The transformative effect of incentives
Over the past two weeks there has been a lively discussion on the value of the Jamaican dollar compared with the US dollar. This was catapulted to the forefront of some contention due to a statement/comment by Howard Mitchell, President of the P.S.O.J., and seems to have taken on a life of its own. Mr. Mitchell called for consideration to be given to the use of a fixed rate regime that would remove the fluctuations and uncertainty from the system, and that would restore the planning process for businesses (in particular smaller businesses).
The Minister of Finance replied to this in a measured but firm speech that discounted Mr. Mitchell’s suggestion and defended the current mechanism for determining the value of the currency, and its benefits over time. The Minister is to be commended for avoiding the obvious attractiveness of vilifying Mr. Mitchell in order to gain some cheap political attention.
Is Minister Clarke signalling a new wave of maturity in the behaviour of elected Parliamentarians? If yes, congratulations on your steps to improve rhetoric, dialogue, and open discussions in a more dignified way. Both men have exhibited a really hopeful scenario that will augur well as soon as the excitement of the economists and journalists subsides, and a new consensus is achieved.
Yes there is room for debate and for new ideas to emerge from the current discussion. There is also an opportunity for renewing our knowledge of past challenges and solutions that may predate the memories of our current players, and therefore there is a chance for those interested in history to inform the discussion. I will offer a few scenarios.
Prior to, and during the First World War (1914-18), many Jamaican cane farmers and processors became suddenly wealthy as the demand and prices for supplying sugar for the fighting forces and their supply chain workforce jumped upwards significantly. But at the end of the war prices dropped immediately and many Jamaicans in the sugar industry went from “riches to rags” overnight.
During the Great Depression and the simultaneous severe drought in the USA, followed by the Second World War our usual sources of bulk staples dwindled. This was due in great part to diversion of supplies from the USA and Canada to Europe in order to support the war in Europe. Secondly, the interruption to shipping southward was severe, and was further aggravated by the tremendous losses of the Merchant Marine due to the introduction of the German U-Boat fleet in the Atlantic.
The combination of these factors stimulated Caribbean trade largely by the usage of schooners for intra-island trade in fresh produce by small farmers, hucksters, and higglers, who replicated a supply chain that had been vibrant prior to the proliferation of steamships. This trade also included parts of Central America and South America (notably Guyana, Suriname, Venezuela, and Colombia).
Interestingly this trade interruption created the impetus for food security, and corn production took off in Manchester and other parishes, giving rise to the establishment of manufacturing companies such as Seprod; livestock and leather; bananas; coconuts; cocoa; coffee; pimento; and ground provisions. We truly ate what we grew!
In the shortage (“shartridge”) days of the mid-1970s to the 80s, many small shopkeepers found their livelihoods severely threatened by political and gang violence in their communities. Import permits were scarce. People bathed with ackee skin because it suds; detergent and soap were manufactured in backyards; chicken necks and backs required no cold storage as they were sold off before they hit the sidewalks; spoiled pickled mackerels were “reconditioned” using white rum and baking soda; and the list went on.
During this period the small business persons reinvented “international higglering” and travelled overseas to trade in goods and US currency even though the BOJ had imposed a maximum of US$50 per annum for travel. It was obvious that the foreign exchange model proved inadequate to deal with persons who earned and traded in foreign currency.
The ingenuity of the “small man/woman” greatly exceeded that of the large companies who considered themselves hampered by the regulations. The higglers became suppliers to big business and everyone made profits. I am not in favour of lawlessness or the corruption that ensues, but I do believe that the so-called small person can be more creative and agile than the big business. This is their relative response time to rapidly changing market conditions.
With that said, I must ask the readers to shift their mindsets to removing the punitive measures (the stick), and introducing a foreign exchange earning incentive (the carrot).
One of the basic factors is that we do not earn sufficient foreign exchange, and our trade balances continue to deteriorate. If we continue to expect large businesses to lead the way then we would be guilty of ignoring the previously indicated historical precedencies. We leave out the small and medium business at our peril.
The new preoccupation of the quarterly results (especially foreign exchange gains/losses) totally distracts executives from dealing with productivity, efficiency, and trade volumes, which are really the substance of the business. So the focus or excuse transfers from the controllable to the uncontrollable. Logically, if all our businesses sold in US$ and bought in US$ then the exchange rate would be irrelevant. It would be similar to dollarization.
I therefore contend that policies that encourage those earnings are put in place that the debate might then become irrelevant. Incentives are therefore the measures that can transform the outlook of the thoughts, actions, and results of the entire gamut of businesses from large to micro enterprises.
A prime example of this has been the incentives granted to hoteliers and cruise shipping. Quite apart from the income tax and GCT exemptions in this area have been the development of infrastructure of airports, seaports, roads, attractions, subsidized industry destination marketing expenditures, the provision of water, and a reduction of other fees. SuperClubs and Sandals built considerable capacity, but what of the smaller hoteliers who could have shown similar growth?
It does require new paradigms, change, and leadership to accomplish this. This element of leadership is claimed by the Government and the private sectors, so let me challenge them to embrace a previously uncharted road.
Survival and growth are real at this time in history, and they can be achieved together. So sayeth the gospel of the Economic Growth Council. Let’s give it a real chance.