Shaping a future to overcome the past

Claude Clarke, GUEST COLUMNIST

This is Part Two of a presentation at a Stocks & Securities leadership and economic growth forum titled 'How to Win in a Tough Climate', on Thursday, March 14.

There is no need to be daunted by our failures of the past. We are still capable of turning this economy around. All we need to do is to adopt policies that will compress costs within the economy, to allow those who produce our goods and export services to be competitive. Government must do this, even if it must also accept the political price tag that may come with the policies required.

First, the Government must accept the fact that we collectively consume far more than our productive output can support. We enjoy incomes unmatched by the real economic value produced by our efforts. And to correct that harmful lopsidedness, those incomes must be compressed until the cost of the things we produce is consistent with their value.

Second, Government must recognise that the trade treaties it so triumphantly trumpets as providing lucrative export opportunities are meaningless if our economy is uncompetitive. Whether it is CARICOM, Caribbean Basin Initiative, or Economic Partnership Agreement: none of them can benefit us if we cannot compete. In fact, CARICOM has done us immeasurable economic harm, because we cannot compete. These treaties must be suspended or amended until we are able to compete.

Third, the Government has now been forced, under the new IMF arrangement, to reduce one of the costs that weigh heavily on our competitiveness: public-sector wages. But the truth is that, from the standpoint of competitiveness, the problem is much greater on the private side of the economy.

Every cost that is added to the productive process goes to someone as income. And the fact that goods produced in Jamaica are uncompetitive against similar goods produced abroad is clear evidence that our incomes are greater than the value that they contribute.

But it should not be assumed that it is the incomes of those businesses engaged in production that is the major problem. An even greater problem is the incomes that feed indirectly into producers' costs through the locally supplied services that they must use in their operations. McKinsey Global Institute estimates that one-fifth of the cost of United States-manufactured goods is represented by the cost of services: from banking to transportation. The impact of these costs is likely to be far greater in Jamaica, as can be seen by comparing the costs of financial services.

After 1995, even companies operating within the protected confines of the free zone could not escape the impact of the inflated cost of labour and services in Jamaica. These costs so burdened their competitiveness that a booming garment sector, exporting over half a billion US dollars at the end of the 1980s, has all but disappeared.

In 1996, I visited the Hong Kong headquarters of one of the largest companies operating in the Jamaican free zone and was shown its books, which confirmed that its Jamaican operation was the most expensive and uncompetitive in their worldwide network. This was almost entirely attributable to the rising cost of labour and locally sourced services. Despite JAMPRO's best efforts, this company, which employed nearly 4,000 Jamaicans, left a few years later.

THE REAL PROBLEM

The real problem is that, unlike goods and export services, domestic services are not subject to the price-constraining effect of foreign competition.

With only limited local competition, they are able to impose prices on their captive market without fear of commercial penalty. This is a huge impediment to the competitiveness of Jamaican goods and export services, and it will only be removed if the Government introduces policies that can effectively keep prices for local services in line with international prices.

That is why I have a sense of disappointment with the proposed IMF programme. I am disappointed because the Government has not used tools it already has in its hands to address these issues - even within the context of an agreement with the Fund.

In the 1980s, both Trinidad and Jamaica used similar strategies to help turn their economies around. The common strategy was an aggressive programme to compress the real cost of incomes, which in both countries had been spiralling out of control. Jamaica, between 1984 and 1985, used currency depreciation along with an effective incomes policy to reduce the US-dollar value of incomes within the country by more than 40%.

But what is even more significant is that, although the international competitiveness of Jamaican wages was improved, Jamaican-dollar wages were increasing above the rate of Jamaican inflation and so left our workers with a standard of living no lower than before.

And as the competitiveness of Jamaica's labour improved, our production was made more competitive, our trade deficit fell from 20% of GDP in 1982 to 15% in 1991. And we saw economic growth averaging more than 5% per year for six years, beginning in 1986. These results were achieved with economic measures which, while severe, were also stimulative because, in the end, they improved the country's competitiveness.

During that period, Jamaica was able to attract investments in production. The free zones filled up with manufacturing enterprises, employing almost 40,000 Jamaicans, and manufacturing across the country blossomed.

But we shouldn't have to look back to see Jamaica as a successful economy. We should be able to see it ahead of us. And we can, if we are prepared to learn from the lessons of the past. We must be willing to emulate what has worked and to shun what hasn't.

In the late 1980s, production, exports and growth were primarily spurred by competitively priced labour. But after we ended our discipline-imposing relationship with the IMF in 1995, the US-dollar value of Jamaican incomes shot up again to three times what they were in 1985. And that ushered in the long period of stagnation that is still with us today.

Economic growth has hardly been able to keep pace with population growth. Our trade deficit, which was brought to less than 15% of GDP in 1991, again exploded; and reached 43% of GDP by 2008. Our productive businesses have been losing the battle against imports; and the country has not been able to join in the new world of exponential export opportunity.

World exports have been growing at an unprecedented rate, and the overwhelming majority of that growth has been coming from developing countries around the world, not just China, as some would have us believe. The developing countries have been able to prevail in international trade because of lower incomes and competitively priced domestic services.

With the easy access to the world market created by modern shipping logistics, the opportunities for exports from developing countries have never been better. Yet, increasingly, Jamaica's trade has been flowing inward, not outward. Our imports are growing and our exports are shrinking.

But the way out of this conundrum is clear: We must compress our domestic costs in order to get into the international game. Included in these costs is that of government taxes. Government must organise its tax system to ensure that goods and export services that must face foreign competition carry no taxes or fees in their production cost that are not also borne by their foreign competition.

Several of the tax waivers that are targeted to be removed under a new IMF agreement were intended to address such a competitive disadvantage; and removing some of them could be very harmful to the competitiveness of many of our goods and export services.

COMPETITIVE CURRENCY

But perhaps the most effective tool available to the Government for maintaining the competitiveness of production in Jamaica is a competitive Jamaican currency. To achieve it, we must keep inflation within the range of our trading partners and closely manage money supply and incomes.

But more important, where our inflation rises above that of our trading partners, the price of our currency must be allowed to change to maintain its competitiveness. However, in Jamaica, we seem to suffer from what can best be described as irrational devaluation paranoia.

It has led to a currency that is chronically overvalued, even while it is constantly depreciating. And so, despite our phobia, the Jamaican dollar is now set to break through the US one-cent floor. And still it remains no more competitive than it was in 1983 when it represented 56 US cents. We have played so many games with our currency over the years that the very devaluation we fear is guaranteed by that fear.

Our economy can recover, but we need to wake up and wise up. We can be a successful exporting country. And our people can have the economic opportunities they deserve if our Government will only be bold, strategic and decisive. We can succeed if we enact an income policy that compresses production costs. We can be successful if we control the cost of domestic services. We can do better if we remove taxation from production.

We will thrive if we maintain a competitive currency. And we will do even better if the Government reforms the tax code to incentivise companies and individuals to invest some of their income in productive businesses.

These are some of the actions that, if taken, will breathe life into our economy, lead Jamaica to growth and prosperity, and make our future much more promising than our recent disappointing past.

I am hopeful that more and more Jamaicans will join in the endeavour to make it happen.

Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.