Thursday, December 27, 2007

2008 economic expectations

As usual in welcoming 2008 it is a time to look at the year past and project expectations for 2008. For the past two years I have been saying that crime and education are the main concerns, and indeed they continue to be. Crime because there is so much economic loss and education because productivity remains a big concern for Jamaica.

In my view 2007 has not been a very good year for Jamaica, as the year has seen the effects of a continually high debt; high crime rate; inadequate education results; and a slow down in the global economy manifest themselves. Growth has also been much less than originally projected, firstly because the projection was unrealistic, as I had indicated at the start of the year, and secondly the long election campaign resulted in a slow down of economic activity, with more time spent managing the election campaign than the economy.

A new government was elected, of which much was expected on the first day, although we didn’t seem to expect much in the past 45 years. When the government came in they had to begin to grapple with understanding the state of government and was immediately faced with global events affecting Jamaica, not least of which the high oil and commodity prices, resulting in inflation were being revised upward. This was not a phenomenon of Jamaica only, as some developed markets became concerned about stagflation (slowing economy and rising inflation), caused primarily rising oil prices and the sub prime crisis.

Higher oil prices
For the first time oil prices threatened to push past US$100 per barrel, and the threat is still very real. In light of this the government has had to grapple with high food and commodity prices while at the same time having to deal with a higher than originally projected fiscal deficit. These events, coupled with a weakening US$, saw the exchange rate climb to near 71.50 but we managed to survive through November and today the exchange rate is back below 71.

So the last three months has been very challenging for Jamaica, with a new government in power after 18 years, and having to deal with global events and a rising crime rate, I believe that they have handled the crisis creditably and as things settle down we can see gains come next year. This will of course depend on how the country’s affairs are managed, particularly on the fiscal side but even beyond that within the public bodies.

The close electoral margin gained by the ruling JLP can be good or bad for the country, but this depends on how we manage it. Very disappointing for me over the past three months has been the continued tribalistic nature of our politics, which can gridlock the country. The only shining light for me has been the way the Prime Minister has continued the path of giving the opposition greater power even in light of the political events as he had committed to, which shows a certain degree of maturity. How can we expect the people of the country to live peacefully with each other if in Parliament we continue to display the partisan approach to management that after 45 years has left us nothing but poverty and debt?

In 2008 the Prime Minister will have to continue to remain above the politics and provide the direction needed for this country. For too long we have been without proper leadership. He has said that he is public servant number one and I believe he is sincere about it. I believe that there is someone on the opposition side of a similar vein, but I will reserve my opinion on which person that is.

We should also expect the global situation to remain bad over the next three months or so, as oil prices remain relatively high over the winter, eventually tapering off to the 70’s on average for the year, and the sub prime crisis is resolved. We may also see a slow down in European markets, and global growth continue to be propped up by the emerging economies such as China, Russia, India, and some South American economies. These markets would be the ideal ones to market tourism and exports, as discretionary spending should remain strong.

2008 developments
I expect that the fiscal situation will settle down, and with the strong tourist winter season expected we should see the exchange rate also stabilize. Inflation for next year should be lower than 2007 and all these factors added to reducing interest rates in the US should see better interest rates for Jamaica. I also like the approach of the Education Minister, and expect that we will start to see better things happening in that sector.

The bug bear for me remains crime, and it is heartening to see Hardley Lewin as the new Commissioner, whom I have every confidence in, as someone I have known for a while and know his capabilities. If we can manage to tame the crime beast then we will see an upswing in economic activity, as crime ridden parts of the country can be returned to economic areas. I hope that after so many years of sowing the seeds of crime we can begin to reverse it by focusing on giving the youth an alternative. The current approach of searching everyone at dances is ridiculous though, as (1) it tramples on the rights of persons and economics; and (2) if the person with a gun or drugs sees that the search is taking place what are they going to do keep the contraband on them. While we continue to perform these sting operations persons are still doing what they want on the roads and music still continues to blare at 7AM in the mornings.

Going into 2008 also the developments within the unregulated investments community should start to unfold, as we have seen two recent events which should form this catalyst, (1) the unaudited statements published by Cash Plus; and (2) the ruling against OLINT and LEWFAM in the courts. Persons invested in these institutions have also reported that they have been receiving tax assessments from the authorities. The start of 2008 should therefore be a very interesting year in this area.

When one speaks of the first 100 days of a government though I always wonder what the significance of this is, as this is not the time that you would necessarily expect results but rather expect that the foundation be laid for governance. Much of this preparation is behind the scenes and may not manifest itself in results over the first 100 days. So the real question to ask government is what have you done to prepare for governance in that time. The first 100 days should therefore be a time for laying the groundwork.

Of relevance though is for us to understand that the most important thing to be done over the 100 days is the appointment of boards. This is not something that has been carefully analyzed. We must understand though that it is not politicians that run countries, and to a lesser extent civil servants. Countries are run by the boards that are put in place by politicians, as poorly performing public bodies can make a responsible Minister look bad. If we want an efficiently run country it is to these boards that we must look.

2008 I expect to be a better year than 2007, as we are over the malaise of elections, and the government will be better positioned. The economic climate will change from what has traditionally driven it and I believe that we will start to see more small businesses come to the fore as crime is dealt with. It is of course going to depend though on strong leadership from the Prime Minister on who much rests.

Thursday, December 06, 2007

True blue for life

Last Saturday was one of the happiest days of my life, when Jamaica College (JC), the greatest institution in the world, won the Manning Cup for the first time in 33 years. Anyone who knows me well understands that the reason JC was my only choice at common entrance was because of its football tradition. I waited for 30 years after entering JC to see the Manning Cup come home to its rightful place, and even after so long I will still take it. For me the Manning Cup is more meaningful than any other trophy JC has lifted, which since I entered included everything else. Much respect to the team and coaching staff that brought it home for all the JC alumni.

As I always say to my friends there are two types of people in this world, those who went to JC and those who wish they went to JC. This great institution has produced many Jamaicans who have and continue to make significant contribution to Jamaica. We have produced three of Jamaica’s eight Prime Ministers to date (Norman Manley, Michael Manley, and Bruce Golding), a West Indian Captain (Jimmy Adams), Olympians (such as John Mair who is a part of the current coaching staff), scholars (such as Professor Hall and Trevor Munroe), and business greats (such as Karl Hendrickson, Jimmy Moss-Solomon and Maurice Facey). And the list goes on and on of great Jamaicans we have produced.

Winners
And we will continue to produce contributors to Jamaican development, which I would feel proud to be named amongst one day. All JC alumni, present and past should be aware of the great tradition of greatness they have to uphold once they enter JC.

Seriously though, what an institution like JC shows us is the effect a single institution can have on national development. And such an approach may not be a bad one to take. Of course we want to see the entire country develop to the highest standard, but in every development there are always winners that lead the way. In other words while we develop the entire country we need to look at centres of excellence that will lead the way.

We have seen this in tourism where Sandals and Superclubs have set the standard for all other hotels to follow. We see it in business also where one or two have been leaders in their industry, for example in the fast food business many have developed their model based on KFC. This is the way that markets operate, and we will see where new leaders will emerge once a new entrant improves on the previous standard or the current leader falters. As an example, the prominence that Microsoft once held in the technology industry is being shared today by companies such as Google and Apple. Similarly countries lose prominence over time and new super powers emerge.

What is takes though is for high standards to be set by one or two institutions and for the market to encourage others to follow. This is one of the significant problems that Jamaica has faced, particularly with crime, over the past ten to fifteen years. Standards have been set, as will always happen when a vacuum is left, but left unguided those standards will be the wrong ones. When we look at the crime situation, we see that what has happened is that over the years the general break down of law and order has led to standards of viciousness, corruption, and easy money being set. Because we have failed to institute effective organs of discipline such as in schools or an effective police force we have left Jamaicans to develop standards for their own survival. There are no rules that they must obey and so the natural laws kick in and people do whatever is necessary to survive.

