In Ponzi's image/A imagen y semejanza de Ponzi/A l'image de Ponzi.
What explains the proliferation of Ponzi and similar financial schemes and scams which overtook Jamaica in the last decade? The explanation offered in this article points to change in the structural and institutional environment that effectively created the conditions for scares to flourish. The short story is one in which neoliberal globalising forces refashioned the country in Ponzi's image.
?Que explica la proliferacion de esquemas financieros Ponzi u otros de naturaleza similar; o las estafas que han permeado Jamaica en la ultima decada? La explicacion ofrecida en el presente articulo alude al cambio en el entorno estructural e institucional que ha creado condiciones ideales para que proliferen las estafas. Este cuento corto trata sobre la manera en que las fuerzas de globalizacion neoliberales han redisenado el pais a imagen y semejanza de Ponzi.
Comment expliquer la proliferation de Ponzi et d'autres plans et arnaques financiers similaires en Jamaique lors de la demiere decennie? L'explication avancee dans cet article pointe des changements dans l'environnement structurel et institutionnel qui ont effectivement cree les conditions pour que les escroqueries fleurissent. La version courte de l'histoire est celle ou les forces mondialisees neo-liberales ont redessine le pays a l'image de Ponzi.
Peter pays for Paul
History is replete with the names of scammers and fraudsters from the financial world. In this history Charles Ponzi stands head and shoulders above all others. It was Ponzi who gave his name to the type of scare that preoccupies this article. A Ponzi scheme is a financial arrangement whereby the scammer funds unusually high returns to older investors by using the funds from new investors in the scheme; i.e. one robs Peter to pay Paul. The key to success is an ever-increasing number of investors. As long as there are sufficient new investors to meet payment obligations to the old, the scheme works well. Ponzi's financial strategy was to purchase discounted postal reply coupons in foreign countries and then redeem them at face value at home in the United States. In so doing he promised a 50% return on money capital within 45 days (100% within 90 days). As the world was to find out, "Ponzi was taking the money of new investors and paying it to the old ones" (Pressman 2008).
If Charles Ponzi is the father of all such schemes and arrangements, the mother (so to speak) must surely be Bernard Madoff. On 11 December 2008, Madoff was arrested for perpetrating the world's largest recorded financial fraud in the form of a US$65 billion Ponzi scheme. (1) Madoff pleaded guilty to his crimes and was subsequently (in June 2009) sentenced to 150 years in prison. According to the acting US Attorney, the size and scope of the swindle deserved the maximum penalty that the law could render (Arvedlund 2009, 2). What makes the Madoff case all the more intriguing is that it is generally held that Madoff administered the scheme over a period spanning 20 to 30 years. In that time the hedge fund regularly recorded returns of 15% per year for its investors. In pleading guilty he actually deprived us of a close look at the workings of his scheme. All he would tell us was:
When I began my Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. I am here today to accept responsibility for my crimes by pleading guilty and, with this plea allocution, explain the means by which I carried out and concealed my fraud ... I always knew this day would come. I never invested the money. I deposited it into a Chase Manhattan bank (Arvedlund 2009, 3).
Why and how do these schemes and these fraudsters so often and so easily recruit investors of all types (rich and poor), into schemes and arrangements that in hindsight and with retrospect always appear too good to be true? Furthermore, what do we make of the case of Jamaica, which, in the last decade alone, saw more than twenty such schemes within a small population of 2.8 million? (See Box I for a listing of known Ponzi schemes in Jamaica between 2002 and 2009.) We know that these schemes occur all over the world, (2) but exactly why should Jamaica provide such a fertile breeding ground for a growing number of fraudsters and their various Ponzi-type arrangements? Pressman (1998) raises similar questions with regard to the operation of these schemes in the countries at the centre of world capitalism. My questions are asked in relation to the tiny island of Jamaica, which is very much at the periphery of the global system of production and distribution.
The economist writing on the subject of Ponzi schemes faces several problems. First, there is no established theory with which to underpin the article. The neoclassical story is an unconvincing one. By assuming rational agents, neoclassical economics in effect assumes away the problem. (2) Which rational investor would expect to double or triple her return in as many months? The traditional explanations couched in terms of greed or of neoclassical economics that posit, " ... asymmetric information in a world of calculable risk" cannot suffice. High returns should alert the investor to the presence of greater risk. That would mean (so the story goes) that investors ought to ask for more information. But that is not what we see; there are numerous accounts of investors desperately seeking entry to schemes. Further, what tools would the investor use to calculate the exact probability that she is giving her money to a scammer and is about to be defrauded? (3) In the neoclassical framework, Ponzi schemes and such scams would be anomalies and there is no way to explain the Jamaican experience during the last decade.
Box 1: Jamaica's high-yielding schemes (2002-2009) A3 Union Caribbean Real Estate Investment Fund, a/k/a CAREIF Cash Plus Group Higgins Warner Music and Entertainment Image Consultants Kingdom Investments Unlimited International a/k/a KIUI MayDaisy E-Partner Plan Club Nipo Farms OLINT Corp. Limited Overseas Locket International Corp Partner Financials Right Vision E-Partners Members Club SGL Holdings Strategical Alliance Investment Company Swiss Cash USIMO Wealth Builder and Associates World Wise Partners Limited Source: The Daily Gleaner
The theory that underpins this work is heavily reliant on Hyman Minsky's (1975; 1982; 1986) reinterpretation of Keynes (2006) and the institutionalist insights of George Beckford (1972) and Susan Strange (1986; 1998). The article is therefore not an exercise in regressing one variable upon another so as to prove a hypothesis. I adopt an inter-disciplinary political economy framework to investigate how structural and institutional change can help to create the conditions in which Ponzi arrangements can flourish. In the spirits of Hyman Minsky and George Beckford, I make no claim to legitimacy, leaving it instead for the reader to decide. The explanation offered in this article points to global structural and institutional change interacting with a local value system to induce changes in the behaviour of agents at the local level.
