Wage-led growth, and manufacturing

Robert Wynter, Contributor

In an earlier article this year regarding government planning, I suggested that the administration's strategic plans must have three components: a) specific objectives and targets in line with Vision 2030; b) major strategies and initiatives to achieve these targets; and c) realignment of government (structure, accountability, resource reallocation, approach, relationships with stakeholders) to deliver on the targets, objectives, and eventually Vision 2030.

I also pointed out: "While it is important to implement initiatives and action items, the Government must be held accountable to the achievement of objectives and targets."

It is against this background that I must congratulate the new minister of national security, Peter Bunting, for his strategic approach to his portfolio. Undaunted by the spike in the first six weeks of the year, Minister Bunting has set bold five-year targets to reduce the murder rate by some 67 per cent to just about 300 per year and has, therefore, declared that he will be held accountable for the achievements of the target.

Having set the target, the minister has proceeded to craft game-changing strategies to achieve targets. This is in stark contrast to the conventional approach where strategies and actions are set simply within the context of the current reality and not of the desired future. With this strategic approach, Minister Bunting has set himself head and shoulders above the rest, and I trust that others will follow suit.

Wage-led growth

Danny Roberts, a seasoned trade unionist, is clamouring for a wage-led growth strategy for Jamaica. There have always been contending views on how value-creation surplus should be shared. The profit-led approach is that those who risk their capital should be given priority and will reinvest, creating more jobs and growing the economy.

The wage-led approach is that as those who supply labour earn more, they can spend more and grow the economy. Naturally, a balance is required, as any attempt at forcing the issue one way or the other can lead to disastrous effects such as during our flirtation with democratic socialism.

Memoranda of Understanding

Attempts in the past to increase wages without the commensurate increase in productivity resulted in the economy correcting itself through inflation.

Mr Roberts' assertion, therefore, that wage increases will drive productivity is very spurious. Rather, it is productivity increases that will result in real wage increases.

While the discussion about share of profits should really be centred in private-sector companies, Mr Roberts focuses his arguments on the wages in the public sector. The problem here is that productivity in the public sector is very low, with many persons in positions that add little or no value.

After being lobbied throughout the 1990s for 80 per cent wage parity with the private sector, the Government raised public-sector wages substantially during the early part of the 2000s. Without any increase in productivity, it was clearly unsustainable, and was corrected with a series of Memoranda of Understanding (MOUs). What the MOUs did was preserve both value-added jobs and non-value added jobs while limiting wage increases.

Strategic contraction of the public sector by sequestering the non-value-added positions can result in increasing the wages of those in high value-added positions, while increasing public-sector productivity.

Both administrations' seeming unwillingness to implement real public-sector reform means we are unable to adequately increase the wages of productive workers because we have to pay wages to the unproductive ones at all levels.

Role of the IMF

Mr Roberts appears to be placing an undue amount of blame on the International Monetary Fund (IMF). He wants the Government to "steer the Fund away from its mainstream policy prescription of a general contraction in public-sector spending, with the resultant effects of wage freeze or cuts, layoffs and reduction in pension and other social benefits".

It is my understanding that the IMF wants us to set our own prescriptions to address debt, stagnation and fiscal deficits and stick to them. The problem with the previous administration was its failure to achieve its own ambitious targets.

The new administration has confirmed that tax, pension and public-sector reform are central planks in its economic policy and not, as Mr Roberts suggests, a prescription foisted on us by the Fund. Were Finance Minister Peter Phillips to be convinced that a wage-led strategy is best for Jamaica and can convince his Cabinet colleagues, Jamaica and the IMF that this is so, I am sure the IMF would sign such an agreement.

Economic growth and development will only take place through strategic thinking, improved governance arrangements, strong leadership, accountability, transparency and, most important, strategy execution. In such a scenario, those who risk their capital will make more money, and those who sell their labour will demand higher wages.

We must remember that investors do not make profits to pay wages; rather they pay wages to make profits. It is, therefore, an exercise in futility arguing between a profit-led and wage-led approach to growth.

Whither manufacturing?

Stephen Hill, CEO of Caribbean International Network, touched a few nerves when he recently suggested Jamaica has no future in manufacturing and, as such, we should concentrate on those sectors where we have a competitive advantage. He cites trade liberation in general, and the World Trade Organisation in particular, as reasons.

As is our custom in Jamaica, we tend to shoot the messenger rather than address the message, as responses came fast and furious, with one person saying that Mr Hill is leading the anti-manufacturing movement campaign in Jamaica.

Another writer quoted Krishna Vaswani as saying, "It is up to manufacturers and the Government to formulate policies to rid the system of its inefficiencies to protect the industry."

Low Productivity of Manufacturing Sector

Manufacturing has, for a very long time, been riddled with inefficiencies, and the focus of the Jamaica Manufacturers' Association (JMA) has been on lobbying Government for subsidies to the sector. In fact, the tax-relief benefits accruing to manufacturers under the 'Modernisation of Industry' programme has done very little to modernise the sector, hence its review under the tax-reform programme.

The Economic & Social Survey of Jamaica indicates that manufacturing contributed 8.1 per cent to GDP during 2009-10 with 6.8 per cent of the labour force. The resulting labour productivity was J$532,000 (constant 2003) value added per worker. This pales in comparison to electricity, gas and water at $2.5 million; mining and quarrying at $2.4 million; financial services at $1.3 million; and real-estate services at $942,000.

In fact, manufacturing is only slightly better than wholesale, retail and machinery repair ($433,000); government services ($431,000) and construction ($421,000).

In the mid-1990s, the administration convinced us that implementing the much-vaunted Industrial Development Policy would result in 12 years of steady 6 per cent growth per annum. This policy was never implemented, and instead we went into three years of GDP decline from 1997 to 1999.

In retrospect, the then administration's lack of faith in the manufacturing sector may have influenced its decision to depart from that policy. This long history of inefficiency, exacerbated by trade liberalisation, was the context within which Mr Hill made his statement.

Instead of attacking Mr Hill, we must focus on correcting the inefficiencies to better tackle trade liberalisation, rather than trying to protect manufacturing. A strong and productive manufacturing sector needs no protection.

Robert Wynter is the managing director of Strategic Alignment Limited, which facilitates organisational realignment and leadership development. Comments are welcomed at columns@gleanerjm.com and rob.wyn@hotmail.com.