PSOJ and JMMB ANNUAL ECONOMIC FORUM HIGHLIGHTS & RECOMMENDATIONS
Developing Beyond the IMF
July 2016
On the 12th of July, the PSOJ and the JMMB held the tenth annual PSOJ Economic Forum under the theme Developing Beyond the IMF. There were five presenters, starting with Professor Densil Williams (Mona School of Business), followed by a panel, which included Jermaine Burrell (JMMB), Sandra Samuels-Reid (WBO), and Dennis Chung (CEO). This was followed by the keynote speaker, German Galvan from the international consulting firm, McKinsey. Each made suggestions for growing the Jamaican economy and maintaining a sustainable path of development after the IMF programme concludes at end March 2017.
The PSOJ is very much aware of the risks to the country’s economic, and ultimately social development if there is not a well thought-out and implemented framework after the IMF programme ends.
The presenters agreed that Jamaica is experiencing a challenging period, but that we have been seeing some positives under the current IMF programme. As a result, the focus should be on ensuring we continue the current path after the current Extended Fund Facility (EFF) agreement comes to an end. The presenters also went on to highlight some of the measures required and identified the risks associated with not having involved IMF oversight.
One of the common facts highlighted by all presenters was the need to have economic stability as this is a prerequisite for attracting investments. Jamaica was compared to several countries which at some point had similar economic issues, which are shown below.
Singapore and Jamaica
There was a comparison between the Jamaican and Singaporean economy. In the 1960’s Jamaica and Singapore had similar economies with GDP per capita being less than US$5,000. In the 1960s, Jamaica also experienced growth rates above 4 to 5 percent per annum, but that of Singapore was almost 0%. Today, Singapore GDP’s per capita is above US$45,000 and an average GDP growth rate of approximately 5%. In contrast, Jamaica’s average GDP growth rate is approximately 0.3% with a GDP per capita of a little over US$5,000.
The Philippines and Jamaica
Jamaica was also compared to the Philippines. In 2006 both economies had similar macroeconomic measurements. Currently, the Philippines GDP growth rate is 6%, and the
unemployment rate 6% coming from 7.325% in 2007. Contrast that again to Jamaica with growth rates averaging less than 1% and unemployment of approximately 13.5%.
Uruguay and Jamaica
Like the Philippines, Jamaica’s economy was similar to Uruguay in 2006. Presently, Uruguay’s growth is approximately 1.387%, GDP per capita is US$15,505.69 and the unemployment rate is 7.764%. Jamaica’s unemployment rate is approximately 13.5% recorded as at October 2015. In addition to these, some other similarities are; Uruguay is a natural gas exporter (non-oil), has a population size of approximately 3 million, faced a financial sector crisis after the Argentina default similar to Jamaica’s FINSAC and an IMF lending program which was also needed for growth.
Like Jamaica, Uruguay has an agricultural based economy; however, the difference is that Uruguay exports mostly processed food and it is heavily mechanized, which contributes to 7.5% of GDP, while Jamaica does mostly subsistence farming which provides only seasonal employment to approx. 18% of the labour force. Another important difference between the two countries is in the area of trade. Jamaica is heavily dependent upon the US and the UK as an export partner while Uruguay has a diversity of trade partners with 77% of exports to 15 countries in 2016.
German Galvan (McCinsey)
German Galvan compared the Jamaican economy with that of Singapore. In his presentation, he showed the strategies used by Singapore over the years which transformed them into a developed country. He highlighted that Singapore has developed with the use of ambitious strategies, coordinated execution, and outward orientation. The country’s growth in productivity was mainly as a result of foreign direct investments, exports, as well as research and development.
For growth, Mr. Galvan highlighted that a development plan should focus on both national economic goals and concrete strategies that will achieve a tangible impact. He recommended that the government consider the following as a perspective on successful growth strategies:
The overall strategy can be developed through a detailed analysis of the country and sector-level comparative advantages. Sector-level strategies need granular analyses to achieve concrete and tangible results.
Thinking about government interventions across three dimensions of target specificity;
i. Flagship projects,
ii. Sector-specific interventions
iii. Cross-cutting interventions.
