The past few weeks have seen oil and commodity prices rising internationally. These incidences, along with the sub-prime crisis, have marked the predicted decline of global growth levels after peaking in 2006. During the times of solid global growth, Jamaica failed to take advantage, instead being satisfied with occasionally achieving 2.5% per annum, averaging less than 1% over the last 18 years.
Contrary to the various commentaries of the need to take advantage of this global growth boom, when even our regional partners were growing in excess of 5% and 6%, the authorities seemed to have been very happy with the accomplishments of 2% per annum. So now the chickens have come home to roost. Everyone knows that economies go through cycles, and not only do you have periods of exceptional growth but there are similarly always periods of depression.
So while other economies have been prepared to deal with the slow times, Jamaica failed to prepare ourselves.
International price increases
We are now faced with a situation where prices internationally are increasing, our largest trading partner (US) seems to be headed for recession, and global growth is slowing. For a few years I have been saying that Jamaica does not have the capacity to grow above 3%, and the authorities have been content to continue projecting growth levels that we did not have the capacity to achieve.
The current administration has realized that in order to grow the economy at the targeted 6% per annum, there has to be a fundamental shift in our productive arrangements. There has to be significant tax reform, a change in our energy policy, and improved productivity levels among other things. And this change in thinking is to be commended because it is at the heart of our problems.
There are some in the US who have stated that oil prices at US$96 per barrel is not such a big problem as relative prices, when compared to a few years ago, is in fact still lower. The reasoning behind this is that inflation and a higher productivity makes today’s price relatively cheaper. In other words inflation over the years would adjust the constant price down and the fact is that the US is using less oil to produce one dollar of GDP than a few years ago.
In Jamaica’s case, however, although we have had much higher inflation, oil prices are denominated in US$, and so has not been affected by inflation, and our productivity levels have declined by about 0.5% per year. So we are using more oil to produce one dollar of GDP over the similar period.
It is this inability to prepare ourselves for these times by improving productivity and thus creating high growth and increased constant income levels that is causing the heightened panic of high prices today. Even though this period will pass also because the economy has been so unprepared to absorb these shocks, even a temporary bout of instability seems unbearable. So one again there is a call by all, including those that have failed to prepare us, to address a problem that should have been anticipated, based on economic cycles, placing greater pressure on our already scarce resources.
This is the real effect of unproductivity. And unless we can improve our productivity as a country then we will continue to see aneamic growth rates at best, while our trading partners surge ahead. As a country we have been too content to measure growth by how many cell phones, cars and women one has. Not understanding that these can be either trappings of wealth or debt, and for us the latter is the case.
Factors affecting productivity
If we are to affect productivity we must understand what are the factors that cause increased productivity? We must first understand what these are and then seek to ensure that the inhibitions to these are removed. In a knowledge based world, it is important, for example, that we increase our literacy rate from the current 80% level while our trading partners are over 95%. The first thing we need to understand is that productivity is driven primarily by human resources, and this is the main reason why I disagree with the contentment over the years of trying to control expenses by paying relatively low wages in the public sector not recognizing that value added is more important than absolute cost. If we really want to attract the best minds then why do we pay the worst salaries?
What is necessary is not the absolute sums we pay but the ROI on the monies invested in our human resources. What we must do is move towards is an effective performance based pay system. It is such a measurement that will drive productivity, not the traditional book keeper approach of scrutinizing each dollar spent irrespective of return.
There are other factors which affect productivity such as our bureaucracy, lack of proper order, and a general malaise to implementation. We are great at studying and preparing reports, but don’t ask us to implement. After all if we implement we may make an error, so the way not to have any responsibility is not to do anything. So no one ends up doing anything because of the fear of being held responsible for errors that other countries, and companies, would be satisfied with incurring because unless we make mistakes along the way we won’t be able to recognize what does not work. The important thing is to ensure that the proper steps are taken to minimize the risk of failure, but isn’t failure a part of success.
This fear of failure has resulted in the Jamaican economy not being able to transform over the years. So our production frontier remains the same, or in fact has been shrinking over the years. Remaining stagnant is the same as declining. If one examines what we were producing 20 years ago to today we would see that we continue to rely on the same production arrangements even though the world has changed. Even more important we have not even improved the way we produce those same things. This is at the heart of our problems.
Dealing with higher prices
In relation to the higher prices, the question is how we ease the pain on the poorer people. They continue to be faced with higher prices. Our traditional approach has been to provide direct support through programmes such as PATH and JSIF. But what we need to do is not just provide food stamps, for example, but seek to lessen the effect on prices, as when prices increase it is very hard for them to come back down even when costs reduce. Price increases also cause pressures for wage increases and reduce economic activity. If we recognize that price increases are temporary, because of increases in world oil prices, then the objective should be to control the temporary anomaly, or smooth out the effect just as the BOJ does when it intervenes in the foreign exchange market. A possible solution would be to (after careful projections) provide a temporary subsidy to the retailers on key cost components, not with new funds, but reallocating capital from places such as PATH, thus controlling prices to the final consumer.
In the medium to long term of course we need to develop our own local industries with less dependence on imported supplies.
Thursday, November 15, 2007
Wednesday, November 07, 2007
Importance of fiscal discipline
The World Bank and IMF projected that global growth reached a peak in 2006, and from hereon we will start to see lower growth levels. It is still expected that China, India, and Russia will lead the way, having grown 11%, 9%, and 8% respectively in 2006, which accounted for half the world’s growth. Global growth is also burdened by the sub-prime situation in the US, which has already seen write offs around US$30 Billion, and expected to be between US$60 Billion and US$250 Billion. The wide range in the estimated write offs is evidence of the continuing uncertainty, which does more harm than the actual losses itself.
There is no doubt that that global events will affect countries such as Jamaica, as we are seeing with the liquidity crunch and rising oil prices. How much it affects us though will depend on how we approach the management of our internal affairs. Over the past few years the global economy has seen high growth levels, and because of the management of our own affairs we did not manage to benefit from that growth. Similarly, while the global market is going through a challenge, it is still expected that countries will still see strong growth.
Hedging our risks
What is important is that we recognize the risks to our economy and seek to hedge against any issues that may surface. Jamaica in particular has quite a large exposure to the global situation because we are seen as closely aligned to the US dollar. This of course is because we have 25% of our exports going to North America, 75% of tourists coming from there, and 75% of our external debt is in US dollars. Naturally therefore Jamaica’s main exposure is to the US dollar rather than the Euro and Canadian dollar. In addition, we see where our oil bill is approaching 50% of our total import bill, and oil prices are expected to rise further, at least in the short term.
The confluence of these factors, if left unchecked, has the effect of creating inflationary pressures, among other tings, in Jamaica. And of course given the already low income levels of Jamaicans this will create a further social burden. It is therefore very important that there is a careful examination of what our greatest exposure is and how it will filter into the Jamaican economy, with a view to hedging against these risks.
My own view is that the main problem Jamaica has comes down to the fiscal accounts and the debt. There is no doubt that since the early 1990s we have seen a significant deterioration of both. The problem Jamaica has had over this time is not mainly an economic one but rather an accounting problem. That is we have continually spent more than we earn and therefore have to borrow to support our over expenditure, and no amount of juggling will help if we do not get to the point where we are living within our means.
For the 45 years since independence we have only managed to see a fiscal surplus for approximately 6 of those years. Because of this we have managed to grow our debt from $34 Billion (1990) to close to $1 Trillion today. Over the same period debt/GDP has moved from 90% to the current level of 130%. The only other country with a higher debt/GDP ratio is war-torn Liberia. This trend is unsustainable and certainly the commitment by the JLP to cap the debt/GDP ratio is obviously a welcome sign in a country where unbridled fiscal irresponsibility prevailed.
Forecasting essential
For years various analysts have been saying that the importance of balancing the fiscal accounts cannot be emphasized enough. Well with the expected slow down in the global economy, and galloping oil prices, once again we will be reacting to a problem rather than forecasting and putting measures in place to address it before it happens. It is always more difficult to react rather than be proactive. In many ways we were still managing the economy as if in the protectionist era of the 1970s and 1980s. Even though we opened up the economy in the 1990s, which in itself was good, we still had a mindset of protectionism and continued to manage our affairs in that way. Hence, while we removed the tariff protection for local companies, we instead subsidized them by providing high interest rates on paper, which many of them invested in rather than face the realities of competition.
In order for us to turn around this economy, especially in light of global challenges, we are going to have to focus on managing down the risks we face. At the heart of it though is the need to move towards a balanced fiscal budget, and then move from there to creating a surplus. This of course means that we have to scrutinize each dollar we spend to ensure that there is a positive return (opportunity benefit).
In many respects we have fallen down on this, as we have not come to grasp with the concept of opportunity cost. We still manage our affairs like old time book keepers, who only focus on the absolute dollar. Such a person faced with a decision to spend $10 or $50 will always spend the $10 because it is less. Never mind the fact that if the $50 is spent you could see a return of additional $50, while the $10 spend may only create $5 in benefit. So this is the way we analyze contracts, and structure our operations. So why should I hire someone and pay them $100 when I can get someone else for $50. Never mind that the $100 person brings more value than the $50 person.
So as we move forward we need a paradigm shift away from the old book keeper mentality. We must start to focus on “value creation” and not just actual expenditure. We need to look at areas where our expenditure will achieve the greatest return after analyzing where our greatest risks are. We then need to identify what the benefits are. For example, if we were to spend the necessary monies to ensure a reliable and efficient public transportation system, then we could save on transportation consumption (30% of total bill). After 45 years of independence it is time that we start thinking outside of the box as what we have been doing for the last 45 years has not worked.
There is no doubt that that global events will affect countries such as Jamaica, as we are seeing with the liquidity crunch and rising oil prices. How much it affects us though will depend on how we approach the management of our internal affairs. Over the past few years the global economy has seen high growth levels, and because of the management of our own affairs we did not manage to benefit from that growth. Similarly, while the global market is going through a challenge, it is still expected that countries will still see strong growth.
Hedging our risks
What is important is that we recognize the risks to our economy and seek to hedge against any issues that may surface. Jamaica in particular has quite a large exposure to the global situation because we are seen as closely aligned to the US dollar. This of course is because we have 25% of our exports going to North America, 75% of tourists coming from there, and 75% of our external debt is in US dollars. Naturally therefore Jamaica’s main exposure is to the US dollar rather than the Euro and Canadian dollar. In addition, we see where our oil bill is approaching 50% of our total import bill, and oil prices are expected to rise further, at least in the short term.
The confluence of these factors, if left unchecked, has the effect of creating inflationary pressures, among other tings, in Jamaica. And of course given the already low income levels of Jamaicans this will create a further social burden. It is therefore very important that there is a careful examination of what our greatest exposure is and how it will filter into the Jamaican economy, with a view to hedging against these risks.
My own view is that the main problem Jamaica has comes down to the fiscal accounts and the debt. There is no doubt that since the early 1990s we have seen a significant deterioration of both. The problem Jamaica has had over this time is not mainly an economic one but rather an accounting problem. That is we have continually spent more than we earn and therefore have to borrow to support our over expenditure, and no amount of juggling will help if we do not get to the point where we are living within our means.
For the 45 years since independence we have only managed to see a fiscal surplus for approximately 6 of those years. Because of this we have managed to grow our debt from $34 Billion (1990) to close to $1 Trillion today. Over the same period debt/GDP has moved from 90% to the current level of 130%. The only other country with a higher debt/GDP ratio is war-torn Liberia. This trend is unsustainable and certainly the commitment by the JLP to cap the debt/GDP ratio is obviously a welcome sign in a country where unbridled fiscal irresponsibility prevailed.
Forecasting essential
For years various analysts have been saying that the importance of balancing the fiscal accounts cannot be emphasized enough. Well with the expected slow down in the global economy, and galloping oil prices, once again we will be reacting to a problem rather than forecasting and putting measures in place to address it before it happens. It is always more difficult to react rather than be proactive. In many ways we were still managing the economy as if in the protectionist era of the 1970s and 1980s. Even though we opened up the economy in the 1990s, which in itself was good, we still had a mindset of protectionism and continued to manage our affairs in that way. Hence, while we removed the tariff protection for local companies, we instead subsidized them by providing high interest rates on paper, which many of them invested in rather than face the realities of competition.
In order for us to turn around this economy, especially in light of global challenges, we are going to have to focus on managing down the risks we face. At the heart of it though is the need to move towards a balanced fiscal budget, and then move from there to creating a surplus. This of course means that we have to scrutinize each dollar we spend to ensure that there is a positive return (opportunity benefit).
In many respects we have fallen down on this, as we have not come to grasp with the concept of opportunity cost. We still manage our affairs like old time book keepers, who only focus on the absolute dollar. Such a person faced with a decision to spend $10 or $50 will always spend the $10 because it is less. Never mind the fact that if the $50 is spent you could see a return of additional $50, while the $10 spend may only create $5 in benefit. So this is the way we analyze contracts, and structure our operations. So why should I hire someone and pay them $100 when I can get someone else for $50. Never mind that the $100 person brings more value than the $50 person.
So as we move forward we need a paradigm shift away from the old book keeper mentality. We must start to focus on “value creation” and not just actual expenditure. We need to look at areas where our expenditure will achieve the greatest return after analyzing where our greatest risks are. We then need to identify what the benefits are. For example, if we were to spend the necessary monies to ensure a reliable and efficient public transportation system, then we could save on transportation consumption (30% of total bill). After 45 years of independence it is time that we start thinking outside of the box as what we have been doing for the last 45 years has not worked.
Thursday, November 01, 2007
Jamaica’s global challenge
Jamaica, like Iraq, is under attack from the US. But in our case this is not because the US is dropping bombs on us. In our case the attack is coming from the weakness, and possible recession, of the US economy. Most economic data coming out of the US is shows signs of weakness, and the sub prime mortgage problem may be spilling over into the broader economy. In fact, the worse of this crisis is not upon us, as many financial institutions are yet to write down the related instruments to market value.
Already companies such as Merrill Lynch and Bear Sterns have wrote down US$ billions, and CEOs are taking the rap, and who has not yet stepped down is under pressure. In the case of the giant, Merrill Lynch, the CEO stepped down after writing down some US$8.4 Billion, with another US$4 Billion write off expected.
Spiraling oil prices
At the same time oil prices topped US$96 per barrel, and at the time of writing is expected to go to US$100 per barrel, and could very well get there by publication. The truth is there is no fundamental basis for a US$100 price, but because of the ongoing tension in the Middle East and lower production out of the Gulf, traders are speculating that supplies will be threatened. And this is going into the US Winter season when demand for oil will increase.
The result is that US consumer confidence and spending have fallen, and the likelihood of a recession next year has increased. In fact some sectors are already deemed to be in a recession. This has resulted in the Federal Reserve (Fed) reducing interest rates within the past six weeks by 75 basis points from 5.75% to 4.50%, which normally would lead to an increase in consumer spending and benefit our 25% of export earnings and 75% tourism earnings that emanate from North America.
This would also have been good news for interest rates also but within the context of investors seeking high quality paper (US Treasuries), the positive impact has been minimal. There is some benefit for us though, as the variable rate instruments will re-price lower, saving us on interest costs, and any new debt instruments we issue can be accommodated at lower rates once we maintain confidence in our fiscal targets especially.
At present fuel consumption levels, in Jamaica, it will also mean that our fuel import bill will increase by approximately US$300 to US$400 Million. No doubt this is the greatest threat that we face to our Balance of Payments (BOP).
The question one would ask then is, doesn’t this mean that Jamaica will suffer under the current global conditions. And the answer is, if we do nothing about it then certainly. However, I believe that we are in a position to determine how much the global conditions impact us and what we need to do is face the challenges and do what is necessary to lessen the impact, or even benefit from the global imbalances.
