Tuesday, October 03, 2006

Preparing the foundation for growth

The government recently released the August 2006 fiscal numbers, which show that while we are ahead of budget, for the overall fiscal balance, this seems to have been at the expense of infrastructure and productivity. The fact is that the $5.8 billion amount, which the fiscal balance is better than budget, was at the cost of spending $4.5 billion, $1.1 billion, and $900 million less on capital programmes, social programmes and wages respectively.

One may say that it is prudent to keep spending in line with revenues, and this is correct, but the fact is that we had projected to have a higher deficit to make these expenditures so why are we not carrying out this much needed expenditure. If we could have done without this expenditure then why budget for it in the first place?

I say this because expenditure on capital projects especially are very important in contributing to future development, as if we do not replace our asset base then we will end up with less efficient earning assets in the future. Also, why do we need to announce a $635 million crash programme when we are already under spending on programmes by $900 million? Isn’t this contradictory? Why do we waste productive hours in industrial disputes when we are already under budget with wages and salaries by $1.1 billion? Is it that we do not intend to spend this money or are we uncertain of future revenue flows to support the expenditures, and so we are holding back?

Macroeconomic stability
Whatever the answer is, it is clear that we are not (and have not been) managing our budget for growth. Year after year we focus on expenditure cuts as a way to meet our targets. Any company, or country, that focuses on expenditure cuts over an extended period of time to manage profits will find that it reduces its market share, revenues and profitability over time. This is especially true the greater the competitive environment. Instead the focus must be on improving revenues, as this is the only way to truly experience growth.

Jamaica can say that for a wile we have had macroeconomic stability, which is very important, and kudos to the Finance Minister and the BOJ for maintaining this. Macroeconomic stability is essential for economies to grow but we fail to understand that by itself it is not sufficient. It is like laying the foundation for the building of a house, but in order to produce a house you need steel and concrete to erect the walls.

2006 Global Competitiveness report
The 2006 Global Competitiveness Report, presented at the World Economic Forum, ranks 125 countries on a Global Competitiveness Index. The index seeks to measure national competitiveness, as it is believed that competitiveness drives productivity and ultimately growth. Jamaica is ranked 60th, and was 63rd in the previous ranking. Barbados is at 31st, while Trinidad is at 67th.

The report states that the empirical evidence shows that macroeconomic stability is essential for sustained growth to take place. It, however, further states that “there is increasing recognition that a solid foundation of macroeconomic stability alone is not sufficient to ensure rapid economic growth”. The report lists six pillars that are important for economic growth. These are:

1st Pillar: Institutions (Public and Private) –property rights, reduction in government inefficiency, judicial independence, security, corporate ethics and accountability;
2nd Pillar: Infrastructure – overall infrastructure quality, port infrastructure, railroad infrastructure development, air transport, electricity and telephone supply;
3rd Pillar: Macroeconomy – government surplus, national savings rate, inflation, interest rate spread, government debt, real effective exchange rate;
4th Pillar: Health and primary education – medium term impact of HIV/AIDS, life expectancy, primary enrolment;
5th Pillar: Higher education and training – secondary and tertiary enrolment ratio, quality of math and science education, availability of specialized research and training services; and
6th Pillar: Market efficiency – agricultural policy costs, efficiency of legal framework, extent and effect of taxation, number of procedures to start a business, intensity of local competition, imports and exports, prevalence of trade barriers, GDP.

This strengthens the argument that Jamaica simply lacks the capacity to grow above 3% on a sustained basis. The only way for us to sustain such a growth rate is to focus on building these pillars. We can say that we have some amount of macroeconomic stability but even this is not as strong as it should be, as it is propped up by government debt rather than a surplus in our earnings. We can also say that we have some amount of market efficiency but this is affected by a slow legal system, inefficient tax system, and government bureaucracy.

Education
Our education system, which needs to be a main pillar of growth given our low literacy level, is and has been achieving a failing grade. Even after the fanfare around GSAT and the upgrading of non-traditional high schools we still see that at the CXC level our students are still performing poorly in Math and English. We are also, by cutting away at expenditure, reducing the investment in our infrastructure, which will affect our future capacity to grow. If we expect agriculture and tourism to be our main earnings shouldn’t we be investing in the infrastructural support? Instead we see reports that Jamaica’s infrastructure cannot properly support the expected tourism growth and we have farming communities demonstrating for better roads. If we do not address these infrastructural problems then our future competitiveness will be eroded as the cost of delivery will increase.

The report also states “…countries which have invested heavily in creating a well-developed infrastructure for tertiary education have reaped enormous benefits in terms of growth. Education has been a particularly important driver in the development of the capacity for technological innovation…”

Michael Porter, Harvard Business School, in commenting on the report states “The world economy is not a zero-sum game. Many nations can improve their prosperity if they can improve productivity. The central challenge in economic development, then, is how to create the conditions for rapid and sustained productivity growth.”

If Jamaica is truly serious about growth then we cannot just achieve macroeconomic stability and expect growth. We have had macroeconomic stability for a while but we are lacking in the other pillars that are necessary for sustained growth. This is why it is very important to ensure that each dollar spent, especially debt, is targeted for areas that will provide future returns in excess of the cost.

If it were up to me I would identify the pillars that will provide the greatest growth opportunities and derive a strategic plan around developing those given the limited resources we command.

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