Let the buyer beware

THE term Caveat Emptor is a Latin phrase used in economics, which means "let the buyer beware'. The reasoning behind this philosophy is that the ultimate protection for market transactions is the responsibility of the buyer. This I think is the real essence of the protection in market economies, as one can never truly provide legislation to protect the buyer against every possible infraction by sellers.

Last Monday I was a presenter at a regional conference on banking and credit put on by Consumers International in Barbados, and funded by the IDB. I think it was a very productive seminar, with much discussion on some of the issues that consumers face, and ultimately some of the challenges that lead to market failures. The conference delegates discussed ways to improve consumer protection in relation to the predatory banking practices in the Caribbean.


Banking practices
Ironically the day after the conference ended the Business Observer published an article titled "Jamaican banking region's worst". At first glance it would seem that the World Bank report was saying that Jamaica's banks were the worst in a group of bad banks, but when one reads further it actually shows that Jamaicans embrace banks less than other territories in the region. It showed that Jamaica had the lowest penetration of loans and deposits per 1,000 adult population count.

This is so although there are many branches of the various commercial banks scattered across Jamaica. I believe that there are explanations such as the greater use of instruments through securities dealers and the tendency for many to engage in community-based banking, referred to as "partner".

Whatever the reason, however, one thing that cannot be discounted is the fact that the Jamaican banks are predatory in their pricing towards consumers. Since they are no longer able to make money from the easy pickings of GOJ securities, they have now turned on the hapless consumer who is charged for even thinking of making a withdrawal, or deposit, or even thinking. Such is the nature of Jamaica, where, as a docile bunch of people we allow politicians, banks, and everyone to step all over us in the name of harmony. I would much rather say we dont want to stand out from the crowd.

In other progressive countries, such as the US we all aspire to reach, consumers are a belligerent bunch of people who understand the real meaning of the term Caveat Emptor. So whether it is their politicians, banks, or retailers they give them a piece of their mind when they feel shafted. And in those progressive countries they are supported by the media, rather than wallowing in the alleged misdeeds of others at the drop of a hat.

The fact is that the only way for true market economy development and growth is through consumer development. The problem in the region is that we have a tendency to regulate everything in the name of protecting our poor citizens, who cannot do a job of protecting themselves as the slave mentality still permeates the society. So we must ensure that everything government touches is biased towards welfare, that is, giving a man a fish rather than teaching him to fish.

So for example, education is always a favourite topic for politicians who profess that no one has to pay for education (even if it's just $10,000 or $20,000 per year) but they don't say where the funding will come from.

Here is another example of over-regulation: at the end of the mid-90s financial crisis in Jamaica, regulations were introduced to prevent the recurrence of the events leading to the crisis . In my own view, we went too far and had too much regulation, because we had to protect the naivety of the Jamaican population. The result, I believe, is that the over-regulation stifled capital innovation and development and may have contributed, in this way, to the rise of the Ponzi culture.

Market progress
One may argue that at least our financial system was not impacted negatively by the recent crisis, but then again we did not benefit from the growth before the crisis, and it is a well known fact that markets never move in a straight line as market progress is always tainted with pullbacks, or corrections. But always in the end the net effect is progress. This is the nature of the market economy, that market players overreach, and by doing so create bubbles along the way and there is consequently always pullback.

The irony is that the extent of the recent global financial crisis was caused by the regulators: contrary to the belief that it was the fault of the banks, the crisis (bubble) actually started in the Bill Clinton era, where the rules at Fannie Mae and Freddie Mac were relaxed to allow for the toxic mortgage-backed securities to seem like gold. To support the home expansion, Alan Greenspan reduced interest rates to 1 per cent, and to put the icing on the cake the rating agencies gave these toxic securities AAA rating. All the banks were doing was packaging the securities endorsed by the Federal Government and the ratings agencies. But such is the nature of the short-term memory of people where they will always only remember the last bad act, rather than the millions of good ones before.

Similarly in Jamaica, it was the fiscal policy of high interest rates that led to the financial crisis we faced. The fact is that banks are nothing more than market players trying to sell a product — money — and they will always seek the highest price if the market allows it. The call therefore to crucify the banks (for doing a market function) with regulations is nothing more than an emotional response which has never truly had any long-term benefit. I am the first to admit that the bank's pricing policies are predatory, but the best ways to improve markets are (1) through competition; (2) information; and (3) consumer education.