The greatest threat to Jamaica is not from the global front but comes from within. In other words it is how we manage our affairs, and seek to deal with the challenges, that will determine how we fare. And this has always been the case, as even with recent peaks in global growth we still only managed to eke out less than 2%. In fact, the projections from the World Bank and IMF are that global growth reached a peak in 2006 and is expected to decrease in this and coming years. In short we were unable to take advantage of the peaks in growth, primarily because we lack the capacity to grow beyond a certain level.
Implement not study
What we need to do is break the habit of just recognizing problems and talking and studying them to death. As an example the rise in oil prices is upon us, and while US$100 may not be sustainable, oil may not fall below a price in the US$80s per barrel. This is still a big threat to our BOP. But we do have the capacity to change that expected impact, as we presently consume approximately 40% of our fuel in transportation.
This in turn impacts the fiscal accounts, as the bus fares for children and the elderly are subsidized by the government. So it is essential that we do something about this now, which does not need any reduction of subsidies, as we have the ability to deal with it otherwise. My own opinion is that the JUTC can be a catalyst for this change, as if it can be made into an efficient, reliable, and secure transportation system then we can transition to where Jamaicans feel comfortable taking the bus rather than driving everywhere they want to go. This will also ease the traffic congestion, saving not only fuel but the need to repair roads sooner rather than later. In addition, less traffic congestion means more productive time spent at the office rather than on the roads.
The downturn in the US economy also is countered by stronger economies globally, such as China, India, Russia, Canada, Europe etc. The first three accounting for half global growth in 2006 and expected to do so in 2007. Certainly the strategy for Jamaica should be to see how much of our products we can diversify to these growing markets, and how much tourists we can lure from these strong markets. After all their currencies are at highs against the US$, and means stronger spending power. Especially going into the tourism winter season we need to start the wooing of these markets now, which may pay more dividends than focusing on the US market where consumers are careful about how they spend their dollar.
These options can begin to pay dividends within a few months but it is essential that we act now, and set timelines for action plans. We cannot remain in the mode of studying the problem and getting the widest possible consultation. By the time we are finished with all of that we will have suffered the full impact, as global markets today change rapidly and will not await our studies and consultations. We must measure the risks to the country between implementation and research. After all governments are put there to govern in the interest of the people, not consult on everything when it is apparent that the risks of delay are high.
It is within this light that I believe that the move by Audley Shaw to request that the multilaterals reconsider their policy on lending to middle income countries be applauded. Many have questioned how successful this move will be, as the multilaterals have maintained the policy for a while that countries like Jamaica do not qualify for this lower cost funding.
But my own view is that if they say no then we remain in the same position. If on the other hand they say yes then Jamaica could benefit from lower interest costs. In other words the upside is greater than the downside risks, so what is the big deal about the request being made. This as far as I am concerned is not only thinking outside of the box but a plea by the Finance Minister on behalf of all Jamaicans, as our fiscal accounts would be positively affected.
Already companies such as Merrill Lynch and Bear Sterns have wrote down US$ billions, and CEOs are taking the rap, and who has not yet stepped down is under pressure. In the case of the giant, Merrill Lynch, the CEO stepped down after writing down some US$8.4 Billion, with another US$4 Billion write off expected.
Spiraling oil prices
At the same time oil prices topped US$96 per barrel, and at the time of writing is expected to go to US$100 per barrel, and could very well get there by publication. The truth is there is no fundamental basis for a US$100 price, but because of the ongoing tension in the Middle East and lower production out of the Gulf, traders are speculating that supplies will be threatened. And this is going into the US Winter season when demand for oil will increase.
The result is that US consumer confidence and spending have fallen, and the likelihood of a recession next year has increased. In fact some sectors are already deemed to be in a recession. This has resulted in the Federal Reserve (Fed) reducing interest rates within the past six weeks by 75 basis points from 5.75% to 4.50%, which normally would lead to an increase in consumer spending and benefit our 25% of export earnings and 75% tourism earnings that emanate from North America.
This would also have been good news for interest rates also but within the context of investors seeking high quality paper (US Treasuries), the positive impact has been minimal. There is some benefit for us though, as the variable rate instruments will re-price lower, saving us on interest costs, and any new debt instruments we issue can be accommodated at lower rates once we maintain confidence in our fiscal targets especially.
At present fuel consumption levels, in Jamaica, it will also mean that our fuel import bill will increase by approximately US$300 to US$400 Million. No doubt this is the greatest threat that we face to our Balance of Payments (BOP).
The question one would ask then is, doesn’t this mean that Jamaica will suffer under the current global conditions. And the answer is, if we do nothing about it then certainly. However, I believe that we are in a position to determine how much the global conditions impact us and what we need to do is face the challenges and do what is necessary to lessen the impact, or even benefit from the global imbalances.
The greatest threat to Jamaica is not from the global front but comes from within. In other words it is how we manage our affairs, and seek to deal with the challenges, that will determine how we fare. And this has always been the case, as even with recent peaks in global growth we still only managed to eke out less than 2%. In fact, the projections from the World Bank and IMF are that global growth reached a peak in 2006 and is expected to decrease in this and coming years. In short we were unable to take advantage of the peaks in growth, primarily because we lack the capacity to grow beyond a certain level.
Implement not study
What we need to do is break the habit of just recognizing problems and talking and studying them to death. As an example the rise in oil prices is upon us, and while US$100 may not be sustainable, oil may not fall below a price in the US$80s per barrel. This is still a big threat to our BOP. But we do have the capacity to change that expected impact, as we presently consume approximately 40% of our fuel in transportation.
This in turn impacts the fiscal accounts, as the bus fares for children and the elderly are subsidized by the government. So it is essential that we do something about this now, which does not need any reduction of subsidies, as we have the ability to deal with it otherwise. My own opinion is that the JUTC can be a catalyst for this change, as if it can be made into an efficient, reliable, and secure transportation system then we can transition to where Jamaicans feel comfortable taking the bus rather than driving everywhere they want to go. This will also ease the traffic congestion, saving not only fuel but the need to repair roads sooner rather than later. In addition, less traffic congestion means more productive time spent at the office rather than on the roads.
The downturn in the US economy also is countered by stronger economies globally, such as China, India, Russia, Canada, Europe etc. The first three accounting for half global growth in 2006 and expected to do so in 2007. Certainly the strategy for Jamaica should be to see how much of our products we can diversify to these growing markets, and how much tourists we can lure from these strong markets. After all their currencies are at highs against the US$, and means stronger spending power. Especially going into the tourism winter season we need to start the wooing of these markets now, which may pay more dividends than focusing on the US market where consumers are careful about how they spend their dollar.
These options can begin to pay dividends within a few months but it is essential that we act now, and set timelines for action plans. We cannot remain in the mode of studying the problem and getting the widest possible consultation. By the time we are finished with all of that we will have suffered the full impact, as global markets today change rapidly and will not await our studies and consultations. We must measure the risks to the country between implementation and research. After all governments are put there to govern in the interest of the people, not consult on everything when it is apparent that the risks of delay are high.
It is within this light that I believe that the move by Audley Shaw to request that the multilaterals reconsider their policy on lending to middle income countries be applauded. Many have questioned how successful this move will be, as the multilaterals have maintained the policy for a while that countries like Jamaica do not qualify for this lower cost funding.
But my own view is that if they say no then we remain in the same position. If on the other hand they say yes then Jamaica could benefit from lower interest costs. In other words the upside is greater than the downside risks, so what is the big deal about the request being made. This as far as I am concerned is not only thinking outside of the box but a plea by the Finance Minister on behalf of all Jamaicans, as our fiscal accounts would be positively affected.
Thursday, October 18, 2007
No one has to be poor
I have always thought that one of the things Jamaica lacked is a vision of where we want to be, summed up in a single statement. I am aware that we have been working on a 2030 plan, but no vision for Jamaica has really been communicated to the people of this country. Prime Ministers have come and declared their undying commitment to bring justice to the people of Jamaica, and have even expressed love for poor people, which if we really love poor people then we should strive to ensure that no one is poor rather than place a shield around them and protect them from prosperity.
It is within this context that the statement made by Bruce Golding, that Jamaica should be a country where “maybe not everyone can be rich, but no one has to be poor”, is the closest I think that has come to a vision statement. I am going to officially declare the last part of this statement, “no one has to be poor”, the official vision for Jamaica, as if my declaration will carry any weight.
In all seriousness though I think we need to examine this statement, as this more than anything else said by Mr. Golding, embodies his commitment to Jamaica and the possibilities. Because if we are to ensure that “no one has to be poor” then we must examine how we are to achieve that. Saying that human rights will be respected, inner city houses will be built, free education or hospital fees will be provided, or any other type of promise serve to be nothing more than temporary reprieves in the ultimate objective of prosperity.
And so the question we must ask is how to achieve the vision statement for Jamaica, “no one has to be poor”. Well in order to get to that vision we must understand what makes people poor and fix those fundamental problems. In other words we must put the structure in place to ensure that the vision is well supported by a set of systems and policies that will outlive any individual. Our country has always operated like many organizations in Jamaica, where the flavour of the month depends on the present mood and attitude of the person running the organization. So that we tend to vote in charismatic leaders and people who promise that they will do something for us, if we vote for them. Based on Mr. Golding’s statements it seems as if that day may be at an end, and the only way that it can be is if the structural changes are put into force by legislation, as one day Mr. Golding will no longer be there and we may end up back in the same arena.
So if we are to examine what makes people poor then we can identify a few factors, which include:
- A lack of access to quality education – I am always amazed that over the years of us talking about providing jobs for people we are always scraping the bottom of the barrel. Garment factory, low level IT jobs, low level jobs in hotels etc. If we want to see people’s earnings go up then we have to train them for high level jobs, as if we do not have a highly trained labour force then we can only provide low paying jobs. So while we may be able to attract investments to Jamaica, it will not be the Jamaicans who get the higher paying jobs.
- Lack of law and order – we constantly speak about the high murder rate in Jamaica but the high murder rate is just a symptom of the real problem of a lack of general law and order. How do we intend to solve murder if we cannot even control the bad driving on the roads? The lack of law and order creates a stranglehold on certain areas, some of which we call garrisons. By allowing this general breakdown of law and order in society we force poverty on the people that live in these areas.
I believe that if we deal with these two social problems they will go a far way in alleviating poverty. There are some other areas that need to be addressed also, more on the financial side.
The first of course is that fiscal discipline must be maintained. The present government has inherited a debt of almost J$1 Trillion, and more importantly a set of fiscal accounts that seem to be always in deficit. Additionally, the fiscal targets have been consistently missed. No doubt fiscal discipline has to be the order of the day, as there is no way that we can continue this indefinitely, as what will happen is that when we are no longer able to borrow money then inflation will return. There are only two ways to address a fiscal deficit, inflation and debt, and the latter is what we have been accumulating since the early 1990s when the debt stood at J$34 Billion.
Management of the fiscal accounts not only means though that expenditure is contained. We have been pursuing a strategy of expenditure containment for the longest while with no success. This is because if you are constantly containing expenditure when the pie is shrinking (there may be growth but the growth in debt outweighs it) then you are going to find that there is no more room for containment. Expenditure management is important though to ensure that monies are spent where the greatest value comes to the country as a whole. As an example the recent roads indicate that higher standards need to be put in road work, so that instead of paying $100 to fix roads every 3 years, we pay $150 and fix them every 10 years.
The strategy surrounding the fiscal accounts therefore must be revenue growth (by growing the economy not necessarily through new taxes). Economic growth has to be achieved through creating a more efficient bureaucracy, and here I would like to add that we should seek to hold our public officials accountable, but it is important to pay them more. Both go hand in hand. We have to create an environment that encourages local business growth, which includes lower interest rates (a balanced budget), tax reform geared at encouraging business development rather than just fiscal revenue growth, a more efficient transportation system, and better use of energy. If we can achieve these then we can reduce our reliance on debt, and remittances, and our people will be more equipped to earn more.
We will then be closer to the vision that “no one has to be poor”.
Accrual accounting justified
Another matter that had me thinking was the statement attributed to Omar Davies that some J$17 Billion and US$15 Million were left in bank accounts. This was said in answer to the J$15 Billion “unbudgeted expenditure” Audley Shaw spoke of. Now I think anyone should understand that money in the bank at any point in time does not mean that it is free and clear to meet additional expenses. The fact is that these balances could also be waiting on unpresented withdrawals, and in fact after all withdrawals are presented the amounts could in fact be negative. So there is really no relevance between the cash balances and any unbudgeted commitments. This has always been the problem with cash accounting, and fully supports the need for the move to accrual accounting, which was started under the previous government.
It is within this context that the statement made by Bruce Golding, that Jamaica should be a country where “maybe not everyone can be rich, but no one has to be poor”, is the closest I think that has come to a vision statement. I am going to officially declare the last part of this statement, “no one has to be poor”, the official vision for Jamaica, as if my declaration will carry any weight.
In all seriousness though I think we need to examine this statement, as this more than anything else said by Mr. Golding, embodies his commitment to Jamaica and the possibilities. Because if we are to ensure that “no one has to be poor” then we must examine how we are to achieve that. Saying that human rights will be respected, inner city houses will be built, free education or hospital fees will be provided, or any other type of promise serve to be nothing more than temporary reprieves in the ultimate objective of prosperity.
And so the question we must ask is how to achieve the vision statement for Jamaica, “no one has to be poor”. Well in order to get to that vision we must understand what makes people poor and fix those fundamental problems. In other words we must put the structure in place to ensure that the vision is well supported by a set of systems and policies that will outlive any individual. Our country has always operated like many organizations in Jamaica, where the flavour of the month depends on the present mood and attitude of the person running the organization. So that we tend to vote in charismatic leaders and people who promise that they will do something for us, if we vote for them. Based on Mr. Golding’s statements it seems as if that day may be at an end, and the only way that it can be is if the structural changes are put into force by legislation, as one day Mr. Golding will no longer be there and we may end up back in the same arena.
So if we are to examine what makes people poor then we can identify a few factors, which include:
- A lack of access to quality education – I am always amazed that over the years of us talking about providing jobs for people we are always scraping the bottom of the barrel. Garment factory, low level IT jobs, low level jobs in hotels etc. If we want to see people’s earnings go up then we have to train them for high level jobs, as if we do not have a highly trained labour force then we can only provide low paying jobs. So while we may be able to attract investments to Jamaica, it will not be the Jamaicans who get the higher paying jobs.
- Lack of law and order – we constantly speak about the high murder rate in Jamaica but the high murder rate is just a symptom of the real problem of a lack of general law and order. How do we intend to solve murder if we cannot even control the bad driving on the roads? The lack of law and order creates a stranglehold on certain areas, some of which we call garrisons. By allowing this general breakdown of law and order in society we force poverty on the people that live in these areas.
I believe that if we deal with these two social problems they will go a far way in alleviating poverty. There are some other areas that need to be addressed also, more on the financial side.
The first of course is that fiscal discipline must be maintained. The present government has inherited a debt of almost J$1 Trillion, and more importantly a set of fiscal accounts that seem to be always in deficit. Additionally, the fiscal targets have been consistently missed. No doubt fiscal discipline has to be the order of the day, as there is no way that we can continue this indefinitely, as what will happen is that when we are no longer able to borrow money then inflation will return. There are only two ways to address a fiscal deficit, inflation and debt, and the latter is what we have been accumulating since the early 1990s when the debt stood at J$34 Billion.
Management of the fiscal accounts not only means though that expenditure is contained. We have been pursuing a strategy of expenditure containment for the longest while with no success. This is because if you are constantly containing expenditure when the pie is shrinking (there may be growth but the growth in debt outweighs it) then you are going to find that there is no more room for containment. Expenditure management is important though to ensure that monies are spent where the greatest value comes to the country as a whole. As an example the recent roads indicate that higher standards need to be put in road work, so that instead of paying $100 to fix roads every 3 years, we pay $150 and fix them every 10 years.
