December 4, 2007

"Getting in the Way of Prosperity: The Seven Deadly Sins"
Keynote Address by David B. Cohen, Deputy Assistant Secretary of the Interior,
before the Annual Conference of the Island Government Finance Officers' Association
Honolulu, Hawaii

December 4, 2007

[Acknowledgements]

Thank you for inviting me to speak.  As always, it is an honor to be here with you.  Ever since I took this job in June 2002, we have been consistent in expressing the top two priorities for the Office of Insular Affairs.  Priority 1 is helping the insular areas promote private sector economic development.  Priority 1-A is promoting accountability, particularly for the Federal financial assistance that we provide for the islands.  Normally, when I speak before this group, I speak about Priority 1-A.  There is an obvious relationship between Priority 1-A—promoting accountability—and your jobs as government finance officers.  Today I would like to speak about Priority 1, because I believe that there is also an important relationship between your jobs and the urgent need to promote private sector economic development in the islands.

Why have we made private sector economic development Priority 1?  The reason is that in most of the insular area economies, there is an unsustainable imbalance between the public and private sectors.  In a healthy economy, a strong private sector creates jobs and generates income and wealth, which can be taxed at a reasonable rate to fund essential services for the public.  The private sector dominates the economy.  In many island economies, this model is turned on its head:  The economy is dominated by the public sector.  Since the public sector generally is a consumer and not a producer of wealth, this type of economy can only be sustained with outside subsidy.  I have referred to these island economies as being "upside down in the middle of the ocean".  These economies will have to get right side up in order to get their heads above water.

Many island economies have evolved in this manner for several reasons.  For one thing, island communities—and small island communities in particular—face unique barriers to private sector economic development.  These communities tend to have small populations, few resources and remote locations.  That means that they are heavily dependent upon transportation systems to bring people and goods to and from their islands, and that transportation is likely to be significantly more expensive than it is in more populated areas.  This, in turn, tends to make everything else on the island more expensive.  The cost of doing business is therefore high.

Many island communities are subject to destructive weather patterns, and in the salty ocean air, the climate often corrodes what it does not destroy.

There are cultural and historical forces in play here as well.  Pacific cultures, for example, are sharing cultures.  The philosophy is "what we have today, we share today".  Pacific cultures do not have the selfish gene that triggers the generation of wealth in a free market economy.  Sharing is a virtue and selfishness a vice, but enlightened self-interest has proven to a useful tool to enable societies to achieve a comfortable standard of living.

Ironically, the Pacific virtue of sharing, when combined with outside financial assistance, has helped to create the bloated public sectors that we see today in many island communities.  The island instinct is to share financial assistance from donors in much the same way that food is shared.  Since donors generally do not allow island governments to allocate their aid to people in the form of cash, they tend to allocate the aid in the form of public sector jobs.  More aid tends to result in more government jobs.  Since the Department of the Interior's Office of Insular Affairs provides more aid to the Pacific islands than any other U.S. agency by far, we have been, inadvertently, the greatest U.S. contributor to this phenomenon.

The result is not only an oversized public sector, but also a public sector mindset where government jobs are deemed to be provided for the benefit of the recipients rather than for the benefit of the public.  The public sector budget is not oriented to provide public service, but rather to provide public jobs.  This means that the public as a whole tends not to receive good value for public expenditures, and donors tend to get frustrated when we attempt to measure the performance of our assistance.

In many island communities, outside subsidies and other distortive policies tend to make government jobs significantly higher paying than private sector jobs.  This tends to encourage the islands' best and brightest to aspire to public sector employment and look down on private sector employment.  In some islands communities, the overwhelming majority of the indigenous workforce is employed by the local government and the lower-paying private sector jobs are filled almost exclusively by foreigners.  These communities become two-tiered societies where a largely unproductive local government workforce is kept afloat by outside subsidies and outside labor.  This type of arrangement, besides being economically unsustainable, can create tension within the society and give rise to a sense of dependence and helplessness in the indigenous population.

These problems tend to exacerbate themselves in a vicious cycle.  A society that cannot sustain itself without outside subsidy generally cannot afford to invest in education, health, infrastructure and other essential building blocks of a strong and prosperous society.  This lack of essential investment tends to weaken the private sector, sending the most talented locals overseas in search of opportunity and making the community more and more dependent on imported labor willing to work for lower wages.

These problems do not exist only in the islands.  Small island communities are particularly vulnerable to them, however.  These problems can be overcome by intelligent policy, strong leadership and a commitment to good governance.  Overcoming these problems requires the development and maintenance of a business climate that enables business to create jobs, to foster prosperity and to assume its natural role as the engine that drives the economy. 

