The financial sector and Jamaica’s growth
Head of the Planning Institute, Colin Bullock, recently declared growth to be "an imperative", and attributed Jamaica's failure to achieve it to the fact that "the economy is too fragile" and vulnerable to the vagaries of weather.
Coming 20 years after the much-ballyhooed National Industrial Policy of the 1990s, and the even more celebrated Vision 2030 a decade later, this seeming epiphany by the Government's economic planning agency is more than a little surprising. After all, the grandiose plans contained in these documents were promoted as road maps to our economic development. Will the newly found wisdom of the PIOJ lead the Government to discontinue its practice of expecting different results from the same failed economic plans?
The PIOJ's faith in its Vision 2030 seemed to have flagged somewhat when, five years after its launch, the planning agency found it necessary to produce another plan, 'A Growth-Inducement Strategy for Jamaica in the Short and Medium Term', to supplement it. However, these plans have not been able to reverse or even halt the downward slide of the economy.
It is little wonder that, 10 years into its life, Vision 2030, promoted as a 25-year plan to make Jamaica a developed country by the year 2030, has left the country further away from that goal than when it was launched. The economy, at the end of 2014, is smaller than it was in 2005.
Additionally, we are now midway through our second IMF programme in five years, both billed as what was needed to put the economy on track for development. The first was a virtual stillbirth. And midway through the second there are signs it is suffering a midlife crisis. Remarkably, neither included a coherent strategy for growth.
But there is a segment of the Jamaican economy that is growing. Since 2005, the financial sector has grown by 11.5 per cent, while manufacturing, with its enormous capacity for creating good jobs and establishing forward, backward and lateral economic linkages, contracted by 11.3 per cent. Exports, the growth of which will be essential for economic prosperity, are estimated to be now below 30 per cent of GDP, having been as high as 62 per cent in 1992.
The continued growth of the domestic financial sector, even while the rest of the economy shrinks, is extremely troubling. It was this same disproportionate growth that triggered the country's economic collapse in the 1990s, which led to the FINSAC fiasco, and created the more than 140 per cent of GDP debt vortex in which the country remains gripped today.
I advocated Jamaica's partnership with the IMF even before the standby arrangement during the last administration, but had hoped that any arrangement with the Fund would have addressed this structural abnormality. I envisaged that while the Fund would ensure Government's fiscal discipline, the government would have had the good sense to win support for a programme directed toward growth.
This would have required Government to acknowledge that it was its policies that sucked capital away from the productive areas of the economy and pumped up the financial sector, generating our stubborn, more-than-two-decade-long economic depression.
This removal of capital from productive use eroded the economy's capacity to grow and left an oversized financial sector to be a growing cost burden to the shrunken productive sector. Yet the same policies continue unabated today.
The IMF's own economists have issued a warning about the damaging effect of a financial sector that is disproportionately large in relation to the economy it serves. A study conducted by economists of the Fund has concluded that emerging economies need to learn the lessons of the 2008 global financial crisis and avoid allowing their banking systems to become too large.
The study goes on to say: "At a certain stage, banks and other financial institutions assume too big a share in economies and end up contributing more to financial instability than economic growth."
In a blog accompanying the authors' study, they conclude, "Beyond a certain level of financial development, the positive effect on economic growth begins to decline, while costs in terms of economic and financial volatility begin to rise."
The financial services sector is vital to the economy's health. That is why earlier this year I wrote, "The capacity of a country's financial sector to provide adequate and competitively priced capital and financial services is as important to economic success as competitive energy. And if Government is to succeed in leading the economy from stagnation to growth, creating such a financial infrastructure must be among its top priorities."
Weighing down economy
However, a financial sector whose size and cost of operations are weighing down the economy cannot accomplish this goal. To reverse the country's economic decline, the Jamaican Government's policy must be centred on containing the size and cost of the financial sector and redirecting capital toward productive use.
We have seen no effort to ensure that the financial sector benefits the economy to the extent it should. The IMF-supported economic programme contains no measures to rein in its growth and improve the flow of capital to productive activities.
But it is the Government that must make this case. The IMF's principal obligation is to the world's financial institutions. As Christine Lagarde told the Council on Foreign Relations in 2011, "Arguably, our most important client is the international monetary system."
At the last review, the IMF was hardly perturbed by Jamaica's failure to grow and found no difficulty giving a technical pass by using the lower than targeted GDP out-turn to reflect a 7.5 percent primary surplus. Evidently Jamaica's growth was less important than satisfying the interest of its most important client.
Hopefully, the recent study by the Fund's economists, combined with the PIOJ director's belated observation, will be the wake-up call the IMF and our Government need. It's time for the economic programme under the extended fund facility to be altered to reflect the imperative of growth and create a less-fragile economy rather than continuing to feed the growth of the financial sector.
- Claude Clarke is a businessman and former minister of industry. Email feedback to firstname.lastname@example.org.