The strategy surrounding the fiscal accounts therefore must be revenue growth (by growing the economy not necessarily through new taxes). Economic growth has to be achieved through creating a more efficient bureaucracy, and here I would like to add that we should seek to hold our public officials accountable, but it is important to pay them more. Both go hand in hand. We have to create an environment that encourages local business growth, which includes lower interest rates (a balanced budget), tax reform geared at encouraging business development rather than just fiscal revenue growth, a more efficient transportation system, and better use of energy. If we can achieve these then we can reduce our reliance on debt, and remittances, and our people will be more equipped to earn more.
We will then be closer to the vision that “no one has to be poor”.
Accrual accounting justified
Another matter that had me thinking was the statement attributed to Omar Davies that some J$17 Billion and US$15 Million were left in bank accounts. This was said in answer to the J$15 Billion “unbudgeted expenditure” Audley Shaw spoke of. Now I think anyone should understand that money in the bank at any point in time does not mean that it is free and clear to meet additional expenses. The fact is that these balances could also be waiting on unpresented withdrawals, and in fact after all withdrawals are presented the amounts could in fact be negative. So there is really no relevance between the cash balances and any unbudgeted commitments. This has always been the problem with cash accounting, and fully supports the need for the move to accrual accounting, which was started under the previous government.
Wednesday, September 26, 2007
Stony Hill Phoenix: a lesson in development
Approximately three months ago, my son started training with the Stony Hill Phoenix under 13 football club. They were making an entrance into the KSAFA under 13 football competition for the first time in a decade. I was attracted to the prospect of my son playing here for a few reasons (1) he would be able to make a mark with a new club; (2) I liked the skills shown by the young boys; (3) the coaching seemed appropriate; and (4) he would get the necessary playing time needed for development at this age.
He could have gone to Real Mona, Cavaliers, Meadhaven, or one of the more established teams, but I felt that for personal development this would have been better for him. As I mentioned he would get the playing time necessary to develop and have the chance to build with a set of skillful youngsters, which would have a greater mark than even winning with an already established team. I felt therefore that it was an ideal lesson in development for him. It is of course similar to building your economy with foreign investors, who are already established, or with your own start up entrepreneurial class. The latter always has more potential for growth and more loyalty to keep profits here.
A lot of his friends would ask him, “which team is that?”, “why don’t you play for Mona?”. All the questions you would typically expect from someone about a start up, for example, if one starts a company as opposed to working with a multinational in the corporate world. This is in contrast to a developed country like the US, where start up companies are encouraged and usually in a few years grow into large publicly listed companies.
Believe in ourselves
What was impressive about this team though is that the youngsters were encouraged to do their best and we always told them that they had the ability to win the competition. They were always told also they had nothing to lose and a lot to prove, as they were seen as underdogs. The lesson in psychological; development was more important for us than skills, which while being important, if one did not believe that the ultimate goal was possible then the skill would be useless. This reminded me also of two things – (1) some persons have told me that the JLP’s vision is a pipe dream as Jamaica is a developing country and we are a victim of globalization; and (2) Bruce Golding’s speech that we should stop making excuses for our failures and accepting mediocrity, as we must believe that everything is possible. It is this approach that we took to the young boys and spent a lot of time, each training session, telling them how good they are.
In addition to the psychological and skills training we worked on the discipline and team work. No matter how skillful one was if the discipline and positive attitude was not present we would sometimes dismiss the person from the side. Discipline was of utmost importance, as any unpunished incident could contaminate the team and lead to total breakdown. So indiscipline was not tolerated. This is similar of course to the way in which crime and indiscipline has been a scourge on the Jamaican economy and has eventually led to the lack of confidence of persons to live and invest in Jamaica.
Success
What was impressive about the team is that (1) the youngsters were not from the more affluent families; and (2) the team was an average age of around 10 to 11 years, and had many who were still in prep school. So in terms of height they were much smaller than the great majority of other teams, which in most cases had mostly high school students and an average age of 12 to 13 years. We also did not have a major sponsor, as this team was after all not known and companies would of course ask what sort of mileage can I possibly get from this team. But for me that was a part of the challenge I liked for my son and adversity I thought would help them to succeed.
In the first round we played teams and beat them by four, six, and eight to nothing. The opposing coaches would take notice in disbelief that this new team of small youngsters was so good. In fact later on the KSAFA website would refer to the team as “Butler’s toddlers” after they got to the final against the defending champions, and favourites, Real Mona. In making their way to the final they even beat Real Mona in the quarter final and went on to win their quarter final zone. In fact my son told me after the quarter final match that when they were being introduced to the Real Mona team, a comment from one member of the towering opponent was something to the effect that the Stony Hill team players were so short that they would get beaten by ten goals. Well Stony Hill beat them two goals to nothing.
Stony Hill went on to beat Boys Town in the semi-final three goals to nothing, and lost the final in a nail biting match two goals to one. We also ended up with the leading goal scorer, who scored 24 goals for the season and the closest goal scorer was about 8 goals behind. Of the starting eleven, eight of are still eligible to play next year. Even so the future of this promising team is threatened as there is a tussle between certain persons in the community and the coach, who has built this team, over control of the franchise. So while the adults fight over the team the boys and football development may well be the real victims, as after entering and doing so well, after 10 years, it may well go into hibernation again. Similar to the way in which we tease the world with our quality agricultural products but then cannot fill the increased demand.
This experience reminded me so much of what is wrong in Jamaica, as I have mentioned. We believe too much in mediocrity; we do not encourage small businesses, having a preference for large foreign investors, when the greatest growth potential is with the small startups, as we see in the US (Google, Dell, Apple etc.); we have a breakdown of law and order, which prevents us reaching our greatest growth potential; and most importantly we have neglected building our human resources, and in many instances go for foreign names rather than the potential in our own people. Our music has shown that even though we are a small nation we can be giants on the world stage. For too long though our politicians have ignored the development of Jamaicans and Jamaica’s potential and this is truly the only way that we can prosper as a nation.
This team is truly a lesson in development for Jamaica, but because of adult egos we may not see them again. At least for me the goal of my son’s development has been met as he has made good improvement.
He could have gone to Real Mona, Cavaliers, Meadhaven, or one of the more established teams, but I felt that for personal development this would have been better for him. As I mentioned he would get the playing time necessary to develop and have the chance to build with a set of skillful youngsters, which would have a greater mark than even winning with an already established team. I felt therefore that it was an ideal lesson in development for him. It is of course similar to building your economy with foreign investors, who are already established, or with your own start up entrepreneurial class. The latter always has more potential for growth and more loyalty to keep profits here.
A lot of his friends would ask him, “which team is that?”, “why don’t you play for Mona?”. All the questions you would typically expect from someone about a start up, for example, if one starts a company as opposed to working with a multinational in the corporate world. This is in contrast to a developed country like the US, where start up companies are encouraged and usually in a few years grow into large publicly listed companies.
Believe in ourselves
What was impressive about this team though is that the youngsters were encouraged to do their best and we always told them that they had the ability to win the competition. They were always told also they had nothing to lose and a lot to prove, as they were seen as underdogs. The lesson in psychological; development was more important for us than skills, which while being important, if one did not believe that the ultimate goal was possible then the skill would be useless. This reminded me also of two things – (1) some persons have told me that the JLP’s vision is a pipe dream as Jamaica is a developing country and we are a victim of globalization; and (2) Bruce Golding’s speech that we should stop making excuses for our failures and accepting mediocrity, as we must believe that everything is possible. It is this approach that we took to the young boys and spent a lot of time, each training session, telling them how good they are.
In addition to the psychological and skills training we worked on the discipline and team work. No matter how skillful one was if the discipline and positive attitude was not present we would sometimes dismiss the person from the side. Discipline was of utmost importance, as any unpunished incident could contaminate the team and lead to total breakdown. So indiscipline was not tolerated. This is similar of course to the way in which crime and indiscipline has been a scourge on the Jamaican economy and has eventually led to the lack of confidence of persons to live and invest in Jamaica.
Success
What was impressive about the team is that (1) the youngsters were not from the more affluent families; and (2) the team was an average age of around 10 to 11 years, and had many who were still in prep school. So in terms of height they were much smaller than the great majority of other teams, which in most cases had mostly high school students and an average age of 12 to 13 years. We also did not have a major sponsor, as this team was after all not known and companies would of course ask what sort of mileage can I possibly get from this team. But for me that was a part of the challenge I liked for my son and adversity I thought would help them to succeed.
In the first round we played teams and beat them by four, six, and eight to nothing. The opposing coaches would take notice in disbelief that this new team of small youngsters was so good. In fact later on the KSAFA website would refer to the team as “Butler’s toddlers” after they got to the final against the defending champions, and favourites, Real Mona. In making their way to the final they even beat Real Mona in the quarter final and went on to win their quarter final zone. In fact my son told me after the quarter final match that when they were being introduced to the Real Mona team, a comment from one member of the towering opponent was something to the effect that the Stony Hill team players were so short that they would get beaten by ten goals. Well Stony Hill beat them two goals to nothing.
Stony Hill went on to beat Boys Town in the semi-final three goals to nothing, and lost the final in a nail biting match two goals to one. We also ended up with the leading goal scorer, who scored 24 goals for the season and the closest goal scorer was about 8 goals behind. Of the starting eleven, eight of are still eligible to play next year. Even so the future of this promising team is threatened as there is a tussle between certain persons in the community and the coach, who has built this team, over control of the franchise. So while the adults fight over the team the boys and football development may well be the real victims, as after entering and doing so well, after 10 years, it may well go into hibernation again. Similar to the way in which we tease the world with our quality agricultural products but then cannot fill the increased demand.
This experience reminded me so much of what is wrong in Jamaica, as I have mentioned. We believe too much in mediocrity; we do not encourage small businesses, having a preference for large foreign investors, when the greatest growth potential is with the small startups, as we see in the US (Google, Dell, Apple etc.); we have a breakdown of law and order, which prevents us reaching our greatest growth potential; and most importantly we have neglected building our human resources, and in many instances go for foreign names rather than the potential in our own people. Our music has shown that even though we are a small nation we can be giants on the world stage. For too long though our politicians have ignored the development of Jamaicans and Jamaica’s potential and this is truly the only way that we can prosper as a nation.
This team is truly a lesson in development for Jamaica, but because of adult egos we may not see them again. At least for me the goal of my son’s development has been met as he has made good improvement.
Stony Hill Phoenix: a lesson in development
Approximately three months ago, my son started training with the Stony Hill Phoenix under 13 football club. They were making an entrance into the KSAFA under 13 football competition for the first time in a decade. I was attracted to the prospect of my son playing here for a few reasons (1) he would be able to make a mark with a new club; (2) I liked the skills shown by the young boys; (3) the coaching seemed appropriate; and (4) he would get the necessary playing time needed for development at this age.
He could have gone to Real Mona, Cavaliers, Meadhaven, or one of the more established teams, but I felt that for personal development this would have been better for him. As I mentioned he would get the playing time necessary to develop and have the chance to build with a set of skillful youngsters, which would have a greater mark than even winning with an already established team. I felt therefore that it was an ideal lesson in development for him. It is of course similar to building your economy with foreign investors, who are already established, or with your own start up entrepreneurial class. The latter always has more potential for growth and more loyalty to keep profits here.
A lot of his friends would ask him, “which team is that?”, “why don’t you play for Mona?”. All the questions you would typically expect from someone about a start up, for example, if one starts a company as opposed to working with a multinational in the corporate world. This is in contrast to a developed country like the US, where start up companies are encouraged and usually in a few years grow into large publicly listed companies.
Believe in ourselves
What was impressive about this team though is that the youngsters were encouraged to do their best and we always told them that they had the ability to win the competition. They were always told also they had nothing to lose and a lot to prove, as they were seen as underdogs. The lesson in psychological; development was more important for us than skills, which while being important, if one did not believe that the ultimate goal was possible then the skill would be useless. This reminded me also of two things – (1) some persons have told me that the JLP’s vision is a pipe dream as Jamaica is a developing country and we are a victim of globalization; and (2) Bruce Golding’s speech that we should stop making excuses for our failures and accepting mediocrity, as we must believe that everything is possible. It is this approach that we took to the young boys and spent a lot of time, each training session, telling them how good they are.
In addition to the psychological and skills training we worked on the discipline and team work. No matter how skillful one was if the discipline and positive attitude was not present we would sometimes dismiss the person from the side. Discipline was of utmost importance, as any unpunished incident could contaminate the team and lead to total breakdown. So indiscipline was not tolerated. This is similar of course to the way in which crime and indiscipline has been a scourge on the Jamaican economy and has eventually led to the lack of confidence of persons to live and invest in Jamaica.
Success
What was impressive about the team is that (1) the youngsters were not from the more affluent families; and (2) the team was an average age of around 10 to 11 years, and had many who were still in prep school. So in terms of height they were much smaller than the great majority of other teams, which in most cases had mostly high school students and an average age of 12 to 13 years. We also did not have a major sponsor, as this team was after all not known and companies would of course ask what sort of mileage can I possibly get from this team. But for me that was a part of the challenge I liked for my son and adversity I thought would help them to succeed.
In the first round we played teams and beat them by four, six, and eight to nothing. The opposing coaches would take notice in disbelief that this new team of small youngsters was so good. In fact later on the KSAFA website would refer to the team as “Butler’s toddlers” after they got to the final against the defending champions, and favourites, Real Mona. In making their way to the final they even beat Real Mona in the quarter final and went on to win their quarter final zone. In fact my son told me after the quarter final match that when they were being introduced to the Real Mona team, a comment from one member of the towering opponent was something to the effect that the Stony Hill team players were so short that they would get beaten by ten goals. Well Stony Hill beat them two goals to nothing.
Stony Hill went on to beat Boys Town in the semi-final three goals to nothing, and lost the final in a nail biting match two goals to one. We also ended up with the leading goal scorer, who scored 24 goals for the season and the closest goal scorer was about 8 goals behind. Of the starting eleven, eight of are still eligible to play next year. Even so the future of this promising team is threatened as there is a tussle between certain persons in the community and the coach, who has built this team, over control of the franchise. So while the adults fight over the team the boys and football development may well be the real victims, as after entering and doing so well, after 10 years, it may well go into hibernation again. Similar to the way in which we tease the world with our quality agricultural products but then cannot fill the increased demand.
This experience reminded me so much of what is wrong in Jamaica, as I have mentioned. We believe too much in mediocrity; we do not encourage small businesses, having a preference for large foreign investors, when the greatest growth potential is with the small startups, as we see in the US (Google, Dell, Apple etc.); we have a breakdown of law and order, which prevents us reaching our greatest growth potential; and most importantly we have neglected building our human resources, and in many instances go for foreign names rather than the potential in our own people. Our music has shown that even though we are a small nation we can be giants on the world stage. For too long though our politicians have ignored the development of Jamaicans and Jamaica’s potential and this is truly the only way that we can prosper as a nation.
This team is truly a lesson in development for Jamaica, but because of adult egos we may not see them again. At least for me the goal of my son’s development has been met as he has made good improvement.
He could have gone to Real Mona, Cavaliers, Meadhaven, or one of the more established teams, but I felt that for personal development this would have been better for him. As I mentioned he would get the playing time necessary to develop and have the chance to build with a set of skillful youngsters, which would have a greater mark than even winning with an already established team. I felt therefore that it was an ideal lesson in development for him. It is of course similar to building your economy with foreign investors, who are already established, or with your own start up entrepreneurial class. The latter always has more potential for growth and more loyalty to keep profits here.
A lot of his friends would ask him, “which team is that?”, “why don’t you play for Mona?”. All the questions you would typically expect from someone about a start up, for example, if one starts a company as opposed to working with a multinational in the corporate world. This is in contrast to a developed country like the US, where start up companies are encouraged and usually in a few years grow into large publicly listed companies.
