A butu in a Benz

The following is from an address to the Lions Club of Kingston on September 4, 2013

PROFESSOR Rex Nettleford is quoted as saying "butu in a Benz is still a butu" or as Jamaicans say, "You can take someone out of the country but may not be able to take the country out of them".

Goat Islands are being seriously considered for the site of a logistics hub to be built by the Chinese. Large amounts of foreign investments, government spending, or legislation alone won't affect the change needed, if we do not address the structural challenges facing our economic and social environment, says Dennis Chung.

These sayings refer to someone who seeks to improve his/her social standing but does not understand that class acceptance has more to do with behaviour than the symbols of wealth. So they purchase an expensive car or a house in an upscale neighbourhood, in order to try to fit in but still have the same boorish behaviour that defined their previous standing.

The reality is that, the label "butu" or "ghetto" has more to do with behaviour, and a way of thinking, rather than clothes.

This is the same for an economy and society. While growth and investments are necessary conditions for economic and social development, the truth is they are not sufficient. So when we have massive amounts of foreign investments but still can't understand why growth is anaemic, we must understand that merely covering up the economic and social challenges with money does not deal with the underlying problem.

So, as in the case of the butu in the benz, large amounts of foreign investments, government spending, or legislation alone won't affect the change needed, if we do not address the structural challenges facing our economic and social environment. We will still be considered just a developing nation.

One of the major structural economic challenges, which has been an underlying factor in our dismal economic performance since the 1970s, is labour productivity. The question has been asked many times: Why has Jamaica seen so much foreign direct investment, and capital investment, and debt of $1.7 Trillion, but has failed to see a response in our growth rates?

The problem, as I outlined in my book, can be blamed on the declining labour productivity since the 1970s (declining at an average annual rate of 1.3 per cent between 1973 and 2007, according to the Jamaica Productivity Centre -- JPC).

The JPC 2009 report also states the following:

* Between 2001 and 2005 the rate of the labour productivity decline increased to 1.8 per cent

* Total factor productivity between 1973 and 2005 declined an annual average 1.74 per cent

* Trading partners and neighbours in the Caribbean saw labour productivity increasing by over 1.5 per cent since 1972

* "...not only has the country lost competitiveness as a result of declining labour productivity but workers have gotten poorer in real terms".

The sad truth is that this continues today because we have failed to address the structural issues that have negatively affected labour productivity. We have failed to implement the necessary policy changes that will cause labour, as a primary factor of production, to become more productive. Instead of allowing the market to determine the value of labour, we have relied on welfare interventionist policies.

In other words, labour, like capital, is most efficient when it is subject to market conditions. So when government employs persons because of political alliance, when labour is paid based on seniority rather than performance pay, when persons are not able to access education and training, then what happens is that labour becomes unproductive, as it is not rewarded based on performance. So there is no incentive to produce.

In other words, if you work for two hours and get eight hours' pay, then why work the full eight hours?

This also explains why despite the high levels of FDI we have been unable to achieve much growth.

The JPC 2009 report shows that between 1973 and 2005 we have seen growth in physical capital every year. Yet between 1973 and 2005 the economy has grown an average 0.5 per cent per annum, which betrays the high levels of investment and debt.

My view is that the primary problem is labour productivity. In order to maximise value from capital, you also need maximum labour productivity. The fact is that we have not been able to apply productive labour to capital and so it is cheaper to import than produce. So the same unit of input in Jamaica, as in another country, will end up having less real value, because when labour is applied to it, it minimises the capital value.

Therefore even when foreign capital is invested, it goes into purchasing imported finished goods as inputs rather than purchasing raw materials and using labour to convert the raw materials to finished goods. And even when high value labour is needed it is imported because of our relatively low literacy levels.

The result of this is that imports are high because either (1) they are cheaper; or (2) because of lack of the required labour input.

Therefore as we move forward with the necessary adjustments, and try to find sustainable economic solutions, it is important to consider the impediments to high labour productivity; if we solve this, then we will not only drive the Benz but have the social behaviour to go with it.

Before we look at what are the practical solutions, it is important to understand that labour productivity measures the amount of goods and services produced by one hour of labour.

Since 1973, labour has been on average 1.3 per cent less efficient each year. Literally this means that in real terms, $100 labour output in 1973 equates to $65.79 today. Is it any wonder then that (1) we have not been able to see any growth from the significant capital investments, or (2) why we have seen the exchange rate move from where the US$ was J$0.90 to where the US$ is now valued J$102.10.

And even though labour productivity kept declining, governments primarily supported low productivity by expanding public sector employment, and implementing rules that contributed. And they were able to do so (unlike a private business) by borrowing and taxing. This ultimately burdened the private sector to the point where investments were only attractive with incentives, resulting in the non-productive regime of waivers and incentives we are trying to do away with today.

This cannot be solved by tinkering with macroeconomic variables and is the reason why we have had 13 previous unsuccessful IMF agreements, and is why this IMF agreement is so critical, and the social and economic transformation is not going to be easy.

For us to properly address the problem this requires much more than what any IMF agreement can accomplish.

Some of the initiatives that must be undertaken include:

* Addressing public sector inefficiency, a major inhibitor to growth and facilitator of low labour productivity. This cannot continue while taxing the productive sector to pay for it, as it will only result in further economic decline.

* Legislating laws that ensure the rights of workers are protected (which is critical to ensure labour works efficiently) but at the same time aren't burdensome to employers.

* Education system must be improved for better results. And our scarce public resources must be targeted towards developing skills needed for our economic transformation.

So while we seek more FDIs, and implement the reforms under the IMF programme, it is important to understand that the root cause of our challenge is declining labour productivity, and at a deeper level the things that support it, such as political expedience.

Therefore as we transform the economy for sustainable development, we need to look at how we do things, and not just focus on macroeconomic targets. Just like businesses will invest capital for the greatest return, labour will do the same.

In other words, our economic problems are really social problems.

And as Nettleford implied, having the Benz is not enough if you do not change your behaviour. Are we prepared to do this?

Understanding economic transformation

“Everybody want to go to heaven, but nobody want to die”. These words were sung by Peter Tosh in “Equals Rights. In other words, how can we expect to go to heaven if we are still living?

This is no different from the many expectations of people who expect (i) improved finances, but do not want to sacrifice consumption; (ii) good health and nice body, but still eat poorly and do no exercise; or (iii) economic transformation but do not want to make the sacrifices necessary.

It is necessary for us to understand that transformation takes discipline, sacrifice, and a commitment to direction. In other words if we want to see the necessary transformation in any aspect of our lives then it is going to require changing the things we are used to and discipline to stay the course.

When we see, for example, the performance of our athletes, we fail to understand the sacrifice and hard work that goes into preparing for that one race. Or, put another way, that one event we see. Being someone myself who does endurance exercise, I know the discipline it takes to train, and eat the proper foods, even though you feel like throwing in the towel many times.

On the contrary, one can also work hard and make sacrifices, and never achieve the transformation you want, simply because the preparation is not done properly or you are heading in the wrong direction. So, for example, (i) it does not matter how fast you drive, if you are heading in the direction of St. Thomas, you will not get to Montego Bay; or (ii) overworking your muscles can lead to disastrous results instead of the desired strength you desire.

What these examples show is that transformation requires, first understanding what your goals are; secondly, identifying the most efficient path to get there; thirdly, getting rid of the obstacles to that path; fourthly, committing to the transformation; and then finally implementing the transformation plan.

My last couple articles have focused on what is needed for economic growth and development, which essentially is to first understand that growth can only come from the private sector, and if the environment does not facilitate private sector expansion, then capital will simply move to more efficient returns. This includes moving out of Jamaica, or investing in short term activities.

So if we truly want economic and social transformation in Jamaica, we need to first accept that transformation requires that changes will happen. This I think is one of the problems we have faced with our past economic programmes, and why we have not been able to benefit in any sustainable way from the sacrifices we have been called on to make repeatedly.

What we have always sought to do is tinker with economic activity, while maintaining the same political and social behaviour that many of us are invested in. Over the decades we have given lip service to economic and social transformation, but we have never truly done what is necessary to cement that transformation.

We have said that the private sector must lead the growth in the country, but we have never truly created an environment for the private sector to flourish, as we have never really reduced the negative effects of bureaucracy, deal with energy, or addressed law and order. So the private sector continues to be expected to perform in an environment that is not as competitive as many of our trading partners.

We have said that we want to transform the public sector, to be more efficient, but political expedience has not allowed this to happen. And we have also failed to understand that what we really need is not a reduction in the public sector, but rather an increase in efficiency of the public sector, whatever that entails. Even if we were to reduce the public sector, within the context of onerous rules and reward based on seniority, rather than performance, we would have the same inefficient system with less people.

We have said that what we really need to transform the society is greater innovation, but have failed to address the challenges facing the education system to ensure that we produce more literate persons who can create the needed innovation. So we have many youth who continue to sit on the corners, or we continue to set up some persons for success, and others for failure through the GSAT exams.

We have said that we are serious about improving tourism, but fail to address the infrastructural issues, the degradation of our beaches, and the harassment and indiscipline on the roads.

And this is why I have always said that irrespective of whatever economic and social policies we have in place, that unless we, in a very significant way, address the structural issues of energy, bureaucracy, tax reform, and law and order, we will not see the sustainable development we need. In other words, how can you build a house properly without ensuring that there is a solid foundation in place? Remember the man who built his house in the sand.

