Auto appetite will drive us over cliff

Analysts commenting on the turmoil sweeping the Middle East and North Africa have mostly avoided mention of Saudi Arabia, fearful it seems, of contempla-ting the cataclysmic fallout in oil markets that would ensue were the kingdom to be swept up in the political caldron in the region.

We may, however, have seen the beginning of anxiety in oil markets last week as the showdown in Libya, a second-tier producer, sent prices over the US$100-per-barrel benchmark. Were civil unrest to disrupt oil production in Saudi Arabia, the world's second-largest supplier, we could well see prices shooting up another 30-40 per cent overnight.

Even at US$100 per barrel, the price of oil would be substantially above the US$80-per-barrel peak of last year, and, if sustained, would depress world economic growth and set back the recovery of the United States economy. This is already causing Americans to worry about the effect of higher energy costs on their household budgets. While rising oil prices drive up the cost of food, it is gasolene prices that are the most visible marker of the economic impact of higher fuel prices on American consumers. Their instinctive reaction to higher oil prices, therefore, is to figure out how to save on their driving.

special-interest pressure

In Jamaica, the reaction of auto dealers has been to ratchet up their calls for the lowering of duties on motor cars. Their focus is entirely on how to exert special-interest pressure to bring about changes in policy that will enable them to push up their sales. This is in a context where the country's exports are stagnant and the value of imports of passenger motor vehicles went up by 11.3 per cent in the first 10 months of last year, even as expenditure on machinery and equipment declined by 15.3 per cent. Of critical importance is that the oil bill climbed by 16.2 per cent, or US$185 million, in the same period, with fuel for transport being the largest single component.

It seems as if we are still delusional about certain overriding facts of our economic reality. First, there is a distortion in the allocation of resources, such that we invest vastly more capital in transport equipment, specifically motor vehicles, than we do on industrial machinery and equipment. We put even less in agricultural machinery and equipment. The results are seen in the low levels of productivity, fall in competitiveness of our firms and industries, and low growth rates. Giving priority to motor vehicle imports is surely not the way to correct these weaknesses.

Beyond the medium- and long-term prospects of the economy, there is the immediate issue of the effect that increased motor-vehicle imports would have on the balance of payments and the local currency. No Jamaican is unaware of the fact that the country is borrowing heavily to cover the gap between what it spends on the importation of goods and services and its earnings from exports. The current rate of borrowing cannot be sustained and, in any event, loans must be deployed to expand our productive capacity if the economy is to grow.

Unless it is a well-kept secret, there is also no immediate source of increased earnings from which to pay a bigger bill for motor cars, and thus such a bill will only result in pressure on the Jamaican dollar. There are, too, the consequences on the fuel bill of pumping up motor-vehicle imports. In an environment of rising oil prices, an expanded motor-vehicle fleet will generate increased demand for fuel and push up the import bill. Even with the postponement of payment for part of the bill under PetroCaribe, there will be pressure on foreign-exchange resources with obvious consequences. And the sums postponed under PetroCaribe have to be repaid.

increasing oil bill

The trade figures show that in the first 10 months of last year, the oil bill went up by more than US$185 million, at prices significantly lower than they are likely to be this year. This amount exceeds the combined earnings of a number of export crops - sugar, coffee, cocoa, etc. - which are all struggling for want of investment in modernisation. That is where we should outlay our foreign exchange rather than on motor vehicles.

Where the auto dealers have a strong case is with respect to the unnecessarily complicated and wide range of duty categories. The duty structure can certainly be rationalised with reduced imports on hybrids and on medium-sized diesel vehicles. Such a move would be entirely consistent with the recently promulgated energy policy, critical objectives of which are conservation and greater efficiency in the use of energy.

Cutting the duties on large-engine cars would be good for the bottom line of the dealers, but it is not consistent with the objectives of the policy. It would only contribute to the worsening of our persistent foreign-exchange deficit, further distort the allocation of resources, and add to the mountain of debt.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.