by Lipton Matthews
The Bank of Jamaica’s latest economic report has indicated Jamaica’s fifth straight quarter of contraction and based on STATIN’s research unemployment is now hovering at 16.3%. Hence there is renewed focus on creating jobs and growth, but insufficient attention is being paid to structural reforms.
The government (any government) is expected to create an environment which is conducive to investment, while the private sector creates jobs when there is an incentive to do so. In order to create sustainable jobs and long term growth, structural reform must be a priority. Furthermore, the view that emergency job programmes are good because they provide individuals with short term employment thereby boosting consumer spending which drives growth is fallacious, as it is investment in capital equipment and research which drive growth not consumer spending. That can only come from savings.
According to a recent study by the St. Louis Fed:
“………….a higher saving rate could mean less consumption, but it could also result in more capital investment and, ultimately, a higher rate of growth.”
In his article, Consumer Spending Doesn’t Drive the Economy, Investment Does, economist Mark Skousen explain this concept rather well:
“When people save more interest rates fall and business can afford to replace their old equipment with new tools, spend more on research and development, or develop new production processes. So while consumer spending stays low business spending can pick up the slack.”
This is not a new concept. However, even if Jamaica’s economic profile could attract a stimulus, very little would be achieved if reforms are avoided. Japan is a perfect example of this. The Japanese economy has received more than ten stimulus packages but the economy has not been rejuvenated, due to the absence of structural reforms.
Let me use a couple of examples. Employers in the private sector can only fire workers when they are going out of business. This situation has prevented employers from hiring new workers and raising wages, productivity has also declined in the long term because the private sector is forced to retain inefficient employees. Although agriculture in Japan is heavily subsidized and the price of rice is supported by an 800% tariff, the sector is still uncompetitive and is a fraction of what it was 30 years ago. Jamaicans who believe in banning imported products or placing tariffs on imported produce, to protect local agriculture, could learn from Japan.
It is an exercise in futility to speak about creating jobs and growth, without mentioning the need to reform the economy. Any country that is serious about courting foreign investors, will have a proper Insolvency Act. Look at New Zealand, who not only ranks number one on the World Bank’s Doing Business 2013 Report in terms of investor protection, but also when it comes to starting a business. Jamaica ranks 82nd and 21st respectively. Obviously the former country will be more conducive to investment. (I won’t even mention Jamaica’s 164th rank on ease of paying taxes, slightly better than our 174th position in 2012).
There is also talk in some quarters about innovation, but innovation and entrepreneurship can only flourish when strong Intellectual Property Laws exists and these laws are outdated in Jamaica. Robust growth only occurs in an economy when the foundation for it exists and the present administration has shown no commitment to reform. Everyone seems to be interested in growing the economy without reforming it and if we continue on this path we should expect things to get worse and not better.
This was a letter to the Editor that originally appeared abridged in print in the Jamaica Observer newspaper on August 30th, 2013.