Jamaica deserves better management

Claude Clarke, Contributor

The economic problems now confronting Barbados have somehow led some to see in it vindication, if not validation, for Jamaica's failed economic strategies.

But they would do well to recognise that the causes and nature of Barbados' problems are quite different from ours. At NCB's 2010 Strategic Retreat, I warned that those of our Caribbean neighbours that had prospered by building offshore financial centres by virtue of accommodating legislation and tax policy would come under increasing pressure from the United States and European Union governments, eager to repatriate capital to their jurisdictions, especially in the wake of the global financial crisis. Today we are seeing the effects of these efforts.

In November 2012, Barbados' central bank Governor Delilse Worrel was moved to say, "These are especially challenging times for the international business and financial services industry because of the duration of the international recession, and the crusading temper of international financial reform and tax reform in the US and Europe."

Partly as a result of these moves, Caribbean economies that were organised to attract international business services primarily for tax reasons have suffered serious economic setbacks. Some global banks, international accounting firms, insurance companies and private owners of mega fortunes have been withdrawing from their jurisdictions.

In addition to their lucrative international businesses services industries, these small island states had also developed strong tourist industries. But world tourism, as we know, was among the industries most badly affected by the international recession, a double whammy for these countries.

The combined effect of the declines in tourism and international business services was particularly devastating for the English-speaking island economies of Bermuda, the Bahamas, the Cayman Islands and Barbados, all of which were among the world's top 20 recipients of tourists per capita and therefore highly vulnerable to the 2008 fallout in the global economy. After recording steady growth for the preceding four years, their four-year cumulative economic growth since 2008 has been negative, ranging from -15% in the case of Bermuda's to just below zero for the Bahamas.

However, they have all moved to put their economic growth engine back on track. The Bahamas responded to the downturn with a flurry of economically beneficial infrastructure projects and a major new tourism development project that is expected to add as much as 15% to its GDP at peak.

COMPETITIVE STRENGTH

Barbados approached its economic setback by going to the heart of its problem: the erosion of its economic competitiveness. The decline in its competitive strength accelerated when earnings from offshore services and tourism began declining, while high levels of private and government consumption continued. This disrupted the low inflation plane which for almost a dozen years had produced an inflation rate that averaged nearly one percentage point below that of the USA and had given it the competitive strength to grow cumulatively by 20% in the five years preceding the world economic crisis.

But Barbados has already prepared itself to take the kind of aggressive action to enhance its competitiveness that our government, over many years of deepening uncompetitiveness, has refused to take. In 2012, the country's central bank governor, addressing the problems facing the international business services industry, asserted that in order to rise to the challenge, Barbados needed to improve its competitive strengths in several dimensions.

The government has now moved decisively under the rubric of the IMF to reduce its operating costs and contract incomes in the economy. These actions are very likely to lead to lower costs of production in the country as a whole and the restoration of its competitiveness.

PRE-CRISIS GROWTH

With lower costs, Barbados' international business services and tourism sectors should resume their pre-crisis growth and the economy, as a whole, will resume its steady growth.

The sound macroeconomic management of these small but economically strong countries prior to the recession, and their relatively high social capital, are likely to make their economic recovery swift and strong.

Larger countries in the region have also been recovering quickly from the international crisis. The Dominican Republic has grown 21% since 2008 and Costa Rica's economy has expanded by 14%. In the same period, Jamaica, which has so many more natural advantages than any of these countries, has shrunk by 5%.

PRODUCTIVE ACTIVITIES

Our population of nearly three million people, similar to that of Costa Rica, gives us the critical mass with which to develop a wide range of productive activities. We are strategically located on major shipping lanes, in proximity to the most-sought-after market in the world: the USA. We are blessed with a unique mix of micro climates and soil types that impart special taste qualities to almost everything we grow. Above all, we have evolved a highly marketable culture reflected in food, music and fashion.

Why we so grossly mismanage these advantages, while micro states which are far more exposed and vulnerable to international economic shocks are able to absorb and recover from them, is a paradox that will need concentrated intellectual study to unravel.

Many of us are encouraged by the resoluteness of our finance minister and his determination to meet all the quantitative targets set by the present IMF agreement. However, the recent decision to cut Government's expenditure budget by more than 4% in order to compensate for a fall in revenue collection, if perpetuated, could make the economy increasingly less capable of generating the revenue the Government needs to fulfil its fiscal obligations. If as revenue falls short, the Government reflexively responds by cutting its expenditure contracting the economy, this will create an economic vortex that sucks away the economy's capacity to grow and provide the Government with revenue.

Meanwhile, the Government pins all its hopes for economic growth on a proposed trans-shipment port and logistics centre. The rationale for, and likelihood of, success of the port are clear. China needs this site to assist its expanding global trade, by distributing and consolidating cargo within the Western Hemisphere. However, outside of the expected short-term economic benefit during the construction phase, these activities will do little more to expand our economy and provide employment than the existing trans-shipment port does.

The real value of a trans-shipment port lies in the manufacturing, assembly and repacking activities it could attract. But the prospects for attracting capital to these high value-high employment activities will depend entirely on the Government successfully addressing the same factors that now make Jamaican industry uncompetitive and that have hindered investment in manufacturing and other forms of production locally.

Now that we hear from the works minister that the proposed logistics hub cannot be operational within the next five years, one must wonder if there is any realistic chance of increased production to offset the effects of the economic vortex that Government's contractionary economic programme will create. If revenues continue to fall short of target and Government continues to cut expenditure to match, the cascading economic contraction will force the IMF programme off its rails.

Hopefully, the Fund will revise its programme to incorporate policies aimed at promoting production before that happens. And the Government will organise to better manage the bountiful blessings we have been given.

Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.