Robust economic growth has to be private-sector led – IMF
Lavern Clarke, Business Editor
Regional governments have long used tax subsidies to entice private capital, but now they are being urged into a new direction by their multilateral backers who say it’s time to fix the business climate.
At less than three per cent annual growth on average, there is emerging consensus that the region needs a change of strategy if it is to create enough output to deal with its debt overhang and sustain jobs.
At a conference of Caribbean financial officials and multilateral financiers in Nassau, Bahamas, which began Thursday, Warren Smith, president of the Caribbean Development Bank said GDP growth at less than three per cent growth was too low to make a significant dent in unemployment, and a regional deficit of four per cent was unsustainable.
But with governments now working through programmes to deleverage their balance sheets, their capital budgets are unable to sustain big growth-inducing projects.
That leaves private capital.
“Durable growth,” says Alejandro Werner, the director of the Western Hemisphere Department of the International Monetary Fund (IMF), has to be “private sector-led.”
The region has to find new ways of financing projects that take the load off governments’ balance sheets, while policymakers concentrate on innovations that, for example, drive developments in the capital markets, he said.
Smith, harping back to a conversation he said he had with a Jamaican journalist, suggested that while policymakers must do outreach, the private sector has to take an active role.
“… I had to remind a journalist that there is something called the private sector that has the lead role in generating economic growth. If the state has appropriately ‘rolled the pitch’ and the business community remains on the sidelines as spectators, the state-driven activities described above will likely lead to compression rather than growth,” the development banker said.
Jamaica, the Bahamas and other economies are already in the process of executing public-private partnerships and other privatization models to divest and/or develop public assets.
However, the prime minister of Bahamas, Perry Christie, indicated Thursday that incentives remain an important driver of capital, and that his country needs some leeway to use tax policy as ‘payback’ to investors who are asked to pay for infrastructure and other support services that would normally be the responsibility of the government. Such is the case, he said, for investments in undeveloped remote areas.
Jamaica, which is working through a new four-year loan programme with the IMF, will be rolling back the majority of its tax subsidies – which at one point amounted to billions of dollars -- to businesses by the end of the year.
Private capital, especially in the tourism sector and manufacturing, has relied heavily on the tax breaks over time.
However, the practice has been criticized as hidden spending through the tax code, and as potentially distortive and unfair to competing businesses that do not get the same tax breaks.
Asked what would incentivize investors in the absence of the tax subsidies, the IMF Division Chief in the Western Hemisphere Department, George Tsibouris, said surveys show that tax breaks are not the most important driver of investment capital.
What businesses want, he said, speaking on the margins of the conference called The 2013 High Level Caribbean Growth Forum, is access to workers with the right set of skills, a legal system that ensures “excellent rule of law”, and a secure environment.
Those are the areas in which governments ought to be investing, he said.
As to whether there has been too much reliance on tax policy, Adrienne Cheasty, IMF deputy director in the Western Hemisphere Department said: “If a country is running a high deficit and debt, then it must have been too reliant on something it can’t afford.”
Tsibouris said the IMF is not so much concerned with fiscal adjustment as it is with “fiscal composition”, which he further defined as the “spending portfolio”.
“We’ve not said that for good investments don’t spend the money,” he emphasized.
As for the sectors that have growth potential, he and Cheasty said there was scope in tourism and agriculture.
The 2013 Caribbean Forum is organized by the IMF, World Bank, CDB and IDB in collaboration with the Bahamas as host government. The conference ends today, Friday.
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