How can the IMF help Jamaicaactually grow?

Nevertheless, a “fresh look” at the programme is now overdue. Jamaica’s very high debt, in the absence of any international appetite for debt forgiveness, and in the context of a local financial sector very heavily invested in government paper, means that our options were always narrow. However, despite the government having done a relatively good job of macroeconomic stabilisation – alternatively called administering the “bitter medicine” – it has not yet achieved significant economic growth.

This is unsurprising in view of the austerity built into the programme. Whilst the overall thrust of the programme’s pursuit of macroeconomic stability was no doubt necessary, there have been, and still are, a number of measures that could have been implemented differently. The only way Jamaica could have reached even the already low growth projections of the IMF programme (so far we have underperformed these by a significant margin), was to encourage our export (tradable) sectors to offset the contraction in our non-tradable sectors inherent in the IMF programme.

A key negative issue was the timing and pace of incentive reform. A simple way of looking at it is to ask whether Jamaica was suffering from either too much foreign direct investment, or the investment was in the wrong sectors, in 2012. If the world is beating down your door to invest in your country, there is no need for any incentives at all. Switzerland is seen as such a haven of stability and efficiency that it recently (not for the first time) charged negative interest rates on foreigners seeking to invest in Swiss Francs. If Jamaica were in such a position our financial problem would be immediately solved.

The Sandals effect

A recent conversation with an international economist, well known to the multilaterals (as well as similar conversations with representatives of key rating agencies) suggests a strong interest in studying, in their exact words, the “Sandals effect” on Grenada and Barbados – meaning the apparent turnaround in their tourism industries following an investment by Sandals.

A similar off-the-record conversation late last year with a leading tax expert from another such institution appeared to accept that a similar effect was seen in Antigua in the early 1990s.

The point of course is not about Sandals, but the critical difference that key investments can make at certain times in turning around an economy, whether it is Atlantis in the early 1990s in the Bahamas, or Intel investing in Ireland in the 1980s and building a similar plant in Costa Rica a few years later.

All these investments had a huge transformative effect on their countries, with huge spin-offs that drove further changes in the business environment, most of which happened long after and not before the investment. In all cases, the investment wouldn’t have happened without incentives.

In short, the academic argument that incentives should not compensate for a poor business environment often puts the cart before the horse, as the investment can be part of the process of fixing the business environment and driving structural transformation into higher productivity industries.

The key is to create structural transformation, thereby raising productivity, through moving into industries with increasing value added. Jamaica’s problem is that we need to correct deeply imbedded structural deformities in our economy accumulated over many decades.

For a country interested in growth, then, unless they are already suffering from a condition of too much investment for some exogenous reason, most of the reduction or elimination of incentives should occur after the business environment has changed to make them more attractive for investment.

It will actually be obvious when a country reaches this point of greater attractiveness, as one will be saying “not in my backyard”, turning down investments due to any number of negative externalities.

In reviewing the issue of incentives, we need to distinguish between rent seeking (the path to economic stagnation) and incentives that drive investment in value-adding industries. If one has a monopoly or semi-monopolistic position in an industry (either legally or de facto), or is protected by high import duties, or controls a natural resource (allowing one to charge what one likes), then one may generate an economic rent, and an opportunity for rent seeking behaviour through influencing policy makers.

If one is facing global competition, is trying to remove extra costs that its competitors don’t face, or compensate for those costs, or produce a better policy environment for an industry overall, that should not be regarded as rent seeking.

This means the approach to tax reform effectively taken in the 1980s is still relevant. Although the voluminous Professor Roy Bahl-led report included a comprehensive and still surprisingly relevant paper on industrial policy and incentives, the committee decided to focus instead on the low-hanging fruit of a “flat tax” reform that led to a major improvement in the business environment.

This and certain other key business environment reforms e.g. privatisation, coupled with the incentive-driven expansion of the textile and all-inclusive tourism industry, allowed Jamaica to grow at roughly five per cent per annum for a period of nearly four years in the late 1980s. This was despite the well known problems of the bauxite sector at the time.

Indeed, many of the issues identified in the Bahl report as impediments to growth then — eg overly high transfer taxes, stamp duties, and customs duties, to name but a few — remained decades later as issues addressed by the Growth Inducement Strategy prepared by the Planning Institute of Jamaica (PIOJ), and are still unresolved today.

