Policy's role in creating an enabling environment

Presentation to The Rotary Club of St Andrew on October 22, 2013

OVER the past few weeks, I have been approached by many persons who ask the questions: What is happening to the economy? Is Jamaica headed in the right direction? Is it time for me to migrate?

These questions have been influenced by the continued devaluation of the Jamaican dollar, increasing prices, difficult bureaucracy, indiscipline on the roads, and a general feeling of insecurity. One could say that the people who ask the questions have a right to be concerned, as they want to ensure their future is secure.

These conditions have now been further compounded by the recording of the lowest levels of business confidence since 2009 and consumer confidence in 12 years. This supports the pessimistic views behind the questions.

The question we need to ask ourselves, therefore, is: Are we on the right track with the current policy initiatives, in terms of the economic, legislative, and social programmes? In my view, it is very important to understand this and ensure that we do what is in the best long-term interest of the country, as it is highly unlikely that we will get another opportunity to bring us back from the brink, if we are not there already.

In order to do a proper assessment of this, we need to understand why we are here and what can actually bring us to a better tomorrow.

The first thing to understand is that the reason why we continuously suffer from low growth and deteriorating social conditions is the result of spending more than we earn. So in our over 50 years since Independence we have run a fiscal surplus, maybe six times, which means that for over 45 years we have been borrowing money to live. If that happens in your own household, then you will soon lose everything and become indebted to creditors.

The other thing to understand is that this predicament has resulted from governance that seeks to satisfy political party die-hards, which see politicians seeking to please persons through handouts rather than encouraging them to work. So, for most of our independent history, the budget has been

crafted around welfare-type programmes rather than creating policy initiatives that will encourage production and productivity.

The irony is that it is not the Government that ultimately pays for this welfare, but the productive class, which has resulted in:

* The economic decline of the 1970s;

* The debt increases from the 1980s to present;

* The financial crisis of the 1990s; and

* The two debt exchanges.

In other words, when government runs into fiscal problems, all they do is impose a tax (one way or the other) on the productive class in Jamaica, in order to continue the support of those who are least productive.

The result is that we developed an unproductive society, where capital and other resources are not allocated to where they are most productive, but rather, allocated based on political and other governmental policy decisions.

This fundamentally is the reason our economy and society are where they are. That is because we have failed to create a policy environment that encourages the factors of production (capital and labour) to move towards where it is most productive. So capital, for example, was concentrated in government paper, because it was the best value-added return and crime was a turn-off for real investments, and labour moved to where it was more protected than productive, or we failed to lend money through the Students' Loan Bureau with any link to development.

The problem we face today is that if we want to, in a sustainable manner, positively develop our economy and society, there will need to be a fundamental shift in policy and values. This is directly linked, in my view, to our legislative framework and policies (economic, fiscal, and monetary). In other words the framework, or environment, that Government puts in place will determine if capital moves from the sidelines (eg in US$ assets) to real investments and if people find it more productive to work, or find it more profitable to be in crime or other non-productive ventures.

For example, because Jamaica is well-known for music and sports, and because of the demand, a lot of money is made from it, then naturally youngsters look towards music and sports as viable careers to pursue.

What it means is that, in order to change the economic and social situation in the country, we will have to do the necessary policy adjustments that will change the way we behave when it comes to allocation of capital and labour, and how we interact with each other socially.

This is what is being attempted with the current IMF-influenced economic programme and the legislative reforms taking place. I am of the view that the fiscal and legislative reforms under the IMF-programme are the right way to go. Many may wonder how I can say that if the result is economic hardship, particularly the continued slide of the dollar. But the fact is that the Jamaican economy has been inefficient for so long, and the resources so misallocated, that any form of adjustment is going to cause some pain. What we do know is that the fiscal adjustments being carried out by Peter Phillips are necessary, because if we continue to spend more than we earn, then the result is going to be catastrophic. The adjustment that we are seeing is a shift of our resources from unproductive to productive purposes. So we are seeing more companies looking towards export, and we are seeing more young persons starting their businesses.

What we are also seeing is greater economic hardships, a devaluing dollar, and higher interest rates. So the question is: How do we do the necessary adjustments and at the same time minimise the pain, and dislocation, that the necessary adjustments cause?

What we must understand is that the only way the economy will grow is if the private sector, and in particular the SME sector, becomes more vibrant. So large companies (that have matured in the Jamaican market) will inevitably turn towards other markets, as this is the best value added for them. The greatest growth, however, is going to come from facilitating SMEs to start and grow into large businesses, just as in the

US where we see small businesses through the stock exchanges, have grown into international businesses. This is the way to reduce unemployment and create greater economic activity.

