The business of FX trading

On March 3, 2006, the Financial Services Commission (FSC) raided OLINT’s New Kingston offices charging breaches of sections 7 (1) (a) and 8 (1) (a) of the Securities Act. Section 7(1) (a) prohibits persons from dealing in securities without a licence, while Section 8 (1) (a) restricts involvement in the business of providing investment advice without an investment advisor's licence.

On August 2, 2006, Elaine Warner, personal financial advisor with Sterling Asset Management wrote “FX Trading – a viable investment alternative”. On September 29, 2006, the Jamaica Observer’s Caribbean Business Report reported Michael Lee Chin as predicting “…that foreign currency trading schemes…cannot be sustained and will end in ruin.” On October 4, 2006 the Business Observer reported that the regulated financial industry was calling on the FSC to allow the licencing of mutual funds to level the mutual fund field, as they have to compete with operations such as Cash Plus.

On Sunday November 5, 2006, the Observer reported that OLINT was granted a stay of execution for a stay and desist order from the FSC, with the condition that they not increase their membership pending the appeal by the company to be heard on March 26, 2007.

With all these contradictory reports, and no final decision, the investing public is of course left in a quandary as to what information is correct. On the one hand small investors have been reaping high returns from outfits such as OLINT and Cash Plus, and Sterling Asset Management (a registered securities dealer), through its Sterling Report, stated that FX trading is a viable investment alternative.

On the other hand, a well respected self made billionaire, has charged that FX trading schemes will end in ruin. The FSC has never stated that FX trading is illegitimate or illegal. They have only charged that OLINT was not authorized to carry on securities dealing or give investment advice. This is quite different from saying that the activity is a scheme, which will end in ruin. The FSC’s Brian Wynter has said that the public should be aware of schemes that promises high return and could end up in disaster, as it is his responsibility to do. The FSC is a regulator and must ensure the investing public is protected and has a responsibility to look into any unregulated entity they believe can damage the financial landscape. Our memories should not be too short to remember FINSAC in the 1990s.

So what is the investing public to believe? Is it possible to legitimately receive these high returns or is it just a scheme designed to take away their hard earned cash? I decided that the best way to ascertain the reality was to investigate the matter personally, and trade myself.

The facts
In order for us to properly understand FX trading we should look at some facts. After all FX trading is an international market and has been in existence since the early 1970s. The question then is why has it not resulted in economic financial ruin, and why countries such as the US and UK not shut down these operations to protect investors. The market does not operate under the cover of dark, so it is not difficult to find out who the main players are. In fact, news stations, such as MSNBC and CNBC, report on FX trading activity daily as a legitimate market.

Some of the facts surrounding FX trading are as follows:
The FX market is by far the largest trading market in the world. Trades across the globe currently exceeds US$1.9 trillion per day;

Rank-----------Name----------------------% of volume
--1-------------Deutsche Bank-------------------17.0
--2-------------UBS------------------------------12.5
--3-------------Citigroup--------------------------7.5
--4-------------HSBC-----------------------------6.4
--5-------------Barclays---------------------------5.9
--6-------------Merrill Lynch----------------------5.7
--7-------------J.P. Morgan Chase-----------------5.3
--8-------------Goldman Sachs--------------------4.4
--9-------------ABN AMRO-----------------------4.2
--10------------Morgan Stanley-------------------3.9

The top ten currency traders are large financial institutions (see table). The ten most active traders account for 73% of trading volumes and the impact of retail traders is minimal. Retail brokers are estimated at 2% of the entire market.
Currency prices are affected by economic and political conditions. The most significant effects are from interest rates, global trade, inflation and political stability. Traders watch commentary, and the economic calendar, to predict which trend the market will take;
Currencies are traded in pairs. On the spot market the most heavily traded pairs are (1) EUR/USD – 28%; (2) USD/JPY – 18%; and (3) GBP/USD – 14%. The top six most traded currencies are (i) United States dollar [USD]; (ii) Euro [EUR]; (iii) Japanese yen [JPY]; (iv) British Pound Sterling [GBP]; (v) Swiss franc [CHF]; and (vi) Australian dollar [AUD];
There is little or no inside information in FX markets. Fluctuations are driven by actual monetary flows, as well as expectations in monetary flows from economic or political information;
There is no single unified FX market, rather a number of interconnected marketplaces. The result is that there is no single dollar rate but a number of different rates, depending on the bank or market maker that is trading;
The main trading centers are London, New York and Tokyo. As the Asian trading session ends then the European session opens followed by the US session. This results in a 24 hour market. It closes on Friday afternoon (end of US session) and opens on Sunday afternoon (start of Asian session – Monday morning in Asia);
It is estimated that only about 15% of all traders are successful; and
Like many other markets and services the currency market has a lot of scams perpetrated.

It is the size of the market, the number of participants and highly speculative nature that makes the market unique. Over 50% of traders stay in the market for under one week and approximately 20% are estimated to be in the market for one hour or less on each trade.

Trading characteristics
Today one can trade by accessing any one of the many brokers via the internet, who provide their own trading platform. When one accesses these sites you can choose to trade a demo account, which allows access for a specified period of time. When you are ready to trade with real money you can do so through a mini or standard account, with a minimum of US$250, which trades in units of US$100,000 per trade, or mini-accounts, which trades in units of US$10,000.

The question may be asked, how does a retail client access that amount of money? The answer is that brokers provide margins. For example, if a margin of 200:1 is provided then if you put up US$500 you will be allowed to trade up to US$100,000. Financial houses usually trade margins of 10:1 but margins of up to 400:1 are provided for retail clients. For this reason FX trading can be very risky for retail clients, as if the market turns against the retail speculator then it could easily wipe our their capital.

Many retail clients use technical indicators, such as Japanese candlesticks, Relative Strength Index, Directional Movement Index, and Fibonacci to take advantage of trends. The other type is called fundamental analysis where traders predict based on economic and political information coming to the market. Traders use either fundamental or technical analysis based on current market information, or tend to stick to one or the other.

On executing a trade there is no commission charged. Brokers make money on the buy-sell spread. When one buys the EUR:USD pair, for example, you buy at say 1.2889 but the selling price is 1.2886, so the only way to profit is to wait until the sell price moves to 1.2890 and above, which at that time the buy price would be 1.2893. Conversely one could short the currency pair by selling it, at 1.2890 and wait until the buy price falls to 1.2889 or under and then buy to make a profit. Thus one can make money on going long (buying) and short (selling). The broker always makes a spread, which means that the only way that market volumes can sustain themselves is if new money constantly enters the market.

What are the risks?
FX trading, however, is very risky. Because of the highly speculative nature and the number of persons in the market, it is extremely volatile. This volatility means that the market can change directions quite easily and because of the highly emotional state of traders, as revealed by the candlesticks, a sudden change can occur that can wipe out retail speculators, especially with large margins. For this reason all “legitimate” brokers advise to only put up money one can afford to lose, and when trading use what is called a stop loss.

The problem, however, is that it is also very addictive. In fact many persons refer to it as gambling because of the highly speculative nature involved. The odds of winning or losing on a trade, however, are 50-50, that is the market can either go up or down. The odds of winning the lottery are very small and the odds of winning cash pot, for example, are approximately 36:1. So that even if forex is deemed to be gambling the odds are much better. In addition there are technical predictive tools, while the predictive tool with cash pot may be a dream.

Over time one can use fundamentals to predict with some amount of accuracy what rates will more than likely be, just as one predicts stocks and bond prices. It is therefore the high level of speculation, and the very short term nature of trades that makes FX trading so risky, as well as the high levels of margin provided. Similarly, US stock brokers do provide margin for trading stock, which can also be very risky.

Because of the large size of the market, and the interest in the high returns that can be made, the market is also victim to many scams. It is therefore important that retail speculators who may choose to enter the market understand this and ensure that they verify the legitimacy of the broker.

It is also because of the high level of risk, addictiveness and scams that the FSC has to try to protect Jamaicans. On the other hand, recent trends have indicated that Jamaicans are willing to accept this risk, as they have got used to a high return environment and when interest rates began falling it was difficult for many to adjust to the lower, although normal returns.

Is it legitimate?
The question then remains, is FX trading a legitimate activity? And if it is legitimate shouldn’t the regulators be seeking to regulate the industry, as it is evident from the call of the industry for mutual funds, that the market is moving towards higher returns, even if unregulated?

The fear of course is that a lot of money could eventually find itself leaving the shores of Jamaica. If we do nothing about legitimizing it then we will only see many inexperienced persons going online and losing their capital anyway. It may therefore be better to have professionals perform this service under the umbrella of the FSC to ensure regulation.

I don’t buy the argument I have heard that FX trading services have affected the stock market performance. It is known that the stock market is mainly driven by institutional investors. If we assume that FX trading has affected the stock market then it means that institutional traders have also gone the way of placing funds on the currency market. If that is so then they would have recognized the legitimacy of the market also.

Based on these arguments, it seems to me that forex is legitimate. The problem with the market is not its legitimacy but rather the high level of risk involved. Because of the high level of risk it is very similar to gambling in my view. After all any speculative trade is taking a chance, which is what gambling is, whether it is FX trading, stocks or bonds. What makes an activity resemble gambling is the level of speculation involved, that is the odds.

My results
So what did my own personal experience reveal? Well in order to satisfy myself I looked at the various sites and tested around two different demos. After trading the demo accounts for approximately one month, I put up the minimum amount of money to make it more challenging. I started trading real money on October 3, 2006 and at the time of writing this article, November 9th, 2006, which is 27 trading days (there are about 240 trading days per annum), I showed a return of approximately 20%, as an inexperienced trader doing it only occasionally. That is an annualized rate of 178%, however, future losses could easily turn that around. One of the things you learn to do from early is develop your own trading strategy that works for you. As a result I focused on certain tools and followed specific rules I developed, and with my accounting training it was not difficult to adhere to the discipline required. While it may not be probable to make 10% per month, it is highly probable to make much more than 10% in a month. So from a marketing point of view it may be worthwhile to spread the return over a year, so that if one month you make 30% and the next month you make a loss of 10%, then you could make an average payment of 10% for each of the two months.