In summary, Mr. Galvan stated that successful economic development strategies have five critical components;
i. a clear and detailed fact base of economic potential
ii. priority sectors and focus areas
iii. a clear vision and macro-goals for the region
iv. stimulus and enabling initiatives
v. an effective delivery mechanism.
Growth in Jamaica.
The most common questions are, where did Jamaica go wrong? And how can it be reversed? All presenters agreed that Jamaica needs to maintain fiscal stability to attract investors. The improvements in the economic indicators such as the improvement in the balance of trade and the reduction in inflation over the past 3 years have indicated some level of fiscal discipline under the IMF program. Mr. Chung, Prof Williams, and Mr. Burrell all strongly recommended that Jamaica considers another IMF monitoring program and that this needs to be a rigorous programme, with continuing quarterly tests, as a normal staff monitoring programme may not be a strong enough deterrent against fiscal indiscipline, given our track record. The three presenters also stressed the importance of maintaining of the Economic Program Oversight Committee.
Benefits of having the IMF
The IMF provides Jamaica with a structured programme approach, acts as a partner with government, provides credibility for creditors and the market generally as well as tests by which the country can measure its progress. The IMF has not only assisted the country in the development of proper monetary policies but has also assisted in the area of fiscal policy and provides balance of payments (BOP) support.
What is next?
It was highlighted that Jamaica does not have a problem in the generating economic growth, but has been unable to generate sustainable high levels of growth. One important point highlighted was that macroeconomic stability is necessary but not sufficient for high sustained long term growth. Like Uruguay, Jamaica can increase growth by capitalizing on the benefits of having an IMF program. Prof. Williams recommended that the country gives greater focus on the global market. Agriculture, he believes has the potential to lead the way for development, however, this will not be achieved with the use of subsistence agriculture.
The presenters further pointed out, which was highlighted in the example of Mr. Galvan, that the Jamaican economy has some structural issues that prevent sustainable growth rates at 3% or more. In other words, the institutions and infrastructure generally do not support high sustainable growth rates. These structural challenges are areas that the PSOJ has been focusing our advocacy and include (i) Inefficient Government Bureaucracy; (ii) Crime and Indiscipline / Lack of Law and Order; (iii) Uncompetitive Tax Rates and Inefficient Tax System; and (iv) Corruption.
Our failure to address the structural challenges will prevent Jamaica achieving sustainable high levels of growth.
Summary
The following summarizes the possible risks that may occur due to the absence of a proper monitoring program after the IMF agreement ends in 2017, as well as the main recommendations.
Main Risks after December 2017
The loss of international and local investor confidence in Jamaica’s fiscal policies and the overall economy.
The risk of lower funding from multilaterals or private lenders and/or higher borrowing rates.
The fiscal discipline not being maintained, leading to the worsening of macro indicators e.g. interest and inflation rates and debt ratio.
Recommendations
Continued IMF surveillance. This should be in the form of a program which mimics closely what currently exists: quarterly reviews and tests and the utilization of Fund/IMF expertise.
Continued private/public partnership most importantly the Economic Policy Oversight Committee (EPOC) and Electricity Sector Enterprise Team (ESET). The re-establishment of the Partnership for Jamaica (PFJ) and the Rule of Law Committee. The continuous monitoring by the civil society of fiscal rules and the IMF reviews (inviting ministers to speak on reviews).
A credible debt management strategy is vital and should embrace a fiscal surplus. Overtime, this facilitates the lowering of the debt and borrowing costs as well as creating the required fiscal space to spend responsibly on vital social services. The development of a comprehensive tax reform and a commitment to implement same.
Strategies to mitigate the impact of economic shocks especially with the new paradigm of increased risk in the international markets.
Continued focus on improving government bureaucracy and practical long term crime fighting measures. Addressing the structural impediments to growth that exist. This means also improving the environment for capital to invest and guaranteeing predictability. For example, the current practice of introducing new taxes each year, or even retroactive taxes, does not encourage long term capital investments.
Focus on infrastructure development.