Jamaica's system of 'enclave' businesses a hindrance to growth

Productivity and economic growth have been significantly constrained by Jamaica's promotion of enclave development, executed through export free zones (EFZ) and in the mining and tourism industries, because there is little spillover from those sectors to the rest of the economy, a new World Bank report has found.

As a result, the multilateral has recommended a move away from that pattern of development as part of the strategy to induce growth.

The new country economic memorandum on Jamaica, titled Unlocking Growth, said that mining, primarily bauxite and alumina, was highly capital-intensive, but the initial impact of the investment was not in line with its size, given that most of the capital goods and services were imported.

Moreover, less than one per cent of the labour force is employed in mining, which has few linkages to other sectors in the economy, said the World Bank, while citing a study showing that local spending by the mining industry accounted for no more than 30 per cent of total cost, including tax and royalty payments, as well as wages and salaries.

Like other industries, mining has been capable of exploiting its competitive advantages in a violent environment, the strategy being to remain isolated, protected by private security personnel, and highly promoted by tax incentives.

The report said the tourism industry employed 80,000 people directly and 180,000 indirectly and hence was responsible for about 10 per cent of total employment, but has developed in a way that also, unlike other countries, prevents strong inter-sectoral linkages.

The weak connection has been exacerbated by the promotion of policies aimed at that sector, the bank said.

"Enclaves are likely to be a response to high crime rates and fiscal incentives that grant duty concessions to imported food and favour large-scale, capital-intensive hotels," said the report.

According to the World Bank, like other industries, rising crime was perceived as one of the main obstacles to tourism and that has been partly mitigated by the development of all-inclusive enclave resorts, where tourists could enjoy beaches without leaving hotel facilities.

The report quoted statistics from the Jamaica Tourist Board which showed that 89 per cent of the hotel room nights sold in 2009 was at all-inclusive hotels.

Noting that Jamaica pioneered the concept of enclave tourism through the Sandals all-inclusive hotels, the bank said such resorts have increased their importance in the sector, accounting for 75 per cent of total rooms in 2009, up from less than 60 per cent in 2004, and 35 per cent of all units, compared with 26 per cent in 2004.

However, among the vulnerabilities inherent in maintaining a strategy of undifferentiated 'sand, sea, and sun' tourism were high leakage rates as revenues were repatriated to owners' countries, as well as fiscal and environmental sustainability, the report said.

The World Bank, pointing to the preponderance of large foreign-owned hotels, and arguing that most tourism earnings do not stay in Jamaica, estimated the leakage rate at 80 per cent, which it said was generally high for the Caribbean region and one of the highest worldwide.

The report acknowledged that new approaches have emerged to encourage more spillovers, but a preliminary assessment suggests that the old schemes might prove politically difficult to dismantle.

Free trade processing zones also followed the enclave development pattern, buoyed by tax incentives contained in the Export Free Zone Act along with other arrangements that discourage or prevent strong links between firms located in those areas and other sectors or enterprises, the report said.

Export free zones could play an important role in attracting foreign direct investment by offsetting some aspects of an adverse investment climate through world-class facilities and best-practice policies.

"In Jamaica's case, crime and inefficient bureaucracy appear to be the greatest obstacles to business growth," said the report, adding, that "failure to remove these obstacles is partly addressed by creating EFZs."

According to the World Bank, "export free zones can be seen as another mechanism to address crime by providing physical protection to promoted firms."

mcpherse.thompson@gleanerjm.com