Anatomy of the FINSAC debtor

Claude Clarke, GUEST COLUMNIST

Part of the fallout from the FINSAC folly has been the summary dismissal of thousands of productive Jamaican business persons as 'bad debtors'. After more than a century of successful Jamaican business, the 1990s ushered in a period in which the positive relationship between productive entrepreneurs and their financial partners came to a crashing halt. Thousands of healthy Jamaican businesses, some of which had grown to become regional and world-beaters, were disdainfully discarded by our national economic stewards as 'bad debtors'.

In the midst of the most fertile and dynamic world economy in a century, a devastating plague of debt struck Jamaica and no other place on Earth. The deadly virus spread through the economy like an epidemic. Factories collapsed like bodies before the Black Plague.

It struck the financial sector and its productive customers alike. In 1998, National Commercial Bank (NCB), the country's largest commercial bank, holding more than 40 per cent of deposits in the commercial banking system, found well over half its loan portfolio in default. Naturally, this bad-debt explosion reflected the collapse of the bank's borrowing customers straining under its weight. Desperately, the Government rushed in to rescue the banks; but it left the affected borrowers to perish, and be later demonised, vilified and hounded down as 'bad debtors'.

NCB, at that time, boasted the leadership of some of Jamaica's most outstanding business moguls, and a management that had successfully taken the bank through more than two decades of growth and expansion, justifiably enjoying the respect and admiration of Jamaicans at home and abroad. Are we to believe that leadership of that calibre was so inept as to have built a portfolio of borrowers so unfit that half would overnight turn out to be bad debtors?

Clearly, something in the environment had changed radically to convert so many good borrowers on one day into bad debtors the next. Something must have happened to transform the vaunted directors and managers of NCB from astute lenders one day into inept and irresponsible lenders the next.

NCB's situation was in no way exceptional and was in every respect exemplary. Except for the two foreign-owned banks, which were naturally less focused on domestic development, the entire Jamaican banking sector was thrown into disequilibrium and distress. This included the feisty incipient banks, whose competitive aggression had stimulated and supported an emerging class of medium and small entrepreneurs, which had helped the economy register five consecutive years of five per cent average growth, a performance not seen since the 1960s.

The sudden dissolution of the delicate symbiotic relationship between the financial institutions and their productive clients ought to have led the Government to try to identify the reason why the productive economy and its bankers were suddenly mired in debt. Had it done so, it would have discovered that the roots lay in its first significant economic policy change after it assumed office in 1989: liberalisation of the foreign-exchange system without sufficient reserves or appropriate regulatory, monetary and fiscal arrangements to support it.

But the Government contented itself to believe that companies which had been conducting business successfully for decades were suddenly struck en masse with ineptitude, stupidity and amnesia as to how to properly run a business. Many of these were businesses that had produced goods and services with distinction, earning and saving foreign exchange for the country, lifting Jamaica's high-value production capability and providing high-paid, high-skilled jobs for thousands of Jamaicans; and for all that time were good customers of the banks.

How did they, overnight, become bad debtors? Was it a deliberate and uniform decision not to service their debts? Or was it that they became overwhelmed by circumstances that made them unable to do so? Given the fact that most, if not all, of these companies were previously profitable and had suddenly become unprofitable, it is very difficult not to conclude the latter.

Once exchange controls were lifted in 1991, without any arrangements or plans to contain domestic inflation or reserves or regulations to prevent rapid depreciation of the currency, the business landscape in Jamaica was radically destabilised. The Government's principal strategy for restoring stability was surging interest rates. But instead of calm, it brought about a tsunami of instability.

Economic and financial crisis

Much emphasis has been placed on Government's high interest-rate policy as the cause of the economic and financial crisis experienced in the 1990s. But it is the combined effect of that policy, with other policies which were introduced by Government at the same time, that really guaranteed economic collapse.