Any other way will only lead to short-term relief, which simply distorts the market and will lead to another bubble. The bank charges survey that was done by the CAC is one example of what is needed to reduce the charges by the banks, as faced with consumer pressure they were forced to revise down their fees. If we want to see market development then we must give the CAC more resources and regulatory authority over consumer-related issues.

So the emotional arguments about the need to place strict regulations on banks will be nothing more than a futile long-term effort. It seems, however, that human beings are prone to continue making the same mistakes over and over again, as the tendency is always for politicians the world over to play to the cries from the loudest mouth rather than rational reason. I guess politicians are also only market players catering to the demands of their constituents. This is why economic and social progress is always greater in societies with a more educated and aware population, as they know what is best in the long term and place pressure on politicians to represent their ideas.

So it is clear to me that despite the ranting of many who believe banks, politicians, etc. should be muzzled with regulations, if we pursue that path - as a globe - we will only be setting ourselves up for the next round of market failure. And with the efficiency of globalisation, the next one will be worse than what was just experienced. In fact the US is trying to fix the problem with the same policies that caused the problem. So in the end the only true protection against economic and social failure is Caveat Emptor.

Leadership's important role

JAMAICA'S economy has been going through a rough patch for the last 12 consecutive quarters. This has caused much stress to many Jamaicans, and in particular the 80,000 reported to have lost their jobs. We have seen some positives, which include the fiscal management programme [including JDX], the relative stability of the macroeconomic numbers, and the reduction in the murder rate. At best, however, these can only be short-lived without longer term stimulation of consumer demand.

Despite the challenges faced by the economy, however, I believe effective leadership can ensure that we emerge stronger than before the recession. When I say stronger I don't just mean an artificial feeling of wealth that results from debt, but a properly structured and progressive economy. That is what I am hoping will be the outcome of the sacrifices that Jamaicans have made over the past two years. For too many times, since independence, Jamaicans have been asked to make sacrifices with nothing to show.

Norman Manley's vision
For this to happen, however, it is going to be necessary to have effective leadership to take us to prosperity. This is what Jamaicans have craved for a long time and it is time it is realised. I think that even our politicians will accept that political leadership has failed Jamaica, since the vision of Norman Manley and the others who fought for political independence. Our political leaders have done nothing but squander the opportunity afforded us by independence. It seems as if they continue to be more concerned about accusations and scandals rather than the welfare of Jamaicans.

I sincerely believe, however, that with effective leadership and focus, that Jamaica's fortunes can be improved. In fact, effective leadership is going to be critical if we are to navigate the dangerous waters of the global and local economy. Over the past two years, while the national debate always centred around scandals, I have been involved in three public sector successes that resulted from the quality of leadership involved.

The first has been the Air Jamaica divestment, for which I was project manager and had the honour of being the only person involved from inception to the end. When Don Wehby called me to his office and said he was relying on me to make the divestment a success for him, I gave my assurance that I would do my best. The first thing Don did was to pick a suitable person to lead the divestment team, and after we discussed it he settled on none other than the Honourable Dennis Lalor, who managed to successfully bring the project to completion. Having worked on this project, I can tell you that the choice of the appropriate person to lead the project was essential, as it was the quality and co-ordination of the team that ensured success, given the challenges faced along the way. The events make interesting reading but requires a book.

The second team, which has been highly successful, is the Jamaica College School Board. I cannot sing enough praises for the leadership of the Honourable Danny Williams, as board chairman, and Ruel Reid, as principal. The board, led by Danny Williams, worked with the operations, led by Ruel Reid, to make Jamaica College the number one school in terms of facilities and improvement in my estimation. To understand the transformation that has taken place one would need to know where the school is coming from. I can safely say that no other high school offers a more rounded experience for the students, and today Jamaica College is one of the best looking high school campuses, having just completed our new auditorium that is big enough to hold the entire school population.

