Inspirational story of a business start up from nothing

I really must share with you a very inspirational story, and one that I think is an example of how a change in attitude and perspective, can move us from financial dependence to independence. This was briefly referred to in “Achieving Life’s equilibrium”, as an example surrounding the principles of wealth creation outlined. Financial dependence for me is having to rely on “direct” employment from someone else for income. This is not to say that employment is a bad thing, as it depends on the job. What it says though that even while employed you should be constantly seeking to increase your financial independence through savings, or acquiring assets (real or intellectual) to enable your transition to have some income independent of “direct” employment. This is the concept that pensions are founded on.

Back to the story then.

From about two years ago I have been discussing with a group of contract workers that they should seek to establish their own business, and take the steps to do so while they are employed under the contract, so that they don’t have to rely on employment in the future. They included mostly office workers, those you would think would have been more accommodating of the idea. There was also one person who was what we call the “office help”, who when I first spoke to her about it resisted and said that she was trying to get another job and would continue to do so. Will refer to her as Rose for this article. This was in the height of the first recession.

Most of the other persons (those who you would think would gravitate to self employment) continued to search for a job also, and some even said it was too much to think about and go about starting their own business. After working with Rose for a few months, and talking to her about the expenditure choices she makes, and what she needs to prioritize I got through to her finally. I then gave her advice on how to start her own business with very little capital, a common excuse I hear from many, which I always say a lot of capital is not necessary. She started her business by discussing with me what she could market, and I went though with her what people would demand and why they would want it. She went about securing the goods and started selling into the market. She has been doing this for approximately one year now and was able to supplement her income, to the point where the income from the business has now replaced if not surpassed what she was getting from employment. And the income, and market is growing daily.

I continue to mentor her and show her ways in which she can improve her income, and she has been doing so. She was able to secure a mortgage through NHT, and is now able to generate her own income to offset the mortgage payment. She also comes to me with ideas almost everyday and I guide her as to what will work and what won’t. She is now thinking of expanding the business, and securing a loan to get some equipment, and I have shown her how to go about expanding it. She is even thinking of employing someone in the near future because of the amount of work she is seeing.

Recently herself and some office colleagues ended their contract, and the others gave a traditional farewell speech, and say how sorry they were to go. She on the other hand said she was grateful for the opportunity she had and that she has acquired the necessary tools to expand her business and thanks everyone, and looks forward to developing her own income.

It just goes to show that moving from one stage in life to the next is really a matter of perspective. I look forward to continuing to give her advice as she continue to expand her horizons, as she is truly an example to follow. She had little knowledge of business, but was willing to listen. And she had very little capital but was able to match the market with the product and turn over the little capital while reducing the risk.

I think she will do very well. 

Why is Jamaica back in recession?

THE recently released Planning Institute of Jamaica numbers show that Jamaica is technically back in recession. I say technically because although there has been no change in Jamaica's economic structure, and underlying problems since Independence, the technical definition of a recession is three consecutive quarters of decline.

We have joined the ranks of Great Britain and Spain who experienced double dip recessions also. I did not say Greece, because they really have never come out of recession, and therefore is still on their first dip. These countries got there because they contracted fiscal spending, and similarly this would have contributed to our own double dip.

An IMF agreement won’t solve Jamaica’s underlying challenges and create economic independence. (Photo: AP)

The fact, however, is that Jamaica's double dip recession is not caused by any fundamental change in the structure of our economy. The structure of the economy has remained the same since Independence and this is one of our primary problems. We have failed to transform the economy from a basic one to either an efficiency or innovation-driven economy, as is supported by the Global Competitiveness Report.

Over the period 1962 to 1972, and the mid 1980s to early 1990s, Jamaica saw its period of greatest growth, which was eroded significantly by the 1972 to mid 1980s decline, and recent period after the 2008 recession. It was not helped by the very slow growth period of the 1990s either.

But Jamaica's economy has not really been much different over these periods, and because of the lack of proper strategic policy and planning, even though we had periods of significant growth in the 1960s and late 1980s, we have failed to maintain the momentum. It would seem clear, therefore, that Jamaica's economy has suffered more from strategic policy failures than anything else. Or should I say governance.

