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Vanus James and Rosalea Hamilton | Benefits of productivity growth

Published:Wednesday | December 21, 2016 | 12:00 AMVanus James and Rosalea Hamilton

On November 23, Minister Audley Shaw gave the main address at a town-hall forum at the Montego Bay Convention Centre titled 'Our Dreams for Jamaica'. The forum was the culmination of a series of civic-responsibility workshops undertaken by the University of Technology, Jamaica's think tank, in collaboration with the Institute of Law & Economics and the Fi Wi Jamaica Project, funded by USAID.

In addressing how to finance national priorities to enable the dreams of Jamaicans to be achieved, Minister Shaw pointed to the central role of productivity growth.

The need for productivity growth is an old but real story. The medium-term socio-economic policy framework (MTF) has identified low productivity as one reason the Vision 2030 targets to be achieved in 2012 and 2015 have only been partially achieved. If we could grow our productivity, especially in combination with real wage restraint, we could increase savings, including savings of foreign exchange, to support the high rate of investment needed to develop the economy.

Productivity growth driven by innovation would also enable growth and diversification of exports to reduce our trade deficit and address our repeated balance of payment problems. In turn, this would strengthen national efforts at debt reduction.

So HOW, actually, can we grow productivity? It boils down to which sectors can generate the fastest growth in overall productivity. History helps here.

We tried import-substitution manufacturing, but that didn't work because of:

(1) difficulties with real wage restraint;

(2) production inefficiencies linked to lack of capacity to innovate technologically; and

(3) rising import costs because of currency depreciation resulting from persistent shortage of foreign exchange. We have also been trying tourism for some time now, without a substantial impact on productivity growth because of the sector's high labour and import intensity.

What are the next best options? We suggest focusing on the capital-producing sectors. These are sectors whose outputs are also inputs. The secret to productivity growth is employment of such domestic inputs. Capital inputs are not 'scarce' since, with imported inputs, their quality can be improved, supply increased and cost reduced. They also grow domestic multipliers. There are two sets of these sectors that we have not really tried - not really in different senses!

 

POLICY SUPPORT

 

First, there are the tertiary education and education-intensive sectors, such as health care and advanced ICT. We have not really tried to convert them into export sectors. They employ our best-trained employees, and the available evidence is that they yield the second highest productivity outcome from investment to grow their capital-labour ratio.

In the case of ICT, there is a growing potential for participation in the global outsourcing market aimed at development of cybersecurity and updated apps. India has cornered much of this market, but there are still nearshoring opportunities with the USA that Jamaica can and should exploit.

Development of this ICT export potential requires international collaboration to create job-specific training infrastructure in the tertiary education sector. In the case of tertiary education and health care, these are mainly government-owned and controlled and have been focused on meeting the needs of the domestic market. They have not adequately focused on the export services.

To become major exporters, education and health care must collaborate with other global players to improve quality and access to technology, as well as financing.

The second set of underutilised possibilities are the much-talked-about creative industries. The available evidence indicates that these sectors yield the highest productivity growth response to investment to increase their capital-labour ratio. Most important, they innovate based on creation of intangible capital from the richness of the Jamaican culture, new meaning and inspiration, and can share information and export using modern ICT platforms.

However, we have not given them a fair chance to lead the process. Though listed as priorities by the MTF, they are limited by inadequate policy support, restricted access to bank credit, and reliance mainly on their flow of retained earnings to fund investment.

Some of these restrictions are linked to their sociological origins in the inner cities, weak governance arrangements, and their related incapacity to significantly shape the development of supporting public infrastructure and financing through the policymaking process.

Some relief is provided through DBJ's micro and small-business financing window and related business support. However, these programmes need to be recalibrated, upgraded and rescaled, guided by data that reveal their impact along with the effect of socio-psychological factors on business performance.

Pursuit of productivity growth in these two sets of sectors will enable us to finance our dreams in short order.

- Rosalea Hamilton, PhD, and Vanus James, PhD, Scotiabank Chair, Entrepreneurship & Development, UTech, Jamaica. Email feedback to columns@gleanerjm.com and rhsermaf@gmail.com or scotiabankchair@gmail.com.