Are we doomed to waste our oil and gas largesse? I ask this question after reviewing the underlying economic philosophy across the political divide in T&T.
During the discussion on the 2013 budget last year, I wrote under the heading, A Crisis of the Political Economy, the following: "After 50 years of debate, no clear consensus emerges for how our country should be developed and what are our priorities."
On one side there is a party that has more often than not sacrificed sustainable economic development on the alter of political expediency. In the process creating a dependency syndrome that positions this country for a level of social instability if the majority of subsidies and transfers were to be removed.
On the other side of the aisle stands a group with no clear philosophical underpinning regarding its approach to sustainable economic development. The end result is that T&T seems to be in a perpetual trap between the proverbial rock and a hard place.
Contrast this to the US where, at least in broad terms, there are clear economic differences between the Republican and Democratic parties. My point is that to govern, there must be an economic anchor across which one makes policy decisions, as this should guide the process through which competing demands are met and resources are allocated.
A clear example of our path to nowhere is the recent announcement of low interest loans for home purchases.
The programme, as I understand it, is for citizens earning less than $8,000 per month. It comes with a zero downpayment and a two per cent rate of interest that is reviewed every five years to purchase a state-constructed house for up to $450,000.
At the time of this recent announcement by the Prime Minister (back on April 8), we went no further than the childish debate as to whose idea this really was.
The current administration lay claim to the plan based on the announcement, a noted political activist claimed credit via the social media space and, of course, it should have been common knowledge that this proposal was made by the Patrick Manning administration during a budget presentation.
Whose idea it is as opposed to whether it makes sense and what are the alternatives is the subject of debate and we wonder why, for all our oil and gas riches, Barbados scores higher than us on many of the human and social indices associated with national development. Clearly, we don't get it and our governments are a reflection of us as a people.
Spending
On July 26, 2012, I wrote for the second time and will now repeat for the third time the views of noted economist the late Milton Friedman on how money is spent.
1. All of us have experience with spending our own money and spending it on ourselves. According to Friedman, in this situation, you are most likely to be interested in getting the best quality at the best price (value) as you are spending money that you have earned on yourself.
2. The second way is to spend your money on someone else, for example, in the form of a gift. Here you are still concerned about price, but may not be as concerned about quality since you are not the ultimate consumer.
3. Next is using other people's money on yourself. Friedman gave the example of a company expense account. You may not be too concerned about the price as it is not your money, but you will ensure that you get value as you are the consumer.
4. The fourth and final way to spend money is when people spend other people's money on other people. This is essentially the way that government spends money and it is considered the most inefficient form of spending because the spender of the funds have no interest in ensuring it is being spent efficiently and the good or service is being received after the funds have been spent, so the recipient has no input into what constitutes quality.
Sub-standard quality housing
So we have a housing programme in T&T spanning both sides of the political divide where the State constructs houses and then provides a subsidised loan for persons to purchase these same houses. If you juxtapose this scenario against item number four above, you are likely to get houses that are constructed in a sub-standard manner and persons unwilling to at any time pay a commercial price for something that is sub-standard.
Now reflect on the issues surrounding State housing from the 1970s to today and see if it is not painfully obvious why we are where we are as far as this issue is concerned.
Further in the realm of personal financial planning, people are advised not to put all their eggs in one basket, but to diversify their risk across a broad range of assets in order to ensure some measure of financial stability. Yet the reality is that purchasing a house goes against every personal finance principle as it is a single large investment using huge amounts of debt spanning much of a person's working life.
Purchasing a house on standard terms and conditions is, therefore, a huge risk and while it may be one that can be tolerated by more affluent people, it should not be a risk taken by lower income people all other things being equal.
The problem is that in trying to bring relief to those who are less able to afford, we do so via transfers and subsidies, essentially invoking point four above, which leads to inefficiency and waste. Yet, if we were really interested in getting value for money and a sustainable approach to development, our focus should be on policies attuned to points one and three above.
Goal aligned
One example of how this can be accomplished in a housing context is via the shared appreciation mortgage.
Here the borrower (home owner) is offered a lower rate of interest, but there is a contingency where the lender participates in the capital appreciation on the property when it is sold. If, therefore, a $500,000 home is sold for $1,000,000 in 15 years, then under this plan with a 20 per cent contingent profit, the home owner pays over to the lender 20 per cent of $500,000 (profit) or $100,000 when the property is sold.
Under this approach, a few things begin to change.
Firstly, the State as the entity constructing the house has a vested interest in ensuring quality workmanship since this will impact the resale value in times to come.
Secondly, the low income home owner is incentivised to utilise the difference between the low interest and market interest rates to maintain the property in order to realise their benefit from the sale.
Thirdly, at a social level, the home owner would also be interested in ensuring the neighbourhood remains intact and improves as this will have an impact on the value of the property in years to come.
The last point deals with some of the issues associated with crime and community policing, etc. When a community has a collective economic interest in keeping criminals out and preventing its constituents from turning to crime, then a huge bridge is crossed. Overall, people come to understand what a true ownership stake really means and are likely to act accordingly.
For the lower middle class, this programme can be modified where the person actually builds their house and then enters in the shared appreciation mortgage. This takes us to point one above and is the most efficient way of spending money.
Overall, the State now mandated to manage the economy, so that there are no huge boom-and-bust cycles as these will affect property prices with no profits to be earned in the bust cycles if houses are sold at a loss, negatively impacting potential voters. Then, of course, there is the issue of sustainable employment to ensure payments are properly made and homes maintained.
I am not in any way suggesting a shared appreciation mortgage is some magic bullet on the path to economic prosperity. What it does is to illustrate the point that when we have more people in our society with common economic interests, then we are more likely to get people working together towards the common outcome of nation building.
Consistent policy anchored to market forces is a better approach to governance than the knee-jerk economics of the past 50 years where, often times, economic policy is crafted by a speech writer the night before a statement on a political platform.
Will we ever get it?
Ian Narine is a broker registered with the Securities and Exchange Commission.
