At his recent press conference, Bank of Jamaica (BOJ) Governor Richard Byles stated that business people may have sensed a slowdown in February or March, but the BOJ has to go by the data provided by the Statistical Institute of Jamaica, so the slowdown is only becoming clear in the data in July and August.

As Byles notes, businesses have been complaining of weak consumer purchasing power since at least February or March this year. In addition, construction has been in decline since last year, business process outsourcing (BPO) growth has stalled, and hotel-based tourism has been reported as weak from around May, following slow growth since the level 3 US State Department travel advisory warning in January.

Jamaica’s newly independent central bank, probably rightly from a credibility standpoint, has to date emphasised the financial stability and inflation fighting piece of its mandate. However, both the US and Jamaica now appear to be behind the curve in cutting interest rates, as well as having an unusually well-synchronised economic cycle, and both need to focus on employment and particularly growth in the case of Jamaica.

Famous economist Mohammed El Erian had correctly argued that the rise in US inflation in 2021 was not transitory by “listening to the companies” (covered in my August 1, 2021 Jamaica Observer article ‘A quick look at the US and Jamaican economies and stock market’). At the time, he cited the large disconnect between the Federal Reserve (Fed) and the micro views of the major company chief executives he talked to who were concerned about rising input costs, wages, and transportation.

Now El Erian appears to believe the Fed was about three months late at the end of July, which means if it cuts in September it will be almost five months late. US financial markets now appear to be forecasting 100 basis points in cuts this year (including a larger 50 basis point cut). El Erian thinks 75 basis points (three smaller cuts) is sufficient, in line with the consensus projection of a US soft landing.

Jamaica, however, does not have the benefit of the current huge fiscal spending in the US and requires interest rate cuts of at least double the US pace to offset the cyclical impact of the monetary tightening already working its way through the system, particularly in areas such as mortgages.

The Return to Low

Jamaica completed its recovery from COVID-19 pandemic at the end of last year and now appears to be returning to its decades-long range of one to two per cent gross domestic product (GDP) growth or an estimated potential growth rate of around 1.5 per cent, reflecting low labour force and productivity growth. This low average level of growth makes us very vulnerable to shocks, whether monetary or from natural disasters, as well as making our necessary debt reduction process more painful than it should be.

An article in The Washington Post in August raised the role of the 2012 Planning Institute of Jamaica (PIOJ) book A Growth Inducement Strategy for Jamaica in the short and medium term — prepared by Gladstone Hutchinson and Professor Donald Harris — in Jamaica’s economic recovery. The importance of the strategy was not so much that it broke new ground, but that it finally fully documented the views of the private sector as well as provided theoretical explanations for their intuitions.

For example, the high investment/low growth puzzle in Jamaica was addressed by Harris in Chapter 7 entitled ‘Resolving the Supposed Puzzle of Low Growth Rate and High Investment Rate in the Jamaican Economy’. Harris identifies the key problem as a matter of “supply-side constraints arising from deficiencies and distortions in the existing structure of economic incentives (risks, rewards, costs, externalities) that drive entrepreneurial decision-making” creating what he calls “wasted capital”.

A review of his 1997 book
Jamaica’s Export Economy:Towards a Strategy of Export-Led Growth reveals that we have the same exact problems nearly three decades later, except that they are possibly worse as we are now in a much less forgiving anti-trade global environment for exporters, with the notable caveat of a competitive exchange rate.

In his paper, Jamaica’s debt-propelled Economy: A Failed Economic Strategy and Its Aftermath, originally prepared for Jamaica Chamber of Commerce’s National Economic Forum in October 2009, Harris notes: “What we see here is an extraordinary and phenomenal transformation in the structure of the Jamaican economy. At the outset, in 1992-1993, manufacturing is more than 1.7 times the size of finance and insurance. By 2007, the situation is completely reversed: finance and insurance becomes 1.4 times manufacture.” This observation is also relevant to the financialisation trend of the US and other Western debt-driven economies.

My overall conclusion is that Jamaica’s debt trap meant that the very tough macro policies of the past decade were necessary but they were never sufficient for growth, and now we desperately need what Harvard economist Ricardo Hausmann calls industrial self-discovery, “a proactive, firm, centric export-orientated policy aimed at developing new sectors”, or more simply what Singapore has been doing from the 1960s and Ireland from the 1980s.