A turning point
By Dennis Chung
As was expected, 2015 was a turning point for the economy and the fiscal accounts.
In 2015 the Jamaican economy started to see the benefits of the economic reform programme (ERP) and ended the year in a very strong position, with third-quarter growth of 1.5 per cent, the fastest-growing stock market in the world, multi-year lows in both interest and inflation rates, and improved business and consumer confidence.
All of this resulted from the perseverance of policies to maintain fiscal discipline and create the legislative framework that would bring greater competitiveness to the market. As a result Jamaica saw our debt to GDP ratio fall to 126 per cent (from 150 per cent in 2012), improving fiscal balances, and the first balance of payments surplus in 10 years, which by itself is a game changer and a significant achievement.
This performance was strengthened by the fortune of lower oil prices, the PetroCaribe debt buyback, and — up until recently — near zero US interest rates.
Without these occurrences, we would still have seen improvement in the economy — but at a much slower pace.
Also, from a regional perspective, Jamaica is poised to regain its place as the “Powerhouse of the Caribbean”, with the Trinidad and Barbados economies now in free fall, as low oil prices and policies against offshore financial havens take a toll on both economies.
Trinidad in particular is in for a rough ride, as oil prices are projected to remain low until maybe 2020, and by that time it could be further impacted by new sources of energy.
Micro level challenges
With all these macro achievements, however, Jamaica’s economy is still in a very vulnerable state, as there are still challenges at the micro level to address.
These risks include (i) an inadequately trained labour force (which resulted from periods where approximately 70 per cent of secondary school leavers left without passing one subject); (ii) crime and indiscipline, which is a major inhibitor to maximising our productivity; (iii) a still struggling SME sector, which, although conditions have improved, still struggles with capacity issues and bureaucracy in doing business; and (iv) an uncompetitive tax structure.
The fact is that unless we address these four major issues — which account for the majority of the most problematic factors in the Global Competitiveness Report — we will not successfully maximise our growth potential. This means that the benefits of growth for the economy, fiscal accounts and general standard of living will take longer to be realised.
This is important because even though we have been seeing the benefits at the macro level and specifically the fiscal and trade accounts, the fact is that the widespread micro effect has not been felt as yet. This is expected in any economic recovery. However, a failure to have widespread benefits in a timely manner will mean that economic activity and spending could be inhibited and lead to a loss of confidence.
In effect, therefore, we have done a very good job as it relates to the ERP, and the effect on the fiscal accounts and other macroeconomic indicators. Much commendation is due to those who have been charged with implementing and overseeing the ERP. However, similar to when a company is being restructured, expenditure management can only have short-term benefits. For the recovery to be sustained, you have to work on the revenue side.
As it relates to the country this means that we must now turn our focus to higher levels of GDP growth in 2016, as 1.5 or 2.0 per cent is insufficient to see the much needed impact on the middle and lower income classes.
In order for this to happen, it is going to be very important to focus on deliberate policy actions to address the issues of inefficient public sector bureaucracy, crime and indiscipline, more efficient justice system, more competitive tax rates and tax compliance, and — very important for me — labour market reform and workforce productivity.
Labour market reform and workforce productivity will be a critical success factor in 2016 if economic growth is to be above the low levels we are used to. It also is going to be a very important factor to increase the value added and compensation to labour. In other words, unless we are able to improve the productivity of the labour force, the standard of living generally will not significantly improve.
Therefore deliberate policy action geared towards education and productivity is going to be essential.
This for me will be the most critical factor for fundamental benefits of growth. That is to ensure that the average man on the street benefits from growth, as to do so they must be able to participate at the highest value added.
Some of the actions that can be taken include (i) vocational training programmes at HEART; (ii) focusing loans from the Students’ Loans Bureau on professions that will be in demand; and (iii) labour market reform.
If we are able to successfully address this and the other issues mentioned, then I have no doubt that we can achieve growth in excess of 3.0 to 4.0 per cent and Jamaica will once again be the envy of the Caribbean.