So if we truly want economic and social transformation, we must understand what is required. We must also understand that given the structural weaknesses in the Jamaican economic and social environment, that transformation means that if we do not plan properly to make the needed changes then it is going to cause some social dislocation. For example, a more efficient economy means that those who do not have the ability to innovate, or be more productive, will fall by the way side and government is going to find itself having to play a greater welfare role.

Development is always going to cause dislocations, but this can be minimized by understanding where the weaknesses are and start putting in place mitigating policies to minimize the dislocation.

In other words, if we want to go to heaven, we must first die. However, at the same time we must do what is necessary to ensure we get to heaven, when we die, instead of somewhere else.

Productivity remains Jamaica's main problem

ON Wednesday I attended the presentation of a report by Professor Vanus James that examined the foreign exchange policy, and what is most appropriate. The study was initiated by Edward Seaga, and is a very good piece of work that seeks to bring some conclusion to the recent dialogue about which exchange rate regime is best for Jamaica.

The study concluded that the best regime is a managed floating rate, which is an argument that was put forward by myself and others, in the face of the opposing argument for a pegged, or fixed, regime. Mr Seaga and his team must be commended for this work, which is what we should expect to come from academic institutions, he being also the Chancellor of the University of Technology.

SEAGA... his team must be commended for their work, which is what we should expect to come from academic institutions

It is important for us to understand why a managed floating rate is best for Jamaica, as opposed to, say ,an unmanaged floating rate. The fact is that the exchange rate is very significant in Jamaica, where approximately 70 per cent of our consumption is imported, and we have always had a significant balance of payments (BOP) deficit. Left unmanaged, the exchange rate would depreciate at a much faster rate, resulting in significant hardships for the consumer and businesses, as long as our BOP deficit remains a challenge.

For those who say that the exchange rate should be left to find its true level, the fact is that the true level approaches infinity, if left unmanaged, as a result of our continuing BOP deficits. Therefore, it is necessary for us to manage our exchange rate, as long as we are unable to resolve our BOP problem. This means that the NIR and monetary policy will continue to be critical tools, and why we cannot fix the exchange rate. The result of doing so would be social challenges.

It follows, therefore, that if we are to resolve our long- term exchange rate problem, thereby causing a rise in income levels, relative to cost of living, then we must address the problem of the BOP. Resolution of the BOP issue means earning more foreign exchange than we spend, or at the very least, enough to cover our expenditure.

Some say to do so, what we need to do is live within our means, and what should be done is to reduce our imports to the level of what our foreign exchange earnings can support. This is a very simplistic argument that is based more on theory than practical application. In other words, if you need to spend $100 just to survive, and you earn $50, then it is practical to say that you can reduce your spend to bring your expenditure in line, if doing so means you are not able to survive.

Similarly, Jamaica's imports are 35 per cent fuel and 10 per cent food. And both are greater than our exports. So reducing our imports to match our exports will lead to food shortages, resulting in higher prices, and also reduced production, as there will be electricity and/or transport disruptions.

It would logically seem then that what we must do is increase our earnings. That is, reverse our BOP deficit. But in order for us to do so, we need to first understand what causes us to import more than we export, which at the base of it, I submit, is the inability to compete globally on a sufficient scale. There are some companies, like Grace Kennedy and Jamaica Producers, that have been making great strides internationally, but the problem is that many smaller companies are unable to make the transition.

This is caused, in my estimation, by our low productivity levels, which have continued to decline since the 1970s. And if we cannot improve productivity, then it is always going to be cheaper to import, and consume than produce locally and export, or consume.

Again the question is what makes it more rewarding for companies to import, or produce locally, for local consumption. In other words, why the preference to use imported content, or sell locally, rather than export.

Again, others argue that the policy should be to make it difficult for companies to survive by just selling locally, through exchange rate depreciation, reducing local income and forcing companies to export. The problem with that argument is that if you reduce local income without addressing the productivity issues, then all that will happen is that companies will close down, as we would not have addressed the productivity issue, and they will be unable to compete internationally and, therefore, have to close their doors as they will be unable to expand.

This shows that the underlying problem we face is one of productivity, and not that people necessarily want to consume imports. But what choice is there? Are we saying that while players in other economies act rationally, and their choice is based on returns, our private sector and consumers should act irrationally and buy local inputs. even though they are more expensive? While this is a short-term fix; it is not sustainable, and is a primary reason why our economy has struggled.

Therefore, if we want to solve our foreign exchange, inflation, cost of living, NIR, BOP, and other issues, then we must focus on solving our productivity issues. And to solve our productivity issues, we must focus on what makes business uncompetitive.

Thus, the emphasis on energy cost, bureaucracy, tax reform, and law and order.

Why private sector led growth is central to development

LAST week I wrote about what the pillars of growth are. Today I want to answer a question, often asked in a roundabout way, by persons who say that the private sector has not done what is necessary to grow the economy, so why should they be accommodated with a more business-friendly environment. This is a question asked often by persons who I don't think truly understand how markets work.

It is very important to understand, as I have often said, that sustainable growth cannot, and will not, happen without private sector prosperity. This concept is sometimes elusive in the Jamaican society, where it is often felt that the "big" man just wants to exploit the "small" man and so must be doing something unethical or illegal to make his money.

There were similar sentiments against the banks in the US, after the 2008 financial crisis, but this emotion soon gave way to the practical knowledge that the poor cannot improve their lot without the growth of the "greedy" private sector. The problem we have is that this feeling is not only restricted to the so-called small man but is oftentimes perpetuated by some politicians and intellectuals in their quest to explain why market economies are bad, and instead proffer state intervention and more brimstone and fire on the rich through taxation.

Ironically, these same persons who find it convenient to put down the "capitalists" are usually very persistent in seeking charitable contributions from them, or support in some other financial matter. In fact, much of the charitable spending that happens in the society is not from government, but rather from private companies and individuals.

But why do I say that private sector-led growth is critical to sustainable economic growth?

We can answer this question by first understanding what drives economic growth. Economic growth is measured by the growth in the Gross Domestic Product (GDP), which is simply the increase in real productive value from period to period, that is adjusted for inflation. GDP growth involves private sector production and spending, as well as government spending. So one may say that government spending is a part of GDP, and therefore, why is the private sector necessary? And it is for this reason that government can play a role in stimulating economic growth, such as during a recession, as they also contribute to GDP.

The problem is that government spending is not sustainable with a stagnant, or struggling private sector. And this has been the experience in Jamaica, and we have seen a similar example in the US model coming out of the recession, as opposed to the European approach, which did not emphasise market growth. The reason why government spending is not sustainable without private sector growth is that government spending depends significantly on private sector income, through taxes. So the income taxes, customs duties, corporate tax, and consumption tax depends on activity in the private sector. Therefore, if the private sector is stagnant, or declining, then it is logical that there can be no increase in government spending.

Thus, in the final analysis, GDP growth at every level depends on private sector activity. Therefore, the logical conclusion is that if we want to see robust growth in the economy, then we need to have robust private sector growth.

It would seem logical, then, that fiscal and monetary policy should have as its primary goal, the facilitation of growth in the private sector. Put another way, which Obama and Bernanke understands very well: the role of government policy must not only be full employment, but also high- value employment through constant innovation. On the contrary in Europe, and particularly Greece, the focus of policy was not on private sector facilitation but rather, fiscal consolidation. The result of both scenarios is there for all to see.

This is important for us to understand, not just in Jamaica, but also the Caribbean. This is because the Caribbean has a tendency towards a government dependency syndrome. Add to that the culture of a lack of embracing of private sector success, and you have a compounded negative effect.

The market economy may not be a perfect system, but the truth is that it's the best. If we want to improve the quality of life for everyone, including the most vulnerable in society, then it is essential that private sector growth be robust.

So as we continue the implementation of the IMF agreement and structural policies, we need to continue to bear in mind that at the heart of it must be the facilitation of a business environment that encourages private and corporate prosperity. So, as an example, the concepts companies of lower tax rates for PAYE and companies, lower energy rates, more efficient government bureaucracy, and improved law, order, and justice system are all critical to supporting that private sector growth.

Our focus of policy must be on encouraging investment and spending through competitive return on investments or feeling secure about one's future. Our focus must be on businesses and individuals feeling safe, and respected by the justice system. It is this focus that will make Jamaica experience robust growth and become the place to live, work, and raise families.

Identifying Jamaica's growth pillars

MY last article looked at how we can increase competitiveness in the tourism industry, which is critical for Jamaica because tourism is our highest foreign exchange earner, and the area in which we have always had the greatest comparative advantage. The same challenges that affect tourism can be seen right across the social and economic landscape, and are the main inhibitors of growth.

The IMF agreement has been heralded as one of the last chances we have of saving ourselves from economic disaster, and whether so or not, it certainly is a significant effort to bring fundamental changes to the economy. In itself the implementation of the agreement is going to be disruptive to the economy and society, as we know it, simply because there is so much fundamentally wrong with our economic and social arrangements. Any change we try to make for the better will of necessity be disruptive.

What we must ensure is that

(1) the disruption is carried out with consultation. So that even if some persons do not agree with some things, they will at least understand. Failure to do so could end up with an outcome that nobody wants to own or participate in.

(2) the disruption must not be too radical, or else we could replace inefficient earnings with nothing in its place. This includes ensuring that when certain adjustments are done, that prior to those being done, something new, and more efficient, is put in place to substitute.

