Jamaica: Poverty to Prosperity?
Last night I went to listen to the Jamaican Finance Minister, Audley Shaw, speak in Westminster about the economic outlook for Jamaica.
"From Poverty to Prosperity" was the defining Jamaican Labour Party tagline during the February election campaign. But implementation is a huge ask. The immediate background is that the island has been exhibit A for the supposedly causal relationship between high levels of public sector debt, which peaked at 145% in 2012, and stagnant economic growth which has averaged 0.6% over 2000-15.
With Jamaica's international creditworthiness busted and the economy seemingly hurtling towards the Bermuda triangle, mid-2013 saw the IMF invited forward with its usual cocktail of fiscal rectitude and deregulation in exchange for lifeline finance. The World Bank and Inter-American Development Bank also contributed to the total package of around US$2bn which was negotiated by the previous government.
Ironically, at just the time when the IMF is seemingly beginning to question its own orthodoxy, Jamaica can also be seen as a headline poster for its potential benefits. Admittedly, there have been some very favourable accompanying external developments, such as the drop in the oil price and a relatively solid pace of US activity. In any case, the economy has stopped listing - growth climbed from -0.5% in 2012 to 1.1% in 2015, and a 2.2% print is expected for this year. Meanwhile, annual inflation has stabilised well below 5% and debt metrics are grinding towards sustainable territory.
So what's next? Not surprisingly, Mr Shaw is fairly relaxed about sticking to the IMF script. He could hardly ask for a better lightning rod and much of the unpopular impact effects took place under the previous regime.
Nonetheless, his ambition burns bright with the emphasis falling squarely on output growth. Other key macroeconomic indicators such as inflation, interest rates and the current account barely got a mention. Much has been made of the newly formed Economic Growth Council, chaired by a Jamaican-Canadian billionaire, Michael Lee-Chin, whose task is to develop strategies that will achieve a 5% GDP growth rate over the next four years. Godspeed.
But while the EGC deliberates, Minister Shaw outlined several immediate and practical steps which, with a fair wind, could underpin a more realistic 2%-3% growth advance during this Parliament. The key measures are:
(1) Infrastructure projects. These include the further expansion of the road programme which has been largely built and funded by France and China in exchange for multi-decade toll concessions. A major alumina plant (Alpart) is set to be re-opened under Chinese ownership while the much touted Logistics Hub Initiative remains live. Even the resurrection of the long defunct railway network is on the table. In principle, the idea is that with government debt payments weighing less on activity, the multiplier effect of such projects will be stronger.
(2) Broadening and deepening financial inclusion. The key example involved improving the ability of local SMEs to fund expansion by equity capital rather than debt instruments. Several companies who have recently been able to tap into the Jamaica Stock Exchange Junior Market, in which Mr Shaw played a crucial role in setting up in 2009, have subsequently become significant domestic and export suppliers such as Jamaica Teas and iCool beverages. His coda that Jamaica had a comparative advantage in the "medical" marijuana sector drew the expected raised eyebrows until he claimed that the US franchise alone is projected to be worth over US$6bn this year and that other countries such as the Netherlands and Israel were well along the production curve. More broadly, the government plans to significantly ease credit frictions which are seen as a major hurdle facing local business and households.
(3) Shifting from direct to indirect taxation. His recent Budget saw an increase in the personal income tax threshold which has benefitted over 250k workers and broadly offset by rises in consumption levies. One argument is that this helps to increase work incentives, soften distortions to savings and investment decisions, and reduce the size of the shadow economy, where most Jamaican workers seem to be parked. As for the adverse impacts on the poorest Jamaicans who do not work but will face higher spending outlays, he is "looking at" how welfare benefits could compensate.
So what's the conclusion? By and large, Mr Shaw put forward a sober and credible case which would have broadly pleased its key intended targets, especially the international investment community who form a critical component of his plan. But significant potential obstacles lay ahead, including further severe cuts to the public sector wage bill alongside "efficiency gains" which could usher in protracted disruptions and blow the economy off course. Clear near-term evidence that his vision is viable and that, if necessary, he is prepared to gently tweak Washington's nose every now and then, at least publicly, would greatly assist his cause.