Tue | Nov 30, 2021

How to grow the Jamaican economy

Published:Sunday | June 22, 2014 | 12:00 AM

Delroy Warmington, Contributor

Jamaica needs to end its economic travails and boost growth. Let’s admit it: Jamaica does not have a debt problem but a growth problem. If only Jamaica had been growing at its true potential of 5% per annum, debt would not be a major issue.
 
The Jamaican economy should be a US$30-billion economy rather than a US$15-billion one. At a growth rate of 5% per year over a 10-year period, the debt/GDP would be down to 65%. This is far superior to what the IMF agreement is offering. Yes, debt is a four letter word, but so is grow. Not all four-letter words are bad.

The current government policies seem to be allergic to growth initiatives.  Countries with declining debt appear to grow equally as fast as countries with low debt. It therefore promotes the idea that the priority should be increasing growth rather than reducing debt. In other words, growth is the most effective way of fixing a country’s debt problems.

Unfortunately, the current IMF agreement does not promotes growth. The Government gave in to the IMF without extracting concessions that could stimulate growth. The IMF has now become Jamaica’s compliant government. The current anaemic growth affects the balance of payments, current account, employment and confidence, while applying severe pressure on the Jamaican dollar. Relying mainly on austerity as the only tool for economic adjustment makes the logics beguiling.

The IMF seems to be giving Jamaica a basket to carry water - by trying to get it to accept the debunked Carmen Reinhart and Kenneth Rogoff distorted claim that government debt put a drag on growth. Paul Krugman, Robert Pollen and Michael Ash have all proven this hypothesis wrong. There is no empirical evidence that large debt impedes growth. Rather, it is the lack of growth which causes an increase in debt, resulting in more government borrowing to pay its bills. 
 
The IMF agreement has compromised growth with its emphasis on debt reduction and austerity. As a matter of fact, there is no clear path from austerity to growth. Jamaica needs to boost its economy. Where is the targeted spending to support economic growth? There must be an increase in domestic demand while raising wages and the standard of living.

Can the Government or IMF justify the abysmal economic growth Jamaica is now experiencing? The Zimbabwean economy is projected to grow 4.2% in 2014 and 4.5% in 2015.  There are not many rational people who would honestly say that the Zimbabwe economy is in a better shape than Jamaica's. If they can grow at this rate, why can’t Jamaica?

Jamaica needs to take a look at how Turkey, Peru, Indonesia and the Philippines have been able to average more than 5% GDP growth between 2002 and 2012. They all had severe economic problems in the early 2000s. Remember that in 2002, Jamaica and Turkey had the same credit ratings. Yet since then through 2012, Turkey's GDP has grown more than 300%, the budget deficit has declined from 11.5% to 1.94%, debt has been reduced from 74% to 37%. The middle class has almost doubled since then. In 2002, Turkey was using 90% of its tax revenue to pay interest on its debt. Turkey is now able to finance its current account deficit by long-term capital inflow.

In the case of Indonesia, average wealth has increased fivefold since 2000. Also, exports more than doubled over five years from 2006 to 2011 - from US$84 billion to US$204 billion. The Philippines increased its export 16% in 2013 over 2012.

Peru did not suffer from the debt overhang that Jamaica experienced. Currently, debt is a manageable 18% of GDP, coming down from 47% in 2003.  Keep in mind that Peru defaulted on its debt in 2000. Its progress since 2002 has been nothing but remarkable. The GDP has grown from US$56.8 billion in 2002 to US$203 billion in 2012 - growth of more than 350%.
More than 4 million people have moved out of poverty, in the case of Brazil, over 35 million. Its balance of trade deficit has been eliminated, while significantly expanding and diversifying its economic base.

