Editorial | Concentrate on elusive GDP growth
The chairman of the Economic Programme Oversight Committee (EPOC), Keith Duncan, has again drawn attention to the fact that Jamaica has failed to meet the GDP growth target set in the current standby agreement with the IMF. This is despite meeting all 22 structural benchmarks under the programme, which ends November 2019.
In his most recent EPOC report, Mr Duncan informed us that “Jamaica’s macroeconomic indicators remain strong, but growth levels continue to hover below two per cent. Projections for the current fiscal year have been lowered to 0.7 per cent as a result of the announced closure of the Alpart alumina plant in St Elizabeth.”
The stark reality is that, despite the yeoman’s efforts of the last two administrations to implement the economic programme with the IMF, the country’s GDP growth performance remains stubbornly around the one per cent per annum average of the last 30 years. This low-growth conundrum has been highlighted by the IMF on several occasions.
Despite the failure to achieve the GDP growth target, however, the achievement of relative stability on the macroeconomic front should not be taken lightly. It took over a quarter-century of effort for Jamaica to be able to report lower-than-targeted inflation on a sustained basis, record-low unemployment, and historic low benchmark interest rates.
The disappointment about the growth performance is another reminder of what has been stated before: macroeconomic stability is a necessary, but not sufficient condition for economic growth. In fact, we have seen criticisms of the IMF approach in other countries, where macroeconomic stability was achieved by deep austerity, leading to a weakening of economic growth.
Economic analyses clearly confirm that in the long run, a sustained increase in total factor productivity is the fundamental driver of economic growth. So while treating macroeconomic stability is a sine qua non, attention must be placed n the factors that drive efficiency and incentives for optimal economic decisions.
NEW INDUSTRIES EXPANDING
More rapid GDP growth over the long term in the Jamaican economy must be built on newer firms and industries supplementing or replacing much of the existing mature sectors like sugar and bauxite mining. With a significant expansion of new industries, particularly in manufacturing, geared towards exports and incorporating newer technologies, Jamaica should be able to increase growth significantly above three per cent per annum.
The successful conclusion of the IMF programme provides the country with a starting point to tackle other issues that have held back the Jamaican economy over the years. Growth and development experts, including many in the IMF, speak of the quality of institutions being a decisive factor in determining long-term growth. This is a reference to the rule of law, property rights, contract enforcement (quality of the criminal justice system), crime and corruption, bureaucracy, and regulation. Of great importance to investors is the presence of a clear regulatory framework, as well as consistency in policy.
Failure to grasp the importance of an efficient and effective institutional framework in driving faster growth might have led to an underestimation of the need to expedite the implementation of the public-sector reform component of the IMF programme, or for the Government to pay such little attention to the last IMF board review, which called for action on corruption and fraud in the public sector.
One other factor that is important in speeding up Jamaica’s growth rate through the improvement of productivity is the level of investment in research and development. R&D investment is critical and must be given priority. This requires a real partnership between the public and private sectors with significant inputs from research institutions. The Ministry of Science must see itself critical to growth and development.
Coordinating these non-macroeconomic issues for the growth agenda should be a major responsibility of the high-powered Economic Growth Council and its CEO, Senator Aubyn Hill. However, not much has been heard from the council recently, even as the growth rate continues to slip.
The ending of the successful IMF agreement in early November provides the country with a great opportunity to relaunch the growth agenda. Focusing solely on macroeconomic stability isn’t going to be enough.