Because of the underlying challenges in the economy, it was therefore, not difficult to predict that with uncertainty surrounding an IMF agreement, the dollar would have devalued and the economy declined. This is the same thing that would have happened in any part of Jamaica's history, if we had a lack of external capital (whether through debt or equity) coming to the country. So there is no difference really between the current situation and past ones, with the exception of the level of confidence that exists at any point in time. The 2008 global recession, consequent drying up of privately available capital, and higher risk aversion, would no doubt have made it much more difficult.

If you look at any of the decades, since Independence, and even before, you would see that Jamaica's economy is highly dependent on capital inflows. Whether it is classified as remittances, foreign direct investments, or other private capital flows such as deposits. Therefore, the only way that we have been able to keep our economy stable is either through borrowing, grants or remittances.

These are what have kept our consumption levels vibrant and our NIR high. Therefore, after the 2008 recession, when there was a (i) lack of private capital (as there was a flight to safety); (ii) slowdown of global investments; (iii) slowdown in remittances; and (iv) reduction in grants; then the only place that one could go to access any funds were the multilaterals. But the multilaterals will only lend to us if we have the seal of approval of the IMF. This is why the IMF has become so relevant globally again. Not because they have had successes, but rather they hold the key to funding for many countries.

If you look at the history this is also the reason why we were able to grow, when we did, and why we declined also. In the 1960s there was a lot of private capital (loans and equity) flowing into Jamaica as a result of banana, sugar, bauxite, and tourism. In the 1970s, because of the lack of confidence, created by the rhetoric of the policies then, that capital retreated. In the 1980s, the IMF seal of approval was in play and much capital flowed back into Jamaica, as showed up in our debt to GDP ratio, which hit 212 per cent in 1984. In the 1990s up to mid 2000s we again saw significant capital inflows, in the form of debt and direct investments. After the 2008 recession, however, that private capital dried up and only the multilaterals were left standing.

This analysis therefore shows us that public policy has failed to change the economy from external (colonial) dependence to independence. This also impacts our fiscal accounts, which is heavily dependent on taxes. The solution we have always pursued, to our fiscal challenge, is to either cut expenditure or tax more. Even during the growth period of the 1980s, our solution was to cut expenditure by reducing the public sector significantly. In the 1990s, we increased the public sector once again and sought to solve the fiscal problem by taxing more. This tax policy was carried into the current century and continues, where today it has come to a compulsory end as the economy has reached a point now where more taxes have a negative effect on the economy and revenues.

The reason why we have not been able to solve the fiscal crisis with this approach is because increased fiscal revenues primarily depend on growing the economy, which we have not been able to do.

It is for this reason I say that, even though an IMF agreement is necessary because we have made it so, it still will not solve the underlying challenge and create economic independence; which as Norman Manley said, should have been the mission of the generation after him.

To solve the problem, we need to change the equation in the balance of payments, and focus on creating a trade surplus. This is why solving energy, food imports, and law and order are critical to achieving a viable economy going forward.

Failing to do this will only continue our frustrated attempts to grapple with economic stability and the fiscal accounts, and we will never get rid of our economic masters.

Understanding the effect of an IMF agreement

IN recent months, there has been significant attention placed on the need for Jamaica to have an IMF agreement in place and its timing.

Most persons have correctly stated that it is critical for Jamaica to have an IMF agreement in place, and even more so because of the speculative effect on the US dollar, that it is essential that an IMF agreement be in place as soon as possible.

I also agree that we need an IMF agreement, as quickly as possible, so as to bring greater certainty and confidence to the markets. However, I have always maintained that it is even more important that we balance the need to have an agreement in place with ensuring that we have an agreement that will assist in the "real" development of

the country.

And I say this against the background of the last agreement, which I, along with Ralston, were the first calling for an agreement (with much criticism), but after it came we were also the first to say that it would not have been successful (again to much criticism). I don't think that we have to discuss whether it was successful or not, for the result is there for all to see.

It is against this background that I say it is very important we have an agreement that will speak to the development of the country, and not one which, like the last one, projected oil imports would move from 14 per cent to 14.5 per cent of GDP over the period of the agreement. We must have an agreement in place, that will, as the PM has said, balance people's lives while balancing the books. Because the reason for governance is not to just balance books but to ensure that the standard of living of Jamaicans improve.

With that said, however, this does not mean that timing is not important, as uncertainty surrounding the timing of an agreement will also cause much hardship on the people of Jamaica.

Uncertainty will no doubt lead to higher interest rates and inflation, primarily as a result of the depreciation of the Jamaican dollar. The timing must therefore be aligned with the level of the NIR, and the conditions we agree to.

