Coping with the future

Edward Seaga, Contributor

History has a way of repeating itself, as if to remind us that it is here to stay.

During the Great Depression which ravaged the global economy of the 1930s, there was a cry by the people for jobs and by political leaders for economic growth to produce jobs. Fifty years later, there was another global disaster, the worldwide recession of the 1980s. There was once again a cry from the people for jobs and from political leaders, a campaign to produce growth and jobs. In 2008, nearly 30 years thereafter, history repeated itself once more. The global recession beginning in that year produced another heart-rending cry by the people for jobs and by the political leaders for growth.

The need for growth and jobs is the common thread running through such mega-disasters because the fundamental links of the economy - finance and trade - are broken and the production sectors linked to them fall apart.

global recession

In the case of Jamaica, the dislocation was severe. At the beginning of the 1980s when the global recession occurred, the economy had already fallen apart. After the ravages of the 1970s, only the mining sector was functioning. The recession took care of that. In bauxite terms, production fell from 12 million tonnes to six million tonnes by the middle of the decade, and a financial loss of US$800 million, or 44 per cent of its total receipts on a stable production basis over the decade.

The process of recovery in the 1980s, therefore, had to start with a clean slate.

In the early years, commerce and manufacturing were reopened for business after the removal of price and import controls and radical tax reforms which cut income tax from a high point of 57.5 per cent to 33 per cent and company profit tax from 45 to 33 per cent.

With little foreign-exchange earnings in the system, only a trickle from tourism and manufacturing and a truncated mining sector, we had to rely on International Monetary Fund (IMF) and World Bank-financial inputs, together with private-external bank loans. But this only closed the gap for survival. It could not provide growth and jobs. Something else was needed.

In 1981, I set the Jamaica National Investment Company (later JAMPRO) on a task with a single objective: find a new sector which earned significant foreign exchange and create substantial jobs. The answer was garment exports, providing licences were available under the Multi-Fibre Agreement to woo to Jamaica Far Eastern garment manufacturers who needed our quotas to expand their production. The two parts of the equation, the need and the supply, fitted hand in glove. New additions to the free zones of Kingston and Montego Bay rolled in.

increased employment

The new export garment subsector within a few years increased employment from around 5,000 workers to some 40,000, and foreign-exchange earnings from US$10 million to more than US$100 million (later, within a decade to more than US$500 million). These earnings stayed in Jamaica for the operators to pay wages, rent and utilities.

With garment export providing a cash-flow lifeline in foreign exchange and local earnings, more attention could be devoted to restructuring the almost completely collapsed tourism sector, boost manufacturing and work to rebuild the truncated mining sector.

One more move was necessary: confidence had not been fully rebuilt after the debacle of the ideologically driven collapse of the economy in the 1970s which ended with only US$11 million in foreign exchange in the Bank of Jamaica in 1980.

Uncertainty remained on the future of the value of the Jamaican dollar, which had been experiencing a series of depreciation. I insisted on pegging the exchange rate. Depreciating the exchange rate to provide more competitive export prices to boost foreign-exchange earnings was the base strategy of the IMF, and it was seemingly cast in cement. In the strident negotiations which followed in 1986, I impressed on the IMF that depreciation of the exchange rate did not improve earnings for our main exports as they were marketed in United States-dollar prices and would not change with depreciation. Only the Jamaican dollar value would do so. Eventually, in January 1986, the IMF agreed to pegging the Jamaican rate at J$5.50 to US$1. This was the catalyst that played a major role in the recovery that followed.

The pegging of the rate, and establishment of export-garment manufacturing as a new substantial subsector can be said to be critical turning points in recovery from the 1980 recession.

The 2008 recession has many points of comparison with 1980.

In 2008:

The bauxite/alumina sector lost roughly 50 per cent of its value amounting to some US$800 million through reduced production induced by the recession.

The manufacturing sector lost ground in the gains made in the 1980s to mid-1990s.

Tourism lost value from the high point of the recovery of the 1980s. But it spurted ahead substantially with the building of 6,000 rooms in the Spanish hotels programme at the turn of the century.

The export garment industry re-established itself elsewhere.

Remittances from Jamaicans residing overseas grew sharply, lifting it to US$2 billion, before it lost some ground in the 2008 recession. Nonetheless, it became the top foreign-exchange earner in the economy.

The financial sector went through a meltdown which cost the immense sum of 40 per cent of GDP to prevent the collapse of the sector. Some 40 financial institutions, nonetheless, ceased operations.

The mining sector maintained a steady position.

Agriculture continued to slide.

With only two positive growth sectors, tourism and remittances, there was little to protect the export-earning capacity of the economy when the 2008 recession arrived.

Once again, there was only a thin line of survival in the face of current recessionary conditions. The lesson to be learned here, as was the case in the 1980s, is that the external sector needs to be a broader and deeper sector to improve economic prospects.

The prospects for maximising the external sector immediately reveal that there is little room left in good tourism locations, and similarly, in new mining areas. Reliance here should be on broadening the two sectors by expansion of what exists. Manufacturing has no export capability base as it is on excessive interest rates and electricity costs, both of which have to be radically adjusted to provide room for expansion (I will deal with interest rates in another article).

Agriculture has much room for expansion, but only on a high-technology basis which, if pursued, could be a winner. Remittances have steady but not dramatic growth prospects. Indeed, better prospects exist, but only with the expansion of higher education to provide for future migrants and greater remittance prospects.

substantial needs

With this candid analysis, it is time to think deeply about the future of the country given its substantial needs and limited capacity, particularly after 50 years of Independence.

The IMF, apparently, proposes to give support to the creation of increased capacity. This should be rated as high priority because it may be one of the only credible courses. I do not have much confidence in the outcome of a second attempt by Professor Donald Harris, who prepared an industrial policy for Jamaica in 1997. It was very wide of the mark. Nor are there any prospects in the Caricom Single Market and Economy as being touted until the two blockades to the manufacturing sector - high interest rates and excessive energy rates - have been lowered to reasonable levels. The Economic Partnership Agreement has even fewer prospects, as its generous terms for Jamaican exports to be given privileged duty treatment in Europe beg the question, what exports? The Caribbean Basin Initiative, its counterpart, established how far off Jamaican manufacturing is in competing for markets in industrial countries.

In the midst of this bleak and sketchy survey, I continue to believe in the great potential of expansion under the right financial conditions of low-interest money and reduced debt in an environment confidently free of the threat of adverse exchange rate movements. This is the scenario for a pegged exchange rate, which holds buoyant prospects for the country:

Ready supply of overseas mortgage funds, as there would be no exchange rate risk to the borrower, which would increase loan repayments.

These funds could open wide windows of opportunity for housing development, hotel construction, factories, agricultural development and educational loans.

Small and medium-size business would thrive on such funds.

It is not hard to imagine what scope of boom activities could follow if the economy could shift its retail lending from 17.5 per cent to seven per cent.

This could be the new sector which could lift the economy to heights which could protect it from the threat of a wipeout of personal and business interests during disasters by insulation with higher levels of income and profits necessary for protection generated by a truly buoyant economy.

Edward Seaga is a former prime minister. He is now chancellor of UTech and a distinguished fellow at the UWI. Email feedback to columns@gleanerjm.com and odf@uwimona.com.