Making sense of Jamaica's growth challenges

Horatio Morgan, Guest Columnist

There is much anxiety today among Jamaicans at home and abroad concerning Jamaica's economic future. Those who have been brave enough to look over the economic precipice often return to the fold with grossly disturbing news.

We hear, for instance, that Jamaica's indebtedness has forced the Government to allocate a relatively large share of its already meagre financial resources toward debt repayment rather than education, health care and infrastructure development. We are provided with accounts of apparently arm-twisting deals between the Government and the International Monetary Fund (IMF).

THE DOWNWARD SPIRAL

Then somewhere along the line we become dizzy from a constellation of fast-moving news items on unemployment among even the most educated youths, crime, and a declining Jamaican dollar. Perhaps it is not a good idea to listen to those in academia, the private sector and the streets who dare to think aloud that the economic end is nigh for Jamaica. Yet, how frustrating it is when there is no refuge in self-induced ignorance or nostalgia.

As bad as the economic scene appears to be, it is fascinating that Jamaicans have been engaged in a vigorous debate on the state of the Jamaican economy. However, what is less clear is whether the apparently fragmented discussion that underscores this debate will achieve any measurable degree of success. While I do not claim to have the universal panacea for Jamaica, I intend to contribute to this ongoing debate by offering a coherent way of making sense of Jamaica's economic growth challenges.

Insofar as we are concerned with the underperformance of the Jamaican economy relative to other economies at a similar stage of economic development, the fundamental question is: Why is Jamaica's standard of living, as measured by its gross domestic product (GDP) per capita, so relatively low?

To be sure, a solid answer to this question does not begin with the usual fixation on prices, such as the interest rate or the foreign exchange rate. Instead, some of the leading economists and practitioners in the fields of business studies and development economics will focus on the less exciting notion that the output produced per hour of labour worked matters. That is, labour productivity growth will lead to a higher standard of living.

But what is the key driver of labour productivity growth? Again, a sound response to this question does not begin with the usual discussion on the sliding Jamaican dollar relative to the US dollar. Instead, the answer lies in the innovative capacity of the Jamaican economy.

In practical terms, we want to know whether Jamaican companies are innovative. That is, are they creating new products and services, new or expanded markets? Are they improving business processes, including the way in which they mobilise resources, combine inputs, generate and deliver value to consumers? We will get an affirmative answer to these questions if Jamaican companies are indeed entrepreneurial, growth-oriented, and are inclined to compete at home and abroad on the basis of innovation.

But this prompts another question: What factors inhibit or encourage Jamaican companies to commit to innovative activity as a basis for competitiveness and survival? This is perhaps where we will have a laundry list of problems that Jamaican companies are presumed to face. However, a substantive discussion is unlikely to materialise until there is a focus on a core set of factors.

The first important factor is the industrial structure of the Jamaican economy. Importantly, resource- or commodity-based sectors are unlikely to spend much of their revenues on research and development (R&D) or information and communications technology (ICTs). Any substantial innovation in these sectors is likely to come from the imported machinery and equipment that already embody innovation by foreign firms. Considering the relative dominance of primary industries (i.e., agriculture, forestry and fishing) in Jamaica, an important question is whether they are equipped with the most advanced machinery and equipment.

If there is not much innovation by way of imported capital goods in the primary industries, one wonders whether other sectors, including manufacturing, tourism and financial services, will fare better in terms of their contribution to innovation. From anecdotal evidence, there are good reasons to believe that the financial services sector's extensive use of ICTs in Jamaica could constitute a significant source of labour productivity growth. The relatively high wages in the financial services sector is consistent with this view. Meanwhile, the contribution of the manufacturing and tourism sector to labour productivity growth, either through investments in machinery, R&D or personnel, seems to be in question on the surface.

Another important factor is the degree of competition and the size distribution of Jamaican companies. Joseph Schumpeter is among the early economists who gave serious thought to the phenomenon of innovation in modern capitalist economies. However, he offered two apparently contradictory ideas on the question of whether innovation is better supported in industries with few large firms or many small ones. Still, a symbiotic relationship is possible, whereby large established firms primarily focus on product innovation while smaller ones focus on producing better quality inputs.

However, this structure is unlikely to materialise in Jamaica, where companies with fewer than 100 employees dominate the emerging private sector. Furthermore, large manufacturing firms are unlikely to be attracted to the relatively small Jamaican market. This is so because they are unable to produce and generate sales on a sufficiently large scale that will enable them to recover their production costs and overheads at competitively low prices. Meantime, the relatively small size of the Jamaican market need not discourage innovative firms if they are prepared to expand by serving customers abroad.

The business climate is another important factor that matters to enterprising individuals, considering whether to start a new innovative venture. In other words, do small innovative firms face systematic barriers in Jamaica?

A stylised fact is that small innovative firms are generally credit rationed. Still, some individuals may insist that commercial banks in Jamaica should devote far more resources to small-business lending; however, what appears to be missed on this issue is the fact that these banks may have good reasons not to make these loans. In general, the costs of serving small firms usually outweigh the fees and returns on small-business loans.

A fundamental problem is that the
owner-managers of small firms are better informed than their banks about
their managerial capabilities and whether their ventures are likely to
succeed or fail. Furthermore, once they receive financing, they may
engage in risky activities that are not in line with the interests of
their banks.

To mitigate the information and incentive
problems associated with small-business lending, banks have to expend
costly resources towards screening, contracting and monitoring that
could have been used more profitably elsewhere. Since the information
and incentive problems are usually more acute in small innovative firms,
they usually face more stringent credit evaluation, and are more likely
to be denied on their loan applications relative to small firms in
general.

Although a compelling case may be made for
R&D subsidies, it is hard to see how such a recommendation would
be feasible, considering the fact that the Jamaican Government is
fiscally constrained. A healthy debate on private and private-public
(universities) financing solutions is warranted in this
area.

Finally, the reader at this point may be keen on
what to make of a weak Jamaica dollar and the debt burden of the
Jamaican economy. What really matters is the underlying reason for the
depreciation of the Jamaican dollar, and the use of borrowed funds.
Insofar as the Jamaican dollar is depreciating relative to the US dollar
because of Jamaica's trade deficit (i.e., value of imports exceeds the
value of exports), the fundamental problem is that Jamaica has been
borrowing from foreigners to pay for consumption goods rather than
capital goods (i.e., advanced machinery and equipment) produced abroad.
Unlike the former, the latter will increase the earning power of the
Jamaican economy, and thereby improves its ability to repay its domestic
and foreign creditors.

A similar story can be told
about Jamaica's indebtedness: The borrowed funds appear to have been
used to primarily pay outstanding bills, and support current consumption
rather than being invested in education, health care and infrastructure
development that yield future dividends. As a result, repayment
problems can be expected since the borrowed funds have not been used
productively.

Beyond Jamaica's indebtedness, or the
worrisome changes in the J$:US$ exchange rate, is an underlying story
that the real spending decisions behind the fiscal and monetary policies
are sufficient to undermine confidence among enterprising individuals
that are usually alert to entrepreneurial
opportunities.

Whether these ill-advised spending
decisions are predicated on political considerations rather than
economic ones is perhaps an unavoidable debate; yet, finger-pointing is
hardly worthwhile when there is so much at
stake.

Altogether, an open and rational discussion on
these issues may offer a basis for framing suitable policy responses to
Jamaica's formidable economic growth challenges.

Dr
Horatio M. Morgan is an assistant professor, Ted Rogers School of
Management, Ryerson University, Toronto, Canada. Email feedback to
columns@gleanerjm.com and
horatio.morgan@ryerson.ca.