The official numbers continue to show positive economic growth and all indications are that this will continue. As I have stated before, however, our economy is in a fragile situation and must be treated with care, as this economic growth can easily be compromised by crime and reckless political decisions. Outside of crime, my main concern remains that leading up to elections the future of Jamaica, and Jamaicans, will take second place to politicking.
One of the main factors driving investments is confidence and this is a significant reason why Jamaica’s economy experienced some amount of buoyancy over the last six months of 2006. The confidence index showed that investor confidence improved, and consumer confidence remained high, during the last calendar year, and no doubt this would have contributed to the improved economic performance.
Over the first two months of 2007, however, we have seen crime return with a vengeance, with over 200 murders being committed thus far. More frightening, however, is the number of police who seem to be involved in criminal activities. It is indeed a good thing that this is being brought to light. No doubt this level of police corruption has always existed but finally it seems as if the leadership of the police seems to be bent on doing something about it. This is a welcome sign and Jamaicans have waited too long for this type of leadership to emerge, which needs now to be replicated in our political system. If we can weed out corrupt politicians in a similar vein then this country will be one of the best places to live.
Police shake up
On Wednesday both newspapers reported that the police high command is going through a major shake up in order to combat the growing crime problem. I believe that this move is a realization that even at the highest levels the police have been compromised. This endemic corruption within the police force is of course the major inhibitor to solving crime, as if the body that is supposed to fight crime is compromised then there can be no solution.
Over the years we have sought to deal with crime by announcing aggressive assaults consistently through the use of ant-crime squads, which have done nothing more than cause great pain to the less fortunate people. In other words we have tried to deal with crime by “cracking skulls” rather than intelligence, and by doing so have created some criminals within the police force itself.
If we are really serious about solving crime it is not enough to just focus on reducing the murder rate. This is of course necessary in the short term, but a long term solution must be to attack the root of lawlessness. When I look around at places such as Montego Bay and Kingston, it is obvious to me what the main problem is. The fact is that generally there has been a break down of public law and order, which the only one that seems to have made any concerted effort to address, in my opinion, has been Mayor Mckenzie.
I have always said that we cannot be effective in reducing murders over the long run if we cannot even control a few taxi men who continue to treat the roads as if it is their private driveway. Two weeks ago I wrote about the state of Montego Bay, our tourist capital. The main problem with Montego Bay is the lack of public order, and this responsibility I think rests squarely with the parish council and the chamber of commerce.
Recently I met with a good Montegonian, Mark Kerr-Jarrett, and discussed with him the current state of affairs in Montego Bay. He also is of the opinion that the man problem in Montego Bay is a lack of public law and order. He also correctly stated that if Montego Bay is to recover then public law and order must be enforced by the local authorities and police. He agreed with me that if we allow Montego Bay to dissolve into oblivion than the entire Jamaica would suffer, as much of Jamaica’s tourism spending is derived from there. This would be a major blow to our current path of economic growth. Maybe what we need is to have Montegonians elect their Mayor directly, as in Portmore, so that people such as Kerr-Jarrett can run for office without subjecting themselves to the filth of our political system.
Any effort to permanently deal with the scourge of criminality in this country, must not only be addressed at hardened criminals, but must of necessity include an assault on the break down of law and order generally. We need to put a stop to the manufacture of criminals by discontinuing the corruption in the public sector and enforcing discipline in the society. Public law and order issues includes (1) public disturbance through the playing of loud music, at anytime of the day, from dancehalls and churches alike; (2) the lack of proper pedestrian signs, which results in people crossing the roads whenever they feel the need; (3) taxi men who continue to hold bedside conversations in the road with each other, by stopping in the middle of the road; (4) double parking on the roadways; (5) littering of gullies, without sufficient fines and enforcement; and (6) vending on the sidewalks.
Discipline required
Unless we can address these issues we will not be able to maintain discipline in the society. And if we cannot have basic discipline then these same undisciplined people will grow up to be hardened criminals. What happens is that people will continue to buck the system as much as possible to see what more they can get away with. So when goods are imported, without being properly approved, then when people get away with this they will feel that they can bring in illegal goods or even export them. I listened to the reaction of a caller to a call in programme, who lamented the fact that the authorities planned to make skin-bleaching products illegal, and that if it were done then he would vote against the government. This shows that people realize that politicians will sell their soul for political power. The crime would be if the government bows to this sort of pressure.
