessary to understand the causes of the greatest financial collapse in Jamaica. After all, this was the era that reversed Jamaica's economic improvement, as all data shows that up to the mid-1990s, the economic indicators were looking good and entrepreneurialism was strong.

In my view, it was therefore very important to do a proper study of the period and understand what went wrong, not to cast any blame but to understand fully an era that resulted in the beginning of our economic stagnation and debt crisis. And so I welcomed the commission of enquiry, but have always felt an objective, academic study of the period was necessary before any testimonies were taken.

This approach is essential in order to avoid what is happening now — a lot of crosstalk and blame being thrown around. For at the end of the day, what do we really achieve apart from political and other point scoring? Will we truly find out what went wrong, and even if we do come up with the truth, the whole truth, and nothing but the truth, will it be believed by most people? The sad truth is no. As we are seeing today, this Finsac issue is going to be argued along party, business, and banking lines.

It is therefore going to be even more difficult for us to arrive at the truth of what happened, and my prediction is that whatever report the enquiry comes up with will be believed by 50 per cent of the country, while the other 50 per cent will disagree. So at the end of the day we will have ended where we started.

There is, in my view, some truth in what is being said by all sides to the story, but there are also half-truths and lies. The only way for us to salvage some objectivity and arrive at an answer, at this juncture, would be to set up a group to do an objective study, made up of the members that are acceptable by government, opposition, business community and civil society. And this group must not include anyone who was affected by the meltdown, as it is too emotional a subject.

I will attempt to provide a synopsis of what went wrong, based on the research I did while writing my book.

The platform for the financial meltdown was created with the premature move to liberalise the Jamaican economy, as stated by Ralston Hyman. The fact is that the economy and our resources were not ready for the onslaught of global competition. One reason we were able to achieve growth towards the end of the 1980s was the protection provided to the economy. It is not that our economy was much more efficient than today, but we were at the time restricting foreign exchange movement and therefore local producers were protected. This is why a fixed exchange rate regime could work then but couldn't work today.

With the coming of the 1990s and freer world trade, there was a push by organisations like the WTO and the IMF for countries to liberalise their trade policies and foreign exchange movement. In fact, one can remember that the mantra of the IMF was always to get competitive through currency devaluation. This, however, was never going to be easy for a country like Jamaica that had a broken market economy and an internationally uncompetitive private sector. Our labour force was also relatively unskilled and unproductive. So in the 1980s, for example, the only way to attract the garment industry to Jamaica was through cost incentives.

The liberalisation policies in the early 1990s, therefore, resulted in significant exchange rate depreciation followed by high inflation. Faced with high inflation, businesses, including banks, would invest in assets such as real estate and land that rose significantly in value each year, and when these assets were revalued on their balance sheets, the equity would always increase even without doing anything else but just holding them. Business owners borrowed money from banks at rates in the high-teens to low-twenties, and purchased real estate and US dollars, or if put into the business they would just increase prices every year and recoup from the poor consumer.

This, of course, was unsustainable and would have come to a stop either from government policy or deflation, as disposable incomes would have fallen in real terms sooner or later.

Faced with this situation, the government correctly used monetary policy, through high interest rates, to halt inflation and bring the exchange rate under control. The problem the government faced was that if it reduced interest rates, then the inflationary cycle would take hold again. So what should it do? And so it continued with the policy of high interest rates. This was against a background of inadequate foreign exchange supply and reserves, low productivity, and an uncompetitive private sector. The correct move would be to reduce money supply, reform the public sector bureaucracy, and in the interim attract foreign exchange (borrow or FDIs) to stabilise the economy. The choice was to continue with the high interest rate policy, and the following were the resulting factors:

* Persons who borrowed at around 20% now saw loan rates of up to 90% and there was no way that businesses could support that interest cost, and it was therefore just a matter of time before the businesses started to collapse; and

* Asset values started to stagnate or decline, resulting in much tighter liquidity and declining capital reserves on the balance sheet of banks. Banks also faced much higher interest cost on overdraft facilities at the BOJ, which they needed to support the worsening liquidity situation.

