Densil Williams, Guest Columnist
It is no secret that Jamaica has a growth problem. For four decades, our average growth rate has hovered around 1%, while similar countries such as Singapore and Barbados grew in the rage of 6-8%. Their citizens now enjoy a higher standard of living as measured by their per-capita income than Jamaicans do.
Singapore has a per-capita income of more than US$43,000; Barbados' per-capita income is around US$23,000, while Jamaica stands at around US$5,000. The disparity is even more alarming if one looks at the fact that these countries are all coming from roughly the same per-capita income of around US$390 in 1960. Indeed, for Jamaica to catch up, it has to grow its economy, full stop. Meandering along with 1% growth is not going to cut it.
However, it must be appreciated that economic growth is not an effortless task, especially for a small, open economy with so many structural problems and vulnerabilities. It is in this context that the discourse on growth in Jamaica has to take place. This article, and some of the others to come, will focus on various impediments to Jamaica's growth over the last 50 years and also provide some insights into dealing with these challenges. The first issue that will be tackled is energy.
ENERGY AND GROWTH
The high cost of energy in Jamaica is clearly an inhibitor to economic growth. To grow the economy, Jamaica will have to increase the production of goods and services each year and sell these into the marketplace.
If people are buying Jamaican goods, the producers will be obliged to produce more. So, the greater the demand for a country's goods and services, the greater the likelihood that the producers of those goods and services will increase their production. All other things being equal, the overall output of the country will be increased as well.
However, because of the high cost of energy, it is difficult for Jamaican goods to compete in the marketplace. Price competition, therefore, is not an option for Jamaican producers in the local and international marketplace. As such, Jamaican producers are at a disadvantage, as the majority of consumers are price sensitive. When they go to the stores, they will choose a product with a lower price, assuming all other factors remain constant.
While in the main it is accepted that Jamaican firms can be more efficient and cut wastage in order to reduce their cost structure and eventually compete at better prices, it is not always true that the high price of Jamaican products results from inefficiency at the firm level. The onerous burden that energy places on the cost structure of Jamaican firms cannot be overlooked when analysing price competitiveness in the marketplace.
Cement production is a good example of how high energy prices impact cost structure of an enterprise although the firm performs efficiently in other areas. To produce one ton of cement, Caribbean Cement Company Limited, a subsidiary of the Trinidad Cement Limited, uses roughly 102kWh of electricity, while in Trinidad, cement producers use 110kWh of electricity to produce the same ton of cement.
Carib Cement, however, pays US$0.30 per kilowatt-hour for electricity from the Jamaica Public Service Company (JPS) - note, this is a preferential rate arrived at through negotiations - while cement producers in Trinidad pay US$0.03 per kilowatt-hour. As such, although the Jamaican plant is roughly 8% more efficient with the usage of electricity, it still faces a US$27 higher cost to produce the ton of cement.
The high price of energy in Jamaica is clearly a deterrent to increased production and, by extension, the future growth of the economy.
THE SOLUTION MIX
There will be no single solution to deal with the high cost of energy in Jamaica. What we all agree on is that we must reduce the exorbitant cost that consumers have to pay for this vital resource. For sure, there has to be greater efficiency on the part of the JPS in providing energy to its consumers. Its heat rate must be improved, similar to those of the private power producers; its system loss has to be improved; and most important, it has to use the most efficient technology to produce electricity for its consumers.
Indeed, the Energy Think Tank at the University of the West Indies, Mona, in its latest publication in the Mona School of Business (MSB) and Management Review, showed that to combat the inefficient rate of conversion of fuel into electricity, combined heat and power system (CHP) - co-generation systems - is an important technology that can be used.
The researchers noted that more than 8 per cent of the world's electricity-generating capacity is produced by CHP systems. While the current conversion rate of fuel into electricity by JPS is merely 34%, the CHP systems are known to have a conversion rate of between 75-90%. Clearly, these efficiency rates make a compelling case for JPS to think seriously about the types of technology it uses to produce electricity.
Despite the need for better technology to reduce system's loss, diversification of fuel source, among other things, if we do not get fuel at a cheaper rate, we will not be able to reduce energy costs in the very near future. Put differently, the price we pay for a barrel of oil has to be reduced.
We are not going to get cheaper energy if we cannot find a way to get a lower price for access to the fuel source that is used to produce the electricity. I believe we can get fuel cheaper if we make functional cooperation in CARICOM work better for us as a region.
CARICOM AND ENERGY
In CARICOM, we have oil-rich Trinidad which has a trade surplus with almost all countries in the movement, mainly because it can produce everything cheaper than any other member state, given its low cost of energy. To their credit, cheap energy is not the only reason why Trinidad is doing well.
Trinidad has adroit leadership in its enterprises and also invests significantly in its enterprises so that they can compete more robustly in regional and extraregional markets. However, having cheap energy helps a great deal.
If Trinidad wants to continue to do well in the region, it has to ensure that it is surrounded by a group of states which are also doing well. Trinidad's future success is directly linked to the healthy growth of all economies in the region, given that the Caribbean is a major consumption market for its goods and services.
As such, it is in the best interest of Trinidad to help other members of CARICOM to deal with their energy problem. A big way to start is to provide fuel at concessionary rates to the other member states. Maybe the rates to other CARICOM members are not as concessionary as those given internally to Trinidadian firms. However, what we may need to have is a sort of LIBOR arrangement for the energy market in the region and then Trinidad can sell to other CARICOM members at some small rate above the energy LIBOR arrangement.
TRADE ON THEIR STRENGTHS
Whatever the configuration of the energy arrangements, CARICOM would be much stronger if countries in the region trade on their strengths and find areas of complementarity rather than merely moving goods and services around and trying to hold the community together on a fickle premise of trade integration.
Energy is clearly complementary to the production process, and if Trinidad can take the lead on this and design a system where Caribbean countries can benefit from special arrangements to get cheaper fuel, this will be a great start to move the economies of the region forward.
The cost of energy in Jamaica is definitely too high to ensure that firms can compete effectively in the marketplace. This high cost becomes even more burdensome given the small size of the economy and the inability of the firms to generate scale in production.
While various options exist to reduce the cost of energy, it is imperative that we get a cheap source of fuel in the short run. This will help us in the short run to reduce the cost of energy significantly.
Oil-rich Trinidad, which is a member of CARICOM, will have to help in this regard. Providing fuel at concessionary price to CARICOM members will be a great start and will help struggling economies deal with their energy bill.
CARICOM must act now to help the region in this regard.
Dr Densil A. Williams is senior lecturer of international business at the MSB, UWI. Email feedback to firstname.lastname@example.org and email@example.com.