By Dr. Omri Evans and Ray Hadeed, ContributorThe country's manufacturing sector has lost its pre-eminence largely as a result of both internal and external factors. There has been a call to arms of sorts to revitalise it and return it to the forefront of the Jamaican economy. This week, two champions of manufacturing Dr. Omri Evans and Ray Hadeed, examine the plight of Jamaican manufacturing and moot ways in which it can be re-vitalised.
THE PRESENT firms/industries in the manufacturing sector have survived the pressures of:
Trade liberalisation (e.g. removal of quantitative restrictions on imports, tariff reductions, removal of subsidies, etc.); and
A prolonged high interest rate regime, which effectively decapitalised in a very significant way those firms that relied on debt financing in their operation.
The prolonged high interest rate policy kept the capital market in a depressed state for a protracted period, and therefore manufacturing firms that were listed on the stock exchange could not use that route to recapitalise their operations. Also, non-listed firms could not come to the market to raise needed capital, because of the depressed state of the stock market and the unattractiveness of equity investments, compared to investments in very low risk Government papers.
An important and relevant question we could raise is, what might have been the likely impact on the surviving firms and industries in the manufacturing sector, if they had benefited from an investment fund similar to the INTECH Fund that was established for the information technology sector? This question will be considered in a subsequent section of this analysis.
Any assessment of the performance of the Jamaican economy over any given period will show that the manufacturing sector has played a very significant role in terms of:
Contributions to real value added (GDP);
Contributions to real economic growth;
Contributions to employment creation (direct and indirect);
Contributions to export growth
Contributions to foreign exchange earnings and savings.
BACK-GROUND ANALYSIS
Contributions to Gross Domestic Product (GDP) and economic growth
In the first three years of the decade of the 1970's (1970 - 1972), Jamaica's Gross Domestic Product (GDP) registered a cumulative real growth of 24.4 per cent. Over the same period, the manufacturing sector, which at that time contributed 19 per cent of the total GDP, registered cumulative real growth of 17.1 per cent.
For the remainder of the decade of the 1970's, (1973-'79) Jamaica's real GDP declined cumulatively by 13.4 per cent, and the corresponding decline in manufacturing GDP was 18.8 per cent. During the decade of the 1980's, Jamaica's real GDP grew cumulatively by 13.5 per cent, while the cumulative growth in the manufacturing sector was 12.6 per cent. In the decade of the 1990's, Jamaica's real GDP grew cumulatively by 8.3 per cent, while the manufacturing sector registered cumulative decline of -15.9 per cent. Between 2000 and 2001, the Jamaican economy grew by an estimated 2.4 per cent, while there was a growth of 1.5 per cent in the manufacturing sector.
Although the manufacturing sector's share of total GDP fell to as low as 15.6 per cent between 2000 and 2001, the data suggests that given the structure of the Jamaican economy, significant levels of GDP growth, cannot be realised without a significant contribution from the manufacturing sector.
Contributions to employment and foreign exchange earnings in 1991 Compared with 2001
In assessing the back-ground to the performance of the manufacturing sector in 1991, the Economic and Social Survey, Jamaica (ESSJ) (1991) observed that the major factors influencing the sector's performance that year included:
The use of very high interest rates on Certificates of Deposits (CDs), with rates ranging between 40 per cent to 50 per cent to "mop-up excess liquidity", resulting in a greater cost of funds to manufacturers (emphasis mine).
Manufacturers, especially non-exporters, being adversely affected by increases in capital and operating costs, arising from the liberalisation of the foreign exchange system and the subsequent 60.9 per cent devaluation of the Jamaican dollar.
The imposition of the General Consumption Tax (GCT) in October 1991, at a maximum of 10 per cent, on both local and imported goods, replaced "several cascading taxes inclusive of consumption, excise and stamp duties, which could be in the order of 27.5 per cent, 17.5 per cent and 10 per cent respectively for some manufacturers" (ESSJ, 1991). However, the ESSJ went on further to observe that, "in the very short run it (GCT) could increase administrative costs to the firms," The administrative cost of the GCT is now a permanent fixture in the operating costs of manufacturers.
