«Productive Development Policies in Jamaica Mónica Panadeiros Warren Benfield Inter-American Development Bank Department of Research and Chief ...»
The rest of the economy, although diverse, lacks modernization and dynamism. It consists of the “traditional sectors,” older manufacturing and industry, which include garment production and agriculture, mainly sugar 10 and bananas. Manufacturing and agriculture together amount to about 22 percent of GDP and have been declining because of the economy’s fall in competitiveness, loss of preferences, and the reduction in import barriers.
The sharp decline in competitiveness took place during the 1990s, as the real exchange rates soared, making it difficult for suppliers of locally produced goods and internationally traded services to compete effectively. More recently, trends in the real exchange rate have been reversed, and competitiveness indicators suggest that its current level is appropriate (IMF, 2008).
The analysis from an ex-ante point of view, that is, the analysis of factors expected to create a competitiveness-supporting economic environment, suggests that much remains to be done to enhance the business climate for enterprises to operate and to be more competitive.
The Global Competitiveness Report, which came out of the World Economic Forum 2008, ranked Jamaica 86th out of 134 countries on the Global Competitiveness Index (GCI). 11 Of the 24 Latin American and Caribbean countries included in the study, Jamaica was ranked 13th, better than Trinidad and Tobago (92nd) and Dominican Republic (98th), but lagging behind Barbados (47th), Costa Rica (59th), and El Salvador (79th).
The CGI captures a number of dimensions related to competitiveness, which are grouped into different yet broader categories (“pillars”) representative of the main components of this concept. The scores for these pillars show that macroeconomic stability (basically, government debt) and market size (not only the domestic market) are the main aggregate competitive disadvantages: Jamaica is ranked 130th and 98th in these components respectively (in a 134The control of the inflation rate in a low-growth economy along with remittances from abroad enabled incomes to rise above the poverty line (Downes, 2004).
Once a major sugar producer, Jamaica is now a net sugar importer.
The GCI is a highly comprehensive index for measuring national competitiveness, which captures the microeconomic and macroeconomic foundations of national competitiveness.
country sample). However, detailed results concerning each of the indicators entering the composition of the CGI suggest that the business costs of crime and violence represent the most significant competitive disadvantage in the Jamaican economy. Other important obstacles to achieving competitiveness are: taxation, poor railroad infrastructure, corruption, quality of the educational system, lack of cooperation in labor-management relations, brain drain, limited access to credit, and the availability of venture capital.
The Global Competitiveness Report includes the results of an Executive Opinion Survey on the most problematic factors for doing business. In the case of Jamaica, respondents indicated that criminal activities, which necessitate high security expenditures, appear to be eroding the competitive advantages of Jamaican enterprises.
Another important problematic factor is related to bureaucratic red tape, which increases the cost of doing business in Jamaica. Holden and Holden (2005) point out that Jamaica’s bureaucracy is described as overwhelming and crushing, and the bureaucratic process as cumbersome.
Financial constraints also represent a relevant limiting factor. The government’s claim on credit resources crowds out the private sector’s access to credit. Therefore, bank lending is concentrated in a few sectors, causing interest rates to rise. Additionally, financial instruments that are commonplace in other countries are not available, and the exchange market is underdeveloped.
The complicated and discretionary tax system is considered a competitive disadvantage.
According to the World Bank’s Doing Business Survey (2008), Jamaica currently ranks 170 out of 178 countries in the difficulties associated with paying taxes. This induces extensive informality and contributes to dishonest and illegal dealings in an environment where corrupt practices are a major concern. Powerful established enterprises usually engage in lobbying and rent-seeking behavior in order to maintain their preferences.
Human capital constitutes a special concern. Considered a country of medium human development with good indicators in basic education, Jamaica has severe problems forming and retaining human capital. The economic stagnation experienced by the country in the last three decades and the increased incidence of criminal activity have stimulated greater levels of emigration, which has led to the loss of a significant portion of the most skilled labor force to the U.S. and Canadian markets. This loss of human resources, which is not easily replaced at the same level of proficiency, retards the growth of labor productivity in Jamaica.
Beyond the education of the work force, some businessmen characterized the functioning of the labor market as a factor that severely restrains private sector development in the country.
This seems paradoxical, as the percentage of the total working population that is unionized is not large and labor regulations are not especially rigid. The problem arises as unions are powerful, the work ethic in the labor force is poor, and procedures (not costs) surrounding dismissals are complicated.
In summary, the competitive disadvantages of the Jamaican economy suggest that current PDPs, including first-generation reforms, have not been sufficient to create a better environment for productivity growth.
2.3 Concluding Remarks Jamaica needs to escape from the “debt trap”: at 80 percent, the ratio of debt service to fiscal revenue is a key vulnerability to be addressed, and it is behind the poor performance and the paradox of high investment and low growth of the Jamaican economy. In turn, persistent low economic growth magnifies the impact of the fiscal crisis. The only way out of the current situation is for the country to experience much more rapid growth than has been registered in the past. This will require investment and productivity gains, as increased growth has to be part and parcel of the debt reduction strategy.
Structural reforms are the key to moving towards this objective. Fiscal policy may help to achieve higher growth by reducing public debt burden and then real interest rates. As causality between growth and debt runs in both directions, it is possible to bring about a virtuous cycle of lower debt and higher growth by simultaneously tackling both the debt problem and the investment climate.
