Adapting to the global environment

Over recent weeks we have seen both a global liquidity crunch and active political campaigning for Monday’s general election. Both will no doubt have a significant effect on Jamaica’s future and one of my disappointments with the economic debate is that we did not see enough coming out as relates to the global impact. Audley Shaw did mention Jamaica’s need to remain competitive in a global market, but the fact is that the questions did not bring out enough on this important issue.

Global markets are seeing a liquidity problem that has already started to affect Jamaica. We have seen where (1) the interest rate on July’s variable rate instrument was 20 basis points more than the June instrument; (2) recent pressure on the Jamaican dollar by the major currencies; and (3) declines in tourism over last year. This should of course come as no surprise for anyone who has been following the global markets, and in fact both Ralston Hyman and I have been saying for months that we would encounter this problem.

Inadequate debate
At the same time the elections will take place on Monday and there has not been much debate on how the parties will address the global challenge we face. No doubt this will call for fiscal prudence, not from the point of view of limiting expenditure, but ensuring the efficient allocation of capital. There can be no question that this is something that we have fallen down on, as is evidenced by the huge mountain of debt accumulated with no real benefit in our growth or GDP per capita numbers. And when I am looking at this I am not going to speak, as we always do, in isolation from the rest of the world. We must at some point in time confront the fact that we live in a global environment and improvements cannot be looked at in isolation from the rest of the world.

As an example the table shows average GDP per capita growth for Caricom states between 1990 and 2001. Isolating Jamaica one may think that we really have not been doing so badly, and certainly this may be confirmed by our experience of improved access to telecommunications, motor vehicles, and reduction in poverty. No doubt there has been development in Jamaica. But when we compare it to the other Caricom member states, we see that the only state that has fared worse than us is Haiti. And I am positive that there is not much to boast about it that. When we look at the other countries, however, we see that relatively Jamaicans are worse off. In fact, apart from Haiti, Jamaica is the only country that has seen an average real reduction in per capita GDP over the period, implying that over those eleven years the average Jamaican income level has been in effect declining. Between the period 1975 and 2001 the average growth for Jamaica was 0.10%,.

When we are therefore looking at the progress that Jamaica has made we cannot look at Jamaica in isolation but must compare us to the rest of the world, and especially the Caricom states. That is unless of course we do not consider ourselves world citizens and want to live in isolation from the rest of the world. And it is for this reason why I continuously say that 2 percent growth within the context of the global growth levels being experienced is far from satisfactory. Especially as Jamaica has so much potential.

Important micro level
At the micro level a significant reason why Jamaica’s growth is less than adequate is because of the performance of companies. Anyone who understands basic economics will know that economies are made up of firm (companies) and individual activities. So if we want to grow economies then certainly an effective way of doing so is increasing and influencing economic activity amongst firms and individuals. And this is why it is so important to create a business climate where investments are encouraged, bureaucracy is reduced, and taxation is used to encourage export of goods and services. The truth is that this is at the heart of the problems we have been experiencing. It is because we have not laid the appropriate environment why we have not seen the growth we need.

The result is that most of our companies are not geared towards efficiency and competition. Most of our companies aim their activities at the Jamaican market and do not look to develop overseas markets. This is primarily because we have developed into a trading economy. A far cry from the industrialization path we were on in the 1960s. If we are going to compete in the global environment it is important that we play by the rules for global competition. At the government level it is important to put in place policies that are going to encourage economic activity to move in that direction. Acting as if we are isolated from the rest of the world will only see us falling farther behind other countries.

An example of how much we do not recognize the changing rules is the fact that we do not realize that the inputs of production are changing. In today’s world, as opposed to 20 years ago, the reliance on things such as telecommunications, a reliable electricity supply, and internet connectivity was not as important. In Jamaica today where 70 percent of our economy is service based, more people are working from home, and access to real time information is necessary, one can see how important these inputs are. But even so we still have a looming crisis with electricity generation capacity come next year, and even when we do not have a hurricane regular power cuts plague us. It is not enough to say that the commercial districts have electricity as many businesses now operate from private offices at home. While the telecommunications industry is satisfactory (including internet access), the rates are still too high for a majority of our population. Additionally, because telecommunications is so essential for a competitive environment any forward thinking tax policy would ensure that GCT is not added to these services, just as GCT is removed on computer hardware. It makes no sense having the hardware and not being able to afford the services. Not all internet service providers are equal though, as I have found out having to move from one of the largest, because of the unreliability and long response time.

If we are going to compete globally then, we must realize that the rules of production have changed. The economy cannot be driven by government activity but must have private sector at the forefront. In order for this to happen though we need a private sector that is properly equipped to deal with the global environment, and need to see more companies like Sandals. We have to realize that the production inputs have changed and government policy needs to make these inputs reliable, affordable and available through tax policy and the regulatory environment. Unless we act like we are a part of a global environment then we will always celebrate small achievements while the rest of the world leaves us behind.

Jamaica’s growth challenge

Hurricane Dean has come and reminded us of our vulnerable fiscal and growth situations. We will certainly see challenges to our macroeconomic environment, fiscal accounts, growth, and balance of payments. This will result primarily from the destruction to the agricultural and tourism sectors, which are significant contributors to inflation and foreign exchange earnings. The passage of Dean is also a reminder to us that hurricanes are a way of life in the Caribbean, and the fact that Jamaica has been so lucky is no reason for us to be complacent and not put the appropriate provisions in place.

I often wonder if it is because Jamaica is such a blessed country (geographic location, natural beauty, and agricultural resources) if this has led our politicians since 1962 to deliberately create problems for the country. The fact is that there has been no natural disaster, since 1962, that has caused greater devastation on Jamaica than the sustained mismanagement of our country by governments. While hurricanes and floods may have come and caused a few billion of dollars in damage, and resulted in lower growth performance, the mismanagement of this country has resulted in far greater losses. Examples of this mismanagement are (1) the cement crisis, which cost us billions of dollars in opportunity lost; and (2) the cost overruns on contracts.

Lacking growth capacity
I have long said, and regret that I am right, that Jamaica does not have the capacity to grow at 3 percent or more consistently. There is no doubt that Dean is going to negatively affect growth but even before Dean the growth target was already revised down by 1 to 1.5 percent. We had projected growth at 3 percent for the fiscal year, and this was revised down to between 1.5 to 2 percent. With the passing of Dean we can expect that target to be further revised down by 0.5 to 1 percent, resulting in growth of 0.5 to 1 percent for the fiscal year, consistent with our average since 1990.

If we look at the growth outturn for the January to March 2007 (Q1) and April to June 2007 (Q2) quarters we achieved total GDP growth of 2.0 and 1.8 percent respectively. The main sectors contributing to this growth included agriculture (Q1- 4%; Q2- 3%), Construction and Installation (Q1- 7%; Q2- 3.6%), Electricity and Water (Q1- 4.7%; Q2- 3.9%), Miscellaneous Services [Tourism] (Q1- (0.1%); Q2- (2.3%)). As a result of Dean we can certainly expect that these sectors will be further negatively affected. Some players have also said that the state of public emergency has negatively affected tourism, but this has been disputed by the authorities.

The main reason why we are always so distressed when a natural disaster occurs, however, is because when times are stable we do not take advantage of the growth opportunities. I come back again to last year, when we did not have any natural disaster, but then we created the cement crisis, which cost us significantly in a year when we should have been growing at a faster pace and taking advantage of the stable times. So when a natural disaster comes around it hurts us even greater because we have not capitalized on the opportunities.

Jamaica’s growth
The graph shows Jamaica’s GDP growth between 1962 and 2006, and I have assumed a growth rate of 1.5 percent for 2007. It shows that in the 45 years between 1962 and 2006 we have grown more than 2% in 17 of those years and more than 3% in 12 of those years. What is more is that of the 17 years we have grown more than 2%, 10 of those years was between 1963 and 1972, with the other years being 1981, 1987, 1989, 1990, 1993, 1995, and 2003. We have only grown 12 of the 45 years above 3%, with 9 of those years between 1963 and 1972, and the other years being 1987, 1989, and 1990. So we have not grown above 3% in over 16 years. Doesn’t this tell us that there is something seriously wrong with our capacity to grow in excess of 3%. And if we understand this concept then why do we project these growth rates when there is no fundamental change in our production factors. As a matter of fact, in my opinion, productivity and the pillars of growth are even more eroded than they were in 1990.

It is therefore apparent to me that there is no way that the economy will grow at 6 to 7 percent rates without some fundamental shift in our production arrangements. At the heart of this are the social and political policies that influence growth. I speak of things such as elimination of bureaucracy, crime, waste and corruption; functioning institutions such as the courts and police; quality education etc. Unless these things are dealt with then I regret to inform everyone that we will not see any sustained growth in excess of 3 percent. For me the concept is clear. When I heard the news report that the police were trying to restore public order after Dean, I thought to myself that there was not much to do as one of the primary problems we have, with or without a hurricane, is the inadequate level of public law and order.

It is for this reason why I continuously say that Jamaica does not primarily have an economic problem, but rather a social and political one. It is for this reason also why our governance relationships are of primary importance. So whoever forms the government after the election should understand that acceptable growth levels will only happen if we have the proper infrastructure and policies in place. Providing a stable macroeconomic environment and a positive primary surplus, while desirable, is not enough if unsupported by proper social and political policies.