My knowledge of the market is from reading and practicing with demo accounts. Let me warn everyone though that even though these returns can be made the market is very risky if you do not (1) have the requisite technical skills to understand the tools and market movements; and (2) maintain the required discipline. After all, the market is driven by the same emotions behind most speculative traders, fear and greed, and if one does not maintain discipline then the market can easily turn against you. Because of the risk involved, however, I would not be trading with anyone else’s money.

In my view, however, the market is legitimate and is not a Pyramid or Ponzi scheme. But like any other lucrative business, these schemes exist as fraudsters try to take advantage of enthusiastic investors. The National Consumers League in the US, cited the top ten internet frauds for 2005 as:
Auction items never delivered, average loss of US$1,155 (42% of complaints);
General merchandise never delivered or misrepresented, average loss of US$2,258 (30% of complaints);
Nigerian money offers, average loss of US$6,937 (8% of complaints);
Fake cheque sent for goods and services and victim is told to wire back money, average loss of US$4,361 (6% of complaints);
Requests for payments to claim lottery winnings, average loss of US$2,919 (4% of complaints);
Phishing, at an average loss of US$612 (2% of all complaints);
Advance fee loans, at an average loss of US$1,426 (1% of all complaints);
Internet access services, at an average loss of US$1,262 (1% of complaints);
Information/adult services, average loss of US$504 (1% of complaints); and
Work at home plans, average loss of US$1,785 (1% of complaints).
The department of Homeland Security has also made predictions about the top frauds for 2006, and this list does not include forex. They have pointed to the emerging risk of hackers accessing on-line brokerage accounts, however.

This list has never included forex trading schemes, even though there are forex fraud schemes. What it shows, however, is that there are greater risks in other areas, which may be even more accessible and difficult to trace. Investors need to be made aware of all the risks, and warnings should be issued by the regulators.

I cannot say enough, however, that it is very risky and does require some amount of formal training, and wit. Some of the rules to follow are:
Only invest what you can afford to lose. A mortgage on the house or using your savings to invest in forex is not only very risky, but also stupid. Portfolio management is key, and while there is a place for high risk investments, one should also have low risk and long term investments such as fixed income and the equities market;
Ensure any advisor is a trusted source, with a good track record, just as you would with any other investment. Regulatory oversight is very important;
If you do not have the requisite skills to do the proper analysis then it is best to stay away because of the risk involved. Not because you have access to a computer and high speed internet does that mean you are a trader; and
Finally but very importantly, remember that under section 5 of the Income Tax Act, once you are resident in Jamaica for tax purposes you must pay taxes on any income earned, whether earned in Jamaica or not.

E-mail: dra_chung@hotmail.com

An environment encouraging success

Each time I go to the United States (US), I always wonder, as many Jamaicans do, why it is that Jamaicans go overseas and become very successful, but find it so difficult to do the same here. It is as if we are deliberately holding back the potential that would give this country the opportunity to grow at enviable rates.

The infrastructural support and assistance provided to US citizens is done with one thing in mind; to encourage development and success. On the contrary the way Jamaica operates is that we put every stumbling block in the way of persons trying to move forward. Is it any wonder then that we find ourselves in an economic quandary, where per capita income is a mere US$4,500 compared to countries such as the US at US$41,600, Trinidad at US$16,800, Barbados at US$17,300, Singapore at US$28,600, and Ireland at US$41,100. This of course is no surprise as education and income is directly linked, and while we are struggling with a literacy rate of under 80% these countries have rates in excess of 95%.

Is it any wonder that we find in excess of US$1 billion invested by Jamaicans in other countries, as stated by the World Investment Report (WIR), when so much more development is needed at home? Is it any wonder that Trinidad receives more Foreign Direct Investments (FDI) than we do?

Neglected infrastructure
The truth is that we have neglected to provide an attractive infrastructure, both in terms of capital development and human resource skill levels to woo much more investments into the country. Over the past two to three years we have been celebrating the fact that FDIs have been significantly up. This, however, is primarily because we have been benefiting from the global explosion in FDI flows over the past two to three years also. The WIR shows, however, that the flows to developing countries, such as Jamaica, have been slowing and is expected to reduce even further. We can therefore expect that the levels of FDI we have been experiencing may fall over the next one to three years.

My view, however, is that it is better to grow organically, that is from locals investing, rather than rely on FDI. And we certainly have the capacity to do so with some support. Whether investments are from foreign companies or locals, however, it is still necessary that we develop an infrastructure and processes that will assist them to be successful rather than feel as if one is fighting a losing battle, because as you push the cart up hill you feel as if the system is pushing against you.

Now that we have finally started to reduce interest rates and tackle the crime problem “intelligently”, we need to now go one step further. We need to ensure that the environment in which people have to invest, work and live in is geared towards assisting them to succeed rather than fail. It is not enough for us to be satisfied with growth rates of 2% to 3% when we have the potential to grow at faster rates if the proper investment in our people and infrastructure is made.

I have always said that one can determine the state of a country’s environment just by driving on the roads. In the US there are strict laws against speeding and many police on the roads to ensure that one adheres to the speed limit; there are many signs on the road that tell you of the various exits and destinations; there are many pedestrian tools on the roads; there are school speed zones, where if you go over the prescribed 15 miles per hour you could end up in serious trouble; the lanes are clearly marked with directional signs; and motorists respect the rules relating to traffic signs.

In Jamaica on the other hand, the police will generally only stop someone speeding if they deliberately set up a speed trap, and sometimes they will ask if you are going “write” or “lef”; the instructive road signs are few are far between; even when there are pedestrian tools, which are far from adequate, the pedestrian better give way to the driver; school speed zone – what’s that; the only thing that the lanes are clearly marked with are potholes; and motorists try to beat rules relating to traffic signs.

This comparison is symptomatic of the way in which we have set up our environment for people to succeed. So because we have made it so difficult we end up with a comparatively low literacy rate and run down infrastructure. The WIR states that the new FDI trend is being driven by R&D investments. Countries that attract R&D investments have a well developed infrastructure and educated work force. If this is the new trend in FDI then where does that leave us with our low literacy rate and less than adequate capital spend. The fact is that we may see short term financial benefits from spending less than budgeted capital expenditure, but what is the long term effect, if this is the global trend.

Misinterpreting debt
The focus a balanced budget has led us to believe that the be all and end all of financial management is to come out with a short-term positive financial position. Just as companies focusing on short-term profits may find itself in difficulty over the long run, so it is the same for a country. I have always said that the real problem with debt is not the level in relation to GDP, but rather what is the return in relation to the cost. If the return on debt far exceeds the cost then there is nothing wrong with it. In theory it is efficient to acquire as much debt as possible to the point where the marginal return is equal to the marginal cost. The problem with our debt is that we have, and continue to, use it primarily for consumption purposes. Therefore the marginal return has been below our marginal cost for a long time. This is the reason why we find ourselves spending so much of our earned dollar to service debt. If on the other hand the marginal return on our debt was still greater than the cost then we would not be faced with spending so much of our revenue on debt servicing.

If instead we had used the almost J$900 billion debt to focus primarily on capital development we would find that we would have been in a much better position to (1) attract investments; and (2) see greater returns for each investment dollar spend. For example, if we were truly focused on infrastructural development then we would not have the situation, as reported in the Gleaner, where cruise ships have to be turned back because of inadequate ports, thus resulting in much needed lost revenue. We would not have to contract overseas companies to build highways and in turn charge Jamaicans, resulting in increased transportation charges, and possibly net remittances outside of Jamaica through repatriation.

If we are truly to benefit from exceptional levels of economic growth then we must do everything to create the environment for investment. Of necessity we must focus on developing our infrastructural support for investments to take place, which means improving our distribution networks, not shutting down our only inland airport in Kingston. We must focus on improving our skill level, not just isolating the children better able to deal with GSAT pressures from the rest of the pack. We must make our roads a more disciplined environment. We must make it easy for small businesses to grow, not pressure them with coping with an inefficient tax system.

In short we must provide the infrastructure for people to want to do business and live in Jamaica. If not then we will always be looking for (1) FDIs rather than having the real development of home grown world class organizations; and (2) being satisfied with aneamic growth rates in relation to the global environment.

E-mail: dra_chung@hotmail.com

Government revenues and corporate earnings

The fiscal numbers for the six-months to September 2006 are out, and in my opinion there are no surprises. My own view, which I had written and commented on, is that the $219.2 billion revenue targets are going to be difficult to achieve, given the past performance in the economy and the fact that there was no fundamental change in our economic arrangements.

The September numbers show that revenues are some $2.7 billion behind budget, driven by tax revenues underperforming budget by the same amount. The forecast is for tax revenues for the last six months to be higher than the first six-month period, with tax revenues projected to be $18.0 billion, $17.4 billion, and $26.3 billion in December, January and March respectively. This in my opinion is going to be difficult to achieve, compounded by revenues being behind already.

My reasons for saying this are what I have always been saying. The cement crisis had a significant effect on the economy and corporate earnings, tax collections in the first six months was biased by cash accounting and the collection of arrears, and the economy was not capable of growing at rates of 3% based on the arrangements at the time. I believe, however, that the changing economic climate will see a fundamental shift in the way we produce and will see improvements in real investments, driven primarily by agriculture and tourism. This will be the catalyst for real growth to take place at 3% and more in the future, but the effect on the current fiscal year will not be fully felt.

Fragile economy
With that said though, the economy is in a fragile state and any disruptions caused by (i) an upsurge in crime; or (ii) irresponsible fiscal spending can once again change our course. It is therefore going to be very important that the upcoming election, and the desire to win, is not given primacy over our economic arrangements.

