Robert Buddan, Contributor
Up to August last year, the Jamaica Labour Party (JLP) was very negative about the economy while raising great expectations of what it would do as a government. But since forming the Government the strategy has been the reverse.
It has talked up the prospects for the economy even in these difficult times while lowering expectations of what people should expect from the budget. The time has come for Audley Shaw to deliver on the real economics of governing Jamaica. It begins with the Budget Debate.
The economic report so far is not good. The International Monetary Fund's (IMF) Article 1V Consultation on the Jamaican economy in January this year reported on the state of the economy up to December 2007 as one showing:
A decline in real economic growth to an estimated one and a quarter per cent in 2007, increase in inflation to 17 per cent at year end, and a widening of the current account deficit to 15-16 per cent of GDP this fiscal year. Moreover, this confluence of shocks and an upward revision of the fiscal deficit, and ongoing turbulence in global credit markets, led local financial markets to become somewhat unsettled. International reserves have fallen to US$2 billion from $2.3 billion in March 2007.
Encouraging assessment
The IMF's assessment of the economy a year ago was actually encouraging. It showed that on measures of current account deficit, GDP growth, inflation, and Net International Reserves, the economy was in a much better position and the overall economic context was 'strong'. The economy was in an expansion mode and performance was adjudged the best in over a decade. This was so despite going through the US recession of 2001, Hurricane Ivan, and oil price rises that were more than 150 per cent between 2001 and mid-2007.
The IMF has spoken of the paradox of high levels of investments and low growth in the Jamaican economy. All of the statistics about the economy intend to indicate the prospects for high or low growth. A newer economic concept is that of shared growth. Global organisations like the IMF and the World Bank can work with governments to play a much more positive role in producing economic growth that benefits people rather than growth that stands as an abstract statistic that matters little to people's lives. The first thing they can do is adopt the concept of shared growth, which means growth in which a significant proportion of a population contribute to the growth process and improve their well-being by benefiting from the stronger growth that results.
The second thing is to apply this concept to the informal and small- and medium-sized enterprise sector where the majority of Jamaicans make their living and where they contribute 40 per cent to 60 per cent of GDP. They deserve to share in the benefits of growth. The usual way of thinking about economic growth is to believe that there is a class of people who are investors and natural business people and another class who are fit only to labour. Then there is a third sector made up of people who cannot fit properly into either. They fall into the informal sector. The sensible economic strategy therefore is to provide encouragement to the investor class who will create business to employ labour from the working class. This will produce economic growth. The informal sector is treated as an anomaly. Yet, in many respects it is the real economy for a majority of the population.
The third thing therefore is to get the IMF and World Bank to encourage the SME sector in deeds, not just words. The World Bank's World Development Report (2006), titled 'Equity and Development', clearly recognises that growth must be equitable for it to lead to development. Its central argument is that broad sharing of economic and political opportunities is instrumental for economic growth and development. The Bank's mission, in simple terms, is to improve the investment climate for everyone.
Small and medium enterprises
This implies the need for a model that gives greater encouragement to small and medium-sized businesses in the formal and informal sectors. This sector employs most people and through their own account activities they provide most of what supports the needs of the household and family. Although there has been much talk about developing this sector, it was only in 2002 that the finance committee of the IMF, then under the chairmanship of the present British Prime Minister Gordon Brown, decided that the IMF, as the premier world financial organisation, had an important role to play in the development of this sector. The IMF itself realises that the Jamaican economy is stronger than official statistics suggest because much activity that takes place is not measured. Yet, it continues to focus on central government statistics taken from the formal economy, which is the economy of big business.
The World Bank's 2006 report makes the case for equal opportunity economies because it sees these kinds of economies as the best for market capitalism and liberal democracy. This is not the recipe that I support but it is more progressive, at least on paper, than the economies of unequal opportunity that we have in countries like Jamaica. The following is particularly noteworthy. Equity and prosperity are complementary because:
Inequitable institutions
High levels of political and economic inequality tend to lead to economic institutions and social arrangements that systematically favour the interests of those with more influence. Such inequitable institutions can generate economic costs. When personal and property rights are enforced only selectively, when budgetary allocations benefit mainly the politically influential, and when the distribution of public services favours the wealthy, both middle and poorer groups end up with unexploded talent. Society, as a whole, is then likely to be more inefficient and to miss out on opportunities for innovation and investments.
Worse, these inequalities reproduce themselves over time causing inequality traps. How does one break out of these traps? The World Bank admits that there is inequality in global governance that helps to reproduce global inequality in power between countries. Unfortunately, the Bank and the IMF, which benefit from this global inequality in governance, seem incapable of making the changes that their own development experts say should be made. But in theory they accept the idea of shared growth and they must get governments to provide equal opportunity to the small- and medium-sized formal and informal sector.
The final thing is for governments to stop playing politics with the Budget. The Budget should not pay back political favours, reinforce inequality, benefit the politically influential, and leave talent unexploded. Governments must not conceive of budgets in abstraction from the class and race system that often structures opportunities in favour of those who control the formal economy. Governments cannot only give token recognition to the informal economy.
The political and economic powers-that-be who control the financial levers of the country have an opportunity at each budget time to match revenue and expenditure strategies to a philosophy of development. To get the best out of people, one must give them the best opportunities to contribute and benefit from their contribution. This is the basic idea behind the concept of shared growth.
Robert Buddan lectures in the Department of Government, UWI, Mona. Email: Robert.Buddan@uwimona.edu.jm.
