Government must move out of the way

LAST week, I told someone making a presentation that one of the challenges facing Caribbean businesses is that regulators act like parents rather than partners.

So regulation in Jamaica is not about working with the business community and civil society in order to assist them to develop, but rather it is more like a parent who keeps a watchful eye on a child, ready to pounce and punish at a moment's notice.

Because of this approach we have developed regulations and laws to provide welfare and punishment, rather than encouragement and teaching the populace to fish. This attitude is highlighted in two recent events. The first is the call to roll back GCT on electricity, which should never have been introduced in the first place.

In the first instance, the introduction of GCT on electricity bills was only a short-term measure to a fiscal problem and ignored the longer-term challenge of high energy costs to consumers and businesses.

Instead of trying to reduce our consumption of imported fossil fuels, the response was to add a tax to the use of it, not really to discourage persons from using it but to raise money for the government accounts.

This approach is similar to the way GCT was introduced on telephone calls, which again sought to raise taxes on something that is widely used.

The second instance I have discussed in previous articles was to state in the tax reform green paper that the most important function of tax reform is to raise money for the fiscal accounts.
It is this attitude that has contributed to much of our restrictive regulations and focus on the fiscal accounts at the expense of the economy and social infrastructure. Admittedly there seems to be an attempt to change this attitude with the public consultations on the tax reform paper, and pension and public sector reform, but this still moves too slowly.

My own view is that government must get out of the way and allow the economy to grow. If a mother is constantly protecting her children, even when they are adults, then what chance do they have to develop their own survival and developmental instincts?

It is this approach that causes businesses that do very well in Jamaica to tend to develop into monopolies or oligopolies. Sectors that readily come to mind are (i) financial; (ii) telecommunications; and (iii) energy. In all these cases it is because of government's desire to act like parents why these industries don't develop further for the benefit of economic growth and development, and, in the end, the benefit of the consumer. In other words, even though we say that we want the economy to develop, the barriers to entry and the burdensome legislation cause a lack of competitiveness.

So even within the financial sector, the long, drawn-out process to allow mutual funds and credit bureaus, for example, has no doubt robbed the country of much-needed capital.

The FSC has been trying to improve the timing of application approvals, but the problem with the “barriers to entry” is not so much the regulators but the regulation they have to work with. Some may argue that it is the strength of our financial regulations that prevented us from experiencing a significant fallout from the recession, but my view is that we could still have been prevented from having that experience even with more players, and businesses would have benefited much more.

In the telecommunications sector, I don't think much more needs to be said than the OUR has twiddled its thumbs while LIME is experiencing a slow and painful death. I have been a Digicel customer for years, and will be for the foreseeable future, but why does it take so long to introduce number portability and establish crossnetwork charges?

Maybe after LIME is dead and gone, and Digicel is the only one left standing, we will have these things introduced. By that time they will be redundant. That is when they are redundant.
The other sector is energy. Our political masters have seen it fit to create a licence that enslaves the Jamaican consumer and business at the hands of one of our new colonial masters — the JPS. Some attempt has been made to change that somewhat, by introducing net billing and power wheeling.

While these are commendable steps, they are far from sufficient to have any positive impact on energy costs to the consumers and businesses. The cost of setting up energy production far outweighs the benefits of net billing, and it is a better payback to produce and store. Also, power wheeling will not bring the economies of scale needed to change the cost landscape.

I understand the restrictions of that horrendous licence, but there are some things we can do outside of the licence that will bring much greater competition to the JPS, and force them to review their operations.

Firstly, we should not reverse the GCT on electricity bills but use it to set up a fund that will provide, say, a 50 per cent credit to “tax-compliant” persons who want to set up renewable energy solutions, with NCC-registered suppliers. Secondly, businesses should look at creating a co-operative-type company, which they all own a piece of, and set up a power generation company that they would power wheel to themselves. Unless the amendment said that you had to own 100 per cent of the power generation in order to power wheel.

These steps are necessary, as by the time LNG comes we will be “powerless”.
Finally, I believe that elections matter so much in this country because government has established itself as such a big player in the economy. When the Government has a financial problem it pressures the poor Jamaicans through taxes, and when elections are in the air we wonder who will be in charge, as it may certainly affect the business or our lives.

This should not be. Government needs to move out of the way and allow people and businesses to thrive.

Jamaica must solve her structural issues

At the time of writing I am sitting and waiting on a connecting flight to Suriname, to do a presentation on the IMF impact on the region. By the time this is published it will be done, but is worth mentioning. The fact is some persons think of the IMF as wicked imperialists (primarily because of political propaganda) and others think of the current programme as a panacea. The truth is that both points of view are incorrect.