So what changes should Jamaica demand in the economic reform programme?

Threat to logistics hub

First, the IMF should allow a fiscal cushion (rather than the current fiscal hairshirt) to finance a real tax reform. Despite being labelled reform, most taxation measures (the productive input relief is one notable exception) have so far have been designed to substantially increase tax revenues, and should simply be called tax increases and not tax reform.

Indeed, many also involve significant increases in administrative costs over and above the actual increases in rates. There is nothing under the direct control of government (this excludes crime and energy over which the government does not have complete control) that would improve the business environment more quickly than a comprehensive tax reform, with a focus on international industrial competitiveness.

The new Customs Bill now appears to be ground zero of this trade-off between short-term revenue collection and the much faster economic growth that could be driven by a real tax reform.

Even higher import transactions costs (they are already way too high) will make the whole logistics hub concept dead on arrival. As in the rest of the economy (indeed without imports there is no meaning to the 42 per cent of GDP informality number in an island that imports virtually everything), Jamaica continues to incentivise informality rather than value-adding investments.

High duties, and the incentives they provide to beat the system mean that customs duty evasion probably drives by far the largest amount of unproductive rent seeking in the economy.

This is not a new problem, as a review of the increases in stamp duties etc imposed at Customs in the 1980s to meet revenue targets to pass IMF tests (probably on the view that one would make rich companies pay rather than poor consumers) has over many decades provided incomparable damage to consumers’ lifetime incomes through all the jobs that were never created (temporary taxes almost never get removed in Jamaica).

It is also time for the IMF to allow the government to stop the decades-old practice of using cash accounting to meet fiscal targets by not paying bills on time, particularly near the end of the fiscal year. The impact of this practice alone could well cost one point of GDP or more in growth due to its ripple effect, particularly through the small business sector. If the government were able to pay all its outstanding receivables to the private sector, this would inject many tens of billions into the economy, often the difference between a small firm’s survival and its failure.

Finally, there is merit to the idea of Richard Byles for the PetroCaribe fund, using say US$500 million, matched by the private sector, to finance faster growth and job creation.

The key is that any such debt created needs to be able to produce a higher return than even our recent 30-year bond issue at just under eight per cent in US dollars.

The answer is projects such as the redevelopment of downtown (and our other major cities and towns), as well as the equity “venture capital” investments required to finance the new industries needed to rent the space.

One model is the UK’s formerly derelict Dockland area (ultimately to become the site for the London Olympics), where private sector developers interested in profit drove real estate development as part of an overall strategic plan.

The government could sell PetroCaribe land and real estate (in return for extinguishing debt), and the real estate would be combined with private development money under an overall government strategic plan (the government would not be responsible for detailed planning or the actual building), with no government guarantee required.

Perhaps a way could be found to finance a new dam and islandwide irrigation while we are at it.




 

How can the IMF help Jamaicaactually grow?

Nevertheless, a “fresh look” at the programme is now overdue. Jamaica’s very high debt, in the absence of any international appetite for debt forgiveness, and in the context of a local financial sector very heavily invested in government paper, means that our options were always narrow. However, despite the government having done a relatively good job of macroeconomic stabilisation – alternatively called administering the “bitter medicine” – it has not yet achieved significant economic growth.

This is unsurprising in view of the austerity built into the programme. Whilst the overall thrust of the programme’s pursuit of macroeconomic stability was no doubt necessary, there have been, and still are, a number of measures that could have been implemented differently. The only way Jamaica could have reached even the already low growth projections of the IMF programme (so far we have underperformed these by a significant margin), was to encourage our export (tradable) sectors to offset the contraction in our non-tradable sectors inherent in the IMF programme.

A key negative issue was the timing and pace of incentive reform. A simple way of looking at it is to ask whether Jamaica was suffering from either too much foreign direct investment, or the investment was in the wrong sectors, in 2012. If the world is beating down your door to invest in your country, there is no need for any incentives at all. Switzerland is seen as such a haven of stability and efficiency that it recently (not for the first time) charged negative interest rates on foreigners seeking to invest in Swiss Francs. If Jamaica were in such a position our financial problem would be immediately solved.