This is no different in a company. If there are no HR rules to govern behaviour of people in an organization then their will be no lines of authority and chaos will result. In the long run you will find that no decisions can be made as the persons in charge lose authority. A small organization can get away with this, but as the organization grows then strict rules must be in place to govern behaviour else stagnation will take place. Similarly, we cannot expect to grow a country and still have practices that are suitable for a small town.
When there is a breakdown of law and order then it is the biggest “bandooloo” who will prosper, not the one with the best talent. This is the danger that Jamaica faces. This causes inefficiencies to creep into the market, and eventually the country becomes internationally uncompetitive, as even though we will have no regard for efficiency, we will still be subject to the workings of the global economy.
As one talk-show host loves to say, “The man who plays by the rules gets shafted”. If Jamaica does not ensure that there are rules that everyone plays by consistently then the whole country will get shafted.
Friday, February 23, 2007
Friday, February 16, 2007
What determines investments?
Last Wednesday the Fed Reserve chairman, Ted Bernanke, reported on US economic outlook at Capitol Hill. The global investment market zeroed in on any indication about inflation and the direction of interest rate movements. The movement of interest rates is of course one of the most fundamental factors affecting investment decisions. If rates go up, then the currency becomes more attractive to hold relative to another, as the returns on holding the currency is greater. On the other hand, a rise in interest rates is unfriendly for real investments as it means that as an option, borrowing money becomes more expensive, and consumers will have less disposable income. Similarly, if rates decrease then it means that financing for a business becomes less expensive, and this will encourage business activity.
From the consumer’s perspective, lower interest rates means that mortgages, and other consumer loans become cheaper. Consumers will take advantage of the less expensive money to improve their life styles by buying new houses and motor vehicles.
Here in Jamaica, one concern expressed is that even though interest rates are declining, we have not seen a corresponding increase in commercial investments. This of course is cause for concern, as if there is no increase in real investments then foreign assets are more attractive, which will place some amount of pressure on the exchange rate. It is therefore critical to understand what factors affect new investments, as clearly declining interest rates is not enough.
Jan-06 Dec-06 Change
T-Bill 12.47% 11.60% (0.87%)
Installment credit 23.07% 21.65% (1.42%)
Mortgage credit 20.26% 13.09% (7.17%)
Personal credit 29.19% 27.64% (1.55%)
Commercial credit 13.72% 13.36% (0.36%)
Local Govt & Other Public Entities 12.09% 12.12% 0.03%
Central Govt 16.49% 13.83% (2.66%)
Overall A/W Rate 17.50% 17.59% 0.09%
Average interest rates
The table shows how average interest rates have moved, between January and December 2006, on various types of loans (www.boj.org.jm). Average Treasury bill rates have reduced by 0.87% over the period. The most substantial reduction has been in mortgage credit, and this is evident in the aggressive rates that are being offered by institutions such as BNS and Jamaica National. The other areas that have seen a fall of more than 1% are installment credit (hire purchase included), personal credit (which would include motor car loans), and loans to central government (which would be impacted by the reducing rates on government paper).
What we find is that commercial credit has not seen any significant reduction in rates. The question is what would have caused such significant reductions in consumer type loans, but in the area where it is needed to fund business expansion (commercial credit) the rate reduction has been marginal in comparison. The two main factors in my opinion are (1) there is a much greater demand for consumer borrowing, influenced by the advertising and loan facilities made available by banks; and (2) banks consider commercial loans more risky than consumer loans, as spreads are lower and venture capital is not readily available from banks.The low demand for commercial loans, and the accompanying risk-averse nature of banks, results from a perception developed out of the FINSAC era and the lack of confidence in the ability of the authorities to administer law and order. One of the main negatives of the high interest rate policy Jamaica pursued, leading to FINSAC, was not the loss of investments, but rather the damage done to our entrepreneurial spirit.
The fact is that even if interest rates were to be reduced by 5%, there would still be limited uptake in corresponding investments. The reason for this is that investment decisions are affected by much more than interest rates, and other monetary policy. We have to remember that economics is a social science, and consequently is a study of the behaviour of people. When we change monetary policy to influence economic outcomes, what we are hoping to do is influence the behaviour of individuals. So reducing interest rates does not by itself improve economic performance.
When interest rates are reduced, it is expected to have the result of affecting people’s investment decisions, as it is hoped that an individual will want to borrow money at the lower cost and invest it in real businesses, which gives a higher return than the cost of the funds borrowed. And this is what happens in countries such as the US and UK. The reason why a rate reduction will have the intended effect therefore is because individuals will react in the desired way. What we need to ascertain then is what is it that influences this reaction from individuals?
