Living in different worlds

Claude Clarke, GUEST COLUMNIST

At Parliament's behest, the Bank of Jamaica (BOJ) conducted a study of fees charged by the commercial banks operating in Jamaica. Despite the public outcry about the high cost of financial services that motivated Parliament's actions, the BOJ found that "compared to regional and international affiliates ... in most instances, highest overall fees are in jurisdictions outside of Jamaica".

Parliament was right to put a searchlight on local banks' fees; and the BOJ's findings on these fees can perhaps not be faulted. Nevertheless, the widely held public view that banks impose too high a cost on businesses and personal affairs remains real. But merely examining the fees charged for specific services cannot properly address the issue.

There are countless ways in which banks, which comprise something of an oligopoly in a country with an inconvertible currency, can impose costs on their customers. So to focus on specific service fees is to be fixated on minutiae. The problem is not simply high bank fees; it is the heavy cost that the financial sector, as a whole, imposes on the rest of the economy and the adverse effect of these costs on its competitiveness.

financial crisis

Leading 20th-century industrialist Henry Ford is credited with saying, "If banks and finance companies become too big relative to the rest of the economy, you have problems." Yet in Ford's time, the financial sector represented less than 2% of the US economy. On its way to its current 7.9%, it left in its wake a financial crisis that almost brought down the global economy.

But the US financial sector today is much changed from that which operated in Ford's time. Its growth may be explained by the rapid expansion of credit released by the 1971 abandonment of the gold standard and the positive role it played in facilitating the rapid expansion in production, consumption and exports generated by the US economy during the period. The export of financial services also added a net annual surplus of $60 billion to the USA's trade account.

In Jamaica, the financial sector was 4% of GDP in 1974, when manufacturing contributed 18% to GDP and the country was 55th in world per-capita GDP. Since then, Jamaica's financial sector has more than trebled its size, swelling to more than 11 per cent of GDP today, even while manufacturing's share of GDP has been halved and Jamaica's per capita GDP has fallen 42 places to be 97th among the world's economies.

Our economic experience is the perfect validation of Henry Ford's principle.

The financial sector exists to perform one function. It moves capital to where it can be used most productively. In doing this, it performs the centrally important role of assisting the optimisation of production, consumption and growth. The relationship between finance and production is typically a symbiotic one in which there can be mutual opportunities for prosperity. Nothing in Jamaica's recent experience provides evidence of such symbiosis.

The rapid growth of Jamaica's financial sector since the 1980s culminated in the massive bailout that cost the country approximately $140 billion and triggered a ballooning national debt which has stifled economic growth.

Despite this, or perhaps because of it, the financial sector has existed in a world completely divorced from the rest of us. In stark contrast to our shrinking capacity to produce, its profits continue to soar and its take of the national economy grows. Among the companies traded on the Jamaica Stock Exchange, the financial sector accounts for more than 70% of total profits. The enormous prosperity it enjoys stands splendidly isolated from the economic stagnation in which the country wallows.

lopsided relationship

The healthy symbiosis that should exist between the financial sector on the one hand, and the producers and consumers on the other, has been replaced by a lopsided relationship in which producers have become increasingly malnourished and progressively incapable of generating economic value, employment or healthy social equilibrium.

The manifestation of this unproductive relationship is felt in myriad ways. And little will be gained from selecting fees for special examination. The disproportionate cost of the financial sector reflects in the economy's profound structural dysfunction and should be the subject of deep and comprehensive review and reform aimed at making it more production friendly.

I do not blame the banks for this dysfunction. Government must create a policy and regulatory framework that motivates the financial sector to deliver greater value to the economy at lower cost.

We readily recognise that Jamaica cannot be competitive with the present high cost of energy. The same is true for the cost of financial services. And as with energy, if its cost to the economy is not reduced, the chance of Jamaica becoming productive and competitive will continue to be remote.

No one should doubt the central and critical role the financial sector must play in our quest for economic success. But its function of mobilising capital and moving it to where it can be most productive and useful within the boundaries of reasonable risk must be performed in a manner that aids, rather than hinders, economic competitiveness.

The fact is that despite its exorbitant cost, in Jamaica, its performance is woefully wanting. According to a recently released World Bank study, "less than 10 per cent of Jamaican firms less than five years old have 'actual and benchmarked access to credit', compared to 50 per cent in Trinidad & Tobago".

IMF data also reveal a frightening disproportion between the share of GDP taken by the financial sector and the aggregate amount of deposits and loans handled by our banks. The share of GDP represented by the financial services sector in Singapore, Barbados and Jamaica are not dissimilar. Yet while in Singapore deposits and loans outstanding combined are 292% of GDP, and in Barbados 197%, in Jamaica, they are no more than 57%.

Sixty per cent of the capital invested in Jamaica's stock market is invested in financial-services companies that in the main produce and export very little. In a country desperate for economic growth, this is a gross misallocation of capital.

These shortcomings are less to be blamed on the banks than on Government that has failed to provide a policy and regulatory framework for banks to better service the production and consumption of domestic goods and services.

The myopia of our economic stewards has distorted the big picture. It is the pesky weeds that attract their attention, not the nutritional health of the crop. Instead of seeking to determine how the financial sector can be made to deliver better value to the economy commensurate to its cost, they are mired in pedantic nitpicking.

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