As it relates to current fiscal year revenues, instead of the $219.2 billion projected, we may see actual revenues being achieved between $210 billion to $215 billion for the year. Revenue projections will be adversely affected by the following lines:

- Profits taxes from companies, projected at $20.1 billion for the year, are currently $576 million behind budget, and will continue to be marginally behind budget given the downturn in corporate earnings. This line may end up being $1.1 billion behind budget for the year;

- PAYE, projected at $43.4 billion for the year, is currently $1.5 billion behind budget. With the recent and expected lay offs from companies restructuring to adapt to the changing economic environment, we can expect that this line will under perform, and may come in at $3.5 billion under budget for the year;

- Tax on interest, projected at $13.0 billion for the year, is currently $1.3 billion ahead of budget. In September 2006 this line was over $800 million behind budget because of refund payments to pensions, which are expected to continue into the final six months. This line may come in on target, as pension payments reduces the surplus; and

- Consumption taxes (GCT and SCT) are currently $1.2 billion behind budget. These have been affected by the reduced consumption caused by the cement issue, which has seen some resolution. This will continue to be affected by the corporate restructurings, however, and may come in $2 billion behind budget.

Based on these lines we could see total revenues coming in at between $6 billion to $7 billion behind budget, resulting in the $210 billion to $215 billion range.

With that said, however, the government should easily meet its fiscal target by continuing to spend less than budgeted on programmes, wages and salaries, and capital projects. Interest expenditure will continue to be higher than budgeted, as loans have been higher than projected. The result of this expenditure savings, of course will be that less monies will be available for social programmes, public sector workers will continue to hold strain, and improvements in the capital infrastructure generally, and for schools and the police in particular, may be delayed. It is obvious, however, that the government is committed to maintaining fiscal discipline, and this is the reason for the ability to reduce interest rates and force a shift to real investments in the economy.

Revenue performance
This underperformance in revenues is to be expected given the corporate results over the last six months. This may continue until the end of the calendar year, after which I expect that we will start to see an upturn in corporate activity, as (i) lower interest rates, coupled with the recent lay offs, means that more entrepreneurial activity will take place; (ii) disposable income increases with an upswing in construction, with the return of cement and projects continue; (iii) corporate earnings come off the lows they have been experiencing, as the restructuring initiatives start to take effect; and (iv) world cup 2007 approaches. This of course is dependent on ensuring that fiscal spending remains responsible and confidence is not reversed by virtue of factors such as crime. It is therefore very important that good governance practices are adhered to.

The situation, therefore, is that the economy is at a cross roads. If we maintain control of the social conditions and continue to improve the investment climate then we will see more private investments taking place, and more importantly from small local entrepreneurs. The continued reduction in interest rates will have a positive effect on the real economy and will be a cornerstone to the turnaround in our economic fortunes. Over the next three to six months companies will continue to see the benefits of their restructuring effort, and corporate earnings will begin to increase, resulting in greater government revenues. The real benefit for government revenues will fall into the next fiscal year, however.

The expectation, therefore, is that if we continue on our current path, and not allow political euphoria to undermine our efforts, then we could see growth in excess of 3% next year, but there is a slim chance of achieving that this year. In any event this adjustment is necessary and the important thing is that there is improvement.

It remains a concern that net loan receipts are $20 billion higher than projected. The question I continue to ask is, if we are within our fiscal target then what is the need for the greater than projected loan receipts? With a lower than projected fiscal deficit we should be expecting to see a lower loan receipts instead. This is important as a higher than projected net loan receipts means that interest payments will continue to be greater than budgeted. If we are to remove our fiscal deficit then it is important that we also seek to reduce interest payments, which is a significant portion of our expenditure (40%).

Going forward then revenues is not expected to surpass expectations, especially given current corporate earnings. The fiscal targets will be met, however, by suppressing expenditure. As the fiscal deficit reduces this will allow for further reductions in interest rates, spurring further economic growth. Again I repeat, however, that good governance is going to be essential going forward.

Adapting to a changing economic climate

The way with which Trafigura has monopolized the press and commentary was predictable because of the enormity of the scandal in many ways. In fact it certainly would have competed with the soaps on television, as it had all the intrigue of a made for television story. The commentary must continue as it is important that there is a full investigation and revelation of what happened so that we can have the purging necessary to move forward.

One of the inadequacies it has shown up is the inability of some persons to focus on more than one issue at a time, as it seems that some commentators cannot understand why we should also address the confidentiality issue, while at the same time addressing the more important issue of the acceptance of the gift by the government.

The incident has also derailed our continuing discussions on the economy, and the fiscal accounts. The Finance Minister recently held a press conference where he fielded questions on the economy and seemed pretty up beat about the prospects as relates to the fiscal targets being met. He stressed that the “inflation scourge” was being brought under control, as the twelve month point to point as at September 2006, showed an annualized inflation of 6.5%. Recently the confidence numbers also showed an upswing in business confidence. There has definitely been a less tense criminal atmosphere year over year. Other indicators show interest rates being reduced marginally, the exchange rate being pretty stable over the so-called “tamarind” season, a rebound in agriculture, and the industrial climate settling down.

On the negative side, the greater than projected increase in the debt of J$26 billion is of concern. This is especially so as we continue to boast of record NIR levels, which in my opinion is not necessary to be so high. If we maintained an NIR of US$1.5 billion, then this would allow for us to retire J$55 billion worth of debt. The lower than targeted capital expenditure is also a concern, as this is what has resulted in a lower than projected fiscal deficit and this type of spend is necessary for future development.

Changing economic environment
What is evident though is that there is a change taking place in the economic environment for the better. Growth is no longer being driven by the financial and retail sectors, but rather by agriculture and tourism, and this is reflected in our improved current account position year over year. The problem with the trade balance remains that even when we increase exports, we are so import dependent, even in our production that imports naturally increase also. In my opinion, this changing economic climate has resulted primarily as a result of the focus on making cheaper funds available to the market and reducing crime through intelligence gathering rather than brute force.

What this has done, however, is caused firms to strive to become more efficient in order to survive. The truth is that even though we have liberalized our economy (certainly foreign exchange flows) since the 1990s, we had not really removed the protection for companies from the globalization effects. This may not seem like a logical argument, but my reason for saying this is that even though there was a significant amount of liberalization in the economy, local firms have had the false protection of high interest rates. In other words there are many companies, not just financial institutions, which did not have to produce real goods and services to increase profitability year over year. All they would do is invest their cash resources in high yielding government paper to make money. Thus what the government did was to liberalize the foreign exchange movements, and removed some protection for the manufacturing industry in particular, but the protection was afforded to companies with cash resources as they could earn almost risk-free income by investing in government paper, thereby protecting them from the competition in the operational business.

With the fiscal situation improving, interest rates trending down, and greater competition coming to the market it has resulted in corporate earnings slowing down generally. Companies must now change their business models in order to continue to grow, as it now calls for efficient organizations.

Consequently, we have been seeing moves by companies to deal with the changing environment. BNS has made an offer to acquire DBG, Grace Kennedy has announced major restructuring in their operations as they seek to become a world-class organization by 2025, Issa transport has announced that they will be merging eight companies into three, Capital Solutions is offering equipment, and Mainland will be importing 200,000 tonnes of cement annually. All of this is happening no doubt because companies realize the changes that are taking place in the economy, and returns from paper instruments are decreasing.

Preparing for the change
It is a good thing that this change is taking place, as it is impossible for us to continue sustaining an economy without growth in the goods producing sector and economic activity in general. It is the lack of growth in these areas that is at the heart of our increasing debt levels, as the economy was being financed by debt. What is going to be important, however, is how as a country we prepare for the changes that are taking place. For example, we have to ensure that we create a much more productive and efficient public sector. Over the past two weeks I have been making every attempt to pay property tax on behalf of a strata, only to be told that they will not accept the “much needed” tax payment because the strata does not have a TRN number. The solution therefore is not to collect the tax rather than assist to get a TRN number for the strata and collect the taxes.

What this implies is that many persons may be unprepared to face the changes that are coming. It is going to be very important that we have a productive and educated workforce if we are to meet the challenges ahead of us. This is what many commentators have been speaking about for a while. As usual, however, we wait until the changes have occurred and then we try to prepare for them.

As normally happens when economies go through a fundamental shift in the way business is done and profits are made, there will be some fall out. We saw that this was coming with the fall off in the stock market and so it should come as no surprise. This sort of shift happens regularly in developed markets, where based on trends and internal reasons, the company finds that its sales and profits are down and have to restructure the organization to adapt. Because in those countries they normally have many new companies being formed the job fallout is usually replaced by the new jobs.

Based on the shift that is happening in the economy, I do expect that there will be more restructuring in many companies. In fact many companies may be going through the restructuring exercise but without any publicity.

The government has an integral role in ensuring that this needed shift in the economy, from earning profits based on paper to real goods and services, is successful. Primary among these responsibilities are (1) to avoid affairs such as Trafigura to ensure that confidence is maintained; (2) continue the intelligence based approach to fighting crime; (3) improve the access to and quality of education; and (4) develop an efficient public sector. If these are not done then we can easily reverse the benefits that we have started to see, and I pray that the election will not cause irrationality to set in. As I have always said, the government must provide the right environment to allow the private sector to be the main engine of growth.

Governance – the real Trafigura lesson

After enduring Trafigura for the past two weeks, the question all Jamaicans must ask is how have we benefited? Have our leaders dealt with the issue in a manner that will significantly reduce the risk of it ever happening again, and more importantly than preserving a political party, will ensure that Jamaica maintains a good image.

The way we have handled the Trafigura issue brings to mind the 90/10 principle, written by well known author Stephen Covey. The 90/10 principle tells us that we cannot control 10% of things that happen to us, but the other 90% we can. The example he gives is as follows:

You are eating breakfast when your daughter knocks over a cup of coffee onto your shirt. You have no control over what just what happened. What happens next will be determined by how you react. You curse. You harshly scold your daughter for knocking the cup over. She breaks down in tears. After scolding her, you turn to your spouse and criticize her for placing the cup too close to the edge of the table. A short verbal battle follows. You storm upstairs and change your shirt. Back downstairs, you find your daughter has been too busy crying to finish breakfast and get ready for school. She misses the bus. Your spouse must leave immediately for work. You rush to the car and drive your daughter to school. Because you are late, you drive 40 miles an hour in a 30 mph speed limit. After a 15-minute delay, and receiving a speeding ticket, you arrive at school. Your daughter runs into the building without saying goodbye. You arrive at the office 20 minutes late and find you forgot your briefcase. Your day has started terribly. As it continues, it seems to get worse and worse. You look forward to coming home, When you arrive home, you find a small wedge in your relationship with your spouse and daughter.

