EDITORIAL - Lessons from the bauxite levy

AT FIRST glance, it is a dry budget story of a kind to which we are accustomed, and thus unlikely to have stirred too many emotions.

But yesterday's piece, published by this newspaper, about Parliament's approval of the withdrawal of J$1.54 billion from the Capital Development Fund (CDF), underlines the long failure of economic management in Jamaica and the propriety of the fiscal reforms being undertaken by the Portia Simpson Miller administration.

Perhaps the most profound bit of information in the report is that, after this withdrawal, the CDF will essentially run dry. Any few inflows, at least in the near to medium term, will be at a trickle.

For the uninitiated, the CDF was created 40 years ago when Michael Manley's democratic socialist government introduced a bauxite production levy which taxed the bauxite/alumina companies operating in Jamaica on the basis of their output rather than on profits. It was a way for the country to earn more from an extractive and strategic mineral, at a time when we earned relatively little for the resource, and our technocrats could have been undone by the chimera of transfer pricing.

TOUGH POLITICAL STRUGGLE

The levy was a tough political struggle for which Jamaica paid dearly, including, in the early years, a cut in production by the firms. But it says something about its efficacy that, in spite of its many transfigurations, it survived four decades, across several administrations.

Over that period, it is estimated that US$3.5 billion, or around J$375 billion at current exchange rate, has been collected in levies and flowed into the CDF. Manley's promise was that the CDF would be used for productive investments, building the economy for the time when Jamaica's bauxite would be depleted.

In other words, it would be something like what we today call sovereign wealth funds. Except that it was never managed that way.

It is true that perhaps a quarter of the money that passed through the CDF was used to acquire productive assets.

In the 1970s, it was tapped for the purchase of Jamaica Public Service, the light and power company, and Caribbean Cement Company, as well as a number of hotels when their owners withdrew from Jamaica. It also financed some road construction, agricultural irrigation, and rural electrification projects.

RECOVERY UNCERTAIN

But the bulk of the money went into the Consolidated Fund to finance the Government's operations, including helping to cover deficits. In other words, the presence of the CDF and the easy access they had to it eased pressure on Jamaican administrations to put our fiscal house in order.

A soft global economy and the relative uncompetitiveness of the Jamaican industry have caused the near collapse of Jamaica's bauxite/alumina business, and with it the CDF. And we have little to show for the cash that flowed to the fund. Recovery is uncertain.

There are lessons in this for us. The most urgent is the need to fix our fiscal affairs. Further, should Jamaica ever again find itself with capital flows of the kind that went to the CDF, or with consistent fiscal surpluses, it can't be managed in the way we did the bauxite production levy.

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