Sat | Dec 10, 2016

Jamaica's limping economic growth

Published:Wednesday | November 12, 2014 | 12:00 AM
Andre Haughton

ACCORDING TO the International Monetary Fund's economic outlook, gross domestic product (GDP) growth in the Caribbean is expected to be 1.1 per cent this year.

GDP growth for Jamaica in particular is expected to be 1.3 per cent this year, with a corresponding inflation rate of 9.1 per cent and an unemployment rate of close to 14 per cent. Output in Jamaica and other Caribbean nations is largely based on tourism inflows. These economies are largely service-led economies, which will not get better substantially unless growth in North America and Europe improves. This state of dependency has been the situation for decades, and must rearrange if Jamaica wishes to increase growth beyond the less than one per cent average per annum it has been materialising consistently over time.

How do countries grow?

The last time we explored growth, we used the Solow Growth model to analyse how some countries are able to increase wealth and grow faster by accumulating capital, and the theory surrounding how to manage population growth.

Today, we will incorporate the impact of technological progress on growth, explore how the Government can help to promote growth, and briefly visit the empirical evidence surrounding growth theory.

What is the importance of technology?

An important factor necessary to increase growth is how efficient a country uses its labour. This labour efficiency looks at how countries' knowledge of a production process improves as technology improves. It shows how fast a country absorbs and incorporates new technology into its production process.

The better a country is at incorporating new technology, the more efficient will be its labour employed and faster the country will grow. In this case, labour efficiency improves as technology advances. Each hour contributes more to the production process and total output increases. Jamaica has a productivity problem. Over the last two decades, labour productivity has been consistently falling, indicating that the country has not been absorbing technology very well and therefore has not been making production processes simpler on average.

In the Solow Growth model, only technological progress can cause sustained economic growth and a rise in standard of living of everyone (inclusive of growth). This means that if Jamaica is slow in incorporating technology in its production process, it will have slow growth and marginal increases in standards of living. Jamaica will be slow at converging to what we define as its long-run steady state growth path.

What is the idea of convergence?

Different countries have varying standards of living and are at different places of their long-run growth path. The world's richest countries enjoy 10 times more income than the world's poorest countries. If poor countries grew at a faster rate than rich countries, then gradually over time these poor countries would also become rich. The process is referred to in economics as 'convergence'. If poorer countries do not grow faster than richer countries, then convergence will not occur and some countries will remain poorer than others with a lower corresponding standard of living. According the Solow, the factors contributing to how or why countries converge in the long run depends on the reasons that made them different in the first place. In reality, there is little convergence between rich and poor countries as different countries have different steady states. In that case, what is important is not convergence, but conditional convergence.

What is conditional convergence?

Every country has its own country-specific characteristics: different levels of technology, productivity, culture, etc. Conditional convergence occurs when a country approaches its own long-run steady state growth path given its own initial starting position. A country that is richer at the beginning will maintain this over time if it continues on the same path of technology absorption.

Countries that are poorer will maintain their own poor path as well if technology absorption does not improve. The deciding factor is the rate at which a country absorbs technology and how the Government helps to create an economic platform that will not only assist the country absorb technology, but use it efficiently to improve labour productivity. Bearing in mind that technology can exist, but if not used to improve labour productivity, economic growth cannot improve.

Economic trends

Data on global economic growth show a surprising correlation between latitude and economic prosperity. Countries farther away from the equator have higher levels of growth than countries that are nearer to the equator. Tropical countries therefore have to work extra hard and think extra smart if growth is really their objective. Data also show that countries that grow faster also have greater levels of inclusive growth and development over time.

Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email editorial@gleanerjm.com.