Friday, September 16, 2011

Examining Jamaica’s competitiveness

Recently the World Economic Forum released the 2011-12 Global Competitiveness Report, and Jamaica showed the worst ranking ever at 107 of 142 countries, coming from 95 of 139 countries in the previous report.

This really is no surprise as the seeds for this were sown from around the mid-1990s when the debt/GDP ratio started to worsen as a result of the macroeconomic policies practised during that time, more notably the prolonged high interest rate policy that led to a logical market choice to sit at the beach and earn rather than do so through productivity. The seeds of indiscipline that led to the lack of reward from productivity started in the 1970s, when the much needed social changes were taken to mean that everyone had the right to property and income even if not worked for. The result at the time was a real GDP decline of approximately 20 per cent during that decade.That period also marked our first fling with the IMF, as a result of near decimation of our economy.

The 1980s saw a return to a focus on economic growth, which resulted in an average annual growth rate of approximately 6 per cent, and by 1990 the debt/GDP ratio, had moved to 90 per cent from 212 per cent in 1984. The challenges faced by the economy in the first half of the 1980s resulted from the near collapse of the economy in the 1970s and the global recession at the start of the 1980s. The problem with the 1980s, however, was that the social side was neglected and therefore there was no emphasis on improvement of the individual but rather a hope that macroeconomic growth would lead to microeconomic benefits.

The problem with Jamaica is that the workforce consists largely of low-skilled labour, and a relatively low literacy level. Like it or not, it was the free education policy of the 1970s that caused many to be able to access higher learning and change the landscape of the workforce, but the result of a poorly implemented free education policy led to a degradation of the school system.

By the time the 1990s came around there was again an ill-conceived approach to the liberalisation of the economy resulting in an increasing trade deficit, as uncompetitive local industries, which were accustomed to protectionist policies, could not compete with the cheaper and more attractive foreign goods. So the exchange rate started to decline and inflation was rampant. In order to put a stop to runaway inflation, the government at the time employed a high interest rate regime that not only served to halt inflation but also put the nail in the coffin of most productive businesses. This was the main push that caused Jamaica to become a service-driven rather than the goods-producing economy that it was.

That period saw the continuous breakdown of our institutions which led to a decline in productivity and discipline. The slump had started in the 1970s, with a brief break in the trend during the last half of the 1980s. Since then productivity has consistently declined and our institutions and infrastructure have generally deteriorated. The only significant positive development in our infrastructure was the building of the highways during the early 2000s, which in my view was somewhat negated by the demise of the railway during that time.

In 2007 we experienced a significant global recession, which did not do us any good, as the economy was structured to be dependent on foreign loans, remittances, and foreign consumers, rather than on our own productivity and local economy.

So here we are today looking at a competitiveness report that shows us as ranking 107 from 142 countries, and within that global ranking even more dismal numbers are represented. Some of these are fundamental pillars on which economies are built as follows (rankings shown at right):

o Public trust of politicians - 112

o Favouritism in decisions of government officials - 121

o Burden of government regulations - 123

o Business costs of crime and violence - 140

o Organised crime - 135

o Reliability of the police service - 101

o Quality of railroad infrastructure - 113

o Macroeconomic environment factors - between 106 and 140 (overall ranking of 142)

o Quality of primary education and enrolment - 108 and 126

o Total tax rate, % of profits - 108

o Redundancy costs, weeks of salary - 99

o Pay and productivity - 114

o Ease of access to loans and Venture capital availability - 124 and 127

When one examines these individual factors, and not just the global rating it is obvious, that where we are today and how we are perceived is a direct result of the decades of neglect. The result is that we celebrate 50 years with this perception of how we have progressed. So all those who have been involved in governing Jamaica since the 1970s, take a bow, you have reaped what you have sown.

On the other hand, we must remember that this rating is a review primarily of the year 2010/2011, when we would have been seeing a significant lingering effect from (i) the global environment; and (ii) our slowness to react because of policy and the politics we have played while the country was burning. So our preoccupation since 2008 has been with politics rather than economic fixes. Much like what happened recently in the US.

But if one takes a look at what has been happening (outside of the politics), there are some positive trends taking place. The economy is still very fragile but there are some positive structural changes happening that will bode well for the economy, if continued. There are also some positive social initiatives taking place. And so even while people like me continue to point out the areas that need improving (because I think if we eliminate weaknesses then all that will be left are strengths), the fact is that some of the structural fixes we need to correct the years of structural abuse are taking place. One other thing to remember is that when structural changes are taking place, as with the global economy, things are going to seem worse than they are.

For example, when one gets a cut and the disinfectant is applied, it is initially uncomfortable and hurts. But then it means that it is preventing any further infection. So it goes with economic adjustment, which is why it is important for governments to smooth out the effect of painful adjustments, as promoted by Maynard Keynes and more recently Christine Laggard (note the international references as promotion of this idea by locals is not credible because of our "browning and foreign" culture). However, because of the decades of neglect of our economic and social environment, we have built institutions around inefficiencies, and it will take some time to see the fruits fully grown.

Some of these structural reforms we have seen include:

o Charter of rights - finally passed after almost 20 years of debate

o Decrease in the murder rate and greater accountability in the police force - more needs to be done in terms of road discipline, though. Can't understand the inability to deal with this

o Enforcement of the building code by the KSAC - don't see much happening in the other parishes. Previously people were allowed to build whatever and wherever they wanted

o Greater vigilance by the OCG, Public Defender, INDECOM - even though sometimes there is loss of credibility from the perception and the final rulings

o Tax reform green paper - good move but still mentions that primary objective is tax revenues and not economic development

o Road improvement works through the JDIP - we need to get past the political rhetoric, though

o Moves by the new Justice Minister to address the court administration

o Divestment of loss-making public sector entities and public sector rationalisation

o Fiscal responsibility framework

The biggest bugbears remain (i) indiscipline and crime; (ii) energy costs; and (iii) bureaucracy. If we were to speed up the initiatives that are geared towards addressing these, then I believe there would be significant improvement in our economic and social variables.

So even though the report has rated us at 107 of 142 countries, a closer look shows that some of the initiatives on the table will address some of these issues and therefore when compared to say Greece, Jamaica is not such a bad investment climate for future growth. However this is dependent on a continuation and strengthening of some of these initiatives aimed at fixing the structural challenges faced, not so much a focus on the macroeconomic indicators that are symptoms of the underlying problem.


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