Believe in ourselves
What was impressive about this team though is that the youngsters were encouraged to do their best and we always told them that they had the ability to win the competition. They were always told also they had nothing to lose and a lot to prove, as they were seen as underdogs. The lesson in psychological; development was more important for us than skills, which while being important, if one did not believe that the ultimate goal was possible then the skill would be useless. This reminded me also of two things – (1) some persons have told me that the JLP’s vision is a pipe dream as Jamaica is a developing country and we are a victim of globalization; and (2) Bruce Golding’s speech that we should stop making excuses for our failures and accepting mediocrity, as we must believe that everything is possible. It is this approach that we took to the young boys and spent a lot of time, each training session, telling them how good they are.
In addition to the psychological and skills training we worked on the discipline and team work. No matter how skillful one was if the discipline and positive attitude was not present we would sometimes dismiss the person from the side. Discipline was of utmost importance, as any unpunished incident could contaminate the team and lead to total breakdown. So indiscipline was not tolerated. This is similar of course to the way in which crime and indiscipline has been a scourge on the Jamaican economy and has eventually led to the lack of confidence of persons to live and invest in Jamaica.
Success
What was impressive about the team is that (1) the youngsters were not from the more affluent families; and (2) the team was an average age of around 10 to 11 years, and had many who were still in prep school. So in terms of height they were much smaller than the great majority of other teams, which in most cases had mostly high school students and an average age of 12 to 13 years. We also did not have a major sponsor, as this team was after all not known and companies would of course ask what sort of mileage can I possibly get from this team. But for me that was a part of the challenge I liked for my son and adversity I thought would help them to succeed.
In the first round we played teams and beat them by four, six, and eight to nothing. The opposing coaches would take notice in disbelief that this new team of small youngsters was so good. In fact later on the KSAFA website would refer to the team as “Butler’s toddlers” after they got to the final against the defending champions, and favourites, Real Mona. In making their way to the final they even beat Real Mona in the quarter final and went on to win their quarter final zone. In fact my son told me after the quarter final match that when they were being introduced to the Real Mona team, a comment from one member of the towering opponent was something to the effect that the Stony Hill team players were so short that they would get beaten by ten goals. Well Stony Hill beat them two goals to nothing.
Stony Hill went on to beat Boys Town in the semi-final three goals to nothing, and lost the final in a nail biting match two goals to one. We also ended up with the leading goal scorer, who scored 24 goals for the season and the closest goal scorer was about 8 goals behind. Of the starting eleven, eight of are still eligible to play next year. Even so the future of this promising team is threatened as there is a tussle between certain persons in the community and the coach, who has built this team, over control of the franchise. So while the adults fight over the team the boys and football development may well be the real victims, as after entering and doing so well, after 10 years, it may well go into hibernation again. Similar to the way in which we tease the world with our quality agricultural products but then cannot fill the increased demand.
This experience reminded me so much of what is wrong in Jamaica, as I have mentioned. We believe too much in mediocrity; we do not encourage small businesses, having a preference for large foreign investors, when the greatest growth potential is with the small startups, as we see in the US (Google, Dell, Apple etc.); we have a breakdown of law and order, which prevents us reaching our greatest growth potential; and most importantly we have neglected building our human resources, and in many instances go for foreign names rather than the potential in our own people. Our music has shown that even though we are a small nation we can be giants on the world stage. For too long though our politicians have ignored the development of Jamaicans and Jamaica’s potential and this is truly the only way that we can prosper as a nation.
This team is truly a lesson in development for Jamaica, but because of adult egos we may not see them again. At least for me the goal of my son’s development has been met as he has made good improvement.
Thursday, September 20, 2007
The accounting side of subprime
While we have exhaustively looked at the subprime mortgage crisis over the past few weeks, and tried to discern the implications for Jamaica, there is one aspect that we have not fully examined. This is the accounting side of the subprime mess. We have seen where financial institutions in the US, Europe, and Asia have been reeling under the liquidity crunch caused by the subprime mortgage collapse, and where equity and currency markets have been significantly affected. In fact the subprime crisis can be blamed for the weakening of the US economy and the main reason for the recent 50 basis points (1/2 percentage) reduction in the Fed target rate this week.
The fact is that the US economy is made up of 70% consumer spending and the subprime crisis has resulted in a downturn of consumer spending and income, which in turn has severely affected the US economy. The crisis has also caused the IMF to revise down global growth projections. No doubt this has already begun to impact Jamaica, and we have seen where tourism arrivals to the Caribbean region are 10% lower than last year, and the demand for the greenback may have something to do with the flight to quality caused by the subprime crisis.
May be worse than appears
But the fact is that the subprime crisis, which is projected to last until March 2008, may be worse than appears. The reason for this is because of the accounting rules that call for financial instruments to be marked to market. Marking an instrument to market means valuing the financial instruments at market value and placing the market value on the balance sheet. So if one is carrying a portfolio of financial instruments backed by subprime mortgage securities purchased at $100, if after the crisis the market value becomes $20, then instead of carrying $100 on the balance sheet you would write off $80 from the asset value and carry $20 instead.
This means that the valuation of the company would reduce by $80 and the asset value reduce by 80%. Under International Financial Reporting Standards, if the instrument is classified as Available for Sale then the other side of the transaction would see the $80 being written off against shareholders equity, and if it is classified as Fair Value through Profit or Loss (previously held for trading) then it would be written off directly against profits. So while the US company Lehman Brothers, for example, has written off US$700 million against its portfolio the great possibility exists that there could be a lot more to write off. This is because the market for subprime mortgages has collapsed and there is no benchmark to value these assets. So companies have been using “Mark to Model”, which means using complex models to value these assets.
The problem though is that the models are not consistent, as market values would be, and may overstate the real value of the assets. The crisis has been compared to the 1994 bond crash, Mexico in 1995, Asia in 1997, Russia and Long Term Capital Management in 1998, and the internet bubble. It is clear then that the subprime crisis has now become an accounting challenge and one of the reasons for the flight to quality, where banks are wary of lending to each other and move towards cash and US treasuries, is because the instruments are not yet marked to market and so no one knows the true value and the extent of the crisis. When these instruments are marked to market then we will really see what the situation is.
Local effect
This could also affect local financial institutions, as they do business with US companies such as Bear Stearns and Lehman Brothers, which have been impacted. It is possible therefore that they have bought into some of these securities (Collaterized Debt Obligations) and could be carrying some of these assets on their books. In addition, as Jason Abrahams said a few weeks ago the overseas brokers have been calling loans for conversion to cash and US Treasuries, and this could have impacted local financial institutions. In addition, a global flight to quality would also mean that investors would find emerging market debt instruments less attractive, and this could reduce the demand and price for GOJ debt instruments, for example. The result is that our financial institutions would have to write down the value of those assets also. This is especially as quite a few of our financial institutions have reportedly tainted the Held to Maturity portfolio, which is the only one that could be carried on the books at cost until maturity and is therefore no longer available. The result of course is that balance sheet valuations may be negatively affected.
Consideration of the crisis must also be given by the government as the market will now demand a higher interest rate for any debt issues, and we have seen interest rates increasing marginally over the past 2 to 3 months. This heightens the need for greater fiscal discipline and is even more reason for the introduction of persons such as Don Wehby to the process and the strengthening of the management capability at the Finance Ministry. No doubt it will be challenging but manageable if properly administered. The remainder of the fiscal year will be the true test of the current administration.
Flow not flowing
A few weeks ago I mentioned in an article that I had changed Internet services to Flow, as I was frustrated with the constant disruptions from Cable and Wireless’ (C&W) ADSL. Well with less than a month into the service I have had 5 days of complete disruption because the network was (and is still at the time of writing) having problems. So I could possibly go into over 1 week of disruption within the first month.
When I called the first time a recorded message said that there were problems with the network in Kingston 6 and 8. I spoke with a customer service representative and to my amazement the person (who is supposed to respond to customer queries) was not even aware of the message on the telephone. So obviously there is a lack of communication between technical and customer departments. There was no resolution for 2 days and I then wrote a strong email and was called by the customer service manager and a director. I shudder to think of what happens to persons that suffer quietly.
Anyway they sent someone on the third day and it was back up. The service then lasted one day and then went down again. This time after calling I am told that they do not know when they will be able to send someone as the service team is fully booked. Now if the service team is fully booked that could give an indication of problems. Thank God that C&W was being their usual inefficient self and did not turn off the ADSL as I had requested that they do about 2 weeks before.
I do not think that these ISPs see the link, in a globalized world, between reliable internet services and productivity. In the world we are today it is imperative that everyone has reliable internet service as many transactions are done through the internet everyday. Our communication with each other is heavily dependent on the internet also. So when we do not have reliable internet, and telecommunications, productivity is hampered as this is just as critical as electricity. This is a requirement of competing globally and something for the regulators to carefully consider. In the meantime I am looking for a reliable ISP and if there is one out there please send me an email.
The fact is that the US economy is made up of 70% consumer spending and the subprime crisis has resulted in a downturn of consumer spending and income, which in turn has severely affected the US economy. The crisis has also caused the IMF to revise down global growth projections. No doubt this has already begun to impact Jamaica, and we have seen where tourism arrivals to the Caribbean region are 10% lower than last year, and the demand for the greenback may have something to do with the flight to quality caused by the subprime crisis.
May be worse than appears
But the fact is that the subprime crisis, which is projected to last until March 2008, may be worse than appears. The reason for this is because of the accounting rules that call for financial instruments to be marked to market. Marking an instrument to market means valuing the financial instruments at market value and placing the market value on the balance sheet. So if one is carrying a portfolio of financial instruments backed by subprime mortgage securities purchased at $100, if after the crisis the market value becomes $20, then instead of carrying $100 on the balance sheet you would write off $80 from the asset value and carry $20 instead.
This means that the valuation of the company would reduce by $80 and the asset value reduce by 80%. Under International Financial Reporting Standards, if the instrument is classified as Available for Sale then the other side of the transaction would see the $80 being written off against shareholders equity, and if it is classified as Fair Value through Profit or Loss (previously held for trading) then it would be written off directly against profits. So while the US company Lehman Brothers, for example, has written off US$700 million against its portfolio the great possibility exists that there could be a lot more to write off. This is because the market for subprime mortgages has collapsed and there is no benchmark to value these assets. So companies have been using “Mark to Model”, which means using complex models to value these assets.
The problem though is that the models are not consistent, as market values would be, and may overstate the real value of the assets. The crisis has been compared to the 1994 bond crash, Mexico in 1995, Asia in 1997, Russia and Long Term Capital Management in 1998, and the internet bubble. It is clear then that the subprime crisis has now become an accounting challenge and one of the reasons for the flight to quality, where banks are wary of lending to each other and move towards cash and US treasuries, is because the instruments are not yet marked to market and so no one knows the true value and the extent of the crisis. When these instruments are marked to market then we will really see what the situation is.
Local effect
This could also affect local financial institutions, as they do business with US companies such as Bear Stearns and Lehman Brothers, which have been impacted. It is possible therefore that they have bought into some of these securities (Collaterized Debt Obligations) and could be carrying some of these assets on their books. In addition, as Jason Abrahams said a few weeks ago the overseas brokers have been calling loans for conversion to cash and US Treasuries, and this could have impacted local financial institutions. In addition, a global flight to quality would also mean that investors would find emerging market debt instruments less attractive, and this could reduce the demand and price for GOJ debt instruments, for example. The result is that our financial institutions would have to write down the value of those assets also. This is especially as quite a few of our financial institutions have reportedly tainted the Held to Maturity portfolio, which is the only one that could be carried on the books at cost until maturity and is therefore no longer available. The result of course is that balance sheet valuations may be negatively affected.
Consideration of the crisis must also be given by the government as the market will now demand a higher interest rate for any debt issues, and we have seen interest rates increasing marginally over the past 2 to 3 months. This heightens the need for greater fiscal discipline and is even more reason for the introduction of persons such as Don Wehby to the process and the strengthening of the management capability at the Finance Ministry. No doubt it will be challenging but manageable if properly administered. The remainder of the fiscal year will be the true test of the current administration.
Flow not flowing
A few weeks ago I mentioned in an article that I had changed Internet services to Flow, as I was frustrated with the constant disruptions from Cable and Wireless’ (C&W) ADSL. Well with less than a month into the service I have had 5 days of complete disruption because the network was (and is still at the time of writing) having problems. So I could possibly go into over 1 week of disruption within the first month.
When I called the first time a recorded message said that there were problems with the network in Kingston 6 and 8. I spoke with a customer service representative and to my amazement the person (who is supposed to respond to customer queries) was not even aware of the message on the telephone. So obviously there is a lack of communication between technical and customer departments. There was no resolution for 2 days and I then wrote a strong email and was called by the customer service manager and a director. I shudder to think of what happens to persons that suffer quietly.
Anyway they sent someone on the third day and it was back up. The service then lasted one day and then went down again. This time after calling I am told that they do not know when they will be able to send someone as the service team is fully booked. Now if the service team is fully booked that could give an indication of problems. Thank God that C&W was being their usual inefficient self and did not turn off the ADSL as I had requested that they do about 2 weeks before.
I do not think that these ISPs see the link, in a globalized world, between reliable internet services and productivity. In the world we are today it is imperative that everyone has reliable internet service as many transactions are done through the internet everyday. Our communication with each other is heavily dependent on the internet also. So when we do not have reliable internet, and telecommunications, productivity is hampered as this is just as critical as electricity. This is a requirement of competing globally and something for the regulators to carefully consider. In the meantime I am looking for a reliable ISP and if there is one out there please send me an email.
Thursday, September 13, 2007
Setting priorities for development
After the election and all that has been happening I was thinking of not writing this week until I saw the story in last Wednesday’s Observer titled “Foreign firms repatriate $13b in profits in 4 months”. This should not be surprising as this is what foreign companies do. Would we really expect that overseas companies would make an investment in a foreign country and not want to take back some of the profits to recover their initial investments and accumulate more capital for expansion.
I have always said, and still maintain, that organic growth is significantly better for Jamaica than foreign investments. While foreign investments are important, especially within the context of a developing economy, it is even more important to develop the local entrepreneur. In this regard this is the reason why I have always said that setting the appropriate business environment and incentives for locally grown entrepreneurs is critical. This is also the reason why I say that FINSAC was the single greatest blow to the economy. But all of that is now behind us and we must be careful not to make the same mistakes we did in the past. In other words when we fall it teaches us how to not fall again.
Importance of organic growth
The importance of organically grown entrepreneurs is no where better represented than in the US today. For months we have seen signs of the US economy weakening but the companies have been doing well. The reason for this is because these organic companies extended their reach by investing in the booming economies of Europe and Asia. So when the local (US) operations were showing a downturn in profitability, the overseas branches were saving the day with increased profits. The recent downturn in the US economy and fear of recession occurred after the subprime mortgage problem found its way into the European and Asian economies and naturally affected the same overseas operations that were saving the US companies. The result is that recession is an increasing possibility.
This subprime situation will no doubt have repercussions for Jamaica, and in fact I think has already started to affect the Caribbean region. It is going to be important that going forward we pursue policies that will not only shield us from the effects of a possible recession in the US but that will also put us on a path of strong growth, and this means getting our priorities right. It also means ensuring that there is a direct correlation between our spending and implementation of policies with the returns from those. In short we do not have the luxury of spending now for long term returns and must ensure that we do the things that will provide immediate returns, so that there is some benefit while the funds are being spent.
