Saturday, October 25, 2014

More on tax reform, please!

I guess the entire world knows by now that The Bahamas is looking forward to implementing Value Added Tax in January, 2015. Everyone except the former Chairman of the Bahamas Chamber of Commerce, Robert Myers, who also stood as the Chairman of the Coalition for Tax Reform- the once anti-VAT campaign lobby. Well, to be fair, they did morph into the "fair tax" and "sensible taxation reform" lobby. For what it's worth.

Mr. Meyers has been caught out, so to speak. As it stands, he got nabbed in an importation scandal with the Customs Department. Reportedly, he was found to have undervalued a vehicle that he wanted to bring into the country.

Bahamas Customs charge you duty on the purchase and value of all vehicles. So, if you bought a car for $1,000 and landed value works out to $1,100, you are expected to pay the duty on the $1,100.

However, Mr. Myers presented to customs a document that stated that the car he bought in the USA was less than what he actually paid for it, and thus presented false information to Customs on the actual value of the car to attract a lower duty.

In addition to this, it was also found that in the back trunk of the vehicle in question, which was a Porsche Hybrid, were groceries and other items valued at over $4,000 dollars that he also had not declared.

Yea, it is an understatement that Mr. Myers messed up. It looks like he was set up, too. Whether he did something like this before isn't something we should get into. But, it is more than curious to see the staunchest anti-government proponent for taxation reform, being taken down by a scandal that involved tax fraud at a time when the country is on the precipice of a new form of taxation. A reform that he was vehemently against from the onset.

Mr. Myers has now resigned as the Chairman of the Coalition for Taxation Reform and as the Chairman of the Bahamas Chamber of Commerce, and has been replaced with accountant Gowan Bowe. This was the right thing to do. The second most right thing to do is to just be quiet about it. Honestly, pay your dues, back away, ask for forgiveness for your sins and move on.

With all of that taking place, without a doubt there is now a void with regard to a very strong voice and pillar on overall taxation reform. Don't get me wrong, whether we feel Mr. Myers was genuine or not in his concerns about VAT, he did hit some key notes with regard to the sincerity of this entire initiative.

In fact, as odd as it sounds, I found myself agreeing with him to a great degree with his overall concern. And I'm a proponent of taxation reform and VAT, in particular.

The Coalition for Tax Reform made the case that the initial date was just undoable, unrealistic and too aggressive. It showed persons trying to put VAT together from the government's aspect were either unaware or didn't care about what it takes for large, and not so large businesses to adjust to a new way of doing things.

Of course policy makers were a little embarrassed by the pooh-poohing of the initial date because they were so cock-sure that it was a slam dunk. But after this set-back they kept plugging at it in earnest. Which is what we need: diligence on a very sensitive and now critical initiative.

While this new date of January, 2015 instead a more favourable date of July, 2015, with the month of July coinciding with the yearly national budget process, sounds a little iffy. January is what they believe and it is not unlikely for the government to present a mid-term budget: a time when spending is supposed to be re-assessed to ascertain if the government is on the right path. A mid term budget may bring clarity to the process in January.

A second issue that I now find myself agreeing with the Coalition for Taxation Reform is that VAT will just work out to another tax heaped on the Bahamian public, with no true reform. While it is found that Mr. Myers may not, and will not, be the main man to continue to hammer this portion of the reform message. This is very important to ensure that everyone gets a fair deal in all of this.

Why it alarms this author so much is that the proposed Central Revenue Agency, the fundamental pillar in this entire taxation nexus, was not a part of the VAT Bill tabled and passed in the House of Assembly. This is critical, as the Central Revenue Agency was seen to be the agency with the potential to tie the hands of meddling persons from subverting the tax-collection process.

Another issue with VAT evolving into another tax to be heaped on the public, is the various professional organisations and related lobby groups are working feverishly to get the concessions and areas of their particular sectors ironed out. No doubt self-preservation is key, but at the end of the day it still makes absolutely no sense to get your concessions and the over-arching system still be in the same position as it once was, with a new tax put on the backs of Bahamians.

Without a doubt however, the omission of the agency from the VAT Bill raises concerns. Because the agency that is now supposed to monitor revenue collection and be new eyes and ears in the revenue collection process, has now been side-lined and the process is now, and we hope for a short time, in the hands of the persons within the same system that we wish to move away from.