Because of the bureaucracies we have created, and the lax manner in which we have sought to enforce laws, if they are enforced at all, we have succeeded in creating a society where indiscipline is the order of the day. I have been writing for a while that if we want to deal with the crime problem in Jamaica we must attack it from the basic levels of discipline. In other words we have to ensure that the laws of the roads and public nuisances are obeyed. I mean how can we expect to solve crime if we cannot even enforce discipline on the roads and that the Noise Abatement Act.

General indiscipline
Two weekends ago I was exiting through a one way and a taxi sought to enter, indicating to me (the person with the right) that I should move over and allow him to break the one way. Well I refused to do so, standing my ground, and eventually he had to reverse onto the road and allow the traffic that had piled up to leave. What was noteworthy also was that the people in the taxi were on his side, demonstrating the level of indiscipline in the society. I was watching the news a few nights ago and saw where the police went to shut down a dance that had gone on until the next morning, and the patrons were on camera saying that the police was fighting against them.

A few mornings ago Emily Crooks was speaking to a policeman, Radcliffe Lewis, who said that a mother of a wanted gunman, whom they found dead with a gun in his hand was saying that she would report the police to Wilmot Perkins and Cliff Hughes because they were looking for her son. The irony is that the police found him on the bed beside his mother murdered by other gunmen.

These examples show that the problem we face today is not just a few gunmen running around and terrorizing the country, but a general breakdown in law and order that has led to a society that does not appreciate the difference between wrong and right, including many in the police force. So how does arranging a few police operations to tackle this solve the problem? It doesn’t. What is needed is a general approach to dealing with discipline in the society and making people know that even the most trivial of laws must be upheld or the law will hold you accountable. Unless we start with the visible areas such as the roads and noise disturbances it will only be one successful operation after another without any general effect.

This again brings me back to JC, where the current Chairman (another great Danny Williams) and the principal (Ruel Reid) has made significant strides with the school. The discipline has improved tremendously and with it the academic performances. They, however, never started by trying to clean up the discipline with “sting operations” among the student body. They ensured that the teachers first and foremost were brought in line and then that the students were made to follow the rules and the standards of excellence that were set. When one goes to JC today we will see signs such as “The school of champions” littering the school yard, as we try to impress upon the students that they are in fact champions, having to deal with them as products of an undisciplined society.

The programme of JC’s transformation is working, although we have had incidents such as the unfortunate stabbing some days ago. It will be a process but we will continue to have our eyes on the prize and will get there, both for JC and Jamaica. but as all JC alumni, past and present knows, FERVET OPUS IN CAMPIS.

Thursday, November 29, 2007

WYPIWYG

WYSIWYG (what you see is what you get) is a computer terminology that refers to the way in which a file is output in relation to how it is viewed on the monitor. As it says, what you see on the monitor is the way the file will be output. Before WYSIWYG technology the representation on the screen may have included references that would not be shown on the output.

I have based on this coined the acronym WYPIWIG, what you pay is what you get. And I think of this mostly in relation to the way we approach human resources in Jamaica. Sometimes when I see Butch Stewart, he proudly refers to the fact that his hotel workers are among the best trained in the world and attributes this large part to the success of his chain. In fact he will tell you that on occasions when he visits a hotel overseas he will see one or two former Sandals workers in management positions. His philosophy, hire good people and watch your business grow.

Recruitment process
This of course is one of the biggest problems in the public and private sector. Many hirers believe that the way to business success is spend as little money as possible on human resources, so that the greatest effort in hiring is to try to get someone with acceptable qualifications for the lowest cost. The result of course is that the “critical thinking” required to perform the job better than the competition, and driving the company to new levels of efficiency, is missing. They would much rather spend the money on internal training, fixing errors, or marketing than getting someone very capable who will prevent such expenses. Is there any question then as to why we have companies that find it difficult to compete internationally?

Some years ago a very senior manager said to me that the main advice he would have for someone is hire good people, irrespective of how long they stay with you, as the value they could add in a year far outweighs the value a mediocre person adds in five years. When that company was facing challenges (driven by global changes) it was the quality of the human resources there that turned it around and today it is one of the more successful companies.

In the USA for example great emphasis is placed on the recruitment process, from the right type of advertisement (for which they use many innovative means) to the selection process which is based more on assessing “critical thinking” rather than academic qualifications. They recognize that the human factor is the most important input in the output process and go to extreme measures to ensure that they recruit the right people, as that is where the success starts. In Jamaica of course there is not much creativity in advertising, as the objective is not about proper recruitment in many cases. In any event when the person is hired in many instances their ideas are not valued as some managers have an autocratic approach.

We talk about productivity improvement in Jamaica, but our public sector in many cases is not set up for increasing productivity. The bureaucratic nature of the rules governing public sector workers, the way they are compensated, and the autocratic way of some managers, in many instances prevents rather than promotes any critical thinking. So while we preach productivity every day we do everything within our structure to prevent the hiring of the best (in some instances) and where we have good people in place the way our public sector rules are organized is not conducive to increased productivity. Is it any wonder then that year after year we struggle with issues such as corruption, bureaucracy, and low productivity. It will never be enough to change one person at the top or buy a piece of equipment if we do not address the people factor.

Objective of the MOUs

As an example, our objective in forming the Memorandum of Understanding (MOU) was to save money, not develop a productive base of people who can contribute more significantly to economic growth and by doing so increase their compensation levels. Our objective is first and foremost to save money, which the irony is unless you improve the people factor it will all blow up anyway. After six years of the MUO (MOU1 and MOU2) what have we achieved. We are even more strapped for cash, productivity has not improved, economic growth is stagnant, and the people have suffered as their real wages have declined. This again is another human resource factor of course, lack of vision by our leaders.

When we talk about our public sector bodies, and how much they lose, we fail to speak about the most important reason for this, the human resources. In many cases the main problem is the quality of the human resources that run some of these institutions. In some cases this is because they are political appointments and has not gone through a proper selection process but is based on who the person knows. As an example someone sent me an email requesting that I help them to get a job because they are currently not working and think that I should help, without saying that they will submit their resume. In other words just expecting the appointment to be made thus continuing a tradition of appointments without scrutiny. We can’t seem to make the link between this type of practice and our current economic dilemma.

And so because of our lack of failure to recognize the human element as an integral part of production we have been hounded with falling productivity levels, which has resulted in a country that is mired in debt and aneamic economic growth. Until we make the link between human resources and economic development we will go nowhere. Unless we make this necessary link we will always create short sighted rules that are based more on controlling absolute costs rather than adding greater value to what we have, or don’t have in our case. For example I know someone working in the public sector that needs a tool to perform their job effectively but because of the procurement procedure has been waiting on that necessary tool for weeks, without any consideration that the waiting period is costing much more than the tool they need. And this is just one of many examples.

I have commented on many challenges faced by Jamaica but none is more critical to address than this. The fact is that unless we can change our approach to see the importance of human resources we will still be talking about the same challenges 20 years from now. At the same time people must be held accountable based on performance, and not be assessed based on who they know. If ever we needed a revolution in Jamaica (in both private and public sector) it is the way we approach the hiring and support of human resources. Our disdain for human input, however, is evident in the way we have revered the poor over the years as if it is necessary for them to be with us. So we continue to do everything to keep people poor in the way we have managed this country.

At the end of the day, the major players in the public and private sector must realize that if the people factor is continuously ignored then the organization, and country, will suffer also.

Thursday, November 22, 2007

Recognizing our excellence

Last Sunday the Prime Minister once again broached the subject of term limits, giving his reasoning behind the subject. This is that if you can’t demonstrate an ability to fix the country’s challenges within 10 years, then what is the justification for providing another term. This brings to mind the importance of human resources in development of countries and companies.

With the advent of globalization being competitive means relying more on knowledge, and by virtue of that human resources. So even though one puts capital in place, without the proper human resource capability to support efficient utilization of that capital, competitiveness will suffer. It is human thinking that determines how efficiently technology is used, as a computer is one person’s hands can be used more productively than by another person who lacks the appropriate training. So while as a country we have always emphasized capital investment where we have failed is in developing our human resource capability.

