Gov’t must act or be content with anaemic growth
TRYING to do business in Jamaica is no easy task. But the greatest hindrance to doing business in Jamaica is the country’s financial institutions. These institutions have got addicted to usurious rates of interest, and easy, even extortionary fees. For the country to grow and prosper these practices must stop.
Government need to abandon its position about having the private sector to lead growth and its position of non-interference in the economy. Don’t get me wrong, I am as capitalistic as they come. And I do believe that the private sector has a very important role to play. But, in any human endeavour involving two or more people, one must lead, and I believe that the elected officials are who should lead and then answer to the people. It cannot be that it is up to people who are pursuing their own self-interest who will determine the common good. It is also naïve to believe that Government’s role should only be limited to establishing macroeconomic stability.
The belief that governments should not interfere in the economy is what has led to three major global economy destructions in recent past. It is a belief slavishly followed by right-wing Conservatives, and they have no success anywhere in the world to show for such beliefs. It should be instructive that the three most recent major global economic crashes emanated from the United States of America, and they occurred when Conservative Republicans were running the country.
In 1873 the Government of Ulysses S Grant sat idly by while greedy men tried to corner the silver market. That attempt failed and the resultant panic was the main cause — some say the trigger — of the depression of 1873. That caused two decades of stagnation, which was called the long depression.
I believe that depression could have been avoided if the Government of the day did not have an aversion to interfering in the economy and had provided sensible guidance.
In 1929 the world experienced the mother of all depression when Conservative Republicans again unleashed policies which led to the economic failure. They cut taxes, flooding the economy with excess money and, on the other hand, chose not to regulate the rampant stock market speculation which ensued. The world could have been spared the tragedy of the great depression and the coming of Adolf Hitler, if only men who were elected to lead had the courage to tell banks to stop lend money to people to buy stocks.
The same playbook was again utilised in 2007-2008. This time tax cuts were implemented in 2003, and the tsunami of cash which was unleashed, were again not regulated. The excess cash found its way into mortgage-backed securities. Any first-grade economic or financial analyst knows that there is an upper limit on the number of people in an economy who can afford a mortgage. And that number should be easy to regulate. But when a Government takes an ideological position that the economy should not be regulated, then bad things can — and do — happen.
Our Government should learn from history and understand that there are times when a Government must intervene and tell businesses what to do in the interest of the country. It is now time for the Government to tell the banks what to do. The banks are clueless about the economy in general, and they are just interested in maximising their returns with minimum efforts.
The banks are as “coward as chickens” when it comes to lending money. They behave as if Jamaican business people are incompetent and dishonest laggards. Let me remind the banks that it was they who blew up the Jamaican economy. An incompetent Government of the 1990s allowed for usurious rates of interest, but it was the banks which gleefully imposed it on businesses. They charged up to 140 per cent interest on overdraft. What did they think would have happened then?
And just as how the banks were clueless then, they are clueless now. They do not have a clue how the economy works.
They are content with lending for mortgagee, car loans, and credit cards — at exorbitant interest, I must add. Where will the people get the jobs to sustain the payments for the mortgages, the car loans, and the credit cards? Oh, they have a job now, they would say, that is why they lend. So how will the borrowers keep their jobs when the other areas of the economy stagnate due to capital depravation?
The hopes of the Jamaican people are heavily invested in the Andrew Holness-led Government. The Government is not to allow ideological nonsense thinking and unrealised reliance on unconscionable banks to cause the people to lose hope. The Government must act. Tell the banks what to do or bring legislation to compel compliance. The legislation can be in the form of carrots or sticks. Carrots for activities which free up capital for our hard-working and enterprising people, who are bursting with ideas, but who are starved of capital. And sticks for banks who want to make money the easy way. Tax them!
If the Government thinks it is politically risky to take on the banks, then other ways must be explored that will make capital more easily available to people with ideas. Edward Seaga established the Unit Trust Act. It is a little known and greatly underutilised act. But it is an act that can unleash the entrepreneurial spirit of the Jamaican people. The Act makes it possible to establish a Trust for any economic activity. This Act is regulated by the Financial Services Commission, and the people who can establish a Trust must be heavily regulated. This is where regulation can be relaxed. All that should be required is that key principals of any proposed Trust must meet “fit and proper” requirements, and that there should be full and complete disclosure of intended use of funds and transparent accountability. Of course, the usual measures to prevent money laundering should also be implemented.
These Trusts could be used to establish agricultural trusts across the island. Rightminded people who love and understand agriculture could have easy access to capital to modernise agriculture in Jamaica. We could have real estate investment trusts (REITS ), not the highfalutin nonsense that currently exist, which is more interested in buying properties in foreign countries and are mostly interested in making money by any means possible for their shareholders, rather than developing Jamaica and the Jamaican people.
A financial entity of this nature is badly needed. In healthy economies around the world a 7 per cent commercial vacancy is a good goal. In Jamaica, people can hardly find anywhere to open a store front. Little wonder we have become a nation of shipping containers for businesses, and people who peddle their goods on the streets.
It is self-evident that a significant number of the existing commercial spaces were built by questionable characters using dubious sources of funding. Many of these buildings lack architectural designs that are aesthetically pleasing. There could also be a ‘Small and Medium Enterprise Trust’ that would invest in small and medium businesses, and most certainly a Tourism Trust.
People investing in these Trusts should be given substantial tax breaks. These tax breaks should be made revenue-neutral by imposing additional taxes on the established financial institutions who are failing to do what they were licensed to do.
Unless bold and innovative actions are taken we will continue to be under the thumbs of banks and anaemic growth will become a way of life.
Dorlan H Francis is a personal financial adviser and author. Among his books is The Economic and Financial Crisis of 2007 — What caused it; how to avoid a repeat. Francis is also Jamaica Labour Party caretaker for St Andrew Western. Send comments to the Observer or dhfken@ hotmail.com.