In the US, for example, when the Fed wants consumers to increase economic activity and drive new investments they will lower interest rates. Lower rates will mean reduced funding costs for businesses and consumer purchases. Thus demand for debt financing will increase. When these funds are accessed then individuals will look at the investment options available and invest in ventures that will give them a consistently higher return than the cost of the borrowed funds. Lower rates will also cause the currency to devalue against that of major trading partners (assuming their rates do not change), resulting in the relative price of goods produced being cheaper, thus increasing exports.
Social factors
The problem we have is that the social factors are a challenge for us. The expected effect of interest rate movements assumes that investors are indifferent between investing in financial products and real investments, and whether they do or not depends on the level of interest rates as one factor. This of course also assumes that people have the necessary confidence in the economy that they will want to make real investments, which is the issue for Jamaica.
The confidence of Jamaicans is affected by (1) the memory of FINSAC; (2) the level of crime, and in particular extortion, which is an unpredictable cost of business; (3) the level of government bureaucracy; (4) the unpredictability of tax policy; (5) the competence of our workforce; and (6) the time it takes to resolve commercial transactions in the courts; as some examples. If investors cannot have reasonable confidence that the environment will remain suitable for business, then irrespective of how low interest rates are, we will not see any significant increase in real investments. Instead we will see investments in ventures that provide quick returns, as one is not sure how much time is available for investment recovery. This is certainly one reason behind the choice of some Jamaicans to invest in high risk alternative investments, as it is their right to do. After all it is not as if we have moved out of real investments to paper investments. We were mainly invested in government paper before, so all we have done is moved from one paper investment to another.
If we are serious about increasing the number of real investments by Jamaicans, we must encourage an environment where people feel safe to invest. Our crime problem, government bureaucracy, and the way we handle development work in our tourist capital does not leave one with a lot of confidence in the investment environment.
From the consumer’s perspective, lower interest rates means that mortgages, and other consumer loans become cheaper. Consumers will take advantage of the less expensive money to improve their life styles by buying new houses and motor vehicles.
Here in Jamaica, one concern expressed is that even though interest rates are declining, we have not seen a corresponding increase in commercial investments. This of course is cause for concern, as if there is no increase in real investments then foreign assets are more attractive, which will place some amount of pressure on the exchange rate. It is therefore critical to understand what factors affect new investments, as clearly declining interest rates is not enough.
Jan-06 Dec-06 Change
T-Bill 12.47% 11.60% (0.87%)
Installment credit 23.07% 21.65% (1.42%)
Mortgage credit 20.26% 13.09% (7.17%)
Personal credit 29.19% 27.64% (1.55%)
Commercial credit 13.72% 13.36% (0.36%)
Local Govt & Other Public Entities 12.09% 12.12% 0.03%
Central Govt 16.49% 13.83% (2.66%)
Overall A/W Rate 17.50% 17.59% 0.09%
Average interest rates
The table shows how average interest rates have moved, between January and December 2006, on various types of loans (www.boj.org.jm). Average Treasury bill rates have reduced by 0.87% over the period. The most substantial reduction has been in mortgage credit, and this is evident in the aggressive rates that are being offered by institutions such as BNS and Jamaica National. The other areas that have seen a fall of more than 1% are installment credit (hire purchase included), personal credit (which would include motor car loans), and loans to central government (which would be impacted by the reducing rates on government paper).
What we find is that commercial credit has not seen any significant reduction in rates. The question is what would have caused such significant reductions in consumer type loans, but in the area where it is needed to fund business expansion (commercial credit) the rate reduction has been marginal in comparison. The two main factors in my opinion are (1) there is a much greater demand for consumer borrowing, influenced by the advertising and loan facilities made available by banks; and (2) banks consider commercial loans more risky than consumer loans, as spreads are lower and venture capital is not readily available from banks.The low demand for commercial loans, and the accompanying risk-averse nature of banks, results from a perception developed out of the FINSAC era and the lack of confidence in the ability of the authorities to administer law and order. One of the main negatives of the high interest rate policy Jamaica pursued, leading to FINSAC, was not the loss of investments, but rather the damage done to our entrepreneurial spirit.
The fact is that even if interest rates were to be reduced by 5%, there would still be limited uptake in corresponding investments. The reason for this is that investment decisions are affected by much more than interest rates, and other monetary policy. We have to remember that economics is a social science, and consequently is a study of the behaviour of people. When we change monetary policy to influence economic outcomes, what we are hoping to do is influence the behaviour of individuals. So reducing interest rates does not by itself improve economic performance.