International preference
Our official statistics show that over 70% of our labour force left school without passing even one subject. We also know that our literacy rate is around 80%, while countries we compete with are at 95% and above. So how can we hope to compete with these countries? It is this falling productivity that is at the heart of our problems.

But developing our human resources has never been our emphasis, as we are like rural persons dazzled by the lights of the city, only in our case rural is Jamaica and the city represents other countries. It seems as if once you take a plane from another country and come to Jamaica that you are a greater expert that a resident Jamaican, even if you come from a less developed country. This is a cultural problem with Jamaicans.

We didn’t really start to recognize how powerful Bob Marley was until he died and was honoured internationally. Never mind the fact that for years before his death people from across the world would kill to see him perform, and would visit Jamaica just because of his name. As usual though foreigners always recognize our excellence before we do. His song was even voted best of the century. Leave it to us we would have chosen an international artiste.

There are also many instances where Jamaicans go abroad and do very well. Why is it not possible for them to do well in Jamaica? So whenever we have a project to do, or we are seeking expertise, the first thing we do is seek to get assistance from overseas. Never mind the fact that the overseas persons may not even have more expertise than we do locally, or not even be able to think out a problem better than we do. The fact is that their address does not have Jamaica on it, and they present a brilliant marketing document and speak differently.

I mean it is the US that has had Enron, WorldCom etc. Jamaica has not had that sort of accounting scandal. We have not yet seen any fallout in Jamaica from the sub prime crisis, even though Europe and The US has been affected. These examples should tell us that our Jamaicans may be thinking more about decisions than many others in international companies.

Economic impact
Even outside of the cultural issue though there is an economic impact for this type of preference. The fact is that when we continue to favour foreign ideas and tastes over Jamaican ones it causes (i) a much slower development rate, and less emphasis, on our own human capability; (ii) it impacts negatively on our foreign exchange; (iii) it supports the development of foreign firms over local ones; and (iv) it changes the emphasis from local produce to foreign ones.

There is no doubt that cultural tendencies determine consumption patterns, which ultimately affect economics. And this is the part of the problem that has plagued us for years. Can you imagine if the preference was for Jamaican tastes and developing Jamaican talent 40 years ago? We would have been far ahead in terms of our economic development. Driving down Knutsford Boulevard we would be seeing all Jamaican companies that have branches all over the world, instead of seeing the all too familiar foreign companies.

As a country we have produced the best in all categories. We have the best flavours in some of our produce. We have produced one of the leading hotel chains in the world (Sandals), and one thing Butch Stewart always speaks to me about is the excellence of his Jamaican trained hotel workers. We have the world record holder in the 100 metres. The irony is that we have allowed foreigners to have capitalized more on brand Jamaica that we have been able to. A few years ago listening to Jamaican dancehall music would have been seen as not proper, leaving the other countries to exploit the product and recognize our artistes at the Grammy awards, which is when we started to accept it.

We have to start thinking outside of the box, and change our cultural attitudes towards anything Jamaican, including most importantly human resources. I believe that many things we run to foreigners for can be done by Jamaicans. But our tendency is to value foreign input more, and thus pay them more for the same job a Jamaican does. If we do not rate our own then who will.

Other countries that are more developed have done so by focusing more internally than externally. We always, for example, focus on development by exporting, when similarly we could do so by developing locally causing the wealth to remain in Jamaica. Instead we import 80% of inputs and then export the product. This has led to neglecting value-added development of our own crops, for example. A few weeks ago I spoke to a UK trade mission and they were excited about finding opportunities in Jamaica by developing our local products.

I have no problem with foreign investments, which are important for development in a globalized economy, but it is important that we do as other countries, which is to develop local talent and industries.

Thursday, November 15, 2007

The effect of productivity

The past few weeks have seen oil and commodity prices rising internationally. These incidences, along with the sub-prime crisis, have marked the predicted decline of global growth levels after peaking in 2006. During the times of solid global growth, Jamaica failed to take advantage, instead being satisfied with occasionally achieving 2.5% per annum, averaging less than 1% over the last 18 years.

Contrary to the various commentaries of the need to take advantage of this global growth boom, when even our regional partners were growing in excess of 5% and 6%, the authorities seemed to have been very happy with the accomplishments of 2% per annum. So now the chickens have come home to roost. Everyone knows that economies go through cycles, and not only do you have periods of exceptional growth but there are similarly always periods of depression.

So while other economies have been prepared to deal with the slow times, Jamaica failed to prepare ourselves.

International price increases
We are now faced with a situation where prices internationally are increasing, our largest trading partner (US) seems to be headed for recession, and global growth is slowing. For a few years I have been saying that Jamaica does not have the capacity to grow above 3%, and the authorities have been content to continue projecting growth levels that we did not have the capacity to achieve.

The current administration has realized that in order to grow the economy at the targeted 6% per annum, there has to be a fundamental shift in our productive arrangements. There has to be significant tax reform, a change in our energy policy, and improved productivity levels among other things. And this change in thinking is to be commended because it is at the heart of our problems.

There are some in the US who have stated that oil prices at US$96 per barrel is not such a big problem as relative prices, when compared to a few years ago, is in fact still lower. The reasoning behind this is that inflation and a higher productivity makes today’s price relatively cheaper. In other words inflation over the years would adjust the constant price down and the fact is that the US is using less oil to produce one dollar of GDP than a few years ago.

In Jamaica’s case, however, although we have had much higher inflation, oil prices are denominated in US$, and so has not been affected by inflation, and our productivity levels have declined by about 0.5% per year. So we are using more oil to produce one dollar of GDP over the similar period.

It is this inability to prepare ourselves for these times by improving productivity and thus creating high growth and increased constant income levels that is causing the heightened panic of high prices today. Even though this period will pass also because the economy has been so unprepared to absorb these shocks, even a temporary bout of instability seems unbearable. So one again there is a call by all, including those that have failed to prepare us, to address a problem that should have been anticipated, based on economic cycles, placing greater pressure on our already scarce resources.

This is the real effect of unproductivity. And unless we can improve our productivity as a country then we will continue to see aneamic growth rates at best, while our trading partners surge ahead. As a country we have been too content to measure growth by how many cell phones, cars and women one has. Not understanding that these can be either trappings of wealth or debt, and for us the latter is the case.

Factors affecting productivity
If we are to affect productivity we must understand what are the factors that cause increased productivity? We must first understand what these are and then seek to ensure that the inhibitions to these are removed. In a knowledge based world, it is important, for example, that we increase our literacy rate from the current 80% level while our trading partners are over 95%. The first thing we need to understand is that productivity is driven primarily by human resources, and this is the main reason why I disagree with the contentment over the years of trying to control expenses by paying relatively low wages in the public sector not recognizing that value added is more important than absolute cost. If we really want to attract the best minds then why do we pay the worst salaries?

What is necessary is not the absolute sums we pay but the ROI on the monies invested in our human resources. What we must do is move towards is an effective performance based pay system. It is such a measurement that will drive productivity, not the traditional book keeper approach of scrutinizing each dollar spent irrespective of return.

There are other factors which affect productivity such as our bureaucracy, lack of proper order, and a general malaise to implementation. We are great at studying and preparing reports, but don’t ask us to implement. After all if we implement we may make an error, so the way not to have any responsibility is not to do anything. So no one ends up doing anything because of the fear of being held responsible for errors that other countries, and companies, would be satisfied with incurring because unless we make mistakes along the way we won’t be able to recognize what does not work. The important thing is to ensure that the proper steps are taken to minimize the risk of failure, but isn’t failure a part of success.

This fear of failure has resulted in the Jamaican economy not being able to transform over the years. So our production frontier remains the same, or in fact has been shrinking over the years. Remaining stagnant is the same as declining. If one examines what we were producing 20 years ago to today we would see that we continue to rely on the same production arrangements even though the world has changed. Even more important we have not even improved the way we produce those same things. This is at the heart of our problems.

