From the exchange rate to economic growth - Part I

David Wong, Contributor

Given the appointment of Professor Donald Harris as consultant to the Planning Institute of Jamaica (PIOJ) on "growth inducement strategies" and the ongoing nationwide "series of consultations with the stakeholders in the private, public and civil society sectors" announced by Dr Gladstone Hutchinson, the PIOJ director general (Gleaner, November 24), it may be useful for a more informed public debate to offer an alternative set of growth-promoting policies that can be compared and contrasted to those of the PIOJ.

Therefore, this series - 'From the exchange rate to economic growth' - begins, not at the beginning but at the end by providing some growth-promoting policies that the subsequent analysis of Jamaica's political economy suggests.

This is not a strategic plan and no attempt is made to be exhaustive or to list the policies in any priority order or sequence for implementation.

The Government should facilitate the formation of new businesses that utilise modern technology and have the potential to grow into globally competitive businesses. The Government should also facilitate the modernisation and expansion of existing businesses that have the potential to become competitive in the global economy. Jobs are created both by new firms - many will be initially small or medium scale, and by expansion and scaling up of existing businesses.

entrepreneurs

Facilitation means specifically helping potential entrepreneurs and existing businesses to identity and seize opportunities in both the Jamaican economy and the global economy. For example, the Government can accomplish this by providing research and marketing assistance, helping to arrange financing for start-ups, improving capital mobilisation across the country, and improving the channels through which capital flows to firms by further developing the local financial markets and providing links to financial markets in the Caribbean and the global economy.

Government should reduce its dependence on borrowing to finance its budget deficit and collect more taxes. It should reform its tax rules and the collection system so as to broaden the tax base, improve tax collection, and remove tax disincentives and bureaucratic obstacles to business creation, expansion, and modernisation. At the same time, government should provide tax incentives to firms for expanding and modernising their operations. While this may initially encourage firms to replace workers by machines and computers, if the modernised firms expand into the global market, which is the prime objective, they may well hire more workers than they replace with capital as they scale up for the fast-growing, global market in which consumption is shifting toward the large emerging-market economies.

reducing production costs

Producing for the global market may help Jamaican firms reduce their unit-production costs significantly and improve their competitiveness by allowing for greater economies of scale and scope. Since production for the global market may require local firms to partner with foreign firms that are already producing for the global market in some type of sub-contracting relationship, government should provide assistance to local firms in forming such relationships. Government assistance is especially important because such partnerships will generally entail legal and tax complications across countries.

Government should revise its anti-monopoly policies since what might appear to be a big firm in Jamaican or Caribbean terms might not be big in global terms. Moreover, competition with firms in the global market will serve to check any abuse of local consumers if imports are liberalised. If local firms are freed up to grow big, then the global market must play watchdog to keep prices down. Trade liberalisation will encourage local firms to partner with foreign firms that can provide access to capital, technology, and management, and help integrate them into the global supply chain of commodity production as competitive entities.

It should also reduce crony capitalism wherein firms offer support to political parties and, in return, receive lax regulation and protection against both local and foreign competition at the expense of taxpayers and consumers.

The Government should urgently tackle the gigantic task of modernising education and training of workers so as to improve workforce quality at all levels. Prioritisation of expenditures for the different tiers of the educational system, from early childhood to university and post-graduate is necessary, in order to ensure that the workers which a modern economy needs are being educated and trained up to the requisite standard for working with modern means of production, communication, and calculation. In this task, the business sector needs to be significantly involved because employers generally know better what skills they want in workers and will have to bear some of the costs of worker-training.

The Government should improve the health-care system so that workers receive adequate medical care. It should also promote preventive medicine and enhance health care for infants and school children. Children cannot learn adequately if they are sick, and sick workers are not likely to be very productive at work. Nor can otherwise productive workers with sick children or relatives at home be as productive as they could be if they weren't worried about caring for their sick children and relatives. Improving the social safety net and reducing poverty should be a pro-growth priority because there is a well-known link between productivity and nutrition.

If you are starving, then you are neither likely to work well on the job, nor learn well at school. Malnutrition, most likely, retards the development of young children into healthy and productive workers. Moreover, business productivity and increased economic activity generally will be more likely with crime reduction. And crime reduction, in turn, will be greatly aided by job creation and improvement in the social safety net. Although these policies are usually viewed as social-welfare policies, their larger significance in enabling workers to be productive should not be missed. Besides the critical issue of how to extract increasing productivity from workers, there is the fact that workers must be capable of increasing productivity in the first place, if it is going to be possible later for employers to extract improved productivity from them.

Therefore, progressive health, education, and safety-net policies, inasmuch as they preserve and maintain workers and ensure that they have relevant work skills and are capable of increasing productivity, the pivot for intensive economic growth in commodity production - are growth-promoting.

Government should continue improving and modernising the physical infrastructure of the economy, the power supply, transportation systems for goods and people, while organising to rebuild the capital of Kingston as a 21st century city, and modernising other cities and towns. This will provide further impetus to economic growth and job creation in a virtuous circle.

TAP OVERSEAS COMMUNITY

The Government should recognise the potentially strong contribution that the large Jamaican overseas community can make to economic growth. The overseas community shouldn't be viewed only as a source of remittances and market for Jamaican exports, important as these considerations are and will remain, but, as a vital pool of scarce and valuable resources that is available for raising the critically important competitiveness of Jamaican industries and growing them through improved access to skilled workers, scientists, professional and technical workers, modern technology, investible funds, business connections, and entrepreneurship.

Considering modern telecommunications and transportation and the globalization of commodity production and distribution, resources don't need to be physically and permanently located in Jamaica to be accessible to its industries. The critical role of India's and China's overseas communities in providing resources and expertise to the growth processes in India and China, and in integrating them into the global economy at critical points serves as a forceful example of the potential of Jamaica's overseas community to enhance its economic growth in the competitive global economy.

Space limitation forbids a more exhaustive listing of things that government should do to promote rapid economic growth. Inevitably, saying that government should do things raises two questions: how will government finance them, and does government have the class motivation, the leadership skills, and the administrative capability for doing them? These questions require another discussion, especially, given the heavy indebtedness of the Jamaican public sector, upward of 130 per cent of GDP, and the apparent deficiencies in Jamaica's political and administrative leadership today.

Before closing, I note that it is easy to make a list of things that government should do in order to promote economic growth by selecting items off-the-shelf or like rabbits out of a hat. My list of growth-promoting policies is not derived in either of those two ways since doing so would not ensure that the policies make sense, given the country's political-economic structure. The above prescriptions are derived from an analysis of Jamaica's political economy, which serves as the foundation for the policies. I'll begin to provide this foundational analysis in Part II.

Part II will discuss the essential macroeconomic connection between Jamaica's trade balance, the Government's budget deficit, and the gap between private-domestic saving and investment. It will also discuss how growth in Jamaica's national income affects the triadic relationship.

David Wong (dwong@fullerton.edu) is a professor of economics at California State University, Fullerton and a participant in the Caribbean Dialogues forum moderated by Trevor Campbell.