My approach to doing this would be first to look at the current status of our cash and fiscal positions. This to ensure that the business of government can continue in the short term, while determining what the plan is for moving forward. After all we have a new government and it would be wise to first of all understand what the current finances are and if the budget still holds true. Apart from the other administrative things that will need to be done I would immediately set about putting in place a medium and long term plan to chart out the growth path. And this does not mean just setting targets but make a deliberate determination about what are the obstacles to economic growth and what is the best way to go about implementing that plan given the financial constraints that face the country. While doing this it is important to bear in mind the social side also so that the social programmes do not suffer from any financial considerations. The task is going to be extremely challenging but can be done.
Determining the priorities
Much has been said about bureaucracy, crime, justice, tax reform etc. The truth is however that while we recognize that these are critical factors that must be addressed in general it is not easy to do so. While those are general areas of concern it is going to be very important to sit down now and determine what the specific issues are and develop a task list that can address each of these inn detail. And importantly in the order that will give the greatest value.
In other words while I may agree that bureaucracy and tax reform are important factors it will be important to do the following:
- Determine what level of growth and other targets you want to achieve. Set goals;
- Through various channels make a determination of what the main obstacles are to these targets e.g. if I want to achieve growth of 4% then what are the prohibiting factors. I still believe we do not currently have the capacity to grow in excess of 3% consistently and that needs to be addressed;
- Detail the issues within each of those prohibitive factors that need to be addressed individually, getting it down to a task list;
- Determine what the cost, return, and payback period is for each of those initiatives that need to be undertaken. It is important to note the dependencies between these tasks, as there are many that will not be able to be implemented on their own. So the cost and return of a dependent task includes the other dependencies. Dependencies would include programmes at other ministries and the national level also;
- Set out the costs and timeline for implementation; and
- Put in place a tool for measuring the outturn against the projections. Plans must be in place for alternate action if the projected returns/outcome do not materialize and that may mean something was wrong in the initial assumptions or some change has taken place.
That briefly would be a simplistic overview of an approach to achieving what is needed to achieve the desired objectives. Although the list looks simple it is by no means an easy task and will require careful planning to ensure that the assumptions are correct and that the plan is credible. Inherent in this though is the need to set out the correct priorities for development as resources are limited.
I have always said, and still maintain, that organic growth is significantly better for Jamaica than foreign investments. While foreign investments are important, especially within the context of a developing economy, it is even more important to develop the local entrepreneur. In this regard this is the reason why I have always said that setting the appropriate business environment and incentives for locally grown entrepreneurs is critical. This is also the reason why I say that FINSAC was the single greatest blow to the economy. But all of that is now behind us and we must be careful not to make the same mistakes we did in the past. In other words when we fall it teaches us how to not fall again.
Importance of organic growth
The importance of organically grown entrepreneurs is no where better represented than in the US today. For months we have seen signs of the US economy weakening but the companies have been doing well. The reason for this is because these organic companies extended their reach by investing in the booming economies of Europe and Asia. So when the local (US) operations were showing a downturn in profitability, the overseas branches were saving the day with increased profits. The recent downturn in the US economy and fear of recession occurred after the subprime mortgage problem found its way into the European and Asian economies and naturally affected the same overseas operations that were saving the US companies. The result is that recession is an increasing possibility.
This subprime situation will no doubt have repercussions for Jamaica, and in fact I think has already started to affect the Caribbean region. It is going to be important that going forward we pursue policies that will not only shield us from the effects of a possible recession in the US but that will also put us on a path of strong growth, and this means getting our priorities right. It also means ensuring that there is a direct correlation between our spending and implementation of policies with the returns from those. In short we do not have the luxury of spending now for long term returns and must ensure that we do the things that will provide immediate returns, so that there is some benefit while the funds are being spent.
My approach to doing this would be first to look at the current status of our cash and fiscal positions. This to ensure that the business of government can continue in the short term, while determining what the plan is for moving forward. After all we have a new government and it would be wise to first of all understand what the current finances are and if the budget still holds true. Apart from the other administrative things that will need to be done I would immediately set about putting in place a medium and long term plan to chart out the growth path. And this does not mean just setting targets but make a deliberate determination about what are the obstacles to economic growth and what is the best way to go about implementing that plan given the financial constraints that face the country. While doing this it is important to bear in mind the social side also so that the social programmes do not suffer from any financial considerations. The task is going to be extremely challenging but can be done.
Determining the priorities
Much has been said about bureaucracy, crime, justice, tax reform etc. The truth is however that while we recognize that these are critical factors that must be addressed in general it is not easy to do so. While those are general areas of concern it is going to be very important to sit down now and determine what the specific issues are and develop a task list that can address each of these inn detail. And importantly in the order that will give the greatest value.
In other words while I may agree that bureaucracy and tax reform are important factors it will be important to do the following:
- Determine what level of growth and other targets you want to achieve. Set goals;
- Through various channels make a determination of what the main obstacles are to these targets e.g. if I want to achieve growth of 4% then what are the prohibiting factors. I still believe we do not currently have the capacity to grow in excess of 3% consistently and that needs to be addressed;
- Detail the issues within each of those prohibitive factors that need to be addressed individually, getting it down to a task list;
- Determine what the cost, return, and payback period is for each of those initiatives that need to be undertaken. It is important to note the dependencies between these tasks, as there are many that will not be able to be implemented on their own. So the cost and return of a dependent task includes the other dependencies. Dependencies would include programmes at other ministries and the national level also;
- Set out the costs and timeline for implementation; and
- Put in place a tool for measuring the outturn against the projections. Plans must be in place for alternate action if the projected returns/outcome do not materialize and that may mean something was wrong in the initial assumptions or some change has taken place.
That briefly would be a simplistic overview of an approach to achieving what is needed to achieve the desired objectives. Although the list looks simple it is by no means an easy task and will require careful planning to ensure that the assumptions are correct and that the plan is credible. Inherent in this though is the need to set out the correct priorities for development as resources are limited.
Wednesday, September 05, 2007
A new economic order
At the time of writing it is clear that the JLP has not only won but seems to be picking up more seats in the recount and could possibly end up with 35 to the PNP’s 25. The PNP has said that they will take certain elected persons to court based on the citizenship issue and that outcome remains to be seen. Whatever happens it must be clearly understood that the right of choice of the people must not be compromised. In any event congratulations to the JLP for the hard fought and strategic campaign.
There is no room for any honeymoon period and the Finance Minister (who I expect to be Audley Shaw) must immediately get on with the business of managing the economy. The situation currently is that economic growth continues to elude us (will only grow at around 1.5% this year); in recent weeks the dollar has been slowly weakening; there is a high mountain of debt; the fiscal deficit is a problem; and no doubt inflation may be higher than originally projected because of the hurricane. It is therefore clear that the Finance Minister will be faced with many immediate challenges that the international community will be keenly watching.
The right person?
There are some persons who have questioned whether Audley Shaw is the right person for the finance job simply because he is not seen as an economic expert. From my perspective I think that he is well suited to the job and is quite capable of delivering the confidence needed and properly managing the affairs of the economy. While an understanding of economic and financial matters is needed in a Finance Minister, I think more importantly that what is needed is the ability to lead and properly utilize good advice. Both these qualities I think Audley Shaw has and based on that I would suggest to the doubters that Mr. Shaw is quite capable of the finance job. Even more dangerous is someone who thinks that because they are an expert in an area they do not take proper advice. So too much knowledge can indeed be bad also if the right personality is not present.
The challenge facing Mr. Shaw is that he will have to bring a new economic order to Jamaica. One where growth runs at upwards of 5% per year; where bureaucracy is reduced; where a business friendly environment is encouraged; where tax is used as a tool to encourage growth rather than just feed the revenue; and where organic growth in business is encouraged. All these things are necessary ingredients to create an environment where economic activity and growth prevails.
At the same time he will have the high debt level to contend with, while also meeting certain social services, and certainly this must be a main priority as it is this debt that is stifling the economy. It is this debt that has given some of us the perception that things are getting better. The fact is that we have been engaged in borrowing to support a life style that we can ill afford. Because of this borrowing to support a life style we find that we are strapped with debt that causes us to spend 60 cents out of each dollar servicing thus depriving the people of Jamaica of essential social services. The only way that we will be able to deal with this is to grow the economy at rates above 5%, which the last time we were able to do so was in 1990. We must realize however that achieving 5% growth may not happen in the next two or three years as the fact is that the economy just does not have the capacity to grow at those rates, especially with a projected slow down in the global economy, and more importantly the US economy where we send 25% of our exports and get over 50% of our tourists. So I don’t expect that 5% growth will happen in the next two fiscal years but what is going to be important for me is that the measures are put in place to ensure that the capacity to grow at those rates exist so that we can consistently see 5% growth instead of hitting 2.5% every five years or so.
Prudent fiscal management
In achieving this growth one of the things that must be ensured is prudent fiscal management. It is clear that with the liquidity issue in the global markets that any new debt is going to cost us more. If we continue to borrow then it will obviously place a greater upward pressure on interest rates, which will no doubt cause stagnation in the economy. This especially in light of a less healthy global economy and the possibility of recession in the US in 2008. This has led some to question the commitments made by the JLP and if they can deliver on these without worsening the fiscal deficit. Frankly I do not know where this argument came from as I have always thought that what was said is that they would be reallocating funds to ensure maximum returns, and certainly we would have to include an educated and healthy population among that. If it were the intention of the JLP to spend additional funds to deliver the commitments then I would also agree that this would be the wrong thing for the country. It will be important to ensure that the fiscal targets are met if not improved on as the longer it takes to get to a balanced budget then the greater the need for debt.
If we are going to build this capacity for growth it is important that some of the things in the JLP manifesto are implemented in good time. These include (1) a business friendly bureaucracy; (2) tax reform; (3) special attention to SMEs; (4) offshore financial centre; (5) develop the electricity generation capacity; (6) improving productivity in agriculture; (7) high end tourism and easy access to the east; (8) improve education and health access (a productive workforce); and (9) reduce crime. There are many other initiatives outlined in the JLP’s manifesto but these I think are most critical for developing the capacity for growth.
What is obvious to me though is that it is going to take time to implement many of the commitments and there is nothing wrong with this as we must be careful that the capacity is built carefully. I would expect that the new government will have a timeline for implementation. Consequently it would be good to outline the targets we expect to achieve as a country as these various initiatives are implemented and present this to the country.
As Mr. Golding has said, at the end of the day it is going to be very important for all Jamaicans to be involved in the process and pull in the same direction. It is not going to be an easy road but if we put the measures in place that will provide the capacity for growth then we certainly have the potential to achieve this and establish a new economic order for Jamaica where per capita income surpasses international standards and people can take advantage of this because of higher educational standards.
There is no room for any honeymoon period and the Finance Minister (who I expect to be Audley Shaw) must immediately get on with the business of managing the economy. The situation currently is that economic growth continues to elude us (will only grow at around 1.5% this year); in recent weeks the dollar has been slowly weakening; there is a high mountain of debt; the fiscal deficit is a problem; and no doubt inflation may be higher than originally projected because of the hurricane. It is therefore clear that the Finance Minister will be faced with many immediate challenges that the international community will be keenly watching.
The right person?
There are some persons who have questioned whether Audley Shaw is the right person for the finance job simply because he is not seen as an economic expert. From my perspective I think that he is well suited to the job and is quite capable of delivering the confidence needed and properly managing the affairs of the economy. While an understanding of economic and financial matters is needed in a Finance Minister, I think more importantly that what is needed is the ability to lead and properly utilize good advice. Both these qualities I think Audley Shaw has and based on that I would suggest to the doubters that Mr. Shaw is quite capable of the finance job. Even more dangerous is someone who thinks that because they are an expert in an area they do not take proper advice. So too much knowledge can indeed be bad also if the right personality is not present.
The challenge facing Mr. Shaw is that he will have to bring a new economic order to Jamaica. One where growth runs at upwards of 5% per year; where bureaucracy is reduced; where a business friendly environment is encouraged; where tax is used as a tool to encourage growth rather than just feed the revenue; and where organic growth in business is encouraged. All these things are necessary ingredients to create an environment where economic activity and growth prevails.
At the same time he will have the high debt level to contend with, while also meeting certain social services, and certainly this must be a main priority as it is this debt that is stifling the economy. It is this debt that has given some of us the perception that things are getting better. The fact is that we have been engaged in borrowing to support a life style that we can ill afford. Because of this borrowing to support a life style we find that we are strapped with debt that causes us to spend 60 cents out of each dollar servicing thus depriving the people of Jamaica of essential social services. The only way that we will be able to deal with this is to grow the economy at rates above 5%, which the last time we were able to do so was in 1990. We must realize however that achieving 5% growth may not happen in the next two or three years as the fact is that the economy just does not have the capacity to grow at those rates, especially with a projected slow down in the global economy, and more importantly the US economy where we send 25% of our exports and get over 50% of our tourists. So I don’t expect that 5% growth will happen in the next two fiscal years but what is going to be important for me is that the measures are put in place to ensure that the capacity to grow at those rates exist so that we can consistently see 5% growth instead of hitting 2.5% every five years or so.
Prudent fiscal management
In achieving this growth one of the things that must be ensured is prudent fiscal management. It is clear that with the liquidity issue in the global markets that any new debt is going to cost us more. If we continue to borrow then it will obviously place a greater upward pressure on interest rates, which will no doubt cause stagnation in the economy. This especially in light of a less healthy global economy and the possibility of recession in the US in 2008. This has led some to question the commitments made by the JLP and if they can deliver on these without worsening the fiscal deficit. Frankly I do not know where this argument came from as I have always thought that what was said is that they would be reallocating funds to ensure maximum returns, and certainly we would have to include an educated and healthy population among that. If it were the intention of the JLP to spend additional funds to deliver the commitments then I would also agree that this would be the wrong thing for the country. It will be important to ensure that the fiscal targets are met if not improved on as the longer it takes to get to a balanced budget then the greater the need for debt.
If we are going to build this capacity for growth it is important that some of the things in the JLP manifesto are implemented in good time. These include (1) a business friendly bureaucracy; (2) tax reform; (3) special attention to SMEs; (4) offshore financial centre; (5) develop the electricity generation capacity; (6) improving productivity in agriculture; (7) high end tourism and easy access to the east; (8) improve education and health access (a productive workforce); and (9) reduce crime. There are many other initiatives outlined in the JLP’s manifesto but these I think are most critical for developing the capacity for growth.
What is obvious to me though is that it is going to take time to implement many of the commitments and there is nothing wrong with this as we must be careful that the capacity is built carefully. I would expect that the new government will have a timeline for implementation. Consequently it would be good to outline the targets we expect to achieve as a country as these various initiatives are implemented and present this to the country.
As Mr. Golding has said, at the end of the day it is going to be very important for all Jamaicans to be involved in the process and pull in the same direction. It is not going to be an easy road but if we put the measures in place that will provide the capacity for growth then we certainly have the potential to achieve this and establish a new economic order for Jamaica where per capita income surpasses international standards and people can take advantage of this because of higher educational standards.
Wednesday, August 29, 2007
Adapting to the global environment
Over recent weeks we have seen both a global liquidity crunch and active political campaigning for Monday’s general election. Both will no doubt have a significant effect on Jamaica’s future and one of my disappointments with the economic debate is that we did not see enough coming out as relates to the global impact. Audley Shaw did mention Jamaica’s need to remain competitive in a global market, but the fact is that the questions did not bring out enough on this important issue.
Global markets are seeing a liquidity problem that has already started to affect Jamaica. We have seen where (1) the interest rate on July’s variable rate instrument was 20 basis points more than the June instrument; (2) recent pressure on the Jamaican dollar by the major currencies; and (3) declines in tourism over last year. This should of course come as no surprise for anyone who has been following the global markets, and in fact both Ralston Hyman and I have been saying for months that we would encounter this problem.
Global markets are seeing a liquidity problem that has already started to affect Jamaica. We have seen where (1) the interest rate on July’s variable rate instrument was 20 basis points more than the June instrument; (2) recent pressure on the Jamaican dollar by the major currencies; and (3) declines in tourism over last year. This should of course come as no surprise for anyone who has been following the global markets, and in fact both Ralston Hyman and I have been saying for months that we would encounter this problem.