What happened is completely determined by your reaction to the spilling of the coffee. Alternatively you could have said nicely to your daughter not to worry about it, go upstairs and change the shirt and everything would have worked out fine.

Political conduct
Similarly the Trafigura situation occurred. I am among the first to say that the accepting of even a donation from Trafigura is poor governance, and am pleased, though not surprised, by the comments attributed to Dr. Davies that accepting the donation was an error. But what followed the incident further compounds the poor state of governance. The reaction by the government, and the opposition to a lesser extent, showed us how sorry a situation Jamaica is in with respect to leadership.

The fact is that the display by both political parties is in breach of the political code of conduct as on both sides party paraphernalia is clearly hanging out even more than the flags along Mountain View a few weeks ago. This hanging of “party colours” climaxed for me on Tuesday night in Parliament when both garrisons were at each others throat in defense of their object of worship, the party. Clearly both the government and opposition forgot that they were supposed to be sitting in Parliament representing the interest of Jamaicans, as they unashamedly drew the line in the sand, daring each other to cross it while snarling and gnashing their teeth in defense of their colleagues in the pack.

And after over seven hours of debate, and electricity and media costs, can Jamaica truly say that we have got one step further to finding out what went wrong and learning from it so that it will never happen again. And can we say that we have taken appropriate action where it needs to be taken, to ensure that anyone involved in such an unethical breach does not purport to represent Jamaica again.

The opposition brought a motion against the government, but it must have failed, as it is uncertain whether the PNP members are even fully aware of all the circumstances. Still they continue to support the tribe and jeer the opposition, and many could find themselves apologizing as the Attorney General did. But in all fairness one could not have expected them to support the opposition even if their conscience would have moved them in that direction, because they may not even know what happened.

It is ironic though that even without the benefit of full knowledge, on either side, they all carry on like a set of school children, consistently talking when a member was on the floor. The prime minister commented on this, as clearly she was incensed by it, giving some amount of hope of it being arrested.

A different approach
Let us assume a different approach had been taken. The opposition leader came across the information and immediately brought it to the attention of the finance minister and prime minister, and alerted them to the fact that he would be bringing it to the attention of the political ombudsman and police commissioner if necessary. He then gives them two weeks to investigate the matter and make a public statement on it, after which he will be going public.

The prime minister investigates and finds that some members of government are implicated and takes appropriate action, and communicates it to the opposition leader. The opposition leader then goes public with it after agreeing what happened with the prime minister. He still calls for the resignation of the government and puts it to Jamaica that such an arrangement is scandalous. The prime minister makes the findings of the investigation public and the matter is discussed in parliament with all the facts and debated without heckling from both sides, so that Jamaicans are not treated to this sort of display by our leaders in the highest body of the land.

The result would be that the public is made aware of the facts, a proper investigation might have been done, the banking act would not have been breached, and the world would not have to sit by and watch the lack of substance of our leadership. The private sector leaders, who have spoken out may not be wondering if they are to consider further investments in Jamaica.

Wouldn’t this have been a better option for Jamaica, and it may not have been necessary for members to stand in Parliament and defend one unethical action by saying that the other side does it also. In all of this did anyone remember that it was more an explanation for Jamaica rather than trying to keep the other party quiet by accusing them of the same thing, or is Parliament a place for political “knights” to jostle. I guess a good defense of a crime is that everyone else does it. I am again heartened by the report that Dr. Davies said he would be fully investigating the income tax leak and taking action. A glimmer of hope.

What Trafigura has shown is not that our politicians are capable of errors. What it has shown is that Jamaica has a weakness in governance. After all is said and done it is the way that we deal with our problems that make us seem like a developed country with proper leadership, not the fact that we have issues.

This is no different from a company that is in crisis. It is the reaction to a crisis that determines if you continuously remain in crisis mode or are able to rise above the tide and swim to shore. That in my view is a mark of good leadership.

The Trafigura effect

This year, blessed with a quiet hurricane season, Jamaica has created our own category 10 hurricane, Trafigura. The issue has been the subject of hot debate over the last two weeks, with charges and counter charges being laid. It is of both national and commercial importance, making it very easy to forget the underlying issue for Jamaicans.

When news first broke, it was posited as a reason for the current PNP government to resign en bloc, by the JLP. The PNP denied anything illegal or immoral about it, and at first seemed to deny that the account name, CCOC, had any particular meaning and then back tracked. They then stated that Trafigura made the contribution as a political donation, but then Trafigura described the $31 million as a commercial arrangement with CCOC, no doubt influenced by the investigations against them in Holland.

In all of this I am heartened by the statements from the JCC and PSOJ, as for the first in a very long time the private sector is not only showing a unified voice, but is actually making public comments in the interest of the country. This inspired by a newly elected, and more importantly, younger generation business leader, Mark Myers.

Public trust
This matter led to the resignation of the Information Minister, Colin Campbell, and the JLP is calling for more heads. The way the PNP handles this one can determine their foreseeable political future, and they should ensure that it is dealt with in Jamaica’s interest and not with the party as primary concern. I trust also that both parties will have campaign reform included in their manifestos for early implementation, although neither has shown any real commitment to campaign reform as yet.

Even if there is nothing illegal about the contribution, it is unethical to have accepted it, under the cover of darkness from a company the government has negotiated a commercial arrangement with. What would be government’s position if a government agency accepted a significant Christmas gift from a company it was in a contract negotiation with?

While serving on the board of the Betting, Gaming and Lotteries Commission, one principle the then Chairman insisted on was that no commissioner should accept any gift from a licensee, including lunch. The fact is, even if the donation was legal, on the face of it it appears to be wrong, and the reality of perception is very important for our persons publicly elected or appointed. It is very difficult for (1) Governments to rule without moral authority; and (2) for foreign and local investors to have confidence in an environment where trust is minimal. We are only two familiar with the effect confidence has had on our economy.

The 2006 Global Competitiveness report states that amongst the 1st Pillar needed in a country to provide a foundation for competitiveness and growth are the state of (i) Ethics and corruption [Diversion of public funds and Public trust of Politicians]; (ii) Undue influence [Judicial independence and favouritism in decisions of government officials]; (iii) Government inefficiency [Wastefulness of government spending and Burden of government regulation]; (iv) Corporate ethics [Ethical behaviour of firms]; and (v) Accountability [Efficacy of corporate boards, protection of minority shareholders’ interests and Strength of auditing and accounting standards].

This illustrates a need to maintain transparency, especially if we are serious about attracting foreign investments, which is a deliberate strategy of this administration. This also supports the argument against the breach of customer confidentiality. The banking sector has its foundation in the principle of confidentiality, as do lawyers, doctors and accountants. This alleged action by an FCIB employee, if true, would be a fundamental breach, and the passing of documents even more damning. The bank has realized this and has taken swift action, and must be commended, but must go further to ensure that preventative systems and controls are in place, rather than react, as must be done by all financial institutions.

Trafigura
From Trafigura’s point of view they are already mired in controversy. Formed in 1993, they are commodity traders and charges have been made of linkages to Marc Rich. Trafigura’s group equity stands at US$600 million (J$39.7 billion), and has 35 offices in 36 countries. The group manages its commercial activities through Trafigura Beheer BV (Parent company in Holland); Trafigura AG; Trafigura Pte Ltd (runs group petroleum trading in the Far East); Puma Group (operate group’s world-wide oil storage and distribution assets and investments); and Galena Asset Management (based in London and FSA registered. This is the subsidiary through which Trafigura established and operates fund management).

In May 2006, the US Department of Justice released a statement that Trafigura AG was convicted of falsely representing that more than 500,000 barrels of Iraqi oil was obtained in compliance with the Oil-For-Food Programme. The company, which Trafigura bought the oil from, Ibex, charged that the scheme “had been cooked up by Trafigura”. Trafigura was ordered by the United States to immediately pay a fine of US$8 million, and forfeit US$9.9 million, representing proceeds of the two implicated oil shipments.

In September 2006, Trafigura was accused of dumping toxic chemicals in Abidjan, Ivory Coast, that caused the death of seven persons and 40,000 to be treated in hospital for nausea, breathing problems and nosebleeds. Ten persons, including two French Trafigura executives, Claude Dauphin and Jean-Pierre Valentini, were charged in connection with this. It also led to the dissolution of the Ivory Coast government “to ensure that those who have a hand in what happened…take full responsibility and are removed…”

Interestingly, the BBC reported that Trafigura tried to dispose of the waste twice before Abidjan. First attempting to discharge the waste in the Dutch port of Amsterdam, but the company that was to do the disposal suddenly increased its charges by 40 times. Trafigura then tried to offload the waste in Nigeria, but failed to reach an agreement with two local firms. The question is, what did those companies become aware of?

Although charges of the second incident would have arisen after them meeting Colin Campbell in August 2006, surely any slight attempt at due diligence would have shown the conviction in May 2006. The responsibility of government must be to ensure that in all their dealings they are very transparent and careful to ensure that it stands up to public scrutiny and maintain public trust.

It is regretful, and distasteful, that certain government representatives have personally attacked the JCC president. This is not what I expect from the new politics brought by Patterson and promised to be continued by the current Prime Minister. Come on let’s all start thinking about Jamaica’s interest as it is only through unity that we can move forward.

At the heart of all of this are the possible effects on the moral credibility of our leaders and the business and economic climate. It is therefore of utmost importance that as a country we are seen to deal with this problem effectively, so that we send the right message to the international community. I am confident that the Prime Minister’s nature will result in the matter being addressed in Jamaica’s interest. The unity of criticism from the private sector, social groups and media underscores its importance.

