A financial look at a possible growth strategy

Dennis Chung

Friday, July 06, 2012    

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OVER the last two weeks I looked at a possible growth strategy for Jamaica, and focused on five ministries from which I think the growth impetus can come. These are energy, transport, security, justice and tourism. A question was asked by a reader: Why not mention agriculture also? I do agree that agriculture, is a significant growth area, but the truth is that agriculture depends on what happens at security, energy, transport, and tourism before it can really get started.

The point, therefore, is that if we focus our limited resources on fixing the areas under these ministries, then it will provide a push for the other ministries, and so in a sense these ministries should, in my view, be the focus of fixing the structural deficiencies that prevent growth.

Someone else asked about finance. True that finance can affect the environment that creates interest in investments, and how capital moves. The fact, however, is that given the fiscal constraint faced by the Government, there is not much that finance can do to positively impact growth directly. It can only serve a role by facilitating the changes needed in these five ministries through providing the much-needed resources.

Before I look at what a financial perspective on growth can be, it is important to mention that the recent EU summit clearly demonstrates that the austerity measures that were being pushed by Germany were going to result in a further deterioration of the EU economies, and the debt crisis. A continuation of the policies would also have led to reduced global confidence and acceleration into global recession again.

The leaders recognised this, and took a common-sense approach by providing a stimulus fund to prop up the fragile EU economies through the banks, and the floating of bonds. This of course means more debt immediately, but the truth is that the debt crisis cannot be solved without incurring more debt. It may seem contradictory, but it is really the only common-sense approach.

In Jamaica, it seems clear that the crisis we face cannot be solved by just a focus on the fiscal accounts, and therefore, the element of the budget that focused on the energy, transport, and tourism projects are critical. The Government has apparently realised this and the focus has shifted (from my perception) to a discussion on the energy initiatives and projects. And I hope that the media can focus on this, as the discussion about which song should be the Jamaica 50 song is really a waste of time, as without growth we may not have energy to sing anyway.

Over the next six to 12 months, we should focus on energy and transport on two fronts.

First, aggressively move households towards renewable energy solutions. This should be done through education, government funding, and private funding. The monthly payment on a loan to install renewable energy will, in all probability, be less than the savings on the JPS bill. Retail consumption is 30 per cent of our US$2-billion import bill, or US$600 million. A reduction of 30 per cent usage amounts to US$180 million ($16 billion) per annum, which goes directly to increased disposable income.

Second, improved public transportation system, which again accounts for 30 per cent of the oil bill (US$600 million). If we can again implement "park and rides" and penalise persons who want to drive into New Kingston and downtown, during work hours, through access fees, we may be able to save another 30 per cent of the US$600 million bill. Again, another US$180 million that goes directly to disposable income.

The other benefit of an improved transport system is the increase in productivity. For example, the implementation of a properly run school bus system, which I am sure parents would pay for, would significantly improve productive hours used to pick up children, in addition to the increase in productivity from decreasing traffic congestion. Assume a 5 per cent increase in GDP from this, then you would be looking at an increase of approximately J$55 billion.

Studies have consistently shown that crime robs the country of approximately two to four per cent of GDP. Based on discussions, I am confident that the security minister is serious about improving "law and order" and reducing the scourge of crime in the country. And he is supported by probably the most effective police commissioner we have ever had, and we must all support him to ensure that he continues his work, as we all have a personal responsibility to help with solving crime. Let's assume that at the low end of the estimates we can improve GDP by two per cent. This amounts to $22 billion in GDP growth. This is also justification for providing the needed resources to security to put proper mechanisms and structures in place, as the payback on even loans for this initiative will no doubt be greater than the cost of the loan.

The intention of Justice Minister Mark Golding to promote an aggressive legislative agenda is also necessary, as our archaic laws stifle business opportunities. What he also needs to focus on is ensuring that the courts move with alacrity, so that cases are not adjourned continuously, delaying justice and costs, which in my view is greater than the cost of going to the Privy Council. These initiatives will also significantly positively impact tourism and and agriculture. Let us also assume that these initiatives conservatively spur a one per cent GDP growth. We again would be looking at a $11 billion GDP growth.

These are what I think can be the direct impact of focusing our resources. However, these initiatives will no doubt cause a chain reaction in things like new investments, and reduction in prices, such as real estate, if we can free up the resources kept locked up in the inner cities.

We would therefore be adding a minimum disposable income increase of $32 billion, which, assuming a low multiplier effect of two, could see around $64 billion being added to GDP. This would be in addition to the GDP increase of $88 billion from the initiatives mentioned before. The total GDP increase would be $120 billion.

Assuming the tax take of 29 per cent from the economy, then this would provide an additional $34.8 billion in fiscal revenues. This would enable the government to reduce tax rates and encourage even greater investments and spending, creating a positive spiral of economic activity.

While the numbers may not be exactly what would happen, it does show the virtue of economic growth as the solution to the global crisis, as opposed to the fiscal austerity path Europe so wisely curtailed.

Dennis Chung is a chartered accountant and the author of "Charting Jamaica's Economic and Social Development - A much needed paradigm shift". His blog is Email:





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