Time to change course with the IMF
Claude Clarke, Contributor
My hope for Jamaica's economic future was effectively expressed in a declaration by Prime Minister Portia Simpson Miller at the recent IMF High-Level Caribbean Forum held in Montego Bay more than a week ago. The prime minister told the meeting: "There can be no greater imperative for us here in Jamaica … than the great urgency of economic growth." She continued, "The growth … must be equitable and inclusive" and must be "growth with job creation".
In concluding, she said, "Without jobs and successful business ownership, our people will have no hope." This has been my consistent position ever since Jamaica began re-engaging with the IMF in 2009.
No doubt, the prime minister has become aware that, despite the IMF's gushing accolades for her administration's 'miracle' economic stewardship, the present external fund facility (EFF), with its overly aggressive programme of debt repayment will continue to yield little more than economic contraction, under-resourced social services, a crumbling road infrastructure and declining job opportunities.
Assuming Mrs Simpson Miller's words reflect true resolve and not mere rhetoric, she is now faced with a glaring dissonance between her stated goal of broad-based economic growth and an IMF programme that involves economic contraction in achieving its objective of lowering Jamaica's gargantuan debt. It is a contradiction that will only be resolved if the present EFF is adjusted to accommodate growth, as I have been suggesting for some time now.
With the prime minister's explicit and direct statement to the IMF that her goals for the country are inconsistent with the effects of the EFF so far, the Fund will have no choice but to respond. It cannot ignore her indispensable value in gaining the people's acceptance of the harsh economic and social consequences of its austerity programme.
It must also recognise the fact that the prime minister's ability to influence the people is dependent on her credibility as the custodian of their hopes for a better economic future. But the people's confidence will be increasingly strained as their economic conditions decline. Jamaicans realise that temporary welfare arrangements are not a substitute for real economic gain, and are becoming both weary and wary of promises of future grand projects. For their trust in the prime minister to be sustained, they need to see tangible economic results.
Hopefully, Mrs Simpson Miller now recognises that she will need an economic strategy that is consistent with her goals, while still accommodating the IMF's objective of reducing the country's debt.
The prime minister and her finance minister must together construct a policy environment to achieve growth within a framework of fiscal stability to replace the present programme, which is entirely contractionary and inimical to economic growth and employment creation.
The finance ministry's orientation must undergo a fundamental shift towards growth and employment. It should start with the recognition that capital needs people to be productive, and it takes capital to create employment and make people productive.
Government should seek to fully develop this healthy symbiosis between capital and labour for the country's economic benefit. And the way to do this is with a properly designed tax-reform programme that incentivises capital to invest in production, employment and the productivity of people. This could be done through existing businesses as well as start-ups.
But the Government's embrace of the flat-tax principle for individual and corporate income militates mightily against this approach to development because it narrows the space for using tax rates to induce capital to invest in targeted areas of the economy.
With a top corporate and personal tax rate of 33.33%, an opportunity to achieve a marginal tax rate as low as 15% as a reward for investing in production and high employment activities, including export services, could be extremely attractive to individuals and businesses, both regulated and unregulated.
The regressive nature of a flat-tax regime also contributes to social and economic instability, as it exacerbates the poverty of the less-well-off and widens income disparity. Jamaica can ill afford this unnecessary burden at a time when the austerity of the IMF programme is already imposing oppressive economic pain.
The financial sector is the most profitable in the economy and has the capacity to inject substantial amounts of capital into production through loans and venture-capital activities. The Government has the ability to use a suitable tax-incentive regime to encourage the sector to shift its focus toward satisfying more of the financing needs of the productive and export sectors.
The participation of small investors and small and medium-size businesses is critical to the country's economic vitality. The Government sacrificed an opportunity for encouraging this involvement when it scrapped the Junior Exchange. If its objective is to grow the economy, the Government needs to reinstate this important initiative as soon as possible.
Countries become poor when they fail to properly manage the economic resources available to them. If Jamaica is to recover, there can be no room for wasting capital.
NEED TO SUSPEND CET
The upwards of $15 billion of revenue which the Government surrenders in subsidising CARICOM imports is a wanton and unwarranted waste of the country's capital. This revenue must be recovered by suspending the Common External Tariff (CET), as I have been imploring the Government to do.
The capital wasted as a result of the CET is more than the amount of tariffs foregone; it extends to the additional foreign exchange spent to purchase CARICOM products at higher prices than third-country imports because the CET subsidy makes them competitive.
Most significantly, the CET deprives Jamaica of capital and jobs when energy-subsidised CARICOM imports render Jamaican products uncompetitive in our own market.
Relative to the rest of the world and our regional counterparts, Jamaica has become progressively poorer over the last two decades. During our partnership with the IMF, this pattern of weak economic performance has not changed. GDP continues to flatline at 1%; and the trade deficit as a percentage of total trade has increased by four percentage points to 60% in the first half of this year. Meanwhile, the Dominican Republic and Haiti, sharing an island right beside Jamaica, are projected to grow at an average of 5% this year.
We are just over a third of the way through the EFF programme, and while the IMF is happy with the Government's implementation, the economically stressed Jamaican people, on whose behalf the State is supposed to act, are manifestly unhappy. This disjunction is unsustainable and suggests that it is time to take stock and determine whether the programme, as currently designed, is capable of fulfilling the economic expectations of the Jamaican people. On the basis of the prime minister's recent declaration, it seems the time is right for the Government and the IMF to change course.
Claude Clarke is a businessman and former minister of industry. Email feedback to firstname.lastname@example.org.