Preparing the foundation for growth

The government recently released the August 2006 fiscal numbers, which show that while we are ahead of budget, for the overall fiscal balance, this seems to have been at the expense of infrastructure and productivity. The fact is that the $5.8 billion amount, which the fiscal balance is better than budget, was at the cost of spending $4.5 billion, $1.1 billion, and $900 million less on capital programmes, social programmes and wages respectively.

One may say that it is prudent to keep spending in line with revenues, and this is correct, but the fact is that we had projected to have a higher deficit to make these expenditures so why are we not carrying out this much needed expenditure. If we could have done without this expenditure then why budget for it in the first place?

I say this because expenditure on capital projects especially are very important in contributing to future development, as if we do not replace our asset base then we will end up with less efficient earning assets in the future. Also, why do we need to announce a $635 million crash programme when we are already under spending on programmes by $900 million? Isn’t this contradictory? Why do we waste productive hours in industrial disputes when we are already under budget with wages and salaries by $1.1 billion? Is it that we do not intend to spend this money or are we uncertain of future revenue flows to support the expenditures, and so we are holding back?

Macroeconomic stability
Whatever the answer is, it is clear that we are not (and have not been) managing our budget for growth. Year after year we focus on expenditure cuts as a way to meet our targets. Any company, or country, that focuses on expenditure cuts over an extended period of time to manage profits will find that it reduces its market share, revenues and profitability over time. This is especially true the greater the competitive environment. Instead the focus must be on improving revenues, as this is the only way to truly experience growth.

Jamaica can say that for a wile we have had macroeconomic stability, which is very important, and kudos to the Finance Minister and the BOJ for maintaining this. Macroeconomic stability is essential for economies to grow but we fail to understand that by itself it is not sufficient. It is like laying the foundation for the building of a house, but in order to produce a house you need steel and concrete to erect the walls.

2006 Global Competitiveness report
The 2006 Global Competitiveness Report, presented at the World Economic Forum, ranks 125 countries on a Global Competitiveness Index. The index seeks to measure national competitiveness, as it is believed that competitiveness drives productivity and ultimately growth. Jamaica is ranked 60th, and was 63rd in the previous ranking. Barbados is at 31st, while Trinidad is at 67th.

The report states that the empirical evidence shows that macroeconomic stability is essential for sustained growth to take place. It, however, further states that “there is increasing recognition that a solid foundation of macroeconomic stability alone is not sufficient to ensure rapid economic growth”. The report lists six pillars that are important for economic growth. These are:

1st Pillar: Institutions (Public and Private) –property rights, reduction in government inefficiency, judicial independence, security, corporate ethics and accountability;
2nd Pillar: Infrastructure – overall infrastructure quality, port infrastructure, railroad infrastructure development, air transport, electricity and telephone supply;
3rd Pillar: Macroeconomy – government surplus, national savings rate, inflation, interest rate spread, government debt, real effective exchange rate;
4th Pillar: Health and primary education – medium term impact of HIV/AIDS, life expectancy, primary enrolment;
5th Pillar: Higher education and training – secondary and tertiary enrolment ratio, quality of math and science education, availability of specialized research and training services; and
6th Pillar: Market efficiency – agricultural policy costs, efficiency of legal framework, extent and effect of taxation, number of procedures to start a business, intensity of local competition, imports and exports, prevalence of trade barriers, GDP.

This strengthens the argument that Jamaica simply lacks the capacity to grow above 3% on a sustained basis. The only way for us to sustain such a growth rate is to focus on building these pillars. We can say that we have some amount of macroeconomic stability but even this is not as strong as it should be, as it is propped up by government debt rather than a surplus in our earnings. We can also say that we have some amount of market efficiency but this is affected by a slow legal system, inefficient tax system, and government bureaucracy.

Education
Our education system, which needs to be a main pillar of growth given our low literacy level, is and has been achieving a failing grade. Even after the fanfare around GSAT and the upgrading of non-traditional high schools we still see that at the CXC level our students are still performing poorly in Math and English. We are also, by cutting away at expenditure, reducing the investment in our infrastructure, which will affect our future capacity to grow. If we expect agriculture and tourism to be our main earnings shouldn’t we be investing in the infrastructural support? Instead we see reports that Jamaica’s infrastructure cannot properly support the expected tourism growth and we have farming communities demonstrating for better roads. If we do not address these infrastructural problems then our future competitiveness will be eroded as the cost of delivery will increase.

The report also states “…countries which have invested heavily in creating a well-developed infrastructure for tertiary education have reaped enormous benefits in terms of growth. Education has been a particularly important driver in the development of the capacity for technological innovation…”

Michael Porter, Harvard Business School, in commenting on the report states “The world economy is not a zero-sum game. Many nations can improve their prosperity if they can improve productivity. The central challenge in economic development, then, is how to create the conditions for rapid and sustained productivity growth.”

If Jamaica is truly serious about growth then we cannot just achieve macroeconomic stability and expect growth. We have had macroeconomic stability for a while but we are lacking in the other pillars that are necessary for sustained growth. This is why it is very important to ensure that each dollar spent, especially debt, is targeted for areas that will provide future returns in excess of the cost.

If it were up to me I would identify the pillars that will provide the greatest growth opportunities and derive a strategic plan around developing those given the limited resources we command.

Process re-engineering needed

The Finance ministry’s recent job freeze announcement is a clear indication that the government is either strapped for cash or is projecting difficulties. Either way the move is a welcome as it suggests government’s intention to meet its budget deficit target. This must not, however, be seen as the end all as it is only the beginning of the needed procedural reorganization. The government must now take this opportunity to implement the next step of process and personnel rationalization.

Process re-engineering
With that said though, the solution is not as simple as cutting jobs or remuneration as that could easily prove to be a counter productive move. Immediate cost savings cannot be interpreted as productivity or efficiency gains. For example, one could eliminate a process or person with a high value added and therefore destroy future income potential although ensuring short term cost savings. Because of this possibility the government must embark on a proper process re-engineering exercise to ensure the greatest advantages. They could in fact conclude that in order to earn the desired income they need to spend more.

It is clear that there have been initiatives to improve government’s service delivery as interactions with front line government staff are a lot more palatable. This experience is however not where it should be because of the procedures and systems that are still in place. This is the area of greatest opportunity for service improvement and reduction of waste.

Unproductive time
To illustrate this I would like to cite a recent experience I had with renewing my driver’s license. I arrived at the Constant Spring collectorate at about 10 AM and was met by a very courteous gentleman who enquired about the purpose of my visit and provided the form for me to complete. He then took the form from me, stamped and signed it and directed me to the cashier. Up to that point I felt obligated to pay for the renewal because of the refreshing service. He then directed me to the driver’s license renewal section. On arriving there, I noticed a gathering of persons who were obviously waiting to complete their renewal. The frustration was obvious on their faces and I immediately began to wonder what went wrong between the reception / cashier area and the twenty seconds it took me to get to the renewal section.

I turned in my old driver’s license along with the receipt and was told to wait for a picture to be taken. I waited for approximately 40 minutes before being called and then took the picture. I did not wait for the license as an earlier discussion revealed that it would take at least another 40 minute unproductive wait.

It occurred to me that there were some 50 persons there at the time, who were waiting for approximately 1.5 hours each, which equates to 75 hours of unproductive time. It is therefore quite possible that up to 400 hours of idle time could have been spent in that particular section on that single day. If we assume that this day was unusual and only 2/3 of that time is lost per day this still translates to 1,340 hours per week of unproductive time being wasted on the renewal of drivers’ licenses at one collectorate. If the relevant information is included for various collectorates and other sections then the number of unproductive hours lost to inefficient systems is tremendous. Is it any wonder then that the country’s productivity is so low? This means that Jamaica has to produce more per labour hour during the productive times than international competitors. The implication for businesses is that they have to pay a higher rate per output even though the rate per hour may be less than our global competitors. Simply put Jamaicans are working more for less.

Alternate process
In contrast to the present system I made some quick observations about what could be introduced to reduce this problem. I had no problem with the persons as they seemed courteous and customer driven. An improved system could easily be implemented as illustrated below, with no significant investments.

On paying the renewal fee the cashier should have taken all relevant information and a unique number be generated for that receipt. That number would be transferred electronically to the renewal section and would also act as the service number. The renewal section would have two processing sections, one for taking photographs and the other for printing and delivering the finished driver’s license, instead of the one area that does everything. They would still use the same office space but divide it into two sections. This division of labour would have been more susceptible to handling transaction volumes.

You would then hand in your receipt and wait to take the photograph. All the information would have been entered at the cashier and so would not have to be re-entered as is currently being done. When your receipt number is input then your picture would be taken and applied to the template that comes up. The fact that a re-entry would not be done would save approximately five minutes.

Instead of someone calling out your name, there would be a number service system that would be wall mounted and persons would proceed in that order as it changes. This would save another five minutes of persons leaving their desks to go and call out a person’s name. It would also improve the delivery efficiency.

On taking your picture you would then go to the next door where you would pick up your license. This would result in the greatest time savings as I observed that the same persons calling out names were the same ones taking the pictures and printing the license. The process of switching between tasks is itself time consuming as well as the fact that multi-tasking is not as efficient as a concentration on one process. If one more person was added to the process then there could be at least two persons dedicated to printing with the current three taking pictures. This would save at least 20 minutes per transaction.

Based on the preliminary observations made above savings of 30 to 40 minutes per transaction could be made by just adding a link between the systems and employing one or two more persons. On the other hand this would save the country approximately 890 hours per week or 46,454 hours per annum of unproductive time from one small section. It seems to me that any up front investment from improving this process would be worth it. Deeper analysis could improve this return on investment even further.

Conclusion
In concluding we need to understand that the move to save short term cash flows is just the beginning of the road and what is needed is a long hard look at the processes we are working with. The aim should always be long term rather than short term implications.

