Thursday, August 23, 2007

Jamaica’s growth challenge

Hurricane Dean has come and reminded us of our vulnerable fiscal and growth situations. We will certainly see challenges to our macroeconomic environment, fiscal accounts, growth, and balance of payments. This will result primarily from the destruction to the agricultural and tourism sectors, which are significant contributors to inflation and foreign exchange earnings. The passage of Dean is also a reminder to us that hurricanes are a way of life in the Caribbean, and the fact that Jamaica has been so lucky is no reason for us to be complacent and not put the appropriate provisions in place.

I often wonder if it is because Jamaica is such a blessed country (geographic location, natural beauty, and agricultural resources) if this has led our politicians since 1962 to deliberately create problems for the country. The fact is that there has been no natural disaster, since 1962, that has caused greater devastation on Jamaica than the sustained mismanagement of our country by governments. While hurricanes and floods may have come and caused a few billion of dollars in damage, and resulted in lower growth performance, the mismanagement of this country has resulted in far greater losses. Examples of this mismanagement are (1) the cement crisis, which cost us billions of dollars in opportunity lost; and (2) the cost overruns on contracts.

Lacking growth capacity
I have long said, and regret that I am right, that Jamaica does not have the capacity to grow at 3 percent or more consistently. There is no doubt that Dean is going to negatively affect growth but even before Dean the growth target was already revised down by 1 to 1.5 percent. We had projected growth at 3 percent for the fiscal year, and this was revised down to between 1.5 to 2 percent. With the passing of Dean we can expect that target to be further revised down by 0.5 to 1 percent, resulting in growth of 0.5 to 1 percent for the fiscal year, consistent with our average since 1990.

If we look at the growth outturn for the January to March 2007 (Q1) and April to June 2007 (Q2) quarters we achieved total GDP growth of 2.0 and 1.8 percent respectively. The main sectors contributing to this growth included agriculture (Q1- 4%; Q2- 3%), Construction and Installation (Q1- 7%; Q2- 3.6%), Electricity and Water (Q1- 4.7%; Q2- 3.9%), Miscellaneous Services [Tourism] (Q1- (0.1%); Q2- (2.3%)). As a result of Dean we can certainly expect that these sectors will be further negatively affected. Some players have also said that the state of public emergency has negatively affected tourism, but this has been disputed by the authorities.

The main reason why we are always so distressed when a natural disaster occurs, however, is because when times are stable we do not take advantage of the growth opportunities. I come back again to last year, when we did not have any natural disaster, but then we created the cement crisis, which cost us significantly in a year when we should have been growing at a faster pace and taking advantage of the stable times. So when a natural disaster comes around it hurts us even greater because we have not capitalized on the opportunities.

Jamaica’s growth
The graph shows Jamaica’s GDP growth between 1962 and 2006, and I have assumed a growth rate of 1.5 percent for 2007. It shows that in the 45 years between 1962 and 2006 we have grown more than 2% in 17 of those years and more than 3% in 12 of those years. What is more is that of the 17 years we have grown more than 2%, 10 of those years was between 1963 and 1972, with the other years being 1981, 1987, 1989, 1990, 1993, 1995, and 2003. We have only grown 12 of the 45 years above 3%, with 9 of those years between 1963 and 1972, and the other years being 1987, 1989, and 1990. So we have not grown above 3% in over 16 years. Doesn’t this tell us that there is something seriously wrong with our capacity to grow in excess of 3%. And if we understand this concept then why do we project these growth rates when there is no fundamental change in our production factors. As a matter of fact, in my opinion, productivity and the pillars of growth are even more eroded than they were in 1990.


It is therefore apparent to me that there is no way that the economy will grow at 6 to 7 percent rates without some fundamental shift in our production arrangements. At the heart of this are the social and political policies that influence growth. I speak of things such as elimination of bureaucracy, crime, waste and corruption; functioning institutions such as the courts and police; quality education etc. Unless these things are dealt with then I regret to inform everyone that we will not see any sustained growth in excess of 3 percent. For me the concept is clear. When I heard the news report that the police were trying to restore public order after Dean, I thought to myself that there was not much to do as one of the primary problems we have, with or without a hurricane, is the inadequate level of public law and order.


It is for this reason why I continuously say that Jamaica does not primarily have an economic problem, but rather a social and political one. It is for this reason also why our governance relationships are of primary importance. So whoever forms the government after the election should understand that acceptable growth levels will only happen if we have the proper infrastructure and policies in place. Providing a stable macroeconomic environment and a positive primary surplus, while desirable, is not enough if unsupported by proper social and political policies.

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