Productivity and Privatisation

First Published: 2004-02-08

Good afternoon ladies and gentlemen…thank you for inviting me to speak to you here today. I always complain about speaking at meals, since I can't enjoy the food! And my apologies to those who have heard me on this topic many times before…

As a Bahamian, I care greatly about the well-being of our people.

Today, I'll focus on the material well being, and leave the spiritual to other experts!

I'm not an economist, but even a non-economist knows that GDP is a measure of the dollar value of total domestic goods and services produced annually in a country. For the Bahamas, it is now estimated to be about $5 billion.

Is that good? Well, of course it depends on the size of the country! In the US, their GDP is about $10.2 trillion, or a bit more than 2,000 times ours. So, is that good? They have a population that's roughly 1,000 times ours, so their people have approx. twice as much GDP each. On average therefore, they are about twice as well off.

Dividing the GDP "pie" by the size of the population gives us per-capita GDP, an average measure of the material well-being of a nation. For the Bahamas, with our population at a bit over 300,000, our per-capita GDP is about $16,000. Again I ask: is that good? Not compared to the US, which as I explained, is about double. We Bahamians want what the Americans have, but we need a much more productive economy to achieve that. Compared to the Caribbean, and indeed Latin American nations, we are doing well, though Bermuda & Cayman both have significantly higher per capital GDP.

It is important to note that this is a measure of average wealth: it is certainly not evenly distributed to all citizens, here or anywhere. Distributing wealth is at the heart of the difference between Left-wing and Right-wing politics. Both agree that the poor need to become wealthier, but the Left believes they themselves know how to do it best, while the Right believes that the markets are the best mechanism.

Most importantly though, all can agree that per-capita GDP must grow! If we want to grow the value of GDP divided by population, we have two initial-and simple-choices: produce more goods and services, or reduce your number of people!

Like many other economies, we have been in a period of very low growth, perhaps even recession. Meanwhile, our population grows, due to a high birth rate and significant illegal immigration. On average, we are getting poorer at the moment!

What to do? On the question of population, family planning and an enlightened approach to immigration would help: as countries become more developed, the natural birth-rate declines. And immigration is a good thing, bringing vitality and vigour to a country: just look at the US, which takes in over a million new immigrants every year. But it needs to be controlled if chaos is to be avoided.

But we can also make sure that the citizens in our work-force produce more each, so that GDP rises. This is labour productivity, measured as output per hour worked. Greater labour productivity can increase per-capita GDP (or produce more leisure time!) Capital is also a critical input to productivity, since workers with more capital can produce more goods and services. Combining the two gives us total factor productivity.

Workers who are better trained or healthier are more productive. Workers with better equipment-especially IT-are more productive. And workers who are better led in organizations with better strategies are more productive.

Give a work-man a new fork-lift truck and he will load many more packages. Give a legal secretary a computer, and she can edit complex documents in a fraction of the time. Give a manager a report on his customers' spending patterns, and he can steer his pricing and advertising.

Give an engineer CAD/CAM software, and she can design an airplane without even drawing it.

Now, increased productivity can also mean lower costs, which leads to more competitive goods and services. And in the Bahamas that's an issue. The cost of doing business here is very high, and our competitors are taking advantage of it. In our principal industries: Tourism & Banking, competitors in the Caribbean–and elsewhere–are offering similar products at lower prices, and we are losing market-share. To combat this we need either a superior product, or lower prices, and preferably both. We must become more productive.

Ask a hotel manager what his or her problems are, and they will tell you it's costs. To fight competition from the Dominican Republic or Cuba, they must charge lower room rates. But holding down the room rates leaves almost no profit margin, because their operating costs are so high. What costs are these? Well, labour, utilities, regulations, taxes & tariffs… And labour demands high salaries because living in the Bahamas is expensive. And why is that? Well, utilities, taxes & tariffs, etc..!

We can talk all we want about FTAA, Caricom, WTO, etc., but meanwhile competition is already here, in force. If we want to keep our tourists from choosing the DR, or our banks from moving to Cayman, we need to provide superior products at lower costs here in the Bahamas. And it's not personal: market forces dictate that the economic activity will move away from us.

I believe that this is a critical juncture: get it right, or slowly decline: per capita GDP will stagnate or decrease. Now, as a nation we have survived many such junctures, and indeed consider ourselves a very lucky people: things always work out. But we do not think much about opportunity cost: what we might have had if we had made the right decisions. But that's a critical concept to good any business manager.

Our offshore financial sector is an important contributor, but think of the captive insurance business we missed that Bermuda now has, or the banks that moved to Cayman. It is no coincidence that their per capita GDP is a lot higher than ours.