The Truth About the Gaming Tax

Since the introduction of the 15% winnings tax on lottery games there have been many representations re the reduction in income and the negative consequence this will have on the industry and future tax revenue inflows. Some have even said that the tax will cause current government intake to fall significantly.

Illegal Market
There is no doubt that revenue intake by the lottery companies have declined, which is estimated to approximate 40%. Anyone who understands the gaming market would have predicted this effect, as there is a significant illegal gaming market, which has no doubt become much more attractive to the player as odds increase relative to the legal game. After all the illegal operator does not pay any taxes and usually has much lower overheads. The payout can therefore be higher. Similarly the player will not have to pay any winnings tax from the illegal bounty. It is a given that the tax will contribute to the growth of the illegal gaming market. We also need to remember that the drop pan game already has an illegal structure in place that existed for decades before the legal game. It is therefore not difficult for players to move back to that structure.

Government Revenue
The government is aiming to raise an additional $1 Billion by introducing the tax, while some are saying that the government will in fact realize less because of the reduction in revenue. It has been suggested to me that the advisors do not understand the gaming market and are therefore projecting incorrectly. Is this actually so? The only way to answer this is to look at the numbers based on the current fall off in sales and the contributions made to the government coffers.

The table portrays the 2002 revenue and tax structure based on information released by the Betting Gaming & Lotteries Commission.

The table shows the payout percentages to the winner and the various government agencies. At the bottom is the weighted average payout percentages based on 2002 revenues. From this we can compute what the government intake was and what it will be with a 40% fall off in revenues.

The second table compares the taxes under the old and new systems assuming a 40% revenue decline. This illustrates that even with a 40% revenue reduction the government agencies will collect $200 Million more than in 2002. This will be significantly less than the $1 Billion projected but will still be greater than the intake before the tax. An additional 5% decline in sales would, however, result in the government raking in less than before the introduction of the tax.

The tax will also redistribute moneys from the productive private sector to the government. If for comparison purposes we assume that salaries and other direct compensation to vendors amount to 10%, then the revenue fall off will cause a steep decline in moneys available for employment, directly and to vendors. From international studies we can also assume a multiplier of three times for earnings from the industry, which means that the $1,191 Million would become $3,573 Million in earnings. After the tax we could see that reduced to $2,145.

Charities (CHASE) will also receive substantially less. This implies a need for further support of charities from government and the private sector. Routing these funds to charities via government will have administrative costs, meaning less per dollar reaching the charities. Direct payments will always be more efficient.

Impact on the Economy
The immediate negative impact includes reduced employment and business activities. Ultimately this may result in lower corporate tax collections. In this example taxes would reduce as potential earnings fall from $3.6 to $2.1 Billion.

This analysis shows that although the government will collect more direct taxes from gaming operations, the overall net tax collections may be less because of:
- Less PAYE from reduced employment;
- Less profits tax from reduced company income levels; and
- The move to illegal gaming will mean greater expenditure on enforcement.
In addition to these factors, there is also the consideration that potential investments may not be realized because of the change in the payback ratios and the uncertainty of the rules. Also, the tax could possibly cause a prolonged stagnation of the gaming market.

Conclusion
The question to be asked is, have we measured the opportunity cost of introducing the tax? The tax may have been a short term solution, but what is the medium to long term implication. Already the tax will not have the desired revenue effect because of the revenue fallout, and in fact will not add much more. Added to this there may be a significant indirect negative effect on other future cash flows. Have we done the right thing to introduce this tax? I guess at this point only time will tell.

Pensions and inflation

There has been much talk recently about the expected inflationary outturn for 2003. The Bank of Jamaica expects that inflation will be in the region of 13%, higher than the single digit inflation projected at the start of the year. This should be of importance to persons who will reach pensionable age within the next ten years.

High inflation environment
In a high inflationary environment pensions are always significantly affected as happened during the period of the early nineties. Inflation has caused many pensioners to be bordering if not below the poverty line. Between 1990 and 2002, the Bank of Jamaica numbers show that we have had cumulative inflation of some 294 per cent, which was reigned in only by the single digit inflation from 1997 to 2002. There are not many persons that would have seen their wages keep pace with that type of inflation and thus their pension would also suffer, as it is tied to wages. In fact, in order to beat inflation, the pension investment would have had to be returning in excess of 22 per cent compounded during that period. Not many pension funds were consistently showing that sort of return.

The pension regulations in seeking to protect the investment, does place restrictions on the type of investments that the trustees can participate in. These are usually safe investments such as government paper and certain blue chip equities, which will not give the same return as riskier investments. With that said though, this is a good thing as if there were no such restrictions there may have been serious consequences resulting from the 1990s financial crisis, as many more pension funds may have been seriously eroded.

Credible inflation numbers
In a recent article Raymond Forrest questioned the credibility of the published inflation statistics. There has been some doubt surrounding what is included in the basket of goods used to measure inflation and whether it has been updated to reflect the current trends. I don’t know what the truth is but if the published numbers are in fact lower than the reality then this will only serve to hurt the pensioner further.

Pensions are usually tied to wages and annual increases usually guided by the officially published inflation statistics. In addition, if we are not honest with ourselves as to what the true inflation numbers are then this will lead to a false sense of security as to the expected returns from the pension investments.

Defined contribution versus defined benefit plans
There are basically two types of pension plans, defined contribution and defined benefit.

The defined contribution plan is where the amount of the pension contribution is set as a percentage of wages. The employer usually matches the amount put in by the employee up to ten per cent of salaries. On retiring the employee will receive actuarial payments equivalent to the contributions plus the returns based on the investment gains over the period. Under this plan the pension is not guaranteed and in fact could be nil if the proper investments were not made.

The defined benefit is where the employer will guarantee a payment amount on the retirement of the employee. The risk of any deficiencies in the pension plan is borne by the employer. This exposure is one reason why some companies will not consider this plan, as in a high inflationary and unpredictable environment it is difficult to project what the company’s exposure will be. The result is that the risk of inflation is left to the employee. In some industries with a naturally high turnover rate, this exposure is reduced as the persons leaving will create a surplus in the pension plan that can be used to offset any deficiencies in the future requirements.

International Accounting Standard (IAS) 19, which deals with Employee Benefits, clearly makes this distinction and requires separate accounting treatments for both types. One of the disadvantages of IAS 19 for companies with a defined benefit plan is that it requires an actuarial valuation to be done each year for the annual report. A recent discussion I had with a representative from a pension company informed me that a $100 million pension will cost anywhere between $300,000 and $500,000 to prepare a valuation. This is an added cost to the company and for that reason he said that some companies were moving away from the defined benefit plan. On the other hand the argument can be made that this valuation is necessary to protect the members and also provide accurate financial reporting, as without this disclosure a company could go belly up without adequately protecting the employees’ pension.

Conclusion
A high inflation model will therefore significantly affect pensioners as it did in the 1990s and create a wider disparity between the wage earner and the person with capital. The long run effect is that the quality of life will decrease for many and there will be a greater dependence on state resources.

Even with a low inflation model, however, employees need to understand that the more popular defined contribution plan will not allow them to replace their income on retirement. Companies must shoulder the responsibility of educating their employees about other methods of savings and so remove the reliance on pension plans.

Some of the issues surrounding pensions will also be addressed in the new regulations being introduced. In the final analysis though it is up to the individual to protect his/her future income by paying close attention to their pension funds and saving in other ways during their working life.

Accounting Rules and the 1990s Financial Crisis

Subsequent to Enron, questions were raised as to the possibility of a similar occurrence in Jamaica. The failures at the time were widely attributed to the American accounting rules (GAAP) leading to much debate about their adequacy.

Proper accounting by itself would not have prevented the crisis, as inappropriate management has more to do with integrity and competence than rules. It would, however, have highlighted the problems early thereby ensuring that proactive solutions are implemented. In Jamaica, some believe that this could not have occurred because our accounting standards provided a greater measure of protection than American GAAP.

While it could be argued that our accounting rules are stronger, I am not convinced that it could not have happened here. As a matter of fact, it is my opinion that we have already seen the likes of Enron in our financial meltdown of the 1990s, especially in light of the irregular practices that existed. During this time, many financial institutions collapsed because of existing reporting methods as well as weak regulatory execution by the authorities. This in no way excuses the failure of management, but the question to be answered is why did it take so long to uncover the problems? No amount of rules will prevent failure but proper regulations will ensure that it is detected much earlier.

The Financial Gleaner of August 15, 2003, carried the first in a five-part series on the 1990s meltdown and lists in chronological order the reasons for the failure of the various financial institutions. The list included almost 20 financial institutions that were affected and included names such as National Commercial Bank, Mutual Life, Century National Bank, Life of Jamaica and Eagle Commercial Bank.

International Accounting Standards
The same article referred to the deficiency in the process of dealing with loans past due, and also significant deteriorations in the asset base of the institutions. There is no question that reporting was taking place, which no doubt came to the attention of the authorities. However, as the situation worsened the banks were still reporting profits and carrying assets at their original values, giving a false impression of what the real worth of the companies were. It is apparent that there was a loophole with our accounting standards as we were reporting on historical trends rather than providing the public with information about the future.

This led me to wonder if we would have experienced the crisis in the same proportion had we introduced International Accounting Standards ten years earlier. I focus on the extent of the crisis, as I believe that the practices contributing to it would still have resulted, as the regulatory arm seemed to have been slow in recognizing and addressing the problem.

I believe that the public might have been better warned if International Accounting Standards were being used as it is a value based accounting approach rather than the historical cost accounting that was in place at the time. This would have forced companies to reflect the true values of their assets and would show up in reducing profitability and equity base. The focus of International Accounting Standards is on Future Cash Flows and, therefore, addresses the future viability of the company in a more significant way than the Jamaican accounting standards.

IAS 36 and 39
The two standards of most relevance to this issue are IAS 36 (Impairment of Assets) and IAS 39 (Financial Instruments). These standards seek to apply fair value measurements to the assets of organizations and require that any losses or impairment of assets are written off either against the profit or directly to equity. Both standards require that if the fair value measurement of the asset is materially lower than the carrying value in the accounts then the difference should be written off against profit or equity in the year of the impairment/reduction of the asset’s value.

