«Productive Development Policies in Jamaica Mónica Panadeiros Warren Benfield Inter-American Development Bank Department of Research and Chief ...»
Small states, such as those of the Caribbean, are more likely to produce a narrow range of products. For this reason, it is often suggested that CARICOM states do not generally pursue export diversification goals. An exception to this norm has been Jamaica, which has had a wider scope for export diversification. This goal has nonetheless encountered important limitations at the level of policy formulation and implementation. The high values of diversification index attests to the narrow export base of the countries of the region, including Jamaica (UNCTAD, 2003). Another indicator of the poor results of Jamaican diversification policy is that traditional exports have remained by far the most important component of merchandise exports, representing 71 percent of the total on average during 1995-2000 and 72 percent in 2007.
The mining sector, dominated by bauxite and alumina, is an important source of foreign exchange and the most important component of traditional exports. As the export value of these minerals is affected by variations in their international price, it diminishes their basis as a potential export platform, and technical and social problems will then follow. In the last decade, exports of manufactures suffered a substantial reduction, mainly as a consequence of the strong decline in the share of apparel exports (from more than 15 percent of total exports to less than 2 percent) due to Mexican competition related to the North American Free Trade Agreement (NAFTA) in the U.S. market.
Within this overall economic and export context (declining manufacturing sector, an agricultural sector that is losing its preferential market access, and a mining sector subject to external shocks), the Jamaican authorities have opted for a trade policy that has two main objectives: protectionism combined with export promotion (see Table 7). 53 The new policy recognizes that Jamaica must create a broad export base and reflects the authorities’ concern over Jamaica’s lack of competitiveness. It also highlights the importance of regional, hemispheric, and multilateral trading arrangements.
The dynamics of recent trade liberalization place great importance on the continued development of focused investment and export promotion mechanisms such as EFZs that provide a simplified regulatory environment. In fact, for developing countries, EFZs traditionally have had both a policy and an infrastructure rationale.
In terms of policy, EFZs have traditionally been considered a useful tool as part of an overall economic growth strategy to enhance industry competitiveness and attract FDI. Through EFZs, governments aim to develop and diversify exports while maintaining protective barriers, to create jobs, 54 and to pilot new policies and approaches (for example, in customs, legal, labor, This policy replaces the previous one, which focused on market access through agreements granting preferential conditions.
EFZs are viewed as highly effective tools for job generation, particularly for women entering the workforce.
Evidence suggests that such zones are a much more significant source of employment in smaller countries with populations of less than 5 million, like Jamaica, than in larger countries.
and public-private partnership aspects). Tax breaks are conferred to firms that export most of their production, and this is a way to use tax policy to favor footloose “successful” investment (Rodríguez-Clare, 2004). EFZs also allow for more efficient government supervision of enterprises, provision of off-site infrastructure, and environmental controls. In sum, EFZs can be seen as a policy to “try” an open economy within a not-so-open environment. In this case, EFZs should be a transitional policy, not a permanent one.
1 Diversify exports a Negotiate removal of tariff and non-tariff barriers in overseas market with an asymmetrical time frame b Provide incentives for development of domestic capital formation c Assist in the development of strategic firms 2 Displace imports a Facilitate access to cheaper imports b Slow the pace of domestic tariff and non-tariff reduction c The pace of tariff and non-tariff reduction should conform to the growth and development of the domestic capital stock 3 Attract foreign capital flows a Implement charter for returning residents Source: Ministry Paper No.69.
EFZs can be considered horizontal PDPs that attempt to solve some market failures, as international trade and FDI are regarded as two key channels for technology transfer. 55 The lack of empirical evidence supporting this assertion suggests that if the amount of tax expenditures associated with this program is high, as it is in the case of Jamaica, it is worthwhile carrying out a cost-benefit analysis of this policy. On the other hand, what makes EFZs a possible facilitating channel for cluster develop and positive externalities is more related to agglomeration than to tax breaks. 56 More importantly, however, in developing countries, EFZs can be seen as the response to government failures. If the country is not attractive to investment because of insufficient Still, EFZs could limit linkages between the firms located there and the rest of the economy, making them a poor development policy (Rodríguez-Clare, 2004).
Clustered firms improve productivity through technology or knowledge spillovers.
infrastructure, high tax burdens, policy instability, or other government failures, an EFZ can be a mechanism to provide specific public goods in a more efficient manner (since it is geographically targeted) and to isolate firms from other appropriability risk. In this way, EFZs can play an important role in attracting FDI by offsetting some aspects of an adverse investment climate, through offering world class facilities and best practices (FIAS, 2008). In the case of Jamaica, crime and inefficient government bureaucracy appear as the most problematic factors for business growth (World Economic Forum, 2008), and both obstacles are relatively easily addressed through EFZs facilities, without compensatory measures such as tax breaks. 57 The general experience shows that while EFZs have been effective in addressing economic growth and development objectives, they have not been uniformly successful (FIAS, 2008). Jamaica's free zones used to be the main apparel production centers. The scaling down of this industry since 1998 has also affected free-zone exports. EFZs employed over 6,000 people in 2007, down from 16,444 in 1994; exports 58 by EFZ entities amounted to US$40 million in 2007 (6.5 percent of non-traditional exports and 2 percent of total exports), US$115 million in 2000 and close to US$300 million in the mid-1990s. The Bank of Jamaica has reported that exports from free-trade zones are affected by the relocation of companies to lower cost countries.