(3) the outcome must be measured, and be one that will bring greater benefit. One challenge we have had as a country is that there have been too many disruptions implemented without the desired outcome, for many reasons, but nonetheless ending up not adding any value.

One thing that we must figure out is: What are the pillars of growth? It is important for us to understand this, as failure to do so will only cause the economic plight of the country to deepen.

The first thing we must realise is that sustainable growth can only come from the private sector. While Government can stimulate economic growth, it cannot be sustained. If we do not understand this, and act in a manner that encourages private sector growth, then we will not achieve sustainable economic growth.

Secondly, it is impossible to maintain low debt/GDP, low interest rates, stable exchange rates, and a current account deficit. In the short run, we may be able to use monetary and fiscal policy to achieve all these at once, but this is not sustainable. What it does is lead to black markets, as we saw with the exchange rate in the 80s and 90s. Irrespective of what type of political system and ideology is in place, markets will react, either through the formal or informal system, which is one reason why Jamaica has such a large informal sector.

Finally, the business environment must be one that encourages businesses, and individuals, to prosper. One of the reasons that the US economy has done so well, and is easy to rebound from economic crises, is precisely because people and businesses have the opportunity to flourish to their potential within the formal environment. If this environment is not present then (1) an informal economy, and society, will develop and (2) capital and human resources will not fully participate in the economy, and may even go to another economy, through migration and business relocation.

It is very important for us to understand these underlying pillars of growth as we move forward under this IMF agreement. In the past I have found that there has been too much preoccupation with focusing on the fiscal solutions, not understanding that everything that happens on the fiscal side depends directly on what happens in the market economy. Because, if the market economy does not grow, then fiscal revenues and the balance of payments will suffer. And if fiscal revenues suffer, then the debt/GDP and foreign exchange rate will suffer. What this will do is create a vicious circle that puts the economy into a downward vortex.

In an attempt to salvage the fiscal downturn, what will happen is that Government will administer more taxes, or more debt, which will again lead to a further downturn.

The only way to break this cycle is to create an environment in which businesses will flourish, and this may also mean providing incentives for foreign exchange earners, in particular. This in turn will increase GDP, and improve the balance of payments, leading to greater earnings for businesses, which will then increase employment, causing greater spending, greater profits, and greater fiscal revenues. This is the only sustainable model. Anything outside of this will be temporary, and will only mean that macroeconomic stability will only be temporary, and can only be artificially held.

The IMF agreement and economic programme does include initiatives that can create this winning equation. These include comprehensive tax reform, insolvency legislation, financial sector legislation, labour market and public sector reform, and financial support for businesses. And these are very good initiatives, but we must be careful to ensure that the initiatives are implemented with reference to what I described above as the pillars of growth.

Therefore, as we move forward in the IMF programme, it is very important for us to understand that the main risk lies in not building on these growth pillars, as failure to do so will certainly result in short-term gain and long-term failure.

Read more: http://www.jamaicaobserver.com/business/Identifying-Jamaica-s-growth-pillars_14706368#ixzz2ZUfWmJPB

Increasing Jamaica's tourism competitiveness

EACH time I am away, I can't help but do a comparison between the country I visit and Jamaica. In particular, I always look at the main industry of the country and contrast it against Jamaica, if it is an industry that Jamaica competes in also.

Over the past few days, a delegation from Jamaica participated in a Caribbean Growth Forum, which was put on by the IDB in conjunction with partners such as the World Bank. The forum's focus was to look at what can be done to enhance the economic growth potential of the Caribbean region. The forum was opened by the Prime Minister of Bahamas, and included significant participation from government ministers from Trinidad, Bahamas, Barbados, and other islands, and included the governor of the Eastern Caribbean Central Bank, president of the IDB, and other senior financial players within the region and even as far as Canada. Of note, Jamaica did not have any government participation, with the exception of Colin Bullock from the Planning Institute of Jamaica.

Tourists sunbathe along a beach in Nassau, Bahamas. (PHOTO: AP)

The discussions which happened offline, resulted in financing opportunities for small and medium-sized companies, in particular, that everyone was keen to be a part of.

I will discuss this, and some other elements of the forum, in later articles, as I want now to make a comparison between tourism in Nassau against Jamaica. Nassau, with a population of only 180,000, and which has to import water, and is much more expensive than Jamaica, has much larger hotels and is humming with tourist activity. The type of activity seen is a distant memory of what I remember used to happen in Jamaica.

The irony of this is that as far as I am concerned the overall hotel experience in Jamaica is ahead of that where I stayed in Nassau. Especially if it is compared with Sandals (which I think is the best hotel experience in Jamaica) but even when compared to the other hotels such as RIU and Sunset Resorts.

The advantages Jamaica have include service levels (our people are more natural when it comes to delivering service) and the operations management at the Jamaican hotels (especially Sandals) is way ahead of the Bahamas experience. The people in Bahamas are very nice, but the service side is not as natural as it is in Jamaica. This is compounded by the poor operations management of the hotel. I don't think the physical infrastructure experience of the Bahamas hotel is superior than the Jamaica experience, but the food in Jamaica is much better.

The number of attractions in Jamaica is also much more, and as far as I am concerned much more attractive. One unique thing about Jamaica also is that we have a very unique culture, and our music and sports, are far more appealing than most other tourist destinations in the world, including Bahamas.

Why then does Nassau seem to have so much tourist activity going on, and certainly more than what you would see at a Jamaican hotel. It certainly is not that our local players are not competitive and creative, because as far as I am concerned, our local tourist players have done wonders, given the lack of environmental support for the tourism product.

The main problem is that tourism service delivery is primarily within the hotel, and is not supported well by the country. It is not that people do not realise the value of tourism to Jamaica, but outside of the players in the industry, the country still has not realised what true tourism delivery is.

So we continuously seek to reduce our competitive edge in tourism, in various ways. And these are the advantages that somewhere like Bahamas has over us, and why the average spend from their tourist is higher than ours.

These include better infrastructure, such as roads, and the fact that everywhere in the Bahamas is clean. In Jamaica when you drive outside of the property you are confronted with a filthy environment, tourist harassment, touts on the beaches, high taxes (in Bahamas there is no income or consumption taxes), and general indiscipline on the roads. In addition to these challenges, we also have allowed our beaches to be degraded because of our poor environmental management, unlike the Bahamas where the beaches are pristine.

This is why an all-inclusive room sells for US$250 double occupancy in Jamaica, while a similar room in Bahamas or Miami sells for US$300 or more just for the bed. If you need internet access, meals, or entertainment you pay additional. In other words we are quickly eroding our comparative advantage in tourism because of poor management.

What we must understand is that a country's comparative advantage is not static and changes based on what other countries are doing, so we need to constantly innovate and properly manage our existing comparative advantage. And it is important that, while we still have a comparative advantage in tourism, we take care of it.

It is necessary for us to ensure that not only the hip strip in Montego Bay looks good, but it must extend to downtown Montego Bay. We must enforce litter laws and ensure that proprietors maintain a certain standard in terms of how their properties look. We must ensure that there is discipline on the roads and must not have so many peddlars in the streets. Tourists, and residents, must also feel safe to walk on the road at any time during the night.

It is these things that matter for tourism, and irrespective of how much more you can offer, if you cannot offer a peaceful and restful vacation then you will not be competitive. Having to lock away tourists is not a vacation. It is an adventure, and that is not what people want to do on their vacations. This is why in Bahamas another vibrant activity you see are the number of buses carrying people on tours. And we have much more to show but do not have that sort of activity.

So if we are really serious about tourism, then we must act on the things that matter and ensure that our time is not preoccupied with matters not related to development.

Playing cricket on a volleyball court

ANYONE who knows the game of cricket would know how difficult it would be to fit all 22 players, both umpires, and both sets of stumps on a volleyball court. It would of course be possible to do so, but would be very uncomfortable and would upset the free flow of the game.

It would, for example, be very difficult for the batsman to make any runs, even though the boundary may seem so close, because he would be surrounded with fielders, and the hard surface of the volleyball court would make it difficult to bat on.

Indians play cricket at the University ground in Ahmadabad, India. (Photo: AP)

This reminds me of what Jamaica has been like for businesses and the PAYE worker. It just seems as if from the start we may have designed Jamaica to be a difficult place to do business and find opportunity. In other words, is Jamaica designed for failure rather than success? Is this the main reason why Jamaicans go to other countries and seem to do so well, while the same Jamaicans struggle here? Is it that we are all trying to play cricket on a volleyball court, where we can see the boundary but can't make the runs because of the myriad of obstacles in the way.

We have debated for a very long time that a big part of the challenge to our economic and social progress are the structural obstacles that are in our way. These are very well identified as (1) the cost of energy; (2) the need for tax reform; (3) the cost of the lack of law and order; and (4) the imposing and inefficient bureaucracy.

The fact is that if this economy is to grow it can happen only through private sector effort. And if we are going to see a significant private sector impact, then we must ensure that not only the playing field is level for all but that we have the right playing field for the game that we are playing.

So, for example, if we want to continue the growth in tourism, then we must of necessity protect our natural environment (including our beaches) and deal swiftly with law and order generally, and tourist harassment specifically. If we are going to get into the agro processing in a big way, then we must deal with the issues of energy costs and praedial larceny. If we are to encourage the proliferation of new business ventures, then the bureaucracy surrounding company formation and paying taxes must be improved significantly.

