Growth and the 2019-20 Budget
DESPITE MINISTER of finance Nigel Clarke’s valiant attempt at playing up the growth numbers for last year during his Budget presentation, the reality is that the hope for acceleration of gross domestic product (GDP) growth in the Jamaican economy has not occurred. The much-heralded Growth Council does not appear likely to realise its ‘5 in 4’ growth target. The last time the Jamaican economy grew anywhere near to three per cent per annum was over a decade ago.
The Jamaican economy seems stubbornly locked into a low growth equilibrium path, averaging only about one per cent per annum over the last 30 years. Over the same period, the Chinese economy, for example, has had double-digit annual GDP growth rates, resulting in the complete transformation of the economy and society. For Jamaica to achieve the much sought-after transformation, it must grow for a sustained period at an annual rate of at least five per cent per annum. Growth has eluded the country, despite tremendous efforts at reforms. Much more needs to be done to achieve faster growth.
Over the last quarter of a century, Jamaica spent a tremendous amount of time and energy trying to get the macroeconomy stable under the tutelage of the International Monetary Fund and other development partners. Significant reforms have been undertaken in both the monetary and fiscal arrangements of the country. These reforms, painful and long drawn out, have begun to positively impact the economy. The reform process itself has been greatly helped by the broad consensus that has been achieved between the political parties around economic and financial policies. It is very important that this consensus becomes entrenched in our governance arrangements. The independence of the Bank of Jamaica, the Fiscal Responsibility legislation, and the planned Fiscal Council should all go some way in realising this national objective.
The current period of relatively low inflation, reduced central bank policy interest rate, and record low unemployment, along with a balanced Budget, signify probably the most benign economic environment in Jamaica since the 1960s. According to the Government’s assumptions that underpin the current economic model, the stability in the economy is the basis for rapid economic growth.
The minister of finance’s Budget presentation was built around the notion that all that is now needed is the removal of a few additional distortions or impediments to the functioning of the market, along with a few additional reforms, and the natural entrepreneurial drive of the business class will propel more rapid growth. While we share some of the optimism about the current business environment, we are not as sanguine about the prospects for rapid growth as the minister, or the Aubyn Hill-led Growth Council.
The failure of Jamaica, over the years, to invest sufficiently in the development of technological innovation to drive productivity is likely to remain a major drag on the country’s growth prospects for many years to come. The quality and quantity of human capital is just not sufficient to drive transformational growth. We further contend that the rate of domestic savings is not sufficient. These are the areas requiring fundamental reforms.
RESEARCH AND DEVELOPMENT FOR GROWTH
Minister Clarke, to his credit, has alluded to the need for technological innovation to drive growth. He has, in fact, allocated some $200 million to “specifically fund research and development to be carried out by faculty and/or students at our tertiary institutions”.
The mechanism for utilising this fund has not yet been clearly spelt out, nor the areas of priority identified. What is clear, however, is that the amount by itself, is much too small to have a major impact on the science, technology and innovation (STI) infrastructure of the country. It can only be seen as a tentative first step. The Jamaican economy is not likely to grow much faster on a sustained basis than presently, without a significant and sustained improvement in productivity. Such improvements must be driven by a transformation of the STI base of the economy and society. The attempt to stimulate the property and real estate market by the tax giveaway skewed towards that sector will likely see a spurt of activity in housing and real estate. However, given the relative weight of the sector, and the very heavy import dependency, the stimulus is not likely to be a sustainable, long-term source of growth. Minister Clarke may well want to rethink future distributions of Budget allocations to ensure that there are more resources for STI to help drive long-term growth.