No gain, no pain

Claude Clarke, GUEST COLUMNIST

The minister never told us how he would achieve what he described as the ultimate objective of his reform agenda: "to reverse the long-term trend of low growth and declining productivity which has come to characterise the Jamaican economy".

Beyond a plan to conform to the IMF's timetable for Jamaica's debt service, there was nothing. Apart from reminding us of previously announced projects, there was nothing to generate growth.

There were exhortations for more responsible and fair administrative and commercial practices, but there was no indication of the strategic policy shifts that could move the economy off the slope down which it has been sliding for more than two decades, to one that would change the game and lead to greater productive investments, increased production and healthy economic dynamism in the country.

But the finance minister's oratory was an effective sugar-coating for the bitter concoction devised with the IMF to rectify the country's chronic debt dilemma. His message was simple but true: In Jamaica's present circumstances, there can be no recovery without austerity. However, as Edward Seaga reminded us in a recent article, for growth to follow austerity, the foundations for growth must be laid during the period of austerity. This is fundamental, because while some austerity measures are themselves growth inducing, others can also bring pain without commensurate gain.

Planned currency depreciation, drastic cuts to bring the cost of government closer to the value it produces, and wage guidelines are among the measures that were used in the 1980s to make the average annual growth rate of more than five per cent between 1986 and 1990 possible. In Jamaica's present circumstances, where there is severe austerity fatigue and public disenchantment with the never-ending extraction of unrewarded sacrifice, austerity measures should not be imposed unless the benefits to the country are clear. The axiom 'no pain, no gain' also prohibits the imposition of pain if there is no commensurate gain.

It is indisputable that strategies which compress internal costs to make them internationally competitive will help move floundering economies towards sustainable growth. But the fact that this type of austerity inevitably involves the use of currency devaluation and some form of incomes control poses too great a risk for 'craven' politicians, whose only objective is political power.

They are daunted by the cautionary experience of governments punished by their people for employing these strategies to rescue their economies from ruin. They know that our people, having been weaned on a culture of instant gratification and reward without effort, are all too happy to support those who perpetuate the illusion of a strong currency and rapidly rising nominal incomes that feed their hopes for indulgent consumption.

There is no doubt that austerity measures designed to pay down debt are important for our development. It is even clearer that austerity strategies which cut production input costs and improve economic competitiveness are essential for economic growth. Austerity to pay down debt seems to be the only focus of the Government's IMF programme. But there is no reason that both debt servicing and economic competitiveness cannot be achieved at the same time.

GOV'T PLAN FLAWED

The problem with the present Government's plan is that it is so narrowly focused on its fiscal accounts to pay its debt that the wider and more important need to improve the economy's overall competitiveness has not been addressed.

Bringing our outsize debt within manageable limits is critical for the health and stability of the economy. However, cutting government expenditure solely to pay debt does not necessarily lighten the burden of government on the economy. It simply continues extracting value from the economy and transfers it to our creditors instead of putting it back, albeit wastefully, into the economy. For the burden of government on the economy to be reduced, we must go beyond debt servicing and lower its cost to the taxpayer and to the country's productive machine.

Over the years, Government has been spending as much as a third of the country's GDP and returning less than half its value to the economy. The productive sector, including export services, is the only area of the economy that faces the challenge of foreign competition, and it must carry the full burden of this excessive cost of government into the competition for markets at home and abroad. Not surprisingly, it has been losing that battle. The effect has been the continuous contraction in demand for Jamaican production and the idling of Jamaican labour.

The waning of legitimate economic opportunity has diverted large numbers of our people to petty scuffling and crime, contributing to the lawlessness and ramshackle conditions that have made our country anything but the place of choice to live, work, raise families and do business.

Meantime, many of our Caribbean neighbours have had more positive contributions to their economic well-being from their governments, using far smaller proportions of their economic output.

For example, Costa Rica, a country with a population of four million, delivers a much higher value of public goods and services than Jamaica, using 40 per cent less GDP expenditure. This is evidenced by its relatively high ranking on the Human Development Index (24 places higher than Jamaica). It ranks 45 places higher than Jamaica in literacy, and the life expectancy of its people is 71 positions ahead of Jamaica.

I first visited Costa Rica in the mid-1980s, in the early stages of its development drive, to attend a conference on regional trade. But although trade was the subject, what I took away from the event was the clear sense of mission conveyed by every Costa Rican government official who spoke - that Costa Rica was building an orderly and economically vibrant country with a population of healthy and educated people.

A leading component of that mission was a new policy to bring predictability and competitiveness to its currency, the colon. This was to be underpinned by a policy to keep taxation away from production within its tax-free industrial zones.

ALTERNATIVE ENERGY SOURCES

It was committed to reliable and inexpensive energy, with electricity largely generated by hydropower and other renewable sources. Today, it has among the lowest electricity rates in the region and its consumption of energy per dollar of GDP is one quarter that of Jamaica's.

With a competitive economy, a healthy and educated population and an incentivised investment environment, the job of Costa Rica's Investment Promotion Agency (CINDE) to attract productive investments to the country was greatly assisted. It was, therefore, not surprising when the global microprocessing giant, Intel, chose Costa Rica to be its production centre in the Western Hemisphere, producing one-third of the world's microprocessors.

Costa Rica has used its competitive economic environment to attract other global technology-intensive businesses, including names like Siemens, Conair, Motorola and Sylvania. Other employment-creating, hard currency-earning investments have been made by many other large global industrial players like pharmaceutical giant GlaxoSmithKline and leading international consumer products company, Procter & Gamble.

The country's economic performance has been stellar, and the comparison with Jamaica's is striking. While Jamaica's economy shrunk by five per cent during the last five years, Costa Rica's surged by 15 per cent. Jamaica's Government broke out the champagne on receiving US$240 million of foreign direct investment (FDI) in 2011. That year, Costa Rica calmly accepted FDI of more than US$2.2 billion. Jamaica's total exports in 2012 were barely US$1.7 billion. Last year, Costa Rica exported US$11.5 billion.

Costa Rica's success has relied essentially on a simple strategy of government creating an environment conducive to successful private economic initiative and concentrating on its core responsibilities of maintaining order, providing reliable social services, developing an efficient infrastructure, and creating opportunity for personal economic upliftment.

There is no reason that Jamaica cannot succeed in similar fashion. It is not beyond us to grow our economy and bring prosperity for our people. Two of our Latin American neighbours, Costa Rica and the Dominican Republic, have shown us how.

To emulate their success, we need only employ the simple and proven strategies they used. We need to use a reformed tax code to motivate and incentivise foreign and domestic capital to invest in production. We must adopt exchange-rate policies, which in combination with an income policy, will keep our currency and, by extension, our economy competitive. We have to protect local production from taxes and other government-imposed charges. Local taxes can be applied to productive outputs after they enter the distribution system, on the same basis as they are charged on the imports against which they compete.

Finally, the high cost of electricity must be significantly reduced by taking decisive action to convert immediately to cheap energy sources and using intelligent financing arrangements to front-end the cost benefits to users.

Above all, our Government must stop asking our people to accept the pain of austerity when they are not prepared to accept the possible pain of electoral loss. Good government leads by example.

Certainly, if there is going to be no gain, there ought to be no pain.

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