The global competitiveness report, for example, ranks us as 163 out of 185 countries, with respect to ease of paying taxes. Where we spend over 360 hours per year paying 72 different tax types, while Singapore spends 86 hours per year paying four different tax types.

One of the more significant challenges we face is the inefficiency and low levels of productivity in the public sector bureaucracy. If we are to address this then it requires that we rethink the way that we operate the public sector. The current system of rules do not facilitate efficiency, value added thinking, or cost optimisation (more important in the public sector than profitability, as the public sector should not be geared towards profitability but rather service). To solve this problem, we need to change the rules and compensation system to allow the creativity of the people in the public sector to come to the fore and for productivity to be rewarded, rather than tenure.

The problem we face today, is that from the start of independent Jamaica, we lay the foundation for failure. I had to say to someone yesterday that it is more important to rely on systems, for control, rather than people. In other words in our daily operation there should not be an emphasis on personality. We should not design laws around personalities, such as our current laws which refer everything back to a minister. We also need to have a system of governance that ensures checks and balance, rather than the current system we have where it is a first past the post who gets everything. This is the total contrast in the US where the whole governance process has many checks and balances.

The question therefore is, did we design Jamaica to fail from the start, and if we are to really see the growth and development that we so desperately need, then should we not be looking at some of these structural issues that prevent us from realising our potential. The IMF agreement does attempt to address many of these structural issues, through the timeline surrounding the passing of certain legislation, such as the insolvency act and the omnibus tax incentive act. And while we seek to address many of the structural changes we also need to be very careful that when we implement these that a clear value added is identified, so that it moves us to a cricket pitch, rather than just add some painted lines to the volleyball court.

In other words, we must ensure that any structural changes that we make that they actually cause the revolutionary change needed, rather than cause pain for nothing more than a different perspective of the same situation.

So, if we want to be competitive in the global market, and change the fortunes of the last 50 years, of our business community and citizens, we need not upgrade just the volleyball court but change the cricket match to a proper cricket pitch.

Example of excellence in the public sector

TWO weeks ago I wrote about the effect of culture on economic growth and development, and want this week to follow up with an example of a public sector company that has excelled during the recession. The company is Jamaica Ultimate Tyre Company Limited (JUTC2), a subsidiary of JUTC, which I have written about before, but want to do so now as I am about to demit office as chairman after six fulfilling years.

JUTC2 is an example of what a culture shift, performance reward, good management, and supportive governance can do. It is an example for not only other public sector bodies to follow, but also what can happen in Jamaica if we develop an enabling environment for businesses.

Jamaica Ultimate Tyre Company has not suffered from any political influence, says Dennis Chung, who has served the company through two transport ministers — Mike Henry (left) and Dr Omar Davies.

It was incorporated in 2001, and I became chairman in 2007, under then Transport Minister Mike Henry. At the time the company was losing approximately $1 million per month; and as a small subsidiary of JUTC and not very important on the national agenda, we were uncertain about getting financial support. In fact, the company was really not afforded much attention.

The first thing the new board did was to look at the business model, and determined that it could not work as it was, as the JUTC (which was cash strapped at the time) was the major customer accounting for 65 per cent of production, and was the main challenge of the company's cash flow and profitability.

The first decision therefore was that we needed to change that ratio, and focus on expanding the commercial base thereby reducing JUTC's impact on the business. Second, we determined that there were five key principles on which we were going to manage the business, which included a value-added approach to every decision made in the company. Third, we had to manage our balance sheet carefully to ensure that we could finance the strategy without any external debt or capital injection. And finally, we ensured that the proper personnel were in place based on what we wanted to achieve.

We also had to deal with the audited statements being six years in arrears, and therefore did not have properly audited numbers we could rely on. One of the first orders of business therefore was to get the audited statements up to date, as information is critical to analysis and management. This is a lesson the Jamaican economy must learn. One of the advantages the US economy has is that they have every type of data you can imagine, and it is very timely, even if not 100 per cent accurate. The important lesson is that relevance and timeliness of information is just as important as accuracy — a very important principle of accounting. For the past three years we have filed the audited statements with the ministry within the statutory period of 120 days, and all our statutory payments done on time.

By 2009 we were able to show a profit, and more important JUTC was no longer the majority of our production sales, and today represents just 30 per cent of production. Profitability continued to grow, where it peaked in 2011/12 to over $30 million, but fell last year as the economy declined. Since 2009, however, we have consistently made profits.

What is it that contributed to this performance, which the country can learn from?

First, the company did not suffer from any political influence. Under Mike Henry, the Transport Ministry was very supportive of our direction and gave us strong analytical support. When Omar Davies took over as minister I explained to him what we were trying to achieve, and indicated to him that I would be willing to stay on for two years to complete a project we were working on to make the company stronger. He asked me to stay on and never one day interfered, and the strong support continued from the ministry. This is illustrative of what needs to happen generally in the country, and is a tribute to both ministers.

Second, the board members I worked with (under both administrations) were business-focused, and gave significant support to the direction. Again this is a tribute to the ministers who appointed people who were well qualified, with their only agenda being good governance.

Third, while the board focused just on policy direction, the management executed the operational strategy efficiently. This relationship between the board and management was critical, where board members never interfered in operations. Management was made aware that their employment depended on profitability, as that was the only way to ensure the company remained open.

Every decision we made was based on a careful value- added approach. If it was not financially prudent, even if the activity was a part of the operations from the start, it was discarded. Everything we did had to have a value proposition attached to it.

Finally, the workers were a big part of the transformation. In around 2010, the management wrote to the finance ministry and got them to approve 10 per cent of the audited profits to be distributed to the employees. This caused the workers to defend jealously the profitability of the company, and in fact when a new worker was found attempting to help himself, the workers gave him up, and effectively terminated him.

I want to pay tribute to the ministers, board members, management, and workers for the tremendous job they have done and hold them out as an example to be followed. The company has been featured in international, as well as local media. It is not any one of the high profile loss making entities, but just a set of workers trying to increase their compensation through their own efforts.

Can Jamaica learn from this? You decide. What I will say is that if we do not improve the environment for doing business in Jamaica, then how can we expect companies, and workers, to excel internationally?

Culture's effect on economic progress

CULTURE can be defined as the characteristics of a group of people, including language, cuisine, social habits, arts, music etc. The culture of a people influences to a very large degree how they behave in relation to economic activity, and can have a significant impact on how economically successful they are also. We have heard many references to the Chinese and Jews made by Jamaicans who say that they are "mean", which really means frugal, or as one caller to Perkins Online said "One Chinese do five somebody work", which means that they are more productive.

These references are used by many Jamaicans to explain why the Chinese or Jews seem to accumulate more wealth than the ones making the reference, and in fact it was a part of our culture that accumulating wealth is sometimes referred to in disparaging terms. So our emphasis is always on how we can take from the "rich" to help the "poor" rather than how we can make everyone rich. This is in contrast to the US where they speak of the American dream, which is a reference to the belief that in the US anyone can become rich if they work hard enough.

A man buys vegetables from a street vendor in Shanghai, China. (PHOTO: AP)

So these examples illustrate the effect that cultural belief can have on economic progress. In fact, I have often heard reference to the view that one of the reasons for Trinidad's greater focus on manufacturing than Jamaica, is that while we were buying new motor vehicles, they were buying new machinery and equipment.

Whether these references can be proven or not, the fact is that we have long recognised the impact of cultural practices on economic progress. This is not strange to economic theory, as we often forget that economics as a social science means that the base of its influence is individual behaviour, or microeconomics. We tend to focus more on macroeconomics. But macroeconomics is really just an outcome of what happens at the microeconomics level. So the appetite of Jamaicans for car loans impacts negatively the NIR, as we do not produce cars, so that our individual desires for motor vehicles means that we must find the foreign exchange to purchase those cars.

This would not be a problem if we earned enough money to pay for those car imports, but the problem is that another part of our cultural behaviour is that we do not place a great degree of emphasis on productivity. This is reflected in the industrial disputes we see sometimes; the labour laws; and the public sector employment rules which emphasise longevity in the job over productivity. This also works against the public sector workers themselves, because they do not gain from being more productive. So what is the incentive to be more productive?

This behaviour then translates into the inability of the government to pay the public sector more, because without greater productivity we face inefficient bureaucracy, which affects private sector profitability and activity, which in turn negatively affects fiscal revenues and exports, resulting of course in the need to finance our culturally driven consumption appetite for foreign goods, which we can't afford because of low productivity, hence leading to the need for debt and a high debt to GDP ratio.

So this vicious circle shows us what effect the behaviour of each individual has on the state of our economy. Our economic and social behaviour is driven by what we have grown up learning from our cultural practices, unlike the Chinese and Jews. When I was growing up I was accused of belonging to the former group. Hence we come back to the explanation by some Jamaicans that the Chinese and Jews are better off than they are because of cultural practices which are taught in the home or at school.

This need to change our cultural habits is recognised by the minister of finance. In a presentation about two weeks ago (which was repeated by him the following week) he stated in no uncertain terms (in fact it was the main focus of the presentation) that if we are to succeed with the IMF programme and change our economic fortunes, then it can only work if we change the way we do things. In other words, focus on productivity, consuming what we produce or what we can afford to, and develop a disciplined society.