Dealing with higher prices
In relation to the higher prices, the question is how we ease the pain on the poorer people. They continue to be faced with higher prices. Our traditional approach has been to provide direct support through programmes such as PATH and JSIF. But what we need to do is not just provide food stamps, for example, but seek to lessen the effect on prices, as when prices increase it is very hard for them to come back down even when costs reduce. Price increases also cause pressures for wage increases and reduce economic activity. If we recognize that price increases are temporary, because of increases in world oil prices, then the objective should be to control the temporary anomaly, or smooth out the effect just as the BOJ does when it intervenes in the foreign exchange market. A possible solution would be to (after careful projections) provide a temporary subsidy to the retailers on key cost components, not with new funds, but reallocating capital from places such as PATH, thus controlling prices to the final consumer.

In the medium to long term of course we need to develop our own local industries with less dependence on imported supplies.

Wednesday, November 07, 2007

Importance of fiscal discipline

The World Bank and IMF projected that global growth reached a peak in 2006, and from hereon we will start to see lower growth levels. It is still expected that China, India, and Russia will lead the way, having grown 11%, 9%, and 8% respectively in 2006, which accounted for half the world’s growth. Global growth is also burdened by the sub-prime situation in the US, which has already seen write offs around US$30 Billion, and expected to be between US$60 Billion and US$250 Billion. The wide range in the estimated write offs is evidence of the continuing uncertainty, which does more harm than the actual losses itself.

There is no doubt that that global events will affect countries such as Jamaica, as we are seeing with the liquidity crunch and rising oil prices. How much it affects us though will depend on how we approach the management of our internal affairs. Over the past few years the global economy has seen high growth levels, and because of the management of our own affairs we did not manage to benefit from that growth. Similarly, while the global market is going through a challenge, it is still expected that countries will still see strong growth.

Hedging our risks
What is important is that we recognize the risks to our economy and seek to hedge against any issues that may surface. Jamaica in particular has quite a large exposure to the global situation because we are seen as closely aligned to the US dollar. This of course is because we have 25% of our exports going to North America, 75% of tourists coming from there, and 75% of our external debt is in US dollars. Naturally therefore Jamaica’s main exposure is to the US dollar rather than the Euro and Canadian dollar. In addition, we see where our oil bill is approaching 50% of our total import bill, and oil prices are expected to rise further, at least in the short term.

The confluence of these factors, if left unchecked, has the effect of creating inflationary pressures, among other tings, in Jamaica. And of course given the already low income levels of Jamaicans this will create a further social burden. It is therefore very important that there is a careful examination of what our greatest exposure is and how it will filter into the Jamaican economy, with a view to hedging against these risks.

My own view is that the main problem Jamaica has comes down to the fiscal accounts and the debt. There is no doubt that since the early 1990s we have seen a significant deterioration of both. The problem Jamaica has had over this time is not mainly an economic one but rather an accounting problem. That is we have continually spent more than we earn and therefore have to borrow to support our over expenditure, and no amount of juggling will help if we do not get to the point where we are living within our means.

For the 45 years since independence we have only managed to see a fiscal surplus for approximately 6 of those years. Because of this we have managed to grow our debt from $34 Billion (1990) to close to $1 Trillion today. Over the same period debt/GDP has moved from 90% to the current level of 130%. The only other country with a higher debt/GDP ratio is war-torn Liberia. This trend is unsustainable and certainly the commitment by the JLP to cap the debt/GDP ratio is obviously a welcome sign in a country where unbridled fiscal irresponsibility prevailed.

Forecasting essential
For years various analysts have been saying that the importance of balancing the fiscal accounts cannot be emphasized enough. Well with the expected slow down in the global economy, and galloping oil prices, once again we will be reacting to a problem rather than forecasting and putting measures in place to address it before it happens. It is always more difficult to react rather than be proactive. In many ways we were still managing the economy as if in the protectionist era of the 1970s and 1980s. Even though we opened up the economy in the 1990s, which in itself was good, we still had a mindset of protectionism and continued to manage our affairs in that way. Hence, while we removed the tariff protection for local companies, we instead subsidized them by providing high interest rates on paper, which many of them invested in rather than face the realities of competition.

In order for us to turn around this economy, especially in light of global challenges, we are going to have to focus on managing down the risks we face. At the heart of it though is the need to move towards a balanced fiscal budget, and then move from there to creating a surplus. This of course means that we have to scrutinize each dollar we spend to ensure that there is a positive return (opportunity benefit).

In many respects we have fallen down on this, as we have not come to grasp with the concept of opportunity cost. We still manage our affairs like old time book keepers, who only focus on the absolute dollar. Such a person faced with a decision to spend $10 or $50 will always spend the $10 because it is less. Never mind the fact that if the $50 is spent you could see a return of additional $50, while the $10 spend may only create $5 in benefit. So this is the way we analyze contracts, and structure our operations. So why should I hire someone and pay them $100 when I can get someone else for $50. Never mind that the $100 person brings more value than the $50 person.

So as we move forward we need a paradigm shift away from the old book keeper mentality. We must start to focus on “value creation” and not just actual expenditure. We need to look at areas where our expenditure will achieve the greatest return after analyzing where our greatest risks are. We then need to identify what the benefits are. For example, if we were to spend the necessary monies to ensure a reliable and efficient public transportation system, then we could save on transportation consumption (30% of total bill). After 45 years of independence it is time that we start thinking outside of the box as what we have been doing for the last 45 years has not worked.

Thursday, November 01, 2007

Jamaica’s global challenge

Jamaica, like Iraq, is under attack from the US. But in our case this is not because the US is dropping bombs on us. In our case the attack is coming from the weakness, and possible recession, of the US economy. Most economic data coming out of the US is shows signs of weakness, and the sub prime mortgage problem may be spilling over into the broader economy. In fact, the worse of this crisis is not upon us, as many financial institutions are yet to write down the related instruments to market value.

Already companies such as Merrill Lynch and Bear Sterns have wrote down US$ billions, and CEOs are taking the rap, and who has not yet stepped down is under pressure. In the case of the giant, Merrill Lynch, the CEO stepped down after writing down some US$8.4 Billion, with another US$4 Billion write off expected.

Spiraling oil prices
At the same time oil prices topped US$96 per barrel, and at the time of writing is expected to go to US$100 per barrel, and could very well get there by publication. The truth is there is no fundamental basis for a US$100 price, but because of the ongoing tension in the Middle East and lower production out of the Gulf, traders are speculating that supplies will be threatened. And this is going into the US Winter season when demand for oil will increase.

The result is that US consumer confidence and spending have fallen, and the likelihood of a recession next year has increased. In fact some sectors are already deemed to be in a recession. This has resulted in the Federal Reserve (Fed) reducing interest rates within the past six weeks by 75 basis points from 5.75% to 4.50%, which normally would lead to an increase in consumer spending and benefit our 25% of export earnings and 75% tourism earnings that emanate from North America.

This would also have been good news for interest rates also but within the context of investors seeking high quality paper (US Treasuries), the positive impact has been minimal. There is some benefit for us though, as the variable rate instruments will re-price lower, saving us on interest costs, and any new debt instruments we issue can be accommodated at lower rates once we maintain confidence in our fiscal targets especially.

At present fuel consumption levels, in Jamaica, it will also mean that our fuel import bill will increase by approximately US$300 to US$400 Million. No doubt this is the greatest threat that we face to our Balance of Payments (BOP).

The question one would ask then is, doesn’t this mean that Jamaica will suffer under the current global conditions. And the answer is, if we do nothing about it then certainly. However, I believe that we are in a position to determine how much the global conditions impact us and what we need to do is face the challenges and do what is necessary to lessen the impact, or even benefit from the global imbalances.

The greatest threat to Jamaica is not from the global front but comes from within. In other words it is how we manage our affairs, and seek to deal with the challenges, that will determine how we fare. And this has always been the case, as even with recent peaks in global growth we still only managed to eke out less than 2%. In fact, the projections from the World Bank and IMF are that global growth reached a peak in 2006 and is expected to decrease in this and coming years. In short we were unable to take advantage of the peaks in growth, primarily because we lack the capacity to grow beyond a certain level.

