Friday, August 22, 2014
Competition is important for developmentBy Dennis Chung
THE Global Competitiveness report is one of the most important guides in determining the development of a country, as it is international competitiveness that drives a country's net earnings and investment attractiveness.
This in turn affects foreign exchange availability, exchange rate, fiscal earnings, standard of living, etc. This is why my view is that a focus on the balance of payments (BOP) is much more important than the fiscal accounts. In fact, the policy in Europe of focusing on the fiscal accounts have resulted in a double dip recession in that region, and they will have a difficult time coming back from that policy error in my view.
It is this lack of competitiveness that has prevented Jamaica from seeing the development it should have. No one can argue that Jamaica has not seen development since 1962, however, development should never be looked at in isolation. And certainly, relative to other countries, we have done very poorly, which is why many Jamaicans look to migrate in search of better opportunities; often to even some of the countries that were less off than we were when we decided against Federation with them.
It is also this lack of competitiveness that is causing Rusal to close its Ewarton plant. It is this lack of competitiveness why we have to constantly be providing incentives and waivers for companies to invest in Jamaica. It is this lack of competitiveness why an all- inclusive room in Jamaica sells for just US$250 per night double occupancy, while a room alone in downtown Miami sells for US$300 per night. It is lack of competition why our electricity bills are so high, causing a relatively lower standard of living and uncompetitive output.
On the other hand, it is competition that has caused Jamaicans to have so much access to telecommunications and Internet service, which has resulted in improved infrastructure for business, and attraction for investment. Prior to this, I am old enough to remember when you had to wait years, sometimes, to get a telephone, or when you were charged when someone called you on your cellphone.
If we therefore want to improve our competitiveness and see development, there are a few things which we must do.
The first is that we need to ensure that the regulatory environment is changed to encourage competition. In the 1990s we took measures to liberalise the economy, but we failed to ensure that we had the regulatory framework that would allow us to benefit from liberalisation, while at the same time protect us from the excesses of liberalisation, hence the 1990s financial crisis.
This is why the initiative by Paulwell to bring competition to the energy sector is critical, as without it there is no guarantee that the present monopoly will deliver the best service and price to the consumer. Even with all the PR they are doing now, it is not sufficient to rely on the good deeds of a monopoly, as the behaviour of the consumer in a competitive environment is always more efficient. And in a world that is highly dependent on technology, energy is the new factor of production.
But we must go further in changing the regulatory framework, to encourage competiveness. The financial sector is probably one of the most important in driving development, as it allows for access to the necessary fuel for businesses, which is capital. This is one of the reasons why the US is able to see a proliferation of startup businesses after the financial crisis, and why companies there can expand into global powerhouses so quickly. It is capital that gives legs to ideas. However, if you have limited avenues to access capital then what will happen is that capital stays mainly with businesses that have reached a size where they are uncomfortable with risks and new ideas.
Governments here have attempted to deal with this deficiency by providing access to special funds, through avenues such as the DBJ, but these routes are laced with bureaucracy and are inadequate. The last attempt to allow any increased competition in the financial sector was in the 1990s, prior to the financial crisis, under Davies. In my view, despite the crisis, it was the right thing to do. The problem was that the regulatory environment did not keep pace, guarding against excesses. But like everything in Jamaica, if a good idea, like this instance or Spring Plain, doesn't work, then we kill it, as we do not have a culture that encourages innovation.
Another important issue to be dealt with, if we want to see greater competitiveness and development, is the justice system and law and order. If we really want investments and competition in Jamaica, then court cases can't take years to resolved, and employees can't take companies to the Industrial Disputes Tribunal, on frivolous charges, costing the company significant legal costs and time without the possibility of recovery.
Also, we can't expect greater productivity if the rights of citizens are not given prominence.
In addition to bureaucracy and crime, the Global Competitiveness Report, highlighted the taxation system as one of the top three inhibitors to improving competitiveness in Jamaica. The system and face of the tax system in Jamaica has improved significantly, thanks to the new TAJ. However, my own view is that the effective tax rate in Jamaica is relatively high when compared to the disposable income and government services offered in other countries. This makes a difference as to where people, who have the choice, choose to pay taxes.
So until we make this a more competitive economy we will be forever chasing our tails and trying to find a solution to our BOP and fiscal deficit. No amount of new taxes, government incentives, or austerity will solve the problem. These only amount to resistance against the powerful, invisible hand of the market. Until we fix the structural issues then for another fifty years we will be moving from crisis to crisis.
The telecommunications sector and tourism are examples of what competition can do for the consumer and productivity, although I think we could enhance the values if they were not subject to so many taxes. We however need to go a step further to ensure this continues.
For telecommunications to improve and have greater competition, the coming number portability is a necessary step. In addition, however, we must have a situation where there is a sharing of the cell site infrastructure. This will reduce the entry, and operating, costs for new entrants that may not have the capital of major players. It will also further reduce the cost and bring newer technologies to consumers.
In the tourism industry, if we are serious about maintaining our comparative advantage, and increasing earnings (not necessarily number of tourists, but dollars per tourist) then we should be strict about our environmental protection, developing proper infrastructure in our tourist towns, and for once address the tourist harassment situation.
All these things we must do however, only if we are serious about growth and development.
Dennis Chung is a chartered accountant and the author of "Charting Jamaica's Economic and Social Development — A much needed paradigm shift". His blog is dcjottings.blogspot.com. Email: email@example.com
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