«Productive Development Policies in Jamaica Mónica Panadeiros Warren Benfield Inter-American Development Bank Department of Research and Chief ...»
It would be interesting to review the coherence of the Master Plan with the traditional tax incentive regime. For example, tourist resorts import some of the foodstuffs that they use, and this is not surprising given the duty concessions set by the legal framework. The “all-inclusive” hotels, the largest ones on the island, seem to have weak linkages to the rest of the economy because they are not integrated with the communities in which they are located. Yet most incentives are aimed at these large facilities.
Other example of initiatives included among the new style of industrial policy is the Private Sector Development Programme (PSDP), a joint project of the Government of Jamaica and the European Union launched in 2005. The PSDP intends to enhance the performance of small and medium enterprises applying modern approaches, such as firm and sector assistance and/or grants that are managed by private sector organizations and support institutions, clustering, 64 and formal dialogue between public and private sectors.
The selected clusters for grant assistance are to four targeted sectors (creative industries, tourism, agribusiness, and services), and were chosen taking into account their comparative advantages.
According to Hausmann and Rodrik (2003), the institutional framework—in particular, public-private dialogues—related to processes and procedures for selecting instruments to be used or sectors to be targeted become one of the most relevant aspects of modern industrial policy.
With respect to clusters, in spite of the potential benefits for enterprises, evidence shows that inter-firm cooperation and the other features of successful clusters do not always emerge spontaneously due to market/government failures (transaction costs, high risk of “free riding”, etc.). The available literature bears out that the intervention of an “external agent” that facilitates the emergence of clusters can greatly reduce the significance of these obstacles. Therefore, while cluster development is ideally a private-sector driven process, there is also an argument for government intervention in cluster promotion.
With regard to export promotion, in the last years the traditional policy approach through the EFZs has been complemented by a more modern and innovative one. It includes JTI supporting the first comers to new developments (facilitating the expansion and development of agribusiness and agro-processing in non-traditional target areas and markets), and being active in trade promotion activities. The economic justification for government involvement in these activities is based on the theory of asymmetric information and other market failures. The resulting evidence suggests that on average export promotion agencies have a positive and statistically significant impact on national exports. 65 EFZs implied a considerable fiscal effort and did not help to boost exports or to diversify the economy. On the contrary, the innovative approach of JTI—although too early to be assessed—seems to be the modern way of thinking about industrial policy: a process of discovery where firms and the government learn about underlying costs and opportunities and engage in strategic coordination.
The two approaches of industrial policy that are present in many areas of the Jamaican economy are also evident in the ICT sector. Jamaica has developed as one of the premiere destinations to Business Process Outsourcing and Contact Centers, largely due to the large English-speaking, trainable labor pool, close proximity to the largest outsourcing market in the world, and competitive cost.
The performance of the Jamaican agency in its efforts to connect businesses to international markets has been considered outstanding by the International Trade Centre and the World Trade Organization: in the last two years, it has won the Global Export Promotion Award for the best trade promotion organization from a small country.
Having identified ICT as one of the sectors for export development, the government implemented a deliberate strategy to develop capabilities in a wide range of ICT services. The most recent one is a five-year NICT Strategy for 2007-2012, the so-called project E-Powering Jamaica 2012, which was the result of extensive consultations and background research, as recommended by major multilateral organizations.
The agreed objectives for the updated project were to significantly increase the number of citizens that are educated and computer literate and to improve their access to ICT networks at affordable prices, in order to generate more active use of the Internet for education, business development, and public administration. The aim is to improve Jamaica’s position as a leader in the delivery of ICT-enhanced services and new investment opportunities in the Caribbean.
The strategies to achieve the goals under the policy in progress include reviewing tax and duty policies for ICT in order to attract major specialized corporations to invest in Jamaica, expanding ICT-focused business parks for major service providers, developing financial and non-financial incentives and resource pools for Jamaican FDI, and creating incentives for rapid adoption and use of new generation networks.
From a theoretical point of view, there is justification for promoting the use of ICT, especially in Jamaica. One argument is the presence of economy-wide externalities associated with this activity: it is the kind of public good that enhances the productivity of the whole economy. Besides, Jamaica seems to have comparative advantages in ICT services. According to Rodriguez-Clare (2005), the best industrial policy entails the direct promotion of clustering in sectors in which the country have comparative advantages, but a policy against comparative advantage may be even welfare improving in the presence of large and inter-industry externalities.
In summary, behind the poor performance and the paradox of high investment and low growth of the Jamaican economy are the “debt trap” and a highly distortive tax incentive structure to attract FDI and promote exports. Although industrial policy is moving towards a more modern conceptual design, the old schemes seem politically difficult to be dismantled. If possible, the common mistakes of the past should be avoided. Subsidies must be contingent on performance and granted on a temporary basis.
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