Against that back-drop of a difficult domestic environment for the manufacturing sector in 1991, the performance of the sector in terms of employment and foreign exchange earnings can be summarised as follows:
Employment contribution
in 1991
In the Kingston and Montego Bay Free Zones, total employment in 1991 was 7,636, down from a previous high of 11,432 in 1987. Although the Kingston Free Zone accounted for more than 60 per cent of Free Zone employment, in that year, there were four factory closures in the Kingston free zone. Manufacturing activities (including textiles and wearing apparel) dominated the free zones in 1991. In the over all manufacturing sector, total employment in 1991 was 95,600 or 10.5 per cent, of the employed labour force and that represented a decline of -31.3 per cent below the figure of 139,100 in 1988, when the sector contributed 15.0 per cent of the total employed labour force.
Employment contribution in 2001
Notwithstanding a 5.4 per cent increase in Employment in the three Free Zones (Kingston, Montego Bay and Garmex) in 2001, above the level of 2000, total employment in the Free Zones was 7,704, just about the same level in 1991. That level of employment was generated by fourteen companies in the textile and wearing apparel sub-sector, sixteen firms in other manufacturing and ten firms in other industries/sub-sectors such as Information Technology (IT) and Distribution (warehousing).
In the over-all manufacturing sector, the number of employed persons in 2001 fell to 66,800; after four consecutive years of decline. The level of employment in the manufacturing sector in 2001, was approximately 70 per cent of the level in 1991, and 48.0 per cent of the level in 1988. Therefore, the significant level of disinvestments in the manufacturing sector between 1991 and 2001, is reflected in the substantial fall in direct jobs in the sector.
Contributions to Foreign Exchange in 2001 compared with 1991
In 1991, of the US$290.1 million foreign exchange earnings from non-free zone manufactured exports, traditional manufactured products (including sugar, cocoa, rum, coffee and citrus products) accounted for approximately 40 per cent, while non-traditional products accounted for 60 per cent. Free Zone manufactured exports in 1991 amounted to US$146.2 million, and foreign exchange inflows in 1991 to cover wages and salaries, rental, utilities, etc., amounted to US$21.1 million.
The total value of non-free-zone manufactured exports in 2001 was US$357.0 million in nominal terms. This figure was approximately 65 per cent of the value of non-free-zone manufactured exports in 1995, and only 23 per cent above the figure for 1991. In real terms the value of non-free zone manufactured exports in 2001 showed no positive growth above the level of 1991. In 2001, traditional manufactured exports amounted to US$101.9 million or 29 per cent of total non-free zone manufactured exports. On the other hand, non-traditional non-free zone manufactured exports amounted to approximately US$254 million or 71 per cent of total non-free zone manufactured exports.
In the Free Zones, foreign exchange earnings in 2001, amounted to US$43 million, or 27.4 per cent below the level of 2000. The gross value of exports from the Free Zones in 2001 was US $261.1 million, compared with US$317 million in 1995; which was a decline of -17.6 per cent in nominal terms.
SOME CHARACTERISTICS OF
THE MANUFACTURING SECTOR
A diversified sector, with fourteen major sub-sectors:
A sectoral break-down of the manufacturing sector with comparable performance in real Gross Domestic Product in 2001 v/s 1991 is as follows:
SUB-SECTORS (%) SHARE IN REAL (%) SHARE IN REAL RELATIVE
G.D.P. in 1991 GDP in 2001 Change(%)
- Food (excluding
sugar) 17.7 22.5 +27.1
- Sugar, Molasses
and Rum 3.0 2.9 -3.3
- Alcoholic Beverages 10.1 11.2 +10.9
- Non-Alcoholic
Beverages 1.5 3.1 +106.7
- Tobacco & Tobacco
Products 8.0 6.8 -15.0
- Textiles & Wearing
Apparel 4.9 2.5 -49.0
- Leather, Leather
Products & Footwear 1.3 0.6 -53.8
- Furniture, Fixtures,
Woods & Cork Products 3.1 2.7 -12.9
- Paper & Paper Products
Printing & Publishing 3.7 2.9 -21.6
- Petroleum Refining 14.8 11.2 -24.3
- Chemicals, Chemical
Products Rubber and
Plastic Products 12.3 8.5 -30.9
- Non-metallic mineral
Products (excld.