That is where all of you come in.  All of you are responsible for executing policy, and as any sports fan knows, good execution typically is the difference between success and failure.  However, most of you also have sufficient stature within your local governments to have an important influence on the formulation of policy, and not merely its execution.  When your respective governments consider reforms designed to improve the business climate, you are likely to be involved in the discussion.  You might even be the driving force behind the discussion.  With so many things beyond your control, it is all the more important for you as government leaders in small island societies to act with wisdom and political courage to address the things that you can control.  Small island societies can successfully transcend their limitations, but there is little room for error.

One of the problems that I have observed with the relationship between the public and private sector in insular area economies is an inability of the public sector to get out of the way.  That does not mean that island governments should abandon their duty to regulate business in a reasonable manner.  It simply means that in some cases, government actions and failures to act needlessly obstruct economic progress.  I have come up with a list of Seven Deadly Sins that could cause island governments needlessly to get in the way of the economic advancement of their own societies.

I will introduce the First Deadly Sin by noting something that most of us love about the islands:  the unhurried pace.  I remember overhearing a Samoan man and a Mexican man talking to each other about their respective cultures.  The Mexican man said, "Mexicans are a hard-working people.  New immigrants come to the U.S. and take jobs that Americans won't take.  In successive generations, they work themselves up from the working class to the middle class and beyond.  Still, with some of my people some of the time, there's this culture of 'mañana'—tomorrow.  What needs to get done can wait until tomorrow."

The Samoan guy said, "Yeah, I think I know what you mean. In the islands, we always say 'fai fai lemu'."

The Mexican guy asked:  "What's that?"

The Samoan guy responded:  "Well, I think it's like your 'mañana', except without the sense of urgency."

I remember hearing Willie Kostka, a Pohnpeian who heads a conservation NGO in Micronesia, poke good-natured at his fellow islanders.  He said, "Haoles come to the islands and they see young men standing around and they think that islanders are lazy.  We're not lazy.  We're just patient."

Well, the First Deadly Sin on my list of seven what I will politely call the Sin of Patience.  Patience is indeed a virtue, unless one becomes excessively and discourteously patient with other people's time.  In business, time is money, and when government officials fail to act responsively in a timely fashion, it can drive away potential investment.  Businesses greatly value a bureaucracy's ability to process permits and licenses expeditiously and to respond quickly to inquiries and requests.

The Second Deadly Sin is the Sin of Complication.  Needlessly complicated, protracted, redundant and even contradictory permitting, licensing and other regulatory procedures discourage the formation and retention of businesses.

The Third Deadly Sin is the Sin of Competitiveness.  This sin occurs when the government sees a private company succeeding in a new type of business and decides that jumping into that business would be a good way to support its bloated public payroll.  This is likely to result in both the private company and the government ultimately failing at the business.  The private company is likely to fail because the government will not compete fairly.  The government will fail because governments are notoriously bad at running businesses.  The best way for a government to generate revenue from a profitable business is for it to get out of its way and tax it—reasonably.

The Fourth Deadly Sin is the Sin of Opaqueness.  Government procedures should be transparent in order to inspire the confidence and full participation of the private sector.  If good companies cannot be satisfied that they will be competing on a level playing field, they will stay away and the community will miss out on the capital, technology, know-how and economic activity that good companies can bring to the islands.

The Fifth Deadly Sin is the Sin of Favoritism.  Favoritism comes in many varieties, including nepotism, where one favors one's family; cronyism, where one favors one's friends; xenophobia, where one favors one's countrymen, and self-dealing, where one favors oneself.  By creating an uneven playing field, it scares away businesses that can bring good things to the islands.

The Sixth Deadly Sin is the Sin of Fickleness.  Businesses value consistency more than anything else.  There is nothing more frustrating than policies that constantly lurch back and forth, to and fro, with the political wind.

The Seventh Deadly Sin is the Sin of Arbitrariness.  Decisions made by government officials should be based upon objective standards applied consistently.  Government leaders who retain too much discretionary power are in a position to benefit themselves at the expense of their constituents.  It is best not to leave government leaders with too much discretionary power, as it is a strong invitation to abuse.

These sins are committed by government officials all around the world, not merely in the islands.  They are certainly committed all across the United States by Republicans and Democrats alike.  As I noted earlier, however, small island communities have a very narrow margin of error, and hence it is all the more imperative to avoid these sins.  Those who commit the sins of Lust, Gluttony, Greed, Sloth, Wrath, Envy and Pride should seek forgiveness from God.  Government officials who commit the sins of Patience, Complication, Competitiveness, Opaqueness, Favoritism, Fickleness and Arbitrariness should seek forgiveness from their own people.
We all know that island communities face many challenges.  It is important to remember that these challenges can be overcome.  They can only be overcome, however, if government leaders do everything in their power to discharge their duties with the highest degree of skill, judgment, integrity and vision.  Given everything that is at stake for the people of the islands, to do anything less than that would be a sin.

Thank you.