Put the brakes on vehicle appetite

Dennis Morrison, Gleaner Writer

The International Monetary Fund's (IMF) chief economist, Olivier Blanchard, in giving the fund's latest World Economic Outlook, added his voice to concerns about the threat posed to global economic recovery by rising commodity prices, especially the surge in oil prices. Not only was the unrest in the Middle East a surprise, but the uncertainty has lasted for much longer than was expected. As a result, oil prices have remained above US$100 per barrel for the last three months, pushing gasolene prices in the United States over the psychological barrier of US$4 per gallon in some states.

In Jamaica, the pressure of rising oil prices triggered an outcry for a tax rollback as the country is once again reminded of our vulnerability to sharp increases in fuel prices. The logical reaction that one would expect to this state of affairs is that we would turn our minds to energy-conservation measures and how to mobilise the capital of the country to relieve us of the total dependence on oil. Not so for leading private-sector voices, particularly among auto dealers.

In their view, the reduction of duties on motor cars should be a national priority. Obviously, lower duties on cars would generate increased demand and bump up their sales, and they argue that government revenues would also go up. But should this be a top priority at a time when the focus of the country ought to be on the stimulation of growth in production? Having endured 14 consecutive quarters of negative growth, and facing declining exports and rising unemployment, how is increased spending on motor vehicles to be paid for? By increased borrowing from the IMF, etc?

Shortage of capital

Their concern is not, however, about the steps to be taken to utilise the access to export markets, expand production for the domestic market, or about measures to raise the competitiveness of industries that are falling behind. In all of these areas, the shortage of capital is an important obstacle, but with interest rates on the decline, businesses should be aggressively planning increased investment activity. Yet this is not a prime topic of conversation.

Our banks are also preoccupied with lending for the purchase of motor cars, with this representing a big chunk of their loan portfolio, and so I would expect that they would back the auto dealers' lobbying efforts. Not surprisingly for 2009, less than two per cent of bank loans went to agriculture; manufacturing got less than four per cent; construction about eight per cent; but personal loans, which included car loans, got the lion's share at more than 30 per cent. This is in line with infomercials put out by the local banks, where loan products for the productive sectors hardly appear, except in the case of the EXIM Bank.

With the disruptive effect of punishingly high energy costs on business activity, we should, by now, have been bombarded with loan offers to businesses to fund energy-efficiency projects. Businesses need to install more efficient air-conditioning and lighting systems to save money on their energy bills. The payback period for projects of this kind should now be much shorter, based on the higher oil prices. But bank advertisements are still almost entirely devoted to consumer loans, in which car loans continue to feature most prominently.

Use of solar power

At the level of households, the obvious energy-conservation measure is the use of solar power for water heating and otherwise. During the first oil shock in the 1970s, several businesses in Jamaica had actively pursued ways to use solar power, and the College of Arts, Science and Technology [now UTech] was an active partner with industry in research in this area. These efforts were dismantled when oil prices collapsed in the mid-1980s, but should have been reactivated with the clear signs that cheap oil is a thing of the past.

An argument being put forward in support of the lowering of duties on motor vehicles is that most cars now come under the 20 per cent concession granted to public-sector workers who sell the concession. Word is that these account for up to 70 per cent of the total, so the Government is losing revenue, while people purchasing cars are paying high prices. If this is true, the answer is to either abandon the concession, or lift the rate and tighten enforcement of the terms of the concession.

Public policy in Jamaica has long been distorted by special interests which fund political parties and election campaigns as well as the welfarist demands of party supporters. Our tax policies and incentive system, including the problematic discretionary waivers, have been evidence of this over many years. It defies logic that a country short of capital to expand its economy and generate growth would, as one of the main policy initiatives, move to stimulate increased imports of consumption goods like motor vehicles.

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