When interest rates are reduced, it is expected to have the result of affecting people’s investment decisions, as it is hoped that an individual will want to borrow money at the lower cost and invest it in real businesses, which gives a higher return than the cost of the funds borrowed. And this is what happens in countries such as the US and UK. The reason why a rate reduction will have the intended effect therefore is because individuals will react in the desired way. What we need to ascertain then is what is it that influences this reaction from individuals?
In the US, for example, when the Fed wants consumers to increase economic activity and drive new investments they will lower interest rates. Lower rates will mean reduced funding costs for businesses and consumer purchases. Thus demand for debt financing will increase. When these funds are accessed then individuals will look at the investment options available and invest in ventures that will give them a consistently higher return than the cost of the borrowed funds. Lower rates will also cause the currency to devalue against that of major trading partners (assuming their rates do not change), resulting in the relative price of goods produced being cheaper, thus increasing exports.
Social factors
The problem we have is that the social factors are a challenge for us. The expected effect of interest rate movements assumes that investors are indifferent between investing in financial products and real investments, and whether they do or not depends on the level of interest rates as one factor. This of course also assumes that people have the necessary confidence in the economy that they will want to make real investments, which is the issue for Jamaica.
The confidence of Jamaicans is affected by (1) the memory of FINSAC; (2) the level of crime, and in particular extortion, which is an unpredictable cost of business; (3) the level of government bureaucracy; (4) the unpredictability of tax policy; (5) the competence of our workforce; and (6) the time it takes to resolve commercial transactions in the courts; as some examples. If investors cannot have reasonable confidence that the environment will remain suitable for business, then irrespective of how low interest rates are, we will not see any significant increase in real investments. Instead we will see investments in ventures that provide quick returns, as one is not sure how much time is available for investment recovery. This is certainly one reason behind the choice of some Jamaicans to invest in high risk alternative investments, as it is their right to do. After all it is not as if we have moved out of real investments to paper investments. We were mainly invested in government paper before, so all we have done is moved from one paper investment to another.
If we are serious about increasing the number of real investments by Jamaicans, we must encourage an environment where people feel safe to invest. Our crime problem, government bureaucracy, and the way we handle development work in our tourist capital does not leave one with a lot of confidence in the investment environment.
Friday, February 09, 2007
Impairing our assets
Recently we had a fire at the Riverton City dump, which caused immense discomfort to people living miles away. Some commentators were of the opinion that the dump should be relocated elsewhere as this was not an isolated incident and it is not ideal to have such a large dump close to residential communities. I think that it doesn't really matter where the dump is located, because people will move to the surrounding areas anyway and the authorities will not even bother to ensure proper zoning.
But where, I thought, would be an ideal location for the dump? Aha! How about the middle of Montego Bay? The second city is already in such a deplorable state that nobody would notice if a dump were to be located right there.
I mean, if you go through Montego Bay you will see that the city is now a totally disorganised area, overrun by undisciplined behaviour, particularly on the streets in the downtown area. The roadwork being done as you approach the second city is disgraceful. It is good that the work is being done, as it will have long-term benefits, but why does it have to take so long? I mean, this is supposed to be the tourism capital of Jamaica, and we have managed to maintain this chaotic status quo for so long! If they were really serious about completing the work as soon as possible, shouldn't work be happening 24/7, as they do in developed countries? If the reason is that the direct cost of working 24 hours is greater, isn't the cost to business activity much more than any additional cost of working 24 hours?
Depleting our assets
When tourists come to Montego Bay, the only place we fix up for them is the hip strip. Outside of the hip strip Montego Bay is in a disastrous state. Even the hip strip is on the decline and is a much underutilised asset. There is no doubt that the Montego Bay that tourists used to look forward to visiting is no longer the same. It is because of the manner in which we have depleted our national assets that the only tourists we seem to get are those who prefer to remain sequestered in all-inclusive hotels. It is the same way that we have allowed the degradation of the seven-mile beach stretch in Negril.
If we are serious about improving Montego Bay's value and attractiveness to tourists, we must put the proper public and private structures in place. We need to elect a parish council, form a chamber of commerce branch, and put a police force in place just like in Kingston. I say that these need to be in place because no one can convince me that we have (1) a parish council with an effective mayor; (2) a Montego Bay chamber of commerce; and (3) a police force. There is no way that that these bodies could exist and have Montego Bay remain in such a deplorable state.