This is one of the most important presentations I have heard, as it recognises the real source of our economic problems. As I have always said, our economic problems have cultural roots. Unless we change the way we produce and consume, then all we will be doing is kicking the can down the road.

I remember when Ronnie Thwaites was the host of Independent Talk, he always said that if we want to see this country improve then we must place a check on our consumption patterns and Parliament must make sure that when the expenditure budget is presented we go through the items with a fine-tooth comb to ensure value for money.

One of the primary roles of fiscal policy is to ensure that the economic behaviour of companies and individuals result in economic prosperity. In other words, fiscal policy (in particular tax policy) should be developed based on how it impacts economic behaviour, rather than how much money it can raise for government. Tax reform is not just about adhering to an IMF agreement, but rather what sort of economic behaviour it causes. This was the aim of the PSWG submission, and is also the intent of the current tax reform proposal being developed by the government.

So the next time someone says that another person is "mean" or wants to take away someone else's work by "doing five somebody work", remember the literal translation in another culture is "frugal" and 'productive".

If we are to solve our crime problem...

Jamaica is really an amazing place. Over the last week, while we have all recognized the need to get economic and social development going, and in a week when we are expecting the Finance Minister to tell us how he will finance the fiscal expenditure, we have been bombarded with discussions of toilet paper, markets, and divine intervention.

These are important issues, and correctly are discussed by the media. But what we really need is a society where when these matters come up they are dealt with immediately, so that we have an agreeable solution.

A distressed looking storeowner in front of her ransacked store on Red Hills Road, during unrest in the nation’s capital after an extradition request was made for convicted crime lord Christopher ‘Dudus’ Coke in May 2010.

The issues surrounding the need for divine intervention, however is a very important one. Crime robs us of an estimated four percent of GDP, or approximately $60 billion, and in doing so inhibits a lot of the productive capacity and competitiveness of the country. For example, the main reason for the high cost of agricultural production in Jamaica seems to be Praedial larceny.

It is therefore very important to deal with the crime monster, as if we are unable to do so then it means that anything else we do to attempt to make the economy, and society, better, will amount to futility.

So why have we not been able to deal with this crime problem. I have some views, which are by no means based on any expertise in crime fighting, but a logical approach to problem solving.

Let me first say that I think that the police force, under Commissioner Ellington, has done quite a lot to help bring back some amount of confidence in the police force, but still has a long way to go. Especially when they keep reversing some of the progress with actions that cause disruption in community relations.

In order for us to get a handle on crime, the first thing we must do is understand that we cannot sustainably solve the problem if we do not have a disciplined and orderly society. In other words it is difficult to create order within an environment of disorder. So if the parents in a household carry on with unethical behaviour in front of their children, then more than likely the children will act out what they see rather than what they are told.

So it is always going to be difficult to solve crime if we do not deal with the indiscipline on the roads, the violations of the noise abatement act and the zoning laws, and the littering of the roads. These are simple things to deal with but unless we address them then it will be like expecting someone to emerge from a mud lake without any mud on them.

A second point is that justice must be swift and low cost. If we are serious about taming the crime monster, we cannot have a situation where the police make an arrest, carries someone to court, and the case takes five years to complete. We also cannot have a situation where jurors go to court and don't even get lunch money, or transportation costs, reimbursed. And then if they do not turn up they get in trouble with the law. Imagine being asked to preside over the life or death of an accused, and you can't concentrate because you are hungry, or thinking about how you are going to get home.

The police needs to treat all crimes as equally violations of the law and act speedily in all cases. So when someone reports domestic violence or Praedial larceny, it is important for the police to treat all those cases as urgent. Don't wait until the petty thief, or the domestic violence accused, graduate to more serious crimes to act. In other words, if you do not act decisively when a young child tries to always get their own way, then you will have to deal with a bigger problem when they are older and may have to apply even more stringent measures.

The law also needs to be applied equally to everyone. And in this case I am not talking just about the person with connections, but also when we give someone leeway because you think they are among less fortunate. So the sentiment is normally to give the small man a chance. Soon you find out that you have a reason for giving everyone a chance and eventually corruption flourishes.

It is also very important that before any charges are brought against someone, or any accusations are made public, that proper investigation takes place before. There have been many cases of people being charged, or accused, of wrong doing which either proves false, or lacks sufficient evidence. This negatively affects the credibility of law enforcement.

The recent example of the traffic ticket amnesty is an illustration.

The last point, but by no means least, is that the enforcers of laws, such as the police, cannot be seen to disobey it. It is very important, that the credibility and authority of those persons in charge of enforcing the rules are intact.

So if we are to solve the crime problem, we cannot just focus on the outcome (such as murders). But we must of necessity, address the root causes of the problem, of which the main one would be a disciplined and orderly society.

Bureaucracy's effect on productivity and growth

FINALLY we can celebrate that we have an IMF agreement again. The real importance of the agreement is that it will bring with it a certain amount of confidence and multilateral support for the fiscal accounts. Importantly also, it will arrest the slide in the NIR.

However, unless we address the structural issues of law and order, energy, and bureaucracy, this will be like any of the past agreements we have had over the past 39 years. That is, nothing but additional debt, with no sustainable improvement in our economic or social situation.

Dennis Chung says he spent two hours in the line at the Constant Spring tax office on Monday, as there were only two cashiers working, while there were six empty stations.

Having discussed energy and law and order many times before, today I will examine the effect of bureaucracy on productivity and growth. What I will do is use an example relating to my recent experience at the tax office.

The 2013 Doing Business Report shows that out of 185 countries, Jamaica ranked 163 in relation to paying taxes. This means that in the category of how easy it is to pay taxes, we are better than only 22 of 185 countries. Is it any wonder then that tax evasion is rampant, and fiscal revenue targets cannot be met?

It is important to recognise (I believe because of the efforts of the TAJ) that we moved up 11 places from 2012, when we were ranked at 174. Despite the improvement, however, and the good work that the TAJ has been doing, the fact is that the bureaucratic nature of our tax system still creates a host of missed opportunities and leads to low productivity.

A real example is my recent experience with paying two types of taxes, over the past three weeks.

First, let me say that the recent online filing and payment of my annual returns went quite well. The customer service experience on the phone was great, and here I have to single out Taneka Newell, who way into the evening called me back to see if everything worked out all right, as I was having some difficulties navigating and recording the online payment because of the number of persons online.

A few days later, however, this excellent customer service was to be negated. I had reason to visit the King Street tax office, and while there sought to ascertain my property tax liability. When I asked the cashier to check it online, she indicated she couldn't because they had no access to the system. So I had to go to another location, and wait in another line. I had to leave because of time constraints, thus delaying the inflow of much-needed taxes to the government coffers.

The second experience came a few days later at the Cross Roads branch, where again I made an attempt to ascertain my property tax liability, so that I could pay it online. This was not to be, as there was a line extending outside the door, and the door was being manned by a security guard, determining who went in (note, not a customer service person). I indicated to him that I just wanted to go to the information desk to find out how much I owed. He told me that I had to join the line to find out how much I owed, and then join again to pay the taxes. That process could easily have taken two hours. Again, I opted to leave, as I figured that the government needed the tax more than I needed to pay it.

The next day I went to Constant Spring tax office where I explained my problem to an employee. He was good enough to ascertain on a computer the amount I owed. He was very pleasant, and was from the large taxpayer office. He also told me that I could have gone online to find out what was owed, even though the notice sent said that I should visit a tax office, and a similar thing was told to me by the cashier at King Street.

I went home and paid online quite easily.

While driving out of town last Friday, a policeman stopped me to do a random check, and when he saw my road licence, he told me that I was in the grace period. It was a good thing he stopped me, because I thought I had another month.

I went to pay it at the Constant Spring office on Monday. I spent approximately two hours in the line, as there were only two cashiers working, while there were six empty stations. The supervisors said they were not able to help, as they were short-staffed.

This meant that the 100 or more persons who were there, while I was in line, spent at least two hours trying to pay their taxes. And it is important to remember that the taxes have been increased significantly. The authorities are telling us to pay more taxes than we did last year, while they cut back on their staff to add to the pain of our experience.

The important point to note here is that there is significant productivity loss. We can compare the savings to the productivity loss as follows.

The saving from the empty work stations is approximately six salaries, which we can put at maybe $20 million per annum. However, this means that 1,000 persons per day will have to wait an extra 90 minutes to pay their taxes, resulting in a daily loss of productive time of 90,000 minutes, 1,500 hours, or 187.5 working days each day.

If we assume a straight-line contribution to GDP, 240 working days per year, a GDP of $1.3 Trillion; and an employed labour force of 1,000,000, then the average daily GDP per person is $5,417 ($677 per hour). The computations therefore show that the lost GDP value per year, from the 1,000 persons per day, at just this one location, is $243.8 million, and a tax (fiscal revenue) loss from that of $73.1 million.

So to save $20 million annually in salaries, we may be giving up $73 million in fiscal revenues. This is why a value-added approach to policy is essential. When you multiply this example by the number of public sector locations with this problem, then you can see the negative effect of bureaucracy on growth and productivity.

The role of government in market economies

My mother used to say of children, it is sometimes better to be seen and not heard. These were of course in the days when parents ruled children, and not as it is today. So it should be or governments in market economies. That is it is always better for the market to realize that the government is always present to ensure equity, opportunity, and protection of the poor and most vulnerable exist.