We should take the controls of the revenue generating agencies out of the current system that has been compromised for so long. If you want to change the system, then change the system. Don't half do it. Change it!

We shouldn't act as if there aren't, or have not ever been, other abuses, like the situation we had with Customs and Mr. Myers. Many persons feel that this was a mere drop in the bucket with regard to what some may have gotten away with in the past, and what people may be getting away with doing right now. Especially when we take into consideration that less than 50% of Customs revenue makes it to the public treasury.

This doesn't absolve Mr. Myers or anyone else that has made serious errors in judgement, but the fact remains that true and systematic reform (something that was promised on the campaign trail by the current government) needs to be continually addressed.

I think the public also sees this new wave of crack downs in import fraud from the Customs Department, coupled with a renewed vigour for work in the auditor general's office, as persons within the system, wanting to look like they're working diligently, to ensure that a new layer of government in that of the Central Revenue Agency is not seen as desperately needed. Well, at least that's what I see. Blame it on me.

How all of this plays out remains to be seen, but I believe The Bahamas would much rather have full reform over half reform, with half reform leaving the Central Revenue Agency out of this initial push. If left undone, as time lingers on, it will most likely be left undone or done half-way. And then we all pay dearly for it in the end.

Saturday, October 18, 2014

What are we doing in The Caribbean? Productivity vs. Busyness.

Government workers are lousy, lazy and dreadfully incompetent. They come to work late, don't produce results of what you asked or paid them for in a timely manner, plus they take 3 hour lunch breaks and then leave work more than a half an hour before their scheduled knock off time.

Employees in the private sector want more money for doing nothing at all. I mean, where do they think this is? Don't they see that I'm the boss and I know it all? What work do you do around here?! How dare you ask for more than $200 dollars a week? For what you do? Are you kidding me? You want us to raise the minimum wage to what?!?

This is what you hear across the board when we talk about labour, work and employment for The Bahamas. You hear the same cries even in America and Canada. No doubt the calls are all the same across the Caribbean and Latin America too. But, for the Caribbean's sake, is it all true? Or, is it just misguided anger?

The most recent strike actions in early September from the Trade Union Congress (TUC) and their related sub-unions has garnered some attention from the local and international media. The courts granted an injunction to the government to put a halt to this action that the government felt was illegal, however the discontent was already in the air and certain concerns were placed before the Bahamian people with regard to these labour matters. Matters that will most likely be addressed, but at a later date.

This strike action prompted this author to review an IMF Working Paper read a few months ago. Published on July 1, 2014, the paper analysed labour market issues in The Caribbean.

I must say from the rip that I'm not in favour of labour unions striking on a whim. I'm not appreciative of their particular matters being rejected totally out of hand either. I'm also not particularly agreeing wholeheartedly with the IMF's Paper, even though the work produced gives impetus to framing a separate debate and from that debate begging particular questions to be asked and other matters to be raised.

My position on this entire affair, leaning from the work produced by the IMF, is done strictly to bring to the attention of the public a parallax position that may be seen as distorted or an aberration of the original issue. But, a part of the issue it is, even though one may feel it too distant or unrelated.

For instance, we're all not lazy loafs, unskilled and unprofessional and choose to spend our time drinking rum, smoking marijuana and taking days off because we can. And, on the other side, we are not mean, maniacal and spiteful policy makers that want to hog up all of the money for ourselves and leave the workers to eat cake like we do! This type of language and sentiment is unhelpful.

In this spirit moving forward, the IMF paper went into great detail to collect, collate and analyse data on labour market trends in the region. Some data was more readily available, and others sparse or simply unavailable. In either extreme case, the data was enough to extract a rich amount of inferences from the data set and the subsequent correlations it brought to the fore.

One theme that's prominent throughout the paper is: Employment output-elasticity. Or, in other terms, the extent to which employed persons' (hired workers or labourers) output (the amount, rate and level they are productive based on how and what they produce) is elastic/inelastic (negatively or positively responsive to external and or internal determinants and/or shocks) to the extent to which it impacts, or is impacted by, GDP and/or GDP growth determinants in the macro-economic sense, or in the micro-economic sense, basic company performance indicators: The bottom line and the inputs or variables that affect the bottom line.