For analytical purposes I have divided the globe into two, the centre and the periphery. This of course is the language of the dependencia school of the 1960s and '70s. I use it because I find it the most appropriate for the story that I tell. The world is one capitalist world; at the centre are the countries of the north--typically affluent, well-endowed with modern technology, where the multinational companies are headquartered and to which profits flow. At the periphery lie the countries of the south. Typically poorer, they lack modern technology, and normally play host to multinationals involved in the extraction of profits. In general, the relationship is an exploitative one in which profits and resources (including the human) flow to the centre from the periphery. It goes without saying that Jamaica is in the periphery and that local agents perceive life chances to be much better at the centre. The usefulness of this distinction is that it places power at the centre and emphasises the idea, " ... that the underdeveloped countries are in important ways controlled by the North Atlantic" (Beckford 1972). It serves further to underscore the power of the centre to effect change in the periphery.
Another point of emphasis in the article is the breakdown of the Bretton Woods system for monetary arrangements in 1971. Without the gold/parity anchor, exchange rates became subject to the risks associated with uncertainty. The responsibility for managing the risks therefore passed from the State to private agents in the financial markets (Eatwell and Taylor 2001, 12). This is very much where the story starts. The end of Bretton Woods unleashed three interrelated ongoing processes on the global economy: privatisation, liberalisation/deregulation and financial innovation. Together they comprise what has come to be known as financialisation of the world economy. Financialisation can be understood as a " ... pattern of accumulation in which profit-making occurs increasingly through financial channels rather than through trade and commodity production" (Krippner 2002). Kurtzman (1993, 60-61), in Nesvetailova 2007, 11) observes, "Nixon transformed it [the dollar as a real symbol of tangible wealth] into something totally new, a currency without any underlying value whatsoever and without any limitations on the government's (or private sector's) ability to create it."
In this article, that is a crucial insight--to divorce real tangible wealth from underlying value is a first foundation stone in creating the theoretical space for Ponzi schemes to flourish. The rest of this article is arranged as follows: The first part examines the financialisation of world capitalism and its effects at the global level. Next there is a brief description of events in Eastern Europe during the period in which it experienced its own epidemic of Ponzi schemes. The idea here is to emphasise the sudden and abrupt marketisation of the social relations and the concurrent roll-back of the State as facilitating factors in common with the Jamaican experience. Then I examine the Government of Jamaica's macroeconomic policy response to the financialisation process. I also analyses the way in which financialisation is experienced by the agent and how such an event may cause change in social and economic behaviour. The paper then concludes.
Financialisation: Global change from the centre
When the Bretton Woods system broke down in 1971, three interrelated processes were unleashed--privatisation, liberalisation and financial innovation. Together they constitute a financialisation of the world economy. As Vasudevan (2009) observes: "The basic principle of financialisation is the transformation of future streams of (profit, dividend, or interest) income into a tradable asset like a stock or a bond." According to Epstein (2001), "It reflects the systemic power and importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international level."
Dumenil and Levy (2010), Harvey (2007), Thomas (1989) and others have identified the 1970s as a decade of transition to what may be considered a different form of capitalism. In Thomas (1989, 331), the '70s marked the emergence of a "fundamental disjuncture" in the development of the capitalist world economy that could only be rejoined by a restructuring and the fashioning of a qualitatively transformed world economy. I do not think Thomas overstates the case when he affirms that the reforms of the period induced profound change no less significant than that of the first industrial revolution. (4) What came out of the '70s and the '80s was a financialisation of the world economy that insisted on:
a. The removal of all trade and capital barriers
b. The removal of subsidies and all forms of trade protection
c. The establishment of freely floating exchange and interest rates
d. The downsizing of the State apparatus.
These have been the chief policy features of the project over the last 30 years. What results is the dominance and primacy of markets in everyday life. The other important feature of the period, as any review of the macroeconomic statistics for the period will show, has been the growing importance of consumption and household debt in economic activity. Consumption and consumerism (consumption in its ideological guise), financed by increasing household debt, became the moving spirits of the late twentieth century. Comaroff and Comaroff (2001) argue that during the same period there was a "concomitant eclipse of production". According to the authors, this change heralds paradigmatic shifts in the ordinary understandings of the nature of capitalism. In particular, "The workplace and labour, especially work and place securely rooted in a stable local context, are no longer prime sites for the creation of value or identity" (Sennett 1998). The factory and the shop, far from secure centres of fabrication and family income, are increasingly experienced by virtue of their erasure; either by their removal to an elsewhere, where labour is cheaper, less assertive ... Less taxed, more feminised, less protected by States and unions--or by replacement at the hands of nonhuman or "nonstandard" means of manufacture.
C.Y. Thomas (in MacEwan and Tabb 1989, 332-33), writing from the point of view of the global south (the periphery countries) observes a different aspect of the same phenomenon. In his words the eclipse becomes a delinking, where primary production has become "delinked" from industrial growth. Moreover, the situation is particularly marked in respect of industrial output compared to material input. Taken to the logical conclusion, employment expansion in the centre countries becomes delinked from any growth in manufacturing.
Production now "appears to have been superseded, as the fons et origo of wealth" (Comaroff and Comaroff 2001, 9). The control over such things as the provision of services, the means of communication, and above all, the flow of finance capital, all reveal themselves as less tangible ways of generating value (Nabudere 2009). In particular,
The spiraling virtuality of fiscal circulation of the accumulation of wealth, purely through exchange, exacerbates this tendency; it enables the speculative side of capitalism to act as if it were entirely independent of human manufacture" (5) (Comaroff and Comaroff 2001, 9).
In the global south what has been striking is the retreat of the State as an agent of social change (Thomas in MacEwan and Tabb 1989, 336). "Gone is any official speak of egalitarian futures, work for all, or the paternal government envisioned by the various movements. These ideals have given way to a spirit of deregulation, with its taunting mix of emancipation and limitation" (Comaroff and Comaroff 2001, 9). Thus, the rise of the market and the retreat of the State means that at the micro-level agents are increasingly driven by the imperative to replicate money and at the aggregate level, the new global system treats people as a source of inefficiency--ever more disposable (Korten 1996; Bryan and Rafferty 2006).
There are six structural aspects of the change in the basic structure of production and consumption and in the character of contemporary capitalism that are material to the construction of the theorisation in this essay that I have taken from Comaroff and Comaroff (2001) and Thomas (1989):
1) By undermining the capacity of States to sustain economies in which "production, plant, firm and industry were national phenomena" (Hobsbawn 1979, 313), it renders obsolete the old system of bargaining in which labour and capital could negotiate wages and conditions within an enclaved territory.