This application would have provided more accurate information to the investing public and the authorities and could have significantly increased the chances of curtailing a sizeable amount of the public debt that is now wreaking havoc on our economy. The amount of debt we carry today resulted primarily from the 1990s financial crisis as well as FINSAC. The effect of creating FINSAC was to transfer the losses (asset reduction) that would be recorded under fair value accounting from the balance sheets of these institutions to FINSAC and ultimately the public. If we were using International Accounting Standards then a significant amount of those losses would already have been shown on the company accounts and we would have been better prepared for the problem that ensued. This is a major reason why the projected debt problem was significantly understated.

Indications of Impairment
Both standards refer to indications that an asset has lost its value and these include the following, which were clear indicators during the 1990s:

“Significant financial difficulty of the issuer” of the instrument and “…high probability of bankruptcy or other financial reorganization…”(initial failure of some institutions should have led the others to look at the value of what they were holding);
“…default or delinquency in interest or principal payments”;
“a historical pattern of collections of accounts receivable that indicates that the entire face amount of a portfolio of accounts receivable will not be collected”; and
Significant changes in technology, market or legal environment. For example, the liberalization of the telecom industry would no doubt have led to a reduction in the estimated future cash flows of the Cable and Wireless infrastructure subsequent to other players being introduced.

These are just a few telltale signs that should have been obvious to us in the 1990s pointing to the fact that disclosed asset values would not have been realized. If these principles were applied at that time then we may have caught the problem $100 Billion before it imploded.

Lessons to be learned
What lessons can we take away from the 1990s? Certainly, the need for proper accounting rules and application are critical, as well as a strong regulatory environment, which has since been significantly improved. This means not only applying the rules but also paying some attention to the accountant. Some persons look to their accountants as they do religion. In other words, just as they find religion when their backs are against the wall, they find their accountants in similar situations.

The newly introduced accounting standards do go a far way in addressing some of the issues that resulted in our high debt costs and needs to be understood and practiced by all. Some may say that accounting matters are to be left to accountants, but accounting is merely a way of objectively measuring performance and projections. It must, therefore, be treated with the importance that it deserves.

Let us remember that it was a general weakness in our reporting and regulations that led to the extent of the debt crisis that we face today and will continue to affect our children.

Towards Greater Efficiency

I have heard on occasions persons in the private sector refer, both publicly and privately, to the inefficiency of the various government processes. The word inefficiency seems to have become somewhat of a cliché for some people and is used freely to explain every situation. A recent experience I have had with two government ministries has led me to question the source of inefficiency.

RECENT EXPERIENCE
Over the past few weeks, the Managing Director of my organization and I have had reasons to interact with the Ministries of Agriculture and Finance. On one of those occasions, he intimated that the reason for the seemingly inefficient operations in Government is, in many instances, a result of the behaviour of the private sector. This led me to reflect on what we had experienced over the preceding days in dealing with these ministries, which, for the most part, was pleasant and fulfilling. In fact, our particular problem emanated from inadequacies in the communication between the private companies involved, thus, causing us to call upon the Government for a speedy resolution at short notice.

Despite this short notice, the Government personnel were able to deal with our problem expeditiously without any complaints. I found that their willingness to meet our needs was driven by their desire to satisfy the market.

I thought about Government personnel with whom I have been in contact over the past two years and the professional and courteous manner in which they have dealt with various issues. I am in no way saying that the service level is where it should be but, in my opinion, that has more to do, today with the archaic systems than the personnel. The truth is that the Government bodies have been gaining in efficiency.

BENDING THE RULES:
There is no doubt that the business processes in Jamaica require far too much interaction with Government bodies which, in many instances, have arduous rules to follow, but beneath all of that is a reason for the procedures. Much of the seemingly difficult rules put in place by the Government have resulted from the private sector’s own actions. In many cases, we try too much to “beat the system”, and many times boast about the successes in doing so.

Many will, no doubt, have heard references to persons who will try to “beat the gate”, even though the function being attended is free. This type of behaviour is not restricted only to the man on the street, as many businessmen will try to buy favours, even when it costs more, in the long run, to beat the system than to do the right thing first time around. They are always trying to get ahead by bending the rules in their favour but, if someone else tries to do the same thing, they themselves will publicly call for that person’s head. This is not the only source of inefficiencies in the systems, resulting from the “red tapes” put in place by Government, but also our lack of international competitiveness, as we do not seem to have what it takes to compete fairly.

My own experience with Government has also made me aware that the reason Government bodies put legislation and rules in place is to ensure that the private entities (companies and individuals) do not take unfair advantage of a situation. The problem with our society is that the “beat the system” mentality seems to be so (pervasive?) that it has become a way of life for many. To counter this type of behaviour, therefore, the Government, in many instances, has had to put procedures and rules in place to prevent the abuse of the system by some to the disadvantage of others. This has resulted in having processes, which are both time-consuming and inefficient. Hence, the build up of a slow-moving and unfriendly investment environment, which hinders serious investors.

BEHAVIOURAL TRENDS
Our private sector has called, time and time again, for protectionist policies and has only taken advantage of those policies without adding any real value to the economy, thus, questioning our inability to survive globally, when this protection is lifted. This is, however, not the case in all situations, as some industries do need protection but, in some cases, the intention is not about national development but rather self-interest. This type of behaviour develops from the individual level where, for example, we will go into a bank and head to the front of the line and ask our friend for a favour, or we speak highly against indiscipline but refuse to pay our monthly housing maintenance fees or rent.

One of the problems that have contributed to the proliferation of this type of behaviour is our outdated laws, which are unfriendly towards investment capital and, ultimately, development. Over the years, Governments have placed band-aid solutions on this by offering incentives to certain investments, but this will not work, if we are serious about development, as we need to apply fundamental changes to our underlying structures, if we are to effectively deal with the problems.

PROPER REGULATION:
We have seen the benefits that can accrue to us from a competitive and well-regulated market from the examples of the telecommunications and media industries. The introduction of multiple players has resulted in increased economic activity and greater benefits for all. This would not have been possible, however, without the efforts of the Broadcasting and the Fair Trading Commissions to ensure that there is a level playing field for all players. These are the models that we need to emulate in the development of other sectors.

The Government must continue to lead the change process, as they have been doing, as the private sector may not be capable of doing this effectively, due to self-interest. The Government has begun the process of change and this is evident by the type of persons they employ and the increasingly efficient ways in which issues are addressed. There is still a need for improvement in many areas but, over the past few years, the wheels have been turning in the right direction.
The private sector needs to be cognisant of the role they must play in the country’s development and, in this process, towards greater efficiency.

Problems with inner cities

Recently during a workday, I was driving along Spanish Town Road, from Three Miles to Downtown. As I was traveling, I noticed several empty buildings that once boasted some of Jamaica’s most successful/productive entertainment centres and businesses. In addition to the wasted real estate, I noticed many young men and women loitering on street corners, evidently searching for something to occupy their time. A conversation I had with one person revealed that most, if not all, would love to have the opportunity of employment.

WASTED RESOURCES
It suddenly hit me that this is one of the reasons for our current economic condition. The real problem of the inner city emanates from the extensive idle resources they contain. These resources are potential business establishments and productive labour that are going to waste. What’s more, the situation worsens with each passing day. How can any nation or company survive in a competitive environment, if it does not fully utilise all of its available assets? Yet, we have been trying to compete with other countries that fully utilise their productive resources.

The problems facing us as a nation are primarily:

1. Idle real estate that lies in many inner city areas because of crime, as well as neglect by the relevant authorities over the decades. These properties, potentially, are thriving businesses that could be employing thousands of persons; and
2. Increasing idleness of our human resources, particularly, in the inner city.

Both these factors are wasted resources, which, as long as they are idle place a greater requirement on the productive sector, as the wants and needs to be satisfied remain relatively inelastic.

In my opinion, the productive employment of these resources is certainly one way of more evenly distributing the tax burden. For example, take two companies with assets valued at $100. If company A invests the whole $100 at 20% per annum it will earn $20 over a year. If company B invests only $70 and leaves $30 unused, it will have to realise a return of approximately 28.5% to earn that $20. Similarly, in our situation, we are competing against countries using a higher percentage of their productive base, both in terms of real assets and labour. In order for us to compete effectively, we, therefore, must realise a higher rate of return on our assets.

DECREASE IN PRODUCTIVE POPULATION
A review of statistics on the population and the economy reveals some interesting points. Our total population has increased while our labour force in absolute numbers and as a percent of total population has decreased, moving from 44.52% in 1997 to 42.86% in 2002.

The implication of this is that we have less persons working to support an increasing population. Over this same period, there has been an increase in the average US$ weekly earnings from US$145.50 to US$173.08 - a 19% increase. Similarly, the total earnings over the total population has increased from US$64.78 to US$74.18, a 14.5% increase, over the same period. The implication is that the work force was, on average, earning more in real terms in 2002 than in 1997. Other implications include a growing young population, increased dependence on the breadwinner and, more importantly, a greater concentration of wealth in the hands of the working class. Whatever the fundamentals are, it translates to a decrease in the productive population.

EFFECT OF THE DEBT
I deliberately neglected to imply an increase in productivity, as while earnings per capita has been increasing, there has been a decrease in real GDP growth. How is this possible since greater earnings should imply more productivity? I would propose that the increased earnings have more to do with increased debt levels rather than productivity. Over the same period of declining GDP, we have seen significant increases in the debt, moving from J$196 Billion in 1997 to J$497 Billion in 2002.

The implication is that increased earnings are stimulated through the injection of borrowed money. It is only recently that we have seen any growth in GDP and, even so, it has been marginal and equivalent to earlier declines. This means that debt is being used to create earnings without any productive assets to support it. Thus, the debt is being channeled significantly towards consumption, rather than capital investments. On the other hand, it could be argued that the debt was necessary to spurn consumption and positively affect growth, which will inevitably feed on itself.

