Rosalea Hamilton | Economic pivot to ensure ‘no one is left behind’

On November 19, Prime Minister (PM) Holness announced a new economic policy to pivot the economy from macroeconomic stability to growth. He noted that good fiscal management and macroeconomic stability are now “business as usual” and proudly announced: “mMssion accomplished on economic stability.”

Earlier, Finance Minister Fayval Williams described this stability as the “launch pad for further economic growth and development”. The announcements raise many issues worthy of attention.

MACROECONOMIC STABILITY

Economists work with two views of macroeconomic stability: 1) A balance (i.e., no surplus or shortages) in economic relationships, such as savings and investment, fiscal revenues and expenditure, domestic demand and supply for goods and services, as well as for labour and capital; and 2) A balance in the market for goods and services, and in savings and investment, with imbalance in the labour and capital markets due to underutilisation of capacity (i.e., under full employment equilibrium). Both views assume that there is enough capital (i.e., human, financial, or physical goods or services and imports) to fully employ the available labour force.

However, in his presentation, PM Holness noted that the shortage of skilled labour, which contributes to underemployment, “is now a binding constraint on our growth”. Today, about 77 per cent of the employed labour force has no formal training or the lowest skill levels defined by the International Labour Organization , i.e., skill levels 1 or 2 (about 17 per cent).

Underemployment implies a shortage of capital to employ available labour. The shortage of capital, in turn, means that there are inadequate or rundown facilities in workplaces relative to the standards thought acceptable by workers. There are also many segments of the economy, like agriculture in rural communities, or retail, where there are too many inadequately skilled workers that keep productivity low. The surplus labour keeps down the wage rate across the economy by lowering the bargaining power of workers seeking better working conditions from employers.

Accordingly, capital shortage is also why so many skilled nurses, teachers, university graduates, and others leave Jamaica annually for employment overseas, in turn, driving remittance growth. The shortage of capital is also evident in the widespread underdevelopment of communities across Jamaica. Claverty Cottage, a remote community near Blue Mountain peak, is a good example of an underdeveloped community that is dying. It is home to Jamaica’s smallest school, with five students. Water service is intermittent, the roads are treacherous, and there is no public transport or garbage collection trucks. These are all signs of macroeconomic disequilibrium/instability in the economy. Put differently, this imbalance in the labour and capital markets undermines the idea that we have achieved macroeconomic stability!

If macroeconomic stability is a condition for growth, this means that we must solve the problems of skills shortage/underemployment and the shortage of capital before we can achieve the desired conditions for growth. The “binding constraint” in capital markets is not new! It has been a persistent feature of our economy for decades.

In fact, Arthur Lewis won a Nobel prize in 1979 by identifying this problem as a peculiar feature of developing economies that distinguished these economies from developed economies. Lewis specifically observed that it is this problem that characterises the core development challenge facing “surplus labour economies” like Jamaica. It has also contributed to Jamaica’s anaemic growth and low living standards.

If Jamaica has already eliminated the shortage of capital plaguing many segments of the economy, our standard of living would be correspondingly high, positioning us to achieve the “developed world status” targeted by Vision 2030.

Instead, Jamaica’s standard of living (GDP per capita of about US$5,000) is about the same today as it was in 1973 and 2005. This is about 10 times lower than the US$50,000 or higher typical of developed countries today. This is why most Jamaicans are not “feeling” the impact of “prudent fiscal management and macroeconomic stability”. These facts also indicate that while prudent fiscal management, lowering debt to GDP ratio, and keeping high foreign exchange reserves are important pillars for achieving macroeconomic stability, the “mission accomplished” announcement is very premature!

INCLUSIVE GROWTH AND DEVELOPMENT

One thing Jamaicans know and feel is that economic “growth” is not the same thing as economic “development”. If the development problem of capital shortage and underemployment is adequately addressed, there would be no need to announce “mission accomplished”. Jamaicans would experience obvious and sustained improvements in all the dimensions of the life of individuals and communities across the country. There would not only be inclusive growth but also improvements in living standards, the environment, and governance as well as improvements in key interdependent economic variables, including productivity, exports, savings, and capital, required for economic development.

Perhaps the most interesting thing about the prime minister’s economic pivot is the goal to “expand economic activity across the island and to create new economic clusters in smaller towns”. He stated: “We will not achieve robust economic growth by focusing only on Kingston and Montego Bay. We will be focusing on developing the local economy of every parish.” In fact, this statement is essentially an admission that the mission has not yet been accomplished. If it was, all communities would have developed in the process of achieving economic stability. No community or parish would have been left behind!

Further, the process of solving our problems of capital shortage and underemployment requires government to be transformed to avoid errors of the past. Government must become a multilevel governance network that facilitates or undertakes economic activities at different levels: the community, the parish, and the whole country.

This is necessary to enable a joint decision-making framework across multiple levels of government involving not just central government actors and Kingston-based collaborators, but also people from communities across Jamaica.

Such a framework will give rural communities, like Claverty Cottage, a voice and fighting chance to survive. But to ensure that no one is left behind, individuals and communities must be empowered through legal, constitutional, and other mechanisms that strengthens their voice in determining the local development they want.

Rosalea Hamilton, PhD, is founding director, Institute of Law & Economics. Send feedback to rosaleahamilton@gmail.com and columns@gleanerjm.com.