In other words the government should be like a referee in a football match, who ensures that the game runs smoothly according to the rule governing football, but never interfering with the play by becoming an active participant. If the referee even gets in the way of a pass, even unintentionally, it can change the whole complexion of the game significantly.

This is what governments need to understand about how market economies run. This is because the government, amongst all the stakeholders, is the least efficient when it comes to allocating productive resources. Put another way, the referee is usually the one on the field with the least footballing ability, at the moment even if he/she used to be a very skillful player.

So what happens when the referee gets involved is that they, even if inadvertently, cause an unfair advantage for one side over the other. So this could mean that the better side loses the match because of an interference by the referee. The referee may for example give an unwarranted penalty against the better side, causing its players to become demotivated or even causing it more difficulty in obtaining the three points they deserve.

The result is a result that does not reflect the true potential of the teams, which will in turn affect the quality and integrity of the tournament, and if this happens too frequently will cause the spectators to stop attending matches, or even cause discontent among supporters and sponsors, which will eventually lead to financial failure and collapse of the tournament.

So those single episodes of interference by the referee can ultimately result in the demise of the tournament.

So too the inability of the government to stick to its defined role in a market economy can ultimately lead to the decline in economic activity and the failure of the market to operate efficiently and result in poverty and decline.

My own view is that this is a role that the US governments have understood very well, and Caribbean governments have not. This is primarily why the US economy and society has done so well, and Caribbean economies and societies have not done so well. The fact is that (maybe because of our colonial and slavery past) Caribbean governments have preferred to act as “social workers”, dishing out welfare, rather than the referee who ensures fair play in the market and society.

This is the primary reason, in my view, why our economies seem to develop this dependency syndrome on governments, and why our economies have done so poorly, when compared to the rest of the world.

The fact is that we have become accustomed to a situation where market, and personal growth, depends on the welfare capacity of our governments. So if the government is not able to spend as used to, in the economy then we face economic decline. And instead of trying to fix the problem permanently, by allowing the private sector to take charge, while government bureaucracy steps back, instead governments taxes more, thereby further restricting productivity and innovation, and distributes more welfare in order to solve unemployment problems.

The result of course is that private investors hold on to capital, or invest it where the environment is more friendly (which is why people were investing in the US at negative interest rates), and ultimately the poor gets poorer, and in order to keep up with the plan of more welfare, and state interference, the country borrows more money.

And guess who is most burdened with the debt, economic, an social challenges.  And guess who ends up paying all the tax increases in the long run. None other than the poor, and most vulnerable, they are trying to protect.

On the other hand, guess who ends up getting all the welfare money eventually. None other than the owners of capital they are trying to tax.

So if we are going to play the market economy game, one of the first things to do is understand the most effective role that governments, and the private sector, has. In other words don’t play the goalkeeper in the forward’s role.

Confidence is key to economic stability and growth

Probably the most senseless decision I have ever seen in my lifetime, was the decision by the Cyprus government and European Union to impose a levy of up to ten per cent on bank deposits.

I really cannot believe that persons interested in global market recovery, and solving the Cyprus problem, actually thought that this would have been an acceptable solution. In fact, the consequence of the decision is to cause risk aversion, and goes to the heart of what causes markets to function effectively.

I think the best thing should be for the persons responsible for this decision to identify themselves so that they could be on a list of "registered market offenders" just like the US have a list of "registered sex offenders".

Any way this turns out there may still be a rush to pull deposits out of Cyprus banks, and what the proposal was trying to avoid may happen anyway. That is possible bankruptcy, and certainly capital movement away from countries like Cyprus that need the capital. This is indeed a big setback for developing countries that need capital to move to, not away from their banks.

In fact, the austerity policies being pursued across Europe, which seems to be the work of German influence, is actually sinking the European countries further into recession. Austerity, without adequate economic programmes, is like someone said to me this week, standing in a bucket and trying to lift it. Even the usually solid UK economy, is threatening a triple dip recession, as a result of the effect of the austerity programme pursued some three years ago.

When asked on Facebook about whether the Cyprus situation could happen in Jamaica, my response was a definite "No!". Say what you want about our politicians, they would never do something like this. In fact I don' know anyone outside of the Cyprus government who would have agreed to this decision. My own feeling is that they may have no option but to resign in order to restore confidence.

The Cyprus situation has caused persons around the world to remind themselves (once again after 2008) about how fragile financial markets are, especially in today's technologically interconnected world. The fact is that markets, and market transactions, are based fundamentally on trust. Trust in the market. Trust in the regulatory environment and justice system. Trust in the security forces.

Irrespective of how many laws we have on the books, what it shows is that the laws are only meaningful if everyone accepts them as the way to function. One of the roles of government is to ensure that the trust is maintained, as any breakdown in that trust causes increased risks, which lead to macroeconomic instability.

In the case of Cyprus, the government was the one that betrayed that trust and created market instability.

This Cyprus fiasco should cause us to reflect on understanding what is required to improve our own economic fortunes. It provides an avenue for reflection on how we have approach market development, and what we have been doing wrong, thereby resulting in Jamaica not seeing any growth of consequence since the late 1980s and even then it was too short a period to have any long term effect.

What we must understand is that government cannot by itself provide a sustainable growth path. What government can do is provide welfare, short term stimulus to the economy, or an environment that facilitates a path for private sector development. In other words, the best role for the government is to stimulate or facilitate economic activity, but not to seek to try to create economic development.

Economic development (activity) is best done by working though the private sector. It is only the private sector, and not public sector, that is motivated to be efficient through the profit motive, and ultimately improve market and country competitiveness. It is only the private sector that can take advantage of the comparative, and competitive, advantages of economies. Not the public sector.

One of the main problems that Jamaica has faced since independence (and possibly before) is that our government seeks to get involved too much in the economy, and by doing so creates a crowding out effect on private sector development. This desire to be involved in the economy, and be the hero of Jamaican's economic salvation, has caused the over taxation of production, over emphasis on welfare, and the increased and slow moving bureaucracy. It has also resulted in a private sector that in many respects is uncompetitive because of the fifty years of government effectively telling it how to run its business, through fiscal, monetary, and regulatory policies aimed at ensuring the survival of big government rather than private sector development.

As far as I am concerned the main thrust of the austerity policies, including Cyprus, coming out of the 2008 recession, has been to ensure the survival of government bureaucracy, through emphasis on fiscal adjustment. Only in countries like the US, Brazil, and China has the emphasis (through stimulus programmes - not necessarily just new cash) been on spurring growth through private sector resuscitation.

It is this philosophical difference, and deep understanding of what sustains the fragile balance of a market economy, that has led the US to turn around the fortunes of their economy, unlike the economic death sentence that Europe seems doomed to, and the seemingly haste with which Cyprus seems to want to carry out that death sentence by slitting its own throat.

Solving our foreign exchange crisis

Over the last week there have been two issues dominating the media, which illustrates to me that Jamaica's foreign exchange crisis is driven primarily by the way we approach challenges.

The first is the discussion that has taken place regarding the uncertainty of the Petrocaribe deal because of the death of Venezuelan President Hugo Chavez, and what it would mean for Jamaica's (and other Caribbean countries') balance of payments. In the case of Jamaica the immediate effect would be a US$600 million hit.

The second is the fact that the NIR went below the internationally acceptable benchmark of 12 weeks of imports, and the lowest level in ten years.

These two situations are an illustration of what the real challenge is that we face as a country.

In the case of the Petrocaribe uncertainty, the discussions focused primarily on how we can save the agreement, and what prospects we face for doing that if the opposition party were elected in the upcoming general elections. In other words, the conversations have focused around hoping that we can continue to benefit from this arrangement.

This for me is the wrong conversation to have. In other words, this development should be a wakeup call for us, that after 50 years of political independence we still cannot secure economic independence, not just in Jamaica but as a region. The conversation that we need to have is, how we can ensure that we move away from the need to ask another country to support our productive capacity, while putting us into more debt. We also need to ask ourselves, how have we utilized the Petrocaribe debt to spur greater productivity and increase our competitiveness? How has the manufacturing sector benefited from the use of the Petrocaribe debt to enhance the efficiency of their energy use?

These are the questions we need to ask ourselves so that we can get to a solution. And note I used the term Petrocaribe "debt" rather than "fund", as no matter how nice the arrangement sounds it really is just more debt that we are accumulating.

We rightly should be grateful to Chavez and his government, for allowing this facility to the Caribbean nations, but as a region we must also ask ourselves if we have been using this facility in the best way for the improvement of the country, productive sector, and the people. In other words after so many years benefitting from the Petrocaribe debt, are we still not facing a more serious energy and balance of payments crisis.

The second issue of the NIR seems to be a recurring theme. Whenever the NIR starts to decline we are always consumed with discussions like when will the International Monetary Fund deal be signed, or can the government access multilateral support or private capital.

In both these instances, the conversation we have in response to the crises is about how we can continue to live another day in dependency syndrome, rather than how can we eliminate the need to face these crises again.

This was brought home to me recently in two discussions I had this week.

The first was with someone who was coming to the end of a contract of employment and I asked the question, what are your plans after the contract has ended. The response was that something will work out. When I tried to engage the person on making plans, and not just leaving it to chance, the response was that Jamaica was a difficult place to live in and that the earnings was not enough, and the solution was to leave Jamaica. Contrast that with someone else who just a few months ago was earning less than the person, who said to me that she wanted to start a business and today earns more than she did and is in a growing business.