One thing that jumps out is the correlation of employment elasticity of The Bahamas, being the lowest correlated point observed in the data set with Jamaica being the highest. Directly speaking, with any change in real growth through cyclical periods, Bahamian employment is least likely to be impacted in any significant way.

This is a very interesting outcome from this study and says a great deal about the Bahamian economy. For starters, it lends to the idea that we are over-saturated with entrenched workers in many areas of our economy, particularly the services and governmental sectors. A lack of employment-skills dynamism and services diversification is and was always a factor in Bahamian labour and employment dynamics.

This also gives the perception that it doesn't matter that if 1 person is employed on a particular task, or 10: The same level of output will be evidenced in our GDP estimates and other output and growth indicators. Essentially, we are doing the very little we are expected to do with an over-saturation of workers in those areas.

In Jamaica's case, it's the exact opposite. Which leads to another interesting piece of information brought out by the Working Paper: The distribution of elasticity of employment over time.

Without being too technical, the second method used is a regression model over time to pin-point the rate at which growth and employment were evidenced over time.

The policies that spurred these dynamics could not be explained in the paper, but highlighting the lowest correlated over time in Jamaica and the highest correlated over time in Trinidad and Tobago, the authors did make mention of the Trinidadian government implementing employment growth initiatives that were independent of regular cyclical periods.

Further to all of this, Caribbean countries that utilized their natural resources, like Trinidad and Tobago, were seen as countries that were able to control the dynamics of employment and employment output outside of the regular business cycles and other related cyclical periods.

To further solidify this observation was that over the last decade, real growth has been historically low, generating low employment growth. During 2002–2012, average real growth ranges from 0.62 percent in the Bahamas to 4.7 percent in Trinidad and Tobago.

The Bahamas has not utilized a great deal of its natural resources in a nationalistic sense, while Trinidad and Tobago has. Neither has Barbados (due to a lack of natural resources to exploit) to any large extent but Jamaica to a larger degree, both countries being on the sub-side of opposite ends of the spectrum.

While it has been reported that over the medium term real GDP growth is projected over the entire country set, one must ask the question based on this analysis is: Where will this growth be seen? Which sectors will be at the lead of this growth? Also, based on the sectors identified for growth, will this truly impact the labour market in a substantial way?

Knowing what we know now, removing constraints to innovation and investment is also a policy recommendation for the region. This is key to being able to open the doors of opportunity for development led employment growth, but also keeping our citizenry employed with worthwhile endeavours and in a sense, not going on labour strikes and other forms of disruptive behaviour.

Whatever happens as a result of these factors, natural resources are critical to impacting employment growth and managing employment elasticity. In fact, this was the key inference suggested from the paper.

Labour unions in services dominated countries must be cognizant, particularly in non-resource rich and natural resource producing countries, that labour input at the widest margins does not significantly impact real GDP growth. And from this author's estimation, an over-saturation of employees may harm growth if this study is launched into another study that pinpoints the effects of labour and employment saturation.

I must also caution that, over time, if counter-cyclical measures aren't put in place to satisfy labour and employment demands, regardless of the benefits negotiated through the various labour unions in conjunction with the government, strikes and other work-related disruptions will become more severe and protracted as the years progress.

Saturday, October 11, 2014

Land prices in The Bahamas: Thinking about the issues and possibilities.

As Jimmy McMillan would say as a slogan when running for Governor of New York back in 2010 with the political party of the same name: "The Rent is too damn high!" We feel you Jimmy. We can also say here in The Bahamas that the price of property is too damn high. Just too damn high!

The price of land has sky-rocketed in The Bahamas over the last 25 years. Many parcels of land today, in middle to lower-middle income areas without a dwelling on top, can fetch any where from between $70 thousand to $95 thousand dollars. In fact, a piece of property 40 by 80 in a middle-income area in 1985 went for anywhere between $2,500 to $3,000 dollars. Yup, the generation post 1995 was given a raw deal with this. A raw and dirty deal.

For upper scale areas, parcels of land can start from $200 thousand dollars and upwards to $1 to $2 million dollars. This is also without dwelling on it.