There was a liquidity crisis and so the government had no option but to step in, through an entity such as Finsac, to provide liquidity support for the banks. So the truth is that it was the continued high interest rate policy that resulted in the liquidity drain, but there were other factors that set the platform for this, such as (i) poor financial regulations; and (ii) bad business practice, in terms of balance sheet, and more specifically debt and risk management both at the level of the business and banks.

But what happened after Finsac exacerbated the problem. Finsac should never have taken control of the assets and businesses in the way that it did. What should have happened is what occurred in the US, after the recent financial crisis, which is that the government through Finsac should certainly have provided the liquidity support for the banks but should have (i) allowed control of the operations to remain with the private sector, if even a new management team was hired, which would deal with the assets instead of Finsac; and (ii) if the government was going to sell the debt it should have been offered to local entrepreneurs at that price, through an objective body.

There is a lot more that could be said, but space does not permit and any more details require financial analysis. What is clear, though, is that without an objective study we will never have significant acceptance of any findings, and that things not only went wrong with government policy but there was bad management practice in both the businesses and banks.

The role of fiscal policy

FISCAL policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy.

Coming out of Jamaica's recent budget presentations, and globally since the recession, some have asked the question, what is the role of fiscal policy? In fact, there has been a sharp division between those who support the Keynesian model and those who oppose it, particularly in the US, where the Republicans, Tea Party members in particular, have questioned Obama's use of fiscal spending in creating hundreds of jobs instead of allowing the free flow of the market.

The downside of fiscal spending is of course an increase in public debt, and the upside, it is argued, is the need to stabilise the economy, especially in a recession, to ensure that the decline is not so significant that it leads to poverty and possible social unrest. The results of this fiscal spending in the US have been (1) significant increases in the fiscal deficit and public debt; and (2) a reprieve for many households and a halt in the slide of the global economy.

Because history does not reveal its alternatives, one cannot with certainty argue what would happen if this fiscal spending did not take place. My own view is that the US economy would have declined further, like in the 1930s, thereby exacerbating the global crisis, and we would have seen much greater global suffering. In fact, we see what has happened in countries such as Greece, UK, and the Middle East, where the lack of fiscal spending has resulted in social unrest.

What is evident is that two similar forces cannot repel each other. So it is general consensus that in order to stop a recession then what is needed is an opposing force, such as private investments, job creation, or fiscal spending. In a declining economy, it seems logical to me that when private sector or consumer spending is in retreat, then one has to have fiscal spending in order to repel the force of recession. There is no doubt that economies cannot free-fall or rise forever, and will always adjust from strong growth or decline, as the survival instinct of people will always cause an adjustment. The challenge that governments face is how to smooth out these adjustments, so one does not have excessive overheating of an economy that causes inflation and rapid pull-back, or there is not prolonged decline.

This effort by governments is done through fiscal policy. It seems logical therefore that when an economy is growing fiscal policy should be mildly applied, and should be geared towards encouraging the continuation of an environment that prolongs the growth period and very importantly ensures that the wealth created is not concentrated in the hands of a few. This can be done through policies such as subsidised health and education, or tax incentives. When an economy is in growth mode the use of monetary policy is always more effective at smoothing out growth periods.

When an economy is in decline, however, monetary policy should take a back seat to fiscal policy. In other words, fiscal policy should be the counter-cyclical force to the recessionary environment. If this does not happen, then the economy will decline much further than if fiscal intervention is used to halt that decline, as business and consumer spending and investments will naturally be in retreat. This is because the natural behaviour of private individuals is to retreat when there is economic danger.

This has been the failing of the IMF programme and the previous budgets to this current one. This is also the reason why the economy went through 14 quarters of consecutive decline. The fact is that if an economy is in decline and all sectors retreat, including government (and government should be the savings account for the country), then obviously it will decline further unless some opposing force causes a sudden stop. In the Middle East, for example, that sudden stop was social unrest. In democracies like Jamaica, that sudden stop would have come after much prolonged suffering, when new injection comes in the form of aid, loans, or at a much slower pace, private investments and economic activity.

