David Salmon | Analysis of industry, investment and commerce sectoral presentation

Sectoral debates provide opportunities for Cabinet ministers to present their priorities for the upcoming year. This year’s contribution from Industry, Investment and Commerce Minister Audley Shaw saw several noteworthy elements that have the potential to enhance Jamaica’s economic position.

A major focus of his presentation was the stated desire to formalise businesses and provide support to micro, small, and medium enterprises (MSMEs). To achieve this objective, several initiatives were announced, including the earmarking of $600 million to provide financing for MSME development.

The minister stated, “I want our small businesses to know that one of the consequences of becoming a formal business is that you will have access to cheaper money to make your business more competitive.”

We applaud the minister for his efforts to make credit available for MSMEs. Although, when examining available information, access to finance is not the primary reason for small businesses remaining in the informal economy. In fact, Jamaica excels in this regard, with the country ranking 15th in the world in this area on the 2020 Ease of Doing Business Report.

However, the 2017 International Labour Organization study, Informality and Economic Units in the Caribbean, identified lack of knowledge and the perception of high costs of registration as major hindrances to formalisation locally. The study also found that the time associated with paying taxes is in fact a greater deterrent than the actual tax rate for micro and small businesses.

Access to capital was not identified as a challenge. In fact, the report states, “An initial assessment would suggest that access to credit bears no direct influence on the choice of agents to register or not.” Coupled with that, the report on the Jamaica Survey of Establishments 2018 found that ‘high cost of electricity’ (35.6 per cent) and ‘high cost of taxes’ (29.4 per cent) were the two most common challenges for businesses. Access to finance came further down on the list.

This was before the COVID-19 pandemic. It is unlikely that additional MSMEs are going to borrow now when they are experiencing cash-flow difficulties. This is particularly true when examining the types of businesses in Jamaica.

One-third of enterprises were found to be wholesale and retail trade, with another third being motor vehicles repair. While 11 per cent of businesses were involved in accommodation and food services. One can safely say that these enterprises would not necessarily need a loan to expand at this time. Therefore, there continues to be incentives for entrepreneurs deciding not to formalise their businesses. These include: the avoidance of delays with taxes, the cost of electricity, and being unable to identify the benefits of formalisation.

Simply put, providing access to capital will not yield the desired outcome. Currently, Jamaica has a thriving microfinancing industry, with some institutions loaning to individuals without the need for registration. If the desire is to use cheap credit to encourage the formalisation of MSMEs, then channelling these resources to enterprises with certain conditions is needed. Although, caution should be taken in order to avoid disincentivising MSME’s registration by increasing their operational costs.

EMPHASIS ON MARKET ACCESS AND EXPORTS

Additionally, Minister Shaw’s presentation provided other incentives that would address some priorities for MSMEs. Connecting suppliers to markets is one of the most important avenues that can encourage the growth of businesses. A young entrepreneur identified that market access is a major priority for her. By comparison, several entrepreneurs continue to establish businesses without ensuring that they have a guaranteed market for their goods and services. Hence, integrating markets within and outside of Jamaica is necessary for expansion.

For example, a major success that was announced was the application of CARICOM’s common external tariff to clinker and condensed milk, which is beneficial to larger firms that export these products. Greater emphasis should now be placed on accessing markets within Africa, especially since the establishment of the African Continental Free Trade Area, which is one of the largest free trade areas in the world. This presents opportunities for Jamaican firms and shows that building an export led economy is the right direction for the future.

Trading across borders has been identified as a major hindrance for companies, with Jamaica currently ranking 136th in the world in this regard in the Ease of Doing Business Report. Thus, the reduction of the Custom Administration Fee, the digitisation of the trade facilitation process through Jamaica Single Window For Trade platform, and limiting the number of agencies that traders interact with were welcomed announcements.

The Enterprise Development for Export Growth Programme (Export Max) was another highlight of this year’s presentation. Export Max provides capacity building, mentorship and market penetration for exporting and export-ready MSMEs.

Minister Shaw revealed that 30 per cent of the companies that took part in this programme experienced a significant increase in sales in 2020. What is even more commendable is that there was greater market access to Europe, North America, the Caribbean and Latin America.

MENTORSHIP AND RESEARCH

Going forward, further mentorship and training is needed for those who are interested in entrepreneurship. Since many are unfamiliar with the benefits of formalisation, additional education and support programmes would ensure that businesses continue to operate in the formal economy.

Furthermore, more research and development is needed to encourage innovation. While larger economies such as China and Israel spend between two to four per cent of their GDP in this area, Jamaica spends less than 0.1 per cent. This needs to be addressed in subsequent presentations. The announcement of greater protection of intellectual property and research into the usage of cannabis and bamboo are important first steps.

Overall, Minister Shaw’s presentation addressed some major concerns that continue to hamper the Jamaican economy. While other areas need to be addressed, entrepreneurs can be comforted by the fact that some of their pressing needs are being tackled, which would ensure the development of the country.

David Salmon is a member of the Youth Advisory Council of Jamaica and a public policy and management student at The University of the West Indies. Send feedback to davidsalmon@live.com or follow on Twitter @DavidSalmonJA.