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How did we get here? - Part 2
published: Sunday | July 27, 2008
Claude Clarke, Contributor
Clarke
This is the conclusion of a two-part article on the demise of Jamaica's productive sector and the rise in criminal enterprise from the early 1990s to the present. Part 1 was published last Sunday.
The uncompetitiveness forced on productive businesses was more than enough to force most Jamaican producers out of [COLOR=orange! important][COLOR=orange! important]business[/COLOR][/COLOR] - and many were. But the unkindest and most destructive cut delivered by government to the producers of the country was, ironically, the weapon it chose to use to force its revaluation strategy to stick.
Having failed to hold inflation at the required levels, the Government began to offer the inducement of outrageously high interest rates to dampen artificially the consequent demand for foreign currency. As a result, lending rates to the productive sector shot up from under 20 per cent per annum to over 70 per cent for some businesses.
Then, as the capitalisation of unpayable interest forced principal balances above approved limits, penalty charges pushed the rates to over 100 per cent. More and more assets had to be pledged to secure the escalating [COLOR=orange! important][COLOR=orange! important]debts[/COLOR][/COLOR]. Personal assets, including homes, were committed by zealous owners when business assets were exhausted, in the hope that the interest-rate nightmare would soon end. Many died waiting.
crippling cash-flow problem
Naturally, it was not long before the [COLOR=orange! important][COLOR=orange! important]financial [COLOR=orange! important]institutions[/COLOR][/COLOR][/COLOR] themselves encountered a crippling cash-flow problem; when real (cash) interest payments from their distressed productive customers dried up and they could not match their cost of funds with cash inflows. This plunged the banks into a deep liquidity crisis and their cry for help from the Government resulted in a series of interventions, which eventually led to the creation of FINSAC.
I am not aware of the mandate given to FINSAC by the then government, but based on FINSAC's actions, it could not have included getting a clear understanding of the nature and cause of the problem with which the banks were confronted.
Massive interest earnings had been credited to deposits in the banks based entirely on the dictates of government policy, not on natural market factors. The funds credited to these deposits were provided by the capital sucked from the businesses of the banks' borrowers by usurious and unnatural interest charges and the mountains of unsolicited debt piled on to their accounts after their capital was exhausted.
Naturally, these borrowers' ability to pay was increasingly compromised by their declining businesses. Clearly, if there was a victim here, it was the borrowers; and if there was a beneficiary, it was the owners of the massive deposits, which had accumulated in the banks based on interest earnings which bore no relationship to reality.
FINSAC's actions were in direct contradiction with logic. It settled 100 per cent of the inflated deposit balances and began an aggressive drive to collect uncollectable debt from distressed business borrowers. This was as impossible a mission as there could possibly be.
The outcome, as we have all now come to see, is that the country's taxpayers incurred over $140 billion of debt for settling with the banks' depositors, while the banks' debtors, who were mainly producers, who neither had assets nor earnings to settle their inflated debts, have been devastated. Huge amounts of productive capacity have been destroyed and thousands of workers have been put out of work.
senseless penalties
Every banker knows that a debt is only worth the value of the assets with which it is secured and/or the ability of the borrower to pay. By either of these measures, the value of the banks' debt portfolio was a fraction of the balances shown on the bank's books - value which was based on compounded, usurious interest rates and senseless penalties.
But how do we justify killing scores of productive enterprises and tens of thousands of workers' jobs in pursuing debt, which was illusory at best, while companies with credit balances running into billions of dollars based largely on the accumulation of usurious interest earnings would receive every single penny?
Who generally did not benefit from the interest-rate bonanza, apart from the case of small depositors, such as passbook savers and other such depositors with small holdings. It is difficult to accept that there was ever a rational basis for restoring 100 per cent of the compounded balances on the deposits in the banks; deposits, which in some cases, ran into the billions of dollars, while leaving distressed productive borrowers to bear the burden of 100 per cent of their inflated debt.