This is why the recent budget's direction, along with the PIOJ growth-inducement strategy, has been a significant positive change in the fortunes of the economy, as it shows that fiscal policy is now being used to create that enabling environment and inducement for economic growth. If this was done up to a year ago then we would have started to see growth already, as the global economic conditions had improved some time ago.

On the other hand, fiscal policy should not be used to facilitate welfare spending, which was the problem of the budget and economy prior to even the 2008 recession. This is why I have kept saying that Jamaica has always been a welfare state, and is the reason why the economy has struggled to grow. Our use of fiscal policy over the years has not allowed for the market to be efficient, and we have been no different from the archaic and inefficient economies created by the former socialist states.

It is for this reason that the recent budget presented by the government has been correctly welcomed by private sector groups, and understandably so. Government must now go further and eliminate all incentives and allow the entire private sector to play the game on a level playing field. If this is done then the more efficient companies will survive and the economy will grow. If we seek to protect inefficient companies then the economy will continue to experience stagnation or relatively slow growth.

Even while this change in the budget direction is welcome and necessary, including the upcoming tax measures, it is not sufficient. What will be needed is for a sustained move in this direction. We need to ensure that the government is held to account to continue moving fiscal policy in this direction, as it is the only way to get the market efficient and confident enough to maximise the value from private investments and spending, and ensure high levels of growth in the future.

What I am fearful of is that because of elections this trend might be reversed, just as we have in the past reversed positives in order to “run with it” for an election. If the government sticks to its commitment of preferring policies for economic growth over political expediency then we will get to the “promised land”. If, however, political expediency raises its ugly head again then we will be back on the track to nowhere.

It is therefore critical that when we are analysing the budget presentations, and policy proposals being put forward by the government, opposition, and other parties or independents going into election, we pay careful attention to the effect of the policy proposals and not be distracted by the hype and fever around election platform speeches. This is the role of those in civil society that have the capacity to understand the true effect of the policy proposals, and those persons should facilitate the education of the masses in this respect.

After the courtship leading up to the election, or even the wedding on election night, we have to live with the government for at least five years.

Achieving Vision 2030

"JAMAICA, the place of choice to live, work, raise families and do business" — Vision 2030 National Development Plan. If Jamaica becomes this place then we would have truly transformed from being a third-world country where we kill, cheat, and slander each other, to a truly first-world nation not to be outdone by even the most developed countries.

It is this vision I always dream of Jamaica becoming, and what drives me to criticize society's ills and misguided policy actions that have led to our economic stagnation for 35 years. Jamaica has excelled in every area except for politics. There are, of course, a few politicians that one can hold up as having been "a few good men", but overall politics has led this country on a downward spiral of destruction, as the aim of achieving state power always supersedes the good of the country.

The question therefore is whether, with 18 years before 2030, we can realistically achieve Vision 2030, as stated in the plan. If in 50 years of independence we have been unable to truly mature into a nation, then can we do so in 18 years and what do the indicators tell us? After 50 years we remain two tribes at war with each other, reminiscent of the African tribes, our forefathers who fought and sold each other to the Europeans as slaves. Isn't the divisiveness we have practised over the past 50 years tantamount to keeping Jamaicans in slavery also? The fact that every year Jamaicans have to await the presentation of the budget to see what new taxes we will be forced to pay is similar to the feudal master extracting money from his subjects for his estate.

So here's the real question once again: is there any hope for us and will we see that change occurring by 2030?

From my own perspective I think there is a ray of hope, given developments over the past couple of years. Some of these are listed below. I would start out by saying that in order to achieve Vision 2030 we have to recognise that primacy in that Vision must be the respect for our people and justice and the promotion of unity amongst Jamaicans. This is what Vision 2030 is about, and what will make Jamaica the place of choice to live, grow families, and do business. Because today what we have is a country where people will come for sunshine, beach, fun, and jerk chicken, but would rather go back to cold North America to raise their families and work, so as not to be subject to the vagaries of our society.

