Designing an economy for growth
Claude Clarke, GUEST COLUMNIST
This year, for the first time in its 89-year history, the Cocoa Merchants Association of America held its annual convention outside the United States. The country chosen as its venue was the Dominican Republic (DR).
This is remarkable only because it was a mere 30 years ago that the DR was a highly unstable banana republic, crippled by a long history of repressive dictatorial governments and its people mired in fear and poverty. In 1990, Jamaica's per-capita GDP was 70% greater than theirs and they had no tourism industry to speak of. The country then barely attracted 250,000 visitors, while Jamaica received more than twice that number.
I did not attend the convention in the DR, but a Puerto Rican associate of mine who did was effusive in his praise of the accommodations and overwhelmed by the dramatic transformation of Punta Cana, the region of the country in which it was held.
In just over 30 years, Punta Cana, a small area in the eastern corner of the DR, with a population of under 100,000, has seen the development of more than 35,000 mostly luxury hotel rooms, modern infrastructure and the third-busiest international airport in Central America and the Caribbean, all financed with private domestic and foreign capital. The DR now has more than 70,000 hotel rooms, two and a half times as many as Jamaica.
While Jamaica's stopover tourist arrivals have quadrupled since 1990, the DR has seen a sixteenfold increase. Yet, it did not have its own airline and its government did not focus its attention on building monuments to tourism like the Montego Bay Convention Centre. Instead, the DR concentrated its efforts on designing economic policies, tax incentives and institutional support mechanisms to spur private foreign and domestic investments in the development of the industry.
What is most interesting about the rapid development of the DR's tourist industry is that, unlike Jamaica, it did not sideline its goods-producing sector in favour of services. Manufacturing growth in the DR has been as impressive as growth in its tourism. This was substantially spurred by the establishment of more than 50 free zones scattered across the country, ensuring geographically even development and participation by both local and foreign businesses.
The principle on which the free-zone concept works is that inputs to the production process are not taxed. This principle is central to the DR's strategy to develop manufacturing. But it is one that our Government seems not to have countenanced in its recently announced economic package. Tax waivers, in some cases, serve the same purpose of removing taxation from the inputs to production; and it is to be hoped that the system will be properly considered in the proposed omnibus incentives legislation instead of indiscriminately doing away with waivers.
By removing as much of the burden of taxation as possible from productive inputs and incentivising investments in production, the DR achieved overall average annual economic growth of more than 5.5% over the last 20 years. It has erased the 70% per-capita GDP advantage which Jamaica had in 1990 and has now moved ahead of us.
In doing so, the DR relieved Jamaica of several job-creating and foreign exchange-generating manufacturing activities. For example, ice cream previously made in Jamaica by Cremo is now produced in the DR, and that country has captured much of the thriving cigar export business Jamaica enjoyed after the US embargo blocked Cuban exports.
LOW-COST DOMESTIC INPUTS
According to the Dominican businessmen with whom I have spoken, their success in manufacturing and tourism is attributable to the low cost of domestic inputs created by government's economic policies which enable them to price their goods and services competitively.
The government has ensured that, despite electricity generation and distribution problems, its producers have moderately priced energy. Electricity, at 18 US cents per kilowatt-hour, is less than half the rate in Jamaica. Yet, energy is used more productively, as the country consumes less than a third of the energy used by Jamaica per dollar of GDP. Inflation and incomes have grown moderately and the DR peso has been managed to maintain its international competitiveness. The result has been growth across its productive sectors.
This is how a government committed to economic growth can best involve itself in its economy: creating the policy and institutional framework that enables, encourages and assists all productive activities in the country to be competitive, without necessarily favouring one productive sector over another.
By contrast, the Jamaican Government, which expends 80% more of GDP than the DR and neglected its manufacturing in favour of services, has not been able to keep pace with the DR's tourism growth.
Although tourism has been Jamaica's star economic performer, it remains a wonder that with the stellar appeal of our culture and the global marketing power of Brand Jamaica, the island's tourism growth has lagged behind that of the DR.
This relatively lethargic growth cannot be attributed to individual private players in the sector. Performance in tourism, as in any other sector, is much less determined by the performance of individual enterprises than by the policy and institutional environment within which they operate.
Government must never be anything but fully engaged in the economy at all times. But it is the nature of its involvement that determines its effectiveness.
While our Government has been fantasising about elusive grand projects which it hopes will bring growth, the DR has been organising its economy to take advantage of real global and regional economic opportunities. Like Jamaica, the DR signed the Economic Partnership Agreement that provides duty-free, quota-free access to the market of more than half a billion affluent citizens of the European Union (EU). But after its signing in 2008, Jamaica's non-alumina exports to the EU plunged 30% by 2011, while the DR has seen a 22% rise in its exports to the European trading bloc.
The DR-CARICOM agreement was intended to boost exports between participating countries. But in the years after its implementation, between 2000 and 2012, the DR saw its exports to Jamaica grow 600%, while Jamaica's exports to the DR declined 90%. And Jamaica's small trade surplus of US$4 million in 2000 was converted to a deficit of US$74 million.
Jamaica could learn much from our Spanish-speaking Caribbean neighbour. An essential lesson would be how to design an economy built for growth. But our Government seems incapable of wrapping its mind around the concept. Having promised the country a growth agenda, the Government then wrote a Throne Speech for the governor general that sets as a major priority for this fiscal year: improving Jamaica's rating on the International Finance Corporation's (IFC) Ease of Doing Business index.
A favourable climate for doing business is highly desirable, but when did this index become the determinant of economic growth? The fast-growing BRIC countries, Brazil, Russia, India and China, are all ranked behind Jamaica on this index and the floundering PIIGS of the Eurozone, Portugal, Italy, Ireland, Greece and Spain, are all ranked ahead of us.
What is the matter with our leaders? Can't they sort out degrees of importance and understand the supreme value of getting the elements of competitive costs within the economy right? Is it too difficult for them to understand that it is because the DR has managed its affairs with a singular focus on competitiveness that, although it ranks behind Jamaica on the IFC's Doing Business index, it has been able to surpass our economy and now seems set to leave us in its dust?
For the next four years, Jamaica's economic management will be heavily influenced by the priorities of the International Monetary Fund (IMF). But although these priorities have traditionally been bent toward the interests of international creditors, it is to be hoped that enlightened self-interest will lead the Fund to recognise that Jamaica's economic interest and the financial interests of its creditors are closely intertwined; and that there is consonance between prioritising Jamaica's economic growth and the financial interest of its creditors.
However, the Government's present economic programme contains little that will encourage growth in the economy. It seems to rely on the hope of mega projects like the proposed logistics hub and the still-to-be-born Harmony Cove. But it is not mega projects but a competitive economic environment that provides the basis for a country's economic development.
It will be the Government's challenge to design changes to its economic plan that will lay the foundation for expanding production within the new IMF programme. Changes must include sensible tax reforms to incentivise investments in the production of goods and export services; measures to reduce costs in the economy; and a workable plan to aggressively reduce the cost and increase the efficiency of Government.
But will the Government have the vision, the wisdom and the courage to engage the IMF in this way and at last design an economy for growth?
Claude Clarke is a businessman and former minister of industry. Email feedback to firstname.lastname@example.org.