The Sandals effect

A recent conversation with an international economist, well known to the multilaterals (as well as similar conversations with representatives of key rating agencies) suggests a strong interest in studying, in their exact words, the “Sandals effect” on Grenada and Barbados – meaning the apparent turnaround in their tourism industries following an investment by Sandals.

A similar off-the-record conversation late last year with a leading tax expert from another such institution appeared to accept that a similar effect was seen in Antigua in the early 1990s.

The point of course is not about Sandals, but the critical difference that key investments can make at certain times in turning around an economy, whether it is Atlantis in the early 1990s in the Bahamas, or Intel investing in Ireland in the 1980s and building a similar plant in Costa Rica a few years later.

All these investments had a huge transformative effect on their countries, with huge spin-offs that drove further changes in the business environment, most of which happened long after and not before the investment. In all cases, the investment wouldn’t have happened without incentives.

In short, the academic argument that incentives should not compensate for a poor business environment often puts the cart before the horse, as the investment can be part of the process of fixing the business environment and driving structural transformation into higher productivity industries.

The key is to create structural transformation, thereby raising productivity, through moving into industries with increasing value added. Jamaica’s problem is that we need to correct deeply imbedded structural deformities in our economy accumulated over many decades.

For a country interested in growth, then, unless they are already suffering from a condition of too much investment for some exogenous reason, most of the reduction or elimination of incentives should occur after the business environment has changed to make them more attractive for investment.

It will actually be obvious when a country reaches this point of greater attractiveness, as one will be saying “not in my backyard”, turning down investments due to any number of negative externalities.

In reviewing the issue of incentives, we need to distinguish between rent seeking (the path to economic stagnation) and incentives that drive investment in value-adding industries. If one has a monopoly or semi-monopolistic position in an industry (either legally or de facto), or is protected by high import duties, or controls a natural resource (allowing one to charge what one likes), then one may generate an economic rent, and an opportunity for rent seeking behaviour through influencing policy makers.

If one is facing global competition, is trying to remove extra costs that its competitors don’t face, or compensate for those costs, or produce a better policy environment for an industry overall, that should not be regarded as rent seeking.

This means the approach to tax reform effectively taken in the 1980s is still relevant. Although the voluminous Professor Roy Bahl-led report included a comprehensive and still surprisingly relevant paper on industrial policy and incentives, the committee decided to focus instead on the low-hanging fruit of a “flat tax” reform that led to a major improvement in the business environment.

This and certain other key business environment reforms e.g. privatisation, coupled with the incentive-driven expansion of the textile and all-inclusive tourism industry, allowed Jamaica to grow at roughly five per cent per annum for a period of nearly four years in the late 1980s. This was despite the well known problems of the bauxite sector at the time.

Indeed, many of the issues identified in the Bahl report as impediments to growth then — eg overly high transfer taxes, stamp duties, and customs duties, to name but a few — remained decades later as issues addressed by the Growth Inducement Strategy prepared by the Planning Institute of Jamaica (PIOJ), and are still unresolved today.

So what changes should Jamaica demand in the economic reform programme?

Threat to logistics hub

First, the IMF should allow a fiscal cushion (rather than the current fiscal hairshirt) to finance a real tax reform. Despite being labelled reform, most taxation measures (the productive input relief is one notable exception) have so far have been designed to substantially increase tax revenues, and should simply be called tax increases and not tax reform.

Indeed, many also involve significant increases in administrative costs over and above the actual increases in rates. There is nothing under the direct control of government (this excludes crime and energy over which the government does not have complete control) that would improve the business environment more quickly than a comprehensive tax reform, with a focus on international industrial competitiveness.

The new Customs Bill now appears to be ground zero of this trade-off between short-term revenue collection and the much faster economic growth that could be driven by a real tax reform.

Even higher import transactions costs (they are already way too high) will make the whole logistics hub concept dead on arrival. As in the rest of the economy (indeed without imports there is no meaning to the 42 per cent of GDP informality number in an island that imports virtually everything), Jamaica continues to incentivise informality rather than value-adding investments.

High duties, and the incentives they provide to beat the system mean that customs duty evasion probably drives by far the largest amount of unproductive rent seeking in the economy.

This is not a new problem, as a review of the increases in stamp duties etc imposed at Customs in the 1980s to meet revenue targets to pass IMF tests (probably on the view that one would make rich companies pay rather than poor consumers) has over many decades provided incomparable damage to consumers’ lifetime incomes through all the jobs that were never created (temporary taxes almost never get removed in Jamaica).

