WHEN I was studying economics as an undergraduate at Cambridge University, I came across a lot of economic analysis that sounded good in theory, but fell woefully short in practice based on my experience even as a young man here in Jamaica.

One example, ridiculously oversimplified, was that they were still discussing the great debate of that time, namely whether monetarist austerity, or Keynesian stimulus was appropriate when the British economy had just been in its deepest post-war recession.

In its Monday editorial “It’s time for private sector muscle”, the Gleaner seemingly chastised PSOJ President Zacca for his comment about the Government’s over- performance on the fiscal targets.

I will let you read the full editorial for yourself, but it provides another opportunity for us to explore what I believe President Zacca may actually have meant, but which is difficult to convey in a single sound bite, that is then turned into a headline.

Our best source for understanding the delicate nuances of the austerity verses stimulus debate as applied to Jamaica is once again Stanford Economics Professor Donald Harris (who also spent some time at Cambridge, incidentally).

Referring to Jamaica, he notes “A crucial lesson of the debt-propelled economy is that government fiscal and monetary policy served to “crowd out” investment in production of “tradables”.

The process of deleveraging (paying down the public debt through fiscal consolidation), if it is to be growth-promoting, now requires learning how to “crowd in” those elements of the private sector that are disposed to invest in tradables (this is the essential meaning of “export-led growth”. You might say it requires unlearning how to crowd-out and learning how to crowd-in.

That path is a “knife-edge” requiring careful management of fiscal and monetary adjustments in tandem with targeted structural reforms (broad-based tax reform, pension reform, public sector retrenchment, financial deepening, removal of impediments to business activity, etc. as well as preserving the social safety net) so as to maintain credibility of the programme and induce a positive response in the tradable sectors.”

He adds, “We may have started out on the wrong foot by the kind of overshooting (“overperformance”) of budget targets accompanied by the rise in interest rates, foreign-exchange slide, and real-sector declines in output and employment that are now being reported.”

Harris is simply noting that the current economic squeeze will require growth in exports “tradables” to offset the negative impact on the economy of the current deleveraging ‘fiscal squeeze” on overall growth.

It appears to this observer, at least, that only the tourism industry has sufficient economic readiness to make a meaningful shift to export-led growth in the next three years. It is therefore useful to explore further whether waivers and incentives, particularly for the tourism sector, are actually one of the main causes of Jamaica’s economic problems, as apparently argued in some multilateral studies. One of the issues regarded as most negative is that of tax holidays. If only we could truly model their impact. In fact, we can do something better than running an econometric model. We can simply turn our eyes to the tourism industry in the Bahamas.

I spent seven years looking at The Bahamas for a local financial institution, over the life of a complete investment cycle from their recovery from near collapse in 1993 with the Atlantis investment, to just before the end of their first boom at the end of 1999, which was followed by the dotcom collapse and September 11th.

During this time, I looked at well over a dozen hotel projects of which only two were worth investing in. One of the advantages one would have had as an investor looking for investments in The Bahamas is there was no income tax, and as the companies were seeking investment, they presented their most attractive numbers. Interestingly, the Bahamas government had an investment policy that did not favour local institutional investment in their tourism industry. In retrospect, whilst I strongly disagreed at the time, I now understand why.

After seven years, my conclusion was that despite the incentive of a zero rate of corporate income tax in perpetuity (much longer than a ten-year tax holiday), and superior concessions on customs duties, the Bahamian tourism industry was for the most part not a particularly good investment as it just was not that profitable. This was despite the fact that Bahamas had very similar customers to Jamaica (in fact they had a higher percentage of higher- paying Americans, still the world’s best tourist consumer), were much closer to the US with a lower cost of airlift, had relatively low crime compared to Jamaica (more importantly much lower perceptions of crime), and it was almost harassment- free at that time (I think I may have been harassed once in my entire time there).

Despite all this, Bahamas was littered with failed hotel developments. Because of their relatively good country brand, of course, a failed development hotel was often quickly bought by another investor who thought they had the correct business model to make it work, with a similar result. One could note that after the global financial crisis, even the fabled Atlantis went into receivership, and is now owned by its lenders.

The Bahamas issue was one of competitiveness, particularly operating costs and overall labour productivity in an increasingly competitive world tourism market. Bahamas had high costs for food (mostly imported), electricity, water, telecommunications etc, and the overall productivity of the tourism workforce was low, so that despite lower wages than the US (although higher than Jamaica), this cost advantage was offset by much lower productivity. As a result, only those hotels with both a room price premium and high occupancies made money, or ones that enjoyed a very specific niche. In a similar fashion to Barbados, their economic problem was also masked by foreign investment in luxury beach front real estate “non tradables”, and the higher- paying offshore sector. Of course, the latter industry is now also being squeezed.

Some time ago, Jamaica appeared to be competitive in terms of its general price level than some other countries in the region, such as Bahamas, but that is no longer the case, and the difference in pricing, at least in the tourism sector, is now very marginal.

What has been happening is that food and electricity costs have been rising sharply here over the past decade, and although Jamaica still has lower labour costs than others in the English-speaking Caribbean, our costs are higher, particularly productivity adjusted, than our main regional Spanish- speaking competitors of Mexico, Dominican Republic and Cuba (their food and beverage costs can also be as much as half of Jamaica’s). In addition, Jamaica effectively has a “crime” discount in terms of pricing, compared with some of the smaller, more exclusively branded Islands.

It turns out that the English- speaking Caribbean hotel industry is simply part of the region’s general competitiveness problem, which should actually surprise no one. Currently, Barbados, mentioned at the beginning of this series of articles, is just another good example of a Caribbean country where these issues have finally caught up with it, and Bahamas is also now facing similar challenges, which it is hoping to offset through Chinese investment (this may sound familiar), in itself a longer conversation.

It is therefore fortunate timing that the PSOJ’s economic seminar tomorrow has as its keynote speaker Jamaican Peter Blair Henry, author of “Turnaround – Third World lessons for First World Growth”, and Dean of the New York University’s Stern Business School, to address the issue of “How emerging markets can achieve growth under the IMF”. Amongst many other things, Dr. Henry has explored comparisons of the Jamaican and Barbados economies, including in his recent book.

The key lesson for today is that many policy makers globally have in fact got the taxation issue (France comes immediately to mind) the wrong way around. The more competitive your economy, the more foreign investment you can attract for a given level of corporate and other taxes (and the higher the overall tax level can be), which then allows you to pay for needed public investments and social services. The economic engine does not work the other way around, as unfortunately it is important what comes first. In our next article, we will explore what all this means in the difficult choices facing our policymakers today.