As I prepared and thought about the presentation, I thought that as a region we are too caught up with the IMF. After all it is just a bank to countries, seeking to get a return on its funds and ensure it gets repaid. The IMF does not and never will have the solution to our problems. We need to have it. So our flirting with the IMF in the 70s, 80s, 90s, and today has more to do with our own inadequacies than the "wicked IMF policies". In fact, before now, the only time that post IMF saw any significant growth was in the 80s when Seaga took the bold decision of playing hard ball until he got the terms that were best for the country. Outside of that, no one else was brave enough to face down the IMF.

So here we are again once ore in our flirtatious but unstable relationship with the IMF. This time, however, I think people are of the view that the IMF programme has more to do with us than them. The fact is that if we were prudent in managing our affairs then we wouldn't have to keep courting the IMF. It is because of our own irresponsibility, and inability to achieve true economic independence after leaving the home of colonialism in 1962, that economic independence continues to evade us, betraying the wishes of Norman Manley and Bustamante. In plain English, our leaders have turned us into adults incapable of fending for ourselves, having to hold on to the frock tail of our "old colonial mothers".

The fact also is that after the IMF programme we won't be in any better position if we do not address the fundamental structural issues of our economy. The only time that we have effectively done so was in the second half of the 80s, when we managed to reduce our debt to GDP ratio from 212 per cent to 90 per cent, and the economy started to grown an average of six per cent. The verdict is still out on the current programme, and while the policy reform directions are positive the pace is concern.

So as I wrote in my book in 2009, although for the 14 years to 2007 the economy recorded growth, the fact is that the GDP structure was showing that the only way we could continue growing on that path was by either borrowing or inflation. History shows that the former was chosen. So when the recession hit us in 2009, we had no choice but to fall down at the feet of the IMF, as we had been borrowing to create an illusion of growth, and when the credit card was no longer available we all know what happened. And Jamaica wasn't alone, as we were in the company of the US and Europe, if that is any consolation.

So the government had no choice but to go to the IMF, and was prudent in first restructuring the debt (JDX) - albeit six months late - and also accepting that reforms such as public sector rationalization, tax, pension, and divestments had to be done. The problem is that almost two years after, while some of these things have happened or started, it has not been sufficient to take advantage of the breathing space provided by the IMF programme funding and JDX. So in 2011 the economy is still as structurally weak as in 2007. I remember over the past three years I was at pains to point out that our preoccupation with scandals and such things would prevent us from focusing on the important structural issues.

Well here we are

What is needed is still as relevant as when i wrote my book in 2009. In fact the recommendations could apply today as if it was written yesterday. The economy still has significant structural issues, evident in the recently published June balance of payments (BOP) numbers. The BOP is the weather vane of the economy's direction. For the six month period the current account deteriorated by over US$500 million. The main reason being rising oil prices. Does this sound familiar? It should because we have been paying lip service to an energy solution since the 70s.

At the same time we have not only failed to implement the much needed tax reform but we have managed to produce a document that says the most important reason for tax reform is to raise money for the fiscal accounts. Does this sound like the cherry picking from the Matalon report that took place in 2005? Is it coincidental that the last time tax reform for economic reasons took place was in the mid 80s, or is there a link between tax policy objective and growth. Certainly when Ireland was growing what they did prior was to cut capital gains tax in half and reduce corporate tax rates to 15 per cent. Their fiscal and monetary irresponsibility after that undid the gains however.

My own belief is that the current reform policies are the right direction and needs to be continued. The truth is that there are not many other solutions that can be offered. The problem has been the pace of reform. That is (i) the IMF targets are too aggressive, causing social dislocation, and (ii) the much needed reforms have taken too long. In addition to this there has not been much emphasis on protecting citizens' rights and enforcing a disciplined society. The police commissioner is to be credited with dealing with corruption, but there is not enough being done to protect citizens from police abuse or enforce road discipline. The charter of rights was finally passed, but we don't want citizens to have to seek enforcement of rights, but for the rights to be respected from the start.

Nowhere is this inability to address our structural issues more prominent than in the Global Competitiveness Report, where it not only shows us falling in the rankings but clearly states that the main challenges to our competitiveness are crime, bureaucracy, and taxation. It is ironic because the reforms currently being pursued are supposed to address these issues. The problem is that we spend too long to enact change and too much time pursuing political rhetoric.

Unfortunately with election in the air, we might have more rhetoric and less issues being discussed. But maybe this is what Jamaicans want as they still hang on to buses as they go to political meetings to hear the latest personality attacks.

