IN Sunday’s Business Observer article, I noted that Jamaica had lost competitiveness because the pricing, not the volume of output (which had seen a limited increase) of its non tradable sector e.g. areas such as government, finance (all domestic), retail etc had essentially grown at the expense of the tradable sector (tourism, manufacturing etc) from 2001 to 2010 (and no doubt much longer).
The simplest way to explain what this means is by way of analogy, using more familiar examples from the US. In the US, over the past several decades, leading economists (not to mention the squeezed US middle class) have noted that there has been a massive increase in the cost of education (particularly for college) and health care, both sectors that currently are for the most past not tradable internationally. This dollar cost inflation has been reflected in a sharp increase in the value of these sectors as a percentage of US GDP, and is a very large multiple above the increase in those actually going to college or being treated in hospital. In short, they have seen a huge increase in their prices, with a very small increase in their measured volume of output. Whilst there are many reasons for this, many people, including President Obama, have realised that this can’t continue, and it is making the US much less competitive than it would otherwise be, increasing costs for firms (health care), and reducing the supply of trained manpower (education). In fact, the US is specifically targeting growing its manufacturing sector as a policy.As explained more fully in my Sunday article, Jamaica has seen a severe loss of competitiveness, and is now at the same decision point the Irish faced in 1987, Barbados faced in 1992, and many other countries globally have faced. In short, competitiveness needs to become our first priority. In analysing what it required to grow our economy, and what it means to be competitive, it is first necessary to understand what Jamaica’s problem really is. Jamaica’s economic problem is not actually the use of incentives, which have been used globally in all countries including the US as part of economic development strategies with varying effect. To look at just two economies, Ireland and Singapore, Ireland’s greatest period of economic transformation, between 1987 and 2002 (covered in detail in my on-line paper “From Celtic Tiger to Carib Tiger”) , occurred when it relied most on incentives, most particularly using the incentive rate of 10 per cent for manufacturing and internationally traded services on corporate profits to attract overseas multinationals. It was only under severe pressure from the EU (where countries such as Germany regarded this as an unfair competitive advantage) that they went to a single flat corporate tax rate of 12.5 per cent. This was much lower than the EU thought they could achieve, and effectively retained their competitive advantage and their foreign direct investment.Where Ireland went off the rails during the global financial crisis (and of course they were not alone), is that between 2003 and 2007 they had a huge
real estate, government (increase in size and cost) and consumption boom as they thought they were now rich. In short, they lost competitiveness as a result of a huge increase in their non tradable sector (they continued to grow around five per cent per annum between 2003 and 2007 but it was now false growth), and a sharp increase in overall costs generally, which they have now, very painfully, largely reversed over the past five years of austerity.Singapore, unlike Ireland, had much tighter financial regulation and did not allow the type of credit boom that occurred in Ireland. However, despite also having a low corporate tax rate, in their case 17 per cent, and being consistently regarded as one of the world’s most competitive economies, Singapore still sees the need for additional targeted incentives to encourage a variety of sectors.Why these countries are relevant to our discussion is despite being small, with similar populations to Jamaica, they both successfully followed “gateway” strategies, for Europe and the Far East respectively. This meant attracting particularly US multinational investment to upgrade their economies technologically through a genuine focus on a business friendly environment, taking advantage of their location and the international business gift of the English language as an entry point for international investment.One key element of the success of both is that they consciously prioritised education over physical capital investment, or put more simply, schools over highways. This consistent long term decision may be at the heart of their impressive productivity growth, compared with Jamaica’s dismal performance.As mentioned in Sunday’s article, the supposed puzzle of low growth and high investment in the Jamaican economy may not be a puzzle at all. As Professor Donald Harris notes in chapter seven of the PIOJ’s Growth Inducement Strategy, it is likely that it reflects chronic fiscal imbalance, underutilisation of productive capacity, economic waste of capital, and concentration of capital investment in highly capital intensive sectors.Harris notes that studies have reported negative labour productivity for the Jamaican economy. Critically, Harris notes that it is “implausible to suppose that in the face of significant accumulation of capital (high investment rate), labour productivity could be negative and large enough to make such a big difference in terms of overall output growth. This is because capital accumulation is itself associated with positive labour — productivity growth, for familiar reasons….related to product and process innovation, organisational improvements in production and supply — chain management, learning effects among workers and managers, investment in education..”.The answer is that, as noted in Sunday’s article, foreign direct investment (FDI) in tourism has actually been quite low (a mere US$71.8 million in 2010) compared with the decades average for capital investment of 25 per cent of GDP that is the key figure behind the supposed high investment/low growth puzzle. In the case of tourism, of particular importance is that not all of the FDI over 2003 to 2010 was greenfield investment, much less now with the effective end of the Spanish invasion. For the last three years, FDI mostly involves existing hotels changing hands.Having looked at the FDI figures, let us now return to Ireland and Singapore. Unlike Jamaica, these countries saw huge foreign investment creating entirely new export industries driving technological innovation, productivity and exports, including billion US dollar Intel chip making plants. This is unlike Jamaica, where even a US$2 million dollar investment in a machine can be regarded as a noteworthy capital investment. In short, not all capital investment is created equal. It is likely that most of what has been recorded as capital investment in Jamaica was in some form of non – productive
real estate, closer to consumption than investment, and in no way comparable to the huge investment in capital goods for export manufacturing seen by some Asian Tigers with supposedly similar investment ratios. In short, the whole analysis of Jamaica’s true economic problem may be “distorted” (there is no puzzle) which we will address in more detail in further articles. In short, as we showed on Sunday, Jamaica’s primary problem is not that our tourism industry has been performing particularly badly (even in terms of linkages), although it could certainly perform better, but that we have completely failed to create other new tradable (meaning export), productivity increasing sectors (like information technology and pharmaceuticals in Ireland).Foreign direct investment in tourism has actually been quite low compared with the decade’s average for capital investment of 25 per cent of GDP that is the key figure behind the supposed high investment/low growth puzzle.
View the original article here
What is really wrong with the Jamaican economy?
Justin was bleary-eyed with sleep when he opened the door to see his grieving parents Police in a small Alaska town mistakenly told a couple their son had been killed in a car crash, leading to an extraordinary reunion hours later.%5CABS%5CAuto%20Blog%20Samurai%5Cdata%5Cjam%5Csport%5CNewsS1602_1_P3WKPGongRoAM.jpg)
%5CABS%5CAuto%20Blog%20Samurai%5Cdata%5Cjam%5Cent%5CNewsS1602_1_P3WKPGongRoAM.jpg)