Wed | Dec 7, 2016

Logistics hub a catalyst for economic growth

Published:Sunday | April 26, 2015 | 12:00 AM

This is a submission from the think tank Caribbean Policy Research Institute.

The development of Jamaica's logistics hub has been billed as the next major driver of economic growth in Jamaica.

A logistics hub is a regional cross-docking point where products from multiple supply sources arrive and are sorted and delivered in accordance to the needs of the destination points. Logistics hubs create value by reducing the costs associated with the transportation, storage and distribution of goods from producer to consumer, thereby improving competitiveness of firms.

Studies conducted by the World Bank in 2007 and 2010 indicate that countries at the same level of per capita income, with the most efficient logistics hubs, experienced an additional 1% growth in GDP. By exploiting the complementarities of interconnected businesses and suppliers, logistics hubs increase the productivity of companies, drive innovation, and stimulate new businesses in the field.

 

Efficient operation

 

Examples can be drawn from countries such as Singapore and the United Arab Emirates (Dubai) to show how logistics hubs have provided the catalyst to the economic growth envisioned by Jamaican policymakers. Experiences in these locations indicate that the efficient operation of the core and creation of 'spin-off' industries require critical institutions to support the entire cluster by providing the specialised human and informational resources needed to operationalise the hub.

The core typically represents a relatively small number of specialised firms that have the ability to facilitate a large number of supported and related industries. These spin-off industries can then create large numbers of additional jobs. Logistics hubs, however, can only generate wealth if the right types of firms and entities are mobilised to operationalise the hub core, and if new firms arise and/or existing firms expand and exploit the potential for related spin-off industries. Success depends on satisfying certain preconditions.

Preconditions include a strategic location, development of the necessary infrastructure and creation of free zones and business parks. Other preconditions that could be considered for the success of a logistics hubs include government stability and continuity of policies, the availability of appropriate human capital, efficiency in administrative processes, and an investment-friendly business environment.

The Jamaican economy is competitively positioned in a number of ways, including: its location as a junction of global trade corridors; physical infrastructure that facilitates sea-sea, sea-air and air-air connectivity; and a highly skilled, educated and trainable workforce. Jamaica also has an investment-friendly business climate, with government agencies geared towards improving the experience of doing business in Jamaica, established by our tradition of democracy.

 

Commitment to stability

 

The Government's commitment to stability was viewed as a cornerstone of the ability of the Singaporean and Dubai logistics hubs to attract and keep the firms needed to operationalise the hubs. This means that there needs to be a degree of trust in the political system and that the long-term national vision extends beyond party lines. This is an area in which Jamaica performs poorly. Possible reasons for the low levels of trust include favouritism in decisions of government officials and the low levels of transparency of government policymaking.

Furthermore, while Jamaica is strategically positioned to take advantage of the wealth creation that logistics hubs afford, the country is not at the place where a logistics hub will automatically create national wealth. This is for a number of reasons, including the fact that Jamaica does not currently specialise in the areas of service provision typically associated with logistics operations, and also, the country has one of the worst records among comparators in attracting foreign direct investment inflows to the sectors critical to the logistics hub core.

Factors such as low productivity and lags in certain areas that are critical to business performance are also likely to reduce the effectiveness of the logistics hub. Other hindrances to the development of a logistics hub as a growth catalyst include corruption, crime, corporate taxation, lack of competitive technologies and the high cost of energy.

In order to take advantage of the distinct advantage of the country's location, physical infrastructure and planned economic zones and business parks, the Government of Jamaica (GOJ) has to first ensure that an overreliance is not placed on these advantages. This is because 1) locational advantages may be overstated; 2) use of Special Economic Zones (SEZs) to offer economic incentives as a means of attracting companies may prove risky as other countries can offer better incentives and lure companies away; and 3) creating an economy where the benefits of the SEZs are contained only within the SEZ may come at the cost of balanced and sustained national development.

Instead, efforts should be made to establish linkages between firms operating within the logistics hub and other firms in the economy. Focus should also be placed on improving the general business environment. The GOJ, therefore, needs to begin looking at the people and processes needed to make the Jamaica logistics hub successful. To do this, comprehensive reform programmes are needed, as opposed to focusing on addressing isolated issues.

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