The third team is the Jamaica Ultimate Tyre Company Limited, which when the board took over in 2007 was making a loss of over $1 million per month and today is making over $2 million per month, and is now looking forward to filing and paying our estimated taxes. The support and leadership provided by the minister of transport was essential in ensuring the successful transformation.

So while the country has been enveloped in the discussion of scandal after scandal, over the last two years, I have been involved in a few successes in the public sector. I am quite certain that there are many other such examples, which we can learn from. It also makes me believe that Jamaica can rise from the economic declines we have been seeing and put this country on a sustainable development path, despite the economic challenges.

Common characteristic
The one common characteristic, in all three cases, was in my view effective leadership. All three cases could have gone a different way if the leadership focussed on the challenges only. But instead, Lalor, Williams, and Henry, all outlined at the start a mission of where they wanted the process to end up, and then they chose the team that was going to work on that mission with them. Whenever things went wrong (such as the scandals) they never attacked anyone on the teams, but rather sought to assist in solving the challenges. In all three cases also they allowed the team members around them to express their views and potential.

I, like many others, have become tired of the finger pointing that has become second nature in our politics, while the people suffer. Given the significant economic challenges that face us if the issue of consumer demand is not dealt with effectively, I think it would be in the best interest of everyone for our leaders to find that consensual working relationship, and finally deliver to Jamaicans the promise of 1962.

The fast tracking of the public sector transformation project is one of the positives that we have seen in recent times. We have been talking about public sector transformation for a long time, and finally it seems like we may get something, even if some believe that it was hurried primarily because of a fiscal crisis rather than a need for improvement.

What I am not sure of, however, is what the end game is. In other words if we just reduce the number of public sector workers without improving service delivery, and other efficiencies, then it would have been a grand waste of time.

Last week I went to a public sector outfit to transact some business. I was always impressed by the transformation they have undergone over the past two years, where the service improved significantly over what it was before. When I went last week, however, one of the critical persons said she had to go to lunch and therefore the persons who were there had to wait until she got back from lunch. There was no replacement, even though the government has increased the fees significantly. Immediately I saw the old culture creeping back in.

This is a problem of leadership. I sympathise with the lady who had to go to lunch, as it was way past her lunch time with no relief. But the managers did not care enough to provide a relief person so that while she went to lunch the public (paying customers) could be served. Again a problem of leadership.

Reviving consumer demand

Last week I indicated that consumer demand is essential for growth in any economy; and this is whatever market system is in place. In 2008 I had indicated that stagflation was the greatest risk that the economy faced, and still faces. Stagflation results from falling / stagnant prices in the face of rising costs. The risk of stagflation results from depressed consumer demand, which is caused primarily by reduced employment or real income levels.

With estimates of job losses in Jamaica since 2007 up to 80,000, and real income levels falling - through job losses, wage freezes, and fewer working hours - this fear is becoming an increasing reality. Although there have been long-standing cries from the MSME sector, the reality of an increasing stagflationary environment is showing up in the published corporate results. We are seeing where consumer companies such as Salada, Red Stripe, and Caribbean Cement are seeing falling / stagnant revenues while experiencing rising costs of sales and administrative expenses. Even in the Lasco Distributors Prospectus we see where the gross profit margin declined from 20% in 2009 to 14% in 2010.

These performances no doubt result from declining aggregate demand caused by an uncertain jobs market. It is therefore going to be very important, if we are to turn around our economic performance, that new jobs are created. We see that even the US has recognized how important jobs are, and President Obama has gone on an all-out war against unemployment.

Inadequate stimulus
The US is reported to have made the mistake of not providing enough stimulus funds initially, so as to create the multiplier effect necessary to halt the economic slide. In our case, one of our failings was the inability of the funds provided by the government for small businesses to have been quickly disbursed to the productive sector.

I had indicated at the time that those funds should have been disbursed directly by institutions such as the DBJ. While recognizing the risk associated with such an arrangement, I had indicated that the risk to the economy of not doing so would have been much greater as more MSMEs would have started to close their doors. The recently held mock funeral, by the MSME sector, is evidence of this.