Manifesting economic growth and development

The main discussions over the past two weeks have focused around the manifestos issued by both political parties. The discussions though have focused more around the side shows, rather than the real issues. These comments would have no doubt been influenced by the parties, who use seemingly independent persons to voice their attacks. But the responsibility in the final analysis must remain with the individual commentators to remain independent and not compromise their credibility. I mean everyone will have their own personal preferences but when you prostitute yourself without any logic then that speaks to your own professionalism.

One such side show I have heard being mentioned repeatedly is the fact that neither parties outlined in the manifesto how they plan to achieve the objectives outlined. For those who believe that there is some merit in this argument let me help by looking at the definition of manifesto. A manifesto is “a public written declaration of principles, policies, and objectives, especially one issued by a political movement or candidate”. So we should not be looking for a road map for implementation but rather in a forum such as the National Debates. However, the Commission incorrectly used questioners on the economic debates panel that do not understand the real issues about the economy, and in that way short changed the Jamaican people and the quality of that particular debate.

In comparing both manifestos, I think that in terms of substance the JLP’s manifesto gets the edge. With respect to how the manifesto looks the PNP’s gets the edge. Why do I say this? Well starting with the easy one first, the PNP’s manifesto has a lot of colour and pictures, while the JLP’s does not, and so just looks better. In terms of content though I believe the JLP’s had a lot more measurable objectives, and showed more creativity inn dealing with issues, and I think that this came out in the debates.

I will deal with some of the reasons, but outside of the economic growth and development, I think that the JLP dealt more comprehensively with the matter of corporate governance and justice. Certainly the two proposals I am most attracted to, in these areas, are (1) sharing power with the opposition; and (2) giving the Commissioner of Police greater powers. These two I think will provide the foundation for greater accountability of politicians and the police.

The following table is what I consider to be the key points in relation to economic development and growth. The list is by no means exhaustive but focuses on the areas I believe will have the greatest effect on economic development. As I have always maintained, however, development and growth depends a lot on the social policies put in place. For example, an efficient justice system and police force, public law and order, and quality education and ensuring that children do not roam the streets. Without these social problems being addressed the economic policies will not generate any benefits.

While there is the realization of both that the state needs to create the business environment for private sector growth, it is still evident that the interventionist role that our governments have played since independence, is present. This is caused mainly by the expectations from the electorate of a government that is going to act like parents.

Both parties have not adequately addressed Jamaica’s interface with the global markets, and no questions were asked on this in the debate. The fact is that the world market today is going through a liquidity crisis that is going to have a significant impact on Jamaica and it is necessary to know how a future Finance Minister will handle this. Already we have seen a 10% fall off in tourism for the region and exports will also be affected. We have also seen where the five year variable rate instrument issued in July was 20 basis points more than the seven year issued in June. Whichever party forms the government on August 28th, the fiscal accounts are going to be a challenge and we can expect growth of about 1.5% - 2% this year, which is half of the projections. It was therefore a missed opportunity in the debate to bring out these issues, as knowing the flavour of our political rallies I really do not expect these issues to be discussed.

The price of debt

The euphoria surrounding elections has caused many of us to forget the economy that needs to be grown. Last week the JLP stated in its manifesto that it wants to place a constitutional level on debt/GDP of 95% within five years. This means they would have to reduce debt/GDP to 95% or lower by 2012. Many are legitimately asking, within the context of all the accomplishments the JLP wants to make whether this is possible? I would be the first to agree that not all the policies set out in the manifesto are achievable within the five-year period, and some amount of prioritising must be done, as well as reallocation of capital to its most efficient use.

Consideration would also have to be given to social consequences of any action, which is what the present government has had to do. No doubt, however, the debt/GDP ratio is an important factor to manage, as the higher the ratio is then the less monies are available for country spending, and the more debt we will have to borrow in the future to alleviate social hardships. The long-term solution, of course, is to address the social policies of proper education and law and order, as even with the best intentions in the world no Finance Minister will be able to improve the fiscal situation without proper social policies.

Effect of debt
We even see in the great USA where the massive trade deficit, and heavy reliance of the consumer on debt, has placed the economy in a quandary and the likelihood of a recession is increasing. This will of course have devastating effects for Jamaica, as 25 per cent of our exports are sent to North America and 75 per cent of our tourists come from there. We already are seeing lower tourist arrivals this year over last. These are the global issues that we should be discussing on the campaign trail, but then again politicians spin information to people and many of us, including those who should, do not understand these issues, so why bother? My thoughts are that if the Fed does not intervene soon, then the US economy will see greater negative effects.

A look at the June-07 quarter end fiscal accounts does show a promising sign - the lower than projected net borrowings over the period. After considering loan receipts and amortisations we have borrowed J$2.8 billion less than projected. This is a hope of some amount of fiscal prudence, especially when coupled with the fact that expenditures have come in under target while revenues are basically on target. The lack of accrual accounting could, however, reverse the position of the primary surplus and it is still early to comment. More importantly, though, I hope the lower than projected net borrowings will continue to be a hallmark of this year's fiscal accounts, and that no matter who assumes power on August 28th this trend will continue.

The graph shows the relationship between debt and nominal GDP since 1980. It shows that up to around 1997 we were still showing GDP growing at a faster pace than debt, and that this trend started to reverse at around the 1997 mark. Believe it or not though, in my opinion what happened after the 1997 period was more in the interest of the country than the prior period of the 1990s. This may sound silly, but in fact what caused the GDP to grow at a faster pace than the debt was inflation.

In 1991 we had inflation of 80 per cent, 1992 - 40 per cent, 1993 - 30 per cent, 1994 - 27 per cent, 1996 - 16 per cent, and 1997 - nine per cent. It was this inflationary pressure that caused the debt/GDP ratio to look good, but it also caused macroeconomic instability, causing unpredictability in the business environment. Reducing inflation caused the debt/GDP ratio to look bad, but was essential to create macroeconomic stability as a precursor for private-sector growth. The problem though is that the business environment was not conducive for investments and growth, and still is not where it should be.

Social policies
We continue to have high crime levels, a poor justice system, and high levels of bureaucracy that prevent the sort of investment, growth, and development we need. For this reason I continue to say that Jamaica has a social and political problem and not an economic one. And although we always complain about high interest rates, high interest rates are necessary because of these social policies we must fix, otherwise we will continue to live with even higher interest rates. Remember, the price of money is interest, and money goes where it feels safest. So while a stable macro environment is essential, this alone will not help. We need a business-friendly environment and low social and political risk to attract capital at lower relative rates of interest.
So can we achieve debt/GDP of 95 per cent in five years? My answer to that would be, whether the PNP or JLP is in government, it is highly achievable. It is going to depend, however, on the social and political policies we pursue. It is going to depend on how much we transform our environment into being business friendly. It is going to depend on how well we can deal with our education system and get young people in productive training rather than loitering on the roads and selling when they should be in school. It is going to depend on productivity and accountability in the public and private sector.

What the graph clearly shows is that from January 07 we see where the debt has been levelling off. This is a very important trend for us to maintain. Because if we can manage to keep the debt capped at around J$940 billion for five years, then even if we have average inflation of six per cent and growth of 2.5 per cent, over five years, we can achieve debt/GDP of 82% by 2012. And if we grow an average of five per cent over the period, we can see debt/GDP of 72 per cent. This will also set us up for lower relative real interest rates. But I would like to stress again that enlightened social policies will be critical to ensure this.

So it is going to be very important for us to prudently manage the fiscal side to ensure there is no increase in debt levels. One of the greatest threats to our expenditure is the energy bill, and therefore it is critical to do everything to encourage fuel efficiency and discourage fuel inefficiency, such as lower taxes on energy-efficient vehicles, and incentives to energy-efficient buildings. Not power cuts, JPS.

On the growth side we will have to ensure that crime is controlled, an efficient and equitable justice system is quickly put in place, and that quality education standards abound. If we can achieve this, then we will see an improvement on the numerator and denominator of the debt/GDP ratio, and more money available for spending.

FINSAC revisited

Last week the Observer quoted me to say that FINSAC is the worst thing that has happened to Jamaica. In particular I was speaking in relation to the economy, which I do believe, certainly as far as I can recall.

In the same week I received a call from a senior person in one of our media houses, representing a national association, to say that they had received complaints about the statement, as it was felt that this was a “strong view” being expressed and as such it could offend some people. He went further to state that they had not received any elevated complaint from any politician but that they were pre-empting any that may occur.

Threat to public expression
Now this high ranking media personality did not seek to find out first what my views are on FINSAC, but sought to take the shallow route of assuming offence to one side. Secondly, and most disappointing is that this is the position of a media leader, and leads me to wonder if the news reports from that organization are tempered to consider feelings, as they may not be allowed to have strong views on issues. And thirdly, there was no official complaint from any politician (I assumed he meant the PNP) and what I know of the politicians on that side is that they are articulate and I have not known of them being offended by any view on issues. As a matter of fact my own view is that media discussions have elevated under the PNP, and very much so under the Minister that had responsibility for FINSAC.