As far as I know, it is the responsibility of the parish council to ensure order in the city. Instead, visitors to the town see a chaotic situation where drivers stop in the middle of the road to talk to each other, people double-park on almost every street , vendors line the streets in makeshift stalls, and the garbage is as prevalent as the number of people walking around. People cross the street at will, as there are no marked pedestrian crossings, thus bringing traffic to a standstill at peak periods. And don't bother talking about the police, as the entire force seems to be located on the hip strip.
The hip strip has become an area of retreat for the locals, as the number of tourists traversing the strip seems to be in decline also. If we were really serious about maximising tourism in Montego Bay, wouldn't we use the hip strip as a place to market our culture and an area where tourists would flock 24/7, instead of leaving it to just restaurants and a strip of clubs at night? For example, during the recently concluded "music festival" we should have transformed the hip strip into an area where jazz music could be played all day and all night, and properly organised street vending of Jamaican products could take place. Instead, we hosted a stage show for three nights. The strip should not have vehicular traffic, but rather people should park on the fringes and walk or be transported by carriages. Just imagine the difference that would make to the attractiveness of the place.
Crime capital
It is because of the indiscipline that prevails in the city that it has fast become the crime capital of Jamaica. I have always said that if we cannot control indiscipline generally, then how do we intend to deal with crime? Over the years we have allowed Montego Bay to be taken over by squatters and have transferred the indiscipline from downtown Kingston to downtown Montego Bay.
Behind remittances, tourism has the highest foreign exchange inflow. So what we are doing is putting our foreign exchange earnings in danger, and even though it is the direct responsibility of the non-existent parish council and chamber of commerce, the government should ensure that this national asset is protected because in the long run it will affect the entire Jamaica.
Maybe we need to start applying accounting standards when assessing the value of our national assets. The standards call for periodic impairment tests to be done on a company's assets to determine if there has been any impairment in the value of the assets. If, for example, an asset is originally valued at $100 and after the impairment test is done the asset shows a value of $60, then $40 is written off the value of the asset, just as NCB has consistently done with the Supreme Ventures shares.
Similarly, if we were to do an impairment test on our cities, beaches, and other national assets, we may well find that the values have been impaired. If we do not protect the value of our assets, which give us the natural competitive advantage in tourism, then we will soon find that we no longer have that competitive advantage. I have always believed that Jamaica's tourism is much less than it should be because we have not been able to properly exploit the natural beauty and culture of Jamaica. Instead, there is always a half-hearted effort to develop tourism.
If we are serious about maximising our tourism potential then we must have a properly developed strategic plan. This must not just include advertising Jamaica, because if we do not protect and develop our assets then we will only be advertising an inferior product. Instead, we allow countries such as Barbados, Bahamas, and Cuba to outclass us in tourism per capita numbers, when we have a superior natural competitive advantage from our beauty and culture.
I believe this is a national crisis which must be addressed by the government. I put it in the hands of central government, because the parish council and chamber of commerce are both ineffective. We cannot have this level of indiscipline permeating our tourist capital. If we do not act now, then sooner or later tourists will be less than enthusiastic about coming back to Jamaica, as all they will encounter are touts and dilapidated attractions.
As if all our efforts at wasting away our assets were not enough, we have gone ahead and charged US$100 for obtaining a Caricom visa during Cricket World Cup, when the fallout could actually cost us much more.
But where, I thought, would be an ideal location for the dump? Aha! How about the middle of Montego Bay? The second city is already in such a deplorable state that nobody would notice if a dump were to be located right there.
I mean, if you go through Montego Bay you will see that the city is now a totally disorganised area, overrun by undisciplined behaviour, particularly on the streets in the downtown area. The roadwork being done as you approach the second city is disgraceful. It is good that the work is being done, as it will have long-term benefits, but why does it have to take so long? I mean, this is supposed to be the tourism capital of Jamaica, and we have managed to maintain this chaotic status quo for so long! If they were really serious about completing the work as soon as possible, shouldn't work be happening 24/7, as they do in developed countries? If the reason is that the direct cost of working 24 hours is greater, isn't the cost to business activity much more than any additional cost of working 24 hours?
Depleting our assets
When tourists come to Montego Bay, the only place we fix up for them is the hip strip. Outside of the hip strip Montego Bay is in a disastrous state. Even the hip strip is on the decline and is a much underutilised asset. There is no doubt that the Montego Bay that tourists used to look forward to visiting is no longer the same. It is because of the manner in which we have depleted our national assets that the only tourists we seem to get are those who prefer to remain sequestered in all-inclusive hotels. It is the same way that we have allowed the degradation of the seven-mile beach stretch in Negril.
