Sat | May 27, 2017

Stop manufacturing half-truths

Published:Sunday | August 17, 2014 | 8:00 AM
Peter Gordon

Peter-John Gordon, GUEST COLUMNIST

Damien King's article 'JMA pushing a Trojan horse' (Sunday Gleaner, August 10, 2014) has unleashed a barrage of angry responses and personal attacks from interests associated with the Jamaica Manufacturers' Association (JMA). There has even been an element of anti-intellectualism contained in some of the public responses belittling 'book knowledge'. Spokespersons for the JMA have sought to justify their call for special considerations on the basis of their contributions to GDP and employment created by their members.

First of all, it might be useful to remind everyone of the insight of Adam Smith's 1776 tome, Wealth of Nations, where he says: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." JMA members do what they do, not because they want to grow the economy or employ people, but to pursue their own interest, which is maximising profit. They employ people as an input into the profit-making endeavour. If hiring more people will increase profits, they will hire more; if laying off people will make more profits, they will lay of people.

The focus of their business is not employment creation. They should desist from pretending that it is. If they are successful in predicting what people want and are able to supply these wants at competitive prices, they are rewarded by becoming very rich. If not, they lose their investment. It is the lure of making much money that drives entrepreneurs, not the desire to employ people.

What really is the essence of King's arguments? It is that incentives given in one area result in disincentives in others, and the overall effect might be negative. By way of example, suppose there were only two sectors in the economy. Let us call them tourism and manufacturing, for simplicity (but any other label would work equally well). The Government could give tourism an incentive by moving all taxes in that sector to zero. One might think that this has nothing to do with manufacturing, but it does. The obvious impact is that taxes on those in the manufacturing sector must now increase to compensate for the loss of taxation from tourism.

Making life easier for persons in tourism simultaneously makes life more difficult for people in manufacturing. Even if somehow the Government were to cut its expenditures so that it would require no additional taxes from manufacturing, the manufacturing sector would be hurt by the incentives given to tourism, because manufacturing has now been given a disincentive. Tourism is now more profitable than manufacturing, so investments will flow towards tourism and away from manufacturing. With lower taxes in tourism, companies in tourism will be able to pay higher wages than those paid in manufacturing, thus labour will be encouraged to abandon manufacturing in favour of tourism.

Output in tourism may very well grow from this policy, but simultaneously output and employment in manufacturing will decline. It is possible that more output and jobs are lost in the manufacturing sector than are created in the tourism sector.

This policy of incentivising some sectors (and disincentivising others, consciously or unconsciously), known as industrial policy, has been practised in Jamaica for a very long time. The complex tax code is testimony to this. This policy, more than any other, is

responsible for the sluggish growth in the Jamaican economy. The growth that occurs in one sector might not be able to spill over into other sectors because of the impediments the policy of picking winners has placed in their paths, since they have been designated losers.

The danger of this policy is that the protected sectors might not be the future growth areas and the discouraged sectors might, in fact, be the sectors of the future. Who in 1980 could have predicted that typewriters would not exist today? Suppose government policy had encouraged the manufacturing of typewriters then?

Sectors sometimes die, and this has nothing to do with the skill of the managers involved. Demand changes over time and can bring about the demise of various industries. It is possible that industrial policy can sometimes turn up real winners. If I bet on horses at Caymanas Park, it is possible that I could bet on a winner.

This, however, is a very bad way of organising public policy, especially since the Government has no better knowledge of the future winners than anyone else. Consultation with private-sector groups is never consultation with the entire private sector; it is, therefore, the interest of those invited to the table that are accounted for, not the hundreds of thousands of unorganised persons in the private sector.

A part of a university lecturer's job is to engage in public education. I would advise my colleague, Dr King, not to be too concerned about the lobbying of the JMA. Many of their members are unaware that what they are lobbying for is deleterious to Jamaica's economic future. They mistakenly think that what is good for their business is automatically good for the economy.

Manufacturers are not economists and are not expected to understand the working of an economy. The JMA wants low interest rates and a stable dollar. It treats these as if they are independent policy variables that the minister of finance can deliver by decree. Does the JMA understand the link between these variables and others within an economy; how the movement in one variable causes movements in others?

Lobby groups are always going to seek to make life easier for themselves. If my students could negotiate grades with me, they would seek to obtain As by this means rather than the more difficult route of studying. People always seek the path of least resistance.

RIGHT POLICY CALLS

What matters is how the government responds to these lobbyists in policy formation. Focus should be on the government making the right policy calls, irrespective of what the various lobby groups want. Politicians, who are the ultimate decision makers of public policy, are not economists and will no doubt be seduced by the 'common-sense' approach the JMA thinks it is advancing as well as the interests emerging from the political process.

What is required is a technically strong bureaucracy that can clearly articulate the implications of the requests from the various lobby groups. This will allow the policymakers the benefit of more information when called upon to make policy.

The anti-intellectualism displayed recently by the JMA spokespersons is not helpful. Too many persons carry the job title and/or functions of economists with little or no formal training in economics. If there were a better understanding in the past of economics and the fact that an economy is more than the sum of its parts, maybe, just maybe, we would be in a better place today.

Peter-John Gordon is a lecturer in the Department of Economics, UWI (Mona). Email feedback to columns@gleanerjm.com and peterjohn.gordon@uwimona.edu.jm.