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Manufacturing — The bastard child of the PNP and JLP

BY DELROY WARMINGTON

Thursday, April 11, 2019

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IT is a folly to proffer the impression that all is right with the manufacturing sector. Succeeding governments have treated the sector with benign neglect with their policies oscillating between bad and worse. If they are serious about growing the economy there is no way they could have behaved with such disdain towards manufacturing.

Their judgement can only be labelled as capricious. Softness in the manufacturing sector contributes to sluggish economic growth. We are led to believe that growing the economy is governed by Byzantine complexity when, in fact, all is elementary.

There is no other way to classify the effort but risible. The lack of emphasis on manufacturing has left a pernicious strain on the economy.

The manufacturing sector should be a major engine of growth. Currently at eight per cent of gross domestic product (GDP), it is punching way below its weight. The Government should target this sector at 14 per cent to 17 per cent of GDP. For Latin America, it is 13.09 per cent, while globally it is 16 per cent. There is no rationale why Jamaica should not be in this range. Let's bring back “Made in Jamaica”. We desperately need the industrialisation of Jamaica.

We are at an inflection point. This should be the nadir for the sector. We cannot afford to slip any further. There is no manifest destiny that assigns the Jamaican economy as a permanent underperformer.

When we look at countries such as Belarus, Vietnam, Laos, Cambodia, Ethiopia, Malaysia, and China, which averaged over five per cent growth in the period 1996-2016, they all have robust manufacturing sectors.

The Government seems to have too many major enablers in its approach. First, the Jamaica Manufacturers and Exporters Association, which should be advocating and evangelising the broadening of the 'manufacturing' base, has, instead, become penitent and beguiling. It seems to prefer to propagate the Merchants of Venice approach. Jampro seems to forget the sector. From all indications, they are allergic to the word manufacturing. This is not part of their lexicon. Can Jampro show any significant manufacturing plant they have attracted in the last 20 years.

We have a toxic legacy of missed opportunities with the country's conscience in a state of slumber — the product of destructive policies. We can't accept the lazy argument that the economy is allergic to sustained growth. The Government cannot be decadent when it comes to maximising the Jamaican economic potential.

One of the main reasons the manufacturing sector should be targeted is the multiplier effect. For every dollar invested in this sector it generates $1.89 throughout the economy. When you take into consideration the upstream and downstream chain you are looking at a $3.6 multiplier effect. Furthermore, it creates four more jobs in the economy for each one created in manufacturing. This is, by far, the greatest contribution by any sector.

As we are fully aware, the global economy is cyclical and we can expect contractions. If we look at the countries which weather these downturns most effectively, they are the ones with a broad manufacturing base.

Let's go back to the 2008-2009 downturn and compare the performance of the German economy, with its strong manufacturing base, and the British economy, which has shifted towards a service one. The results are compelling in favour of countries which emphasise manufacturing. Countries with strong manufacturing bases can more easily calibrate their economy to changes in demand.

Moreover, this will have a most positive impact on the overall economy, such as reducing the trade deficit, balance of trade, import substitution, stabilising the Jamaican dollar, increasing reserve, skills transfer, and reducing poverty and, at the same time, reducing the dependency on the informal economy. Above all, this will create good-paying jobs. The manufacturing sector is wealth-creating, whereas the service sector is more about wealth distribution.

When one looks at the manufacturing output and capacity utilisation there is a long way to go to make it anywhere near the global standard.

Bespoke manufacturing can be the engine of growth, developing a competitive workforce and enhancing productivity. We all know the positive impact productivity and innovation can have on economic growth and capital formation.

One must applaud Minister of Finance Dr Nigel Clarke for recognising and enunciating the potential positive impact research and development can have on the economy. Here's hoping that the implementation of these policies will be convex rather than linear; targeting incentives to facilitate growth and innovation.

Productivity and innovation can do wonders to the economy. Think about the genuine impact it can have on capital accumulation. It will provide a lot more flexibility in the economy as increasing productivity requires terminating inefficiencies throughout the economy. What this does is boost the number of engineers and technicians in the workforce, making Jamaica a more competitive location for manufacturing.

The shifting trade pattern has provided Jamaica with a great chance to exploit the opportunities. Even if there is a trade agreement between China and the USA things will never return to the halcyon days. The recent tariff imposed on metal from Canada and Mexico is still in place, even though there has been a trade agreement. Companies are now re-evaluating and rationalising their supply chains and manufacturing facilities. We are likely to see some shifting of manufacturing from Asia. With its bloated trade deficit, Jamaica could be an ideal location. There needs to be a concerted effort to promote Jamaica as a compelling location. Japan, China, Korea and other Asian manufacturers could surely use Jamaica as an additional manufacturing base.

Jamaica should start highlighting the impact it can have above the gross margin line. An emphasis must be placed on undisputed plusses that locating in Jamaica will have on cash conversion cycle and working capital, quantifying how Jamaica can help companies get to the backside of the manufacturing curve much faster.

The areas in which Jamaica can be most successful are remanufacturing; health care; electronics; appliances; and heating, ventilation, and air conditioning (HVAC). Then we can gradually move up the value chain. We should avoid prosaic industries such as apparel. Jamaica cannot compete in an industry in which workers are being paid US$5 per day. The garment industry is always trying to find the lowest cost-manufacturing environment. Bangladesh is more ideal for this. A survey showed that over 70 per cent of American companies are looking to further source assembly; they are all evaluating relocating manufacturing facilities.

In the case of remanufacturing, Jamaica has some distinguished attributes. Jamaicans think they can fix anything. If your car breaks down and a lady is passing on a donkey, she is likely to offer ideas as to how to repair your car. If you put out an iron, a fridge, a stove, or any electronic device, it is almost certain someone is going to take it and try to repair it. It is natural for Jamaica to be a dominant player in the remanufacturing sector.

Health care is also a natural fit. Globally, there are more Jamaicans working in this industry than any other. Go to the USA, Canada, or the UK, and you are sure to find Jamaicans employed at almost, all skill levels. Jamaica should look at medical devices, pharmaceuticals (both prescription and non-prescription drugs), supplies, and equipment. Given the burgeoning problems with the safety and efficacy of drugs manufactured in China and India, Jamaica would benefit substantially from targeting drugs manufacturing. The US Food and Drug Administration (FDA) has significantly increased its inspection of sites in these two countries because of the decreased confidence in drugs originating from plants located there. The manufacturers are looking for alternatives.

Appliances lend themselves as a most attractive industry. Here we could mostly have assembly — in which Jamaica has, in the past, excelled at. We have seen that Turkey has become a dominant player in the appliance industry, Costa Rica in medical devices, and Puerto Rico in pharmaceuticals. There is no apparent reason Jamaica could not do the same.

Rather than being a $15-billion economy today it should be a $30-billion. If only Jamaica had exploited the opportunities presented to it.

If the Government is going to make prosperity its creed, then growth should be its tenet. Manufacturing must correlate with economic growth. Let's adopt the mantra “Made in Jamaica!”

Delroy Warmington is a global investment fund manager. Send comments to the Observer or dlwarm2001@yahoo.com.


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