Jamaica's high investment, low-growth conundrum

Wilberne Persaud,  Financial Gleaner Columnist

Contrary to the wishes of some, 'Vx' does not refer to the excellent Jamaican Appleton Estate V/X, a blend of 15 choice aged rums.

Borrowing the convention of naming software according to vintage or version, we try to capture the fact that high investment and low growth have been a persistent, perhaps chronic, state of the Jamaican economy.

So read 'V' to mean 'version' and 'x' to mean any large number you choose.

In 2011, February 25 to be exact, this column had its title as 'Jamaica's High Investment, Low-Growth Conundrum'. It considered the fact that "In the 15 years 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 - 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."

That column highlighted only a 15-year period. But we had explored the problem before on February 16, 2007 when we considered an IMF working paper reporting that considering "the amount and growth, over time, of government borrowing, we find that as government debt gets bigger, productivity gets worse."

This problem is not new. The World Bank's website reminds us: "Jamaica has grappled with issues of low productivity and poor economic growth for decades. [Its] recent Country Economic Memorandum (CEM) on Jamaica, Unlocking Growth, states that 'Jamaica's disappointing economic performance is a case of low productivity,' but the longstanding nature of the problem was highlighted by Dr Wesley Hughes, Jamaica's financial secretary, who quoted a 1952 World Bank mission report, The Economic Development of Jamaica, on these challenges. 'The important task of the future' the mission team wrote of Jamaica then, 'is to improve productivity.' Dr Hughes highlighted the similarity between both reports' conclusions during a dissemination seminar for the CEM on June 17, 2011 at the University of the West Indies in Kingston, Jamaica."

Actually, considering these investment/growth relationships, not much has changed in the ensuing 59 years from 1952. Come 2011, the big change is we speak of 'unlocking growth' and 'challenges'.

Unlocking growth is the beautiful PR-approved phrase meaning whatever Alice might choose. 'Challenge' has become so 'cliché' it may well refer to 'Schools' Challenge' or a person with some physical disability.

Regardless, our financial secretary asserts: "The puzzle of economic growth in Jamaica has been one of high investment but relatively low growthÉ.There has been an inability to utilise capital and technologies and this is partly linked to low human capital skills or low productivity of labour."

World Bank Director for the Caribbean, Francoise Clottes, notes that "Jamaica has barely grown in the past four decades" and that "it is critical to change poor growth performance and generate rapid economic growth as soon as possible. Jamaica's Government has prepared studies and strategies to this end and there have also been contributions from academia and the private sector. The CEM is just one more step in that direction."

three main bases

The World Bank identifies three main bases for endemic low productivity - high crime levels, human capital deficiencies and fiscal distortions. It claims these factors are the three major binding constraints to economic growth in Jamaica.

The underlying analysis generating this diagnosis is fine, consistent with the bank's model. I suggest however, that 'Jamaica' neither generates nor reinvests profits. 'Jamaica' is a physical space and population, a concept in our minds. It is also real, vibrant and it is beautiful! But it does not invest.

Jamaican people, firms and its governments invest. How these three categories interact, provide a key to understanding the problem of virtually zero aggregate 'growth' amidst high investment in our country.

No amount of sophisticated econometric modelling tools and conventional aggregation can provide answers to this conundrum.

We must tease out the answers we seek from questions posed in a different way. My February 25, 2011 column suggested we should "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?

Answers to these questions shall contain aspects of the three binding constraints the World Bank identifies. Yet, a simple concept our farmers live with in rural Jamaica is powerful - the idea of transplanting.

If the ground is improperly prepared to receive lettuce seedlings, they atrophy and die, regardless of fertiliser and water applied. Until we 'prepare the Jamaican ground' for acceptance of transplants - new technologies and processes - that shall improve our growth response to capital injections, this conundrum shall remain.

A mythical Jamaica emerges when Reggae Boyz qualify for France, Usain Bolt breaks two world records, Bob Marley defeats old pirates through redemption songs, and when we contemplate endemic flora and fauna in the mist of the Blue Mountains.

Our young population must grasp this Jamaica, learn to cherish and defend it. There's nothing wrong with individual achievement, whether of people or corporate Jamaica, it's just that collective defence of agreed and shared values takes us to places hitherto beyond belief.

wilbe65@yahoo.com