Petroleum & Coal
Products) 5.5 7.7 +40.0
- Metal, Fabricated Metal Products, Machinery & Equipment 13.6 16.9 +24.3
- Other Manufacturing 0.3 0.5 +67.0
Although real manufacturing G.D.P. for 2001 was approximately 8.8 per cent below the level of 1991, the sub-sectors which improved their relative significance in the over-all manufacturing sector included: Processed foods (excluding sugar), alcoholic Beverages, non-alcoholic beverages, non-metallic mineral products and metal, fabricated metal products, machinery and Equipment.
High levels of un-utilised and under-utilised production capacity. The amount of empty factory space advertised recently by Factories Corporation of Jamaica was approximately 355,000 sq.ft. The Garmex Free Zone had a 20 per cent occupancy level in 2001, and the occupancy level in the Montego Bay Free Zone was 63.4 per cent in 2001. The Kingston Free Zone had an occupancy level of approximately 80 per cent but mainly for warehousing business activities. Additional un-utilised production capacity has been created in the manufacturing sector as a result of the closure of more manufacturing firms in 2002.
(iii) A Large pool of unemployed persons, with specific skills and training ready for employment in the manufacturing sector. There were 17,200 unemployed manufacturing sector specific skills in the Labour Force in April 2001. According to the 2001 STATIN's Labour Force Survey, the number of unemployed persons across all professional, technical, vocational and other occupational groups was 163,500. Therefore, there is a large pool of readily available unemployed skills from which the manufacturing sector could absorb management, technical vocational and other categories of human resources to kick start a strong growth and investment momentum.
(iv) High levels of value added contribution. The value added contributions of the manufacturing sector can be broken into the following general categories:
- Operating surplus (36.6 %)
- Compensation of employees (34.6%)
- Indirect taxes (23.6%)
- Consumption of fixed capital (5.2%)
The per employee real value added contribution of the manufacturing sector in 2001 was $72,177; broken down as follows:
- Operating surplus: $26,417
- Compensation of employees: $24,973
- Indirect taxes: $17,034
- Consumption of fixed capital: $3,753
These data suggest that despite the difficulties in manufacturing, the sector has the capacity and potential to generate significant levels of reproducible capital (via operating surplus) and at the same time significant levels of direct jobs and revenues to the Government.
Some Critical External Constraints Facing Jamaican Manufacturers
- UNCOMPETITIVE LENDING RATES and inadequate financing for both loans and equity purposes, and these impede long term investments.
- High risks of price dumping, especially from goods out of China (inadequate policing of the quality of imported goods).
- High and uncompetitive electricity costs.
- High security costs.
The resolution of the foregoing external constraints lie within the domain of the Government of Jamaica.
Some Critical Internal Constraints Facing Jamaican Manufacturers
At the micro level of the firms some critical constraints faced are as follows:
- Uncompetitive capital structures with high capital costs, high debt servicing costs and high debt to equity ratios.
- Low development of international business alliances which could provide better access to international brand names, promotional materials, selling techniques, Research and Development (R&D), finance capital and technology transfer to build globally competitive firms, producing globally competitive products.
- Low productivity and low motivation on over-time production (both linked to taxation on overtime income).
The resolution of most of these internal constraints lie within the domain of the management of the enterprises.
Strengths and Opportunities for Growth at the Enterprise or Industry Level
- Some firms are now operating with relatively low levels of capacity utilisation, and therefore have significant room for output expansion in the short to medium term, without the need for additional plan capacity.
- Some manufacturers have already undertaken substantial retooling, plant upgrading and product rationalisation, thereby eliminating marginal products.
- Some manufacturers can expand production over the short to medium term without having to find new markets.
- Some firms have already developed alliances with international or global firms in their industry to get better access to market, R&D, and technology.
- Some firms have the potential to develop as linkages or spokes into a "Mother Firm" type production mode.
- There is a significant amount of empty factory space available.
Weaknesses and Threats at the Enterprise or Industry Level
- The small scale operations of some firms restrict their scope for developing economies of scale production systems.
- Production systems that were designed for small import substitution markets are becoming obsolete, when operating as stand-alone economic units. But some of these firms could be re-positioned within a new production mode to create some critical mass manufacturing activities, by placing them into Production Clusters or Zones.
