AT the IMF press conference yesterday, fund mission chief Jan Kees Martijn praised Jamaica's "strong implementation", with the IMF release stating "All quantitative performance targets and indicative targets for end June were met, including the floor on social spending."
Noting that Jamaica did not get to where it was overnight, he argued that continued "resolute implementation' of the programme would be necessary before Jamaica would see a return of confidence from local and foreign investors.
Minister Phillips added that investors had had "reason to be concerned, that it will "take time to rebuild confidence" and that one won't convince investors with "a lot of talk". He added that international investor confidence in Jamaica appeared to be improving, and that in his recent road trips to Europe and North America, many international investors described themselves as "pleasantly surprised" when Jamaica got an IMF programme. He believed that the successful conclusion of the first review would further increase international investor confidence.
The Minister argued that the return of confidence will require a much more comprehensive communication effort, and that while the reform programme "of necessity" was administered by government, implementation will require the participation of other stakeholders including the investor community.
According to Jan Kees Martijn, tax reform is a critical part of the programme, meaning broadening the tax base, simplifying the system, reducing rates and economic distortions, all in a phased and prudent manner that does not jeopardise the budget target.
In his Washington Times article, "Can the Celtic Tiger Roar again", respected Washington Post economic columnist Steven Pearlstein notes that Irish foreign direct investment over the past two years is again at record levels, citing the reason as Ireland's continued low corporate tax rate, flexible labour laws and modest government subsidies for job creation and research and development, all helped by the fall of Euro, the decline in real estate values and moderation in starting wages. In short, despite entering into an IMF programme involving a massive fiscal contraction, Ireland held onto its low tax rate with grim determination to attract foreign investment.
In my 2003 conversation with one of the most respected economists in Ireland at the time, and one of the architects of the Irish international financial services industry (for more detail see the online PSOJ paper "From Celtic to Carib Tiger - Lessons from Ireland"), he argued that in his experience a small developing country, like Ireland was in 1987, needed to be at least 30 to 40% more competitive than the already industrialised countries, whether it be in tax rates, wages, or real estate costs to attract business from elsewhere. Once you actually had the business, he observed, then you could afford to have relative parity in these areas, or to just be "competitive".
Clearly, after the end of their boom years, Ireland has returned to this philosophy again. In the case of their tourist industry, they even lowered the tourism rate of VAT (GCT) by one third from 13.5% to 9% earlier this year, whilst increasing the higher standard VAT rate further. The effect has been so dramatic as to cause British newspaper headlines such as "VAT row as UK tourists flock to Ireland", even forcing a response on the issue from the British Prime Minister yesterday.
This is not in any way to argue everything is now perfect in Ireland, which remains essentially a dual economy, with 15% of the labour force employed in the highly productive, global export economy, and the rest of Ireland's domestic economy remaining relatively inefficient, unproductive and uncompetitive. According to Pearlstein, issues include a bloated government (rivalling Sweden's in size but with poor services), welfare and pensions still amongst the highest in Europe, and greater emphasis on the quantity than quality of education. Other issues include Dickensian bankruptcy laws, poor access to domestic credit after the financial crisis, a tiny stock market (with the few venture capital firms relying on either government or foreign money), and a cultural bias against entrepreneurs, with Irish mothers preferring that their sons go into medicine, law or government.
The insights of Washington-based Jamaican, Stanford "Emeritus" Economics Professor Donald Harris, in his 1997 book "Jamaica's Export Economy : Towards a Strategy of Export -led Growth" unfortunately remain almost as relevant to Jamaica now as when his book was first written. Commenting on the article, Harris observes :
"The significant contribution of Pearlstein's report is that he sharply identifies and enumerates the deeper structural problems which underpin the economic crisis in Ireland and continue to stall recovery and a return to sustainable growth. Some of the structural factors that he describes are very much like those which we have in Jamaica, and we have many more besides. In our case, it is not that we don't know about them. Rather, the problem is that we have been very slow in dealing with them in a comprehensive and systematic manner with long-term perverse effects on economic incentives and economic behaviour".
Harris adds that, like Jamaica, the failure to undertake necessary structural reforms has had powerful and "pernicious" long-term effects on Ireland's economy, strengthening the "old bias against risk-taking and entrepreneurship" (a point also noted by Minister Phillips in his IMF presentation in the context of previous periods of high interest rates in Jamaica). This had turned Ireland once again into an "emigration nation" as described in a website of the Irish Times. Harris notes that "There is much that we can learn from examining and applying these insights to Jamaica's experience." The as yet unanswered question is whether the recent reform momentum in Jamaica over the past few months can be maintained over the next four years. In addition to IMF and IDB pressure, local ownership of reform, and an absolute focus on competitiveness, is key. A good mechanism would be the Partnership of Jamaica, the second attempt in 2004 being initially modelled off Ireland's in 1987. Ironically, Harris was part of the first attempt in 1997. His book actually represents the economic research, focused on Jamaica's competitiveness, that would have made it meaningful at that time. Now would be a good time for the IDB to help Jamaica update it, perhaps as part of their country growth forum initiative.