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EDITORIAL - Finance schemes need deeper study
published: Tuesday | January 22, 2008
It offers no comfort to know, as has been reported by the Caribbean Policy Research Institute (CaPRI), that the bulk of the people who have put money in the unregulated investment schemes which abound in Jamaica are from the middle class rather than the poor or very poor.
These investors, according to the CaPRI researchers, have on average $600,000 in principal in these schemes and are fully aware of the risks that they have taken. The assumption, therefore, is that a collapse of these schemes would hardly lead to demands for a bailout by the Government or any long-term economic or social dislocation.
While this, on the face of it, is good news, the CaPRI findings and the interpretation of the data merit further discussion.
Significantly, CaPRI estimates that Jamaicans have invested up to $200 billion in these schemes, which is equivalent to around a quarter of nominal GDP and 65 per cent of the deposits held in commercial banks.
Those numbers represent 'a hefty piece of change'. If there was a systemic collapse of these schemes, some of which regulators have suggested may be Ponzis, perhaps the largely middle-class professionals who invested in them could absorb a $200 billion hit.
We are reminded, however, that while most people's homes and major assets are not at risk - unlike at the time of the 1990s financial sector crisis - it was middle-class people who led the campaign for a bailout of failed banks and insurance companies.
Like now, many of them had been drawn to high-yielding instruments offered by the financial companies, which had used short-term money for long-term ventures.
Should middle-class people be willing to ride out the storm, this dent, insubstantial as it may be in their accumulated savings, would possibly hurt confidence, causing a slowdown in consumer spending. As spending slows, so would the economy.
Even if this did not occur to any significant extent, the CaPRI data suggest that nearly a quarter of the investors in the informal schemes are lower middle class and nine per cent are lower class.
Here, we are dealing with a group whose investments and economic impact may, in the scheme of things, be relatively minuscule. But they are the ones who can ill-afford to lose their cash and would therefore be badly hurt. This group, too, represents an important political constituency.
The CaPRI study provides a critical backdrop for a wider and deeper discourse on the mushrooming of these schemes. It also provides additional information which can help the Government to fashion a response to the phenomenon.
Perhaps when Finance Minister Audley Shaw speaks Wednesday at the Investors' Choice forum, he will have by then formulated, and be ready to articulate, a full and clear position on the issue. So far, he has been strangely quiet on the matter.
The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.
published: Tuesday | January 22, 2008
It offers no comfort to know, as has been reported by the Caribbean Policy Research Institute (CaPRI), that the bulk of the people who have put money in the unregulated investment schemes which abound in Jamaica are from the middle class rather than the poor or very poor.
These investors, according to the CaPRI researchers, have on average $600,000 in principal in these schemes and are fully aware of the risks that they have taken. The assumption, therefore, is that a collapse of these schemes would hardly lead to demands for a bailout by the Government or any long-term economic or social dislocation.
While this, on the face of it, is good news, the CaPRI findings and the interpretation of the data merit further discussion.
Significantly, CaPRI estimates that Jamaicans have invested up to $200 billion in these schemes, which is equivalent to around a quarter of nominal GDP and 65 per cent of the deposits held in commercial banks.
Those numbers represent 'a hefty piece of change'. If there was a systemic collapse of these schemes, some of which regulators have suggested may be Ponzis, perhaps the largely middle-class professionals who invested in them could absorb a $200 billion hit.
We are reminded, however, that while most people's homes and major assets are not at risk - unlike at the time of the 1990s financial sector crisis - it was middle-class people who led the campaign for a bailout of failed banks and insurance companies.
Like now, many of them had been drawn to high-yielding instruments offered by the financial companies, which had used short-term money for long-term ventures.
Should middle-class people be willing to ride out the storm, this dent, insubstantial as it may be in their accumulated savings, would possibly hurt confidence, causing a slowdown in consumer spending. As spending slows, so would the economy.
Even if this did not occur to any significant extent, the CaPRI data suggest that nearly a quarter of the investors in the informal schemes are lower middle class and nine per cent are lower class.
Here, we are dealing with a group whose investments and economic impact may, in the scheme of things, be relatively minuscule. But they are the ones who can ill-afford to lose their cash and would therefore be badly hurt. This group, too, represents an important political constituency.
The CaPRI study provides a critical backdrop for a wider and deeper discourse on the mushrooming of these schemes. It also provides additional information which can help the Government to fashion a response to the phenomenon.
Perhaps when Finance Minister Audley Shaw speaks Wednesday at the Investors' Choice forum, he will have by then formulated, and be ready to articulate, a full and clear position on the issue. So far, he has been strangely quiet on the matter.
The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.