Implement not study
What we need to do is break the habit of just recognizing problems and talking and studying them to death. As an example the rise in oil prices is upon us, and while US$100 may not be sustainable, oil may not fall below a price in the US$80s per barrel. This is still a big threat to our BOP. But we do have the capacity to change that expected impact, as we presently consume approximately 40% of our fuel in transportation.

This in turn impacts the fiscal accounts, as the bus fares for children and the elderly are subsidized by the government. So it is essential that we do something about this now, which does not need any reduction of subsidies, as we have the ability to deal with it otherwise. My own opinion is that the JUTC can be a catalyst for this change, as if it can be made into an efficient, reliable, and secure transportation system then we can transition to where Jamaicans feel comfortable taking the bus rather than driving everywhere they want to go. This will also ease the traffic congestion, saving not only fuel but the need to repair roads sooner rather than later. In addition, less traffic congestion means more productive time spent at the office rather than on the roads.

The downturn in the US economy also is countered by stronger economies globally, such as China, India, Russia, Canada, Europe etc. The first three accounting for half global growth in 2006 and expected to do so in 2007. Certainly the strategy for Jamaica should be to see how much of our products we can diversify to these growing markets, and how much tourists we can lure from these strong markets. After all their currencies are at highs against the US$, and means stronger spending power. Especially going into the tourism winter season we need to start the wooing of these markets now, which may pay more dividends than focusing on the US market where consumers are careful about how they spend their dollar.

These options can begin to pay dividends within a few months but it is essential that we act now, and set timelines for action plans. We cannot remain in the mode of studying the problem and getting the widest possible consultation. By the time we are finished with all of that we will have suffered the full impact, as global markets today change rapidly and will not await our studies and consultations. We must measure the risks to the country between implementation and research. After all governments are put there to govern in the interest of the people, not consult on everything when it is apparent that the risks of delay are high.

It is within this light that I believe that the move by Audley Shaw to request that the multilaterals reconsider their policy on lending to middle income countries be applauded. Many have questioned how successful this move will be, as the multilaterals have maintained the policy for a while that countries like Jamaica do not qualify for this lower cost funding.

But my own view is that if they say no then we remain in the same position. If on the other hand they say yes then Jamaica could benefit from lower interest costs. In other words the upside is greater than the downside risks, so what is the big deal about the request being made. This as far as I am concerned is not only thinking outside of the box but a plea by the Finance Minister on behalf of all Jamaicans, as our fiscal accounts would be positively affected.

Thursday, October 18, 2007

No one has to be poor

I have always thought that one of the things Jamaica lacked is a vision of where we want to be, summed up in a single statement. I am aware that we have been working on a 2030 plan, but no vision for Jamaica has really been communicated to the people of this country. Prime Ministers have come and declared their undying commitment to bring justice to the people of Jamaica, and have even expressed love for poor people, which if we really love poor people then we should strive to ensure that no one is poor rather than place a shield around them and protect them from prosperity.

It is within this context that the statement made by Bruce Golding, that Jamaica should be a country where “maybe not everyone can be rich, but no one has to be poor”, is the closest I think that has come to a vision statement. I am going to officially declare the last part of this statement, “no one has to be poor”, the official vision for Jamaica, as if my declaration will carry any weight.

In all seriousness though I think we need to examine this statement, as this more than anything else said by Mr. Golding, embodies his commitment to Jamaica and the possibilities. Because if we are to ensure that “no one has to be poor” then we must examine how we are to achieve that. Saying that human rights will be respected, inner city houses will be built, free education or hospital fees will be provided, or any other type of promise serve to be nothing more than temporary reprieves in the ultimate objective of prosperity.

And so the question we must ask is how to achieve the vision statement for Jamaica, “no one has to be poor”. Well in order to get to that vision we must understand what makes people poor and fix those fundamental problems. In other words we must put the structure in place to ensure that the vision is well supported by a set of systems and policies that will outlive any individual. Our country has always operated like many organizations in Jamaica, where the flavour of the month depends on the present mood and attitude of the person running the organization. So that we tend to vote in charismatic leaders and people who promise that they will do something for us, if we vote for them. Based on Mr. Golding’s statements it seems as if that day may be at an end, and the only way that it can be is if the structural changes are put into force by legislation, as one day Mr. Golding will no longer be there and we may end up back in the same arena.

So if we are to examine what makes people poor then we can identify a few factors, which include:

- A lack of access to quality education – I am always amazed that over the years of us talking about providing jobs for people we are always scraping the bottom of the barrel. Garment factory, low level IT jobs, low level jobs in hotels etc. If we want to see people’s earnings go up then we have to train them for high level jobs, as if we do not have a highly trained labour force then we can only provide low paying jobs. So while we may be able to attract investments to Jamaica, it will not be the Jamaicans who get the higher paying jobs.

- Lack of law and order – we constantly speak about the high murder rate in Jamaica but the high murder rate is just a symptom of the real problem of a lack of general law and order. How do we intend to solve murder if we cannot even control the bad driving on the roads? The lack of law and order creates a stranglehold on certain areas, some of which we call garrisons. By allowing this general breakdown of law and order in society we force poverty on the people that live in these areas.

I believe that if we deal with these two social problems they will go a far way in alleviating poverty. There are some other areas that need to be addressed also, more on the financial side.

The first of course is that fiscal discipline must be maintained. The present government has inherited a debt of almost J$1 Trillion, and more importantly a set of fiscal accounts that seem to be always in deficit. Additionally, the fiscal targets have been consistently missed. No doubt fiscal discipline has to be the order of the day, as there is no way that we can continue this indefinitely, as what will happen is that when we are no longer able to borrow money then inflation will return. There are only two ways to address a fiscal deficit, inflation and debt, and the latter is what we have been accumulating since the early 1990s when the debt stood at J$34 Billion.

Management of the fiscal accounts not only means though that expenditure is contained. We have been pursuing a strategy of expenditure containment for the longest while with no success. This is because if you are constantly containing expenditure when the pie is shrinking (there may be growth but the growth in debt outweighs it) then you are going to find that there is no more room for containment. Expenditure management is important though to ensure that monies are spent where the greatest value comes to the country as a whole. As an example the recent roads indicate that higher standards need to be put in road work, so that instead of paying $100 to fix roads every 3 years, we pay $150 and fix them every 10 years.

The strategy surrounding the fiscal accounts therefore must be revenue growth (by growing the economy not necessarily through new taxes). Economic growth has to be achieved through creating a more efficient bureaucracy, and here I would like to add that we should seek to hold our public officials accountable, but it is important to pay them more. Both go hand in hand. We have to create an environment that encourages local business growth, which includes lower interest rates (a balanced budget), tax reform geared at encouraging business development rather than just fiscal revenue growth, a more efficient transportation system, and better use of energy. If we can achieve these then we can reduce our reliance on debt, and remittances, and our people will be more equipped to earn more.

We will then be closer to the vision that “no one has to be poor”.

Accrual accounting justified
Another matter that had me thinking was the statement attributed to Omar Davies that some J$17 Billion and US$15 Million were left in bank accounts. This was said in answer to the J$15 Billion “unbudgeted expenditure” Audley Shaw spoke of. Now I think anyone should understand that money in the bank at any point in time does not mean that it is free and clear to meet additional expenses. The fact is that these balances could also be waiting on unpresented withdrawals, and in fact after all withdrawals are presented the amounts could in fact be negative. So there is really no relevance between the cash balances and any unbudgeted commitments. This has always been the problem with cash accounting, and fully supports the need for the move to accrual accounting, which was started under the previous government.