The implication is that the threat to public expression is greater from some of our citizens than politicians. After all I don’t think it was a politician that threatened Nationwide recently. And this is one reason why I went further to say at the luncheon that business persons need to unite around issues rather than speak out against issues that affect them individually. Isn’t this why the PSOJ and other such trade organizations were formed? So what is the big deal about saying it? The tribal nature of politics in many instances is the result of private citizens branding people as PNP or JLP, not having the ability to see things as pro-Jamaica or anti-Jamaica. Instead many of our educated do not vote on issues but are no different than the average Jamaican who votes based on the picture of the 1960s political leader in their home.

Anyway this brings me around to the issue the phone call has revived. That of FINSAC and why I say it is the worst thing that has happened to Jamaica’s economy. And again, as I said a few weeks ago, I am going to go slowly and try to inform the media especially so that they can follow what I am saying.

Now, the lesson starts with the question, what are some of the main inhibitors to Jamaica’s economic development? The main setback caused by FINSAC is not the high level of debt (over $900 Billion) that we have today. In fact in 1984 the debt/GDP ratio peaked at 212%, before it started to decline. The difference at that time was that it was on the decline after 1984 and growth rates ran in excess of 5%. So as I always say, there is nothing wrong with debt as long as the returns are higher than the cost of the debt. It was the high growth rate that caused us to be able to reduce the debt, as a percentage of GDP, at that time. The result is that, if GDP grows at higher rates than the debt then it means more money available for spending in the country.

Importance of growth
This is what the government is trying to achieve by aiming to accelerate economic growth. The position we are in today is that our productivity base has been reduced, over prior decades, while our lifestyles have increased. This means that we have had to borrow money to compensate for lost productivity.

The graph clearly shows that after the mid 1908s when we started to see growth rates in the region of 6% and 7%, the debt/GDP ratio started to decline. At the start of the 1990s, when the Jamaican economy was liberalized, the debt/GDP ratio increased, as we had to borrow more money to stabilize the economy from the effects of globalization. In 1997 FINSAC came into being, and from that point the debt/GDP ratio has increased and is just leveling off. But every five years or so we have a thing called an election and that of course always stops the progress.

So the high level of debt/GDP is nothing novel, as this trend of high levels of debt/GDP started in the 1980s. But at that time the economy was more productive and could grow at higher rates. This is the main reason why I always say that the problem with the Jamaican economy is its capacity to grow, as we have eroded the social and economic institutions that form the productive base.

Following on this then, I think it is fair to say that the main problem with FINSAC is not the high levels of debt. The main problems caused by FINSAC are (1) the erosion of an entrepreneurial mindset; (2) the lack of accountability and independence that came out of that period, which has contributed to the indiscipline today; and (3) the high involvement of government in the economy. One positive that has come out of the FINSAC period is a strong regulatory environment for financial institutions, which has been well managed by the BOJ, under the stewardship of the present governor, and the FSC, which I think is the most effective regulatory arm. Right now the global financial markets has reached a stage where creativity is moving farther ahead of regulation, but that discussion is for another time.

Fading entrepreneurialism
The reason why I think the waning of the entrepreneurial spirit is the main problem caused by FINSAC is simple. We all know that what drives economies to move forward is the small entrepreneur. It is not government spending and growth in distribution, construction, or increased debt through credit cards. In fact if we look at what is happening in the US, the domestic economy is suffering from an extension of debt to consumers and because countries such as China are looking to move away from holding US debt (treasuries). What is holding up the US economy is the entrepreneurialism that caused many US companies to invest in China, the next superpower.

The late 1980s to the 1990s saw a lot of Jamaicans come to the fore in terms of new business ventures. Many manufacturing and financial institutions were being headed by Jamaicans, which is the organic growth that drove the economy during this period. This meant that we were relying less on foreign investments, and certainly did not need imported police and teachers, which would be a return to colonialism. We had our own self made Jamaican entrepreneur and as this example spread, more and more Jamaicans saw the possibilities of starting their own business. Then came the high interest rate environment and FINSAC in 1997.

The high interest rate environment saw many existing variable rate loans ballooning overnight, and logically companies would not be able to service these loans. The high interest rates were used as a means to control devaluation, which also would have had a devastating consequence on the poor. The problem though was that monetary policy (high interest rates) was used for too long a period, when what was needed was fiscal policies, and the roll back of monetary policies.

The problem was not solely that of government policies however, as we did not have the regulatory framework to properly monitor the financial institutions, and so the poor risk management practices within many institutions contributed to the situation. Even before the government intervened the financial institutions should have called the loans long before they got to the point where the security could not cover the loan balances. If this were done then the high level of FINSAC intervention would not have been necessary. And it is because of the good regulatory environment today that I do not believe another FINSAC will occur.

But the end result of all of this is that the Jamaican entrepreneur went into hiding and has only recently started to emerge. This is why it was so necessary for Omar Davies to stabilize the macro environment to bring back confidence to the Jamaican economy, for local and international investors alike, an accomplishment he can claim. Being the ones burnt, though, the Jamaican entrepreneur had a longer recovery period, as markets are driven primarily by perception and confidence.

Lack of accountability
The FINSAC debacle has caused so much pain and yet still the level of accountability is low. This has contributed to the attitude that if people can get away with causing billions of dollars in damages, then why do I have to conform. The belief is that politicians will protect their “big friends”. I don’t know of any protection, which may have possibly happened knowing Jamaica, but certainly in the main the problem was not caused from this. We have seen where the government has pursued many persons but have been unable to get too far, after many years. The main problem is with the judicial and regulatory systems, which is why our institutions are critical in the development equation. At the time of the crisis the regulation and legislation were weak, and so it was difficult to get accountability in the time desired. Additionally, the need to call in forensic auditors meant that it was a web of documentation that needed to be sifted through.

This lack of accountability, no doubt, has contributed to the wider problem of indiscipline. Since that time much of the legislation has had to be updated, as Jamaican laws really did not have much teeth until recently. An example is the Companies Act that prior to 2006 was last updated in 1965.

Government bureaucracy
We all know that government is probably the most inefficient player to have in the economy. After FINSAC government got caught owning many private companies that no private investor wanted to touch, because of the FINSAC experience, resulting in foreigners buying our assets. This meant that government had become a major player in the economy, and became the main engine of economic growth.

There is definitely a problem when an organization founded on bureaucracy is the major player in the economy. Our government is no different from any other around the world when it comes to bureaucracy, as it is necessary for governments to have bureaucratic structures because of their size. As a matter of fact, this is one reason why even private companies in the US break up into pieces after attaining a certain size. The smaller you are then the less bureaucratic you have to be to maintain controls and the more nimble you can be.

When government found itself owning all these private companies, and being a major player in the economy, they truly did not know what to do. They did what they knew best, which was to apply bureaucracy to the control of these companies. The result of course is that productivity declined, and companies and the economy became less efficient. This inefficiency has now become engrained in the Jamaican culture.

Summary
So to my friends who were following me, and were able to understand what I have said, the problems with FINSAC were far reaching and way beyond any issue of debt. What made the situation bad was that the Jamaican environment was not prepared to deal with this situation, and the management of the crisis (both in the private and public sector) was handled poorly. Whilst I believe that government intervention was necessary, I believe that (1) it came too late, as the writing was on the wall long before; (2) not everyone should have been bailed out to the extent they were; and (3) they should have found a way to allow the private sector to carry on with the companies immediately instead of creating FINSAC to manage them for so long. There is a lot more that can be said about the FINSAC era, and it needs public discourse to avoid any recurrence and educate those amongst us that should know.

Growth versus development

Two sayings that apply to Jamaica are 'If you don't know where you are going then any road will take you there' and 'If you do the same thing every day then you will always get the same results'.

Quite frankly, if you do not have an objective in mind and just keep going with the wind, then you don't have to know which road to take, and if you are happy with the results you are getting then there is no need to change your actions. If, however, as in Jamaica's case, you want to get to developed country status in 25 to 30 years, then it is necessary that you 'change course'. No pun intended.

Another question the young people are asking though is who is going to change the course, as illustrated by their dissatisfaction with both political parties not focusing on issues, but carrying on the same politics we developed in the dark ages of the 1938 riots.

Same cry
Is it any wonder then that if we continue to practise the same politics that we have always done, we will get nothing more than the same political campaigns and promises that are never usually fulfilled? But as I said to someone recently 'a promise is a comfort to a fool', and no doubt we have been repeat fools for believing the same promises every five or so years. But such is the literacy level of Jamaicans that we continue to be impressed by whoever speaks or looks good and then bawl out about hard times for the ensuing five years until 'feel good' time comes around again, and like fish to bait we are sucked in once again.

The so-called intelligentsia amongst us are not excepted, as their strategies for Jamaica's success flutter like a weathervane with the direction of the wind. One day they profess that Strategy A will work and when it does not, 'no problem', we just shift to Strategy B. In the meantime, of course, Jamaicans have gone deeper into debt and the masses continue to be content with the illiteracy into which they have been from the days of slavery until now.