The woes of the Jamaican producer did not stop at the revaluation strategy, which was discussed earlier, and the resultant FINSAC debacle. The ground was further cut from under them by the careless manner in which trade policy was developed and executed. The manner in which the common external tariff of CARICOM was introduced was perhaps the most glaring example.
The CET cut the protective tariff against extra-regional imported competition from around 50 per cent to 20 per cent, and lower. This had the effect of dramatically increasing the competitiveness of extra-regional finished goods and further undercutting the competitiveness of local producers. This provided the opportunity for imports to complete their capture of the domestic market and push the local factories farms and workers deeper into oblivion.
There was nothing wrong with the basic rationale behind the CET, but if there was any sensitivity to the fact that its introduction would radically increase the competitive pressure on local producers, there would have been a deliberate effort made to prepare them and action taken to soften the negative impact on their relative competitiveness. Trinidad seemed to have done this by allowing its currency to depreciate from TT$5.7:US$1 to TT$6.3:US$1, an approximate 11 per cent adjustment, around the time of the introduction of the new CET rates in 1998.
capitalist economic orthodoxy
To what should one attribute this sustained assault by government on its own producers and workers? That it happened under an administration which came to office on a platform of putting the Jamaican people, and by extension, the Jamaican producer and worker first, makes the actions of the Government even more puzzling.
I can only conclude that somewhere during the transition from democratic socialism to a yet-to-be-defined or articulated philosophy, the PNP, not being natural free-marketers, a capitalist economic orthodoxy emerged that totally dominated the thinking of the whole government.
They followed this orthodoxy as slavishly as the newly literate clings to [COLOR=orange! important][COLOR=orange! important]phonics[/COLOR][/COLOR]. There seemed to have been no voice of real-life pragmatism being listened to. There seemed to have been no one representing the interest of the producers who were being destroyed, or the workers who were losing their jobs.
The relentless pursuit of the FINSAC 'debtors' into [COLOR=orange! important][COLOR=orange! important]bankruptcy[/COLOR][/COLOR] and destitution, taking their workers into unemployment with them, is the clearest manifestation that the PNP, without a philosophy to guide it, had completely divorced itself from the mission of its founding fathers, namely the upliftment of the masses of the Jamaican people.
The selling of these destroyed Jamaican business people into virtual slavery to a Texan bank is unforgivable. Apart from the unpatriotic quality of handing over your own heavily distressed people to a foreign power to do with as it pleased, the idiocy of setting up a situation that would lead to the export of the capital left in the companies they owned, borders on an act of national masochism.
ECONOMIC ABANDONMENT
A very substantial proportion (estimated at 80 per cent) of the liquidation proceeds is sent abroad by the debt collector cynically named Jamaica Redevelopment Foundation. This very sorry episode of what I would describe as 'economic abandonment', has moved so far away from Norman Manley's mission of the development of the masses of the people, that one could certainly be forgiven for thinking that by its practice, Seaga's JLP might have supplanted the PNP as the 'people's party'.
Regrettably, however, the new JLP administration has not so far demonstrated any better understanding of the underlying causes of the county's economic and social problems, and as far as its fundamental economic and social policies are concerned, seems intent on pursuing the very thing it condemned in its election campaign - 'not changing course'.
When Norman Manley set out to start the movement to uplift the masses of the people of Jamaica, he would never have imagined that 70 years later, we would have become so economically deprived and socially depraved as we clearly are today.
It is now my hope that the PNP will use its time in opposition to rediscover its mission, embrace it and reclaim its rightful position as the party that not only advocates for but works consistently to advance the interest of the masses of the people of Jamaica. In the meantime, until the PNP is returned to office, my fervent wish is that this JLP administration will quickly change economic course from that which it inherited and give the country the opportunity to begin the process of economic recovery and rebuild our social capital. Claude Clarke is a former trade minister and manufacturer.
published: Sunday | July 27, 2008
Claude Clarke, Contributor
Clarke
This is the conclusion of a two-part article on the demise of Jamaica's productive sector and the rise in criminal enterprise from the early 1990s to the present. Part 1 was published last Sunday.
