Foreign investments crucial for Jamaica to leap into future

Dr Densil A. Williams, Contributor

Singapore, in the early 1960s, was in a worse position economically and socially than Jamaica is today. Almost five decades on, Singapore today is celebrated as one of the greatest success stories of how an economy can move from abject poverty to prosperity.

This small city state of only 697sq km, located between Indonesia and Malaysia in South East Asia, is home to circa 4.7 million people. It has per capita of more than US$59,000 and is now the 40th largest economy out of 226 countries.

By any measure, the story of Singapore is a remarkable one, coming from one of the poorest economies in the world just under five decades ago. So, the logical question is, what accounted for the massive transformation in this economy?

Clearly, there is no single answer to this question, but surely, one cannot analyse the growth and transformation of Singapore without paying close attention to the role of foreign direct investments (FDI) in the economic growth and transformation of that city state.

The story is told how Lee Kuan Yew, the father of modern Singapore, took a short sabbatical from his duties as head of state and went to visit Harvard University where he met Professor Raymond Vernon.

Yew declared: "Vernon dispelled my previous belief that industries changed gradually and seldom moved from an advanced country to a less developed one." With this enlightenment, Yew went back to Singapore and immediately ramped up his efforts to attract US FDI to Singapore. He had also transformed Singapore's Economic Development Board, and implemented an aggressive campaign of investment promotion in order to attract a significant flow of FDI to the city state.

There is no doubt that this effort to attract more FDI to Singapore was an important game-changer in the economy moving from a poor, deprived country in the Malay region to becoming the 40th wealthiest country five decades later.

The lessons from Singapore can, no doubt, be replicated in other small nations like Jamaica which are struggling to transform their economies and to improve the wealth of their citizens. Like Singapore, FDI will have to play a major catalytic role in these economies.

The fact is, local capital is not sufficient to drive the economic transformation that is necessary to lift these economies out of the poor state that they are in. Moreover, besides the injection of capital, FDI can also generate positive externalities in the form of technology upgrading, which is critical for economic transformation as well.

FDI Flows to the Caribbean Region

In the 1950s, Nobel laureate in economics, Sir Arthur Lewis, posited that Caribbean countries could improve their economic performance through the use of FDI. He noted that the key to the industrialisation efforts of the region was attracting foreign firms to invest in the region.

The logic was that these investors will be able to bring to the region their firm specific advantage, such as capital and technological know-how, and combine these with the locational advantage of the countries in the region (the Caribbean is close to the largest economy in the world, the United States). In doing so, they would produce goods and services that could be sold in the international market and generate income that could increase domestic savings.

In essence, FDI, which was once seen as the problem to Caribbean development, was seen by progressive Caribbean thinkers as part of the solution mix. The benefits from FDIs to the region are tremendous.

Types of FDI needed

The works of my colleagues here at UWI, Dr Lou Anne Barlcay and Prof Alvin Wint, have demonstrated the tremendous benefits to be gained from attracting more FDIs to the region.

A critical point to note, however, is that the region does not have a serious problem in attracting FDI. Over the period 2005-2010, the Caribbean attracted more than US$200 billion in FDI, with an average of US$48 billion per year. This compares to the southern African region which attracted just over US$100 billion, with an average of US$17.6 billion over the same period.

Jamaica, over this period, attracted more than US$4 billion of investments, with an average of US$768 million per year. The Dominican Republic attracted more than US$10 billion in investments, with an average of US$1.75 billion, while The Bahamas attracted more than US$5 billion, with an average of just under US$1 billion over the six-year period.

While the stock of investments in the region is high, these have not translated into robust economic transformation and growth in most instances, especially in the case of Jamaica. This is mainly because of the type of investments that are attracted to the economy.

For FDI to facilitate economic transformation and growth, countries must be able to select the right type of investments. In Jamaica, for example, while the stock of FDI is high, equally, a high level of investments is in low value-added and labour-intensive activities.

In other words, Jamaica should aim to attract FDIs that are not merely seeking a market to sell their excess production or seeking raw materials to further their value-added production in other locations.

Instead, the country needs to attract FDI that adds value to the country's resources and is generating technological spillovers so that domestic investments can benefit. That is, domestic investors can learn the trick of the trade and indulge in industrial activities for themselves. To put it simply, Jamaica needs to attract more efficiency-seeking FDI and move away from low value-added investments.

Sectors ripe for FDI

FDI-facilitated development is not just about getting the investors to create jobs. The investments must be located in critical sectors of the economy that can lay the foundation to generate production in other sectors. Some critical sectors in the Jamaican economy that will need FDI-facilitated development are: construction, e.g. seaports and airports, roads, etc; financial services, light manufacturing, music and theatre production, among others.

The truth is, the Government does not have the capital to engage in large-scale investments that are needed to set the framework for industrial production and commerce. The capital from the local private sector is also very limited in most cases, especially as it relates to large construction projects. It is large investors like a China Harbour, Pihl, etc., which we are going to have to attract to invest in these infrastructural development projects if we are to spur industrial production in the economy.

We cannot depend on the Government to do these, given the tight fiscal space in which it is operating. Actually, this fiscal situation will get worse before it gets better. However, the Government and its bureaucracy have a significant role to play in facilitating this sort of development.

Role of Government

Like Singapore, Jamaica has to be active and aggressive in its FDI promotion and attraction programmes. FDI-facilitated development will be effective when governments are able to implement policies that are credible, consistent and can influence the corporate behaviour of firms. The Government will have to implement policies to upgrade the competitiveness of the Jamaican economy in order for FDIs to enter. This will mean having a stable macroeconomic social, political and regulatory environment.

The Government will also have to be serious about some selective intervention strategies which will favour some firms over others. The Government must determine which types of activities will drive its development over time, and put policies in place to attract these types of investments.

Given Jamaica's stage of economic development, not all investments will be good for the economy. Careful planning and assumptions will have to be made in order to determine intervention policies, in order to minimise the market failures that can result from the attraction of the wrong types of investments. We need to hear more from JAMPRO and the Ministry of Foreign Affairs and Foreign Trade on Jamaica's FDI policy.

Dr Densil A. Williams is a senior lecturer of international business and head, Department of Management Studies, UWI. Email feedback to columns@gleanerjm.com.