No shame in business failure
IT’S NOT surprising that the focus on Nigel Clarke’s speech at last week’s conference, aimed at ginning up entrepreneurship in the Caribbean, was mostly on his plan to adjust the rules to allow Jamaica’s pension funds to put some of their money as venture capital. As important as that is, there is more that should command attention.
According to the finance minister, in the years since the financial-sector collapse in the 1990s, Jamaica’s regulatory environment has moved in the direction “of stopping risk-taking rather than managing risk-taking”. For instance, the island’s pension funds, with assets of nearly J$553 billion, are precluded from investing in venture funds.
Said Dr Clarke: “Their limit is zero. That’s crazy if we are invested in growth and innovation. And it’s crazy as well, in the context of entrenched macroeconomic stability, where we are pursuing low, stable and predictable inflation.”
Further, with government no longer aggressively in the market for debt, fund managers won’t be able, in the future, to look to investment in government bonds to satisfy pension liabilities. “You will have to take risks,” he said.
Given the current asset base of pension funds, and with Dr Clarke suggesting a cap of around five per cent of their portfolios for venture-capital investments, that would potentially free upwards of J$27 billion for investment in start-ups. “This is a game-changer for innovation, for opportunity and for growth,” he said. With which we agree, but with a proviso – the reinforcement of the same caution invoked by Dr Clarke to shift the limits “not aggressively, but moderately”.
Indeed, history demands prudence in such matters. For while it is sensible in the circumstances to ease the levers of risk-taking allowable to pension schemes, we are reminded that even if government policies contributed to the financial debacle of two decades ago, they weren’t the only culprits. In a loosely regulated and aggressive financial market, there was a great misalignment of capital and their underlying assets. Plenty of short-term chased long-term assets and, in many instances, the quality of those assets weren’t as sound as they might have been. In the end, taxpayers were left with a bailout bill of J$140 billion, representing, at the time, over 40 per cent of GDP, which the Government borrowed, lifting its debt from below 80 per cent of GDP to above the 100 per cent mark.
Much has been sacrificed in recent years to achieve the macroeconomic stability to which Dr Clarke referred which he, like us, is agreed oughtn’t to be jeopardised. For Jamaicans are unlikely to, anytime soon, have the appetite for another FINSAC-type rescue mission.
RISK-TAKING
There was another, related, element of Dr Clarke’s remarks that deserves a substantive, ongoing dialogue as part of efforts to achieve the innovation that tends to characterise successful economies. Risk-taking is an important driver of economic advancement, but in business, as in other areas of life, taking risks can end in failure.
In the United States, for instance, up to 90 per cent of venture fund-backed start-ups fail and 50 per cent of all small businesses fail in the first four years; only a third makes it to 10 years. In the UK, an estimated 80 per cent of new businesses don’t pass 18 months. In those countries the entrepreneurs quickly shake themselves off and are usually soon ready for the next venture.
In Jamaica, however, business failure is often seen, as Dr Clarke observed, as a character-defining flaw – a cause for shame. It’s a response that weakens risk-taking and drives entrepreneurs into perceived safe havens, thus limiting innovation. It’s a culture that we must aggressively work to change.