I have always maintained that while it is certainly the most desirable state to have an agreement in place before the end of 2012, it is not necessary to bring back confidence and certainty to the market.

This is so because investors do not emphasise the current conditions in a market, as much as the future conditions. And in fact, the current condition is assessed in order to predict the future. That is because the nature of an investment is that you make a return in the future not the current.

Unless of course you invest in a Ponzi scheme. Therefore, while many are still arguing about the need to have an agreement in place now, the truth is that the holders of money have long gone passed that period and is now looking at the effects on next year. In fact I think that most investors would have already dismissed the notion that an IMF agreement is coming by the end of 2012, and would have positioned their portfolios accordingly.

What is important, in order to remove the uncertainty, and bring back confidence in the market, is communication around the timing of an IMF agreement. This also must be very transparent and said with a certain degree of certainty.

It is also very important that the agreement be in place before the NIR reach critical levels. My own view is that much of the demand for US dollar is speculative, and not based on immediate demand for business purposes. However, this is to be expected as businesses, and individuals, will seek to improve their financial position and guard against foreign exchange losses, which can have a very debilitating effect on a business or person.

It therefore is a waste of money to be running ads that seek to encourage persons not to speculate on currency else they could end up losing. This is a liberalised market economy, where money is an investment like equities or bonds.

So if an investor sees that they can make money betting on money, then let them take the risk. If they get burnt then it is just like any other investment. What will ultimately discourage persons from speculating on money is when the risk of the investment opportunity is too high for the expected return.

In terms of how much money we can expect to get from an agreement, I believe that Shaw is correct that in the ordinary course of an agreement it will be US$400 million. This is because the IMF lends to countries on a quota arrangement and the last agreement had used up our quota, as far as I remember, to the tune of the US$1.2 billion. It therefore is logical to assume that under the rules, we would only be entitled to an additional US$400 million.

However, I don't see this as a big problem. The fact is that the real immediate challenge the government faces is the fiscal account, and therefore what the government needs is budgetary support. If you cast your minds back to the last IMF agreement, in addition to the IMF loan, an additional US$1.2 billion was supposed to come in from multilaterals, which primarily would be used for budgetary support. You will also remember that in order to have access to those funds it was necessary to have an IMF agreement in place.

This is the real value of an IMF agreement, not necessarily the IMF money. And this is why the BOJ governor has indicated that the US$800 million we received from the IMF is still sitting there, as we never needed to draw down on it for balance of payments (BOP) support, which is what it was available for, as we had a strong NIR.

The declining NIR means that unless we see remittances and earnings increase or imports decrease relative to earnings; or investment funds coming in as a result of confidence being restored, then we will need to draw down on the IMF funds. If we get to that point, then we will see even further declines in the economy. An IMF agreement will lead to investment flows coming in.

Let us be very clear, however, that an IMF agreement will not solve our current economic predicament, particularly if the policy focus is similar to the last agreement. The only way to sustainably solve our economic problem is to recognise that our major challenges are the BOP, and in particular energy and food costs, and law and order. Which if both are addressed properly can add over $100 billion to the economy, with minimal pain, outside of a cultural shift, which will also see increased disposable incomes for Jamaicans.

Why does Jamaica need austerity?

I read with interest the call by Chris Zacca, the PSOJ President, to advise Jamaica's about the austerity measures we are about to undergo with the IMF and it reminded me of a statement made by our PM, Simpson-Miller a few years ago, that it is important to balance people's lives while balancing the books. To many this may have seemed like an election statement, but nothing could be truer about the way we need to approach our future. In any negotiations with the IMF it is important that this is born in mind, especially as I hold to the belief that austerity is. Other necessary to see prosperity in Jamaica. In fact my firm belief is that austerity will only lead to more prolonged suffering for Jamaicans. Europe has experienced this and along with the IMF is retreating from the original austerity focus in favour of the previously rejected stimulus. I want to hear from the voices that were once very much in favour of austerity measures being imposed. I believe Jamaica can easily address much of our economic challenges if we allow ourselves to implement fiscal solutions to our law and order energy options. These hold the key to our economic turnaround and not fiscal austerity. Thee should of course be responsible fiscal spending, but austerity will drive us further into the ground. If we take the appropriate fiscal actions and the necessary calculated risks we can avoid austerity and see robust economic development.