2) By subverting domestic production in industrialised countries, it encourages the cutting of labour costs through casualisation, outsourcing and the hiring of discounted (female, immigrant, racinated) workers, thereby either making blue-collar employees redundant or forcing them into the menial end of the service sector.
3) By widening the gulf between rich and poor nations, it makes the latter--via the export of labour or the hosting of sweatshops and malquiladoras--into the working class of the former.
4) By reducing proletarians everywhere to the lowest common denominator, it compels them to compete with little protection against the most exploitative modes of manufacture on the planet.
5) Development of information technology has reached a point where all shades of opinion comment on the unprecedented degree of villagisation of the global economy. The most striking consequence is the growing hold of the consumerist culture of the West. Indeed the only significant area of self-conscious rejection of this trend is located in present-day Islamic appeals. The transition therefore is strongly associated, both as cause and effect, with a historically unprecedented global homogenisation of consumer goods, services, finance, and even the institutions and instruments of economic management.
6) On a global scale, the contradictory development of bureaucracy in the face of ideological assaults on the State is another noteworthy feature of the transition. This development includes, first, a burgeoning growth of corruption, which has reached such staggering proportions that some social scientists see it as an "independent productive factor". A second factor is the growing informalisation of wide areas of economic activity across the world: it is estimated that one third of the labour force in the OECD countries operates substantially in the informal sectors. A third factor is the unprecedented impact of the international bureaucracy of the national management of economic systems in the periphery (the IMF/IBRD syndrome--IMF being the International Monetary Fund and the IBRD being the International Bank for Reconstruction and Development, now known as the World Bank).
These are the changes in global capitalism that feed the Ponzi phenomenon at the local level in Jamaica and the wider Caribbean. At the local level the Ponzi phenomenon is explained as a case in which, "complex poetically rich, culturally informed imaginings" come " ... between structural conditions and subjective perceptions". Here in the Caribbean there was an embrace of the Ponzi idea and as the schemes grew the local imaginings multiplied and waxed more ethereal and more fantastic. The Ponzification of the region is in this article presented as a consequence of the delinking of real production from the generation of value. Faced with circumstances in which economies are characterised by the absence of any engine of growth in the real economy, the separation offers an opportunity to develop an industry entirely geared to the circulation of financial paper; (6) Ponzi's are then but one small step.
Ponzi schemes in Eastern Europe: The retreat of the State
The story--as told in this article--is one of historical forces determining the institutional environment, with key institutional features imposing particular structural constraints that limit the possibilities for growth, employment and development. (7) Further, it is the institutional setting and the Government of Jamaica's policy itself that in part explain the rise in the number, size and scope of the various Ponzi-type schemes that proliferated in Jamaica between 2002 and 2008.
In East and Central Europe, where transition/post-socialist countries had experienced their own waves of Ponzification ten years earlier, the schemes were, as in the Jamaican case, supported by government officials and prominent executives. One of the biggest boosters of the Caritas scheme in Romania was the Mayor of Kluj, Gheorgh Funar. Although he was not an executive of the Caritas group, the Mayor managed to have Caritas pay for a series of renovation projects in the city. (8) In each case, events have followed a similar pattern. Early customers would reap huge profits, quickly fuelling excitement that in turn generated new investors. But as in all pyramid schemes, the first investors were simply being paid by money from the later investors. As soon as it became impossible to generate enough new investors, the schemes collapsed.
How are we to view the various schemes and clubs? What explains their existence and their ability to plant roots and multiply in a relative short space of time? Ponzi, pyramid and other such scams, which from time to time engulf various nations, ought to be seen as responses to uncertainty. In both the Eastern European and Caribbean cases, the uncertainty comes directly from the sudden and abrupt marketisation of social relations. In Eastern Europe, the Berlin Wall simply came down and from one day to the next the countries became market economies. In hindsight and with retrospect, it is clear now that the faithful decision to push through neo-liberal policies could and should have been introduced more gradually over a longer period of time. As it was the policy change was sudden, abrupt and acted as a shock, with tremendous dislocation to the economy and society.
In both the Eastern European and Caribbean cases the activities of the State were abruptly scaled back in favour of the operation of market forces that were largely a mystery. The schemes are in this way the outcome of the uncertainty associated with this change. In Jamaica's case the uncertainty was also an unintended consequence of government policy, in that the neo-liberal project has sought to transform the world into an unencumbered casino; it has demanded contraction in the size and scope of the State's activity and sphere of influence (Strange 1997). Thus in Jamaica's case we ended up with a casino without a dealer. Without regulation, without the exercise of State power, and in the absence of strong institutions of civil governance, the market system as it unfolds at the local level becomes ripe for Ponzification. At the very minimum when the agent is fed a healthy dose of inflationary expectations and government paper with interest rates of 40 percent and 50 percent, it is but a small step for others to offer similar financial paper at 60 percent and 70 percent* This seems to be what transpired in Jamaica.
The underlying notion in this essay is that fraud as expressed by the Ponzi scheme phenomena should be traced from the institutions of the market system. Along the same lines we ought to note as an immutable truth of human existence that
... the future economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold. Uncertain government action, unknown corporate and individual behaviour, all make for an uncertain, unknown future" (JK Galbraith 2004, 39).
To assume otherwise is, in truth and in fact, the start of the fraud, and this of course would apply in equal measure to Wall Street consultants as it would to gypsy fortune tellers.