However, improving the conditions that create a competitiveness-supporting economic environment, although necessary, may not be sufficient to foster productivity and enhance economic growth. Industrial policies, or PDPs (microeconomic interventions) aimed at correcting various kinds of market failures that impede efficient resource allocation are also determinants of competitiveness.
3. An Overview of Productive Development Policies in Jamaica As part of the sound economic reform that took place over the last three decades, Jamaica has dismantled most of the PDPs that existed at the beginning of the 1980s, including those related to international trade. Jamaica is a founding member of the Caribbean Common Market (CARICOM), which began unilateral trade liberalization in 1992, when the revised Common External Tariff (CET) came into effect. This movement toward greater integration into the world economy has intensified with the implementation of several free trade agreements.
Nonetheless, the government remains involved in trading activities through a number of commodities boards and the Petroleum Corporation of Jamaica (PCJ). Commodities boards were introduced to monitor the quality of agricultural products exported. Even though their roles have been reduced over time, they still have regulatory powers, and they have become more involved in providing services. The PCJ was established in 1979 with the purpose of searching for oil and gas and to be the lowest-cost provider of these products. Its current efforts are concentrated on the purchase of petroleum, property management, and the search for alternative sources of energy.
The government is also involved in commercial activities in agriculture, mining, utilities, banking, and transport, through a number of publicly owned companies that are commercial.
During the last three to five years, the government has been undertaking various steps to restructure some of these firms (including liquidation of redundant ones). Most of them are expected to play a regulatory and/or promotional role in creating the environment for markets to develop in emerging sectors and industries.
More important than these interventions are the complicated and comprehensive incentive schemes which focus on selected sectors of the economy, and undoubtedly dominate the industrial policy and are today still maintained (Holden and Holden, 2005). Through tax incentives, tourism is one of the most favored activities. The Hotel Incentives Act provides income tax relief and import duty concessions for up to 10 years for approved hotel enterprises, and 15 years for convention-type hotels having an aggregate number of no less than 350 bedrooms. The Resort Cottages Incentives Act provides recognized resort cottages with income tax relief for up to seven years and import duty concessions on imported building materials and furnishings. The recently instituted Attractions Incentive Regulation has benefits which include the importation of specific items free of general consumption tax and customs duty for five years and a five-year exemption from corporate taxes for investors.
Another well-established area of the Jamaican economy is the bauxite and alumina sector, which is also favored with tax relief. Under the Bauxite and Alumina Industries Encouragement Act, a business engaged in these activities automatically qualifies for import duty concessions on capital goods, lubricating oils, grease, and other chemicals. Within the mining sector, the oil refineries are benefited with tax incentives, too. The Petroleum Refinery Encouragement Act provides these firms with relief from customs duties and general consumption tax on imported articles used in the construction, manufacture, and operation of the refineries. In addition, the companies are entitled to relief from income tax, including that on dividends paid to shareholders for a period of up to seven years; after this, the companies have six years to carry forward net losses incurred during that period.
Through the Approved Farmer Status policy, for certain products, the agricultural sector is exempted from income tax for ten years, general consumption tax for 10 years on capital equipment, Common External Tariff (CET) and stamp duties on raw material import, and 20 percent duty on importations of specific categories of vehicles.
Investments aimed at producing films in the country can also benefit from incentives under the Motion Picture Industry Encouragement Act. Under this Act, the following benefits are granted: i) relief from income tax for a period not exceeding nine years, after the first release of the motion picture; ii) an investment allowance of 70 percent of the total expenditure on the production facilities, with a carry forward of the unused portion; iii) exemption from the payment of import duty on equipment, machinery and materials for the building of studios or for use in motion picture production; iv) no withholding of tax on dividends paid to resident shareholders with investments in film companies; v) General Consumption Tax rebate of 16.5 percent for films, on all goods and services purchased in Jamaica. Within the entertainment industry, music is also promoted by providing musicians with duty-free importation of “tools of trade,” as long as they belong to the formal economy.
Similar benefits are granted to approved shipping corporations under the Shipping (Incentives) Act. Under the Act, beneficiaries receive exemptions from income tax payments for ten years (with a carry forward of six years), exemption from the payment of import duty on any ship, and on articles imported for the construction, repairing, etc. of a ship, and tax on dividends paid to resident shareholders is not withheld.
The manufacturing sector is one of the most targeted to benefit from a number of incentives. Some of them are oriented to encourage investments, such as the Modernization of Industry Programme (waiving of general consumption tax on the acquisition of machinery and equipment directly related to the manufacturing process), Customer User Fee Waiver (waiving of the Customs User Fee on capital equipment and raw material for the first three years of operation of the entity), Accelerated Depreciation Programme/Special Capital Allowance (special allowance on capital expenditure for 50 percent of full cost in the year of purchase and the remaining 50 percent the following year), and the Factory Construction Law (for construction of factories leased or sold to producers, there are exemptions from import duties for items not available in the local market, and from income tax on income related to the leasing or sale of the specific unit constructed). On top of this, some institutions, such as the Development Bank of Jamaica, provide financing for investment projects under concessionary conditions.
In an effort to promote offshore banking, the International Financial Companies Act provides international companies with income tax relief on both profits and capital gains.
Other pieces of legislation are oriented to export promotion to non-traditional markets.