The result is that as we approach the end of the IMF agreement, the economy is still challenged for sustainable development, as in 2007. The difference is that over the past two years we have seen a significant global recession and there has been a move in the right direction with respect to policy. So the next time we think about the effect of IMF policies, let's look in the mirror first.

Jamaican economy vulnerable to global crisis

Today I want to address two issues, which could have a negative impact on the Jamaican economy. The fact is that even though fiscal and other reform programmes have been taking place, the economy still remains very vulnerable and can easily reverse the small positive growth we have been seeing for the past three quarters. This is why it is very important that as we approach an election that we all act responsibly to ensure that the economy is not damaged.

The first issue of grave concern is what is happening in Europe, and more particularly Italy, which has an economy much bigger than Greece and can result in catastrophic consequences for the global economy.

In September 2009, I had written an article titled "Risk of a double-dip recession?", in which I raised the real possibility of the world going back into another recession. And my main reason for saying so was that even though the markets were recovering, the fact is that all the policy actions that have taken place since the recession have not been aimed at arresting the structural issues but rather at cosmetically creating an impression of growth. There was therefore little doubt that the problem would once again show its face.

The situation as it is today, with significant challenges in European sovereign debt, is even worse than I had thought it would get. I had expected a double-dip, and then a slow recovery after that. However, if the crisis in Europe is not managed properly then we could be looking at a decade or more of stagnation and a significant negative impact on currency values, higher inflation and interest rates, and no or low growth. The fact also is that any second recession as a result of challenges with sovereign debt could be worse than the 2008 recession.

Although Jamaica has fared relatively well, when compared to other countries, during and coming out of the recession, which took hold here in 2009, there are some realities that we face. The first is that Jamaica's main foreign exchange earners are discretionary and will be amongst the first expenditure cuts by foreign consumers if uncertainty sets in. On Wednesday last, for example, we saw markets fall by 3 per cent, a significant strengthening of the US dollar implying flight to quality, and all-time high Italian interest rates.

The second is that the IMF agreement is coming to an end, if there is no extension, and it means that funding support will also end. If the global reality results in greater uncertainty then capital markets could remain close to the required funding, as we still have an earnings shortfall.

Oil prices should continue to rise, even in a stagnating global economy, and in fact the International Energy Association has said that if enough investment in oil exploration does not happen in the short term, oil prices could reach to US$150 per barrel. Jamaica has not managed to reduce the 96 per cent dependency on fossil fuels.

The fiscal situation remains fragile, and the Balance of Payments shows a worsening situation because of the lower than projected global growth and the dependency on oil.

It is therefore very clear that the Jamaican economy would be very much affected if the European debt crisis is not resolved positively. The other problem is that there is nothing that any Jamaican government will be able to do about it, as any escalation in the European situation would see much of the multilateral resources being directed there, even while capital markets are closed.

Telecommunication industry threatened

The other issue which is of some concern is the competitiveness of the telecommunications industry. In June of this year I had written about this same concern, based on the then pending Claro-Digicel deal, and the continued poor results of C&W. I had pointed out at the time that the competitiveness of the industry is under threat because of the following reasons:

o Dominant position of Digicel while there was no number portability or regulation of internetwork charges;

o Continued losses by C&W, which implies that continued upgrade to the infrastructure is questionable; and

o The declining income levels of consumers means that this will affect their ability to afford the services.

The reason why this sector is so important is that apart from energy, telecommunications is one of the most important ingredients in business and consumer life today. It is not just about making a telephone call but business models now have telecommunication as a central part. Also any monopoly situation could see significant cost increases for businesses, if not properly monitored by regulation and the market.

It is for this reason that the continued losses being shown by C&W is of some concern, as this is unsustainable and already it seems apparent that Digicel's network has been having some challenges.

I say that C&W has challenges, as they have more than doubled their losses for the quarter, from $549 million in September 2010 to $1.323 billion in September 2011. One could argue that this includes depreciation charges (non-cash) of J$1 billion, but importantly the operating profit over the same period fell by 50 per cent, from $802 million to $435 million. Total revenues also fell slightly. More importantly the cash flow statement shows that the company had negative cash balance at the end of the quarter.

My own view is that the business model is such that irrespective of what they do within that business model they will continue to lose money.

Whether C&W survives or not is not important to me. What is important is that the regulators take the steps necessary to protect the consumers and the cost structure of the telecoms market. This should be done by regulation and competition. This is why it is important to address the matters of number portability and cross network charges with some amount of urgency, and not deal with it in the same way we have allowed our energy crisis to fester since the 1970s. Telecommunications is too important a component of business and individual life to allow it to go the way of the energy sector.