Most of the factory space in the Kingston and the Garmex EFZs is used for warehousing and distributing activities. In 2003, 14 enterprises were engaged in the Kingston Free Zone (six in manufacturing), down from 17 enterprises in 2002. The Montego Bay Free Zone has succeeded in expanding ICT business and increasing employment, despite the loss of most of its manufacturing enterprises. 59 In 2002, it had 22 enterprises in operation, of which 16 were in information technology, five in manufacturing and one in warehousing and distribution. In 2003 the number had decreased to 17 enterprises. The Garmex Free Zone has also suffered from decreasing manufacturing activities. In 1997 a decision was taken to dezone part of the area in a venture to undertake non-free-zone activities. Currently, only three manufacturing companies (all in garment manufacturing) are operational. The Cazoumar Free Zone, the first private free zone Obviously, the most appropriate approach should be to eliminate those obstacles that provoke the government failure.
Neither imports nor exports from EFZs are included in national trade statistics.
The Montego Bay Free Zone is particularly conducive to investments in the information technology sector due to the presence of Jamaica Digiport International, which holds powerful data transfer facilities for international exchanges as well as sophisticated imaging, voice, and facsimile services.
in Jamaica, currently has five operators (all in IT and IT-related areas) and employs 1,000 persons.
In short, the Free Zone regime in Jamaica, at the macro level, has facilitated investment (foreign and local) in traditional as well as in new areas of business and has provided employment, but is failing to contribute to foreign exchange earnings. The original objective of EFZs was to promote non-traditional exports to third markets, but the non-traditional exports ratio is stagnated, and those originated in EFZs are a very low proportion of the total. EFZs exports have therefore also poorly contributed to market diversification.
A related phenomenon could be low value-added in some of the FDI activities involved (explaining, in part, the investment-growth paradox of the Jamaican economy), highlighting weak production linkages with the productive apparatus. Three decades of zone development experience suggests that the failure or success of a zone is linked to its policy and incentive framework, where it is located, and how it is developed and managed. This experience shows that the use of generous incentives packaged to offset other disadvantages (such as poor location or insufficient facilities) is ineffective in terms of overall zone performance, due in large part to the increasing commonality of zone investment incentives in recent years (FIAS, 2008).
Besides these fiscal incentives, Jamaica provides some facilities for export financing, with the National Export-Import Bank being the main institution offering instruments such as the Export Credit Facility, a post-shipment facility that provides working capital support in local currency to exporters (see Table 9).
National Export-Import Bank of Jamaica:
Programs and Activities Related to Export Promotion, 2003 Export credit insurance: Covers foreign receivables against the risk of nonpayment by foreign buyers Foreign currency lines of credit for short term trade credit: Covers imports of raw materials, equipment, capital goods, spare parts by firms involved in manufacturing, distribution, agriculture or service provision.
Cuban line of credit: Aimed at facilitating the entry of Jamaican exports to Cuba Export factoring program: Assists in the development and diversification of nontraditional exports.
Export credit facility: Provides working capital support in domestic currency to exporters of nontraditional products. Loans are granted for a maximum of 120 days on a revolving basis Bankers export credit facility: Provides shipment finance in domestic currency to exporters of non-traditional goods. Loans are granted for a maximum of 120 days on a revolving basis Pre-shipment facility: Includes prepaid shipment financing in domestic currency to exporters of non-traditional products. Loans are granted for a maximum of 90 working days to purchase local raw material for export.
Export loan: Provides loans on a short or medium term basis and on concessionary terms of financing CoPack Facility: The facility has a capital, operates on a revolving basis and it consists of working capital loans that allow access to one short term low cost pre-shipment financing Ornamental fish farming loan program: Grants funding to farmers (existing and new entrants) in the export trade of ornamental fish, to farmers providing vital linkages to exporters.
Modernization fund for exporters: Provides loans to exporters firms or foreign exchange earner.
Small business facility: Provides working capital finance at a preferred rate of interest to small and medium sized business.
Source: UNCTAD (2003).
Jamaica is also active in trade promotion activities through Jamaica Trade and Invest (JTI, formerly JAMPRO), a national agency focused mostly on investment and export promotion within the leisure industry (tourism, film, and music); manufacturing; bauxite and mining;
agriculture and agro-industry; information technology and knowledge services.
JTI helps exporters promote their products and locate and penetrate foreign markets by providing marketing information. It has opened offices in several cities, including New York and London, intending to facilitate trade and to represent Jamaican companies at trade fairs. The economic justification for government involvement in these activities is based on the theory of asymmetric information and other market failures. The evidence suggests that on average export promotion agencies have a positive and statistically significant impact on national exports (Lederman, Olarreaga et al., 2006).
The performance of the Jamaican agency in its efforts to connect businesses to international markets has been considered outstanding by the International Trade Centre 60 and the World Trade Organization (WTO). In the last two years, it has won the Global Export Promotion Award for the best trade promotion organization from a small country. Among the issues considered for Jamaica to have been selected was the dialogue launched with key stakeholders, aimed at developing a unified national export strategy.
JTI is also seeking to develop new markets. It is the main implementing agency of programs such as the Private Sector Development Programme (PSDP), and through their own initiatives in non-traditional target areas. In particular, JTI has selected the following strategic
projects to support:
i) Flavors of Jamaica, which focuses on market entry and partnership opportunities for individuals or clusters of companies dealing with functional foods, nutraceutical ingredients, seasonings, condiments, spices, and other authentic Jamaican food and beverages. It involves the developing and testing of market entry strategies for North America, Europe and regional markets.
ii) Linkages: JTI has developed a strategic relationship with hotel chains within the country, and is working to establish a reliable supply chain to create access to the hotel market for Jamaican food and beverage suppliers.
Agency of the United Nations.
Thus, with respect to export promotion in Jamaica, there are two very different policy approaches: the traditional one, through the EFZs, and the more modern and innovative one, supporting the first comers to new developments and strengthening linkages with the main external market, geographically indoors: tourism.