Assessing FINSAC
Published by www.jamaicaobserver.com on Jan 23, 2008
Jan 23, 2008

Newly appointed, and highly respected, Minister Don Wehby is quoted in the Observer [January 10, 2008] as saying: "The Finsac experience is the worst disaster to happen to any economy in this hemisphere".

The Jamaica Gleaner [January 13, 2008] then followed with an editorial saying that : "The Government bail-out, which guaranteed depositors in failed banks all their principal and interest. pushed the national debt from 70 per cent of GDP to over 140 per cent".

As one who was a major player in the financial sector and who has written about its demise in With All Good Intentions: The Collapse of Jamaica's Domestic Financial Sector [1998] and The Entrepreneurial Journey in Jamaica : When Policies Derail [2004], I am writing to raise issues that should be considered in what the Gleaner claims is a lack of a "serious, intellectual and emotional debate of the events of the 1990's".

But first a correction is needed in the editorial on FINSAC. The editorial makes two major errors. It claims that the bail-out is limited to deposits in failed banks when in fact it was much more extensive covering life insurance companies.

The second mistake is that the bailout pushed the national debt to 140 per cent of GDP. This is incorrect. While Dr Omar Davies has exaggerated the cost of the bail-out by saying in his 2006 closing budget speech that the cost "approximately 40 per cent of GDP", published facts suggest that it is closer to 20 per cent.

This was the figure I calculated and stated in The Entrepreneurial Journey. Professor Damien King in The Evolution of Structural Adjustment [2007] also comes to the same conclusion that the ratio is about 20 per cent.

What I suspect is that Dr Davies has excluded receipts from the sale of assets taken over and has used compound interest rate to blow up the size of the bailout for political reasons - not the least of which is to mask his publicly admitted irresponsible expenditures in the penultimate election and his overall fiscal indiscipline.
We now turn to issues to be considered in assessing FINSAC. One suggested approach is for a cost benefit analysis be done, measured in both financial and
economic terms.

For non-economists, financial costs and benefits are measured in monetary terms-actual dollars. On the other hand economic costs and benefits deal with "real" costs and benefits and not just how much money is received and spent.

The biggest mistake of FINSAC was that it did not embark on any restructuring of the troubled financial sector but simply sold them off to overseas interests, including business and personal debts taken over. The approach taken in many countries that experienced similar problems was to pursue a strategy which arranged mergers, joint ventures and new capital for troubled financial entities.

I suspect that Minister Wehby was thinking of the real economic costs when he made such a scathing criticism of FINSAC. His reference seemed to focus on the adverse impact on entrepreneurship. And this would include not only those who spearheaded the "Jamaicanisation" and development of the financial sector, but would apply to all those businessmen whose bank debts were sold to a US debt collection agency which had no interest in saving enterprises. So many businesses just collapsed since they did not have their bank or any agency to work with them during the period of high interest rates and devaluations that drove them against the wall.

As businesses closed, workers were laid off, production fell and so did exports. These are real costs that are difficult to correctly calculate, not to mention the catastrophic message sent to the business sector and the country.

The response from investors was therefore to play it safe and buy government paper. The investment bias was shifted to trading activities to the neglect of longer term productive investments. Thus, entrepreneurship in productive activities was set back resulting in less investment, production, employment and economic growth.

Besides the negative impact on entrepreneurship and businesses, the fire sale of prized national assets will for future generations result in significant capital outflows as profits and dividends accrue to overseas interests.

Jamaica was already experiencing massive increases in imports and falling exports that adversely affect the balance of payments. FINSAC, by selling off the banks and insurance companies, greatly exacerbated the balance of payments problem. Not only would Jamaica be experiencing increasing trade deficits, but now it will have increasing capital outflows each year. These outflows will far exceed the initial influx of capital from the sale of prime national assets.

Any independent analysis of FINSAC must include both the financial and economic costs. Certain aspects of the financial costs and benefits analysis should not be difficult. It would be instructive to see a calculation of the inflows from the sale of the financial companies and the outflows by way of profits earned and attributable to overseas interests.

The operating cost of FINSAC and its massive expenditures on forensic auditors and attorneys and the financial returns from such expenditures should be quantified. Estimates of business closures, lost jobs and production would also have to be done to obtain some measure of economic costs.

It is suggested that a comprehensive financial and economic cost benefit analysis of FINSAC be undertaken so that the public can really assess how the country was served by this entity. Perhaps Wiberne Persuad of the UWI Department of Economics, who was a director of FINSAC, and who has written about the problem but without quantifying some of the relevant factors, can now undertake a proper research project with his students.

While we await such a study, whose terms of reference need to be clearly spelt out, I stand by my characterisation of FINSAC published earlier this year in the Observer. It was "disaster". This conclusion has now also been drawn by no less an eminence than the Minister without portfolio in the Ministry of Finance, Mr Don Wehby.

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