So I said to the person that the problem you have is that you always try to blame everything around you for the problem you are having when the problem really is that you have failed to act.

The other situation is where recently I addressed a group of persons about what they need to do to improve their lives, and in particular what they need to do about improving their health. This came out of my most recent book.

This set of persons has significant challenges in relation to their health, but everyone who was there seemed upbeat about their chances because they were determined to address the root cause of the problem. Because of this attitude, and approach to dealing with the challenge they face, some reported on the progress they were making.

So it is with our foreign exchange crisis, which has been with us since the 1970s. If we are to solve it then it is going to require that we do a lot of things differently. It is going to mean that we recognize that the problem to our energy crisis is not to defer some of the payment for our oil bill but reduce the cost of energy significantly by generating energy more efficiently, using a diversified energy source, and through an improved public transportation system.

It is also going to mean creating greater productivity in agriculture by dealing with crime, having greater economies of scale, and better marketing of our produce. It is also going to mean that government becomes a facilitator of the productive sector, and economic activity generally.

If we are to solve our foreign exchange crisis then the discussions about the Petrocaribe debt must move from how likely are we to save it to how quickly can we get to a position where we do not need it.

Prosperity requires new thinking

THERE is something the Honourable Dennis Lalor always says to me that has a lot of relevance for the country, and individuals. That is: "Bird seed don't make John Crow sing." For any reader who is not Jamaican, a John Crow is the same thing as a vulture. What it simply means is that no matter how much bird seed you feed to the John Crow, it will never sing like a bird simply because it cannot.

Similarly, Albert Einstein said the definition of madness is to do the same thing over and over again and expect different results.

EINSTEIN... said, the definition of madness is to do the same thing over and over again and expect different results.

In effect, what both gentlemen mean by the respective quotes is that if you are doing something that can never produce the result you desire, then doing it over and over again can never give you the result you want. In other words, in order to get the result you want it is necessary to approach the problem with new methods and thinking.

So recently I have heard comments to the effect that the Jamaican dollar is overvalued, and that we need to let it find its true value. There have even been target rates quoted such as J$120 and J$150 to US$1. My question, though, is can we allow the dollar to devalue within the context of the current environment where productivity capacity is limited, where the major component of imports is oil, and where a significant part of our export inputs are imported. Is devaluation going to make us use less oil, if we do not change our energy source first, or are the exporters going to absorb the import cost increases when they price their exports?

Similarly, can we really improve the efficiency of the bureaucracy by just laying off public sector workers, or would it not be more beneficial to approach the problem from the point of view of changing the rules and processes to create a more efficient environment?

As individuals, can we improve our financial situation by the same consumption and investment habits we had before, or do we need to change them?

From both the country and individual perspective, if what we have been doing is giving us the results we want, then obviously there is no need to change it. And you should keep doing what you have always been doing. If, however, you are not happy with the results, then it means that you have been feeding bird seed to a John Crow and expecting it to sing. In other words, if you want to hear singing then you have to realise that it makes no sense feeding the John Crow, as it will never sing. Get rid of the John Crow and get a bird that has the ability to sing.

Only after you have done that do you even stand the possibility of hearing any singing coming from the bird. Note that the John Crow is a bird, but it is not one with the ability to sing.

So, if we want to see a country or individual prosper, then doesn't it similarly mean that we have to ensure that we equip ourselves with the resources that will lead to prosperity? If we change the brand bird seed, and feed it to the John Crow it still won't sing. Even if we increase the quantity, and change the brand, the John Crow still won't sing.

So, irrespective of how much money we get to borrow from multilaterals, and no matter how much tax we put on the people of Jamaica, and no matter how many public sector workers we lay off, or how many wage freezes we have, the fact is that if we continue to make these changes within the context of an environment that is not competitive or productive, it really is nothing more than an exercise in frustration.

The only way for us to see any sustainable prosperity in Jamaica is to fix the structural problems we have. And these structural problems have been with us since Independence, as even the growth in the booming 1960s was primarily because of foreign investments. All the structural challenges existed at that time also.

What are the major structural issues we face? Energy cost, inefficient bureaucracy, law and order, and the need for proper tax and incentive reform. Doing anything else without fixing these is, well, giving bird seed to a John Crow and expecting it to sing.

From an individual's perspective the same applies. If you have financial challenges and it arises primarily because your consumption expenditure is too high for your income, then refinancing any debt you have will not change your financial problems. What you must do is radically change the way you consume in relation to your income. For an individual it is much easier as you can get a good financial advisor to assist. Just make sure you get a good one and follow the advice. In other words, resist the temptation of buying a dog and then do the barking yourself.

In both cases, what is needed for any increase in prosperity has to start with a new way of thinking. This is the first step in changing that paradigm. Regrettably, I do not think that as a country, and as individuals, we have realised that this is the first step. So the old way of thinking persists and what happens is that the same ideas used in the past are repackaged under a different name. And sure, you can always get away with selling a newly repackaged item at least once. But the taste and effect are going to be the same, irrespective of the packaging.

So in order to hear that sweet singing sound that only a bird can make, let us first think about what type of bird can sing, and which one delivers the melody we want to hear, before we start feeding it bird seed.

Changing costly cultural habits

In 2011 I remember having a discussion with someone who questioned my continuous advice that people should look towards solar energy at home, and if necessary borrow the funds to install it. At the time he said that he would rather to borrow the money to buy a new car, as data showed that the investment in solar was not a good payback.

That argument I couldn’t understand because while an investment in solar energy gives a return on investment, in savings and convenience, I don’t see how one gets any return at all from a car. Particularly if you borrow the money for the purchase. Well maybe there is the social benefits.

At the same time, in 2012, we saw where bank loans, and in particular personal loans (mostly for cars) increased over 2011.

Being the stubborn person I am, I went ahead with my plans to invest in solar energy at home, and today enjoy significant savings and much convenience. I have never regretted the decision and investment.

Today I spoke with someone who advised that many persons today are having difficulty servicing their car loans, and over the weekend I heard two stories where cars were seized by the bailiff while they were in transit. Additionally I have heard stories of businesses in trouble because some business people borrowed money to purchase motor vehicles, instead of saving the money or reinvesting it in the business.

This reminds me of a real life story where two men who were truck drivers in the 70s had $250,000 each. One decided to buy a house in Beverly Hills and the other a business, and continued to rent. Today the one with the house still has it and the one who went into the business could but many of those houses, and in fact has many investment properties.

These examples show that one of the most significant factors that cause financial hardship, even though there is a recession, is the cultural attitude of many in the country. This is illustrative of what investment advisors always tell you that there are two things that cause people to lose money – fear and greed. And in the Jamaican context I want to add another – the need to “profile”.

I have found in many instances that people who make bad financial decisions do so because they want to impress others with the so called badges of wealth. That is the car, house, and other accessories. So what they do is borrow the money and live today with the income they expect in the future.

This cultural attitude is what has caused financial distress for many Jamaicans. And I find that the ability to overcome this “profile” attitude is a significant step in regaining financial health. This is why one of the first things I mention in my book is the first step to financial reform is an acceptance of what needs to be done and an acceptance of the inherent problem.

When I was around sixteen, my uncle said to me. “its not how much you earn that is important but rather how much you earn”.

Some will come to grips with this problem and reform their finances but many more will not. They will continue to make mistakes and suffer from the need to live the culture of profiling. My own view is that this need is derived from an underlying insecurity but I am no psychologist.

This cultural attitude can be found in many countries and cultures but I think Jamaica has a big dose of it. If we are to overcome our financial challenges then there is going to have to be a radical reform of this culture, so that we can invest in productive assets, just as Trinidad did in the 1980s, while we invested in motor vehicles. After all it is the individual lifestyles that sum up to the overall condition of a country,and we must remember that economics is a social science and hence is based on cultural attitudes also.

If anyone wants to make the change they can, especially if they have someone advising them about it, but the deeper you have found yourself in this culture is the more difficult, and more help you will need.

Devaluation not good for Jamaica

Over recent weeks there have been utterances from several quarters - including economists, analysts, and technocrats – about the benefits of devaluation for the country.

The argument being made, is based on the theory that if we were to devalue the J$ in relation to the US$ then our exports would get relatively cheaper and this would lead to a greater demand for Jamaican exports. This is a strategy that countries like the US, Europe, and China are well aware of, and it seems as if there is a constant currency value war between these countries. The US for example is constantly complaining that China’s currency is undervalued, which leads to China’s goods being cheaper than the US gods, resulting in the massive trade deficit the US has with China.

If this argument holds true then the position being put forward by those in favour of the Jamaican dollar being devalued, and as some put in finding its true value, should be correct then.

The question is, if this argument is true then why has the J$ moved from a position in the 70s where it was stronger than the US$, to where it is today (approaching 100) and it seems as if our economy is getting worse, and more importantly our trade deficit is expanding. Shouldn’t the massive devaluations we have seen (over average $2.50 per year since the 70s) result in an improved trade deficit.

This is where those who propose devaluation fall short in their argument, as the assumptions they make is incomplete.

The fact is that devaluation can only help a country’s currency IF and only IF the country’s currency being devalued has the productive capacity to replace the imports. So in Jamaica’s case where 45% of our imports are oil (35%) and food (10%), the question to be asked is do we have the productive capacity to replace the imports. So as expensive as oil gets can we substitute it with locally produced energy sources? Or can we replace our food imports with locally produced foods?

