Jamaica's high investment, low-growth conundrum
Published:Friday | February 25, 2011 | 12:00 AM
Wilberne Persaud, Financial Gleaner Columnist
In the 15 years from 1990 to 2005, Jamaica experienced an average growth rate of 1.3 per cent whereas the rest of the Caribbean registered 3.1 per cent for the same period. Trinidad and Tobago, for instance, had 5.3 per cent and Antigua 3.4 per cent.
The statistic that generates the puzzle, the conundrum, however, is the high rate of investment for the same period - almost 30 per cent of gross domestic product (GDP) - relative to Barbados and Trinidad for instance, surprisingly high.
Trinidad's average investment-to--GDP ratio for the comparable period was 18.8 per cent and Barbados' 16.6 per cent.
This column has considered this issue before. On February 16, 2007, we looked at Rodolphe Blavy's attempts to understand the problem. That column spoke of the IMF working paper.
"Cross-country analysis provides evidence of a significant and negative relationship between total public debt and productivity growth. In lay language read: In many countries, when we look at the amount and growth, over time, of government borrowing, we find that as government debt gets bigger, productivity gets worse."
We must understand several outcomes and relationships if we are to overcome this low-growth level trap. Why does investment remain high with growth so low? Are entrepreneurs silly, continuing to invest while making low returns? Does Government respond to political pressures from a deprived population by consistently dumping loan proceeds into ridiculous schemes? Was the euphoric period of high inflation and real-estate boom of the late 1980s and 1990s, coupled with high interest rates, cause of so much speculative investment failure that capital evaporated? Is the accounting category 'investment' filled with strange expenditures - protection money or finders' fees - bribes or corruption? Is the Jamaican economy using capital inefficiently? Are institutional arrangements inimical to efficient business and productive practices? Does the informal sector grow exponentially but GDP aggregate numbers do not capture this, hence, growth estimates are too low, wrong and invalid? These are merely a few of the questions. Which of them is the right one? Is there really one 'right' question?
As it stands, our politically charged atmosphere allows the beholder's eye to focus on the scenario fitting his bias. Yet, this is the worst way to go about solving the conundrum. There are a few self-evident truths, though. Private investors would cease investing if they made losses. Indeed, to continue would mean they should soon lose the wherewithal to invest. So it is likely that whereas, in aggregate, there is a low return on investment, for particular investors the return is high enough to warrant reinvestment.
There are many interesting leads to follow. Pursue them we should. Arguments about high interest rates, the true cause of our ability to place successfully, a US$400-million debt instrument on the international market at a lower rate than obtained initially are not going to take us very far. There is an urgent need to find the answer to this apparent problem of Jamaica's inability to translate relatively high rates of investment into commensurately higher rates of growth.
Our official stance on generating jobs, improving our people's standard of living and truly taking Jamaica into the 21st century shall be much stronger should we find the solution to this problem.