Wednesday, September 26, 2007

Stony Hill Phoenix: a lesson in development


Approximately three months ago, my son started training with the Stony Hill Phoenix under 13 football club. They were making an entrance into the KSAFA under 13 football competition for the first time in a decade. I was attracted to the prospect of my son playing here for a few reasons (1) he would be able to make a mark with a new club; (2) I liked the skills shown by the young boys; (3) the coaching seemed appropriate; and (4) he would get the necessary playing time needed for development at this age.

He could have gone to Real Mona, Cavaliers, Meadhaven, or one of the more established teams, but I felt that for personal development this would have been better for him. As I mentioned he would get the playing time necessary to develop and have the chance to build with a set of skillful youngsters, which would have a greater mark than even winning with an already established team. I felt therefore that it was an ideal lesson in development for him. It is of course similar to building your economy with foreign investors, who are already established, or with your own start up entrepreneurial class. The latter always has more potential for growth and more loyalty to keep profits here.

A lot of his friends would ask him, “which team is that?”, “why don’t you play for Mona?”. All the questions you would typically expect from someone about a start up, for example, if one starts a company as opposed to working with a multinational in the corporate world. This is in contrast to a developed country like the US, where start up companies are encouraged and usually in a few years grow into large publicly listed companies.

Believe in ourselves
What was impressive about this team though is that the youngsters were encouraged to do their best and we always told them that they had the ability to win the competition. They were always told also they had nothing to lose and a lot to prove, as they were seen as underdogs. The lesson in psychological; development was more important for us than skills, which while being important, if one did not believe that the ultimate goal was possible then the skill would be useless. This reminded me also of two things – (1) some persons have told me that the JLP’s vision is a pipe dream as Jamaica is a developing country and we are a victim of globalization; and (2) Bruce Golding’s speech that we should stop making excuses for our failures and accepting mediocrity, as we must believe that everything is possible. It is this approach that we took to the young boys and spent a lot of time, each training session, telling them how good they are.

In addition to the psychological and skills training we worked on the discipline and team work. No matter how skillful one was if the discipline and positive attitude was not present we would sometimes dismiss the person from the side. Discipline was of utmost importance, as any unpunished incident could contaminate the team and lead to total breakdown. So indiscipline was not tolerated. This is similar of course to the way in which crime and indiscipline has been a scourge on the Jamaican economy and has eventually led to the lack of confidence of persons to live and invest in Jamaica.

Success
What was impressive about the team is that (1) the youngsters were not from the more affluent families; and (2) the team was an average age of around 10 to 11 years, and had many who were still in prep school. So in terms of height they were much smaller than the great majority of other teams, which in most cases had mostly high school students and an average age of 12 to 13 years. We also did not have a major sponsor, as this team was after all not known and companies would of course ask what sort of mileage can I possibly get from this team. But for me that was a part of the challenge I liked for my son and adversity I thought would help them to succeed.

In the first round we played teams and beat them by four, six, and eight to nothing. The opposing coaches would take notice in disbelief that this new team of small youngsters was so good. In fact later on the KSAFA website would refer to the team as “Butler’s toddlers” after they got to the final against the defending champions, and favourites, Real Mona. In making their way to the final they even beat Real Mona in the quarter final and went on to win their quarter final zone. In fact my son told me after the quarter final match that when they were being introduced to the Real Mona team, a comment from one member of the towering opponent was something to the effect that the Stony Hill team players were so short that they would get beaten by ten goals. Well Stony Hill beat them two goals to nothing.

Stony Hill went on to beat Boys Town in the semi-final three goals to nothing, and lost the final in a nail biting match two goals to one. We also ended up with the leading goal scorer, who scored 24 goals for the season and the closest goal scorer was about 8 goals behind. Of the starting eleven, eight of are still eligible to play next year. Even so the future of this promising team is threatened as there is a tussle between certain persons in the community and the coach, who has built this team, over control of the franchise. So while the adults fight over the team the boys and football development may well be the real victims, as after entering and doing so well, after 10 years, it may well go into hibernation again. Similar to the way in which we tease the world with our quality agricultural products but then cannot fill the increased demand.

This experience reminded me so much of what is wrong in Jamaica, as I have mentioned. We believe too much in mediocrity; we do not encourage small businesses, having a preference for large foreign investors, when the greatest growth potential is with the small startups, as we see in the US (Google, Dell, Apple etc.); we have a breakdown of law and order, which prevents us reaching our greatest growth potential; and most importantly we have neglected building our human resources, and in many instances go for foreign names rather than the potential in our own people. Our music has shown that even though we are a small nation we can be giants on the world stage. For too long though our politicians have ignored the development of Jamaicans and Jamaica’s potential and this is truly the only way that we can prosper as a nation.

This team is truly a lesson in development for Jamaica, but because of adult egos we may not see them again. At least for me the goal of my son’s development has been met as he has made good improvement.

Stony Hill Phoenix: a lesson in development


Approximately three months ago, my son started training with the Stony Hill Phoenix under 13 football club. They were making an entrance into the KSAFA under 13 football competition for the first time in a decade. I was attracted to the prospect of my son playing here for a few reasons (1) he would be able to make a mark with a new club; (2) I liked the skills shown by the young boys; (3) the coaching seemed appropriate; and (4) he would get the necessary playing time needed for development at this age.

He could have gone to Real Mona, Cavaliers, Meadhaven, or one of the more established teams, but I felt that for personal development this would have been better for him. As I mentioned he would get the playing time necessary to develop and have the chance to build with a set of skillful youngsters, which would have a greater mark than even winning with an already established team. I felt therefore that it was an ideal lesson in development for him. It is of course similar to building your economy with foreign investors, who are already established, or with your own start up entrepreneurial class. The latter always has more potential for growth and more loyalty to keep profits here.

A lot of his friends would ask him, “which team is that?”, “why don’t you play for Mona?”. All the questions you would typically expect from someone about a start up, for example, if one starts a company as opposed to working with a multinational in the corporate world. This is in contrast to a developed country like the US, where start up companies are encouraged and usually in a few years grow into large publicly listed companies.

Believe in ourselves
What was impressive about this team though is that the youngsters were encouraged to do their best and we always told them that they had the ability to win the competition. They were always told also they had nothing to lose and a lot to prove, as they were seen as underdogs. The lesson in psychological; development was more important for us than skills, which while being important, if one did not believe that the ultimate goal was possible then the skill would be useless. This reminded me also of two things – (1) some persons have told me that the JLP’s vision is a pipe dream as Jamaica is a developing country and we are a victim of globalization; and (2) Bruce Golding’s speech that we should stop making excuses for our failures and accepting mediocrity, as we must believe that everything is possible. It is this approach that we took to the young boys and spent a lot of time, each training session, telling them how good they are.

In addition to the psychological and skills training we worked on the discipline and team work. No matter how skillful one was if the discipline and positive attitude was not present we would sometimes dismiss the person from the side. Discipline was of utmost importance, as any unpunished incident could contaminate the team and lead to total breakdown. So indiscipline was not tolerated. This is similar of course to the way in which crime and indiscipline has been a scourge on the Jamaican economy and has eventually led to the lack of confidence of persons to live and invest in Jamaica.

Success
What was impressive about the team is that (1) the youngsters were not from the more affluent families; and (2) the team was an average age of around 10 to 11 years, and had many who were still in prep school. So in terms of height they were much smaller than the great majority of other teams, which in most cases had mostly high school students and an average age of 12 to 13 years. We also did not have a major sponsor, as this team was after all not known and companies would of course ask what sort of mileage can I possibly get from this team. But for me that was a part of the challenge I liked for my son and adversity I thought would help them to succeed.

In the first round we played teams and beat them by four, six, and eight to nothing. The opposing coaches would take notice in disbelief that this new team of small youngsters was so good. In fact later on the KSAFA website would refer to the team as “Butler’s toddlers” after they got to the final against the defending champions, and favourites, Real Mona. In making their way to the final they even beat Real Mona in the quarter final and went on to win their quarter final zone. In fact my son told me after the quarter final match that when they were being introduced to the Real Mona team, a comment from one member of the towering opponent was something to the effect that the Stony Hill team players were so short that they would get beaten by ten goals. Well Stony Hill beat them two goals to nothing.