First and foremost, Jamaica needs to put greater emphasis on exports. Look at Mexico: it exports more than US$300 billion worth of goods to the USA. Don’t tell me Jamaica cannot do 2% of this. This US$6 billion would go along way in alleviating the chronic balance of trade problems while significantly reducing the underemployment and unemployment rate. 70% of the raw materials used in manufacturing in Mexico are imported. A combination of domestic demand and export is needed to propel the economy. Since 2007, Spain has reduced imports by 10%, Greece by 40%, while Portugal has increased exports by over 24% while decreasing import by 5%.

The manufacturing sector has been underperforming for a long time. As a percentage of GDP, it is on a declining trend now at 9%. This needs to move to the 20% range. We need to see more products with the label 'made in Jamaica'. There is a need to invest in and promote manufacturing in order to provide the velocity to effectively grow the economy.
At 6.7% of GDP, the agriculture sector's contribution is woeful. Walk into any supermarket and look at all the imported goods. A vast majority could and should be produced in Jamaica. This sector should be at least 10% of GDP. Bear in mind there is an export market for Jamaica’s agricultural products.

Productivity is a key ingredient of any country’s economic growth. There are too many companies which do not contribute towards the economic growth. Increase in productivity is needed to attain economic targets. Companies need to embrace technology while modernize their equipment.  Jamaica will have to improve productivity by at least 4% per year over the next five years just to keep pace.

Jamaica needs FDI. However, the amount it attracts is inadequate to finance its current account deficit. Jamaica should promote itself as a competitive destination for investments. It should be able to attract at least US$750 million in FDI each year. Since 2003, Colombia has increased FDI ninefold from US$1.7 billion to US$15.3 billion.

Talent enhancement must be a focus. Jamaica needs to improve its global competitiveness. and one of the major ways of doing this is to significantly improve its education standard. There are too many students leaving school without any marketable skill. The Government needs to gently remind both LIME and Digicel that they are regulated entities and need to up their contribution to economic growth. They should be required to give a compressed timetable as to when they will have broadband deployed islandwide. Every school in Jamaica should have broadband access. Like Ecuador, Jamaica should provide free technology training for its citizens. The cost would be minuscule because most of the applicable courses are available online free.
  
skills. It must nurture small business. Currently they are starving for capital. Increasing the availability of capital to this sector should help rekindle the economy. It must improve the efficiency by which capital and labour are converted into goods and services. It is imperative that the government facilitate the link between entrepreneurs and the capital market.
The tax system should favour investment. That is, attractive incentives should be offered to companies making investment in new and existing facilities. Jamaican companies should be encourage and rewarded for investments in research and development. The current rate is not competitive.

Tax avoidance seems to be a norm in Jamaica. Paying taxes should not be voluntary but mandatory. It is estimated that between 30% and 40% of the taxes is not collected in Jamaica. It needs to look at the way Brazil and the Philippines have addressed this. In the case of Brazil, tax revenue as a percentage of GDP went from the mid 20% to the upper 30%. The Philippines has embarked on a tax-collection scheme which includes a name-and-shame approach.  This can significantly increase revenue for the Government. Moreover, it would reduce the need for borrowing, thus reducing the debt.
Jamaica should seriously look at using inflation to reduce its debt. The World Economic Outlook found that a country that uses inflation to help erode it debt ends up in a far better shape than those that rely on fiscal and monetary policies. Look at Japan and its aversion to inflation. Its debt has exploded while its growth has stagnated. In the case of the USA it used inflation and low interest rate to significantly reduce its debt after World War 2. Inflation is good for debtor nations such as Jamaica.

Jamaica’s toxic legacy of distorted economic policies has resulted in a prostrate economyaking growth elusive. It should no longer rely on the epic financial folly of perpetual devaluation. Can anyone tell how the devaluation of the Jamaican dollar over the last 20 years has helped the economy? Over this period, the dollar has lost over 85% of its value.
Growing at 1.4%- 1.7% over the next four years, Jamaica will consistently underperform. Compared to emerging markets, Latin America and the world, the economy has significantly under perform. It is about time policies be implemented that will let the economy grow at its true potential which is at least 5% per year.
 
Delroy Warmington is a global fund manager. Email feedback to columns@gleanerjm.