A real stimulus

Claude Clarke, Contributor

Amid the gloom hanging over our recession-racked economy, Lasco's decision to launch three initial public offerings (IPOs) on the Jamaica Junior Stock Exchange (JJSE) has brought a sudden glow to the local investment community. The Group expects to raise $450 million of new equity to grow and expand three of its companies, bringing thousands of small new investors into the ownership of business and providing a welcome boost to the local equities market.

Since the global economic meltdown, the tax incentives contained in the new arrangements governing the JJSE are perhaps the closest the Government has come to providing a genuine stimulus to the economy, capable of generating real vitality and momentum. The twin objectives of the JJSE, as Mrs Marlene Street Forrest, the general manager of the Jamaica Stock Ex-change, explains are, on the one hand to bring equity capital to smaller, newer and probably smarter and nimbler enterprises; and, on the other, to make small investors (the "small man" if you will) more comfortable and willing to invest in businesses they do not control. The capital appreciation of the companies listed on the JJSE seems to have more than justified the early enthusiasm it has generated. The average capital appreciation on this exchange, at 60 to 70 per cent, is almost three times the average appreciation on the main market. This will give substantial liquidity to stocks on the JJSE and lead to a surge in investor confidence.

The JJSE has also managed to achieve something long needed in Jamaica's investment landscape, but which has been long absent: investments in stocks other than financial services. There is little doubt that the sobering effect of the JDX on the financial sector has reduced the appeal of financial sector investments, and could eventually lead to capital moving away from unproductive government paper toward investments in the real economy. However, with the introduction of the JJSE, a new enthusiasm to establish and expand non-financial enterprises has emerged and this augurs well for increased production and productivity in both the goods-producing and non-financial services sectors. Since its introduction last year, there have been three new listings. The three from Lasco are soon to be listed; and there is word that another four or five are preparing to apply for listing shortly.

Importantly, of the three firms listed so far two are manufacturing companies. Only one is financial. The Lasco three will include one in manufacturing and one in distribution.

And this brings me to a less obvious benefit likely to emerge from the JJSE: an enhanced level of competition in the distribution sector and, as a result, a better deal for the consumer. If this effect is indeed realised, we will have come a long way since the situation I encountered in the late 1980s when I entered politics. So complete was the control of the distribution sector by a handful of large distributors that a live radio discussion programme on the economy descended into a heated argument between executives of two of Jamaica's leading distribution houses, over which of them should get the right to distribute additional rice and flour. I was then the opposition spokesman on industry and commerce and anxious to share my ideas; but I was relegated to the role of spectator as the two distribution giants duked it out over government-allocated distribution privileges.

All basic foods at the time were procured by the government-controlled Jamaica Commodity Trading Company (JCTC) and distributed through the four or five large distribution companies in the country. With basic food, so vital to the survival of the majority of Jamaicans, subject to such callous non-market allocation, I did not see how it was possible for either the ordinary citizen or the economy to benefit.

On entering Government in 1989, I developed a plan to break up this distribution cartel by ending the JCTC's policy of dealing exclusively with these privileged distribution houses; instead, opening up the trade in basic foods to include a large number of smaller distributors spread across the country. The plan was approved by Cabinet, but came under such heavy lobbying force that it was killed before it could be implemented.

Non-market allocation takes many forms, but its ultimate effect is always reducing competitive activity, disadvantaging consumers and discouraging the less privileged from participating in business. This distortion of the business environment is debilitating to an economy and is particularly damaging in the distributive trade, which tends to be less exposed than other sectors to the price-restraining influence of external competition. Its potential for damage is especially great, because distribution is responsible for the single largest portion of the price of consumer goods and so carries the greatest capacity for generating inflation.

Competitive, dynamic and attractive

It is for this reason that it is so important that the distribution sector is kept competitive, dynamic and attractive to the participation of small and new players, who tend to be the most dynamic and innovative forces in any economy.

I have long held the view that the difficulty of small and new businesses to enter this sector has been one of the principal reasons for the poor performance of our economy over the years. Services as a whole account for just under two-thirds of our Gross Domestic Product, and over one-third of that is attributable to the distributive trades. If this sector is inefficient and the consumer goods it handles are overpriced, consumers will demand higher incomes from their employers. Their employers, in turn, will be uncompetitive; and those which must face foreign competition at home or abroad will fail.

It is clear that without an efficient and competitive distributive sector the productive side of the economy cannot be competitive and will continue to contract, as it has been doing for the past twenty years.

Just as in 1989 when it was recognised that a critical requirement for national economic development was bringing competition and efficiency to the distribution of the goods our people consume, so it remains fundamentally important today that vibrancy and competitiveness in the distribution of all goods and services throughout the economy be achieved.

Not much has changed between then and now. The sector is still dominated by a few distribution giants. But with the arrival of the JJSE and this first listing of one of our newer distribution companies, it could be that the landscape is about to change.

In 1989, in the context of a largely government-controlled economy; the tool to effect change was the authority of government to bring a large number of small players into the game. In today's liberalised environment, far more effective and less clumsy tools are available to achieve the same objective. The JJSE could become a vehicle through which significant equity capital could be brought to smaller distributors, giving them the financial clout to challenge the hitherto decisive economic power of the larger distribution houses. In doing so, it would also provide more ordinary Jamaicans the opportunity to participate directly in the ownership of this vital sector.

The Government's support of the JJSE with tax incentives has proven to be a powerful elixir; attracting the participation of both smaller enterprises and smaller investors. It provides businesses, wanting to expand and grow, access to capital, without the debilitating burden of debt. Small investors can also feel a closer sense of identity to the entities in which they invest and can benefit from the greater growth potential of these early-stage enterprises.

Governing is much easier than our governors have led us to believe. They set themselves up as the font of all business wisdom and set about to lecture businessmen on how to do business. Meanwhile, they make heavy weather of doing what they are supposed to do: establish the competitive macro environment within which business can be conducted fairly and productively. They fail to establish fair and equitable rules within which we can achieve a competitive and productive economy, and leave businessmen to do what they do best: compete and produce the quality goods and services that will grow the economy.

In providing the incentives which have given the JJSE its effectiveness, the Government has now taken one step in this direction. It has so far achieved desirable results and could, ultimately, represent a major change of course in the development of a competitive business environment in Jamaica. Perhaps this is the start of the change promised by the JLP in its election campaign.

One can only hope that the lobbying which thwarted the effort to open up the distribution sector in 1989 will not be allowed to succeed again.

Claude Clarke is a former trade minister and manufacturer. Feedback may be sent to columns@gleanerjm.com