Based on The Bahamas's GDP per capita at a very liberal $22 thousand dollars (a grossly inflated estimation of GDP per capita as it doesn't take into consideration the over-saturation of incomes from the top 20% high-wage earners compared to the bottom 70%), leveraging for land becomes more than a task. It's almost impossible for average families to purchase land and a home of their dreams without being in debt to banks or land developers for years on years.

This, coupled with the perpetual and seemingly ubiquitous soft-services economy, an economy yet to fully rebound from the ravages of the 2008 economic collapse and financial crisis, we have a dire and particularly important issue of land-reform that's desperately needed in The Bahamas.

Land reform, or the intention of land reform, has not been missed by all and sundry. In fact, recent developments based on rulings of two major and long-standing cases (one of these matters dating back to the early 1980's) for a major land development company in The Bahamas, Arawak Homes and their associated company, Eleuthera Properties Ltd., drove the critical issue of land reform home to many Bahamians.

Without going into the details of the particular court cases, the major issue involved a process called "Quieting Titles". A process by which a person can transfer title of a said property through the Supreme Court though particular means. Whether through just occupying the land for a considerable amount of time, or just through being interested in the land and the original property owners are uninterested in doing any thing with it, for some reason or the other.

Thus was the case for Eleuthera Properties Ltd. in North Eleuthera and their claim and subsequent acquisition, through a Supreme Court ruling, of nearly 2500 acres of land.

A second case, involving the parent company, Arawak Homes, is a more acute case of Quieting Titles and involved the purchase and re-sale of property that was disputed from the onset. This court case involved a particularly controversial area in The Bahamas- Pinewood Gardens. An area where someone put a petition to Quiet the land that was already, reportedly, purchased and owned by Arawak Homes.

This issue also underscored the need for a proper land registry in The Bahamas and a revamping of the Registrar General's office and the department charged with insuring the integrity and validity of property titles.

So, here we have it, one company being both a victim and claimant in two separate court cases surrounding the Quieting of Titles conundrum, where the same company came out the victor in both of the court proceedings.

This prompted the president of Arawak Homes, Mr. Franklyn Wilson, to cry about the abuses of Quieting Titles in The Bahamas. And we cry with him too! Really!

All of this, in addition to other matters surrounding the murky process of obtaining Crown Land from the central government; the lack of commitment by policy makers and the judiciary in finding a workable, best-case-solution to Generation Property (with Generation Property being land handed down from former plantation owners to their slaves primarily); and another issue of contention, The International Persons Landholding Act. of 1993 (making land purchases and ownership less cumbersome for foreigners), which repealed the former Immovable Properties Act., and is a key reason behind the explosion of land prices in The Bahamas.

In fact, with current prices taken into consideration with the Landholding Act of 1993, a Realtor from one of the most prominent real estate companies, H.G. Christie, lamented on the now 90/10 split in property sales with the 90% of sales being high-end North American, Canadian and European clients.

What the Realtor didn't explain during his lamentations was whether or not this 90/10 split was based on the numbers of individuals or entities buying property; or, in other words, 90 high-end buyers to 10 local buyers. Or was it a case of sheer value and profit; For example, 90% of his profit is realized from high-end buyers as opposed to 10% of his profit from local buyers.

Explaining what that Realtor means can help a great deal towards understanding how severe the issue is. It also must be noted that H.G. Christie specializes in the high-end market in any event.

Be that as it may, without question, all of this has certainly opened the market to fraudulent activity with particularly lengthy and confusing court cases as the fight for property for Bahamians becomes more heated and contentious as the years progress.

I'm not going to pretend that I have the solutions to all of these issues. I won't even give the impression that I can give you a workable solution to any of them. But I would like for my reading audience to consider this formula for helping with reducing the overall cost for average Bahamian families. This formula may prove fruitful for the rest of The Caribbean and Latin America at large, where developing country stagnation issues and bottlenecks are severe in many instances.

One way in which we can look to reducing the cost of land, without amending the International Persons Landholding Act., is by policy makers creating a "race to the bottom" scenario. A scenario whereby real estate companies, banks, lawyers, relevant stakeholders along with the government create an atmosphere through capping fees and interest rates for land valued and zoned in particular areas.

For example, hypothetically speaking, pieces of land in "Eastern Estates", deemed as a historically Bahamian area for residences and businesses, the rates at which the stakeholders can extract service charges and other processing fees should be capped at a certain value.