In order to achieve Vision 2030 this attitude must change. And if we do achieve this change, then I guarantee that Jamaica will be one of the most prosperous places on the planet. The only drawback is that our feudal... I mean political masters will see power ceded from them to the people. This is why in my book, I started out analyzing economic data and concluded by saying that the real problem with Jamaica is our constitutional political system.

I believe, however, there are some things happening that give hope that Jamaica can achieve Vision 2030, but require consistent application in order for it to be achieved. These are:

1. Tax reform: the Finance Minister has been at pains to indicate that the tax system is going to be reformed to encourage greater productivity and production. At the time of writing the revenue numbers have not yet been presented, but based on things I have been hearing I am hopeful that the necessary tax reform will come that will provide a boost to the productive sector. I am also confident about the Minister's determination to do so, and commend efforts already in place, like the Tax Administration reform.

2. Public Sector Transformation: a lot of work is being done here, and I am hopeful that it will be properly implemented. My own view is that a lot of time has been wasted, however, trying to transform a system that cannot be centrally done (as this was always the problem) and that could easily have been done in a year or two with simpler steps.

3. Charter of Rights: after taking almost 20 years to pass this bill, my understanding is that we are still waiting on the Governor General to sign it into law. This should be immediately done, as the people have waited long enough for fundamental rights to be enshrined in the constitution. Jamaica owes a debt of gratitude to Edward Seaga, who piloted the bill, and we must also commend the politicians for recently passing it in both houses. Personally I do not see the merit in the arguments that the government can be sued for not paying for education for the poor, because it is included as a right, and seems to be politicising the charter already. I mean, I have the right to breathe fresh air, so if I choose to live near a dump, do I have the right to sue the government, or can I sue the government for depriving me of sleep because of night noise?

4. INDECOM, DPP, OCG, and Public Defender: In spite of the public spats that have occurred between these offices, I think the holders and the way they have approached their work is to be commended. Each office can be cited for their efforts to uphold justice or stamp out corruption in one way or the other, and as a country we are fortunate to have had all these offices seemingly working for justice and ethics. I actually believe the public disputes between the offices are good for our democracy. It happens in the great USA, and is healthy as it shows that each office is prepared to defend what it believes is right against other sections of the justice system, which is good control.

5. Police Commissioner: we have a maturing police force under Commissioner Ellington. Over a year ago I indicated that what Ellington does would be what determines the future of this country. I think he has brought a level of discipline and ethical standards to the police force that has been lacking for as far back as I can remember. For the very first time in memory, policemen and women can proudly say they are a part of the JCF. My own view of the police prior to this was a rogue element. In the next survey of trust, we may very well see the police force significantly better than our politicians. Two other officers doing an excellent job are Radcliffe Lewis and Dathan Henry.

6. Civil Society: Lastly, but by no means least, I want to mention the role that civil society has played over the past few years. There is no doubt that there has been a very active and determined civil society keeping our politicians pressured to ensure they get back on the right track when they falter, as they so often do. This is good for our democracy and is the reason why Jamaica will not go the path of the Middle East, as some think. I note that the cries for justice have come from individuals who have formed organisations to fight the corrupt system. These include JFJ, FAST, JUSD, environmental organisations, Columnists, and the list goes on. What is evident is that this change has been carried by individuals while the private sector leaders have apparently caught on, which is not unusual.

Notice I have not mentioned any growth-inducement strategies or macroeconomic numbers as the means to help us achieve Vision 2030, as these are mere symptoms of the underlying problem. If we have social justice and make Jamaica the choice to live and raise families, businesses will certainly follow and economic growth will result. While the signs for social justice are positive, we must ensure we remain consistent, as like a train progress is easy to derail.

Finally I want to add that the biggest failing has been the inability to address our high energy costs. I think there are initiatives that can be taken to ensure a reduction in our energy bill, but until then energy costs are the greatest threat to businesses and disposable incomes today. More on this another time.