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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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Jamaica’s foreign exchange outflows were fairly high, at 40 percent. 34 Some common areas of leakages in Jamaica’s tourism sector are, inter alia, imported linens, towels and sheets, carpets and drapes, electrical items, soaps and toiletries, furniture and fixtures, and advertising and promotion. 35 The literature suggests that this is an area where self-discovery externalities may have been preventing the development of some of these activities. It is likely that some goods can be locally produced in a profitable way, but learning “what and how” requires investments with a social value that exceeds private investments.

Jamaica Trade and Invest (JTI) is working on reducing leakage through the development of its own initiatives. It 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. Similar initiatives are being carried out through the Private Sector Development Programme and the Jamaica Cluster Competitiveness (see Section 4.3).

Despite the many opportunities provided for local SMEs under the plan, it is felt by some that bureaucratic red tape is still too onerous. Small-attraction operators in Trelawny recently voiced their frustration over the unnecessary bureaucratic procedures involved in starting a business. They were of the view that the start-up requirements of state agencies were lengthy and time-consuming. 36 Furthermore, whereas the plan focuses on prospective developments in a number of resort towns, there seems to be some urban bias. Greater emphasis is being placed on Montego Bay as opposed to Negril, another popular vacation spot in Jamaica.

Despite the impressive planning and implementation phases of the institutional framework for the Master Plan, monitoring and evaluation, which is to many the most important part of results-based management, is quite weak. The Ministry has entered into partnership with the Statistical Institute of Jamaica (STATIN) to create Tourism Statistic Accounts so that the performance of the industry can be better measured. The institutional capacity to ensure that targets are being met and to make decisions on fallback positions if objectives are not met is lacking. Very few plans are in place to minimize potential threats to the realization of the Master Plan’s objectives. One implication of this is that determining the effectiveness of the Master Plan Singh and Jayawardena ( 2005).

Seaga (2006).

Gareth Manning. The Sunday Gleaner, Volume 69, No. 50 December 14, 2008.

will be difficult. A cost-benefit analysis will require more than a determination as to whether targets are being met given what is known about leakages.

Investment in tourism may lead to a number of opportunities, such as boosting the Jamaican brand and the music and entertainment industry. It can lead to greater productivity in the manufacturing and agricultural sector. However, given the multi-dimensional nature of the new tourism concept, the former is neither a necessary nor a sufficient condition for the latter to occur, and the likely effects are not unidirectional.

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, which is not surprising given the duty concessions set by the legal framework. In the same way, the “all-inclusive” hotels, the largest ones on the island, seem to have weak linkages with the rest of the economy because they are not integrated with the communities in which they are located. Yet incentives are directed most strongly at these larger facilities. Moreover, while the government views tax incentives as necessary for Jamaica to compete with other tourist destinations in the region and the world, the negative impact of such incentives on tax revenues should be evaluated, as it leaves the government with fewer resources to address the main weaknesses of the sector.

Finally, the image of Jamaica is threatened by the fact that tourism is set in a highviolence environment. This suggests that the sector may bring out adaptive features which may lead to areas of the sector thriving on illegal services such as prostitution and drugs. 37 Despite all this, the Master Plan is absolutely justified from a theoretical point of view: it attempts to address the very common coordination failures associated with the industry by creating an institutional framework which involves the private sector (handle in this way the “missing public inputs” market failure) and implementing promotional programs that aim to solve the problem of underproduction of different potential local providers due to self-discovery externalities.

Harriott (2006).

4.2 Investment Promotion Most Caribbean economies followed policies inspired by the strategy known as “Industrialization by Invitation” formulated by Nobel Laureate Arthur Lewis (UNCTAD, 2005).

Lewis theorized that the limited amount of island trade prevented these economies from exporting competitively because they could not afford incurring the cost of breaking into established export supplier markets. He recommended these small countries should, through a series of incentives, attract foreign entrepreneurs to install and open their businesses and factories in the region. Foreign capital was viewed as a means of overcoming limitations to industrial development imposed by the small volume of trade among Caribbean economies.

The attraction of foreign capital would also contribute to the acquisition and development of fundamental managerial, entrepreneurial, and administrative skills that were absent in developing economies, such as those of the Caribbean. Over time, after a learning period, it was thought that local entrepreneurs would acquire the capacity to start their own ventures and create their respective national industrial bases.

English-speaking countries, following these proposals, passed a series of fiscal incentives. They also formed a regional integration scheme—CARICOM—which provided the framework for a customs union and, at least during the 1970s, a common and regional approach to industrialization and tax incentive polices. The regional policy of fiscal subsidies was formalized in the Agreement for the Harmonization of Fiscal Incentives (1973). This agreement conceived fiscal policy as a microeconomic tool providing incentives to promote industrialization and to develop mining and tourism sectors. The instruments included profit tax holidays, tariff exemptions, export allowances for extra-regional exports following the expiration of the tax holidays, dividend payments, loss-carry forward, and depreciation of allowances.

While the legal framework was conceived at a regional level, its implementation was carried out at the national level. At the same time in which countries implemented the Harmonization Fiscal Incentives Act, they applied a comprehensive package of domestic tax incentives as part of their national development policies. Thus, the regional interests in targeting did not necessarily coincide with that of the individual countries. As a result, CARICOM countries exhibited a different distribution of fiscal incentives by firms and sectors. The national schemes remain to this day the main vehicle for the provision of tax incentives and the main tool for developing sector policies.