This sort of behaviour is to be expected from those who have not had the benefit of a proper education, but when I hear people continually professing economic growth as the messiah for the Jamaican economy, year after year, I wonder if we have really grasped the problem Jamaica faces. And even though economic growth should not be difficult to achieve, it continues to elude us.

My point though is that growth is not necessarily the same thing as development, which is what Jamaica needs. It logically follows, by definition, that if we are to achieve developed country status then what is needed is development. Economic development is not the same as economic growth, and it seems to me that one of the issues we have is that we have always been satisfied with growth, when growth can be destructive to the economy. Although, if targeted properly, it can lead to development.

I say this because GDP growth focuses not on development, but rather just measuring the value of the domestically produced services and goods in an economy and comparing it against a previous period. So if last year the constant value of all goods and services produced was $100 and this year it is $102, then we have 2 per cent growth. On the face of it, this looks fine until we dig into the numbers. When we look at the January to March 2007 quarter we see that GDP grew by two per cent. Construction and installation grew by a whopping 7 per cent, Electricity and Water by 4.7 per cent, and Real Estate and Business Services by 2.4 per cent. This sounds great, as it must mean that economic activity is taking place and things must be good. The truth is that we have always seen good growth in these areas.

Growth paradox
Why then, if we are showing growth, irrespective of how minute most of the times, are we still seeing a declining dollar, galloping debt, large fiscal deficits, inflation concerns sometimes, shortages in hospital inventories, frequent industrial unrest, and people not being able to afford hospital or school fees? Not to mention the frequent power cuts that disrupt our productive base. Isn't it supposed to be consistent with the concept of growth that instead of the challenges increasing each year, people should be seeing their lives improve?

The fact is that growth is not necessarily consistent with development. The areas of significant growth pointed out above are all areas of consumption that have a high import content. When you look at the same quarter numbers, you will see the sectors that have the best potential for exports - Agriculture grew at four per cent, but all the others had dismal performances - Mining and Quarrying at 0.8 pe rcent; Manufacturing at 0.2%; and Miscellaneous Service (includes Tourism) at -0.1 per cent. It is for this reason that while we have been boasting of increased exports, we are still seeing an increasing trade deficit, which is at the heart of wealth creation. In other words, this is the measure of how much Jamaica earns versus how much it spends and is the measure that affects devaluation.

So it seems that increasing exports is bad for us. The problem, of course, is that the infrastructural support for development is not there. If we want growth, we can easily achieve it by importing more than we did the year before and by borrowing money to increase salaries to increase spending power. We will not have development, but will have phenomenal growth.
It is apparent then that the emphasis must be on the things that lead to development, because if we put that infrastructure in place then development will happen. It is obvious that one of the reasons for our economic situation is because our focus has been wrong. Even after the 2.5 per cent growth we had last year, we still have a justice system that seems to wait until enough time has passed for the complainant to die or forget about the case before it comes to trial. We still have citizens complaining about police brutality with regularity. We still have a government bureaucracy that is hostile to businesses. We still have high levels of indiscipline on the roads. We still have high crime levels, including in schools. We still have roads that simulate earthquakes when one is driving.

If we are to achieve developed country status in 25 to 30 years then it is not only important that we grow at six or seven per cent, but we must address the institutions necessary for a developed society. We need an independent and corruption-free police force. We need an efficient justice system, including proper accommodations. We need to make quality education and health available to our citizens. We need to ensure that citizens' rights are protected. We need to grow local businesses instead of constantly looking for overseas investors. This is what development is about, not just increasing the value of goods or services, especially when the import content is so high.

These are the issues that persons want to hear about on the campaign trail. These issues are the ones to be discussed in the context of globalisation that will eventually leave us behind if we do not properly discuss and act. But if the objective is not about development, but just to increase the value of goods and services produced, then we are on the right track.

Service essential for development

A few months ago one of Jamaica’s leading entrepreneurs said to me that there is only one world-class company in Jamaica. At the time I questioned what he was saying, and suggested to him that there were about three. He was insistent that there was only one and when I enquired as to why he said so, his answer was that this was the only company that year after year received world class awards without fail, and has been doing so for a while. The company he said is Sandals.

I still believed that there were two other companies, and when I think about it now, it was only because I wanted there to be more world-class companies in Jamaica. After thinking about it for all this time I am inclined to agree with him.

A few weeks after speaking to him I went to see Butch Stewart, for what was supposed to be a 15-minute meeting, and ended up being with him for more than an hour. Among the topics I spoke to him about was his start as a businessperson and the obstacles he faced along the way. What stood out more than anything else, and what I believe is behind his success, are two philosophies he holds dear. These are (1) good customer service is the most important rule to him; and (2) his affinity to hire good people and leave them to manage.

Customer service
After all, if he did not emphasize quality customer service, then there is no way that Sandals could grow to build such an international reputation, as the company is in an internationally competitive business. He also could not succeed against the odds of the high crime levels and poor infrastructure in Jamaica. Additionally, if he did not hire good people and trust them to work, then he could not grow the business to the size it is by trying to be hands on with everything, as many Jamaican businesspersons do.

About two weeks ago I had to go to the jewelry store to replace the battery in a watch. The first, well-known, store I went into they said that they could not replace the battery as the person responsible for that function was at lunch. Amazed at this response, I asked them if they were really open for business. I went to another store and they took the watch and damaged the back when opening it, as they apparently did not have the proper tool to do so. They never said anything to me and just presented the watch and the cost of the battery. When I pointed out to them that the watch was damaged the owner said that in order to open it he had to force it open. Never mind the fact that he has damaged the watch, as he was trying to sell a J$200 battery.

Well I immediately vented my anger and told him that I would not be paying for the battery. He offered no compensation, as would have happened in developed markets, without considering that I would never set foot in that store again and would relate my experience to at least five other persons. I am sure that some other customer must have at some time suffered a similar fate. But it won’t be the six persons, including myself, that will never shop at that store again.

This incident was what got me to thinking about what make a company, and country, successful. At the heart of any efficiently running market economy is the aim of providing good customer service in order to increase profits, due to competition. Of course one is assuming that the objective of the company is profit, and that the competition provides better service. The problem with Jamaica may be that the level of service is so sub-standard that bad service is acceptable. In the case of Sandals because they have to compete with international destinations, and is already at a disadvantage with Jamaica’s image, they have to provide a world-class service and product in order to excel.

Regulatory environment
The Consumer Affairs Commission does not do much to raise the standards of customer service also, which is what I think an organization like that should be proactively doing. This is a symptom of our regulatory environment, which is not about protecting consumer rights but rather government’s interest. Case in point the OUR and RGD, which although they try communicate protection of consumer rights is really not set up for that. I also started to think about the reason why the Jamaican electorate has always been satisfied with poor service from politicians. The fact is that Jamaicans have never been used to good leadership. We are accustomed to substandard service from our leaders, from even before independence, so accepting mediocrity is our nature.

One of the reasons why many companies are unable to provide good service is because they are so consumed with poor back office operations that they don’t have the focus of good customer service. This is a major contrast between US and Jamaican companies. Local companies do not like to spend money on proper systems and good people. And if you do not have proper systems then it is very difficult to deliver good service and compete, as information is not readily available.

How then does poor customer service prevent national development? Well f we accept that economies are driven by the private sector, then it is fair to assume that the more efficient the private sector is then the more successful the economy will be. If we accept that private companies are the ones behind exports, therefore providing Jamaica’s foreign exchange, then we see where those with poor customer service may have a problem competing internationally. Poor service will drive inefficient businesses, which may mean relatively greater costs per production unit.

Another major reason also is that our regulatory environment does not seem to encourage competition. The first reason for regulations in Jamaica always seems to be restrict rather than monitor. So we tend to make the process for coming under regulations so difficult that many persons get frustrated, and would rather stay in the informal economy. One example of course is the TCC process.

The US market, on the other hand encourages new ideas, and so frequently new products and services come to the fore. A case in point is a new financial product in the US called “Death Bonds”. As the name implies it is a bond on someone’s life. If, for example, I am the holder of a $1 million life policy and need cash, I could sell the rights today to receive the premium when I die, to an investor. The bet by the purchaser is that I will die within a specified timeline, and the earlier I die the more profit he/she makes. The purchaser may, for example, decide to take the risk on someone who smokes and does not exercise that they will die in a specified amount of years and decide it is a good risk to take. Such a product may be taking it too far, as the US always seems to do, but it is this sort of innovation that leads to development of markets. And lets face it two things are certain in life, death and taxes, especially in Jamaica.

So in order for economies to develop they must be driven by companies. In order for companies to grow they must provide good customer service, which if not done is negative for international competitiveness. The plea to companies is to realize how important it is to deliver good customer service, in order to build a company and nation.

The problem of capital allocation

I have always maintained that one of the main problems causing Jamaica’s debt problem is that we use our capital incorrectly, whether debt or equity. The fact is that much of the $1 Trillion debt has been used in consumption activities with no hope of providing a return in excess of the cost of the debt, directly or indirectly. We see also that many Jamaicans would rather borrow money to purchase motor vehicles and big houses rather than start businesses.