But what can we do not to halt this slide in corporate performance? And it must be halted because many small companies are either at the end or are nearing the end of their investment cycle. This simply means that they may be making the decision not to continue in business so as not to face further losses. One example of this type of decision is the recent closure of the Amart chain, and before that we saw places like Sammy's shoe store downsizing their operation.

Some persons have said that because of the 12 consecutive quarters of decline the economy is in depression and not recession. A depression is defined as "a severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels". We are experiencing inefficient economic productivity and high unemployment ,but falling prices are yet to come. Falling prices will not come in a uniform manner but will start with prolonged retail sale events, or can be evidenced by falling corporate revenues. While there is some evidence of both happening, I don't think that it is sufficient to say that prices are generally falling. The important thing to understand is that we are close to that, and thus the technical definition of a depression.

This is why I have said that while the government's focus on fiscal management was essential, continues to be , and was effectively executed, there must now be a shift in focus to stimulating consumer demand, through not only increased employment but also increased income levels.

Changing options
The option we had up to last year of direct lending to the MSME sector is still necessary but is no longer sufficient. The decline in consumer demand means that even if funds are available at near zero percent, businesses will be reluctant to borrow, as the probability of making a profit will have declined. What you will find is that people will borrow to secure either current standards of living or refinance more expensive debt. This may be a significant factor in the decline in commercial banking loans and increase in building society loans.
The focus therefore needs to be on stimulating consumer demand. This stimulation can only result from increased jobs and income levels, and so this must be the primary focus going forward. The question may be asked, how one can revive consumer demand in a declining economy and a global environment that is fearful of a double-dip recession? While it has become much more difficult than it was a year ago when consumer psychology was not as negatively affected, it is still possible. What it requires, however, proper analysis and swift implementation. And by swift I don't mean at the rate our public sector wheels turn. In fact in 2008, when the government indicated that it would provide a stimulus to the economy, I indicated to Bev Manley that it would be ineffective because of the slow pace of our public sector bureaucracy.
Within the context of our economy, there are two primary avenues where consumer demand can be successfully stimulated. The first is through import substitution in areas such as agriculture, tourism inputs, and energy. The second is through fiscal incentives, such as reduced taxes and the reduced size of the bureaucracy and more market-supported regulations.
In the case of import substitution this needs to be done through (1) the proper organization of the agriculture landscape - standards of production, properly organized division of labour, agro-processing, and land reform; (2) more organized linkages between the tourism, agriculture, and craft sectors; and (3) focus on creating greater renewable energy sources, which would have the effect of creating jobs, lower energy costs, and the side effect of reducing the monopolistic hold of the JPS. In all these cases, the effect is replacing import costs with a more vibrant local economy.

Fiscal incentives will also create a facilitatory environment for businesses to flourish. This includes tax incentives aimed at encouraging local and export production, reduced bureaucracy, infrastructural development, public sector transformation, and a market encouraging regulatory environment.
The government must continue its focus on prudent fiscal management, including the divestment programmes, and its encouragement of improving the export sector. This is the right policy direction but also needs to add a more significant emphasis on consumer demand stimulation.

It is going to be essential for the government to take the lead in doing this, as with the economic crunch that the private sector has been facing a lot of capacity has left, and I get the sense that businesses are more concerned with remaining in business, which means preservation of cash. Again I will make the observation that this initiative will not be effective within the confines of the current public sector infrastructure

Consumer demand essential for growth

In September 2008, I wrote an article titled "Risk of a double dip recession?" where I pointed to the fact that there was a very real risk of a double dip recession despite "green shoots" at the time. Even though many were professing that the global economy was recovering, I still did not see the fundamental structural changes required to ensure sustainable economic recovery. The only thing happening at the time was the injection of stimulus money and the continued reliance on expanding credit facilities without any impetus to greater production.

Today we see where the gradual withdrawal of the stimulus funds from the US economy has caused increasing concerns of the economy falling back into recession. In fact, as I pointed out at the time, the US and UK economies were still facing high unemployment and delinquency levels.

Similarly in Jamaica, the recent green shoots we have been seeing resulted from the very rational moves to approach the IMF and the JDX. These two factors by themselves provided the economy with the necessary breathing space to allow for the systematic implementation of policies required to ensure that the economy emerges stronger after the recession. The fact is the economy has been in decline for the past two to three years, and it was these two moves that eased the pain that would inevitably have come with the fall of the global economy.