So, how to improve products and lower costs in order to retain banks and tourists? Well, you will notice that most of the ingredients are controlled by government: utilities, taxes & tariffs, regulations…Governments use taxes and regulations to pursue their own ideological goals, which may or may not be appropriate for increasing economic activity. Foreign investors seek reassurances on these topics before risking their capital.

But all governments, everywhere, have shown little skill in running businesses. Their motives are not those of the market: they focus on social objectives rather than business ones. Of course, there is nothing wrong with social objectives, but they have a cost, which must be clearly identified. Meanwhile, businesses (and tourists and banks) move with the markets: we can no longer keep competition away from our shores.

For example, perhaps there is a social objective to providing Bahamians with unlimited, free local telephone calls. However, there is a cost. So a government-controlled Batelco has to charge artificially high long-distance rates to subsidise the local calls. In fact, it's a tax on businesses and wealthier individuals. Problem is, competition is here: call-back and voice over internet! Batelco faces the worst of both worlds, while our hotels and banks face exorbitant phone costs. Actually, even the hotels and banks are increasingly indulging in illegal call back and voice over internet! The market forces slowly prevail over governments…

By the way, now there's an opportunity to increase national labour productivity: imagine the hours of work-time that would not be spent on the phone if calls were not free, or if only they were metered so bosses could keep track?!

The great economist Schumpeter coined what I think is one of the greatest true oxymorons: "creative destruction". Markets wait for no man-or government! Businesses rise and fall based on the quality of their decision making, not on government fiat. If we are to reduce costs, drive up productivity, and fight for our market share and economic future, we must unleash our economy, starting with our utilities.

It's called privatisation..!

Batelco, BEC, Water & Sewerage, Bahamasair…they are all being asked to fight international competitive forces with one foot nailed to the floor! There is no room for creative destruction: only the pursuit of a government controlled agenda, dictated not by good business practices but by social objectives. I repeat, social objectives are not wrong, and indeed can be crucial, but take them off-line, or the markets will blow right past us!

Personally, I believe in a minimalist role for any government: little more than assuring the basics necessary for the economy to get on with its work: security (internal and external), a legal system to support it, basic health and education, a strong currency with low inflation.

Furthermore, I acknowledge that creative destruction is painful: the transitions are cruel, and governments must protect displaced workers in failing businesses. For example, today productivity in the US is going through the roof, because businesses that downsized during the latest recession are not hiring back yet during this recovery: they are squeezing as much as they can out of their existing workforce in order to be competitive, and output per hour worked is soaring. No government is capable of fighting such market forces; instead, they should focus on helping workers through the transition. But only that.

The problem is that they cannot resist the temptation to create temporary relief that becomes permanent! This slowly drives up the costs to businesses through various taxes, benefit programs, regulations, and even nationalization of businesses. I never encountered a politician anywhere who did not consider himself or herself and expert on such things, despite almost universal evidence to the contrary.

It takes an enlightened government to acknowledge its own limitations in this area, But it takes a visionary government to take the difficult steps to privatize. A champion for privatisation must come forward, and lead by articulating the facts: a Maggie Thatcher! Indeed today, the Bahamian economy resembles England in the 60's and 70's under the Labour government: nationalised industries and utilities, dominant trade unions, and foreign competition siphoning off business. Privatisation is both too important and too difficult to be left to just "happen" somehow.

For example, today the airport here in Nassau has degenerated into a disgrace. Even smaller competitor nations in the Caribbean have far better airports in order to lure our tourists: the markets are at work! What to do? Over $200 million will be needed, together with great business leadership (only to be found in the private sector). Current ideas seem to centre on hiring an outside company to build and operate an improved airport. Sounds great: but who will hire them, pay them, and rule over their decisions? Decisions about whom to hire, whether to downsize, which firms to get the contracts, who will control the restaurants and duty free stores…

This of course is not privatising, and such decisions will therefore never be made on a purely business basis. But such half-way measures are attractive to government, because they feel they get the best of both worlds: retaining power, while acquiring professional assistance. But what in fact is the result? Higher costs, lower quality, less productivity, and a less positive impact on our economy.

This may not be obvious at first: we all tend to notice the improvement, but miss the opportunity cost. Voters notice trends, not levels. If we get a new airport, who notices that it cost too much, the user charges are therefore too high, or that we should have had it long ago? If we all get cool new cell-phones for Christmas, will we be too excited to remember that we couldn't get one all this year?

Creative destruction and the rise and fall of economies (and nations) are facts of life. In the survival of the fittest, we must face these market forces with our best skills: let the business of government be government, and the business of business be business!

Ladies and gentlemen, we must privatise to survive!

Thomas R. M. Bain.

November 5, 2003.

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