This is one is one of the same problems facing the great US. Consumers, and investors, are so highly leveraged that any increase in interest rates could cause a breakdown in consumer spending, which drives the economy. Already we have seen the effect on the housing market of interest rate increases from previous lows. The problem the US faces because of this debt problem is that they have a very high trade deficit and has to contend with higher interest rates globally, causing depreciation in the US dollar. One big difference between the US and Jamaica though is that much of the retail leverage is for higher yielding investments.

Free education and health
This matter of capital allocation brings to mind the recurring debate on how the JLP can afford to fund free education and the PNP free health care. Of course being in the silly season, we expect politicians will not be responsible for what they say as they are caught up in the euphoria of the moment and will make all sorts of promises and uncharacteristic statements. Such is the nature of our politics and we are to blame as the ones that get excited by the music, promises and numbers that play a critical role in political rallies. Even the police get caught up as they ignore the traffic laws and allow political supporters to travel on buses with protruding bodies. So during election all sense of rationality is forgotten and even the most law abiding and educated amongst us get hypnotized.

Recently some otherwise rationale persons called me to ask, how the JLP will find money to fund education to the tune of just over $1 billion. When I pointed out that there could be an allocation of our funds to do so, the answers were that but there is no money in our $380 billion budget. When I pointed out that we spend billions of dollars each year on Air Jamaica, JUTC, sugar, and recurring projects such as cricket world cup and lift up Jamaica the response is well that money has been spent already so where are the additional funds going to come from. I even got the response from a radio host one morning to forget the money spent on world cup and let’s find a way now to recover the funds.

Even after I pointed out the excesses on Air Jamaica et al, and persons agreed with me that education and health were more important for productivity and development, these persons still argued that it would be hard to find the additional funds. Of course they forgot the important need to efficiently allocate capital, implying of course that we should continue to spend our capital inefficiently but question spending that will help to move our country forward. So I have to conclude that election is a very special time every five years where educated, and otherwise rational persons, are allowed to plunge themselves in political diatribe irrespective of how silly the argument is.

Economic development
When I hear these arguments then I wonder if anyone thinks about what is really needed for economic development. And I say development because we have always been speaking about growth, which can happen without development, as all we have to do is put up some buildings and expand the distributive trade of imported products. Never mind that our trade deficit is running away. Never mind that the average Jamaican is getting poorer or suffering more at the hands of the police. Never mind that the courts take upwards of five years to dispose of a case. These things don’t matter because we have growth.

Even though we are in the heights of the silly season I am going to go slowly and ask that these persons follow my reasoning. First, in order for us to experience economic development there are certain things that we must place priority on. The fact is that Jamaica is in a global market and has to compete with other countries. It is therefore unacceptable that in a global market where knowledge is key to development we have a literacy rate of 80 percent while our competitors show in excess of 95 percent. It is unacceptable that while developed countries, which we are trying to be like in 30 years, have free health care for the poor we have a system where if you don’t pay, well you know.

It is unacceptable that while our competitors have interest rates of less than 6 percent we have rates of 11 percent. It is unacceptable that the inefficient bureaucracy in Jamaica frustrates businesses. It is unacceptable that justice is either absent in some cases or the process moves so slowly that the criminal seems to win. I trust that we can all accept that these are the things that we need to change in order to achieve economic development and developed country status.

As an example, two prominent businessmen told me recently that they had hundreds of acres in mango and ackee production only to find that despite hiring security they did not see any produce from their efforts while persons on the roadside were selling in abundance the same crops. One of them even caught on camera persons stealing the crops and after four years in the court the case was thrown out because the photographs were not admitted. Well they pulled out and went into government paper.

If we accept the need for these changes then the next logical step is to say, how can we allocate capital to these areas? In other words where the return is highest, not in areas such as Air Jamaica which give us national pride and greater debt. If we also accept that in today’s global environment knowledge is essential for a competitive edge then we must ensure that our citizens have access to quality education. If we accept that human resources are critical to productivity then we must ensure that justice and proper health care is in place.

The issue for me therefore is not whether we can afford to fund education and health but rather how can we find the funding? How can we more effectively direct our capital to productive areas? If we had properly utilized our capital in the first place then we could more than afford the national pride of a loss making airline. These are the issues that need discussion instead of who gave what to the constituents and therefore deserve to win. While watching Trevor Munroe on CVM’s Direct the other night his line of reasoning gave me some hope that all is not lost.

Loving Jamaica
In all my years, last weekend I heard Reverend Al Miller give the best description of love. He said that love is not about feelings or emotions but doing the right thing all the time just because it is right. In other words if you love your child then you will not succumb to feeling and give in to their desire when it is wrong to do so. The question then is, all those persons who claim to love Jamaica, who do not do what is right, do they really love our country.

Jamaica: not serious about development

Last week 'Butch' Stewart made a commitment to invest US$100 million in a Portland hotel, but cited the lack of proper infrastructure and the need for the reopening of the Ken Jones aerodrome. Dennis Morrison stated that the Ken Jones aerodrome was not suitable for development, and that the needed J$2 billion would not be spent as the development of the highway would solve the access problem. My own view is that even with the highway an airport may be necessary if we want to go for the high-end tourists.

I had to take a drive down to Portland and was appalled at the poor road infrastructure. Even with the prevalent potholes the parish is still the most beautiful part of the island and the neglect is representative of the way in which we have ignored the development of the country. It seems as if Jamaica is not open for development. Even though we love to blame the government, a part of the problem is that very few members of the private sector are committed to real development instead of paper returns.

Bureaucracy
A big problem is the high levels of bureaucracy to get a project under way. It is said that in New Zealand, for example, one can set up a company in half an hour. In Jamaica it takes days going into weeks. Even after that, try to get a tax compliance certificate (TCC) or a licence. The TCC process is a symbol of the mindset of bureaucracy, as it treats everyone as a criminal, and fosters corruption. I mean, wouldn't a business-friendly environment be one that uses negative assurance in the process rather than requiring that everyone have a TCC? It would be better to blacklist those out of favour with the tax laws instead of requiring a TCC from everyone. Instead everyone is treated as suspicious, and the process creates inefficiencies and costs for legitimate businesses.

Looking at Portland I have to wonder if we are really serious about development. This, the most beautiful parish, is languishing for need of adequate infrastructure. From Kingston it took over three hours to get to Portland, avoiding the sea of potholes. This is a country that has its most productive foreign exchange earnings coming from tourism. I say productive because remittances are not productive earnings. If we are serious about developing tourism and jobs, why have we for so long neglected the most beautiful parish and left the youngsters to languish and a possible investment in the lurch?

Last week a government official called me to advise that 'Butch' Stewart receives the same tax benefits as overseas hotel investors, and what I wrote last week could be misconstrued as saying the contrary. I am happy to know this because incentives for local entrepreneurs must be applauded. These concessions will never be enough, though, if the infrastructural support is not present, as at the end of the day it is not concessions that drive investment decisions but returns.

It may have been better to spend Air Jamaica's annual J$10-billion loss on Portland so that the economy can develop and foster prosperity. Isn't it better to spend the money where greater value can be created? I really would love to know about the country's development plan. If I were spending the funds the first question I would ask is, which projects can I underwrite that will create long-term developmental value and which ones are easiest to attack? I doubt that Air Jamaica would be in the top 10, but I stand to be corrected.

We must spend our scarce funds so that the country's long-term viability is not sacrificed. And it is not only the economy that is threatened but our unique culture and environment also. These two are integral to the tourism product and we continue to deplete them. Increasingly we chip away at the uniqueness of the Jamaican tourism product until shortly we will lose the competitive advantage.

Vote Jamaica
Last weekend someone said to me that this election we should not vote JLP or PNP but for Jamaica. In other words, we should not be voting based on charisma, polls, who gives bun and cheese, free health or education, but rather on what are the best developmental policies being offered. It was within this context that I was heartened by the live broadcast of the JLP rally last Monday, where I thought Bruce Golding spoke to the real issues to be addressed. But what I found most heartening was his commitment to constitutional reform of a system that places so much power in one set of hands. I am happy to see that he will once again make the separation of powers a focal point. It is important that we hold him to this, as this is the primary reason why in the year 2007 we are still killing each other over politics. The US campaigning continues in earnest but at the same time the capital markets show record highs. In Jamaica while we await the election date everything comes to a standstill. Golding properly addressed the failing of our institutions, such as the public health and judicial systems. I hope that all politicians will start to discuss the issues and stop disrespecting the intelligence of Jamaicans.

Wesley Hughes stated recently that the lack of talent is the main crisis Jamaica faces. If we are moving towards developed country status then we need talent and properly functioning institutions. Democracy, protection of human rights and development cannot happen without these. Until we develop proper institutions and hold on to our most talented, then it makes no sense talking about development. If we really want to create jobs then we must start by developing our country rather than bringing one-time projects. One-time projects only provide temporary jobs, not development. We have to bring out the value in the assets that give us our competitive advantage. We have to develop areas such as Portland that have the greatest tourism potential. We have to reorganise our agriculture away from small farm plots to one where economies of scale can be realised. We have to protect the rights of the citizens and give them opportunities for education to the highest level. We have to improve our public transportation systems such as roads.

These are things that need to be done if we are to develop. We shouldn't feel happy growing at just over two per cent per year, which will most certainly be reduced this year.

