Professor Donald Harris of Sanford University, speaking at the first annual JJ Economic Forum in Kingston on Wednesday. - JIS
Donald Harris, economics professor at Stanford University, on Wednesday suggested that Jamaica's financial sector needed further reform to nudge its players into developing more innovative products instead of tying up their assets in low-risk government securities.
Harris, a Jamaican, is shooting for the emergence of a new cadre of financial experts willing to do more to build wealth for their clients, but under the watchful eye of regulators.
"We must proactively promote the emergence of new dynamic leadership within the financial sector who will themselves seek out profitable opportunities to channel funds into long-term productive investments, acting under appropriate regulatory oversight," said Harris.
"The sector has grown to be bloated and fat from feeding at the trough of public debt," he added in his presentation titled 'Towards an Export-led Strategy for Jamaica: Lessons from Experience with the speaker at the JCC annual economic forum Wednesday.
Harris' proposal was among 12 initiatives he suggested the government should undertake as it tackles the various problems facing the economy.
He did not specify the institutions but the Bank of Jamaica data at June 2009 reported $213 billion of investments held by commercial banks, near banks and private mortgage companies, compared to loans of $353 billion.
Commercial banks
Commercial banks alone had $158 billion of investments - mostly government-issued - or just about a hundred billion below loan portfolios valued at $259 billion.
National Commercial Bank of Jamaica alone had $77 billion of investments, compared to an $87 billion loan portfolio, the BOJ data showed.
Still, it is securities firms that are the chief designers of financial products, but even then, two of the largest brokerages are owned by the two largest banking groups, NCB and Scotia Group Jamaica.
Companies outside the banking industry such as insurance and securities dealers are no different, and although many of those balance sheets do not break out GOJ securities from others, they do have large values on their books for repos and other debt securities.
"It will be difficult to wean those elements of the private sector that have fed off of this largesse to move into more productive investments where the economic risks and management requirements are very different and more challenging," said Harris.
"If the symbiotic relationship between government debt and the finance industry has become dysfunctional for the economy as a whole, then reform of one side of this relationship necessitates reform of the other," remarked Harris as he proposed that a new type of leadership is needed in the financial industry, one that will drive more innovative products for the marketplace.
At the same time, Harris was also hard on public officials whom he said are responsible for creating and promoting the conditions for investors to gain these exceptionally high returns from government paper which is considered to be virtually risk free.
"I certainly hold no brief for the investors who succumbed to the easy inducements of the debt bubble. But I also think it is disingenuous for some current and former public officials be criticise investors for not taking risks," said Harris.
More specifically, he pointed out that the new leadership should seek to develop new mechanisms and instruments to deepen financial intermediation towards the long end of the spectrum, such as equity and venture capital, as distinct from short-term debt-financing.
Among the other immediate steps, Harris suggested the government should refresh personnel who hold top positions in the public institutions.
"There is no objective reason why the official director or governor of a government agency or statutory body should be allowed to hold on to that position for up to 15 or 20 years, and more, in some cases, before yielding it up to younger, highly qualified, aspiring candidates," he said.
sabrina.gordon@gleanerjm.com