The Government of Jamaica's (GOJ) response to financialisation
Looked at from the point of view of the Caribbean, financialisation is an external source of change. What are the internal sources? In following Beckford (1972), the focus in this section will be on the institutional setting. In the Jamaican context, Jefferson (1999) identifies the aspects of the institutional environment which are important for our purposes, such as:
1. Political tribalism;
2. Trade union rivalry that tends to foster indiscipline at the workplace, thereby inhibiting both domestic and foreign investment;
3. The absence of a sufficient number of dynamic entrepreneurs;
4. Bureaucratic inertia which stifles rather than promotes entrepreneurial activity;
5. The inadequacy of critical social and physical infrastructure;
6. High levels of crime that are a disincentive to investment.
These are generally the reasons that the various theorists and experts give for the poor growth and employment performance (see Table 1) of the Jamaican economy. (9) These are the fissures if not created then exacerbated by the years of structural adjustment, liberalisation and, more recently, globalisation in the Jamaican society. I start from the premise that the entire institutional setting is framed by a tortuous history that predisposes the agent towards speculative activity. (10)
The macroeconomic data in Table 1 speaks to poor, weak performance in employment and in GDP growth. Over the period unemployment hovered between 15% and 16% of the labour force, with a declining participation rate. GDP growth over the period was stagnant and year after year the population increases. Government of Jamaica (GOJ) economic policy has not been able to lift Jamaica out of its morass, prompting Robotham (2001, 69) to give this description: "It is an unproductive economy ... the economic cupboard is bare." A bare economic cupboard, with socially fatigued economic actors, predisposes the social system towards Ponzi penetration.
Fostering inflationary expectations
With the liberalisation of the exchange rate regime in 1991, the Jamaican dollar was supposed to float freely and find its own level, based on demand and supply in the market. Table 1.2 and Fig. 1 tell the story. Inevitably the currency started to depreciate. The speculators weighed in and pushed the currency further southward. Because of the dependency on imports, the price of almost everything (including basic commodities) started to rise (rice, salt-fish, mackerel, electricity, gasoline). For the People's National Party (PNP) Government, with the bitter memory of the 1970s (11) imprinted upon its psyche, "price rises were synonymous with a loss of power". (12) When inflation reached 80% in 1994, the die was cast.
[FIGURE 1 OMITTED]
The currency had to be protected at all costs, and protected it was.
The main economic task of the government was to tame the devaluation beast and so to halt what had then become the entrenched public expectation of continuous increases in the cost of basic goods. Targeting the exchange rate therefore became the thing to do as a means of drastically cutting inflation, stabilizing the cost of living and ensuring political support for the government (Robotham 2001, 70).
Interest rates were increased and they remained at extraordinary levels for the next seven years. As a result, there was a massive and unprecedented build-up in the Net International Reserves (NIR). According to King (2005), the NIR increased from a negative of US$443 million to US$ i billion over the period (King 2005, 10). Real interest rates were increased to such an extent that holders of hard currencies were induced to convert their holdings into Jamaican dollars, thereby earning for the holders rates of return over and above that which pertained to US dollars, pounds sterling or Canadian dollars. At one time in the 1990s this was the biggest game in town. (13) The increased Jamaican dollar liquidity resulting from the conversions was then borrowed by the Government through its securities issues at rates that private capital could not afford. Thus, the Government of Jamaica, with the single objective of defeating inflation, also found itself in massively win-win circumstances. Yet Jamaica itself and the people of Jamaica were undoubtedly worse off. The government unleashed powerful forces of finance capital on the economy by which the local currency was supposed to have found its own depreciated and competitive level. Confronted by the reality of price rises and a possible loss of power, the government then sought to shore up the currency by keeping real interest rates at an extraordinarily high level for an inordinate length of time. The cost to the country was substantial.
The conduct of the government's macro-economic policy in the period resulted in three main consequences:
1. Like many of the countries who became suddenly subject to the discipline of the market system, Jamaica had its own banking crisis in the mid-1990s. The banking crisis had the effect of wiping out fledgling indigenous Jamaican banks whose cost of funds skyrocketed in the period. Wint (2005) only tells part of the story when he attributes the failure of the indigenous banks to weak management practices. Not a single foreign bank went under, so the Bank of Nova Scotia (BNS) and the Canadian Imperial Bank of Commerce (CIBC), with histories of over 100 years weathered the storm because they had long since cornered the most bankable segment of the Jamaican marketplace, where the cost of funds was low. In difficult times they could afford to discount the rates they paid on deposits because they stood on their hundred-year reputations. The relatively new Jamaican banks (Workers Bank, Citizens Bank, etc.), without such a history, had to pay much higher deposit rates. Moreover, when loan rates topped 40% and 50%, it was the Jamaican banks' customers (a fledgling black entrepreneurial class) who struggled to repay. Eventually, many defaulted and the Jamaican banks went to the wall. The conditions favoured the foreign banks--when faced with liquidity problems, the foreign multinational banks always had the option of borrowing from the overseas parent at significantly lower rates than their indigenous counterparts. They then converted their United States dollars, pounds sterling or Canadian dollars into local currency, shoring up their liquidity at discounted rates. Local banks had no choice but to go to the inter-bank overnight markets, where rates peaked at 120% at the height of the liquidity crisis in 1996. (14)
2. A massive upward transfer of wealth and income from the taxpayer to those who had the wherewithal to purchase GOJ debt security. Thus the issue of government securities resulted in a deepening of inequality in the society at large. The high interest rates of the period functioned as a disincentive to real investment. At the local level in Jamaica, one of the more profound changes of the period is that agents learned to accumulate wealth by doing nothing other than owning and trading financial paper. One accumulated money capital simply by buying and holding government paper. Alternately, one could bet against the Jamaican dollar. Whatever the case, "production" necessitating economic activity in the real economy was to be eschewed for the trade in financial paper.
3. A slowdown of investment in the real economy. Why would the rational investor risk an outlay on plant and equipment for productive purposes to earn a 10% or 15% return on capital when 40% per year could be obtained by purchasing and holding government debt? High interest rates here act as a disincentive to investment in the real economy but as an incentive/impetus for investment in financial paper. At these very high rates the government crowded out the private sector so that the whole market became a GOJ market. In totality, what emerges is a mechanism for the GOJ to borrow local currency in order to fund the defence of the exchange rate, while simultaneously providing a mechanism whereby one group of agents accumulates money capital at a rapid rate, courtesy of the GOJ-sponsored usurious rates.
From the investing agent's point of view, the question becomes increasingly how to use the market and its wealth-generating properties so as to offset the swings in the Consumer Price Index (CPI), which characterises the management of the local macro-economy. Economic management here preconditions agents towards inflationary expectations, along with high nominal interest rates. In the mind of the agent,
... Production appears to have been superseded, as the fons et origo of wealth, by less tangible ways of generating value: by control over such things as the provision of services, the means of communication, and above all, the flow of finance capital* In short, by the market and by speculation" (Comaroff and Comaroff 2001, 5).
