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«Productive Development Policies in Jamaica Mónica Panadeiros Warren Benfield Inter-American Development Bank Department of Research and Chief ...»

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The involvement of stakeholders is considered fundamental to the successful implementation of Vision 2030 Jamaica. The Planning Institute of Jamaica (PIOJ), in its capacity as the main planning agency in Jamaica, is leading and facilitating this collaborative process, incorporating support from private sector groups, civil society and the diaspora. Initially, a number of task forces, each comprising experts in the respective fields, will support the work of the PIOJ. They are charged with the development of sector strategic plans, and a Plan Advisory Group (PAG) consisting of industry leaders, academia, as well as leaders from various sectors.

A draft of this plan was presented in January 2009, made up of 32 draft sector plans prepared by the respective task forces. Island-wide consultations will be held on the draft plan.

Among the main PDPs described, the most modern ones, such as the Tourism Master Plan, support for MSMEs and the widespread use of ICT, have become the guidelines to elaborate on the proposals to be included in Vision 2030 Jamaica. The traditional PDPs, especially the tax incentive systems, were widely criticized, which led to recommendations for their revision.

Using the PDP combination matrix suggested for this study, Table 1 depicts the classification of the PDPs described according to the dimension (horizontal/vertical) and channel of intervention (public input/market intervention).

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Most of the PDPs prevailing in Jamaica are examples of full-fledged vertical policies, which must be carried out in the context of the constraints placed upon the country’s potential development by its small size, population, markets, and limited resources. Countries of the size of Jamaica tend to be high-cost producers in both the manufacturing and agricultural sectors.

They are also externally propelled economies because of their high degree of openness. In this sense, Jamaica’s efforts to improve its level of competitiveness are hampered by both geography and the international trading environment in which it functions.

Since the 1970s and 1980s, the PDPs established to address these obstacles were based on granting selected tax incentives as part of an export promotion strategy. Parallel to this, the attraction of FDI has also been a significant pillar. As Rodríguez-Clare (2004) suggests, one conceptually valid argument for providing fiscal incentives to foreign investment is that such investment is more “footloose” than domestic investment, even though it could lead to a suboptimal tax structure if many countries engage in the same practice.

Another argument in favor of policies to promote both foreign investment and exports is that these activities generate positive externalities to the rest of the economy. However, the lack of empirical support regarding the existence of such externalities makes the case study more relevant. A preliminary assessment suggests that the Jamaican economy does not escape the general result seen elsewhere: the very few linkages between tourism development and local communities, and between firms in the Export Free Zones and the rest of the economy, are indicative of this phenomenon. Other studies have found that the high number of incentive schemes makes it nearly impossible to identify all of them accurately, and that the tax incentive structure is not only complex but distortive (Holden and Holden, 2005). Moreover, although the dominance of vertical policies could have been the response to real or perceived market failures, the long history of lobbying and rent-seeking characteristics of public-private relationship in Jamaica introduces certain doubts. The National Implementation Plan (NIP) mandated a review of Jamaica's fiscal incentives to improve the competitiveness of the business environment by making incentives more transparent, simple, and performance-based.

While export promotion and foreign investment attraction constitute the most relevant policies carried out up to now, at the beginning of the present decade, a new set of PDPs was put in place. Most of these policies share with the traditional ones the vertical approach: they are focused on specific areas, sectors, and industries. However, they seem to respond to the most modern vision of industrial policy: 16 they promote clustering in sectors that already show some comparative advantage, and they try to address coordination and information failures. The incorporation of this new way of understanding industrial policy within Vision 2030 Jamaica, the National Development Plan, suggests that reforming the prevailing productive development policies is possible.

Severe budget constraints could also explain the different policy approach: available resources for new PDPs and other discretionary spending are limited.

4. Selected PDPs for this Study

For this study, the following five PDPs are assessed:

• Tourism Master Plan

• Investment tax incentives

• MSMEs / Cluster Promotion: Private Sector Development Programme

• Extending use of ICT: E-Powering Jamaica 2012

• Export promotion: Export Free Trade Zones These policies can be mapped according to the matrix suggested by the IDB (2008), as is shown in Table 2.

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The PDPS selected for this study are diverse. On the one hand, they are representative of different combinations H-V/P-M and of different categories according to Melo and RodríguezClare’s (2006) taxonomy of industrial policies, i.e., export promotion policies/policies to promote innovation, higher productivity and competitiveness/fiscal and financial incentives for production and investment. On the other hand, there are specific quantitative and qualitative

reasons for their inclusion, such as:

• Tourism promotion: its importance as a source of employment and foreign exchange, the large externalities normally associated with it, and the large unexploited potential benefits make this sector the most interesting when assessing the public policies oriented to enhancing its performance.

• Tax incentives for investment: tax policy seems to be a critical area. There is evidence of a distorted investment incentive framework among sectors and activities and between capital and labor.

• PSDP: through different components, this program intends to enhance the performance of MSMEs applying modern approaches, such as clustering and formal dialogue between public and private sectors. The innovative character of this program and the need to do away with rent-seeking behavior are the main reasons it was included in this study.

• E-powering Jamaica 2012: the low and declining productivity of Jamaica requires harmonized efforts to increase the use of ICT; at the same time, this program promotes traditional tax incentives.

• Export promotion: the country’s export performance is worrisome in view of the increasing erosion of trade preferences. This underscores the importance of improving the competitiveness and growth of non-traditional export sectors to non-traditional destinations. In this context, reviewing the effectiveness of FTZs is important.