If we are serious about improving Montego Bay's value and attractiveness to tourists, we must put the proper public and private structures in place. We need to elect a parish council, form a chamber of commerce branch, and put a police force in place just like in Kingston. I say that these need to be in place because no one can convince me that we have (1) a parish council with an effective mayor; (2) a Montego Bay chamber of commerce; and (3) a police force. There is no way that that these bodies could exist and have Montego Bay remain in such a deplorable state.
As far as I know, it is the responsibility of the parish council to ensure order in the city. Instead, visitors to the town see a chaotic situation where drivers stop in the middle of the road to talk to each other, people double-park on almost every street , vendors line the streets in makeshift stalls, and the garbage is as prevalent as the number of people walking around. People cross the street at will, as there are no marked pedestrian crossings, thus bringing traffic to a standstill at peak periods. And don't bother talking about the police, as the entire force seems to be located on the hip strip.
The hip strip has become an area of retreat for the locals, as the number of tourists traversing the strip seems to be in decline also. If we were really serious about maximising tourism in Montego Bay, wouldn't we use the hip strip as a place to market our culture and an area where tourists would flock 24/7, instead of leaving it to just restaurants and a strip of clubs at night? For example, during the recently concluded "music festival" we should have transformed the hip strip into an area where jazz music could be played all day and all night, and properly organised street vending of Jamaican products could take place. Instead, we hosted a stage show for three nights. The strip should not have vehicular traffic, but rather people should park on the fringes and walk or be transported by carriages. Just imagine the difference that would make to the attractiveness of the place.
Crime capital
It is because of the indiscipline that prevails in the city that it has fast become the crime capital of Jamaica. I have always said that if we cannot control indiscipline generally, then how do we intend to deal with crime? Over the years we have allowed Montego Bay to be taken over by squatters and have transferred the indiscipline from downtown Kingston to downtown Montego Bay.
Behind remittances, tourism has the highest foreign exchange inflow. So what we are doing is putting our foreign exchange earnings in danger, and even though it is the direct responsibility of the non-existent parish council and chamber of commerce, the government should ensure that this national asset is protected because in the long run it will affect the entire Jamaica.
Maybe we need to start applying accounting standards when assessing the value of our national assets. The standards call for periodic impairment tests to be done on a company's assets to determine if there has been any impairment in the value of the assets. If, for example, an asset is originally valued at $100 and after the impairment test is done the asset shows a value of $60, then $40 is written off the value of the asset, just as NCB has consistently done with the Supreme Ventures shares.
Similarly, if we were to do an impairment test on our cities, beaches, and other national assets, we may well find that the values have been impaired. If we do not protect the value of our assets, which give us the natural competitive advantage in tourism, then we will soon find that we no longer have that competitive advantage. I have always believed that Jamaica's tourism is much less than it should be because we have not been able to properly exploit the natural beauty and culture of Jamaica. Instead, there is always a half-hearted effort to develop tourism.
If we are serious about maximising our tourism potential then we must have a properly developed strategic plan. This must not just include advertising Jamaica, because if we do not protect and develop our assets then we will only be advertising an inferior product. Instead, we allow countries such as Barbados, Bahamas, and Cuba to outclass us in tourism per capita numbers, when we have a superior natural competitive advantage from our beauty and culture.
I believe this is a national crisis which must be addressed by the government. I put it in the hands of central government, because the parish council and chamber of commerce are both ineffective. We cannot have this level of indiscipline permeating our tourist capital. If we do not act now, then sooner or later tourists will be less than enthusiastic about coming back to Jamaica, as all they will encounter are touts and dilapidated attractions.
As if all our efforts at wasting away our assets were not enough, we have gone ahead and charged US$100 for obtaining a Caricom visa during Cricket World Cup, when the fallout could actually cost us much more.
Friday, February 02, 2007
The problem of capacity
If a car is built to go at a top speed of 150 kilometres per hour (kph) then we all know that it is highly unlikely that it will get to 200 kph. Similarly if a tree does not have an adequate root structure to support its branches then it will fall at the first wind. This came to mind as I attended the Air Jamaica Jazz and Blues festival last weekend.
There is no doubt that the festival has a large, and a much greater possibility of a larger, impact on the Jamaican economy. Not only does it provide substantial revenues for the organizers but when one thinks of the demand for accommodation, food, entertainment and products, emanating from the festival, the multiplier effect is tremendous. This is especially important as the festival comes at a time when the tourist season is off its peak, thus creating revenues for the tourism capital in a time when many of the assets would have been operating close to or below breakeven.