A Realtor typically asks for anywhere from 7% to 10% for sales, and the lawyer asks for 2-3% on top of that.

Lets say that a piece of property worth $100 thousand typically attracts 10% total fees from the Realtor, Lawyer, etc. But, if mandated that sales of $100 thousand should not exceed 5%, or $5 thousand; and sales for property valued at $50 thousand shall be equal to, but no less than, 11% of the total value of the property. That's $5 thousand five hundred. Parties involved would actually make more money per value off of the property at a lower price than they would make selling at the higher price.

Following the rationale of something of this nature needs to have several other factors put into consideration. One in particular is at which rates would it be profitable for a Realtor to sell land at structured price ranges? Without a doubt discussion and analysis into the socioeconomic dynamics of property sales should be broached with the Bahamas Real Estate Association.

A second issue for consideration is with regard to what price range would this ascending fees scale stop? This can also be easily appreciated by both policy maker and the Real Estate Association.

Last, but not least and what should be atop the pile for consideration with both the former, is managing the expectations and the articulation of what regulations vs. free-market policies can mean for the Real Estate industry. This is important. Important particularly with regard to persons that bought land at a higher price, but have yet done nothing with regard to it because they do not have the financial headroom.

One can see persons lashing back at what would be rightfully presumed to be government interference with price mechanisms in the industry. But as it stands now, with all of the prevailing factors surrounding the Bahamian economy, from flagging employment to inflation to socio-political behavior that has become injurious to investment and entrepreneurs, standing around doing nothing while property prices remain at virtually un-buyable prices hurts all involved.

As it stands now however, property sales under a different policy regime and arrangement is a better way forward than keeping the new status-quo of high prices and lack of flexibility for Bahamians looking for decent and affordable homes and property of their choice in their own country.

Saturday, October 4, 2014

Crime pays, but costs the society a great deal!

A recent article by a contributor to Project Syndicate, an Economic and Political Think Tank and Journal, Professor Bjørn Lomborg, from the Copenhagen Consensus Centre, brought to our attention a recent study on the economic and financial costs associated with violent crime, in a recent article titled: The Economics of Violence.

His ruminations were born out of the current conflicts around the world, from the wars in Iraq and Afghanistan, to the upheaval in the Ukraine and Crimea and how those conflicts affect local economies and the global economy, at large.

He noted that, while it may come as a surprise to some, wars and large scale conflicts, from air-raids to pogroms, cost less than the combined costs associated with murder; domestic violence; and other forms of country-level violence and crime. He notes that it is estimated that nine people are killed in interpersonal violence for every battlefield death due to civil war, and one child is killed for every two combatants.

When we analyse murder rates world wide, it makes sentiments like the ones expressed by Lomborg seem valid.

It almost seems understood that Africa, Latin America and the Caribbean, by region, are ranked the highest in violent crime and murder. United Nations estimates show us the top 5 highest homicide rate by region per 100,000 persons in 2011:
    Southern Africa31.0
    Central America26.5
    South America22.6
    Middle Africa18.5

In an article written by this author in 2011, "Is crime and economic concern?", I noted that in the Caribbean, and in particular Jamaica, Saint Kits and Nevis and The Bahamas, as reported by the UNODC, were ranked well above the average murder rate for the region, with rates of 43, 35 and 22 per 100,000 persons respectively.

That has since changed! The murder rates have increased since that UN report in 2011, and now stand at 62 in Saint Kits and Nevis; and in The Bahamas 37 per 100,000 persons as per the UN's latest Global Study on Homicide, 2014.  However, there was a slight decrease in Jamaica at 41 per 100,000 persons.

We should also add Belize, second behind Saint Kits n Nevis at 39 per 100,000 persons, and with the former capital, Belize City, at over 105 per 100,000 persons.

These are very sad and stark statistics.

One has to ask: Are people from developing countries in Africa, Latin America and the Caribbean just evil people? Have we lost control? Are we just violent people with no understanding, no reason, and no mercy? South East Asia is just as underdeveloped in many areas as some parts of the Caribbean and Latin America, but they have lower crime rates and lower costs associated. Why is the epidemic of violent crime so pervasive as it relates to us?