4.1 Tourism Promotion CARICOM countries have a natural comparative advantage for the development of tourism but, because of their size, they are overly dependent on the sector. As a result, these open economies are highly vulnerable to external shocks caused by the volatility of the industry. 17 Close proximity to one of the world’s major origin markets (the United States) heightens the risks associated with the sector. However, this also puts the Caribbean in a favorable position to achieve greater market share.

In the case of Jamaica, tourism accounts directly for some 7 percent of GDP and 8 percent of total employment. Stopover visitor arrivals of 1.7 million and cruise visitor arrivals (an established feature of tourism in the Caribbean) of approximately 1.2 million lead to an accrual of gross foreign exchange earnings of some 50 percent of Jamaica's foreign exchange This is particularly important given the fact that the Caribbean accounts for only 3.7 percent of the world’s tourism, market share which far exceeds Latin America’s 0.7 percent but is relatively low when compared to the United States of America’s 66.6 percent, Canada’s 11.2 percent, the United Kingdom’s 10.9 percent and Continental Europe’s 6.1 percent.

receipts, equivalent to over 80 percent of exports of merchandise. This is the reason why this sector was one of the few strategic clusters identified for development in the NIP announced in 1996.

Like many tourist destinations, Jamaica has experienced numerous setbacks in the last decade. The decline in tourist travel for a short period after 9/11, as well as numerous storms and hurricanes, have adversely affected the sector, but the industry seems to have recovered, having shown consistent growth between 2004 and 2008. The tourism sector in Jamaica is not as vigorous as in other similar destinations. Its stagnation or slow growth is attributed to insufficiently varied attractions and difficulties in creating a different product in order to gain competitive advantage. 18 On top of that, unlike elsewhere in the world, where tourism has major spillover effects to other areas of the economy, the export-oriented focus of tourism in Jamaica has hampered strong intersectoral linkages and limited the scope for economic diversification. 19 The promotion policy traditionally applied to this sector has favored this situation.

The tourism sector has been promoted mainly through generous tax incentive schemes.

For example, a hotel operator can be granted a 10-year tax holiday by building a hotel of 10 rooms or more. Larger hotel complexes—with 350 rooms or more—qualify for a 15-year tax holiday. Both types of investments qualify for an abrogation of import duties for the same period as their tax holidays. The industry also provides assistance for fast-tracking processing of applications for work permits for foreigners wanting to work within the country’s tourism sector.

Doubts have been cast on the effectiveness of incentive regimes. Many analysts are of the view that once investors have decided on the investment location, available incentives play a subsidiary role in the decision-making process. They maintain the view that operating costs, political and economic stability, and the general business climate, inter alia, are far more significant factors in deciding the investment location. 20 In the case of Jamaica, a number of factors have dogged tourism activity since its inception. Among the most important are natural Jamaica ranked 48th out of a total of 124 countries in the 2007 Travel and Tourism Competitiveness Index.

See Singh and Jayewardene (2005).

Karagiannis and Salvaris (2005).

disasters, crime, 21 HIV/AIDS prevalence, poor training and low standard of industry staff, 22 low use of ICT, and the country’s inability to provide reliable air transportation at a reasonable cost.

With respect to the scant linkages with the rest of the economy, promoted by the tax incentives policy, the high import content of food remains one of the major sources of foreign exchange leakages, but is by no means the only one. Additional sources of leakages are other consumables such as beverages, investment goods required to build and maintain accommodation stock, and transport equipment. 23 A Master Plan was formulated in 2003 with the aim of moving the industry onto a path of sustainability. It represents the first attempt to provide a comprehensive framework for the development of Jamaica’s tourism sector. 24 The Ministry of Tourism and Sports (MOTS) 25 designed the plan. It was further elaborated following broad consultation on the needs assessment and strategic options document among all stakeholders, ensuring that all who are affected by the plan had a stake in the development of the tourism product. The adoption of this strategy aimed at overcoming a common failing in national plans, which is that many are never implemented because of, among others reasons, lack of consensus.

The main objective of the Master Plan is to return the industry by 2010 to the rapid rates of growth achieved during the 1980s. It aims to achieve six primary growth targets. Using the year 2000 as a baseline, it is expected that room stock will increase by 4.0 percent per annum;

direct or indirect employment by 5.7 percent per annum; visitor expenditures will grow by 8.4 percent; 26 stopover arrivals by 5.5 percent per annum; the industry’s share of GDP is expected to grow by 15.0 percent over the next ten years; and foreign exchange expenditure will increase by

8.2 percent per annum. It is also expected that earnings in the tourism sector will be increased by US$2.9 billion per annum before 2010. The Master Plan calls for investment of US$2 billion over its ten- year life span. The vast majority of this (73 percent) is estimated to take the form of Research indicates that rates of crimes against tourists are fairly low. In 2003, of the 2,482 million visitors to the island, 0.0004 percent were criminally victimized. The greater challenge for the country however, as highlighted by Harriott (2006), is how to develop the leading sector of the economy in a high-violence environment.

Jayewardene and Crick (1999) have identified the weak educational background of certain categories of workers as a factor which affects the quality of service and the ability of the country to diversify into non-English-speaking markets.

Under the Tourism Ground Transportation Sub-Sector Incentive Policy, an undefined period of relief from customs duty and GCT is granted to ground transportation providers.

The long-term national development plan of Jamaica, Vision 2030, ratifies the objectives of the Master Plan.

At present, Ministry of Industry and Tourism.

This is considered a critical indicator for economic contribution.

private sector investment in commercial ventures such as additions to the room stock and developing attractions and tours. Public sector-led projects will require just over US$552 million with nearly US$230 million required from the government.

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