Maximizing assets
The foresight to have created the festival at this time is indeed a lesson in good management, as it was deliberately created to give a return on underutilized assets during a down period. This is typically an easy way to maximize return on investments. In other words, if you have already incurred the cost of the assets and operations then selling the product or service below the normal price during the slow period can actually bring greater profits. Accountants analyze this using what we call marginal costing.
The concept behind this music festival (deliberately called so because I don’t think it has much to do with Jazz and Blues anymore) should definitely be replicated in other areas to bring even greater revenue flows. It is this creativity of thought that drives markets as I mentioned in my article last week in relation to capital markets. What the various music festivals have shown us is the powerful revenue generating capacity of Jamaica and our culture, which we have not really made any serious attempt to maximize.
The main problem that we are faced with, which was demonstrated at the Air Jamaica music festival, is one of capacity. The failing of the festival is that we were not able to maximize the possible economic benefits. This is a direct result of our weak infrastructural support, which prevents us from maximizing our growth. Someone said to me that the Jazz festival was a success, which it might well have been, however we need to also look at success not from the point of view of what we are satisfied with but what could have been, in other words the opportunity cost or value.
As an example, I attended a football match in the United States where there were some 90,000 persons in attendance. Even with so many persons attending we arrived to the stadium from where we were staying in ten minutes. This of course was as a result of their infrastructure as well as organization. These two were missing at the recent music festival. First of all we do not have enough rooms and the road network to handle significant numbers. Secondly, I believe that the organizers should have taken a much more proactive approach to handling the traffic, and if they had done this might not have lost the estimated 4,000 persons that did not attend on the Saturday night as a result of the Friday night. This 4,000 times US$80 per person (J$21.6 million) is the direct opportunity cost of not having the infrastructural support and the organization. I say direct because there is the indirect revenue lost to the surrounding businesses in the Montego Bay area.
I have heard a lot of people say that they will not be going back to the festival next year because of the lack of organization. Before any of the organizers say that the event was well organized let me say this. When one is marketing a service it is much more than the point at which the service is delivered. It is the whole experience, which in this case would mean arriving into Montego Bay, whether by air or car; the food experience; the entertainment facilities outside of the show; the ease of transportation; the experience with the people; and finally the show itself. When one spends three hours in traffic going to and from the venue then it reduces the time to enjoy the other parts of the experience. It also reduces the time available for spending on the other activities.
Economic growth
This is a similar problem that we face with economic growth. Our current social and infrastructural support does not provide us with the capacity to grow over 2.5% to 3.5% at most. In other words if we want the car to go faster then we have to put in a more powerful engine. The factors that continue to limit us remain literacy levels, crime and corruption, slow moving justice system, poor road network, lack of organization of our agricultural sector; among the challenges we face.
If therefore we want to really put the economy on a strong and consistent growth path, we have to build the foundation for growth. This means that we must have deliberate policies and strategies around improving our literacy rates, eliminating crime, improving the roads, and a deliberate action plan as to how we will develop our agricultural sector to replace food imports.
What this means then is that we have to look at our limited resources and see what the best value for spend is. In other words what is the value added from (1) continued subsidies being pumped into Air Jamaica; and (2) the massive spend on World Cup cricket, as two examples. Would we have been better off spending that money on cleaning up the police force or providing proper education or health facilities for the potential criminals?
The problem I think is that this sort of road map to national development may not exist. If anyone knows about it I would love to see it. This lack of a proper plan to national development causes us to focus short term on things like balancing the budget, while what we sacrifice in order to do that is the capital expenditure and investment required to develop that infrastructural support needed for economic growth.
Even within companies this sort of support is necessary. A company will never realize its true potential if the infrastructural support is not in place to facilitate the revenue side. In other words the need for a proper technology infrastructure and human resources are key to any company’s development in today’s world. This is the main difference driving a successful multinational versus a national company.
Although we may not have experienced much jazz at the festival we can’t say that we were short of “blues”. If we are really serious about development though we have to adopt a more structured approach. We have to look at each item of expenditure and make a decision not on how the electorate will see it or meeting a short term fiscal target solely, but rather what is the medium to long term value added to be gained.
If we do this then we may find that much of the expenditures we have committed to may not have been in our best interest, even though it looks good. One such question surrounds the expenditure on World Cup Cricket. The problem with this is not that it is not good for Jamaica, but rather that we have not done the proper analysis to know.
There is no doubt that the festival has a large, and a much greater possibility of a larger, impact on the Jamaican economy. Not only does it provide substantial revenues for the organizers but when one thinks of the demand for accommodation, food, entertainment and products, emanating from the festival, the multiplier effect is tremendous. This is especially important as the festival comes at a time when the tourist season is off its peak, thus creating revenues for the tourism capital in a time when many of the assets would have been operating close to or below breakeven.