This, however, is only possible if we have a business climate that encourages capital, and labour, to move towards establishing new SMEs. This means an environment where SMEs can flourish and grow. It does not mean handouts, but rather, providing cheaper electricity, more efficient bureaucracy, a more efficient justice system, transparent governance, and improved law and order.

It is my view that much progress has been made in this area, but it needs to be faster in order to compensate for the inevitable decline we see in economic conditions because of the necessary fiscal adjustments.

In other words, because of the fiscal adjustments and reform programmes, we have seen capital move out of government paper and that capital is going to find a home that gives the best value for risk. At the moment, what we are seeing is that capital is shifting to US dollars, which is what is causing the rate to move.

Therefore, what we need to do is create an environment where business and consumer confidence is such that capital will want to move to real investments. This means that policy initiatives must be focused on creating an environment of efficient and friendly bureaucracy, competitive energy cost, law and order, and important reforms, such as a competitive tax environment. Unless we make the changes to create a competitive environment for businesses, then we will not be able to create sustainable growth and development.

So, in concluding, I can say that the direction of the reforms under the IMF programme is the correct way to go. We must, however, be careful about how we manage the transition and ensure that we create the environment to encourage the allocation of capital and labour to productive investments.

Development can only happen with trust

IN my article last week, I looked at the role that behaviour plays in economic growth. This week I will focus on the critical nature of trust, or confidence. As I have stated on many occasions, economics is all about how we interact with each other, which means that economies, and ultimately economic development, are the outcome of the behaviour of people.

Similarly, whether a company is successful or not really depends to a great degree on the interaction between its employees and other stakeholders. In other words, it would be very difficult for a company to progress if the employees did not trust the boss, and there were no rules governing how persons should behave towards each other. This not only relates to how we work with each other, but also how we interact socially outside of work.

People have no obligation to interact with each other outside of work, but the truth is that it can assist significantly with productivity if persons working together develop a healthy social relationship outside of work related activity. This is something I say to younger professionals all the time, using the example of men who went to the same high school or have always played sports together.

What this social interaction around school or sports does is create an element of trust and commonality between individuals. So the person I attended high school with over 30 years ago, or the person I trust to ride in front of me when I am going at over 30 mph, is naturally someone I will be very comfortable dealing with in a work environment. This is referred to professionally as networking, but really goes beyond networking. It really is developing a deep confidence in someone whom you must in other important aspects of your life.

So in the cycling example above, if every week that I ride with someone, I trust that they are going to point out any upcoming obstacles in the road (pothole or oncoming car), or trust that they won't be slowing down in a manner that will cause a fall, then what this does is develop a belief in what that person says to me. In addition, if every week we have a common purpose of surviving the ride unharmed, then when it comes to work the relationship will be much enhanced.

This is why I think that being involved in sports (especially team sports) at an early age in school is so important to professional and social development. Team sports teach you to rely on, and trust, others. This interaction also teaches you whom to trust. This, of course, is something that I find has been missing from schools, as many parents focus their children on academics only, without understanding the importance of sports to social development, and also physical development.

This supports the argument that one of the most important policy initiatives that recognised the importance of relationships in economic and social development were the Values and Attitudes and PALS initiatives that were developed under the PJ Patterson administration. My own view as to why they didn't have the intended impact is simply that they were not enough of a priority for most of us, but rather just seen as a Band-Aid solution.

It would seem to me, though that this is a fundamental challenge that Jamaica, and the world, faces. We only have to look at what is happening in Washington where grown men (and I mean men as I don't really see any women involved) are unable to arrive at a consensus. The result is that many of the citizens who elected them are being negatively affected, and more importantly, the fragile global recovery is being threatened. What is amazing is that both sides want the same objective - an improvement in economic and social conditions - but are still unable to arrive at an agreement. And this same scenario has been playing out every year.

Contrast this to when Gingrich was the speaker of the House and Clinton was president. They both said they were able to resolve the matter because even before the lockdown at the time, they constantly dialogued with each other.

In other words, in the latter case, there was greater trust between both parties, and so they felt a greater confidence in what they were saying to each other. In the current case, however, there seems to be a total breakdown of trust, when you listen to the commentaries.

This of course is no different in Jamaica, where everyone is labelled either PNP or JLP, or even within the parties, where once there is a challenge of ideas there is a total breakdown of relationships between persons who were allies the previous day. This also can be seen in the relationship between trade unions and management, in both public and private institutions, or even more critically, the relationship between citizens and the police force. And we then wonder why we are unable to solve the crime plague.