Jamaica’s tax system has evolved over many decades and has become increasingly complex and cumbersome. 38 Its structure includes an extensive set of incentives for investments, many of which have accumulated over more than half a century and are available to local and foreign investors. Typically, they provide relief from income tax on earnings as well as concessions on import taxes and duties to eligible enterprises for a period of time that may range up to 15 years, while some incentives provide other benefits such as capital allowances. Many incentives are specific to particular sectors, while others are available to any eligible applicant.

A recent study estimated that there are over 200,000 different incentives, but observed that it is impossible to identify all of them accurately and that there may be more that were missed when the incentives were counted. That same study estimated that the incentives that have been identified have led to revenue foregone amounting to about 20 per cent of total government revenue (Holden and Holden, 2005).

The sectors that have benefited the most from tax incentives are tourism (Hotels Incentives Act; Resort Cottages Incentives Act; Attractions Incentive Regulation); industry (Export Industry Encouragement Act, Export Free Zone Act, Modernization of Industry Programme, Accelerated Depreciation/Special Capital Allowance, Customs User Fee Waiver, Factory Construction Law); bauxite and mining (Bauxite and Alumina Industries Encouragement Act, Petroleum Refinery Encouragement Act); agro-Processing (Approved Farmer Status);

creative industries (Motion Picture Industry Encouragement Act); shipping (Shipping Act) and ICT (Export Free Zone Act, Accelerated Depreciation/Special Capital Allowance, Export Industry Encouragement Act, Moratorium on Duties). Apart from these special schemes, companies that do not qualify under existing incentives laws but are considered to have the potential to contribute significantly to foreign exchange earnings and employment may be granted relief from import duties for up to three years by the Minister of Finance. 39 Nominal income and company tax rates in Jamaica are close to the average of other Caribbean countries. However, the complex system of tax incentives distorts the actual structure of taxation, with the result that the private sector in Jamaica is either relatively highly taxed or not taxed at all. For example, by Jamaican law, Corporate Income (CIT) is taxed at a flat 33.3 The most recent global assessment indicates that Jamaica has one of the worst tax systems in the world, ranking 170th out of 178 countries in ease of paying taxes and number of required annual tax payments, 144th in the time required to pay taxes, and 128th in the total tax rate. For example, tax compliance is estimated on average to take a total of 414 hours each year in Jamaica, compared to only 76 hours per year in Ireland and 71 hours in St. Lucia.

Section 3 provides a more detailed description of tax incentives granted through different pieces of legislation.

percent rate, but among the largest taxpayers, the telecommunications industry, the hotels/tourism industry, and the construction industry, have a collected tax rate of 2 percent, 5 percent and 9 percent, respectively, due to high number of tax incentives, deductions, and credits (IDB, 2007).

Figure 4. Average CIT Tax Rate Paid by Top CIT Taxpayer Industries

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Some of the generous investment incentives included in the FTZ are exempt for CIT indefinitely, while investments in hotels and certain agricultural activities may enjoy a tax holiday of five to 15 years. Special depreciation schemes include a partial expensing (initial allowance) of 20 percent of the investment, with normal depreciation for the remaining 80 percent of the historical cost of the asset. A more favorable, special capital allowance, designed for the purchase of machinery in basic industry (part of manufacturing and construction) may be depreciated over two years. However, the most important tax break is an investment tax credit (ranging from 20 percent for basic industry to 40 percent for the sugar industry) for the cost of the capital good (Investment Allowance).

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Incentives related to CIT allow projects with a negative investment rate of return (IRR) to benefit the private sector. For example, a debt-financed investment in the sugar industry, in a scenario of a 10 percent inflation rate, with a negative social rate of return of 17 percent per year may yield investors a 10 percent positive return because the government covers 40 percent of the investment cost. The implied allocation of capital is highly inefficient: in sectors without subsidies, an equity-financed investment will demand that productivity be high enough to yield IRR in the range of 14 percent. In other sectors, productivity could be so low as to generate negative IRR (Artana and Navajas, 2004). Such distortions may partially explain the reason for poor economic growth despite high total fixed capital formation.

Some studies of the incentive regime in Jamaica suggest that there is substantial bias in favor of capital-intensive projects generally, and larger projects in particular (Artana and Navajas, 2004). As a consequence, these tax exemptions encourage informality in the business sector and penalize those with a small amount of capital, which describes the large majority of native firms. What seems to be especially difficult to justify is such favorable treatment of capital income combined with labor taxes in an economy with high unemployment.

The analysis of the effects of the tax incentives policy suggests that this strategy seems to have succeeded in attracting foreign capital. FDI has increased from US$171 million in 1990 (less than 4 percent of GDP) to US$882 in 2006, representing at present between 7 and 9 percent of GDP. However, the performance is not so impressive when compared to the evolution of worldwide and regional inward FDI flows.

Figure 5. Inward FDI Flows as a Percentage of GDP Source: World Investment Report 2008 and IMF Statistics.

As in the rest of the English-speaking Caribbean, the export performance of the dynamic sectors has not been able to offset the underperformance of the declining ones. This is reflected in the deterioration of the export of goods and services, measured by the export/GDP ratio. As the average propensity of import (i.e. the ratio of imports to GDP) shows a rising trend, the Jamaican economy is more dependent on foreign capital, implying that most of its internal policies are shaped to attract and capture foreign exchange.

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Source: IMF Statistics.

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