Inadequate debate
At the same time the elections will take place on Monday and there has not been much debate on how the parties will address the global challenge we face. No doubt this will call for fiscal prudence, not from the point of view of limiting expenditure, but ensuring the efficient allocation of capital. There can be no question that this is something that we have fallen down on, as is evidenced by the huge mountain of debt accumulated with no real benefit in our growth or GDP per capita numbers. And when I am looking at this I am not going to speak, as we always do, in isolation from the rest of the world. We must at some point in time confront the fact that we live in a global environment and improvements cannot be looked at in isolation from the rest of the world.
As an example the table shows average GDP per capita growth for Caricom states between 1990
and 2001. Isolating Jamaica one may think that we really have not been doing so badly, and certainly this may be confirmed by our experience of improved access to telecommunications, motor vehicles, and reduction in poverty. No doubt there has been development in Jamaica. But when we compare it to the other Caricom member states, we see that the only state that has fared worse than us is Haiti. And I am positive that there is not much to boast about it that. When we look at the other countries, however, we see that relatively Jamaicans are worse off. In fact, apart from Haiti, Jamaica is the only country that has seen an average real reduction in per capita GDP over the period, implying that over those eleven years the average Jamaican income level has been in effect declining. Between the period 1975 and 2001 the average growth for Jamaica was 0.10%,.
When we are therefore looking at the progress that Jamaica has made we cannot look at Jamaica in isolation but must compare us to the rest of the world, and especially the Caricom states. That is unless of course we do not consider ourselves world citizens and want to live in isolation from the rest of the world. And it is for this reason why I continuously say that 2 percent growth within the context of the global growth levels being experienced is far from satisfactory. Especially as Jamaica has so much potential.
Important micro level
At the micro level a significant reason why Jamaica’s growth is less than adequate is because of the performance of companies. Anyone who understands basic economics will know that economies are made up of firm (companies) and individual activities. So if we want to grow economies then certainly an effective way of doing so is increasing and influencing economic activity amongst firms and individuals. And this is why it is so important to create a business climate where investments are encouraged, bureaucracy is reduced, and taxation is used to encourage export of goods and services. The truth is that this is at the heart of the problems we have been experiencing. It is because we have not laid the appropriate environment why we have not seen the growth we need.
The result is that most of our companies are not geared towards efficiency and competition. Most of our companies aim their activities at the Jamaican market and do not look to develop overseas markets. This is primarily because we have developed into a trading economy. A far cry from the industrialization path we were on in the 1960s. If we are going to compete in the global environment it is important that we play by the rules for global competition. At the government level it is important to put in place policies that are going to encourage economic activity to move in that direction. Acting as if we are isolated from the rest of the world will only see us falling farther behind other countries.
An example of how much we do not recognize the changing rules is the fact that we do not realize that the inputs of production are changing. In today’s world, as opposed to 20 years ago, the reliance on things such as telecommunications, a reliable electricity supply, and internet connectivity was not as important. In Jamaica today where 70 percent of our economy is service based, more people are working from home, and access to real time information is necessary, one can see how important these inputs are. But even so we still have a looming crisis with electricity generation capacity come next year, and even when we do not have a hurricane regular power cuts plague us. It is not enough to say that the commercial districts have electricity as many businesses now operate from private offices at home. While the telecommunications industry is satisfactory (including internet access), the rates are still too high for a majority of our population. Additionally, because telecommunications is so essential for a competitive environment any forward thinking tax policy would ensure that GCT is not added to these services, just as GCT is removed on computer hardware. It makes no sense having the hardware and not being able to afford the services. Not all internet service providers are equal though, as I have found out having to move from one of the largest, because of the unreliability and long response time.
If we are going to compete globally then, we must realize that the rules of production have changed. The economy cannot be driven by government activity but must have private sector at the forefront. In order for this to happen though we need a private sector that is properly equipped to deal with the global environment, and need to see more companies like Sandals. We have to realize that the production inputs have changed and government policy needs to make these inputs reliable, affordable and available through tax policy and the regulatory environment. Unless we act like we are a part of a global environment then we will always celebrate small achievements while the rest of the world leaves us behind.
At the same time the elections will take place on Monday and there has not been much debate on how the parties will address the global challenge we face. No doubt this will call for fiscal prudence, not from the point of view of limiting expenditure, but ensuring the efficient allocation of capital. There can be no question that this is something that we have fallen down on, as is evidenced by the huge mountain of debt accumulated with no real benefit in our growth or GDP per capita numbers. And when I am looking at this I am not going to speak, as we always do, in isolation from the rest of the world. We must at some point in time confront the fact that we live in a global environment and improvements cannot be looked at in isolation from the rest of the world.
As an example the table shows average GDP per capita growth for Caricom states between 1990
and 2001. Isolating Jamaica one may think that we really have not been doing so badly, and certainly this may be confirmed by our experience of improved access to telecommunications, motor vehicles, and reduction in poverty. No doubt there has been development in Jamaica. But when we compare it to the other Caricom member states, we see that the only state that has fared worse than us is Haiti. And I am positive that there is not much to boast about it that. When we look at the other countries, however, we see that relatively Jamaicans are worse off. In fact, apart from Haiti, Jamaica is the only country that has seen an average real reduction in per capita GDP over the period, implying that over those eleven years the average Jamaican income level has been in effect declining. Between the period 1975 and 2001 the average growth for Jamaica was 0.10%,.When we are therefore looking at the progress that Jamaica has made we cannot look at Jamaica in isolation but must compare us to the rest of the world, and especially the Caricom states. That is unless of course we do not consider ourselves world citizens and want to live in isolation from the rest of the world. And it is for this reason why I continuously say that 2 percent growth within the context of the global growth levels being experienced is far from satisfactory. Especially as Jamaica has so much potential.
Important micro level
At the micro level a significant reason why Jamaica’s growth is less than adequate is because of the performance of companies. Anyone who understands basic economics will know that economies are made up of firm (companies) and individual activities. So if we want to grow economies then certainly an effective way of doing so is increasing and influencing economic activity amongst firms and individuals. And this is why it is so important to create a business climate where investments are encouraged, bureaucracy is reduced, and taxation is used to encourage export of goods and services. The truth is that this is at the heart of the problems we have been experiencing. It is because we have not laid the appropriate environment why we have not seen the growth we need.
The result is that most of our companies are not geared towards efficiency and competition. Most of our companies aim their activities at the Jamaican market and do not look to develop overseas markets. This is primarily because we have developed into a trading economy. A far cry from the industrialization path we were on in the 1960s. If we are going to compete in the global environment it is important that we play by the rules for global competition. At the government level it is important to put in place policies that are going to encourage economic activity to move in that direction. Acting as if we are isolated from the rest of the world will only see us falling farther behind other countries.
An example of how much we do not recognize the changing rules is the fact that we do not realize that the inputs of production are changing. In today’s world, as opposed to 20 years ago, the reliance on things such as telecommunications, a reliable electricity supply, and internet connectivity was not as important. In Jamaica today where 70 percent of our economy is service based, more people are working from home, and access to real time information is necessary, one can see how important these inputs are. But even so we still have a looming crisis with electricity generation capacity come next year, and even when we do not have a hurricane regular power cuts plague us. It is not enough to say that the commercial districts have electricity as many businesses now operate from private offices at home. While the telecommunications industry is satisfactory (including internet access), the rates are still too high for a majority of our population. Additionally, because telecommunications is so essential for a competitive environment any forward thinking tax policy would ensure that GCT is not added to these services, just as GCT is removed on computer hardware. It makes no sense having the hardware and not being able to afford the services. Not all internet service providers are equal though, as I have found out having to move from one of the largest, because of the unreliability and long response time.
If we are going to compete globally then, we must realize that the rules of production have changed. The economy cannot be driven by government activity but must have private sector at the forefront. In order for this to happen though we need a private sector that is properly equipped to deal with the global environment, and need to see more companies like Sandals. We have to realize that the production inputs have changed and government policy needs to make these inputs reliable, affordable and available through tax policy and the regulatory environment. Unless we act like we are a part of a global environment then we will always celebrate small achievements while the rest of the world leaves us behind.
Thursday, August 23, 2007
Jamaica’s growth challenge
Hurricane Dean has come and reminded us of our vulnerable fiscal and growth situations. We will certainly see challenges to our macroeconomic environment, fiscal accounts, growth, and balance of payments. This will result primarily from the destruction to the agricultural and tourism sectors, which are significant contributors to inflation and foreign exchange earnings. The passage of Dean is also a reminder to us that hurricanes are a way of life in the Caribbean, and the fact that Jamaica has been so lucky is no reason for us to be complacent and not put the appropriate provisions in place.
I often wonder if it is because Jamaica is such a blessed country (geographic location, natural beauty, and agricultural resources) if this has led our politicians since 1962 to deliberately create problems for the country. The fact is that there has been no natural disaster, since 1962, that has caused greater devastation on Jamaica than the sustained mismanagement of our country by governments. While hurricanes and floods may have come and caused a few billion of dollars in damage, and resulted in lower growth performance, the mismanagement of this country has resulted in far greater losses. Examples of this mismanagement are (1) the cement crisis, which cost us billions of dollars in opportunity lost; and (2) the cost overruns on contracts.
Lacking growth capacity
I have long said, and regret that I am right, that Jamaica does not have the capacity to grow at 3 percent or more consistently. There is no doubt that Dean is going to negatively affect growth but even before Dean the growth target was already revised down by 1 to 1.5 percent. We had projected growth at 3 percent for the fiscal year, and this was revised down to between 1.5 to 2 percent. With the passing of Dean we can expect that target to be further revised down by 0.5 to 1 percent, resulting in growth of 0.5 to 1 percent for the fiscal year, consistent with our average since 1990.
If we look at the growth outturn for the January to March 2007 (Q1) and April to June 2007 (Q2) quarters we achieved total GDP growth of 2.0 and 1.8 percent respectively. The main sectors contributing to this growth included agriculture (Q1- 4%; Q2- 3%), Construction and Installation (Q1- 7%; Q2- 3.6%), Electricity and Water (Q1- 4.7%; Q2- 3.9%), Miscellaneous Services [Tourism] (Q1- (0.1%); Q2- (2.3%)). As a result of Dean we can certainly expect that these sectors will be further negatively affected. Some players have also said that the state of public emergency has negatively affected tourism, but this has been disputed by the authorities.
The main reason why we are always so distressed when a natural disaster occurs, however, is because when times are stable we do not take advantage of the growth opportunities. I come back again to last year, when we did not have any natural disaster, but then we created the cement crisis, which cost us significantly in a year when we should have been growing at a faster pace and taking advantage of the stable times. So when a natural disaster comes around it hurts us even greater because we have not capitalized on the opportunities.
Jamaica’s growth
The graph shows Jamaica’s GDP growth between 1962 and 2006, and I have assumed a growth rate of 1.5 percent for 2007. It shows that in the 45 years between 1962 and 2006 we have grown more than 2% in 17 of those years and more than 3% in 12 of those years. What is more is that of the 17 years we have grown more than 2%, 10 of those years was between 1963 and 1972, with the other years being 1981, 1987, 1989, 1990, 1993, 1995, and 2003. We have only grown 12 of the 45 years above 3%, with 9 of those years between 1963 and 1972, and the other years being 1987, 1989, and 1990. So we have not grown above 3% in over 16 years. Doesn’t this tell us that there is something seriously wrong with our capacity to grow in excess of 3%. And if we understand this concept then why do we project these growth rates when there is no fundamental change in our production factors. As a matter of fact, in my opinion, productivity and the pillars of growth are even more eroded than they were in 1990.
I often wonder if it is because Jamaica is such a blessed country (geographic location, natural beauty, and agricultural resources) if this has led our politicians since 1962 to deliberately create problems for the country. The fact is that there has been no natural disaster, since 1962, that has caused greater devastation on Jamaica than the sustained mismanagement of our country by governments. While hurricanes and floods may have come and caused a few billion of dollars in damage, and resulted in lower growth performance, the mismanagement of this country has resulted in far greater losses. Examples of this mismanagement are (1) the cement crisis, which cost us billions of dollars in opportunity lost; and (2) the cost overruns on contracts.
Lacking growth capacity
I have long said, and regret that I am right, that Jamaica does not have the capacity to grow at 3 percent or more consistently. There is no doubt that Dean is going to negatively affect growth but even before Dean the growth target was already revised down by 1 to 1.5 percent. We had projected growth at 3 percent for the fiscal year, and this was revised down to between 1.5 to 2 percent. With the passing of Dean we can expect that target to be further revised down by 0.5 to 1 percent, resulting in growth of 0.5 to 1 percent for the fiscal year, consistent with our average since 1990.
If we look at the growth outturn for the January to March 2007 (Q1) and April to June 2007 (Q2) quarters we achieved total GDP growth of 2.0 and 1.8 percent respectively. The main sectors contributing to this growth included agriculture (Q1- 4%; Q2- 3%), Construction and Installation (Q1- 7%; Q2- 3.6%), Electricity and Water (Q1- 4.7%; Q2- 3.9%), Miscellaneous Services [Tourism] (Q1- (0.1%); Q2- (2.3%)). As a result of Dean we can certainly expect that these sectors will be further negatively affected. Some players have also said that the state of public emergency has negatively affected tourism, but this has been disputed by the authorities.
The main reason why we are always so distressed when a natural disaster occurs, however, is because when times are stable we do not take advantage of the growth opportunities. I come back again to last year, when we did not have any natural disaster, but then we created the cement crisis, which cost us significantly in a year when we should have been growing at a faster pace and taking advantage of the stable times. So when a natural disaster comes around it hurts us even greater because we have not capitalized on the opportunities.
Jamaica’s growth
The graph shows Jamaica’s GDP growth between 1962 and 2006, and I have assumed a growth rate of 1.5 percent for 2007. It shows that in the 45 years between 1962 and 2006 we have grown more than 2% in 17 of those years and more than 3% in 12 of those years. What is more is that of the 17 years we have grown more than 2%, 10 of those years was between 1963 and 1972, with the other years being 1981, 1987, 1989, 1990, 1993, 1995, and 2003. We have only grown 12 of the 45 years above 3%, with 9 of those years between 1963 and 1972, and the other years being 1987, 1989, and 1990. So we have not grown above 3% in over 16 years. Doesn’t this tell us that there is something seriously wrong with our capacity to grow in excess of 3%. And if we understand this concept then why do we project these growth rates when there is no fundamental change in our production factors. As a matter of fact, in my opinion, productivity and the pillars of growth are even more eroded than they were in 1990.It is therefore apparent to me that there is no way that the economy will grow at 6 to 7 percent rates without some fundamental shift in our production arrangements. At the heart of this are the social and political policies that influence growth. I speak of things such as elimination of bureaucracy, crime, waste and corruption; functioning institutions such as the courts and police; quality education etc. Unless these things are dealt with then I regret to inform everyone that we will not see any sustained growth in excess of 3 percent. For me the concept is clear. When I heard the news report that the police were trying to restore public order after Dean, I thought to myself that there was not much to do as one of the primary problems we have, with or without a hurricane, is the inadequate level of public law and order.
It is for this reason why I continuously say that Jamaica does not primarily have an economic problem, but rather a social and political one. It is for this reason also why our governance relationships are of primary importance. So whoever forms the government after the election should understand that acceptable growth levels will only happen if we have the proper infrastructure and policies in place. Providing a stable macroeconomic environment and a positive primary surplus, while desirable, is not enough if unsupported by proper social and political policies.