This lack of trust of everyone has even found itself into our public sector rules, where, because of the lack of trust, we have managed to set up rigid procurement rules and then have seen the need to set up more than one level of managing the rules because we don't necessarily trust one organisation to oversee the process. So we have the OCG, NCC, and Cabinet all overseeing the procurement process.

The result of this lack of trust is that there is always suspicion of everything that is done in this country, and so when political parties change they dismantle even good programmes because they do not trust anyone who wears a different colour shirt. We therefore create layers of control (bureaucracy) to compensate for our lack of ability to work together, just as would be done in a company where there is a breakdown of trust between workers and management.

The consequence of this is, of course, that we spend many unproductive hours trying to discredit each other. Then we wonder why we are unable to make any progress.

Behaviour's role in economic growth

LAST Saturday I was with my cycling group for the ride out to Palisadoes and back. After getting to the airport roundabout we usually turn and go back to Harbour View before heading back to the airport.

While going around the roundabout, a man who was on a bicycle, heading towards Port Royal, also started to go around the roundabout. He, however, went around from the right side, while the approximately 20 cyclists correctly went from the left to go back to Harbour View. On seeing the 20 cyclists approaching him, at a pretty quick speed, he started to curse us, using some words that cannot be mentioned now, for fear of the Broadcasting Commission.

One of the greatest challenges we face as a country is how we hold the human resources accountable for their action, says Dennis Chung.

If he had followed the rules set out by the road code, then there would not have been any encounter, and he would not have had to utter such words, which could have led to further confrontation. In other words, if he had followed the rules, then there would have been perfect order, and peace would prevail.

However, in true Jamaican style, he chose to verbally abuse us although he was wrong and we were right.

I am sure that we can all relate to that situation in Jamaica, where persons breaking the rules abuse the other party. So, for example, you are driving and going within the 30 mph speed limit, but you are going too slow for the taxi man behind you who calls you all sorts of names while overtaking above the speed limit and where there is an unbroken white line. Or, as many young men can attest to, someone claiming to be the police wants to get information from you and you ask for identification and you are abused, even though the law requires that it is produced.

More commonly we can refer this to a situation where you walk into a tax office and while you are waiting in line, the person at the counter is on the phone speaking (obviously not work-related) or is chatting casually with a fellow employee.

All these instances are cases in which laws and processes are in place to ensure that there is order and that things are done efficiently, but the behaviour of the persons charged with the responsibility of carrying out the function, according to law, cause the inefficiency.

I believe that this is one of the fundamental challenges being faced by the bureaucracy in Jamaica today. It is not that we need more laws, or that processes are not in place, but rather that they are just not followed. So it seems to me that one of the greatest challenges we face as a country is how we hold the human resources accountable for their action. Which, of course, speaks to the problem of enforcement.

One glaring example of this, which may cost the country approximately one to two per cent of GDP growth, is the development approval process. Recently, I was alerted to the fact that development approval takes approximately nine months (at best) to process. This is not because there are not processes in place, such as a computerised tracking system, but rather because of the lethargy in ensuring that the approvals happen in a timely manner.

In fact, my understanding is that there are many millions of dollars in economic activity tied up in the bureaucracy of the approval process. This of course is at a time when there is fiscal tightening happening, causing a contraction in economic activity, which has resulted in six consecutive quarters of negative growth, and the highest unemployment levels in 16 years. And all we have to do to ease some of this pain is just to ensure that the already existing tracking system and processes are used, which could see the average approval time reduced from nine to three months, which is where it can easily end up.

This of course is not just a Jamaican problem, as we see in the US where grown men, knowing that the citizens of the US and the world are depending on them to reach a compromise, for their livelihood, cannot do so because of egos. We, of course, need to be careful of how we criticise them as we behave the same way all the time. It is estimated that if this continues for another week it could cost about one per cent in GDP growth, or even worse, if not resolved within two weeks, could lead to a global economic problem.

These examples illustrate the direct impact that behaviour has on economic growth. Many times we forget that economics is really about human behaviour, and that the macroeconomic measurements we like to speak of, are really nothing more than the outcome of how we behave.

Understanding this, it is therefore very important for us to consider the behavioural effect of policies on economic outcomes. I say this because when we sit down to think about the reform programmes being implemented, we should not keep our eyes fixed just on financial targets but on, more importantly, behavioural targets, which in turn affect financial targets.

So, that tax reform will only be successful when they encourage capital to move from the sidelines, or from overseas, to real investments in the country. Law enforcement is only successful when it causes orderly and compliant behaviour, which results in the citizens holding the enforcers of the law in high esteem and confidence.

So as we consider our economic future, let us look towards the current stand-off in the US as a behaviour we do not want to adopt, as it is clear that economic growth depends critically on influencing behaviour in the direction of greater productivity.