Stony Hill went on to beat Boys Town in the semi-final three goals to nothing, and lost the final in a nail biting match two goals to one. We also ended up with the leading goal scorer, who scored 24 goals for the season and the closest goal scorer was about 8 goals behind. Of the starting eleven, eight of are still eligible to play next year. Even so the future of this promising team is threatened as there is a tussle between certain persons in the community and the coach, who has built this team, over control of the franchise. So while the adults fight over the team the boys and football development may well be the real victims, as after entering and doing so well, after 10 years, it may well go into hibernation again. Similar to the way in which we tease the world with our quality agricultural products but then cannot fill the increased demand.

This experience reminded me so much of what is wrong in Jamaica, as I have mentioned. We believe too much in mediocrity; we do not encourage small businesses, having a preference for large foreign investors, when the greatest growth potential is with the small startups, as we see in the US (Google, Dell, Apple etc.); we have a breakdown of law and order, which prevents us reaching our greatest growth potential; and most importantly we have neglected building our human resources, and in many instances go for foreign names rather than the potential in our own people. Our music has shown that even though we are a small nation we can be giants on the world stage. For too long though our politicians have ignored the development of Jamaicans and Jamaica’s potential and this is truly the only way that we can prosper as a nation.

This team is truly a lesson in development for Jamaica, but because of adult egos we may not see them again. At least for me the goal of my son’s development has been met as he has made good improvement.

Thursday, September 20, 2007

The accounting side of subprime

While we have exhaustively looked at the subprime mortgage crisis over the past few weeks, and tried to discern the implications for Jamaica, there is one aspect that we have not fully examined. This is the accounting side of the subprime mess. We have seen where financial institutions in the US, Europe, and Asia have been reeling under the liquidity crunch caused by the subprime mortgage collapse, and where equity and currency markets have been significantly affected. In fact the subprime crisis can be blamed for the weakening of the US economy and the main reason for the recent 50 basis points (1/2 percentage) reduction in the Fed target rate this week.

The fact is that the US economy is made up of 70% consumer spending and the subprime crisis has resulted in a downturn of consumer spending and income, which in turn has severely affected the US economy. The crisis has also caused the IMF to revise down global growth projections. No doubt this has already begun to impact Jamaica, and we have seen where tourism arrivals to the Caribbean region are 10% lower than last year, and the demand for the greenback may have something to do with the flight to quality caused by the subprime crisis.

May be worse than appears
But the fact is that the subprime crisis, which is projected to last until March 2008, may be worse than appears. The reason for this is because of the accounting rules that call for financial instruments to be marked to market. Marking an instrument to market means valuing the financial instruments at market value and placing the market value on the balance sheet. So if one is carrying a portfolio of financial instruments backed by subprime mortgage securities purchased at $100, if after the crisis the market value becomes $20, then instead of carrying $100 on the balance sheet you would write off $80 from the asset value and carry $20 instead.

This means that the valuation of the company would reduce by $80 and the asset value reduce by 80%. Under International Financial Reporting Standards, if the instrument is classified as Available for Sale then the other side of the transaction would see the $80 being written off against shareholders equity, and if it is classified as Fair Value through Profit or Loss (previously held for trading) then it would be written off directly against profits. So while the US company Lehman Brothers, for example, has written off US$700 million against its portfolio the great possibility exists that there could be a lot more to write off. This is because the market for subprime mortgages has collapsed and there is no benchmark to value these assets. So companies have been using “Mark to Model”, which means using complex models to value these assets.

The problem though is that the models are not consistent, as market values would be, and may overstate the real value of the assets. The crisis has been compared to the 1994 bond crash, Mexico in 1995, Asia in 1997, Russia and Long Term Capital Management in 1998, and the internet bubble. It is clear then that the subprime crisis has now become an accounting challenge and one of the reasons for the flight to quality, where banks are wary of lending to each other and move towards cash and US treasuries, is because the instruments are not yet marked to market and so no one knows the true value and the extent of the crisis. When these instruments are marked to market then we will really see what the situation is.

Local effect
This could also affect local financial institutions, as they do business with US companies such as Bear Stearns and Lehman Brothers, which have been impacted. It is possible therefore that they have bought into some of these securities (Collaterized Debt Obligations) and could be carrying some of these assets on their books. In addition, as Jason Abrahams said a few weeks ago the overseas brokers have been calling loans for conversion to cash and US Treasuries, and this could have impacted local financial institutions. In addition, a global flight to quality would also mean that investors would find emerging market debt instruments less attractive, and this could reduce the demand and price for GOJ debt instruments, for example. The result is that our financial institutions would have to write down the value of those assets also. This is especially as quite a few of our financial institutions have reportedly tainted the Held to Maturity portfolio, which is the only one that could be carried on the books at cost until maturity and is therefore no longer available. The result of course is that balance sheet valuations may be negatively affected.

Consideration of the crisis must also be given by the government as the market will now demand a higher interest rate for any debt issues, and we have seen interest rates increasing marginally over the past 2 to 3 months. This heightens the need for greater fiscal discipline and is even more reason for the introduction of persons such as Don Wehby to the process and the strengthening of the management capability at the Finance Ministry. No doubt it will be challenging but manageable if properly administered. The remainder of the fiscal year will be the true test of the current administration.

Flow not flowing
A few weeks ago I mentioned in an article that I had changed Internet services to Flow, as I was frustrated with the constant disruptions from Cable and Wireless’ (C&W) ADSL. Well with less than a month into the service I have had 5 days of complete disruption because the network was (and is still at the time of writing) having problems. So I could possibly go into over 1 week of disruption within the first month.

When I called the first time a recorded message said that there were problems with the network in Kingston 6 and 8. I spoke with a customer service representative and to my amazement the person (who is supposed to respond to customer queries) was not even aware of the message on the telephone. So obviously there is a lack of communication between technical and customer departments. There was no resolution for 2 days and I then wrote a strong email and was called by the customer service manager and a director. I shudder to think of what happens to persons that suffer quietly.

Anyway they sent someone on the third day and it was back up. The service then lasted one day and then went down again. This time after calling I am told that they do not know when they will be able to send someone as the service team is fully booked. Now if the service team is fully booked that could give an indication of problems. Thank God that C&W was being their usual inefficient self and did not turn off the ADSL as I had requested that they do about 2 weeks before.

I do not think that these ISPs see the link, in a globalized world, between reliable internet services and productivity. In the world we are today it is imperative that everyone has reliable internet service as many transactions are done through the internet everyday. Our communication with each other is heavily dependent on the internet also. So when we do not have reliable internet, and telecommunications, productivity is hampered as this is just as critical as electricity. This is a requirement of competing globally and something for the regulators to carefully consider. In the meantime I am looking for a reliable ISP and if there is one out there please send me an email.

Thursday, September 13, 2007

Setting priorities for development

After the election and all that has been happening I was thinking of not writing this week until I saw the story in last Wednesday’s Observer titled “Foreign firms repatriate $13b in profits in 4 months”. This should not be surprising as this is what foreign companies do. Would we really expect that overseas companies would make an investment in a foreign country and not want to take back some of the profits to recover their initial investments and accumulate more capital for expansion.

I have always said, and still maintain, that organic growth is significantly better for Jamaica than foreign investments. While foreign investments are important, especially within the context of a developing economy, it is even more important to develop the local entrepreneur. In this regard this is the reason why I have always said that setting the appropriate business environment and incentives for locally grown entrepreneurs is critical. This is also the reason why I say that FINSAC was the single greatest blow to the economy. But all of that is now behind us and we must be careful not to make the same mistakes we did in the past. In other words when we fall it teaches us how to not fall again.

Importance of organic growth
The importance of organically grown entrepreneurs is no where better represented than in the US today. For months we have seen signs of the US economy weakening but the companies have been doing well. The reason for this is because these organic companies extended their reach by investing in the booming economies of Europe and Asia. So when the local (US) operations were showing a downturn in profitability, the overseas branches were saving the day with increased profits. The recent downturn in the US economy and fear of recession occurred after the subprime mortgage problem found its way into the European and Asian economies and naturally affected the same overseas operations that were saving the US companies. The result is that recession is an increasing possibility.