The uncompetitiveness forced on productive businesses was more than enough to force most Jamaican producers out of [COLOR=orange! important][COLOR=orange! important]business[/COLOR][/COLOR] - and many were. But the unkindest and most destructive cut delivered by government to the producers of the country was, ironically, the weapon it chose to use to force its revaluation strategy to stick.
Having failed to hold inflation at the required levels, the Government began to offer the inducement of outrageously high interest rates to dampen artificially the consequent demand for foreign currency. As a result, lending rates to the productive sector shot up from under 20 per cent per annum to over 70 per cent for some businesses.
Then, as the capitalisation of unpayable interest forced principal balances above approved limits, penalty charges pushed the rates to over 100 per cent. More and more assets had to be pledged to secure the escalating [COLOR=orange! important][COLOR=orange! important]debts[/COLOR][/COLOR]. Personal assets, including homes, were committed by zealous owners when business assets were exhausted, in the hope that the interest-rate nightmare would soon end. Many died waiting.
crippling cash-flow problem
Naturally, it was not long before the [COLOR=orange! important][COLOR=orange! important]financial [COLOR=orange! important]institutions[/COLOR][/COLOR][/COLOR] themselves encountered a crippling cash-flow problem; when real (cash) interest payments from their distressed productive customers dried up and they could not match their cost of funds with cash inflows. This plunged the banks into a deep liquidity crisis and their cry for help from the Government resulted in a series of interventions, which eventually led to the creation of FINSAC.
I am not aware of the mandate given to FINSAC by the then government, but based on FINSAC's actions, it could not have included getting a clear understanding of the nature and cause of the problem with which the banks were confronted.
Massive interest earnings had been credited to deposits in the banks based entirely on the dictates of government policy, not on natural market factors. The funds credited to these deposits were provided by the capital sucked from the businesses of the banks' borrowers by usurious and unnatural interest charges and the mountains of unsolicited debt piled on to their accounts after their capital was exhausted.
Naturally, these borrowers' ability to pay was increasingly compromised by their declining businesses. Clearly, if there was a victim here, it was the borrowers; and if there was a beneficiary, it was the owners of the massive deposits, which had accumulated in the banks based on interest earnings which bore no relationship to reality.
FINSAC's actions were in direct contradiction with logic. It settled 100 per cent of the inflated deposit balances and began an aggressive drive to collect uncollectable debt from distressed business borrowers. This was as impossible a mission as there could possibly be.
The outcome, as we have all now come to see, is that the country's taxpayers incurred over $140 billion of debt for settling with the banks' depositors, while the banks' debtors, who were mainly producers, who neither had assets nor earnings to settle their inflated debts, have been devastated. Huge amounts of productive capacity have been destroyed and thousands of workers have been put out of work.
senseless penalties
Every banker knows that a debt is only worth the value of the assets with which it is secured and/or the ability of the borrower to pay. By either of these measures, the value of the banks' debt portfolio was a fraction of the balances shown on the bank's books - value which was based on compounded, usurious interest rates and senseless penalties.
But how do we justify killing scores of productive enterprises and tens of thousands of workers' jobs in pursuing debt, which was illusory at best, while companies with credit balances running into billions of dollars based largely on the accumulation of usurious interest earnings would receive every single penny?
Who generally did not benefit from the interest-rate bonanza, apart from the case of small depositors, such as passbook savers and other such depositors with small holdings. It is difficult to accept that there was ever a rational basis for restoring 100 per cent of the compounded balances on the deposits in the banks; deposits, which in some cases, ran into the billions of dollars, while leaving distressed productive borrowers to bear the burden of 100 per cent of their inflated debt.
