Friday, September 06, 2013

A butu in a Benz

The following is from an address to the Lions Club of Kingston on September 4, 2013

PROFESSOR Rex Nettleford is quoted as saying "butu in a Benz is still a butu" or as Jamaicans say, "You can take someone out of the country but may not be able to take the country out of them".

Goat Islands are being seriously considered for the site of a logistics hub to be built by the Chinese. Large amounts of foreign investments, government spending, or legislation alone won't affect the change needed, if we do not address the structural challenges facing our economic and social environment, says Dennis Chung.

These sayings refer to someone who seeks to improve his/her social standing but does not understand that class acceptance has more to do with behaviour than the symbols of wealth. So they purchase an expensive car or a house in an upscale neighbourhood, in order to try to fit in but still have the same boorish behaviour that defined their previous standing.

The reality is that, the label "butu" or "ghetto" has more to do with behaviour, and a way of thinking, rather than clothes.

This is the same for an economy and society. While growth and investments are necessary conditions for economic and social development, the truth is they are not sufficient. So when we have massive amounts of foreign investments but still can't understand why growth is anaemic, we must understand that merely covering up the economic and social challenges with money does not deal with the underlying problem.

So, as in the case of the butu in the benz, large amounts of foreign investments, government spending, or legislation alone won't affect the change needed, if we do not address the structural challenges facing our economic and social environment. We will still be considered just a developing nation.

One of the major structural economic challenges, which has been an underlying factor in our dismal economic performance since the 1970s, is labour productivity. The question has been asked many times: Why has Jamaica seen so much foreign direct investment, and capital investment, and debt of $1.7 Trillion, but has failed to see a response in our growth rates?

The problem, as I outlined in my book, can be blamed on the declining labour productivity since the 1970s (declining at an average annual rate of 1.3 per cent between 1973 and 2007, according to the Jamaica Productivity Centre -- JPC).

The JPC 2009 report also states the following:

* Between 2001 and 2005 the rate of the labour productivity decline increased to 1.8 per cent

* Total factor productivity between 1973 and 2005 declined an annual average 1.74 per cent

* Trading partners and neighbours in the Caribbean saw labour productivity increasing by over 1.5 per cent since 1972

* "...not only has the country lost competitiveness as a result of declining labour productivity but workers have gotten poorer in real terms".

The sad truth is that this continues today because we have failed to address the structural issues that have negatively affected labour productivity. We have failed to implement the necessary policy changes that will cause labour, as a primary factor of production, to become more productive. Instead of allowing the market to determine the value of labour, we have relied on welfare interventionist policies.

In other words, labour, like capital, is most efficient when it is subject to market conditions. So when government employs persons because of political alliance, when labour is paid based on seniority rather than performance pay, when persons are not able to access education and training, then what happens is that labour becomes unproductive, as it is not rewarded based on performance. So there is no incentive to produce.

In other words, if you work for two hours and get eight hours' pay, then why work the full eight hours?

This also explains why despite the high levels of FDI we have been unable to achieve much growth.

The JPC 2009 report shows that between 1973 and 2005 we have seen growth in physical capital every year. Yet between 1973 and 2005 the economy has grown an average 0.5 per cent per annum, which betrays the high levels of investment and debt.

My view is that the primary problem is labour productivity. In order to maximise value from capital, you also need maximum labour productivity. The fact is that we have not been able to apply productive labour to capital and so it is cheaper to import than produce. So the same unit of input in Jamaica, as in another country, will end up having less real value, because when labour is applied to it, it minimises the capital value.

Therefore even when foreign capital is invested, it goes into purchasing imported finished goods as inputs rather than purchasing raw materials and using labour to convert the raw materials to finished goods. And even when high value labour is needed it is imported because of our relatively low literacy levels.

The result of this is that imports are high because either (1) they are cheaper; or (2) because of lack of the required labour input.

Therefore as we move forward with the necessary adjustments, and try to find sustainable economic solutions, it is important to consider the impediments to high labour productivity; if we solve this, then we will not only drive the Benz but have the social behaviour to go with it.

Before we look at what are the practical solutions, it is important to understand that labour productivity measures the amount of goods and services produced by one hour of labour.

Since 1973, labour has been on average 1.3 per cent less efficient each year. Literally this means that in real terms, $100 labour output in 1973 equates to $65.79 today. Is it any wonder then that (1) we have not been able to see any growth from the significant capital investments, or (2) why we have seen the exchange rate move from where the US$ was J$0.90 to where the US$ is now valued J$102.10.

And even though labour productivity kept declining, governments primarily supported low productivity by expanding public sector employment, and implementing rules that contributed. And they were able to do so (unlike a private business) by borrowing and taxing. This ultimately burdened the private sector to the point where investments were only attractive with incentives, resulting in the non-productive regime of waivers and incentives we are trying to do away with today.

This cannot be solved by tinkering with macroeconomic variables and is the reason why we have had 13 previous unsuccessful IMF agreements, and is why this IMF agreement is so critical, and the social and economic transformation is not going to be easy.

For us to properly address the problem this requires much more than what any IMF agreement can accomplish.

Some of the initiatives that must be undertaken include:

* Addressing public sector inefficiency, a major inhibitor to growth and facilitator of low labour productivity. This cannot continue while taxing the productive sector to pay for it, as it will only result in further economic decline.

* Legislating laws that ensure the rights of workers are protected (which is critical to ensure labour works efficiently) but at the same time aren't burdensome to employers.

* Education system must be improved for better results. And our scarce public resources must be targeted towards developing skills needed for our economic transformation.

So while we seek more FDIs, and implement the reforms under the IMF programme, it is important to understand that the root cause of our challenge is declining labour productivity, and at a deeper level the things that support it, such as political expedience.

Therefore as we transform the economy for sustainable development, we need to look at how we do things, and not just focus on macroeconomic targets. Just like businesses will invest capital for the greatest return, labour will do the same.

In other words, our economic problems are really social problems.

And as Nettleford implied, having the Benz is not enough if you do not change your behaviour. Are we prepared to do this?

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