Give business a kick in the shins

Paul Golding, Guest Columnist

The International Monetary Fund's (IMF) managing director, Christine Lagarde, evaluated both the credit and debit side of Jamaica's economic performance balance sheet year to date. On the debit side, she commented: "The economic outlook is improving. Compared to a year ago, growth has picked up, unemployment has declined, inflation has been brought under control, the current account deficit has shown an ongoing improvement, and reserves are starting to recover. Debt-to-GDP has firmly been put on a downward trajectory. Key reforms were implemented, in particular, the tax-incentive legislation and the fiscal rule."

On the credit side, she said, "There are other major reforms that are still pending, including improving the collection of taxes, modernising the public sector, and improving the business climate, and a prudent fiscal stance needs to be sustained."

The College of Business and Management at the University of Technology (UTech) reported on findings of the Global Entrepreneurship Monitor (GEM) 2013 which gave additional insights into the state of the business climate. GEM has conducted an annual assessment of the entrepreneurial activity, aspirations and attitudes of Jamaicans.

GEM funnel approach

The Jamaican data collected are then harmonised with approximately 100 other countries facilitating cross-national comparisons. GEM uses a funnel or pipeline approach to evaluate entrepreneurial activity in sequential phases:

1. Potential entrepreneur: individuals with opportunities, knowledge and skills to start a business;

2. Intentions: persons who plan to create a business;

3. Nascent individuals involved in setting up a business, no salaries paid;

4. New and established: businesses that have been in existence up to and beyond three and a half years. The funnel for Jamaica versus our other regional neighbours is depicted below, based on gender male/female:

The four countries included in the Caribbean category are Barbados, Colombia, Suriname, and Trinidad and Tobago. In Jamaica, almost 70% of the sample saw good potential entrepreneurship possibilities and 40% have intentions. However, there is a precipitous decline to 8% when it comes to establishing a business.

The World Bank and the International Finance Corporation's report, Doing Business 2014, provides some insight into what factors contribute to this chasm between intentions to start a business and actually starting one.

The report highlights two glaring factors: the first is the cost of electricity; and the second is the administrative burden of paying taxes. Jamaica ranks 168th out of 189 countries in the number of tax filings required per year. The situation has improved since 2012, when 72 filings were required per year and 414 hours were required to file. In 2014, the number of fillings has reduced to 36 and the number of hours down to 368. This is still onerous and drives a lot of businesses into the informal sector where no taxes are paid.

The GEM report also evaluated the level of innovation in entrepreneurial activity measured in terms of the novelty of products or services and the application of new technology. The level of innovation was very low, with 85.5% of new businesses and 75.5% of established businesses indicating that they did not believe they were offering products that were considered new or unfamiliar.

A December 2013 World Bank report corroborates the lack of innovation in Jamaica, indicating that the rate of product development in Jamaica is less than half that of Macedonia (population 2.1m). If misery loves company, Jamaica could feel some solace from the fact that, generally, Caribbean firms develop new products less frequently than their counterparts in other developing regions.

The lack of innovation (copycat/follow-fashion culture) in Jamaica and the region points primarily to two issues: the scarcity of graduates in science, technology and engineering, and the low quality of education, especially at the tertiary level. In fact, there is a worrying lack of differentiation (follow fashion) trend at the tertiary level. However, the education issue is for another article.

Entrepreneurialactivity in Jamaica

The findings relating to entrepreneurial activity in Jamaica is alarming, especially when we are looking to the micro, small and medium enterprises (MSME) sector to create jobs for economic growth. The current MSME profile based on the GEM study - and supported by other studies - indicate low levels of technical skills, lack of financing, low levels of operational and marketing capacity, low capacity for innovation and utilisation of technology, limited product differentiation, weak linkages to supply chains, insufficient promotion of entrepreneurship in the education system, taxation burden, and a high level of informality.

The Ministry of Industry, Investment and Commerce (MIIC) has attempted to improve and create conditions for fostering private-sector growth. These include the MSME and Entrepreneurship Policy and the proposed establishment of the Secured Interest in Personal Property Act, which will allow for the use of personal property (that is assets other than real estate) to be used as collateral for loans to promote entrepreneurship growth.

The MIIC is also proposing modern insolvency legislation to encourage viable entities to restart business after failure to ensure that entrepreneurs are not stigmatised or regarded as failures. Another encouraging development from a policy perspective is the proposed restructuring of three critical agencies that are engaged in lending and financial advisory services for the MSME sector: the Jamaica Business Development Corporation, the Self Start Fund, and the Micro Investment Development Agency.

Support programmes

In addition to the MIIC policy initiatives, there are a number of support programmes and initiatives, including the Joan Duncan School of Entrepreneurship Ethics and Leadership at UTech, to promote and nurture new entrepreneurs.

What is sadly lacking is a high degree of integration and consistency. Case in point is the need for an intergovernmental and private-sector partnership to implement the MSME and Entrepreneurship Policy. This would ensure that there is no minimum business tax charged to companies in business for less than five years. There is also the need for stronger links between the universities (UTech, UWI, & NCU) and the private sector to facilitate the transfer and commercialisation of research and development.

Entrepreneurs are key actors in turning low productivity around to create lasting economic benefit and quality jobs. It is, therefore, imperative that we create an economic environment that enables business innovation and competition to increase productivity and to grow quality employers. If this growth agenda is not realised, the cycle of low growth and high debt that resulted in sustained high unemployment rates, large-scale emigration of labour, and high poverty rates will continue, despite any help from the IMF.

Dr Paul Golding is associate professor and dean, College of Business and Management, UTech. Email feedback to columns@gleanerjm.com andpgolding@utech.edu.jm.