Our own local economy has been seeing some green shoots. Some of these include (1) the relatively successful fiscal management programme, (2) the divestment of certain loss-making assets, (3) the improvement in the balance of payments, (4) the increasing activity in agricultural production, and (5) the focused efforts on restructuring the education infrastructure (I didn't mention the JDX and IMF, as these are actions within a policy direction).

My own view is that these policy actions are in the right direction. My reason for saying this is that the way to achieve sustainable economic development is to ensure the foundation is secure, and so while the direction of these policy actions might bring some discomfort, the deflation of the economy was always going to be necessary in order to build a sustainable base.

However, while these policies are necessary for development, they are definitely not sufficient. And the pursuit of these policies, without other initiatives, can prove to do more damage than good to the economy. My reason for saying this is that the policy actions have mostly been deflationary, that is, they have all resulted in decreased economic activity.

Prudent fiscal management in a declining economy can only come from reduced real expenditure, as real fiscal revenues would have been declining also. Divestment of loss-making entities, while positively impacting the fiscal accounts, also has a negative effect on immediate economic expenditure. The improved balance of payments has come from a greater reduction in imports than a growth in exports, which again negatively impacts economic expenditure. While agriculture is improving, and there is greater focus on improved education quality and planning, the fact is that these will have longer-term effects. We also see that income levels have fallen, as a result of increased unemployment and decreased income levels.

So while it was necessary to deflate the economy in order to properly restructure the base, if we are to avoid the significant negative risk of ravaging deflationary effects, we must ensure that consumer demand does not fall too much. If consumer demand is not addressed, then we face the very real risk of disinvestments and further economic decline. It is therefore imperative that policy must focus on growing consumer demand as an essential ingredient for economic growth.

The only alternative to that is to grow our foreign exchange earnings, or foreign direct investments, but with the risk of declines in the global economy (or continued stagnation), the probability of this happening is decreasing.

Stop the mudslinging
One issue I want to discuss is what I see as a very real distraction to that necessary economic progress. This is what I call the "mudslinging" approach that we have taken on as a society. Because while our economies falter, all we have been doing is saying who is corrupt, who has breached policy or protocol, and the mudslinging goes on and on. It seems as if we are more concerned with decrying everyone else's actions rather than focusing on what we can do to help each other improve, or for that matter the country.

While it is necessary for our democracy that constructive criticism takes place on all issues, we must avoid the name calling and constant battering of everyone that wears a different colour shirt from the one we prefer, as it does not help the country. And what sort of example do we set for the children we claim to love so much? Or do we really care about our children who we abandon to beg on the streets or wipe car glasses for a living.

I for one do not judge someone based on the colour shirt they wear, as it seems to me that the character of the person is more essential. I went to school and grew up with persons in all the political parties; green, orange and blue shirts (I would mention the NNC but don't know what their colour is). And as far as I am concerned their character is substantially the same as I knew them before, so why should they immediately become an adversary because of the colour of their shirts. And this attitude I think is more prevalent in the supporters of the parties than the politicians themselves.

For example, even though I disagreed with the monetary policies pursued by Omar Davies, I have a healthy respect for him as an individual because of interactions I have had with him. In addition, his involvement in his constituency tells me a great deal about his character. Another example is while at the UWI, I was maybe one of the only capitalist-minded persons in Trevor Munroe's politics lectures, and knew his own views, but even so I thought that his contribution to debate and the knowledge he imparted were invaluable.

The point is that if we close our minds to people because of what their own preferences are then we lose the value of their contributions. I also feel good to know that I have been invited to do presentations for small groupings of the G2K, NDM, and PNP; because my own view is that the only way to convince those around me of my own belief is to talk to them. Not stay away. I therefore plead with the leaders, media, and every Jamaican to be more tolerant of each other, as this is the only way that we can move forward as a "nation".

This unity is necessary if we are to grow this economy, as economics cannot succeed without proper social interaction. And the way we have been behaving as a society is dysfunctional. We don't have to agree with everything that someone says to respect them as a person. This type of behavior is the essence of civilisation and intelligence.