The answer to these questions is no. So therefore irrespective of how much the dollar is devalued, we will still need to import oil and food, because we have not put the energy policy in place to grow for example renewable energy generation to replace foreign oil. And in the case of food, praedial larceny, lack of proper roads, and using farm lands for construction inhibits local food production.

The other argument for imports that we can substitute with local production, is that 70% of our export content is from imported raw materials, as labour costs (unlike China) are a very small percentage of inputs. So it follows that as the dollar devalues the cost of exports increase also because more money has to be found for the imported content.

Therefore, my conclusion, as was the same for Seaga and Davies, is that the only thing devaluation does is cause inflation and erodes spending power. The only way to solve the problem is to fix the structural issues of crime, energy, and bureaucracy.

Surviving under the IMF

AT the end of December 2012, when it became clear no International Monetary Fund (IMF) deal was coming, I wrote an article that was published on January 4, titled "Jamaica without the IMF", as I felt that it was important to think about options. This was because not having a deal by the end of 2012 meant there were harsher measures than expected that would be coming.

Many persons said that there was no option but the IMF, and that we must get an IMF deal. Well, we did and some of the same persons who were saying there was no other option are now criticising the tax package and the National Housing Trust (NHT) drawdown. I can never understand what some of us want.

A home built with solar cells that double as roofing material. Investing in renewable energy to cut energy costs would be a smart move in the face of the harsh economic climate, advises Dennis Chung.

So here we are facing IMF terms that obviously will cause further contraction in the economy, on top of the devaluation we continue to see. A point here is that devaluation, as both Seaga and Davies recognised, does mostly harm to Jamaica and little good. This is because most of our export content is from imports, and so any devaluation only makes the cost of our exports more expensive, and will either result in increased export prices or shutting down of businesses which can't recover costs. How we deal with that is for another discussion, as what I want to focus on today is how the individual can deal with the current environment.

There are certain measures individuals can take to protect themselves, which in the short to medium term will result in a reduction in economic activity and fiscal revenues, but at least will protect against the terms of the IMF agreement.

To be clear, there are some people who are going to be affected more than others because of situations like debt levels (especially personal debt such as credit cards and car loans) and if they have not been working for a while. However, I believe that everyone can protect themselves to some degree against the coming environment if you have the commitment, discipline, and work with someone who can help. After all, when you are sick you go to a doctor, why not seek financial expertise when you have financial issues?

The issues I will mention come from discussions I have been having on Facebook, and out of which a group has been started, to discuss specific issues that can help people cope with the economic conditions while also improving your health. In fact, the main motivation was health reasons but also results in protection against the economic environment.

The objective is that you want to maintain your standard of living as much as possible by reorganising your expenditure and habits to maximise the utility of your resources. The first thing I say to people is if you do not have consumption debt, then do not acquire it, and if you have it, then get out of it as quickly as possible. So the credit card and car loan you should shy away from.

You also should seek to improve your income, as just cutting back alone (as in the austerity measures) will only result in a decline in living standards. So a real-life example is someone I recently coached who was an office helper in an organisation. Before her contract came to an end I told her, and her colleagues, to look at starting their own business. The better-paid and more formally educated ones chose to go and work for someone else. She said to me that she wanted to start her own business but had no capital. So I asked her what she liked to do and she said food. So I told her to go bake a cake and come back and sell slices to the people at the office. Within a month she was selling a few cakes and today her customer base has expanded, she is building her house, is thinking of employing someone, is making more money than when she was working, and is enjoying it much more.

The other thing to do is examine your consumption and see how you can be more efficient at it -- For me this includes improving health, which also means less future medical expenses.

So there are two things that I have done that have improved my quality of life and at the same time reduced my consumption expenditure (although required some upfront investment) and put more money to savings.

The first is to go with renewable energy at home. I have been using solar for the last three years, and today generate 80 per cent of my energy needs. A good problem I face is that for about four hours I generate more energy than I need and because I have a charge controller on the system it doesn't use the maximum it can. But what it also means is that within two years I would have paid back for the cost of the system and have another 10 to 20 years of use before replacement, and I never suffer during Jamaica Public Service outages or cost increases, from fuel prices or devaluation. Today my water and light bills are approximately the same.

The other thing I do for health purposes primarily, but ends up saving me money also, is to grow my own herbs, vegetables, and fruits. Today what I grow accounts for 10 per cent of my food consumption and the plan is to move it to 70 per cent in six months, which is achievable because I am practically vegetarian. The most important thing is that it is healthier, as it is fresher and I know it is organic, but secondly, it is much more convenient to just go outside and pick what you want to eat.

Everyone can do this to some degree, and it is a much healthier alternative. Can you imagine if enough people adopted this approach to reduce unnecessary consumption and create their own energy and food consumption, the amount of foreign exchange savings the country would have?

It is important that we start to think this way, as there has not been presented as yet any economic agenda that is going to increase GDP and spending power of the masses. What we need to do, therefore, is start to take our own individual actions to cope.

These actions will no doubt decrease economic activity, and reduce taxes from consumption and income, but at least they are the best way for everyone to contribute to the country's balance of payment solution, while improving their own circumstance.

Fix the structural deficiencies to see growth

THERE were two occurrences within the past week that reminded me that Jamaica still has a lot to do in order to see long-term sustainable development.

There was an announcement that an International Monetary Fund (IMF) team is on the island, and it is expected that a staff-level agreement should be reached after this visit. This means that we can expect board approval within six weeks, which would be just before the 2013/14 budget is tabled.

A Jamaica Public Service (JPS) worker about to climb a light pole. The Office of Utilities Regulation’s decision to cancel the process which would have facilitated JPS to use liquefied natural gas as its main fuel source, was one its most impractical decisions ever, says Dennis Chung.

There seems to be general acceptance that any IMF agreement is just a stop-gap measure, as articulated by Prime Minister Portia Simpson Miller and more recently the Private Sector Organisation of Jamaica (PSOJ) president Christopher Zacca. What is also evident is that the government has to be careful not to get an agreement like the 2010 one where the targets set were unrealistic and never had a chance of being met.

Correctly, the position of the PNP's NEC is that there should be no new taxes, which is a position I have supported for years now. This position is supported by the numbers that show that since fiscal year 2003/04, we have seen four tax packages up to 2012/13 and the shortfall in collections has been more than the tax package. For the current financial year the tax package is $25 billion, and already we see a shortfall of $11 billion to December 2012, with the highest projected months to come. It is clear that the only effect of tax packages is to reduce disposable income, economic activity, and push inflation. So the position of the NEC is an enlightened one.

The other event of interest is the development: re the Office of Utilities Regulation (OUR) terminating the approval of the Jamaica Public Service Company (JPS) to pursue the liquefied natural gas (LNG) facility. This is one of the most impractical decisions to have come out of that body, and there have been a few. What is the rational for denying the JPS another 30 days, when they were the sole bidder and we need an energy solution like yesterday? I mean, are we going to go over the bidding process again, only to select JPS as the sole bidder again? Do we expect that after making such a decision that other persons, seeing that after JPS has spent US$2 million on this process are going to compete for the facility? How many persons do we think have US$600 million sitting down and waiting to invest, especially given the monopoly hold that JPS has on the industry?

And I say this having indicated at the start of the LNG project that it would not have come to fruition, in the time projected, and being one who has always believed that coal is the most practical way to go for industrial energy, and renewable for retail and office consumption. It just does not make any practical sense to turn down JPS's request for an additional 30 days. Even if we do not see the savings on electricity cost, at least we would have seen the benefits of the investment in the economy.

Anyway, I have given up trying to understand the mental workings of some of our bureaucrats.

In any event, my pet peeve is why we seem to stand around and wait on long-term solutions. Why do we not look at the plausible short-term solutions to 60 per cent of our oil consumption, in the form of retail and transportation consumption? If we had acted on these four years ago, then we could have saved at least US$2 billion on our trade deficit.

So the country stops as we focus on getting an IMF agreement and long-term energy solution. We fail to understand that we can at the same time, and should, work on other short-term policies to reduce the urgency for these longer-term policies.

The other area that we do not seem to understand how to resolve is the matter of public sector bureaucracy. When the PSTU was being set up, a few years ago, I had indicated that we would not see any benefit from it in the projected two-year time period. It has been approximately four years now and we still are debating how to deal with public sector bureaucracy.

I said it then and I say it again, we cannot bring efficiency to the bureaucracy by centralising the solution in the same bureaucracy it is supposed to improve.

The most prudent way to bring efficiency to the public sector is to (1) reform the rules that govern public sector bodies, so that things do not take forever to happen, like public sector rationalisation; and (2) put good people in charge of these public sector bodies with the requisite authority and objectives, and pay them a part of their salary based on agreed improvements. Instead, we argue about how much money some of these bureaucrats are paid instead of what value they are adding.

As an example, if you pay someone $2 million, who adds $1 million value, and someone else $20 million, who adds $30 million value, then who is more expensive?

It is time for us to change the way we approach solutions to our challenges.

We must understand that we shouldn't wait around on major projects to fix our structural issues, because many times the small actions can add a lot more value. We need to focus not just on major announcements.

Again, I state my view that we can see short-term solution to the energy crisis if we make the right policy decisions, and in addition, we can see improved public sector operations if we focus on solving the public sector individually.

Until we realise this and take the necessary actions, then we will certainly get an IMF agreement but will find ourselves back in this economic quandary sooner rather than later.