A case of economic malpractice

Claude Clarke, Contributor

Edward Seaga turned towards me with visible disbelief and wryly muttered, "Not during my time." Dr Wesley Hughes, the current financial secretary and director general of the Planning Institute of Jamaica during the 1990s, had just made the shocking revelation that "a decision was made by Jamaica's governments in the 1980s and 1990s to make Jamaica a services economy". Dr Hughes was speaking at the recent PwC forum reviewing the 2012-13 Budget and was attempting to explain the weak performance of industrial production in the economy during the last 20 years.

What's more, Dr Hughes made this remarkable statement after having affirmed the fact that manufacturing offers a greater opportunity for value creation than either agriculture or services.

The reaction of the former prime minister and finance minister was, therefore, not surprising. After all, during the five-year period most affected by his 1980s economic policies, goods production rose to levels not seen since the boom years of the 1960s. Manufacturing output and exports were growing. Some of the biggest names in global manufacturing operated in Jamaica. And a whole new modern garment-manufacturing industry was created, employing nearly 40,000 workers and generating exports exceeding half a billion US dollars annually.

This decision to sideline manufacturing in favour of services seemed completely divorced from rationality, given the relative vibrancy of the manufacturing sector at the time. Jamaica's manufacturers were outperforming CARICOM competitors in regional trade by as much as 40 per cent before Trinidad imposed its trade embargo against them. Manufacturing's contribution to exports and import substitution was significant in bringing our exports to within 40 per cent of imports - a level not seen since then. Today, imports are almost four times the value of our exports.

Prospects for growth in manufacturing were being facilitated by access to the developed markets of the world through trade agreements like CBI, CARIBCAN and the GSP. Bilateral pacts with Venezuela and Colombia were available for favourable entry to those markets. And trade agreements with CAFTA and its member states could have been easily arranged to further extend market access for our manufactured output.

The 1980s ushered in an era of unprecedented industrial expansion in the developing world. The revolution in shipping logistics had removed the logistical barrier between the low-cost manufacturing capability of the South and the lucrative expensive markets of the developed North. The world was going through an unparalleled transfer of industrial production from the Northern industrial giants to the developing world. According to the McKinsey Global Institute, 85 per cent of the 1.1 billion non-farm, mainly manufacturing, jobs created between 1980 and 2010 were in developing countries.

Ja missed manufacturing boat

Unlike in Jamaica, the leadership of successful developing countries understood the global trends and turned their economies towards manufacturing to capitalise on the migration of manufacturing jobs from high-cost producers in Europe, North America and Japan. And, consequently, while manufacturing in Jamaica shrank, its contribution to their economies expanded. In Trinidad, manufacturing's share of GDP rose by over 100 per cent.

At the same time, developing countries that, like Jamaica, are blessed with natural aesthetic gifts were not content to rely on their successful tourism industries. They also leveraged the intellectual capacity of their people and developed strong international business service industries to supply the high cost economies of the North. The success of this strategy is exemplified in the economic growth of Barbados, Cayman and The Bahamas while Jamaica stagnated.

Remarkably, despite the claim to have made a strategic shift to services, there is very little evidence that the Jamaican Government put the necessary institutional and policy infrastructure in place to attract and accommodate this type of activity in the country.

I am aware that, through JAMPRO, Jamaica, along with Barbados, pitched for the highly lucrative international business services at a major forum in California in the mid-1990s. Since then, Barbados did what was necessary to accommodate this business activity, and today offshore business services is estimated to contribute almost one-third of total government revenue.

But in Jamaica, those who declared their intention to make Jamaica a services economy failed to institute the necessary enabling legislative, administrative and policy infrastructure to make the operation of such an industry possible.

Given these glaring facts, what could have possessed our economic stewards to make the radical decision that Jamaica should give up the progress it had made in manufacturing, buck global economic trends, ignore the opportunities of beneficial trade agreements and put all Jamaica's economic eggs in the services economy basket, for which there was no track record, no policy and institutional preparation, and no realistic supporting economic rationale?

So what has been the performance of Jamaica's services economy since then?

In 1992, our total exports of goods and services exceeded total imports. By 2008, as imports replaced domestic goods production in keeping with the policy to de-emphasise manufacturing, exports of goods and services were barely enough to pay for 60 per cent of our total goods and services imports.

In the 20 years since 1990, the gross value of services exported as a percentage of GDP has declined by approximately 20 per cent.

Export services, which in 1990 exceeded services imports by more than 100 per cent, were a mere 13 per cent higher in 2008. What happened to the vaunted services economy?

Well, since the early 1990s, while this policy would have been in effect, domestic services increased its share of GDP by almost 25 per cent. The proponents of a services economy might point to that as a positive outcome of the policy change. But there is a marked difference between the benefit of domestic services and export services to an economy.

The differing impact of the two is analogous to the relative effect of bad and good cholesterol on the human body. Cholesterols perform an essential and beneficial function in the body. But depending on their structure, they have the potential to do more harm than good. Those with the potential for harm are bad cholesterols. And too much of that type is dangerous to health.

Similarly, services are necessary in an economy. However, domestic services have the potential to be harmful because they represent a cost to productive economic activities. And if too high, domestic services will harm competitiveness and the health of the economy. On the other hand, like good cholesterol, export services such as tourism offshore banking, insurance, accounting and call centres are a net benefit to the economy.

We must also recognise that unlike goods, prices for most of our domestic services are not subject to the restraining influence of foreign competition. The cost they impose on the economy must, therefore, be contained by domestic economic policy so that they do not become an unrecoverable cost on the real economy.

Jamaica's real economy contracted following this policy shift. Goods and export services, as a share of GDP declined by more than 30 per cent and the economy stagnated, registering average growth of less than one per cent. Taken together, goods and export services share of GDP declined by more than 30 per cent and the economy stagnated.

Effects of shifted focus

The revelation that Government deliberately removed its focus from the production of goods to services explains the seemingly irrational economic policies that piled pressure on the country's goods producers for more than two decades and decimated the productive sector. It explains interest-rate and exchange-rate policies that senselessly raised the foreign-exchange cost of all local inputs to production without regard to the economy's falling productivity.

The decades-long failure to address the high cost of energy can only be explained by that fateful policy decision. And it certainly explains the hitherto inexplicable sanguineness of our governments and their economic technocrats with the persistent 'bang-belly' economy that emerged in the 1990s: an economy characterised by a distended domestic services sector and a wasted productive sector.

The kindest verdict that can be reached on those responsible for this decision to convert Jamaica to a services economy is: guilty of economic malpractice. The only remaining question is whether our political leaders and economic planners have learned anything from the experience.

Jamaica has largely missed the global shift towards low-cost production of goods and services that enriched more developing countries than ever before. Some, like Singapore, have ridden this wave across the economic divide between the North and the South to become First World. Jamaica has drifted in the opposite direction.

The problem we face today is that the global economic landscape is no longer what it was in the 1990s and 2000s. The export of manufacturing and services jobs from the industrialised North to the South has slowed to be barely perceptible. Now, following the global economic crisis, the guiding mission of the developed countries is to repatriate their previously exported manufacturing and services jobs in a new phenomenon called 'insourcing'.

Have any of our economic planners even begun to think about a strategy to address this? I think not. They are still hopelessly lost in denial of their past economic malpractice.

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