Is Government serious about growth?
Nineteen eighty-seven, the year before Hurricane Gilbert struck, Jamaica recorded its highest economic growth rate since the decade of the 1960s. The Planning Institute of Jamaica said the economy expanded by 8.0%. The Bank of Jamaica governor warned of the economy overheating.
Many lessons could have been learned from the success of Jamaica's 1987 economy. But, judging from the state of our economy today, not many have.
While in 1987 the productive sectors of agriculture, manufacturing and mining represented more than 30% of the economy, today they are only 17.5%. Exports were 54% of GDP in 1987; today, they are no more than 30%.
In the rapidly growing economy of 1987, the financial sector was only 7% of GDP. Today, boosted by exorbitant fees and outrageous interest rate spreads, it has grown by 60%, to be 11.2% of GDP; and its only export is the gigantic profits it earns in Jamaica.
There can be little doubt that much of the economic malaise that characterises today's
economy can be traced to this remarkable reversal of fortunes suffered by the productive and export-earning sectors.
Ultimately, it is production and exports of goods and services that determine our wealth. And it is the contraction of these wealth-creating activities, while the internally focused financial sector expanded, that has produced today's lopsided, growth-resistant economy.
The IMF was correct in identifying irresponsible, undisciplined fiscal management and the gargantuan public debt it created as primary causes of Jamaica's economic failure. And it focused its attention on fiscal consolidation and debt reduction in its economic programme.
The severe erosion of the country's productive capacity, which occurred during the FINSAC debacle of the 1990s, was not addressed.
But it is clear that without restoring that productive capacity and re-establishing the balance between the productive economy and domestic services that underlay 1987's rapid growth, the strong and sustainable growth we hope for will not be possible.
attractive fiscal policies
To restore the productive exporting capacity we need, Government will have to adopt fiscal policies to make investments in these areas attractive to capital.
Audley Shaw's proposal, which adopts the suggestion I have consistently made over the last three years, that tax credits be used to induce the big profit earners in the economy, including the financial entities, to invest their profits in Jamaican production and export activities, is the policy most likely to achieve this result.
Another of Mr Shaw's proposals, which should also be embraced by Government, mirrors my own suggestion that Government's incentives regime be reordered to weight benefits towards the producers of goods and exporters of both goods and services.
At the time of the signing of the IMF agreement two years ago, advocating for fiscal consolidation to be combined with growth-generating tax policies as a counterweight to the contractionary effect of the austerity measures was a very lonely endeavour. I chose that lonely path because I believe it is more constructive to identify weaknesses in government policy and propose better alternatives than it is to cheer along anything ordained by government and confine one's thinking within the boundaries it sets, as if on Mosaic tablets.
The view that growth-inducing strategies are essential for a workable economic policy has now begun to gain favour. The Government, after contenting itself to wait on the arrival of promised mega projects for growth to take place, has finally presented a Growth Agenda.
It is particularly satisfying that this newly minted 'Agenda' has addressed my caution that the drastic cuts to capital spending on the social and economic infrastructure would harm productivity in the economy. And a significant $90 billion has now been committed to capital spending this year.
The 'Agenda' contains some commendable ideas and goals, which, if properly executed, could yield modest economic benefits. However, if the Government is really serious about meaningful growth, it will concentrate on just four imperatives that have not been addressed in its 'Agenda'.
First, it is essential that action taken to establish and maintain the competitiveness of the Jamaican dollar be more decisive. The policy of gradual exchange-rate adjustments will not achieve this.
investment tax regime
Second, an investment tax credit regime open to all enterprises, from mega to micro, must be introduced. Tax credits used as reward for the timely payment of statutory deductions from people who are already employed cannot be a substitute for tax credits for real investments in new or expanded productive and exporting capacity that will increase wealth creation and employ more people.
Third, while its rules-based and transparency features are good, Government's new tax-incentive regime need to be specifically directed at businesses of all sizes operating in the areas of the economy that drive production and exports. Incentives to assist such enterprises will expand and increase employment; create backward, forward and lateral linkages; drive research and innovation, and will increase and save foreign exchange more than is possible in any other area of economic activity.
Fourth, to expand the markets available to Jamaican enterprises, we need a strategy to restore some semblance of balance to our trade with CARICOM, as a first step in creating a complex of trading arrangements with countries within our hemisphere.
If the Government is serious about growth, it will also review its recent decisions on taxes. It is inconsistent with the objective of economic growth for a government to increase the share of the economy it consumes in taxes, as the present Budget does.
The collapse of world oil prices has been an unexpected gift for the country. If handled wisely, it could provide an opportunity to chart our course away from stagnation and toward prosperity. At today's reduced prices, which OPEC seems determined to maintain, more than US$1 billion is likely be cut from our oil import bill and could be added to our net economic output. And more than $115 billion could be cut from costs that drive inflation. But the Government seems too preoccupied with meeting IMF targets to seize these opportunities.
Its first response to falling oil prices has been to replace the revenues lost from lower oil import costs by imposing new taxes of $9 billion on energy. Were the Government serious about growth, it would have found another way to close its Budget gap without obstructing the path lower oil prices has provided to reducing domestic production costs.
These are the directions in which the Government must look if it is serious about growth.
I do not doubt the Government's desire for Jamaica to achieve economic growth. What cannot be certain is whether the actions needed to achieve it will be taken.
- Claude Clarke is a businessman and former minister of industry. Email feedback to firstname.lastname@example.org.