Grow economy by growing businesses

Paul Golding, GUEST COLUMNIST

The world's population reached seven billion earlier this year, and according to Jim Clifton, chairman of Gallup, a global research-based consultancy company, what the world currently needs and will need in the future are jobs. Clifton points out that cities and countries that fail to create jobs will experience suffering, instability and, eventually, revolution.

A number of scholars have attributed the uprising in the Middle East to high levels of unemployment in the population, and especially among the 15-29 age group. Demographers argue that high unemployment in this age group is a good predictor of conflict and instability, as the young are typically the foot soldiers in protest action.

All the economic and social indicators strongly suggest that Jamaica is in a crisis and may be teetering on the verge of social unrest.

According to a recent Gleaner editorial, as at August, Jamaica's debt was $1.6 trillion, or 130 per cent of gross domestic product (GDP), the value of all goods and services produced in Jamaica. The editorial continued: "When off-book transactions are taken into account, that debt is perhaps closer to 140 per cent of GDP, not far behind Greece's and worse than Italy's, where governments collapsed because financial markets felt that their debts were unsustainable."

The poverty rate has increased over the last three years from 344,000 in 2008 to 482,900 in 2010. The youth unemployment rate is 30.5 per cent, and among the volatile 15-24 age group, the rate is 28.7 per cent, which is hovering around the rate at which some scholars argue ignited the Arab Spring. What the figures do not show is the increasing number of persons who are going to work and are completely broke the day after pay day.

Fixing our predicament

Among the proposed solutions to our present predicament is public-sector reform, including reduction in public-sector jobs and tax reform. Tax reform should include broadening the tax base to ensure that persons pay their fair share and to increase government revenue. The irony is that Jamaica's GDP is declining, therefore jobs, real spending and the tax base are also declining.

With the reduction in public-sector jobs, there will be still fewer people to tax, hence less revenue to collect, which will lead to reduced government spending, especially on infrastructure. Take a look at the state of our roads. The impression that both political parties portray - that if the incumbent Government remains, or if that administration is replaced, they are going to find money to create jobs - is an illusion.

The Government does not create wealth or money; they tax persons who make money and redistribute it, too often to itself. The point is that while public-sector and tax reform is necessary, none of these measures will create growth.

From my perspective, the main purpose for tax reform should be to create the environment for entrepreneurship and innovation, which will stimulate job creation and sustainable growth, while reducing poverty.

The only way to reduce poverty sustainably is to promote economic growth, through wealth and employment creation. In developed countries, small and medium enterprises (SMEs) are the major source of income, a breeding ground for entrepreneurs and a provider of employment. In most developed countries, SMEs comprise more than 95 per cent of the economy and contribute significantly to GDP.

In South Korea, SMEs represent 99.8 per cent of all enterprises and provide 86.7 per cent of all employment; in the Philippines (not a developed country), 99.6 per cent of all enterprises and 70 per cent of total employment; and Japan, 98.6 per cent of enterprises and 69.2 per cent of employment. Contrary to popular belief, the USA does not consist primarily of large Fortune 500 companies. More than 99 per cent are SMEs, and they contribute significantly to employment.

Formal jobs needed

The jobs that are required by the Jamaican economy are formal jobs in formal companies, where persons have steady work and a paycheque which pays their bills; are employed for 35 or more hours per week; and pay taxes.

On the contrary, informal companies typically don't pay taxes, they have a slower growth rate, poorer access to credit, their staff receives no health or other benefits, and they generally remain outside the labour law.

To create much-needed formal jobs, our approach must change from primarily seeking foreign direct investments from multinationals. Multinationals and foreign direct investments will have their place in Jamaica's economic development, but they are seldom as committed to the country as SMEs, and the growth of indigenous SMEs directly benefits the country.

The world economy has changed; knowledge is by far the most important factor in determining a country's standard of living and, by extension, its ability to create jobs. Despite this change, we, however, seem to be stuck in the past with an uncanny ability to identify all the problems we face without offering credible solutions.

If we are uncompetitive because electricity and oil prices are too high, we, therefore, need to reposition into businesses that are not energy-intensive and dependent on fossil fuels. The reality is that fossil-fuel supply is expected to decline and demand is expected to continue to rise, therefore international prices will not be going down in the long run.

Based on the change in the world economy, we require a new paradigm, targeting and developing the ingenuity and entrepreneurship of Jamaicans at home and from the diaspora. The Government's role will be to foster a pro-business environment, to facilitate the development of new and existing SMEs, not to create jobs.

As mentioned earlier, the new tax regulations must encourage the development of SMEs and the integration of government administration, the Registrar of Companies, all the Inland Revenue services and the further development of e-government services to facilitate electronic filings and payments.

We conducted a survey in 2009, and it indicated, unsurprisingly, that most SMEs had only adopted basic information and communications technologies (ICT), i.e. fixed phone lines, basic cellular, fax machine and standalone computer without Internet access. For SMEs to compete in the knowledge economy, they must adopt ICTs.

The universities should provide programmes that can help (SMEs) embrace and adopt information communications to improve their business productivity, growth and differentiation. In fact, innovation and entrepreneurship should be taught and encouraged from the primary level. This will require a change in curriculum and approach, not just having students learning by rote and getting the 'right answer'.

An important distinction must be made between innovation and entrepreneurship, as we have been primarily stressing the former. Innovation is creating something new, whether it is a product, idea or a process. Entrepreneurs are the ones who get persons, many persons to purchase the innovation. Without entrepreneurs, the innovations stay on the shelf and gather dust. So we are not focusing on innovation alone.

Include industries

As it relates to diffusing ICT in SMEs, the initial target groups should include entire industries that are likely to benefit immediately from ICT. We may have to target service industries, as this sector currently provides 60 per cent of Jamaica's GDP, and SMEs which are willing and able to implement ICT. In addition, a public sector-private sector-university triage to facilitate the growth of industries and enhance the innovation and business capabilities to better access market and business opportunities. JAMPRO would play a pivotal role in this area.

An important strategy is to incentivise the development of new businesses which use ICT and other technologies. This could be done by way of an annual competition in which potential businesses, however humble, are mentored by senior entrepreneurs and those with growth potential have their business plan developed. The winning business plan would receive substantial seed funding and incubated.

Apart from these incentives, the Small Business Association of Jamaica should be the agency to help local businesses find the answers they need to start, sustain and grow their businesses. This is by no means a short-term solution; these policies should be bipartisan and should not change significantly with the changing of governments.

We have been in this predicament for too long. Let's not wait for others to solve our problems. Encourage our best and brightest to remain in Jamaica by offering them a realistic possibility to make a change.

Paul Golding is associate professor and dean, College of Business and Management, University of Technology, Jamaica. Email feedback to columns@gleanerjm.com and pgolding@utech.edu.jm.