In so doing, policy itself prepares the ground for Ponzi schemes to flourish.
The macroeconomic policy of the GOJ, which sought to construct a Jamaica driven by the market system, was premised on a faith in the prevailing ideology of the period. According to Hobsbawn (2000, 68),
This ideology (the neoliberal, free market ideology) is based on the assumption that the free market maximizes growth and wealth in the world, and optimizes the distribution of that increment. All attempts to control and regulate the market must therefore have negative results because they reduce the accumulation of profit from capital, and therefore obstruct the maximization of the growth rate.
The realignment of the market system resulting from the financialisation of the world economy is most tellingly experienced by Jamaicans through the depreciation in the US/Jamaican dollar exchange rate (Table 3.1). The foreign exchange rate is not only the currency that business is transacted in, it is the main channel through which the ideology is communicated and transmitted.
The exchange rate represents a binding structural constraint. In order to manage the exchange rate (and thereby the rate of inflation), the GOJ offered an ever-increasing mass of debt securities at extraordinary nominal rates that diverted money capital from investment in the real economy to the paper world of contemporary finance. In actuality, the GOJ issued promises to reward a class of investors at very high rates of return for no more than buying its paper.
Taking together the internal and external changes make for speculation. Inflationary expectations, along with fears of depreciation of the local currency, make for speculation against the currency. Uncertainty comes directly from the local government's macro-economic policy and from the sudden and abrupt marketisation of the social relations associated with neoliberal globalisation. In this context the proliferation of Ponzi schemes is explained as the logical outcome of these concurrent processes. In this way the disjuncture cited by Thomas (1989) and Comaroff and Comaroff (2001) becomes apparent. One no longer needs to labour to earn an income--one buys government paper and waits for its maturity date!
Lived economics in the periphery (15)
For the average Jamaican then financialisation has been experienced as a series of progressive shocks that make material reproduction harder and harder. Any government commitment to the provision of health, education and the social services has been progressively rolled back by the dictates of the new neoliberal order. Joined with the failure of the State to provide adequate security services, there is a very pervasive sense in which, "I am responsible for me, myself and I" emerge as the mantra of the period. According to Beckles (in the Barbados Advocate of 14 April 2012), 'Citizen versus country' is now the primary conflict; 'self versus society' is the form this conflict takes.
As the State has been rolled back, there has been a corresponding expansion in informal sector activities. Quantifying the size of the informal sector in Jamaica is difficult. Various authors have proffered estimates from one half to three-quarters of the GDP. My approach is somewhat different. I use three measures from the labour force statistics. First, those who are classified as not in the labour force; this category grew from 478,200 in 1991 to 592,000 in 1998 (Anderson 2001). According to Anderson, the most pronounced changes in the participation rate were found among persons under the age of 25. Second, "own account" employment increased from 27.6% to 38.9% of the employed labour force between 1991 and 1998 (Anderson 2001). And last, the own account non-agricultural self-employed group of the labour force grew islandwide from 155,248 to 184,000 persons (Anderson 2001). While not everyone in these various categories is involved in the informal sector, my assumption is that if one is not in the labour force there must be some alternative means to support life and limb which can only come from the informal sector.
Anthony Harriott (2003) has long maintained that there is a close connection between the growth in the informal sector and the rise in violent crime (specifically murder) in Jamaica. Thus, according to this line of analysis the expansion in the informal sector has led to an increase in violent crime. But clearly the road-side vendor selling cigarettes or the informal sector gardener who trims the lawns of the well-to-do cannot be included in that segment of the informal sector which is responsible for the multiple killings in x or y community that are all too frequent in Jamaican society. We need to make some distinction between the various segments of the informal sector. Fajnzlyber (2001) differentiates between the informal and the formal on the basis of taxpaying and tax-avoiding in an analysis of the OECD countries. My distinction is between that economic activity requiring group organisation and that which is criminal--the underground and the informal--that which is visible and can be carried on by the individual and is sometimes illegal (see Box 2).
The list is by no means exhaustive, neither is it hard and fast, because operatives in the informal sector often double up in the underground.
There is a very definite sense that everyone in Jamaica is engaged in some type of "hustling", which may range from a second job to something illegal and underground.
Box 2: Underground and informal activities Underground Informal Ganja distribution Selling of shoes/clothes and other goods Cocaine trans-shipment Selling of household consumer items Import of guns Car washing Extortion Taxi operators Money laundering Gardeners Illegal gas stations Ganja cultivation
These stories are regular and numerous and the last clipping gives us a sense of the potential profitability of these ventures, and certainly their monetary weight. J$62 million in annual sales is something that the small businessman selling car parts and kerosene can only dream about. It is obvious that an illicit gas station cannot exactly be hidden, i.e. it's hardly underground. Moreover, the overhead costs required to establish such an enterprise cannot be undertaken by the petty criminal. Such an enterprise requires a capital outlay beyond the reach of the hustler.
Box 3: Newspaper clippings "Higglers Selling Prescription "The illegal drug trade has left Drugs on the Street: Open air the health sector baffled about pharmacy on the sidewalks." how so many different kinds of prescription drugs could have found their way on the street side, and concerned about the health risk involved in the abuse of drugs." "Wired Up" Under the photograph of a single telephone pole with a spider's web of hundreds of wires leading away from it was the "headline:" The story proceeds: "This is one of many illegal wire connections in Majestic Gardens in the Kingston 11 area. The Jamaica Public Service Company estimates that there are 50,000 illegal wire connections island wide. Majestic Gardens is an inner-city community, but illegal connections are found in various forms in suburban and rural communities." "Thousands of drivers using "We are talking about illiterate expired licenses" drivers," Mrs. Ferguson admitted. She said drivers who have bought their licenses and avoided the standard examination can hardly be singled out as long as their original documents were signed by legal authorities and they passed the reading test. "If there is collusion at the depot, there is nothing we can do about that," she explained. "If the person can read, the department cannot tell whether the licence is bogus." "Illegal Gas Plentiful and Cheap" "It took a short 15-minute ride but within that time, the Sunday Observer, in an undercover probe of the thriving and lucrative trade, detected four illegal gas 'stations' in Greenwich Town alone, whose clientele ranged from taxi operators to the police. An 'attendant' at one of the outlets, believing he was speaking to a taxi driver, tells the Sunday Observer that, on a bad day, the outlet makes $150,000 to $200,000-which, assuming a six-day business week, roughly translates to $47 million to $62 million in annual sales. "Business," he adds, is most vibrant when regular market prices are fluctuating at legitimate pumps." Source(s): Sunday Gleaner of 21 June 2001 cited in Meeks (2001); Sunday Observer of 5 February 2006
According to Robotham, "It is common to encounter stories of persons who have achieved great material success by dishonest means but who are nonetheless treated by official society as pillars of the social order. The recent financial crisis and the revelations of the serious financial difficulties of politicians from across the political spectrum have greatly fuelled this already strong feeling. In this context the persistence of an increase in inequality, accompanied by severe impoverishment for the majority and a sense that the elites' wealth represents ill-gotten gain, is bound to breed bitterness and deep resentment among the deprived" (Robotham 2003, 207).