Maximizing assets
The foresight to have created the festival at this time is indeed a lesson in good management, as it was deliberately created to give a return on underutilized assets during a down period. This is typically an easy way to maximize return on investments. In other words, if you have already incurred the cost of the assets and operations then selling the product or service below the normal price during the slow period can actually bring greater profits. Accountants analyze this using what we call marginal costing.
The concept behind this music festival (deliberately called so because I don’t think it has much to do with Jazz and Blues anymore) should definitely be replicated in other areas to bring even greater revenue flows. It is this creativity of thought that drives markets as I mentioned in my article last week in relation to capital markets. What the various music festivals have shown us is the powerful revenue generating capacity of Jamaica and our culture, which we have not really made any serious attempt to maximize.
The main problem that we are faced with, which was demonstrated at the Air Jamaica music festival, is one of capacity. The failing of the festival is that we were not able to maximize the possible economic benefits. This is a direct result of our weak infrastructural support, which prevents us from maximizing our growth. Someone said to me that the Jazz festival was a success, which it might well have been, however we need to also look at success not from the point of view of what we are satisfied with but what could have been, in other words the opportunity cost or value.
As an example, I attended a football match in the United States where there were some 90,000 persons in attendance. Even with so many persons attending we arrived to the stadium from where we were staying in ten minutes. This of course was as a result of their infrastructure as well as organization. These two were missing at the recent music festival. First of all we do not have enough rooms and the road network to handle significant numbers. Secondly, I believe that the organizers should have taken a much more proactive approach to handling the traffic, and if they had done this might not have lost the estimated 4,000 persons that did not attend on the Saturday night as a result of the Friday night. This 4,000 times US$80 per person (J$21.6 million) is the direct opportunity cost of not having the infrastructural support and the organization. I say direct because there is the indirect revenue lost to the surrounding businesses in the Montego Bay area.
I have heard a lot of people say that they will not be going back to the festival next year because of the lack of organization. Before any of the organizers say that the event was well organized let me say this. When one is marketing a service it is much more than the point at which the service is delivered. It is the whole experience, which in this case would mean arriving into Montego Bay, whether by air or car; the food experience; the entertainment facilities outside of the show; the ease of transportation; the experience with the people; and finally the show itself. When one spends three hours in traffic going to and from the venue then it reduces the time to enjoy the other parts of the experience. It also reduces the time available for spending on the other activities.
Economic growth
This is a similar problem that we face with economic growth. Our current social and infrastructural support does not provide us with the capacity to grow over 2.5% to 3.5% at most. In other words if we want the car to go faster then we have to put in a more powerful engine. The factors that continue to limit us remain literacy levels, crime and corruption, slow moving justice system, poor road network, lack of organization of our agricultural sector; among the challenges we face.
If therefore we want to really put the economy on a strong and consistent growth path, we have to build the foundation for growth. This means that we must have deliberate policies and strategies around improving our literacy rates, eliminating crime, improving the roads, and a deliberate action plan as to how we will develop our agricultural sector to replace food imports.
What this means then is that we have to look at our limited resources and see what the best value for spend is. In other words what is the value added from (1) continued subsidies being pumped into Air Jamaica; and (2) the massive spend on World Cup cricket, as two examples. Would we have been better off spending that money on cleaning up the police force or providing proper education or health facilities for the potential criminals?
The problem I think is that this sort of road map to national development may not exist. If anyone knows about it I would love to see it. This lack of a proper plan to national development causes us to focus short term on things like balancing the budget, while what we sacrifice in order to do that is the capital expenditure and investment required to develop that infrastructural support needed for economic growth.
Even within companies this sort of support is necessary. A company will never realize its true potential if the infrastructural support is not in place to facilitate the revenue side. In other words the need for a proper technology infrastructure and human resources are key to any company’s development in today’s world. This is the main difference driving a successful multinational versus a national company.
Although we may not have experienced much jazz at the festival we can’t say that we were short of “blues”. If we are really serious about development though we have to adopt a more structured approach. We have to look at each item of expenditure and make a decision not on how the electorate will see it or meeting a short term fiscal target solely, but rather what is the medium to long term value added to be gained.
If we do this then we may find that much of the expenditures we have committed to may not have been in our best interest, even though it looks good. One such question surrounds the expenditure on World Cup Cricket. The problem with this is not that it is not good for Jamaica, but rather that we have not done the proper analysis to know.
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