High interest rates are generally harmful. But interest costs, like any other cost factor, can be absorbed in prices; and in an economy in proper balance would be picked up by the final consumer. The tragedy of the 1990s is that, at the same time that Government's policies were imposing these high interest costs on businesses, it was removing pricing as a means of offsetting them. The 1990s saw the Government obeisantly and recklessly accepting and imposing WTO and funding agency-promoted trade liberalisation measures, with complete disregard for its responsibility to protect the interest of the Jamaican producers and its workers.

At the same time that high interest rates and local inflation were driving up the cost of Jamaican production, Government was reducing import duties on competing imported products by as much as 60 per cent.

It is interesting that when faced with the same WTO-promoted import duty reductions, Trinidad tactically devalued its currency by 10 per cent and maintained its producers' competitiveness. The Jamaican Government, at the same time, was witlessly revaluing the Jamaican dollar by more than 20 per cent.

Many other countries have, to this day, resisted the implementation of WTO measures they consider harmful to their economies. The Jamaican Government's reaction was to behave like helpless lambs.

These contradictory governmental actions put the Jamaican productive sector in a competitive straightjacket. The capacity to compete in the local market against imported products was being savagely undercut. Inflation averaging 40 per cent, surging interest rates, and the uncompetitive Jamaican dollar were effectively subsidising imports and taxing domestic production.

Exporters were particularly badly hurt. To increase export prices is rarely an available option. As a result, because the Government failed to maintain a competitive currency, the Jamaican dollars earned from export sales were increasingly unable to keep pace with rising Jamaican production costs. The octupling of our trade deficit between 1991 and 2008 is eloquent testimony to the devastating effect of these contradictory policies on the economy.

Despite the evidence, it might be somewhat ungenerous to infer that there was a design to remove every possibility for Jamaican producers to succeed in an increasingly competitive world. But it is completely rational to conclude that within the government of the day, the right hand of finance did not know or care what the left hand of production was doing. Those with responsibility for foreign affairs, too, seemed to operate as a dismembered appendage of the administration, accepting and imposing trade agreements that harmed, rather than benefited, Jamaica. The net result was that Jamaican producers who were exposed to international competition had nowhere to go but under. And many of them did.

The tragic irony is that many of these producers, trusting that their Government was looking after their interest, had borrowed, sometimes pledging their homes, to invest in state-of-the-art equipment to improve their efficiency, only to be crushed by the cost of servicing the debt. Many sought out new export markets to increase their sales, but lost them as their competitiveness vanished through Government's exchange-rate policies. Many strengthened their marketing only to be overwhelmed by the advantages given to imported competition by the Government's unwise liberalised trade policies.

Ultimately default

Driving local producers into uncompetitiveness, unprofitability and ultimately default on their bank obligations had consequences far beyond the particular businesses and industries affected. With thousands of businesses folding and jobs disappearing, there emerged a wave of schemes promising to generate wealth out of thin air. The era of the great pyramids was born.

Feeding off the appetite for garnering high income from doing nothing created by the high returns on Government's debt instruments, the Carlos Hills and David Smiths rode into town like white knights. The real wealth that was being generated by productive businesses was replaced by fake money from the pyramids.

The fake income put billions of dollars into the consumer economy, boosting the retail and distributive sectors and creating a false sense of prosperity in the country. This pyramid-driven boost in consumer activity may help explain the paradox that the collapse of manufacturing, by far the largest section of the productive sector, did not result in a more precipitous decline of gross domestic product.

The feel-good effect of increased consumption, without corresponding production, allowed the Government of the day to successfully deflect the public's attention away from its role in the economic collapse and to direct it to the fictional villains it had created and labelled 'bad debtors', absolving itself of blame.

One can only hope that with the passage of time and the findings of the FINSAC commission of enquiry, the public will finally realise who were the real villains of the country's greatest ever economic collapse.

Claude Clarke is a businessman and former minister of trade. Email feedback to columns@gleanerjm.com.