Thus as neoliberal globalisation shrinks the State and the social space which it occupies, the response coming from within Jamaica is a significant growth in the informal sector and underground economy entailing a corresponding change in attitude, which predisposes agents to breaking and bending the law in pursuit of economic gain.
In our story, it is the emergence of the Jamaican cambio sector which is the significant development. There had always been a group operating just below the radar whose business was the buying and selling of foreign currency, either on their own account for speculator purposes or at the behest of customers. This group operated not just on behalf of below-the-line customers in the informal sector and underground economy, but also on behalf of the biggest companies and banks on the island. Liberalisation of the foreign exchange regime in 1991 provided an impetus for the growth of this sector and this group of middlemen and women became pivotal. The Bank of Jamaica, the commercial and so-called investment banks, big and small business, were the source of an insatiable demand for foreign currency. What was needed was a supply or set of suppliers that would satisfy the demand. The Jamaican authorities turned to the middle men, those who for years were deemed to be involved in illegal underground activity, and legitimised the sector by issuing approximately 130 cambio licences, which authorised the holder to pursue the now legitimate business of buying and selling currency.
Why would the Jamaican authorities legitimise a group of agents whom they had previously deemed illegal? Why bestow licences that would facilitate this business and speed this group on its way to rentier profits? The answer is peculiarly Jamaican: the authorities needed the foreign currency that was available in Jamaica and calculated that there were far more US dollars, GB pounds and Canadian dollars than what was flowing through the official system. What was necessary was a means to these monies that would:
a. Reach into the informal underground economy.
b. Nullify the deep distrust that Jamaicans have historically shown for officialdom.
Thus, in a pragmatic move, the authorities licensed informal sector operators, created a new financial institution and raised shady operators above ground.
These events do not take place in a social vacuum. They are framed in a social context, and in this case the lesson being reinforced is that it does not matter what the agent does (legitimately or illegitimately); making money would buy power that in the long run would confer legitimacy.
Not only did the Bank of Jamaica (BOJ) legitimise a shady and dodgy group of agents, but it ensured that this group accumulated super-profits at a rapid pace via a curious pricing practice. The record of each day's foreign currency market transactions is captured in a daily newspaper report. The US$/J$ rate of exchange is reported as a weighted average of all the buying and selling rates of the various banks that made up the market. The big feature of the pricing arrangement was the "surrender" amount, which was payable to the BOJ at some rate determined by the BOJ. And because the surrender amount varied between 20 percent and 50 percent of total purchases, and because the BOJ would normally stipulate rates at the lower end of the spectrum, it had the overall effect of weighting down the overall weighted average price and giving the appearance that the J$ was much stronger that, it actually was. But the distortion went beyond this. In pulling down the US$/J$ rates, the arrangement caused significant and persistent misalignment of the cross rates between the US dollar, pound sterling, Canadian dollar and so on. In doing so, it made it far more profitable to trade dollars against sterling in the international markets. This, of course, is nothing more than arbitrage as practised in the more developed international currency markets. The difference is that in developed markets the profit margins are wiped out by the actions of the arbitragers themselves. Here, in the Jamaican case, such oppor-tunities for speculative gain were provided on a daily basis over several years by the authorities themselves. In this manner super-profits were built into the system and these profits flowed to the newly created cambio operators. In so doing the BOJ created a new class of agents who, over time, accumulated great wealth and influence.
Internal social relations and the schemes
Olint Corporation began operations in Jamaica in 2004. Between 2004 and 2006 investors in the scheme experienced returns on their money capital of 10% to 15% per month. On 3 March 2006, officers of the local Financial Investigations Department raided David Smith's Olint Corp Limited offices in the middle of Jamaica's capital, Kingston. According to the local newspapers, the agents were armed with a search warrant claiming that under Sections 7 (1) (a) and 8 (1) (a) of the Securities Act, breaches had occurred. They seized documents, records and essential computer equipment. "Section 7 of the Securities Act prohibits persons from dealing in securities without a licence issued by the Commission, while Section 8 restricts involvement in the business of providing investment advice without an investment advisor's licence" (Jamaica Observer 13 March 2006). At the time Smith claimed that Olint was not trading in securities, neither was the firm providing securities advice. Olint, according to Smith, was merely a private club whose sole business was to trade in foreign exchange in order to make a return for its members. This was the start of a protracted legal battle between Smith and the Jamaican authorities that culminated in Smith moving his operations to the Turks and Caicos Islands. In the end Smith was arrested and charged with money laundering and fraud by US officials. He is currently serving 30 years in a Florida prison. It emerged that the scheme involved around six thousand people, (16) with the scam being worth over US$220 million (TCI Weekly News 12 August 2011).
Cash Plus Group, the brainchild of Carlos Hill, started operations in 2002. It was made up of 125 companies in the distribution, gaming, real estate, telecommunications, entertainment, and security, industrial and financial sectors (Jamaica Observer 3 April 2007). The flagship was Cash Plus Ltd, which took deposits from investors and guaranteed a return of 10% per month. Depositors were locked in for 10 months after which they were free to redeem their principal. In 2008, after the company began to experience cash-flow difficulties, Hill was arrested and the company declared bankrupt by the authorities. In total there were more than forty thousand investors with approximately J$7 billion involved. (17)
At the height of the schemes both Smith and Hill were deified by Jamaican society. Hill was portrayed as a hero of the working class, from where he drew his investors, and Smith, a creative young entrepreneur who was making money from foreign exchange markets, was embraced by the middle class and the political parties. Both were doing what the established traditional banks would not do--give their customers a "fair" rate of return.