This subprime situation will no doubt have repercussions for Jamaica, and in fact I think has already started to affect the Caribbean region. It is going to be important that going forward we pursue policies that will not only shield us from the effects of a possible recession in the US but that will also put us on a path of strong growth, and this means getting our priorities right. It also means ensuring that there is a direct correlation between our spending and implementation of policies with the returns from those. In short we do not have the luxury of spending now for long term returns and must ensure that we do the things that will provide immediate returns, so that there is some benefit while the funds are being spent.

My approach to doing this would be first to look at the current status of our cash and fiscal positions. This to ensure that the business of government can continue in the short term, while determining what the plan is for moving forward. After all we have a new government and it would be wise to first of all understand what the current finances are and if the budget still holds true. Apart from the other administrative things that will need to be done I would immediately set about putting in place a medium and long term plan to chart out the growth path. And this does not mean just setting targets but make a deliberate determination about what are the obstacles to economic growth and what is the best way to go about implementing that plan given the financial constraints that face the country. While doing this it is important to bear in mind the social side also so that the social programmes do not suffer from any financial considerations. The task is going to be extremely challenging but can be done.

Determining the priorities
Much has been said about bureaucracy, crime, justice, tax reform etc. The truth is however that while we recognize that these are critical factors that must be addressed in general it is not easy to do so. While those are general areas of concern it is going to be very important to sit down now and determine what the specific issues are and develop a task list that can address each of these inn detail. And importantly in the order that will give the greatest value.

In other words while I may agree that bureaucracy and tax reform are important factors it will be important to do the following:
- Determine what level of growth and other targets you want to achieve. Set goals;
- Through various channels make a determination of what the main obstacles are to these targets e.g. if I want to achieve growth of 4% then what are the prohibiting factors. I still believe we do not currently have the capacity to grow in excess of 3% consistently and that needs to be addressed;
- Detail the issues within each of those prohibitive factors that need to be addressed individually, getting it down to a task list;
- Determine what the cost, return, and payback period is for each of those initiatives that need to be undertaken. It is important to note the dependencies between these tasks, as there are many that will not be able to be implemented on their own. So the cost and return of a dependent task includes the other dependencies. Dependencies would include programmes at other ministries and the national level also;
- Set out the costs and timeline for implementation; and
- Put in place a tool for measuring the outturn against the projections. Plans must be in place for alternate action if the projected returns/outcome do not materialize and that may mean something was wrong in the initial assumptions or some change has taken place.

That briefly would be a simplistic overview of an approach to achieving what is needed to achieve the desired objectives. Although the list looks simple it is by no means an easy task and will require careful planning to ensure that the assumptions are correct and that the plan is credible. Inherent in this though is the need to set out the correct priorities for development as resources are limited.

Wednesday, September 05, 2007

A new economic order

At the time of writing it is clear that the JLP has not only won but seems to be picking up more seats in the recount and could possibly end up with 35 to the PNP’s 25. The PNP has said that they will take certain elected persons to court based on the citizenship issue and that outcome remains to be seen. Whatever happens it must be clearly understood that the right of choice of the people must not be compromised. In any event congratulations to the JLP for the hard fought and strategic campaign.

There is no room for any honeymoon period and the Finance Minister (who I expect to be Audley Shaw) must immediately get on with the business of managing the economy. The situation currently is that economic growth continues to elude us (will only grow at around 1.5% this year); in recent weeks the dollar has been slowly weakening; there is a high mountain of debt; the fiscal deficit is a problem; and no doubt inflation may be higher than originally projected because of the hurricane. It is therefore clear that the Finance Minister will be faced with many immediate challenges that the international community will be keenly watching.

The right person?
There are some persons who have questioned whether Audley Shaw is the right person for the finance job simply because he is not seen as an economic expert. From my perspective I think that he is well suited to the job and is quite capable of delivering the confidence needed and properly managing the affairs of the economy. While an understanding of economic and financial matters is needed in a Finance Minister, I think more importantly that what is needed is the ability to lead and properly utilize good advice. Both these qualities I think Audley Shaw has and based on that I would suggest to the doubters that Mr. Shaw is quite capable of the finance job. Even more dangerous is someone who thinks that because they are an expert in an area they do not take proper advice. So too much knowledge can indeed be bad also if the right personality is not present.

The challenge facing Mr. Shaw is that he will have to bring a new economic order to Jamaica. One where growth runs at upwards of 5% per year; where bureaucracy is reduced; where a business friendly environment is encouraged; where tax is used as a tool to encourage growth rather than just feed the revenue; and where organic growth in business is encouraged. All these things are necessary ingredients to create an environment where economic activity and growth prevails.

At the same time he will have the high debt level to contend with, while also meeting certain social services, and certainly this must be a main priority as it is this debt that is stifling the economy. It is this debt that has given some of us the perception that things are getting better. The fact is that we have been engaged in borrowing to support a life style that we can ill afford. Because of this borrowing to support a life style we find that we are strapped with debt that causes us to spend 60 cents out of each dollar servicing thus depriving the people of Jamaica of essential social services. The only way that we will be able to deal with this is to grow the economy at rates above 5%, which the last time we were able to do so was in 1990. We must realize however that achieving 5% growth may not happen in the next two or three years as the fact is that the economy just does not have the capacity to grow at those rates, especially with a projected slow down in the global economy, and more importantly the US economy where we send 25% of our exports and get over 50% of our tourists. So I don’t expect that 5% growth will happen in the next two fiscal years but what is going to be important for me is that the measures are put in place to ensure that the capacity to grow at those rates exist so that we can consistently see 5% growth instead of hitting 2.5% every five years or so.

Prudent fiscal management
In achieving this growth one of the things that must be ensured is prudent fiscal management. It is clear that with the liquidity issue in the global markets that any new debt is going to cost us more. If we continue to borrow then it will obviously place a greater upward pressure on interest rates, which will no doubt cause stagnation in the economy. This especially in light of a less healthy global economy and the possibility of recession in the US in 2008. This has led some to question the commitments made by the JLP and if they can deliver on these without worsening the fiscal deficit. Frankly I do not know where this argument came from as I have always thought that what was said is that they would be reallocating funds to ensure maximum returns, and certainly we would have to include an educated and healthy population among that. If it were the intention of the JLP to spend additional funds to deliver the commitments then I would also agree that this would be the wrong thing for the country. It will be important to ensure that the fiscal targets are met if not improved on as the longer it takes to get to a balanced budget then the greater the need for debt.

If we are going to build this capacity for growth it is important that some of the things in the JLP manifesto are implemented in good time. These include (1) a business friendly bureaucracy; (2) tax reform; (3) special attention to SMEs; (4) offshore financial centre; (5) develop the electricity generation capacity; (6) improving productivity in agriculture; (7) high end tourism and easy access to the east; (8) improve education and health access (a productive workforce); and (9) reduce crime. There are many other initiatives outlined in the JLP’s manifesto but these I think are most critical for developing the capacity for growth.

What is obvious to me though is that it is going to take time to implement many of the commitments and there is nothing wrong with this as we must be careful that the capacity is built carefully. I would expect that the new government will have a timeline for implementation. Consequently it would be good to outline the targets we expect to achieve as a country as these various initiatives are implemented and present this to the country.

As Mr. Golding has said, at the end of the day it is going to be very important for all Jamaicans to be involved in the process and pull in the same direction. It is not going to be an easy road but if we put the measures in place that will provide the capacity for growth then we certainly have the potential to achieve this and establish a new economic order for Jamaica where per capita income surpasses international standards and people can take advantage of this because of higher educational standards.

Wednesday, August 29, 2007

Adapting to the global environment

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

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


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.

Thursday, August 23, 2007

Jamaica’s growth challenge

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

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

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

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

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

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


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.