«Productive Development Policies in Jamaica Mónica Panadeiros Warren Benfield Inter-American Development Bank Department of Research and Chief ...»
In fact, there is growing skepticism about the traditionally well-accepted view among economists and policymakers that attracting FDI is essential for economic growth and development. The empirical literature is, however, not conclusive, and very little is understood about the dynamic impact of FDI. The research on which there seems to be consensus was conducted on the importance of the economic and policy context for FDI in determining its eventual impact (CPDC, 2008; Schiffbauer, 2006). In addition, studies of incentive regimes elsewhere point to their ephemeral ability to retain investments once the incentive period has expired.
Taking into account the controversial empirical evidence about the benefits of the tax incentive policy to attract FDI, the estimation of the fiscal cost of this tool and a social costbenefit analysis of this promotional policy were considered important. Thus, the NIP mandated a review of Jamaica's fiscal incentives to improve the competitiveness of the business environment by making incentives simpler, more transparent, and more performance-based. A Report of the Jamaica Tax Reform Committee in 2004 drew on previous studies of Jamaica’s tax system and made a number of recommendations for tax reform, including commissioning of an independent study on the costs and benefits of incentives to the productive sectors.
An extensive review of proposed tax reform measures is underway, taking into account previous tax reform studies. The Foreign Investment Advisory Service (FIAS) was asked to assist in the review. Among the proposals advanced are a reduction of the corporate income tax rate to 25 percent and the elimination of all tax holidays (IDB, 2006).
However, the long-term plan, Vision 2030 Jamaica, supports the idea “…that it will be necessary to determine the optimal incentives system that will contribute to the successful achievement of the long-term economic development goal…” (PIOJ, 2009), revealing the hesitant position of the government of Jamaica. The Ministry of Finance and the PIOJ asked the IDB to carry out further analysis in this field because of the official reticence or fear of eliminating tax exemptions. The IDB report, presented in 2007, provides a quantified impact analysis of some potential tax reforms, including cutting the investment CIT incentives. 40 Eliminating CIT incentives will have benefits and costs. The costs are clear: eliminating these incentives, ceteris paribus, will lower the net return to capital and discourage investment for those particular industries. In Jamaica, those industries with tax incentives represent a large share of the total capital stock, so that in aggregate, capital returns will fall for a significant portion of the economy. The benefit from eliminating these exemptions is improved capital productivity. In a tax-package, it is possible to eliminate incentives, then to use the funds to lower the overall rate of corporate taxation. Such a package will raise the return to capital if the lower CIT rate By way of illustration, in a scenario in which the statutory rate is reduced to 20 percent but at the same time tax incentives and deductions are eliminated for some “targeted” sectors (communications, electricity, construction, and tourism/hotels), it is deemed possible for the economic outcome to be positive. Short-run output increases by 0.4 percent annually, and longrun output rises by 3.8 percent. 41 On the other hand, lowering corporate profit taxes clearly favors capital owners rather than workers. Although this may be more efficient and may foster long-run growth, it may not necessarily be popular among the majority of Jamaicans.
In addition to this, it is likely that the current fiscal incentives will be very difficult to dismantle because of strong lobbying by rent-seeking organizations, even though they could have been introduced in response to perceived market failures in the past, justified by the notion that there were spillovers associated with investment.
4.3 Micro, Small and Medium Enterprises (MSMEs) and Cluster Promotion Smaller business operators face obstacles that are remarkably similar across countries. Among the main ones, with only minor adaptations for the Jamaican context, are the following (Tenant, 2008):
• Barriers to entry and non-competitive behavior in markets where small enterprises are potentially competitive;
• Expensive and time-consuming regulatory requirements, such as licensing and registration;
• Official and unofficial levies that discourage small enterprises from growing and becoming formal;
• Laws governing the protection of business and intellectual property and the use of property as collateral;
• Tax structures that distort incentives and discriminate against small firms;
encourages enough investment to offset the reductions in investment demand by those sectors where incentives are removed.
If all capital were assumed to be mobile capital, then it is possible that the elimination of tax-incentives would lower the overall return to capital, and discourage investment. This would lead to long-run results where the capital stock falls. In the current scenarios, part of the tax-burden is absorbed by specific-capital owners, and the CIT rate reduction from 33.3 percent to 20 percent is substantial enough to raise the overall return to investment.
• Government procurement procedures that discourage successful bidding by small enterprises;
• Labor market rigidities that make hiring and firing workers difficult and expensive, and limit the mobility and flexibility of the labor force; and
• Limited infrastructure and institutions that offer access to finance, information, and markets, particularly transportation, market facilities, and communications infrastructure.
Recognizing these challenges faced by MSMEs, the government has been actively promoting them. Recent changes to the Companies Act of Jamaica make registering these businesses easier. The establishment of government agencies such as the Jamaica Business Development Centre (JBDC) has been the policy response to develop MSMEs.
The JBDC initiative is a cooperative arrangement among government agencies and the private sector, associations, and the academic and research communities. It provides business and technical support services across the spectrum—especially to MSMEs—from guiding business startups to a wide range of consultancy advice for established businesses. Services available at JBDC include advice on operating challenges in existing businesses, review of business plans and strategies, guidance in starting new businesses, preparation of loan requests, financial analysis, and budget development.
JBDC is one of the co-implementing agencies of the Private Sector Development Programme (PSDP), an innovative initiative launched in 2004. The PSDP is a five-year technical assistance program jointly funded by the European Union (EU) and the government of Jamaica.
