Sat | Oct 20, 2018

What will fuel our growth?

Published:Sunday | August 24, 2014 | 12:00 AM
Labour Minister Derrick Kellier makes a presentation to Parliament. Says columnist Claude Clarke:
The Jamaica Stock Exchange at Harbour Street, Kingston. In 2012, the capitalisation of the local stock market, when measured in US dollars, was 55% smaller than it was in 2004, reflecting diminishing appetite for investing in Jamaica. - File
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Claude Clarke, Columnist

USA Today's citing of Jamaica as one of 11 countries at risk of default has provided an unwelcome jolt of realism, disturbing the Lagarde-induced slumber into which many of us had fallen.

Though Peter Phillips can be relied on to continue to do whatever it takes to honour our debt-repayment obligations, the finance minister's resoluteness is not enough to keep Jamaica from defaulting. Only the country's ability to pay can do that. That, in turn, will depend on the economy's capacity to generate the resources required to do so.

Unfortunately, Government's present economic programme is designed almost exclusively around fiscal consolidation aimed at extracting revenues from a static economy to service our gargantuan debt. It is almost devoid of strategies that can stimulate economic growth. This myopic attention to the debt could eventually become the agent of the default that is so feared.

Under this debt-repayment-first growth-later policy, the only growth that is likely is the swelling of the ranks of the poor by former members of the middle class. This is becoming increasingly evident. Distributors complain of slowing business. Ordinary people become less able to afford transport, electricity and other essentials of normal life. Productive output is falling and opportunities for our people to participate legally in the economy are declining.

Contrary to the Government's expectation that a few large projects carried out by the Chinese for their own global strategic advantage will drive Jamaica's economic growth, it is equity capital invested in the broadest swathe of productive activities that will do so. But the likelihood of this happening has become slimmer over time.

Contracted stock market

In 2012, the capitalisation of the Jamaican stock market, when measured in US dollars, was 55% smaller than it was in 2004, reflecting the diminishing appetite for investing in Jamaica. During that period, the market contracted more than any other in the world, except for those in the great recession-ravaged countries of Iceland, Greece, Estonia and Cyprus.

Although the stock exchange is by no means representative of the entire economy, it is clear that capital has been avoiding equities, which is among the reasons that growth has eluded us for so long, while other economies have rebounded from the 2008 global economic shock.

The dramatic decline in the stock market's capitalisation is partially explained by the need for a correction following the irrational 600% run-up in its value in the preceding eight years. This was among the seeds of economic stagnation that continues to afflict Jamaica. During that period (1996-2012), the industrial sector, with its high value-added quotient, contracted by 40%, while financial services expanded by a similar 40%. The trade deficit as a percentage of total trade doubled. Capital raced away from production into the financial sector and through it to the Government to gain returns beyond Bernard Madoff's most larcenous dreams.

The likelihood that capital invested in equities will yield satisfactory returns is at the heart of the success of any economy. And the unimpressive performance of the equities market since 2004 suggests there is strong scepticism about the prospect of this happening in Jamaica. If this perception continues, the prospects for economic growth will be increasingly bleak.

Government must create policies that will change this equation to tilt the scale in favour of equity capital invested in real wealth creating economic activity. This is the most efficient and sustainable way to generate the resources needed to service our debt. And will do so without squeezing life out of the economy and further impoverish the people.

The well-being of people is a critical ingredient in any sound economic recovery programme. Government has to do more than express concern for the poor and create temporary economic assistance. To help the poor, Government's economic policies must open up opportunities for their meaningful participation in the economy.

One thing that distinguishes economically successful countries is their capacity to productively employ their people. Since 1994, Jamaica has been distinguished by its failure to do this. It has the dubious distinction of being the only country in the hemisphere in which the labour force participation rate has declined. While other countries in the region have seen workforce participation increase substantially, based on the latest STATIN data, Jamaica suffered a decline of 15% after 1994. This represents the failure of every administration since then to deliver on one of government's most important responsibilities: creating the conditions for people to be productively engaged in the economy.

Does the Government or the IMF now have a plan to reverse this pattern? Or do they expect advocacy for the poor to be the solution?

If there is to be a workable plan, it must address the challenge of attracting equity capital to wealth-creating activities in Jamaica. The plan must recognise that, as important as the domestic services infrastructure such as financial services, distribution and retail is to the efficient operation of our economy, it is the growth of the sectors that produce goods and export services which creates wealth. And that it is policies that favour these sectors that will lead the economy to growth and our people to rewarding economic opportunities.

Lifting tax

Almost three years ago in The Sunday Gleaner of October 2, 2011, and in several subsequent articles, I suggested that among the most effective strategies for attracting equity capital to production would be lifting the top tax rate to 33.3% and offer tax credits for profits invested in productive and export activities that could reduce their marginal rate to 15%. By doing this, the high pile of cash on which many corporate interests and high-net-worth individuals have been sitting could be attracted to investments in production and exports. South Korea has just introduced a similar policy, aimed at inducing corporate profits to be used for stimulating economic activity in the economy through investments and consumption. A similar push is under way in Japan and China.

Present talk of attracting capital to Jamaica by selling citizenship is a mindless fantasy. A significant factor in the attractiveness of a country's citizenship to a wealthy person is the ability of its passport to enable unencumbered entry to desirable countries. With a visa required for almost every desirable country in the world, Jamaica's passport is more of an obstacle to global mobility than it is a facilitator.

Of course, competitively priced energy is also critical. But unless Government can attract the capital needed to fuel our growth, recovery will continue to elude us. And while managing our fiscal affairs is important, we will not be able to sustain the effort to reduce our debt until Government develops a comprehensive plan to bring capital to production and increase the economy's capacity to pay it down. This is the fuel we need to fire our growth.

Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.