The woes of the Jamaican producer did not stop at the revaluation strategy, which was discussed earlier, and the resultant FINSAC debacle. The ground was further cut from under them by the careless manner in which trade policy was developed and executed. The manner in which the common external tariff of CARICOM was introduced was perhaps the most glaring example.
The CET cut the protective tariff against extra-regional imported competition from around 50 per cent to 20 per cent, and lower. This had the effect of dramatically increasing the competitiveness of extra-regional finished goods and further undercutting the competitiveness of local producers. This provided the opportunity for imports to complete their capture of the domestic market and push the local factories farms and workers deeper into oblivion.
There was nothing wrong with the basic rationale behind the CET, but if there was any sensitivity to the fact that its introduction would radically increase the competitive pressure on local producers, there would have been a deliberate effort made to prepare them and action taken to soften the negative impact on their relative competitiveness. Trinidad seemed to have done this by allowing its currency to depreciate from TT$5.7:US$1 to TT$6.3:US$1, an approximate 11 per cent adjustment, around the time of the introduction of the new CET rates in 1998.
capitalist economic orthodoxy
To what should one attribute this sustained assault by government on its own producers and workers? That it happened under an administration which came to office on a platform of putting the Jamaican people, and by extension, the Jamaican producer and worker first, makes the actions of the Government even more puzzling.
I can only conclude that somewhere during the transition from democratic socialism to a yet-to-be-defined or articulated philosophy, the PNP, not being natural free-marketers, a capitalist economic orthodoxy emerged that totally dominated the thinking of the whole government.
They followed this orthodoxy as slavishly as the newly literate clings to [COLOR=orange! important][COLOR=orange! important]phonics[/COLOR][/COLOR]. There seemed to have been no voice of real-life pragmatism being listened to. There seemed to have been no one representing the interest of the producers who were being destroyed, or the workers who were losing their jobs.
The relentless pursuit of the FINSAC 'debtors' into [COLOR=orange! important][COLOR=orange! important]bankruptcy[/COLOR][/COLOR] and destitution, taking their workers into unemployment with them, is the clearest manifestation that the PNP, without a philosophy to guide it, had completely divorced itself from the mission of its founding fathers, namely the upliftment of the masses of the Jamaican people.
The selling of these destroyed Jamaican business people into virtual slavery to a Texan bank is unforgivable. Apart from the unpatriotic quality of handing over your own heavily distressed people to a foreign power to do with as it pleased, the idiocy of setting up a situation that would lead to the export of the capital left in the companies they owned, borders on an act of national masochism.
ECONOMIC ABANDONMENT
A very substantial proportion (estimated at 80 per cent) of the liquidation proceeds is sent abroad by the debt collector cynically named Jamaica Redevelopment Foundation. This very sorry episode of what I would describe as 'economic abandonment', has moved so far away from Norman Manley's mission of the development of the masses of the people, that one could certainly be forgiven for thinking that by its practice, Seaga's JLP might have supplanted the PNP as the 'people's party'.
Regrettably, however, the new JLP administration has not so far demonstrated any better understanding of the underlying causes of the county's economic and social problems, and as far as its fundamental economic and social policies are concerned, seems intent on pursuing the very thing it condemned in its election campaign - 'not changing course'.
When Norman Manley set out to start the movement to uplift the masses of the people of Jamaica, he would never have imagined that 70 years later, we would have become so economically deprived and socially depraved as we clearly are today.
It is now my hope that the PNP will use its time in opposition to rediscover its mission, embrace it and reclaim its rightful position as the party that not only advocates for but works consistently to advance the interest of the masses of the people of Jamaica. In the meantime, until the PNP is returned to office, my fervent wish is that this JLP administration will quickly change economic course from that which it inherited and give the country the opportunity to begin the process of economic recovery and rebuild our social capital. Claude Clarke is a former trade minister and manufacturer.