The broad objective of the PSDP is to address the competitiveness challenges that the MSMEs
face. It seeks to:
• Improve the macroeconomic environment by identifying and addressing policy and regulatory-level opportunities and constraints to MSME development;
• Provide firm and sector-level assistance to companies in the MSME sector, improving their productivity and competitiveness via grants that are promoted and/or administered by private sector organizations and support institutions (PSOs);
• Strengthen PSOs via capacity building support on a cost-sharing basis, thereby enhancing their ability to increase the assistance they provide to MSMEs.
The Jamaica Trade and Invest (JTI, formerly JAMPRO) is the core-implementing agency and has been set up as a Project Management Unit to coordinate the activities of the program.
This unit works closely with two other co-implementing agencies, the Private Sector Organization of Jamaica (PSOJ) and the JBDC. General oversight functions are delegated to a Steering Committee, comprising representatives of the government and the private sector (JIT, JBDC, PSOJ, Jamaica Exporters’ Association, Jamaica Manufacturers’ Association, and the Small Business Association of Jamaica), with the European Commission (EC) as observer.
Activities under the PSDP correspond to three major components with 12 support programs (see Table 4).
The PSDP has a total budget of €28.67 million, which is available to business operators within Jamaica’s productive and services sector, as well as to their intermediary private sector organizations and support institutions, to grow their businesses and improve their competitiveness. Of this budgeted amount, €20 million represents grant funds from the EU, with the remaining amounts to be provided by the government and beneficiaries who are supported by the program.
The criteria for selecting PSOs to benefit from PSDP funding include being an organization legally registered in Jamaica (with majority Jamaican ownership) involved in the delivery of business development and/or support services, serving members and clients primarily in the MSME sector.
For MSMEs, selection will include consideration of the following:
• The importance of the company to the economy, measured by the relative size of its existing export turnover;
Larger companies may also be eligible for assistance, if their application and proposals demonstrate direct linkages to secondary or smaller suppliers and contractors in the MSME sector.
Potential beneficiaries of PSDP funding must apply following the publication of Call for Proposals notices (periodically on the PSDP web site as well as in the local newspapers), which is the open and transparent mechanism required by the European Development Fund (EDF) to publicize the availability of grant funds and to invite eligible applicants to submit proposals.
Among the most interesting activities of PSDP is the one carried out within the Target Growth Competitiveness Committee. It is a multi-sectoral body of representatives from the private sector, labor, and government, which conducts research on the MSMEs 42 and lobbies for policy changes at the government level through policy papers and public awareness campaigns.
Its scope is to develop a national competitiveness strategy for Jamaica by the end of the program in 2009.
Since December 2007, the PSDP has been run through a process of organizing beneficiaries and PSOs via the use of the “cluster approach.” Future clients will be chosen on the basis of this strategic direction. 43 Under the PSDP’s Cluster and Sector Initiative (CSI) Based on previous studies and stakeholders’ comments, the TGCC identified eight core areas to be addressed in the MSME policy: Institutional, Legal and Regulatory Framework; Human Resource Development; Technology, Research and Development; Extension and Support Services; Marketing; Network and Clustering; Infrastructure and Finance. Initially, analysis was undertaken for two of the eight areas identified by the TGCC: (i) financing MSME growth and development; and (ii) building human resources in MSMEs through training (Tenant, 2008).
For companies that do not fall into specific cluster groups, the PSDP offers several packages of assistance via specialized units, such as Export Centres.
component, the process of accessing financial and technical assistance will be more streamlined and will reach a more broad-based target group. PSOs will lead cluster development activities and manage grants and other technical assistance on behalf of the clusters. This approach is being undertaken because it is thought that clusters create opportunities for entrepreneurs to better identify their problems, compare themselves with others, do benchmarking, overcome limitations of size, obtain information about sectoral needs, and be involved in the development of their value chain.
The target set by the program is to assist up to ten clusters for the duration of the PSDP.
The clusters selected for grant assistance belong to four targeted sectors (creative industries, tourism, agribusiness, and services).
The process of cluster selection was performed through a Call for Expressions of Interest, where a total of 42 clusters, through their representative PSOs, submitted notes detailing the long-term strategies that would be required for their respective value chains. A five-person independent committee reviewed the submissions and short-listed 15 of them, following evaluation criteria such as potential contribution to economic growth, employment, export growth, and potential for building competitiveness. The selected group moved to the second phase of the application process, submitting detailed grant applications which were evaluated by an independent Evaluation Committee completing the final approval.44 The selected clusters and their respective coordination PSOs are shown in Table 5.
The application process included clarification workshops, one-on-one sessions, and technical assistance, to facilitate it.
The general idea is that all PSDP support must be run within the context of what is good for the value chain first, i.e. within the context of a cluster.
The rest of the components of PSDP already launched are the following:
• Enterprise Rating and Upgrading (ERU), which operates by conducting indepth assessment/benchmarking of enterprises (affiliated with any of the ten approved clusters), and rating them against other local and international competitors to identify gaps and areas for improvement, followed by the development of a plan for upgrading. The program provides financial support for upgrading efforts. The JBDC and JTI will implement this activity on behalf of the PSDP.
• Export Centres and Business Information Points: provide export advisory services, and standardized and value-added business information, respectively.
Services can be obtained through different modes, such as internet, printed material and personal/telephonic contact. There are three primary partners responsible for implementing the Export Centres and Business Information Points island-wide. JTI has overall management responsibility, and the agency collaborates with the JEA and the JBDC in the delivery of the service.