In Jamaica inflationary expectations, the roll-back of the State, the sudden and abrupt marketisation of social and economic relations in an unproductive, high unemployment context provided a ready breeding ground for Ponzi arrangements. There is one other facilitating factor that pertains--Jamaica's patron-client social relations. In the Jamaican context patron-client (or clientilist) relations are reciprocal social relationships whereby the patron bestows jobs, housing, protection, etc. upon the client in return for the client's allegiance and loyalty. In the post-independence period (after 1962) patron-client relations between the State, its institutions and sections of the urban poor emerge as the defining social relationships of the social system as a whole. (18) It was in part a variant of these relations that fuelled the deification of the personalities of Smith and Hill to such an extent where both (and Smith in particular) functioned as a "formal" patron for jazz concerts, the church, the political parties and for youth in general, through the Olint Foundation (established in late 2007). The patron-client relations identified by Stone (1983), Sives (2002) and others fed the phenomenon and gave it traction. Sives argues that patron-client relations among sections of the urban poor have undergone some change, with the patron changing from the politician to the drug don. She argues that clientilist political relationships are dependent not only on internal political, social, cultural and economic developments, but also on external factors. A similar argument is being made here; these relations are subject to change and at a moment when the authority of the traditional patron (the politician) is being contested by a new agent (the drug don), yet another actor, this time the Ponzi operator, enters the contestation process.
Recalling Jefferson's (1999) "political tribalism" as a determining force in Jamaican affairs, we note that in the General Election of 2007, both parties took money from Smith's Olint and Hill's Cash Plus. According to The Gleaner (19 April 2011), "The more profound consideration is that both solicited, and accepted, Smith's money at a time when there were already questions about the legitimacy of Olint. Regulators had been in and out of court with Smith, who was accused of operating an unregistered securities business." When the government and opposition parties operate in this way, there ought to be no small wonder that private agents would have added incentive to follow suit. Let it not be forgotten that when traditionally hostile political parties act in concert (as they have done in this case), there is a tremendous validating signal across the society.
Recall too that Jefferson cites the absence of a sufficient number of dynamic entrepreneurs and bureaucratic inertia (which stifles rather than promotes entrepreneurial activity) among the influential features of the institutional setting. Looking at the Ponzi phenomenon, I would argue that Jefferson ignores the informal and the underground economy. (19) It is in the grey and black sections of the economy that we find dynamic entrepreneurs and it is here that the bureaucratic inertia is resolved. The growth of the informal sector, its incursion into daily life and the visible "success" of the operators within it help to induce what is a relaxed attitude towards legality and illegality. Thus, what is important in the mind of the local agent is not whether Ponzi schemes are legal or illegal, but whether or not they provide the returns they boast. The operators are smart businessmen operating below the line because the official sector forces that upon them.
Institutions of the market system to answer for fraud
Ponzi schemes are generalised. They arise in disparate countries, from the USA to Macedonia, but whereas the amount lost in GDP is estimated at 0.3% and 3% respectively for the USA and Macedonia, in Jamaica this estimate ranges from between 12.5% and 25%. Box 4 shows the IMF's best-guess approximations of the amount lost in percent/GDP as a result of the operation of selected Ponzi schemes. Jamaica's estimated lost GDP is second only to that of Albania (79%). Even if, in actuality, the amount lost is a fraction of the estimates, in an environment where the economic cupboard is already bare, lost GDP is a luxury that Jamaica can ill-afford.
This article has sought to bring together understandings from various heterodox theorists to explain the Ponzi phenomenon from an institutionalist or structuralist perspective. The core of the argument has been that external change in the form of financialisation of the world system comes together with aspects of the local political economy to foster conditions in which Ponzi schemes proliferate. The underlying notion in this essay is that fraud as expressed by the Ponzi scheme phenomena should be traced from the institutions of the market system. In the end, the effects of an asset price bubble are remarkably similar to those of a Ponzi scheme, "where net profits accrue to those that enter and exit early", and latecomers lose out (Magnusson 2010). Asset price bubbles are the hallmark of the financialisation process, thus it is financialisation itself that spawns the proliferation.
Box 4.0: Speculative data on selected investment schemes Promised Years in Rate of Country Names Operation Return Jamaica Olint, Cash Plus, 2002-2008 6-20% per World wise, month Lewfam, etc., Grenada SGL Holdings 2006-2008 7-10% per month USA Madoff Investment unknown- 10-17% per Securities 2008 year Colombia DRFE, DMG etc 2005-2008 300% per six months Lesotho MKM Burial Society unknown- 60% per year 2007 Albania VEFA, Gjallica, 1991-1997 4-19% per Kamberi, etc month Macedonia TAT Savings House unknown- 4-5% per 1997 month Romania Caritas 1992-1994 800% per month Russia MMM 1993-1994 7,000% per six months Peru CLAE 1978-1993 5% per month Serbia Daifiment Bank 1990-1993 15% per month Amount Amount AC's in invested lost in # of % of Country in US$ % GDP investors Pop. Jamaica 1-2 billion 12.5 to 25 50,000 2 Grenada 30 million 5 ... USA 50 billion 0.3 13,000 -- Colombia 1 billion 0.4 Up to 4 <.01 million Lesotho 42 million 3 100,000 < 8 Albania 1.7 billion 79 2 million 57 Macedonia 80 billion 3 25,000 1 Romania 450 million 1.5 2-3 million 9-13 Russia 1-1.5 billion 0.5-0.8 1-2 million 0.6-1.3 Peru 200 million 0.3 300,000 1.2 Serbia 600 million ..... 14 million 133 Source: IMF Working Paper, WP/09/95 April 2009
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(1) According to Pressman in Matulich and Currie (2008), Ponzi himself only garnered $10 million (around $100 million in 2007 dollars).
(2) Large-scale scams have occurred in the United States, Russia, Albania, Lesotho, Romania, Bulgaria and Serbia to name but a few.
