Friday, February 18, 2011

A SWOT analysis of Jamaica's economy Part 3

OVER the past two articles I tried to develop a simplistic SWOT analysis and demonstrate the method that should be used to target the development objective of the country in the most efficient manner. There is no one solution that is right and the others wrong, but there is always going to be one that is the most efficient use of resources and greatest value-added return, which is what this analysis is trying to do.

Coming out of the last article, I identified three possible areas that would provide maximum return, in relation to the resources that need to be invested. The three specific areas I identified were (1) dealing with indiscipline to create order and fairness in the society; (2) breaking up the JPS monopoly hold on the energy distribution lines and creating an efficient transportation system; and (3) reforming the tax system (already we have seen where just improving tax administration has resulted in significant compliance improvement. Can you imagine if this was coupled with real productivity-oriented tax reform?).

This week I want to take a simplistic look at the possible effect of focusing on these three areas by imputing financial numbers from the initiatives, and hence completing another step in looking at the SWOT approach.

GDP Effect ($M)
Yr 1 Yr 2 Yr 3 Yr 4 Total
Productivity plus from improved justice   34,048   34,048   34,048   34,048   136,190
 
Import substitution / agro-processing     7,695   15,390   23,085   26,933     73,103
 
Energy savings - retail   25,650   12,825     7,695     7,695     53,865
Energy savings - transport  
 
Tax reform effect   16,314   16,314   16,314   16,314     65,256
 
  83,707   78,577   81,142   84,989   328,414
 
US$ equivalent        979        919        949        994       3,841
BOP Effect ($M)
Yr 1 Yr 2 Yr 3 Yr 4 Total
Productivity plus from improved justice  
 
Import substitution / agro-processing     7,695   15,390   23,085   26,933     73,103
 
Energy savings - retail   25,650   25,650   25,650   25,650   102,600
Energy savings - transport   25,650   25,650   25,650   25,650   102,600
 
Tax reform effect  
         
  58,995   66,690   74,385   78,233   278,303
 
US$ equivalent        690        780        870        915       3,255

The table (Figure 1) shows imputed values from the initiatives outlined. It shows a total four-year positive effect of J$328.4 billion on GDP and J$278.3 billion (US$3.2 billion) on the Balance of Payments (BOP). The actual outcome could be more or less, so what I am trying to do here is show an approach to selecting the best value-added initiatives and how to do an analysis on the financial projection. It is important to focus on the effect on GDP and BOP, as these should be the real objective of economic policy.

With respect to productivity improvement from improved justice and discipline, this assumes an improvement of one productive hour per week per person in the labour force multiplied by the average labour output dollar amount. The assumption is that if we were to improve justice and order in the society then we could see people being at work longer and producing more productively as a result of (1) persons not spending time focusing on issues of justice; (2) fewer resources being spent in the courts dealing with justice and indiscipline problems; (3) greater availability to the human and real estate resources in the inner-city communities; (4) less traffic congestion and more productive time as a result of improved road conditions; and (5) productivity increase from lower crime levels, including extortion and praedial larceny. What is obvious is that the initiative of creating a more ordered society and improved justice will always have the largest positive impact on GDP because it creates greater efficiencies in the market economy.

Another initiative mentioned in the table is the focus on food import substitution from increased agricultural productivity and agro-processing. The table assumes that food import substitution is done to 10 per cent in year one, 20 per cent in year 2, 30 per cent in year three, and 35 per cent in year four. This initiative will have a positive effect on both GDP and the BOP to the same extent, and is assumed to have a positive four-year effect of J$73.1 billion.

The energy initiative that focuses on retail consumption (through renewables) and transportation (through an efficient public transport system) is assumed to have the effect of reducing the energy consumption of these two sectors by 50%. This is not hard to believe given the significant positives that can flow from these initiatives, and is assumed to have a positive impact on GDP and BOP of J$53.9 billion and J$205.2 billion respectively. The effect on GDP comes from the creation of energy jobs. The attractiveness aspect of it is that they are short-term initiatives, yet they have the largest positive impact on the BOP.

The final initiative of productivity-oriented tax reform, I assume will cause a positive GDP impact of 5% of tax revenues budgeted for the current year. This I think is very conservative, but you know us accountants. Never count our chickens even after they hatch, as they could still die. In addition to the good work being done by the Tax Administration to reduce bureaucracy, we should be looking at tax reform aimed at improving productivity and keeping monies longer in the economy to have a greater multiplier effect. These include moving more towards indirect from direct taxation. This will allow for greater spending and hence a higher multiplier effect. Incentives also need to be geared more towards production and productivity in foreign exchange-earning industries.

This is by no means an exhaustive list of value-added initiatives and requires much deeper and dedicated analysis, especially to arrive at the financial possibilities. What I have tried to do over these three articles, however, is show one method for arriving at the greatest value-added initiative given the limited resources we have.

The debate will no doubt continue, but what is obvious is that we need to define our SWOT and systematically choose the best initiatives based on return on investment and difficulty to achieve.

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