Wed | Sep 20, 2017

Rosalea Hamilton and Vanus James | A response to unemployment in Jamaica

Published:Thursday | July 14, 2016 | 7:00 AMDr Rosalea Hamilton and Dr Vanus James

Under Jamaica's Extended Fund Facility (EFF) with the International Monetary Fund (IMF), significant adjustments are being made, especially with respect to reducing public debt and deficits, tax reforms and public financial management. The current account deficit, budget deficit and inflation have declined, net international reserves have increased, and upgrades in national credit ratings have improved access to domestic and international financial markets. Yet, after 12 successful EFF reviews, significant employment and economic growth remain elusive. For the financial year (FY) 2015-2016, the real GDP is estimated to have grown by only 0.8 per cent and is projected to grow by only 1.7 per cent for FY2016-2017 (Jamaica 2016 Article IV Consultation and the 11th and 12th EFF Reviews Concluding Statement of the Mission, May 20, 2016 at https://www.imf.org/external/

np/ms/2016/052016.htm). Although the unemployment rate fell to 13.3 per cent in January 2016, down from 14.2 per cent in 2015, the marginal GDP growth is insufficient to bring the unemployment rate into single digits on a sustained basis. Why such a partial, inadequate market response?

The microeconomic evidence from business data collected from a random sample of 733 firms under the Scotiabank Enterprise-Wide Risk Management and Financing (SERMAF) Project suggests two substantive reasons: (1) financial market failure; and (2) inadequate identification and policy targeting of the firms that are optimally poised with export capacity, innovative capacity and price-making options. When policy aimed at meeting IMF targets leads to income reduction, some resources are freed up and become unemployed. It is the export-ready firms that are most capable of utilising these unemployed resources - importantly, including human resources - and expanding their markets overseas by growing their capital-labour ratio. Which firms as these? Microeconomic evidence suggests that these firms are in the creative sector, including firms in information and communications technology (ICT), education, music/entertainment and sports, among others. They tend to be optimally configured and generate productivity growth of 1.24 per cent for every 2 per cent growth in their capital-labour ratio. Why have these firms not been exploding on the export stage? The evidence points partly to financial market failure.

The micro evidence collected in 2015 suggests that only 18 per cent of the firms in the economy borrow from the commercial banking sector. About 82 per cent of the firms are yet to be identified and attracted into the commercial credit market, and about 58 per cent are relying on self-financing to drive growth in their businesses. Significantly, about 55 per cent of these self-financing firms are among the top 150 performing firms. These are among the firms most capable of increasing employment and driving growth.

 

INADEQUATE SPENDING

 

The other part of the problem is inadequate public-sector prioritisations and targeting of its capital spending. There is need to identify the type of capital spending needed to support entrepreneurs in the creative sector. For example, in determining the type of capital spending in education that targets entrepreneurs in ICT, music or sports, it is necessary to ascertain the type of capacity-building in the University of Technology, Jamaica (UTech) required to support these entrepreneurs with graduates who can help them grow their exports or their creative participation in the fast-growing global outsourcing industry. This may include strong international networking to produce market-ready graduates that will be demanded by creative firms. Some of this may be done with international collaboration and development partners.

The point is that this kind of specificity is needed by the Government to more strategically target capital spending. In the 11th and 12th IMF reviews, the IMF recommended improving the targeting of vulnerable groups to minimise possible negative impact of the personal income tax plan. Many micro/small creative businesses are vulnerable and can also benefit from targeting to minimise negative market impacts.

With ongoing efforts to gather and analyse the kind of micro-level data unearthed in the SERMAF project, this kind of specificity and targeting is possible. Together with improved financing for export-ready firms, these firms will be better able to respond to IMF-induced adjustments and, in turn, contribute to increasing employment and economic growth.

• Rosalea Hamilton, PhD, and Vanus James, PhD, Scotiabank chair, entrepreneurship and development, University of Technology, Jamaica. Email: rhsermaf@gmail.com; scotiabankchair@gmail.com.