I guess we can never truly wrap our minds around this. But, we can wrap our minds around the notation of Lomborg and the works highlighted on the economic value of violence and victim costs produced by Kathryn McCollister, et al, 2010, and primarily from the work of James Fearon and Anne Hoeffler, 2014 and their Conflict and Violence Assessment paper.

The documents sourced to produce these works are extensive. Impressive, to say the very least. I'm pleased to have it cross my inbox and thrilled that it induced me to find more information as I wrote this article. It was as refreshing as a cool glass of water on a hot summer's day.

The reason why I was so impressed with the work was that the main thrust of the assessment was centred on the economic cost of crime.

A very strong case for the economic costs associated with crime at many different levels was made; from domestic crime, to child abuse (fatal and non fatal) and violent crime like rape and murder.

These costs were separated between "tangible costs" and "intangible costs": Tangible costs consisted of victim costs, criminal justice system costs and crime career costs. Intangible costs factored were with regard to the pain and suffering costs and corrected risk of homicide costs; or, in other words, the costs associated with crime and violence prevention.

Elaborating point for point on each assumed variable would be too long and cumbersome for this article. So I won't. I just won't. I can't, even if I wanted to. Don't be angry with me, but I really want you to stay awake during this op-ed.

The 2010 study by McCollister found that, in America, $9 million was estimated as a value of economic losses as a result of one murder over the course of the life and working expectancy of both the criminal and victims. This, of course, is a means average. Murders cost more than burglary, rape more than pickpocketing, etc.. This is understood!

Without saying, we can't compare US costs to Bahamian costs, or the US to any other developing country for that matter. But if we scale down to relative size by virtue of GDP, taking the methodology as is, we can see what that $9 million dollar figure per murder can look like in The Bahamas; even bearing in mind the differences in the way criminal investigations are treated, the differences in the legal system and the lack of personal protection and handguns for citizens.

A figure of $423 thousand per murder committed in The Bahamas was estimated. This is 20 times the GDP per capita for the Bahamas. If we take into account the highest recorded murder count of 127 in 2011, we would have something like $53 million. 

This is below the regional average for Latin America and Caribbean, which is somewhat good news. But with the murder rate being extremely high, and with a small economy relative to other countries,  I am reminded that, at times, statistical representations can give you the wrong impression of the facts, if interpreted incorrectly.

Let's also look at the total amount of crime incidents reported for the year, 2011. As reported in the "Bahamas 2012 Crime and Safety Report", there was 11,951 cases of hard crimes reported in 2011. These crimes include assaults and murder as a result of both domestic and non domestic violence.

If we add the amount of child abuse cases reported for that year, 636, we can move closer to the methodological criteria that the researchers used. Also, if we take into account "white collar crime", a total of 448 reported in 2012, and assuming that the differences are negligible between 2012 and 2011, we have a total of 13,305 cases, or thereabouts, of total crimes reported.

If we were to take only robbery, at a total cost of $9.5 million dollars and rape at nearly $15 million dollars, add it to the total cost of murder at $53 million dollars and after calculations, we would have some very interesting figures to play with.

Unless you haven't already totalled, the amount is well over $77 million dollars in economic value and the subsequent welfare losses of victims as a result of the amount of those crimes committed over time. That's nearly 1% of Bahamian GDP!

This multi-million dollar figure amounts to nearly $2 million dollars a year of future earnings lost if we take into consideration the working age expectancy of 40 years. That's 25% of the budget allocated to the Royal Bahamas Police Force.

With an average inflation rate of just over 4 % per year in The Bahamas, by the 40th year an estimated $9 million dollars would have been lost over time if crime statistics remain constant.

This is not to say that we are losing $2 million dollars a year of GDP, just that $2 million dollars per year of economic activity we are projected to not having, and will not have for the future from just one year of crime.

This also does not take into account the already compounded economic losses of crime before and after 2011, which also needs to be factored in. Continue to calculate per year, the value we have already lost and expected to lose, the figures would be astronomical if we take the average from previous years and project crime rates for following years.

The most startling thing is that this is just representative of crimes against a person or business, and not state-crime: For example, tax evasion, false declarations to revenue agencies like Customs and the National Insurance Board, documentation fraud and the like. My word!

Setting aside the dollars and cents of it all, loved ones that were lost and how it affects their family and friends can never be quantified. My deepest sympathies for those grieving and dealing with loss. No amount of money can replace a loved one. Ever!