Sun | Jun 24, 2018

Sectoral Presentations 2018-2019 | Peter Bunting - Opposition spokesman on industry, commerce and competitiveness

Published:Saturday | May 26, 2018 | 12:00 AM
Peter Bunting
Large investments in some enclave economic sectors will generate a large number of jobs but make only a modest contribution to growth.
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ECONOMIC GROWTH

 

"Economists have very few hard facts about growth. They know that countries can become rich only by growing steadily over long periods. They know that in some fundamental way growth is about using new technologies to become more productive and to uncover new ideas. Beyond that, almost everything else is contested." - From a recent article in the Economist magazine.

However, there is general agreement that our public sector implementation capacity is weak and that the top three obstacles or impediments to growth and competitiveness being 1) crime and corruption, 2) the burden of government (tax rates and bureaucratic inefficiency), and 3) informality/access to financing.

 

PRODUCTIVITY IS FAILING

 

Total factor productivity is also falling relative to other small economies, which means that even though investment is relatively high, economic growth is low. The weak relationship between investment and economic growth has been related to a high concentration of investment in private residential construction and 'enclave economic sectors', including tourism and mining.

Companies in these sectors have weak linkages with the rest of the economy and are highly import dependent - restricting the multiplier effect on growth outside of the sectors.

Large investments in modern production facilities will be highly automated, productive and will contribute to growth, but will not generate many jobs. On the other hand, large investments in some enclave economic sectors will generate a large number of jobs but make only a modest contribution to growth. So what is the solution to this apparent paradox?

The solution must be located at the enterprise or firm level, where growth and employment are sustainably generated.

 

MSME SECTOR

 

The MSME sector has the potential to be a major catalyst for the development and growth of the private sector, while supporting innovation, competitiveness, wealth creation and social stability. Currently, however, the MSME sector is highly vulnerable and not contributing its full potential to the growth of the economy.

In developed countries such as Germany, the MSME sector largely consists of highly innovative and productive firms, many of which are world leaders in their fields. In Jamaica, contrastingly, the majority of firms in the MSME sector are replicative or necessity enterprises that are poorly financed and globally uncompetitive. This is reflected in the Global Entrepreneurship Monitor (GEM) data related to the motivation for entrepreneurial activity in Jamaica. With regard to necessity-based entrepreneurship, Jamaica ranked number two in the GEM 2016 Report. While for opportunity based entrepreneurship, Jamaica was at the very bottom, ranking 64th out of 64 countries. This signifies that much effort is needed to drive the sector towards greater levels of innovation and productivity.

In looking at obstacles to growth in the MSME sector, we have to identify crime and education/training as two principal impediments even though policy for those areas fall outside this portfolio.

 

CRIME

 

Polling over the last 20 years has consistently identified security as the most important problem facing Jamaica, more so than poverty, the economy, and inequality. The cost of crime (security costs and losses) exceeds six per cent of sales for all size firms!

In 2001 when the violent crime rate was about half what it was in 2017, the cost of crime was estimated by Francis et al to be 3.7 per cent of GDP, so we can reasonably assume that the cost of crime to the economy is now much higher. Cross-country panel data suggests that Jamaica could boost economic growth per capita by 5.4 per cent per year if the country were to bring homicide rates down to the level of Costa Rica.

 

INEFFICIENT PUBLIC SECTOR

 

Jamaica's public sector suffers from institutional sclerosis - the accumulation of vested interest and influence, slowing the ability of the government to adapt and reform, which results in losses to society, including through lower innovation and growth.

The current operating context and the spirit of the GOJ's overbearing control mechanisms, its disempowering micro-management and its centralised non-value adding bureaucratic approval procedures, stifle any prospects for the innovative creation of growth and productivity initiatives at the level of ministries or public bodies.

The public sector of Jamaica must lead the growth and productivity strategy by example. It must now assume its time-appropriate posture, role and purpose as FACILITATOR and ENABLER. This means a deliberate and visible retreat from its traditional role of CONTROLLER. This transformation must be the core theme and guiding principle of any public sector reform.

 

LEVEL THE PLAYING FIELD

 

The Jamaica Manufacturers' Association has long requested that government uses its procurement policy to prefer local manufacturers. They have suggested that so long as their prices are within 15 per cent of the imported product price they should be preferred because of the employment and other linkages local manufacturers provide.

Once again the reality is that government procurement in fact prefers the foreign supplier. Government construction procurement is focused on mega-projects for which the contractor also supplies financing. This approach not only eliminates the participation of local construction companies, but does not deliver value for money for the Jamaican taxpayer as there is no competitive bidding.

 

CONCLUSION

 

After five years of reforms under two IMF programmes, Jamaica has not reaped the expected dividends to break us out of the decades-old low-growth pattern. Macroeconomic stability, while necessary, is clearly not sufficient to guarantee higher growth.

However, as our macroeconomic situation improves, Jamaica must now focus on removing impediments to the growth of our local private sector, and especially the MSMEs which can deliver inclusive growth, jobs, and innovation.

While crime and education will likely require a medium-term horizon for sustained improvements, the oppressive taxation and bureaucratic regulation which drives MSMEs to informality can be addressed in the short term.

Government contracting which prefers locals can be addressed in the short term. As our macroeconomic situation improves, Jamaica must be more discriminating in the type of investor and investment that we solicit and encourage, particularly where that investor will dominate a sector.

The minister of finance has abandoned talk of five per cent growth per year within four years (5 in 4) along with his previous position as deputy chair of the Economic Growth Council, and is now pitching a new term - economic independence. If the minister is serious, then he should realise that true economic independence means that Jamaica should not behave like a capital-starved country. We should not allow capital to be 'weaponised' in a sort of 'debt trap diplomacy', and be used by others to obtain advantageous access to our market.

Economic independence cannot be about opaque contracts and predatory loan practices that mire our nation in debt and undercut its sovereignty.

We must instead seek investment that develops sustainable growth, strengthens the rule of law, and builds our capacity to stand on our own two feet.