It is also time for the IMF to allow the government to stop the decades-old practice of using cash accounting to meet fiscal targets by not paying bills on time, particularly near the end of the fiscal year. The impact of this practice alone could well cost one point of GDP or more in growth due to its ripple effect, particularly through the small business sector. If the government were able to pay all its outstanding receivables to the private sector, this would inject many tens of billions into the economy, often the difference between a small firm’s survival and its failure.

Finally, there is merit to the idea of Richard Byles for the PetroCaribe fund, using say US$500 million, matched by the private sector, to finance faster growth and job creation.

The key is that any such debt created needs to be able to produce a higher return than even our recent 30-year bond issue at just under eight per cent in US dollars.

The answer is projects such as the redevelopment of downtown (and our other major cities and towns), as well as the equity “venture capital” investments required to finance the new industries needed to rent the space.

One model is the UK’s formerly derelict Dockland area (ultimately to become the site for the London Olympics), where private sector developers interested in profit drove real estate development as part of an overall strategic plan.

The government could sell PetroCaribe land and real estate (in return for extinguishing debt), and the real estate would be combined with private development money under an overall government strategic plan (the government would not be responsible for detailed planning or the actual building), with no government guarantee required.

Perhaps a way could be found to finance a new dam and islandwide irrigation while we are at it.




 

How can the IMF help Jamaicaactually grow?

Nevertheless, a “fresh look” at the programme is now overdue. Jamaica’s very high debt, in the absence of any international appetite for debt forgiveness, and in the context of a local financial sector very heavily invested in government paper, means that our options were always narrow. However, despite the government having done a relatively good job of macroeconomic stabilisation – alternatively called administering the “bitter medicine” – it has not yet achieved significant economic growth.

This is unsurprising in view of the austerity built into the programme. Whilst the overall thrust of the programme’s pursuit of macroeconomic stability was no doubt necessary, there have been, and still are, a number of measures that could have been implemented differently. The only way Jamaica could have reached even the already low growth projections of the IMF programme (so far we have underperformed these by a significant margin), was to encourage our export (tradable) sectors to offset the contraction in our non-tradable sectors inherent in the IMF programme.

A key negative issue was the timing and pace of incentive reform. A simple way of looking at it is to ask whether Jamaica was suffering from either too much foreign direct investment, or the investment was in the wrong sectors, in 2012. If the world is beating down your door to invest in your country, there is no need for any incentives at all. Switzerland is seen as such a haven of stability and efficiency that it recently (not for the first time) charged negative interest rates on foreigners seeking to invest in Swiss Francs. If Jamaica were in such a position our financial problem would be immediately solved.

The Sandals effect

A recent conversation with an international economist, well known to the multilaterals (as well as similar conversations with representatives of key rating agencies) suggests a strong interest in studying, in their exact words, the “Sandals effect” on Grenada and Barbados – meaning the apparent turnaround in their tourism industries following an investment by Sandals.

A similar off-the-record conversation late last year with a leading tax expert from another such institution appeared to accept that a similar effect was seen in Antigua in the early 1990s.

The point of course is not about Sandals, but the critical difference that key investments can make at certain times in turning around an economy, whether it is Atlantis in the early 1990s in the Bahamas, or Intel investing in Ireland in the 1980s and building a similar plant in Costa Rica a few years later.

All these investments had a huge transformative effect on their countries, with huge spin-offs that drove further changes in the business environment, most of which happened long after and not before the investment. In all cases, the investment wouldn’t have happened without incentives.

In short, the academic argument that incentives should not compensate for a poor business environment often puts the cart before the horse, as the investment can be part of the process of fixing the business environment and driving structural transformation into higher productivity industries.

The key is to create structural transformation, thereby raising productivity, through moving into industries with increasing value added. Jamaica’s problem is that we need to correct deeply imbedded structural deformities in our economy accumulated over many decades.

For a country interested in growth, then, unless they are already suffering from a condition of too much investment for some exogenous reason, most of the reduction or elimination of incentives should occur after the business environment has changed to make them more attractive for investment.

It will actually be obvious when a country reaches this point of greater attractiveness, as one will be saying “not in my backyard”, turning down investments due to any number of negative externalities.