Thursday, August 16, 2007
Manifesting economic growth and development
The main discussions over the past two weeks have focused around the manifestos issued by both political parties. The discussions though have focused more around the side shows, rather than the real issues. These comments would have no doubt been influenced by the parties, who use seemingly independent persons to voice their attacks. But the responsibility in the final analysis must remain with the individual commentators to remain independent and not compromise their credibility. I mean everyone will have their own personal preferences but when you prostitute yourself without any logic then that speaks to your own professionalism.
One such side show I have heard being mentioned repeatedly is the fact that neither parties outlined in the manifesto how they plan to achieve the objectives outlined. For those who believe that there is some merit in this argument let me help by looking at the definition of manifesto. A manifesto is “a public written declaration of principles, policies, and objectives, especially one issued by a political movement or candidate”. So we should not be looking for a road map for implementation but rather in a forum such as the National Debates. However, the Commission incorrectly used questioners on the economic debates panel that do not understand the real issues about the economy, and in that way short changed the Jamaican people and the quality of that particular debate.
In comparing both manifestos, I think that in terms of substance the JLP’s manifesto gets the edge. With respect to how the manifesto looks the PNP’s gets the edge. Why do I say this? Well starting with the easy one first, the PNP’s manifesto has a lot of colour and pictures, while the JLP’s does not, and so just looks better. In terms of content though I believe the JLP’s had a lot more measurable objectives, and showed more creativity inn dealing with issues, and I think that this came out in the debates.
I will deal with some of the reasons, but outside of the economic growth and development, I think that the JLP dealt more comprehensively with the matter of corporate governance and justice. Certainly the two proposals I am most attracted to, in these areas, are (1) sharing power with the opposition; and (2) giving the Commissioner of Police greater powers. These two I think will provide the foundation for greater accountability of politicians and the police.
The following table is what I consider to be the key points in relation to economic development and growth. The list is by no means exhaustive but focuses on the areas I believe will have the greatest effect on economic development. As I have always maintained, however, development and growth depends a lot on the social policies put in place. For example, an efficient justice system and police force, public law and order, and quality education and ensuring that children do not roam the streets. Without these social problems being addressed the economic policies will not generate any benefits.
While there is the realization of both that the state needs to create the business environment for private sector growth, it is still evident that the interventionist role that our governments have played since independence, is present. This is caused mainly by the expectations from the electorate of a government that is going to act like parents.
Both parties have not adequately addressed Jamaica’s interface with the global markets, and no questions were asked on this in the debate. The fact is that the world market today is going through a liquidity crisis that is going to have a significant impact on Jamaica and it is necessary to know how a future Finance Minister will handle this. Already we have seen a 10% fall off in tourism for the region and exports will also be affected. We have also seen where the five year variable rate instrument issued in July was 20 basis points more than the seven year issued in June. Whichever party forms the government on August 28th, the fiscal accounts are going to be a challenge and we can expect growth of about 1.5% - 2% this year, which is half of the projections. It was therefore a missed opportunity in the debate to bring out these issues, as knowing the flavour of our political rallies I really do not expect these issues to be discussed.
One such side show I have heard being mentioned repeatedly is the fact that neither parties outlined in the manifesto how they plan to achieve the objectives outlined. For those who believe that there is some merit in this argument let me help by looking at the definition of manifesto. A manifesto is “a public written declaration of principles, policies, and objectives, especially one issued by a political movement or candidate”. So we should not be looking for a road map for implementation but rather in a forum such as the National Debates. However, the Commission incorrectly used questioners on the economic debates panel that do not understand the real issues about the economy, and in that way short changed the Jamaican people and the quality of that particular debate.
In comparing both manifestos, I think that in terms of substance the JLP’s manifesto gets the edge. With respect to how the manifesto looks the PNP’s gets the edge. Why do I say this? Well starting with the easy one first, the PNP’s manifesto has a lot of colour and pictures, while the JLP’s does not, and so just looks better. In terms of content though I believe the JLP’s had a lot more measurable objectives, and showed more creativity inn dealing with issues, and I think that this came out in the debates.
I will deal with some of the reasons, but outside of the economic growth and development, I think that the JLP dealt more comprehensively with the matter of corporate governance and justice. Certainly the two proposals I am most attracted to, in these areas, are (1) sharing power with the opposition; and (2) giving the Commissioner of Police greater powers. These two I think will provide the foundation for greater accountability of politicians and the police.
The following table is what I consider to be the key points in relation to economic development and growth. The list is by no means exhaustive but focuses on the areas I believe will have the greatest effect on economic development. As I have always maintained, however, development and growth depends a lot on the social policies put in place. For example, an efficient justice system and police force, public law and order, and quality education and ensuring that children do not roam the streets. Without these social problems being addressed the economic policies will not generate any benefits.
While there is the realization of both that the state needs to create the business environment for private sector growth, it is still evident that the interventionist role that our governments have played since independence, is present. This is caused mainly by the expectations from the electorate of a government that is going to act like parents.
Both parties have not adequately addressed Jamaica’s interface with the global markets, and no questions were asked on this in the debate. The fact is that the world market today is going through a liquidity crisis that is going to have a significant impact on Jamaica and it is necessary to know how a future Finance Minister will handle this. Already we have seen a 10% fall off in tourism for the region and exports will also be affected. We have also seen where the five year variable rate instrument issued in July was 20 basis points more than the seven year issued in June. Whichever party forms the government on August 28th, the fiscal accounts are going to be a challenge and we can expect growth of about 1.5% - 2% this year, which is half of the projections. It was therefore a missed opportunity in the debate to bring out these issues, as knowing the flavour of our political rallies I really do not expect these issues to be discussed.
Friday, August 10, 2007
The price of debt
The euphoria surrounding elections has caused many of us to forget the economy that needs to be grown. Last week the JLP stated in its manifesto that it wants to place a constitutional level on debt/GDP of 95% within five years. This means they would have to reduce debt/GDP to 95% or lower by 2012. Many are legitimately asking, within the context of all the accomplishments the JLP wants to make whether this is possible? I would be the first to agree that not all the policies set out in the manifesto are achievable within the five-year period, and some amount of prioritising must be done, as well as reallocation of capital to its most efficient use.
Consideration would also have to be given to social consequences of any action, which is what the present government has had to do. No doubt, however, the debt/GDP ratio is an important factor to manage, as the higher the ratio is then the less monies are available for country spending, and the more debt we will have to borrow in the future to alleviate social hardships. The long-term solution, of course, is to address the social policies of proper education and law and order, as even with the best intentions in the world no Finance Minister will be able to improve the fiscal situation without proper social policies.
Effect of debt
We even see in the great USA where the massive trade deficit, and heavy reliance of the consumer on debt, has placed the economy in a quandary and the likelihood of a recession is increasing. This will of course have devastating effects for Jamaica, as 25 per cent of our exports are sent to North America and 75 per cent of our tourists come from there. We already are seeing lower tourist arrivals this year over last. These are the global issues that we should be discussing on the campaign trail, but then again politicians spin information to people and many of us, including those who should, do not understand these issues, so why bother? My thoughts are that if the Fed does not intervene soon, then the US economy will see greater negative effects.
A look at the June-07 quarter end fiscal accounts does show a promising sign - the lower than projected net borrowings over the period. After considering loan receipts and amortisations we have borrowed J$2.8 billion less than projected. This is a hope of some amount of fiscal prudence, especially when coupled with the fact that expenditures have come in under target while revenues are basically on target. The lack of accrual accounting could, however, reverse the position of the primary surplus and it is still early to comment. More importantly, though, I hope the lower than projected net borrowings will continue to be a hallmark of this year's fiscal accounts, and that no matter who assumes power on August 28th this trend will continue.
The graph shows the relationship between debt and nominal GDP since 1980. It shows that up to around 1997 we were still showing GDP growing at a faster pace than debt, and that this trend started to reverse at around the 1997 mark. Believe it or not though, in my opinion what happened after the 1997 period was more in the interest of the country than the prior period of the 1990s. This may sound silly, but in fact what caused the GDP to grow at a faster pace than the debt was inflation.
In 1991 we had inflation of 80 per cent, 1992 - 40 per cent, 1993 - 30 per cent, 1994 - 27 per cent, 1996 - 16 per cent, and 1997 - nine per cent. It was this inflationary pressure that caused the debt/GDP ratio to look good, but it also caused macroeconomic instability, causing unpredictability in the business environment. Reducing inflation caused the debt/GDP ratio to look bad, but was essential to create macroeconomic stability as a precursor for private-sector growth. The problem though is that the business environment was not conducive for investments and growth, and still is not where it should be.
Social policies
We continue to have high crime levels, a poor justice system, and high levels of bureaucracy that prevent the sort of investment, growth, and development we need. For this reason I continue to say that Jamaica has a social and political problem and not an economic one. And although we always complain about high interest rates, high interest rates are necessary because of these social policies we must fix, otherwise we will continue to live with even higher interest rates. Remember, the price of money is interest, and money goes where it feels safest. So while a stable macro environment is essential, this alone will not help. We need a business-friendly environment and low social and political risk to attract capital at lower relative rates of interest.
So can we achieve debt/GDP of 95 per cent in five years? My answer to that would be, whether the PNP or JLP is in government, it is highly achievable. It is going to depend, however, on the social and political policies we pursue. It is going to depend on how much we transform our environment into being business friendly. It is going to depend on how well we can deal with our education system and get young people in productive training rather than loitering on the roads and selling when they should be in school. It is going to depend on productivity and accountability in the public and private sector.
What the graph clearly shows is that from January 07 we see where the debt has been levelling off. This is a very important trend for us to maintain. Because if we can manage to keep the debt capped at around J$940 billion for five years, then even if we have average inflation of six per cent and growth of 2.5 per cent, over five years, we can achieve debt/GDP of 82% by 2012. And if we grow an average of five per cent over the period, we can see debt/GDP of 72 per cent. This will also set us up for lower relative real interest rates. But I would like to stress again that enlightened social policies will be critical to ensure this.
So it is going to be very important for us to prudently manage the fiscal side to ensure there is no increase in debt levels. One of the greatest threats to our expenditure is the energy bill, and therefore it is critical to do everything to encourage fuel efficiency and discourage fuel inefficiency, such as lower taxes on energy-efficient vehicles, and incentives to energy-efficient buildings. Not power cuts, JPS.
On the growth side we will have to ensure that crime is controlled, an efficient and equitable justice system is quickly put in place, and that quality education standards abound. If we can achieve this, then we will see an improvement on the numerator and denominator of the debt/GDP ratio, and more money available for spending.
Consideration would also have to be given to social consequences of any action, which is what the present government has had to do. No doubt, however, the debt/GDP ratio is an important factor to manage, as the higher the ratio is then the less monies are available for country spending, and the more debt we will have to borrow in the future to alleviate social hardships. The long-term solution, of course, is to address the social policies of proper education and law and order, as even with the best intentions in the world no Finance Minister will be able to improve the fiscal situation without proper social policies.
Effect of debt
We even see in the great USA where the massive trade deficit, and heavy reliance of the consumer on debt, has placed the economy in a quandary and the likelihood of a recession is increasing. This will of course have devastating effects for Jamaica, as 25 per cent of our exports are sent to North America and 75 per cent of our tourists come from there. We already are seeing lower tourist arrivals this year over last. These are the global issues that we should be discussing on the campaign trail, but then again politicians spin information to people and many of us, including those who should, do not understand these issues, so why bother? My thoughts are that if the Fed does not intervene soon, then the US economy will see greater negative effects.
A look at the June-07 quarter end fiscal accounts does show a promising sign - the lower than projected net borrowings over the period. After considering loan receipts and amortisations we have borrowed J$2.8 billion less than projected. This is a hope of some amount of fiscal prudence, especially when coupled with the fact that expenditures have come in under target while revenues are basically on target. The lack of accrual accounting could, however, reverse the position of the primary surplus and it is still early to comment. More importantly, though, I hope the lower than projected net borrowings will continue to be a hallmark of this year's fiscal accounts, and that no matter who assumes power on August 28th this trend will continue.
The graph shows the relationship between debt and nominal GDP since 1980. It shows that up to around 1997 we were still showing GDP growing at a faster pace than debt, and that this trend started to reverse at around the 1997 mark. Believe it or not though, in my opinion what happened after the 1997 period was more in the interest of the country than the prior period of the 1990s. This may sound silly, but in fact what caused the GDP to grow at a faster pace than the debt was inflation.
In 1991 we had inflation of 80 per cent, 1992 - 40 per cent, 1993 - 30 per cent, 1994 - 27 per cent, 1996 - 16 per cent, and 1997 - nine per cent. It was this inflationary pressure that caused the debt/GDP ratio to look good, but it also caused macroeconomic instability, causing unpredictability in the business environment. Reducing inflation caused the debt/GDP ratio to look bad, but was essential to create macroeconomic stability as a precursor for private-sector growth. The problem though is that the business environment was not conducive for investments and growth, and still is not where it should be.
Social policies
We continue to have high crime levels, a poor justice system, and high levels of bureaucracy that prevent the sort of investment, growth, and development we need. For this reason I continue to say that Jamaica has a social and political problem and not an economic one. And although we always complain about high interest rates, high interest rates are necessary because of these social policies we must fix, otherwise we will continue to live with even higher interest rates. Remember, the price of money is interest, and money goes where it feels safest. So while a stable macro environment is essential, this alone will not help. We need a business-friendly environment and low social and political risk to attract capital at lower relative rates of interest.
So can we achieve debt/GDP of 95 per cent in five years? My answer to that would be, whether the PNP or JLP is in government, it is highly achievable. It is going to depend, however, on the social and political policies we pursue. It is going to depend on how much we transform our environment into being business friendly. It is going to depend on how well we can deal with our education system and get young people in productive training rather than loitering on the roads and selling when they should be in school. It is going to depend on productivity and accountability in the public and private sector.
What the graph clearly shows is that from January 07 we see where the debt has been levelling off. This is a very important trend for us to maintain. Because if we can manage to keep the debt capped at around J$940 billion for five years, then even if we have average inflation of six per cent and growth of 2.5 per cent, over five years, we can achieve debt/GDP of 82% by 2012. And if we grow an average of five per cent over the period, we can see debt/GDP of 72 per cent. This will also set us up for lower relative real interest rates. But I would like to stress again that enlightened social policies will be critical to ensure this.
So it is going to be very important for us to prudently manage the fiscal side to ensure there is no increase in debt levels. One of the greatest threats to our expenditure is the energy bill, and therefore it is critical to do everything to encourage fuel efficiency and discourage fuel inefficiency, such as lower taxes on energy-efficient vehicles, and incentives to energy-efficient buildings. Not power cuts, JPS.
On the growth side we will have to ensure that crime is controlled, an efficient and equitable justice system is quickly put in place, and that quality education standards abound. If we can achieve this, then we will see an improvement on the numerator and denominator of the debt/GDP ratio, and more money available for spending.
Friday, August 03, 2007
FINSAC revisited
Last week the Observer quoted me to say that FINSAC is the worst thing that has happened to Jamaica. In particular I was speaking in relation to the economy, which I do believe, certainly as far as I can recall.
In the same week I received a call from a senior person in one of our media houses, representing a national association, to say that they had received complaints about the statement, as it was felt that this was a “strong view” being expressed and as such it could offend some people. He went further to state that they had not received any elevated complaint from any politician but that they were pre-empting any that may occur.
Threat to public expression
Now this high ranking media personality did not seek to find out first what my views are on FINSAC, but sought to take the shallow route of assuming offence to one side. Secondly, and most disappointing is that this is the position of a media leader, and leads me to wonder if the news reports from that organization are tempered to consider feelings, as they may not be allowed to have strong views on issues. And thirdly, there was no official complaint from any politician (I assumed he meant the PNP) and what I know of the politicians on that side is that they are articulate and I have not known of them being offended by any view on issues. As a matter of fact my own view is that media discussions have elevated under the PNP, and very much so under the Minister that had responsibility for FINSAC.