(3) In general, neoclassical economics has no theory of financial crisis; there is the assumption of harmonious relationships that preclude any rupture in the financial system.
(4) See Pressman (1998) for a more detailed critique of neoclassical theory applied to Ponzi schemes.
(5) See C.Y. Thomas (1989, 331) for a fuller discussion.
(6) " ... If capital strives to become autonomous of labour, if the spatial and temporal coordinates of modernist political economy have been sundered, if the ontological connection between production and consumption has come into question what has happened to the linchpin of capitalism: the concept formerly known as class?"
(7) In this connection it should be noted that Barbados, Antigua, the Turks and Caicos Islands and many others sought to present themselves as offshore banking and finance centres until the US crackdown on tax dodgers and money laundering for A1 Qaeda and other terrorist organisations.
(8) See "Structuralist Approaches to Social and Economic Development in the English-Speaking Caribbean" (McKenzie 2005, 23)
(9) According to the New York Times of 29 January 1997, "Even though the scheme collapsed and cost hundreds of people their life savings, Mr. Funar remains Mayor."
(10) See Jefferson (1999)
(11) The origins of the approach lie in the writings of Beckford and other Plantation theorists that identify a preoccupation with "beating the system" on the part of the agent, and in Thomas, who makes the point that living in the Caribbean has always been a riskier proposition than living in the centre.
(12) The 1970s was a decade of tremendous social and political upheaval in Jamaica.
(13) See Robotham (2001) for elaboration. See references included.
(14) There is at least one successful "investment" bank, which was established in the period to play this type of arbitrage game.
(15) Confronted by a banking crisis initiated by its own policy, the GOJ, in an about-face, bailed out distressed institutions and individuals with the taxpayers' money. Thus the debt-to-GDP ratio increased to 150%, making Jamaica one of the most indebted countries in the world.
(16) This section of the article insofar as it pertains to trading foreign currency in Jamaica draws on my professional experience as a Treasury Manager and Corporate Finance Officer between 1990 and 1996 for foreign and local banks in Jamaica.
(17) The number of Jamaican investors is estimated at fifty thousand by an IMF Working Paper. See Table 4.
(18) Of this total amount various newspaper sources suggest that some $4 billion has been irretrievably lost.
(19) These relationships are rooted in the history of the island, in its slave plantation origins.
Table 1: Growth, GDP Per Capita, Unemployment Labour Employed Population Force Labour Labor Mid Year Working Age Participati Force Force ('000) Population * on Rate % ('000) ('000) 1991 2388.5 1555.5 68.7 1072.5 907.7 1992 2411.3 1567.4 69.1 1074.9 905.7 1993 2434.8 1589.9 68.3 1083 906.3 1994 2459.4 1653.6 69.2 1090.5 923.1 1996 2488.1 1671.8 69 1150.5 963.3 1996 2515.5 1692.5 67.7 1142.7 959.8 1997 2540.5 1710.5 66.6 1133.8 946.9 1998 2563.7 1723.2 65.6 1128.6 953.6 1999 2581.7 1741.2 64.3 1119.1 943.9 2000 2591.6 1750.2 63.2 1105.3 933.5 2001 2607.6 17583 63 1104.8 939.4 Unemployed Labor Unemplo- Force yment GDP (Constant 1996 ('000) Rate (%) Producers Value J$) 1991 164.8 15.7 220,000,000,000 1992 169.2 15.4 223,600,000,000 1993 176.7 16.3 227,400,000,000 1994 167.4 15.4 229,300,000,000 1996 187.2 16.2 231,600,000,000 1996 182.9 16 228,700,000,000 1997 186.9 16.5 224,100,000,000 1998 175 15.5 222,900,000,000 1999 175.2 15.7 222,000,000,000 2000 171.8 15.5 223,800,000,000 2001 165.4 15 227,100,000,000 GDP Per Capita (J$ % GDP constant Growth prices 2000) 1991 0.87 87091.76 1992 1.64 88171.84 1993 1.70 88721.67 1994 0.84 89100.62 1996 1.00 90687.05 1996 -1.25 89751.42 1997 -2.01 88021.84 1998 -0.54 86185.36 1999 -0.40 86421.92 2000 0.81 86526.8 2001 1.47 87323.83 Table 1.2: Select Macroeconomic Indicators Exports US$ CPI % to Imports to Exchange Year % Rate Real Change GDP(%) GDP(%) Rate 1980 10.0 -6.6 29.0 44.9 46.8 3.3 1981 9.8 -3.1 4.6 41.5 50.6 4.95 1982 8.6 -0.6 6.5 33.5 43.7 5.5 1983 12.4 -4.9 16.6 32.9 43.5 5.5 1984 13.3 -8.4 31.2 46.7 52.5 5.52 1985 19.0 -2.2 23.1 51.3 60.3 5.5 1986 20.9 6.0 10.7 46.5 44.7 6.5 1987 18.2 8.1 8.4 44.9 44.6 8.17 1988 18.5 6.3 8.8 41.8 45.8 21.57 1989 19.1 0.4 17.2 41.5 49.9 22.2 1990 26.2 -11.4 29.8 46.1 49.8 32.7 1991 25.6 -16.3 80.2 49.1 50.2 33.37 1992 34.4 -10.5 40.2 58.7 59.6 39.8 1993 28.9 -2.7 30.1 47.7 56.0 35.03 1994 43.0 12.1 26.9 51.9 58.1 36.59 1995 27.7 4.0 25.5 50.6 60.9 37.16 1996 38.0 18.1 15.8 43.9 55.4 41.42 1997 21.1 9.2 9.2 39.3 52.1 45.53 1998 25.6 16.4 7.9 40.4 50.3 47.4 1999 20.7 13.0 6.8 41.4 49.7 50.97 2000 18.2 10.3 6.1 43.1 54.5 60.62 2001 16.7 8.7 8.7 38.8 55.1 61.63 2002 15.5 5.0 7.3 36.9 57.4 64.58 2003 25.9 12.7 14.1 40.7 59.2 65.5 Source: Bank of Jamaica, Statin,
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|Author:||McKenzie, Rex A.|
|Publication:||Social and Economic Studies|
|Date:||Dec 1, 2012|
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