So if I were a foreign businessman looking at Jamaica for long-term investment I would say that this country is not serious about development and find another country to put my money. Not just because of government bureaucracy, but because the focus of the private sector has been mostly about paper and not real investments.

JPS
Speaking about development, Mirant has really given us a bad deal. After all the "hoopla" when they came on the scene and what they were going to do, here we are a few years later.

Mirant has made hundreds of millions of dollars on the backs of poor Jamaicans. The island wide power cuts over the past few days really demonstrate that nothing has been done to improve the electricity infrastructure. It couldn't be that they are sabotaging the government in favour of the JLP.

In all seriousness, though, in a country that is paying billions daily to service debts, and has a problem with productivity, we should never tolerate this sort of situation from JPS, which has nothing more to offer than PR cover-ups. It's time for the authorities to pull a power cut on them.

Allocating priorities

Last Wednesday, I attended a forum put on by the Taking Responsibility group on 'Jamaica's Foreign Policy: The Economic Development Link', where a report was presented that discussed foreign policy in Jamaica since independence and sought to make a link with economic development. When the group first came on the scene and presented its paper on 'The Jamaican Economy Since Independence', I thought that this was just another academic group, that would produce mountains of paper to add to the growing pile of studies and reports we have amassed over the years. Well, after reading the report, and listening to the discussion, I no longer have a doubt, and I'm convinced that they will produce nothing more than academic information for students and to attain professorships.

One of the main problems we have had in this country is that we are brilliant at studying and saying what the issues are, but never seem to get to the point of implementing. There are many eye-opening studies (and commissions) that have been done, correctly outlining the challenges we face as a country but which are never implemented. We have even had citizens of the calibre of Douglas Orane and Peter Moses contributing their time in leading studies and making some solid recommendations. But they have never been implemented. Soon we will call for a study to determine why the studies were never implemented.

Nine-day wonder
Someone once said to me that the purpose of the various studies and commissions is never to seek solutions for implementation but to give the impression that something is being done. And in our true 'Nine-Day Wonder' style, after the reports are published and discussed for a few days in the media, then we forget about them. So we hear statements from politicians such as it's time for us to forget about the Trafigura affair, as it has been discussed enough, or that we need to stop talking about the wasted funds on the Trelawny monument to elephants, and start thinking about how we can now make money from it. Never mind the fact that billions of dollars have been wasted and the trust in public institutions has diminished considerably, as accountability is never important.

So back to the academic report from Taking Responsibility. Both reports mentioned above do not come with any concrete steps for moving forward and ensuring economic development in Jamaica. Instead, the reports outline generally what they believe got us to this point and, even more generally, what needs to be done, but propose no specific tasks and timeline needed for action.

Coincidentally, the same morning I was discussing with Ronnie Thwaites and Ralston Hyman, the ascendancy of Gordon Brown as the UK's prime minister, and what the implications for the UK were. During that discussion, Ronnie asked a question, which I think was most important, what are the implications for Jamaica? In other words, how can our foreign policy take advantage of the evident changes that will be ushered in with Gordon Brown?

The answer of course is a question I asked the forum, without getting an answer. How did we arrive at studying Jamaica's foreign policy without first addressing the real issues here at home? In other words, why do we seek to put the cart before the horse, as we do with many other things? It seems to me that before we get to studying Jamaica's foreign policy that there are some more fundamental issues to look at. After all, Jamaica's foreign policy has been nothing more than seeking debt, aid, and foreign investments. The problem, of course, is that the foreign policy is only supporting what the domestic policies are.

Economic development
Therefore, it would seem logical to me that the approach should be to first address the challenges with domestic policy, ensuring that they are properly aligned with economic development.

The truth is that our domestic policies are not geared towards economic development, but rather at keeping the status quo afloat to hold onto state power. This is the way that we have operated since independence, irrespective of who is in power. The objective of governments has never been economic development, but political power. So when we fought for, and gained independence in 1962, we were more interested in political rather than economic independence. And this objective is supported by the way our constitution was crafted. The only thing that changed for us was who was placed in the Great House, not the abolition of it.

So because of our domestic policies, our foreign policy is supporting the wrong path. Is it any wonder then that we have not achieved anything more from foreign policy than signing new debt agreements and getting some foreign investors, after giving up tax revenues? My question would be, after all the money that we have spent on the numerous embassies around the world, and trips here and there, what have we achieved? The only thing we seem to have done is sunk this country into greater debt and poverty. Wouldn't it have been better to rationalise the embassies, as recommended by Douglas Orane, and use that money for education, health, and crime? And then we ask ourselves where can we get money from to fund education and health services?

The report by this group makes five main recommendations that, from a 56- page report, take up one page. The other 55 pages are dedicated to describing the problem. Now if that is not an academic report then I don't know what is. What we need is not only the identification of issues, but specific steps to achieve these recommendations with the agreement of course, of all the stakeholders. Some of the issues described in the report also I think are not true. One such is that Jamaica, as a small state is a price taker. That may have been true decades ago but not so in an age of globalisation where information is accessed at lightening speed. Many companies and countries have demonstrated this. As a matter of fact, small means that one can be more nimble.

In a market the truth is that all players are price takers, and this is determined by product/service quality, supply and demand. We have products such as our coffee and ginger that we do not have to compete with in a strict price range because of the quality. Our tourism potential is so great that if we were to take care of it we could be demanding higher prices. We just have to look at what 'Butch' Stewart has done so successfully with Sandals. Instead of giving a tax break to local entrepreneurs such as Butch Stewart to develop the tourism product, we would much rather give tax breaks to overseas investors.

Our priority, of course, is not about economic development, so we go for the quick money from foreign investments rather than the stable money of organic growth. So business persons such as 'Butch' Stewart will have to succeed against the bureaucracy and the investigations into scandals such as Whitehouse, which will turn out to be a grand waste of time as nothing will come from it.
But such is our culture. We are great at studying and reporting, and this is the sensationalism that our citizens demand. We are more concerned with what politicians say than what they do. I bet if the question were asked of the Observer, which is the most read page daily, they would say page two. The one that shows the parties and images of well-being.

Tis the season to be silly

So I was watching the nightly news three nights ago when a thought came to me that politicians have got the media to support the silliness of the election season. This is obvious because of the nightly reports of political rallies aired in the name of giving equal air time to all. I mean I understand the concept but should we continue to air every bit of nonsense that comes from the mouth of our politicians. When I watch the news and hear the blatant promises of gifts being belted out by our politicians, and the resounding response by the crowd, I am saddened that after 45 years of independence this is the best that we can do.

After 45 years our politicians are still promising us the same deliverance from poverty they did in 1962. So nothing has changed. They still make the same promises and we still believe them. Who is more stupid, the fool or the one who continues to follow the fool? After all this time the media continues to present this display to the Jamaican people, who unashamedly show delight at every word shouted by our politicians. The media is indeed behaving like a drug addict that needs to have its daily fix of political crack. My opinion is that we need to cease the glorification of this “Paris Hilton” type of political discourse and start contributing to the building of our nation by focusing on the real issues that will move us forward.

US political campaign
When I look at the US political campaign and compare it to ours I understand why we are a developing country and they are developed. When I listen to the media coverage in the US and compare it to ours I understand why we celebrate underachievement and mediocrity. I do accept that even the US politicians have flashes of “soap opera” type performances but in the main the focus is on policies that will contribute to development. Commentary in the US surrounds foreign policy (Iraq e.g.), tax policies, health care, and immigration issues. In Jamaica of course our focus is on who said what, when, and where; who went on peace marches and who did not; who will supply piped water, fix roads, or build community centres; which poll was not published; who gave out bun and cheese; and the list goes on and on of promises to give a fish rather than teaching people to fish.

Of course the people gobble up the promises because our politicians have managed to successfully keep them illiterate in the most part, where over 80 percent of children leaving school do so without one subject. And the media, which should include educated persons, supports the propaganda by focusing on petty issues rather than the important determinants of our success. It is as if we have all forgotten that (1) while the region is growing at an average of 5 percent, we are growing at under 2.5 percent, and an average of only 1 percent per year; (2) we have official debt of almost $1 trillion; (3) we have a sugar industry and airline that is hemorrhaging $ billions per year; (4) we have a police force that is not only under equipped to fight crime but is also unable to solve murder cases effectively; (5) we have a literacy rate of 80 percent while competing countries are at close to 100 percent; (6) government bureaucracy is stifling the private sector; (7) we face challenges in a global environment, such as competition from China and global warming; and (8) how we do we plan to control our expanding energy bill and ensure consistent power supply. The list of real issues is too long for this column but we do not hear of any solution in the coverage of the rallies.

I have to conclude that our politicians do not consider us sufficiently intelligent to understand the real issues and confine us to promises of roads, water, security, and a few nights of curry goat and beer, as if we are at the nine-night preceding the burial of our country. The irony is that it seems as if this is what we enjoy. I guess it is human nature, as even internationally many people would rather watch coverage of Anna Nicole’s promiscuity and Paris Hilton’s childish fits than understand what is happening with economic development. It’s just that we seem to have a lot more of those people than everyone else. So each night the media continues to air the latest “Jerry Springer” episode of the campaign rallies.