In reviewing the issue of incentives, we need to distinguish between rent seeking (the path to economic stagnation) and incentives that drive investment in value-adding industries. If one has a monopoly or semi-monopolistic position in an industry (either legally or de facto), or is protected by high import duties, or controls a natural resource (allowing one to charge what one likes), then one may generate an economic rent, and an opportunity for rent seeking behaviour through influencing policy makers.

If one is facing global competition, is trying to remove extra costs that its competitors don’t face, or compensate for those costs, or produce a better policy environment for an industry overall, that should not be regarded as rent seeking.

This means the approach to tax reform effectively taken in the 1980s is still relevant. Although the voluminous Professor Roy Bahl-led report included a comprehensive and still surprisingly relevant paper on industrial policy and incentives, the committee decided to focus instead on the low-hanging fruit of a “flat tax” reform that led to a major improvement in the business environment.

This and certain other key business environment reforms e.g. privatisation, coupled with the incentive-driven expansion of the textile and all-inclusive tourism industry, allowed Jamaica to grow at roughly five per cent per annum for a period of nearly four years in the late 1980s. This was despite the well known problems of the bauxite sector at the time.

Indeed, many of the issues identified in the Bahl report as impediments to growth then — eg overly high transfer taxes, stamp duties, and customs duties, to name but a few — remained decades later as issues addressed by the Growth Inducement Strategy prepared by the Planning Institute of Jamaica (PIOJ), and are still unresolved today.

So what changes should Jamaica demand in the economic reform programme?

Threat to logistics hub

First, the IMF should allow a fiscal cushion (rather than the current fiscal hairshirt) to finance a real tax reform. Despite being labelled reform, most taxation measures (the productive input relief is one notable exception) have so far have been designed to substantially increase tax revenues, and should simply be called tax increases and not tax reform.

Indeed, many also involve significant increases in administrative costs over and above the actual increases in rates. There is nothing under the direct control of government (this excludes crime and energy over which the government does not have complete control) that would improve the business environment more quickly than a comprehensive tax reform, with a focus on international industrial competitiveness.

The new Customs Bill now appears to be ground zero of this trade-off between short-term revenue collection and the much faster economic growth that could be driven by a real tax reform.

Even higher import transactions costs (they are already way too high) will make the whole logistics hub concept dead on arrival. As in the rest of the economy (indeed without imports there is no meaning to the 42 per cent of GDP informality number in an island that imports virtually everything), Jamaica continues to incentivise informality rather than value-adding investments.

High duties, and the incentives they provide to beat the system mean that customs duty evasion probably drives by far the largest amount of unproductive rent seeking in the economy.

This is not a new problem, as a review of the increases in stamp duties etc imposed at Customs in the 1980s to meet revenue targets to pass IMF tests (probably on the view that one would make rich companies pay rather than poor consumers) has over many decades provided incomparable damage to consumers’ lifetime incomes through all the jobs that were never created (temporary taxes almost never get removed in Jamaica).

It is also time for the IMF to allow the government to stop the decades-old practice of using cash accounting to meet fiscal targets by not paying bills on time, particularly near the end of the fiscal year. The impact of this practice alone could well cost one point of GDP or more in growth due to its ripple effect, particularly through the small business sector. If the government were able to pay all its outstanding receivables to the private sector, this would inject many tens of billions into the economy, often the difference between a small firm’s survival and its failure.

Finally, there is merit to the idea of Richard Byles for the PetroCaribe fund, using say US$500 million, matched by the private sector, to finance faster growth and job creation.

The key is that any such debt created needs to be able to produce a higher return than even our recent 30-year bond issue at just under eight per cent in US dollars.

The answer is projects such as the redevelopment of downtown (and our other major cities and towns), as well as the equity “venture capital” investments required to finance the new industries needed to rent the space.

One model is the UK’s formerly derelict Dockland area (ultimately to become the site for the London Olympics), where private sector developers interested in profit drove real estate development as part of an overall strategic plan.

The government could sell PetroCaribe land and real estate (in return for extinguishing debt), and the real estate would be combined with private development money under an overall government strategic plan (the government would not be responsible for detailed planning or the actual building), with no government guarantee required.

Perhaps a way could be found to finance a new dam and islandwide irrigation while we are at it.




 

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