The implication is that the threat to public expression is greater from some of our citizens than politicians. After all I don’t think it was a politician that threatened Nationwide recently. And this is one reason why I went further to say at the luncheon that business persons need to unite around issues rather than speak out against issues that affect them individually. Isn’t this why the PSOJ and other such trade organizations were formed? So what is the big deal about saying it? The tribal nature of politics in many instances is the result of private citizens branding people as PNP or JLP, not having the ability to see things as pro-Jamaica or anti-Jamaica. Instead many of our educated do not vote on issues but are no different than the average Jamaican who votes based on the picture of the 1960s political leader in their home.
Anyway this brings me around to the issue the phone call has revived. That of FINSAC and why I say it is the worst thing that has happened to Jamaica’s economy. And again, as I said a few weeks ago, I am going to go slowly and try to inform the media especially so that they can follow what I am saying.
Now, the lesson starts with the question, what are some of the main inhibitors to Jamaica’s economic development? The main setback caused by FINSAC is not the high level of debt (over $900 Billion) that we have today. In fact in 1984 the debt/GDP ratio peaked at 212%, before it started to decline. The difference at that time was that it was on the decline after 1984 and growth rates ran in excess of 5%. So as I always say, there is nothing wrong with debt as long as the returns are higher than the cost of the debt. It was the high growth rate that caused us to be able to reduce the debt, as a percentage of GDP, at that time. The result is that, if GDP grows at higher rates than the debt then it means more money available for spending in the country.
Importance of growth
This is what the government is trying to achieve by aiming to accelerate economic growth. The position we are in today is that our productivity base has been reduced, over prior decades, while our lifestyles have increased. This means that we have had to borrow money to compensate for lost productivity.
The graph clearly shows that after the mid 1908s when we started to see growth rates in the region of 6% and 7%, the debt/GDP ratio started to decline. At the start of the 1990s, when the Jamaican economy was liberalized, the debt/GDP ratio increased, as we had to borrow more money to stabilize the economy from the effects of globalization. In 1997 FINSAC came into being, and from that point the debt/GDP ratio has increased and is just leveling off. But every five years or so we have a thing called an election and that of course always stops the progress.
So the high level of debt/GDP is nothing novel, as this trend of high levels of debt/GDP started in the 1980s. But at that time the economy was more productive and could grow at higher rates. This is the main reason why I always say that the problem with the Jamaican economy is its capacity to grow, as we have eroded the social and economic institutions that form the productive base.
Following on this then, I think it is fair to say that the main problem with FINSAC is not the high levels of debt. The main problems caused by FINSAC are (1) the erosion of an entrepreneurial mindset; (2) the lack of accountability and independence that came out of that period, which has contributed to the indiscipline today; and (3) the high involvement of government in the economy. One positive that has come out of the FINSAC period is a strong regulatory environment for financial institutions, which has been well managed by the BOJ, under the stewardship of the present governor, and the FSC, which I think is the most effective regulatory arm. Right now the global financial markets has reached a stage where creativity is moving farther ahead of regulation, but that discussion is for another time.
Fading entrepreneurialism
The reason why I think the waning of the entrepreneurial spirit is the main problem caused by FINSAC is simple. We all know that what drives economies to move forward is the small entrepreneur. It is not government spending and growth in distribution, construction, or increased debt through credit cards. In fact if we look at what is happening in the US, the domestic economy is suffering from an extension of debt to consumers and because countries such as China are looking to move away from holding US debt (treasuries). What is holding up the US economy is the entrepreneurialism that caused many US companies to invest in China, the next superpower.
The late 1980s to the 1990s saw a lot of Jamaicans come to the fore in terms of new business ventures. Many manufacturing and financial institutions were being headed by Jamaicans, which is the organic growth that drove the economy during this period. This meant that we were relying less on foreign investments, and certainly did not need imported police and teachers, which would be a return to colonialism. We had our own self made Jamaican entrepreneur and as this example spread, more and more Jamaicans saw the possibilities of starting their own business. Then came the high interest rate environment and FINSAC in 1997.
The high interest rate environment saw many existing variable rate loans ballooning overnight, and logically companies would not be able to service these loans. The high interest rates were used as a means to control devaluation, which also would have had a devastating consequence on the poor. The problem though was that monetary policy (high interest rates) was used for too long a period, when what was needed was fiscal policies, and the roll back of monetary policies.
The problem was not solely that of government policies however, as we did not have the regulatory framework to properly monitor the financial institutions, and so the poor risk management practices within many institutions contributed to the situation. Even before the government intervened the financial institutions should have called the loans long before they got to the point where the security could not cover the loan balances. If this were done then the high level of FINSAC intervention would not have been necessary. And it is because of the good regulatory environment today that I do not believe another FINSAC will occur.
But the end result of all of this is that the Jamaican entrepreneur went into hiding and has only recently started to emerge. This is why it was so necessary for Omar Davies to stabilize the macro environment to bring back confidence to the Jamaican economy, for local and international investors alike, an accomplishment he can claim. Being the ones burnt, though, the Jamaican entrepreneur had a longer recovery period, as markets are driven primarily by perception and confidence.
Lack of accountability
The FINSAC debacle has caused so much pain and yet still the level of accountability is low. This has contributed to the attitude that if people can get away with causing billions of dollars in damages, then why do I have to conform. The belief is that politicians will protect their “big friends”. I don’t know of any protection, which may have possibly happened knowing Jamaica, but certainly in the main the problem was not caused from this. We have seen where the government has pursued many persons but have been unable to get too far, after many years. The main problem is with the judicial and regulatory systems, which is why our institutions are critical in the development equation. At the time of the crisis the regulation and legislation were weak, and so it was difficult to get accountability in the time desired. Additionally, the need to call in forensic auditors meant that it was a web of documentation that needed to be sifted through.
This lack of accountability, no doubt, has contributed to the wider problem of indiscipline. Since that time much of the legislation has had to be updated, as Jamaican laws really did not have much teeth until recently. An example is the Companies Act that prior to 2006 was last updated in 1965.
Government bureaucracy
We all know that government is probably the most inefficient player to have in the economy. After FINSAC government got caught owning many private companies that no private investor wanted to touch, because of the FINSAC experience, resulting in foreigners buying our assets. This meant that government had become a major player in the economy, and became the main engine of economic growth.
There is definitely a problem when an organization founded on bureaucracy is the major player in the economy. Our government is no different from any other around the world when it comes to bureaucracy, as it is necessary for governments to have bureaucratic structures because of their size. As a matter of fact, this is one reason why even private companies in the US break up into pieces after attaining a certain size. The smaller you are then the less bureaucratic you have to be to maintain controls and the more nimble you can be.
When government found itself owning all these private companies, and being a major player in the economy, they truly did not know what to do. They did what they knew best, which was to apply bureaucracy to the control of these companies. The result of course is that productivity declined, and companies and the economy became less efficient. This inefficiency has now become engrained in the Jamaican culture.
Summary
So to my friends who were following me, and were able to understand what I have said, the problems with FINSAC were far reaching and way beyond any issue of debt. What made the situation bad was that the Jamaican environment was not prepared to deal with this situation, and the management of the crisis (both in the private and public sector) was handled poorly. Whilst I believe that government intervention was necessary, I believe that (1) it came too late, as the writing was on the wall long before; (2) not everyone should have been bailed out to the extent they were; and (3) they should have found a way to allow the private sector to carry on with the companies immediately instead of creating FINSAC to manage them for so long. There is a lot more that can be said about the FINSAC era, and it needs public discourse to avoid any recurrence and educate those amongst us that should know.
In the same week I received a call from a senior person in one of our media houses, representing a national association, to say that they had received complaints about the statement, as it was felt that this was a “strong view” being expressed and as such it could offend some people. He went further to state that they had not received any elevated complaint from any politician but that they were pre-empting any that may occur.
Threat to public expression
Now this high ranking media personality did not seek to find out first what my views are on FINSAC, but sought to take the shallow route of assuming offence to one side. Secondly, and most disappointing is that this is the position of a media leader, and leads me to wonder if the news reports from that organization are tempered to consider feelings, as they may not be allowed to have strong views on issues. And thirdly, there was no official complaint from any politician (I assumed he meant the PNP) and what I know of the politicians on that side is that they are articulate and I have not known of them being offended by any view on issues. As a matter of fact my own view is that media discussions have elevated under the PNP, and very much so under the Minister that had responsibility for FINSAC.
The implication is that the threat to public expression is greater from some of our citizens than politicians. After all I don’t think it was a politician that threatened Nationwide recently. And this is one reason why I went further to say at the luncheon that business persons need to unite around issues rather than speak out against issues that affect them individually. Isn’t this why the PSOJ and other such trade organizations were formed? So what is the big deal about saying it? The tribal nature of politics in many instances is the result of private citizens branding people as PNP or JLP, not having the ability to see things as pro-Jamaica or anti-Jamaica. Instead many of our educated do not vote on issues but are no different than the average Jamaican who votes based on the picture of the 1960s political leader in their home.
Anyway this brings me around to the issue the phone call has revived. That of FINSAC and why I say it is the worst thing that has happened to Jamaica’s economy. And again, as I said a few weeks ago, I am going to go slowly and try to inform the media especially so that they can follow what I am saying.
Now, the lesson starts with the question, what are some of the main inhibitors to Jamaica’s economic development? The main setback caused by FINSAC is not the high level of debt (over $900 Billion) that we have today. In fact in 1984 the debt/GDP ratio peaked at 212%, before it started to decline. The difference at that time was that it was on the decline after 1984 and growth rates ran in excess of 5%. So as I always say, there is nothing wrong with debt as long as the returns are higher than the cost of the debt. It was the high growth rate that caused us to be able to reduce the debt, as a percentage of GDP, at that time. The result is that, if GDP grows at higher rates than the debt then it means more money available for spending in the country.
Importance of growth
This is what the government is trying to achieve by aiming to accelerate economic growth. The position we are in today is that our productivity base has been reduced, over prior decades, while our lifestyles have increased. This means that we have had to borrow money to compensate for lost productivity.
The graph clearly shows that after the mid 1908s when we started to see growth rates in the region of 6% and 7%, the debt/GDP ratio started to decline. At the start of the 1990s, when the Jamaican economy was liberalized, the debt/GDP ratio increased, as we had to borrow more money to stabilize the economy from the effects of globalization. In 1997 FINSAC came into being, and from that point the debt/GDP ratio has increased and is just leveling off. But every five years or so we have a thing called an election and that of course always stops the progress.
So the high level of debt/GDP is nothing novel, as this trend of high levels of debt/GDP started in the 1980s. But at that time the economy was more productive and could grow at higher rates. This is the main reason why I always say that the problem with the Jamaican economy is its capacity to grow, as we have eroded the social and economic institutions that form the productive base.
Following on this then, I think it is fair to say that the main problem with FINSAC is not the high levels of debt. The main problems caused by FINSAC are (1) the erosion of an entrepreneurial mindset; (2) the lack of accountability and independence that came out of that period, which has contributed to the indiscipline today; and (3) the high involvement of government in the economy. One positive that has come out of the FINSAC period is a strong regulatory environment for financial institutions, which has been well managed by the BOJ, under the stewardship of the present governor, and the FSC, which I think is the most effective regulatory arm. Right now the global financial markets has reached a stage where creativity is moving farther ahead of regulation, but that discussion is for another time.
Fading entrepreneurialism
The reason why I think the waning of the entrepreneurial spirit is the main problem caused by FINSAC is simple. We all know that what drives economies to move forward is the small entrepreneur. It is not government spending and growth in distribution, construction, or increased debt through credit cards. In fact if we look at what is happening in the US, the domestic economy is suffering from an extension of debt to consumers and because countries such as China are looking to move away from holding US debt (treasuries). What is holding up the US economy is the entrepreneurialism that caused many US companies to invest in China, the next superpower.
The late 1980s to the 1990s saw a lot of Jamaicans come to the fore in terms of new business ventures. Many manufacturing and financial institutions were being headed by Jamaicans, which is the organic growth that drove the economy during this period. This meant that we were relying less on foreign investments, and certainly did not need imported police and teachers, which would be a return to colonialism. We had our own self made Jamaican entrepreneur and as this example spread, more and more Jamaicans saw the possibilities of starting their own business. Then came the high interest rate environment and FINSAC in 1997.
The high interest rate environment saw many existing variable rate loans ballooning overnight, and logically companies would not be able to service these loans. The high interest rates were used as a means to control devaluation, which also would have had a devastating consequence on the poor. The problem though was that monetary policy (high interest rates) was used for too long a period, when what was needed was fiscal policies, and the roll back of monetary policies.
The problem was not solely that of government policies however, as we did not have the regulatory framework to properly monitor the financial institutions, and so the poor risk management practices within many institutions contributed to the situation. Even before the government intervened the financial institutions should have called the loans long before they got to the point where the security could not cover the loan balances. If this were done then the high level of FINSAC intervention would not have been necessary. And it is because of the good regulatory environment today that I do not believe another FINSAC will occur.
But the end result of all of this is that the Jamaican entrepreneur went into hiding and has only recently started to emerge. This is why it was so necessary for Omar Davies to stabilize the macro environment to bring back confidence to the Jamaican economy, for local and international investors alike, an accomplishment he can claim. Being the ones burnt, though, the Jamaican entrepreneur had a longer recovery period, as markets are driven primarily by perception and confidence.
Lack of accountability
The FINSAC debacle has caused so much pain and yet still the level of accountability is low. This has contributed to the attitude that if people can get away with causing billions of dollars in damages, then why do I have to conform. The belief is that politicians will protect their “big friends”. I don’t know of any protection, which may have possibly happened knowing Jamaica, but certainly in the main the problem was not caused from this. We have seen where the government has pursued many persons but have been unable to get too far, after many years. The main problem is with the judicial and regulatory systems, which is why our institutions are critical in the development equation. At the time of the crisis the regulation and legislation were weak, and so it was difficult to get accountability in the time desired. Additionally, the need to call in forensic auditors meant that it was a web of documentation that needed to be sifted through.
This lack of accountability, no doubt, has contributed to the wider problem of indiscipline. Since that time much of the legislation has had to be updated, as Jamaican laws really did not have much teeth until recently. An example is the Companies Act that prior to 2006 was last updated in 1965.
Government bureaucracy
We all know that government is probably the most inefficient player to have in the economy. After FINSAC government got caught owning many private companies that no private investor wanted to touch, because of the FINSAC experience, resulting in foreigners buying our assets. This meant that government had become a major player in the economy, and became the main engine of economic growth.
There is definitely a problem when an organization founded on bureaucracy is the major player in the economy. Our government is no different from any other around the world when it comes to bureaucracy, as it is necessary for governments to have bureaucratic structures because of their size. As a matter of fact, this is one reason why even private companies in the US break up into pieces after attaining a certain size. The smaller you are then the less bureaucratic you have to be to maintain controls and the more nimble you can be.
When government found itself owning all these private companies, and being a major player in the economy, they truly did not know what to do. They did what they knew best, which was to apply bureaucracy to the control of these companies. The result of course is that productivity declined, and companies and the economy became less efficient. This inefficiency has now become engrained in the Jamaican culture.
Summary
So to my friends who were following me, and were able to understand what I have said, the problems with FINSAC were far reaching and way beyond any issue of debt. What made the situation bad was that the Jamaican environment was not prepared to deal with this situation, and the management of the crisis (both in the private and public sector) was handled poorly. Whilst I believe that government intervention was necessary, I believe that (1) it came too late, as the writing was on the wall long before; (2) not everyone should have been bailed out to the extent they were; and (3) they should have found a way to allow the private sector to carry on with the companies immediately instead of creating FINSAC to manage them for so long. There is a lot more that can be said about the FINSAC era, and it needs public discourse to avoid any recurrence and educate those amongst us that should know.
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