Economic development
One of the issues I would have thought we would have focused on is how we can ensure that Jamaica continues to grow at comparable rates to the international community. Because while we continue to lose ourselves in the euphoria of promises the ship of global economic progress continues to sail past us. The region is again projected to grow at around four to five percent for this year, and we are on target to grow at two percent or less by my projections.

The PIOJ, for example, is involved in the very important task of putting together a national development plan. While this has been publicized there is no discourse from our politicians on what this should include. Is it that they don’t understand it or they do not think that those attending political rallies, or watching the nightly news, will understand it? Or maybe it’s a combination of both, because based on some of the commentary I hear coming from the mouths of those on the campaign trail I have to wonder if they really appreciate what is needed for moving their communities forward.

We need more people like Andrew Holness and Peter Bunting in representational politics, that is young and more importantly understand the issues that need to be addressed. But then again representational politics can be such a slimy issue that one’s stomach can easily turn at its produce. So if I did wear a hat I would certainly lift it to these gentlemen, who not only have the courage to represent the people, but have demonstrated to me that they understand what needs to be done to move Jamaica forward. And there are maybe a few more such persons, but the great majority fails to qualify.

Our politicians, however, are nothing more than salespersons who are trying to get state power and will tell us anything that will secure our votes. It is therefore the responsibility of all of us to demand real discussion of the issues. Let them tell us how they plan to bring sustained economic development to Jamaica. What are the policies they will embrace to move this country forward? We could possibly have election in July, and we have not yet seen any manifesto. But based on the media’s preferred coverage of the “tracings” by candidates of their opponents I wonder if this would even get adequate coverage.

In many constituencies it does not matter who the candidate is as we do not vote for candidates but for a political party, and which ever leader makes us feel best. Even if a cockroach is put to run it would not make a difference.

So I am appealing to Jamaicans, and in particular the media, not to focus on the curry goat politics that has led us to our present economic situation after 45 years of independence, but rather focus on understanding what politicians have to offer in terms of developing Jamaica and hold them to it. This is a big concern not only for me but the many responses I get to my columns and blog, from Jamaica and around the world, but it seems as if we are in the minority.

Traveling with Air Jamaica

The Bob Woolmer mess up by the Jamaican authorities has captured most of the news headlines recently. This is not surprising, as it is possibly the most internationally embarrassing moment that I can recall for Jamaica. And while Jamaica’s image suffers it seems as if the main preoccupation is to deflect blame and not seek to suppress the really bad publicity, and possible law suits, that could arise from this. But such is the culture of Jamaica, and even imported persons will soon fall into this Jamaican trait.

One other thing about the “Bob Woolmer Foul Up” is that it could possibly be as costly to us as Air Jamaica, in terms of lost revenue. With Air Jamaica we can actually see the money leaving the bank, as if the victim of some massive Nigerian scam. The airline has not been without its fair share of media attention with the sale of the London route to Virgin Atlantic. This has culminated in a battle royal between the political parties, with the opposition JLP, supported by the JHTA, charging that the 5.1 million pounds sterling deal was not the best we could have received, and the PNP defending the shots in true West Indian batsman style.

The real deal
But what is the real deal with Air Jamaica. Let’s examine the facts we know, even without the full knowledge of the business plan. We know the following:
- it is costing us J$10 billion per annum, which could build four “world cup opening ceremony stadiums”;
- It is suggested that the London route was one of our biggest routes;
Virgin will not be increasing the number of flights to Montego Bay, to compensate for the abandoned Air Jamaica flights;
- Air Jamaica will soon begin replacing the Air Bus aircraft with older Boeing planes;
- Accumulated loss is over US$1 billion, and an additional US$125 million was recently raised and US$72 million is loaned to the airline from the PetroCaribe fund; and
- Paul Pennicooke has recently stated that the losses are decreasing, and some benefits are being noticed.

So the airline continues to cost us immensely, and if it is not profitable could see write offs well in excess of US$1 billion (J$69 billion) that could be used to fund education, health, equip our security forces, fund small business development, and build a few stadiums of course. The first four mentioned would have significant positive development for Jamaica, by creating an environment where businesses can compete and tourists will come free of harassment.

But even while St. Lucia is opting out of LIAT, and relying on free market forces to service their hotel industry, we have decided that Air Jamaica will be profitable come 2009. This is of course in the face of mounting challenges being faced by much larger airlines internationally, and rising fuel costs, which are projected to go even higher. So if by 2009 we are not profitable then it would have cost Jamaica what we cannot afford, and once again the poor people of Jamaica will be set back by maybe about J$100 billion, which they will have no choice but to will to their children and grandchildren.

Based on this risk, it is therefore very important that the powers that be do everything to ensure that the 2009 plan is not only viable but highly probable. Because after all the losses have been racked up, those responsible for taking the decisions will leave the debt for Jamaicans to bear. And so Mr. Golding is right in indicating that Air Jamaica’s future must be given much consideration. One fundamental rule of investing is that the reward must be considerably greater than the cost of the risk. If for example the cost of the risk is $100 and you only stand to gain $50 from the transaction then it is not a good investment decision. If the reward-risk amounts are reversed however then it is a good gamble, after of course considering all the technical and fundamental information.

Decision time
So the decision that must be made re Air Jamaica is, is the projected profitability more likely to occur than further losses? If the probability of the airline being profitable is 70% and the probability of losses is 35%, then it may be worth the risk. Consideration of course will have to be given to projected fuel price increases, competition expectations, any competitive advantage, and the cost to our tourism sector of no Air Jamaica. The decision cannot be based on an emotional reason such as, we need a national airline, or mistakenly trying to recoup past losses because of pride.

So my stance on Air Jamaica is that I am going to trust those in authority that the sale of the London route was the best financial decision for Jamaica, and that this is a part of the process to take us to sustained profitability in 2009. I am going to trust those in authority that pumping billions into Air Jamaica is the best use of our funds for Jamaica’s long term development. I trust these decisions simply because I do not have access to the intricacies of the business and development plans of Air Jamaica, and as the Minister states this could create a disadvantage if leaked to the competition.

While I trust the authorities to do so, and understand that the business plan cannot be revealed in detail, I also would like to understand what decision will be taken if we get to 2009 and the airline is still not profitable. I also would like to know what the accountability is in that situation. At some point in time we have to put in place what traders call “stop loss”, which is put a stop on the losses so that you can walk away with something.

At some point in time we have to stop throwing borrowed billions at projects that serve no more purpose than to sink us deeper into debt and poverty. We are fast approaching J$1 trillion in official debt. For example, included in the PetroCaribe disbursements are flood repairs and toll road routes ($3.72B); Lift Up Jamaica ($0.43B); Air Jamaica ($4.82B); SCJ ($3.72B); and JUTC ($0.20B). There are other disbursements, which I am assuming have some benefit as they mostly address debt refinancing and may be to replace higher cost debt. But these amounts must certainly be questioned as to what benefits are expected that will make Jamaica a more prosperous country.

As Ronnie Thwaites has been saying publicly for years, given the situation we are in, we must ensure that we get added value for every dollar that we spend. And this can only happen through proper financial analysis and due diligence.

Can the debt be capped?

Probably the most problematic part of the budget is the amount of money that we have to pay in servicing the debt. In 2007/08 we are projected to pay out 42 percent of revenues in interest payments, down from 59 percent in 2003/04. While this reduction is good, it has not come because we have managed to reduce the absolute amount of interest being paid, but rather because of increased revenues. Since 2003/04 interest payments have risen from $88 billion to the projected $101 billion in 2007/08.

It is good that we have managed to reduce the percentage of revenues paid out in interest costs, but 42 percent is still too high if we are to have any meaningful impact on social programmes. The focus therefore must be on looking at ways that we can reduce the amount of money paid for debt servicing. A big part of the problem of course, is that between 2003/04 and 2006/07, we have borrowed a net of $92 billion more than projected, primarily because we have not been able to meet budgeted revenue targets.

The argument has been forwarded that we must place a constitutional limit on the debt, not necessarily an absolute amount, but a percentage of GDP. But the question must remain, is it possible to actually cap the debt when we seem to depend so much on the borrowing flexibility to meet our budgetary requirements? Debt to GDP has actually been projected to increase this year because of the increased fiscal deficit projected. The size of the fiscal deficit, that is the excess of expenditure over revenues, is what determines how much debt is needed. So unless we can reduce the fiscal deficit then the debt will keep growing. The way we have been reducing the debt to GDP ratio, is not by reducing the debt servicing cost, but by trying to increase GDP value.

Debt to Equity
Despite this inability to properly manage our deficit, however, could we actually cap the debt? If we were to do so then what would be the negative effects on the country? I think that this is really the question that we need to ask. In the case of a company, for example, one of the ratios that you want to manage carefully is the debt to equity. The debt to equity ratio is derived by dividing the total debt by total equity. So if debt equal $200 and equity equal $200, then the debt to equity ratio is equal to 1. This is similar to our debt to GDP ratio, where GDP can be seen to represent the equity of the country. The debt to GDP ratio for Jamaica is 133 percent, or 1.33.