This situation again follows the argument above regarding the underutilisation of property and human resources. Here, we are again underutilising financial assets. In all areas, we seem not to be using our resources in the most productive manner. This problem may be as prevalent in the private as in the public sector and it may do well to do some research in this regard. The Government seems to have recognised this, and is attempting to address it through its public sector modernisation programme, but is already at a disadvantage as decades of cultural and infrastructural acceptance of waste is difficult to overcome.

UNPRODUCTIVE ASSETS
Apart from the non-use of assets, we also have been placing emphasis on industries that have long become unproductive and uncompetitive, thereby not using our assets in the most effective and productive way.

Whatever the approach, we must put to productive use the many idle and unproductive resources existing in the inner city. This necessitates a shift in the social and economic paradigm of the country. If we are not able to fully leverage our assets and make them productive, then we are already at a disadvantage in a global environment.
It is within this context that the work of the Kingston Restoration Company is critical to the future of our country and the Government and private sector must be applauded for the effort being placed on this venture. The Government has also shown its intention to focus on the renewal of the inner cities, which can only be beneficial for the country and should be supported by all. If we can address this, focus effectively, then many of our economic and social problems will be resolved.

The Necessity for Established Rules

I have often thought of the potential Jamaica has for meaningful development. This idea has consistently been echoed by various commentaries. Ever since my awareness of current affairs, I have always heard references to Jamaica’s potential for tourism, agricultural crops, reggae music, etc. This has led me to think about why we have not been able to realize this “much talked about” potential and why we always seem to be on the brink of a breakthrough but never attaining it. There is no denying that Jamaica is truly blessed with natural resources and a resilient people and could easily be first class in areas of natural competitive advantage.

In my experience, the development of a country can be easily related to that of a company. Why do some companies succeed to become large national or multinationals and yet there are others that are not able to expand beyond medium to large size? The development of a company to national or multinational status depends primarily on two things:

1) People and
2) Established rules and procedures.

Multinationals usually have strict policies and procedures that must be adhered to and rewards are usually based on set performance criteria and not left to the subjectivity of any one person. Companies that always seem to be on the brink of national growth but never attaining it, usually have a dominant personality who seeks to direct everything and stifles the initiative of others. This dominant personality is usually instrumental in the start and initial development of the company but restricts the company from growing further because no action can be taken without his/her input.

Similarly with a country, established laws and rules are needed to allow the players to exercise their initiative in their own areas. Importantly, however, the rules must be stable. In other words, the players must be able to make long-term projections without fear of any changes to the rules of the game while they are playing. The consequences of actions also need to be predetermined so that the potential outcomes are evident. In addition, rules must be relevant to the objectives that one is trying to achieve.

It seems to me that this is one of the primary problems we face as a country. This problem did not begin with this Government but has always been in existence. In fact, in my opinion, the present Government has made a far greater effort to update the antiquated colonial laws than any other but still faces an uphill task because of the long period of inaction in this area. In short, the problem that we have suffered from is that our antiquated laws have no relation to the objectives that we are trying to achieve as a country.
Many of our laws still refer to the discretion of ‘the Minister’ and so the development of industries usually relies on the mood or will of an individual. Many years ago, this was acceptable but today this reliance on an individual leads to a bottleneck for progress.

It is for this very reason that multinationals and first world countries have established rules that apply to everyone. It would be impossible for their own control and survival to rely on anything less. This is a consequence of development, that is, less reliance on individuals and more on systems and controls, which is the only way to monitor and reward progress.

Jamaica suffers immensely from this problem. On the one hand, we desire economic growth and ever so often it seems as if we are about to but we are restricted because we do not allow private sector initiative to flourish. Too often, the rules change at the drop of a hat. There is no certainty about what will happen after its occurrence and so we plan for the short-term aware of the fact that we could be playing by different rules later. The consequence is that many companies experience a difficulty in making long-term plans and commitments.

No one will invest seriously in Jamaica unless they are assured of stability. For that reason we will attract persons seeking to make quick profits in the services or trade industries or seeking to make a quick return from our relatively high interest rates but no serious investments in capital goods.

The present regime has sought to provide some form of stability in the market and has been fairly successful in doing so in the areas of inflation and exchange rates. The Government must be applauded, as these are very important to corporate planning. The problem, however, has been that this has been achieved at the expense of maintaining relatively higher interest rates than our international competitors.

The effect of the high interest rate policy is two-fold:

1. High interest rates prevent entrants with little or no capital, which either comes from equity or debt, as they will not be able to afford debt financing. The result is a restriction of the entrepreneurial initiative; and
2. High interest rates encourage low risk interest bearing deposits, thus discouraging productive investment.

These two factors have combined to cause the erosion of our productive sector and made us primarily a service and trade-oriented economy. These factors have been compounded by the uncertainty of the legislative and social environment, resulting in uncertainty in the economic environment. This is the primary reason for the continued decline in investments in capital goods by private entrepreneurs.

Businesses already have to grapple with the uncertainty of markets and consumers and so will shy away from countries with high political and economic risk. The political and economic risk can only be minimized by assuring investors of the relevance and stability of the rules by which they will be governed. In today’s global environment, we cannot afford the luxury of this type of uncertainty. We must conform to global practices and ensure that we develop and maintain a business environment that will provide the type of long-term stability that investors require.

Defining Third World

Interacting with government agencies is one of the most frustrating activities one can face. Every time I face this ordeal it reminds me immediately of our third world status. The definition of third world in my mind does not have to do with the type of industries we have but the way we execute our socialization and business processes. We can be financially successful in any activity we choose but this depends significantly on the method of execution.

RECENT EXPERIENCE
I had a recent experience with the tax office, which demonstrated only too clearly this concept. I went to replace a motor vehicle title that had been lost. The process started with a trip to the Half Way Tree police station to make a report. This was a rather pleasant experience. I was directed to the office responsible for this. On entering I was asked immediately by a lady what the problem was, who expeditiously dealt with my report. A few weeks after I made a trip to the tax office to complete the transaction and was told that the other person named on the title had to be there in person to sign the application. This of course meant waiting a few more weeks as it was difficult for the both of us to find the time. When this was finally possible, it was discovered that the person’s name had to be changed on the motor vehicle registration as the tax office had mistakenly left off the hyphenated extension to the person’s name. I was then sent to another desk to correct the error. On completion I was directed to another point to get a substitute document. On arriving there I was told that I had to pay a fee to correct a mistake made by the tax office. I protested on a point of principle as the documents were correctly presented to them and it was therefore their error, only to be told that the error was made by the Cross Roads office, which was separate from Constant Spring and if I didn’t want to pay I had to go back to Cross Roads. For your information, these are branches of the same agency.

After protest I eventually got the replacement done without being charged. I then had to go back to the original desk to have the documents stamped in order to pay the replacement fee at the cashier. When I got back to the cashier I was told that I needed to be in possession of the insurance certificate for the car, which did not exist because the insurance had been up on the car for a while. A supervisor came to my rescue and allowed the transaction to go through after much explanation. The end result of all of this is that a transaction that should have taken 15 minutes ended up lasting for one hour during which time I went though various emotional stages.

BUREACRACY
This experience prompted me to think that this is the reason why we are a third world country. The difference between a first and third world country has everything to do with the ease of carrying out transactions and daily living. How can we as a nation be serious about development when so much time is wasted with experiences such as these? At the same time I was there I heard a man cursing that he was just trying to pay some money to close down a business, as he was frustrated with the process, and even the act of paying much needed revenue to the government was difficult.

It is this bureaucracy that it helping to stifle our development. The problem I find is not necessarily with the people who carry out the daily functions at the government agencies. There has evidently been a wide scale introduction of people trained in customer service in the various government agencies. The problem is that these very same persons are restricted in what they can do by the rules and processes that act as a noose around their necks. They obviously do try to assist and the frustration is also evident on their faces. Very soon these people will fall into the mode of inefficiency and we will have to start all over again.

CUSTOMER SERVICE
Customer service does not change because new computers and policy manuals are introduced. The most important part of any system or technological improvement depends on people. If we set up a system where the natural talent and discretion of employees are restricted by the rules then the system will be as inefficient as before the change. The problem in many instances is because the same administrators that existed before the changes are the same ones retained, with the same mind set in many cases. System improvement emanates primarily from a change in the way of thinking and skills. Our present government bureaucracy is based on the principle of “guilty until proven innocent”.

PRIVATE SECTOR
The same is true for the private sector. There are many companies that do not understand what service is. When you call them you get this new and improved telephone answering system that provides a grand tour of the office extensions and after you have wasted 15 minutes trying to get someone you are then placed on hold for another 5 minutes. At the end of it you feel as if you have just been afforded a privilege to spend your money.

This is the main distinction between today’s large organization and tomorrow’s international corporation, and is at the heart of our inability to compete internationally. The cumulative effect of the bureaucracy of government agencies and the internal inefficiencies of companies result in very high cost structures.

How then do companies such as Grace Kennedy and Jamaica Producers Group compete so effectively on an international scale? Only recently these companies were facing challenging times and have made remarkable recoveries. I also remember that it was on the basis of human capital that IBM saved itself from extinction. I know because I was working at IBM at the time of the reorganization.

The difference with these companies is that they hire and reward good human resources. This is the same model that can be found in the Fortune 500 companies around the globe. In today’s world it is the quality of the human resources that is going to give any company a competitive edge. If you can think of one good employee within your own company, think how difficult it is to replace that person and what it would be like if you could not rely on that person. The cost of sub-standard human resources is much higher than properly rewarding good people. Most persons will realize this only after the person has left the company.

The next time you think about why Jamaica is a third world country, it is because of the long approval process to start business, the dependence on personalities to complete transactions, the corruption that exists, the lack of service within private companies, the need to be aggressive on the roads, the frustration to pay taxes and the preference of a friend over expertise for a job. In short it is the lack of productive human capital and the resistances to properly reward excellence and build our organizations on human resource talent that make us third world.