Caption: Only one of Jamaica’s ten economic sectors grew their volume of economic output very substantially (tourism), but their pricing did not improve as Jamaica completely failed to go up market on an overall basis (Barbados’s current strategy).

Keith Collister

In his Friday Observer article, PSOJ CEO Dennis Chung has done all Jamaica a real service in reminding us of the results of the extremely important Jamaica Productivity Centre (JPC) report of 2009, which noted that labour productivity had declined at an annual rate of 1.3 per cent between 1973 and 2007, an almost unparalleled poor performance internationally. The real question that needs to be fully answered is why, and in this context we note, encouragingly, that the JPC is having another seminar on October 8th and 9th on the issue of productivity.

Time will not allow one to go into all the issues involved in one short article, so today we will focus on the tourism industry. At this point, a quick look at Barbados is useful. In a recent research piece by Oppenheimer’s Dr. Carl Ross, entitled “Barbados — At the Precipice”, Ross observes that Barbados is facing an economic growth crisis, with traditional industries under distress, and “Tourism in almost a downward spiral”. He notes “The industry has been running at low capacity since the onset of the global recession” and “new investment has come to a standstill” while “existing hotels have not been refurbished”, meanwhile “Barbados is amongst the most expensive destinations in the region”, their “value proposition has worsened” with “airlines cutting seats”. Approvingly, he notes however, Barbados is finally responding to their worsening predicament, spending more on promotion, subsidising airlift, assisting in the refurbishment of existing hotel room stock, facilitating the construction of new rooms, and reducing the VAT on hotel rooms to make them a little more price competitive. All of this while announcing the end of free tertiary education and other austerity measures.

Why this is relevant to Jamaica is because of what Barbados is not. The Barbados hotel sector is almost entirely European plan, not all inclusive, and Barbados still has a relatively low crime rate (much less than Jamaica and certainly is seen as safe by tourists), much more social cohesion generally with a relatively large middle class, and a relative absence of tourist harassment. Yet the economy is declining, and the tourism industry appears to be in almost free fall.

Their issue appears to be one of competitiveness. For several decades, Barbados has seen a large investment in high end real estate – housing – by overseas investors, and has positioned itself as one of the global lifestyle destinations for the rich, particularly the British elite. This has allowed them to live beyond their means, financed by foreign direct investment in high end housing, and the related services. Non tradables, such as real estate, have risen in price, reducing the competitiveness of the economy overall in a kind of dutch disease (the purchasing of beach property on their Gold Coast replacing oil in this scenario). Dutch disease, of course, refers to the effect of a natural resource windfall raising the exchange rate, absolutely or relatively, as occurred in the UK after the discovery of North Sea oil where manufacturing became less competitive, and declined.

Jamaica has similar competitiveness issues, the main difference being we have a floating rather than a fixed exchange rate like Barbados. It is quite probable that we have also had a case of dutch disease, in our case remittances, as suggested by former Minister Claude Clarke.

Perhaps the most interesting evidence on what is wrong with the Jamaican economy, particularly on this competitiveness issue, is contained in a virtually ignored report on the tourism industry by the Jamaica Hotel and Tourist Association in 2011. The report notes that the tourism industry grew relatively over the period 2001 to 2010 in volume terms by the most of any industry in Jamaica — 36 per cent, no doubt due to the Spanish invasion. Notably, over the period, all the other three tradable sectors – agriculture and fishing, manufacturing, and mining declined in absolute volume terms.

However, despite their huge volume growth, tourism’s value added (at current prices) grew at below the average value added for the total economy. Of particular note, the six sectors with the fastest growth in value added at current prices were all non -tradables : real estate and business, government (second fastest), finance and insurance, electricity and water, wholesale and retail trade, other services, and construction. Essentially, they had pricing power, so they were able to charge much more for a relatively small increase in output. Significantly, the only non tradable sector that grew below that of the total economy was the relatively competitive transport, storage and communication sector, whose prices would be expected to decline from competition and technical innovation.

The key implication is that the Jamaica economy, like Barbados, lost competitiveness over the period, as non tradables had pricing power and increased the overall cost base of the economy, reducing further the competitiveness of the tradable sector. Only one of Jamaica’s ten economic sectors grew their volume of economic output very substantially (tourism), but their pricing did not improve as Jamaica completely failed to go up market on an overall basis (Barbados’s current strategy). As an aside, the implication is, as suggested by Professor Donald Harris in chapter seven of the PIOJ’s Growth Inducement Strategy, entitled “Resolving the Supposed “Puzzle” of Low Growth and High Investment”, that there probably is no low growth/high investment puzzle, itself a much longer conversation. In this regard, focussing on the tourism industry alone, for the period 2003 to 2010, foreign direct investment ranged from a low of US$71.8 million in 2010, to a high of US$197 million in 2007 and 2008, a relatively low portion of the total economy and even overall capital investment. As their clearly was not a huge investment in capital goods for export manufacturing over the period, it is likely that, like Barbados, much of the investment was in real estate, and not focussed towards tradable exports. Unlike Barbados, most of this would not have been for foreign owners, although some would be for returning residents. The only conclusion is that it is this issue of competitiveness, and how to improve it, that policy makers should focus on like a laser beam.