The reason why the debt to equity ratio is important is because it tells you how highly leveraged a company is, and the more highly leveraged a company is then (1) the more of the company has been pledged to creditors, who can move in and call the loan or take the security; and (2) the more expensive is the capital base of the company, which means that it may have lower returns on capital than a similar company with a lower debt to Equity ratio. The reason for (2) is that debt is always more expensive than equity.

This is one of the reasons why Jamaica has a problem with our fiscal accounts. The high level of debt to GDP ratio is playing havoc with our fiscal accounts, and ability to fund social programmes and critical sectors such as education, health, and security. What has happened is that we have managed to borrow so much debt as a percentage of GDP, that whatever we produce (GDP) is mainly being used to pay for the interest cost and principal payments of the debt. This is the same situation that a company faces, when they borrow money and have to pay it back. Say they borrow $100 at an annual interest of $10 per year and annual principal payment (paying back the amount borrowed) of $20. If they make a profit of $20 for the year, before interest, then they have to pay back $10 out of the profit leaving only $10 in profit after interest. If another company had the same profit with no debt (had only equity) then they would still have the entire $20 to put back in the business. From a cash point of view they would have to use $30 of the cash (interest plus principal) to pay back the loan, therefore, having $30 less cash to invest in working capital or research and development, putting them at a disadvantage to a competitor company with no debt.

This is what happens in the case of the country. Because we have this massive debt that we have to service then we have much less of our monies available (58 percent of revenues after interest) to spend on the country. So for each $100 collected, we have to spend $42 paying interest leaving only $58 to spend on running the country, and the poor people that we have made poor by mismanagement, which is a paradox I cannot understand. I mean if we love poor people so much then why have we, on gaining independence, mismanaged their affairs so badly that we have made them poorer so that we can make “saviour type” announcements, like free health and education, coming up to election. Shouldn’t we have managed the country in such a way that we can provide those things as a matter of course like developed countries do?

Proper management options
A proper management option I think is to put a cap on the debt, as responsible management would do in a company. We need to do so to ensure that in 2007 we do not give away anymore of our independence that we earned in 1962. We may have political independence but still have multilateral agencies and creditors dictating what we are to do. They might not do so directly, but when they issue credit ratings on our bonds, and sell off our bonds when they are uncomfortable, then they are indirectly influencing our behaviour. When the IMF issues reports on Jamaica, although we have stopped borrowing from them, it can affect the way our creditors see us, and so we better make sure that we continue to please them with our performance.

The question may be asked then, if we cap our debt then what will happen to the programmes that we usually use the debt to undertake? How are we going to expand the programmes that we use debt for and will this not affect the less fortunate amongst us? Of course this will be much more beneficial for us in the long run, as it will ensure that we do not use more than a certain percentage of revenues to pay back debt. But what of the short term thinking cycle we are always preoccupied with.

The answer to that of course is that many of the projects that we borrow money for is not geared towards national development anyway. If we were forced to use our resources more efficiently then would we be spending $10 billion each year on Air Jamaica, or hundreds of millions on the Sugar Company? Would we be spending $2.5 billion on the most expensive cow pasture in the world, the Trelawny stadium? In the case of Air Jamaica, it seems as if the argument that the benefit to Jamaica is far greater than the direct cost of carrying the tourists to Jamaica is no longer valid, after so many years of losses, as that does not seem to have been a consideration in selling the London route. And since it is a private airline being funded with public money, then we are not entitled to any further clarification on the sale amount and the process behind the sale.

So can we afford to cap the debt? Although it should not be necessary, as what is needed is prudent management of our affairs, then if we have to cap the debt to control the impulses of our politicians then we must do so. In the long run it will be better for us to do so, although we may not be able to afford things such as a national airline and propping up a dying sugar industry, when other countries have taken the decision to leave sugar. But at least the people of Jamaica may be saved from greater impoverishment so that they won’t have to wait until every five years to be considered by our politicians.

2007/08 growth projection

I have commented that I do not expect the Jamaican economy to grow at the projected 3 percent this fiscal year. While I really do hope that I am wrong, an examination of the numbers, and what is happening in the economy, does not support a 3 percent target. Last year the projection was for 3 to 4 percent and we came in at 2.5 percent. And this is amidst (1) no hurricanes; (2) record levels of confidence; (3) world cup cricket preparations; (4) highway 2000 road construction work; (5) construction of the Spanish hotels; and (6) strong regional and global growth.

In addition to the fact that many of these factors will not be present, or will slow down this year, the period January to March 2007 (Q107) came out at just 2 percent. This is not to be included in the current fiscal year numbers but was a period in which we had high confidence levels reported and a lot of work due to world cup. Going forward the factors will not be as favourable as in Q107.

Inhibiting factors
The following will affect growth going forward:
1) The hurricane season is predicted to be even more active than last year’s prediction. The quiet season last year was because of the emergence of El Niño, which is not expected this year. We are expecting 13 to 17 hurricanes this season, with 3 to 5 major hurricanes, and all we need to have a disaster is a little rain or wind as we have so neglected our environment;
2) Crime has significantly increased from the downturn at the end of last calendar year, and therefore I expect that this would have negatively affected confidence;
3) This is an election year and the predictions of violence will no doubt lead to a wait and see attitude until after election, and from all indications the date is being dragged out, which is not good for the economy. Many persons are also waiting on the announcement of the date to book airline tickets. We must start having a fixed date for elections;
4) There is no more preparations for world cup, so we will find a slow down in capital expenditures;
5) Not much work is left to be done on the Montego Bay leg of Highway 2000, and I can bet that the next leg will slow down given the tight funds situation;
6) Most of the Spanish hotels have been completed and Harmony Cove construction activity may not have any significant impact on the fiscal year;
7) The regional and global economy is projected to grow at a slower rate than last year, and China’s undervalued Yuan has seen the USA buying more from China, which could negatively affect us. In addition there is a possibility that China’s equity market could see a significant correction this year that could affect global markets; and
8) The companies on the stock market will not see any significant growth in profitability overall. Most of the listed companies are financial institutions and I expect that the securities dealers especially will continue to under perform the previous year. We also see companies like Jamaica Producers showing worst results, which I expect will continue for another one or two quarters. Companies like Cement Company and Hardware and Lumber, although showing improved performance, is doing so against the background of the cement crisis last year. There is one or two companies that I expect will do better but I will keep that to myself until I have had enough time to do the analysis and buy them.

PIOJ growth numbers
When one looks also at the numbers presented by the PIOJ, it supports the argument that growth will be closer to 2 percent for 2007/08. Growth in the Q107 was driven by 2.5 and 1.5 percent growth in the goods producing and services sectors respectively. The main contributor to growth in the goods sector is agriculture. In 2006/07 fiscal year the agriculture sector was the fastest growing. But this was because it was recovering from the effects of the hurricane in the two previous years. The sector therefore stabilized in 2006/07 and growth is expected to be moderated in 2007/08, as evidenced by Q107 when growth in this sector came in at 4 percent compared to 22.9 percent the previous year.

The main contributor to growth in the services sector is Tourism, in the Miscellaneous Services category. In Q107 this sector declined by 0.8% compared to a growth of 9.2 percent the previous year. Tourism was down in the quarter even in the March when an improvement was expected as a result of world cup cricket. I believe that at best Tourism will be flat for the fiscal year, and therefore growth of the services sector will be affected. In addition, the financial services sector is not expected to see any significant growth based on the expected company performances, and government services should remain flat given the tightening in the budget expenditures.

Therefore the two main sectors that provided exceptional growth last year, when we only came in at 2.5 percent, will see a slow down. Construction may see some growth, but with no world cup activities and a slow down in the highway project, we will not see enough upswing here to make up for the slow down in these sectors. Overall the services sector, which accounts for 70 percent of the economy, grew by only 1.5 percent. So although the goods sector grew by 2.8 percent, this only represents 30 percent of the total economy. I expect that the services sector will continue to lag behind the goods sector for the reason mentioned above. For us to see 3 percent growth in the economy then we will have to see over 3 percent growth in the services sector.

As this is also election year, I don’t expect that much new investment activity will take place. It is important that the election be called earlier rather than later so that we can get on with the development of the country. Everyone seems to be in a wait and see attitude. One may argue that in an election year we should see more spending, as government and the opposition throws money around. This time it is different though, as evidenced by the no growth expenditure budget. In real terms expenditure is the same as the 2006/07 fiscal year. In fact a significant part of the capital expenditure budget relates to expenditures already undertaken, which would have been counted in the growth numbers in 2006/07.

When we are projecting numbers, we cannot put something down on paper just because it sounds like a good number but must have proper assumptions to support it. I wouldn’t mind if someone was to explain what the projects, and growth areas, are expected to be that will provide us with 3 percent growth in a year which seems like it will have less new activities than in 2006/07. Importantly also the tourism projections had to be recast because of the lackluster performance during world cup.

This is my simple logic as to why I do not think that the economy will grow at 3 percent this year. I would love for someone to disprove my logic, as I really would like to see us growing at 5 percent this year, but until then I see nothing to convince me that 3 percent growth will happen. I have a bet riding on it, and if I am right then you can catch me at Christopher’s enjoying my winnings.