The authorities in Singapore are projecting that the country's economy is likely to decline by six to nine per cent this year, which would not only be its worst performance in decades, but would put it among the most badly affected by the world recession.

This news must have come as a big surprise to admirers of Singapore's economic miracle and given its reputation as a dynamic country that is driven by high levels of competitiveness and phenomenal rates of savings and investment. The question may well be asked: What are Jamaica's growth prospects in a global environment where an economic dynamo like Singapore is being hit so hard?

Though there are similarities between these two countries, such as geographic and population size, as well as nearness to large economies, the capacity of both their state and private sectors is vastly different. This factor has been decisive in influencing relative economic performance and will determine the ability to respond to the current crisis.

Strategic and smart actions

As is well known, Singapore's success has partly been based on the strategic and smart actions of an activist or even an overarching state collaborating first with foreign capital and then with an aggressive local private sector. Because of the small size of its population, it had to pursue an export-led growth strategy and its open economy, as well as its strategic location in that part of Asia turned out to be advantageous as world trade expanded rapidly from the 1960s onwards.

Precisely because of this openness and export dependence, Singapore's economy is now feeling the effects of this recession dramatically, as for the first time in 60 years, the world economy is declining and world trade is falling simultaneously. Like Jamaica, its major markets in North America and Europe are in a recession whose severity is compounded by the global financial crisis that has destroyed over US$40 trillion of wealth, nearly equivalent to the value of world GDP. Consumer demand has plunged at a rate not seen since the deep recession of the early 1980s.

But given the dynamism of Singapore's economy, it will be interesting to see how rapidly it recovers. In the 1980s recession that country was seriously affected as its cheap-labour exports lost markets to other then upcoming East-Asian competitors. It responded by strategically planned shifts to high-value manufactured goods on the basis of which it was able to expand exports even more rapidly than before.

Whether to a similar extent as Singapore's or not, Jamaica's economy will contract sharply in 2009 and perhaps in 2010 as well. This is because the openness of our economy and the powerful role of exports and foreign-exchange inflows in driving domestic production and demand will leave us vulnerable to the sharp downturn in North America and Europe. One significant difference is the relatively greater exposure of Singapore to the highly contagious financial crisis as one of the world's leading financial centres. The reforms of Jamaica's financial system in the 1990s have shielded us to a great extent.

Impact of the recession

But the impact of the recession on the local economy is already deepening. The first casualty has been the bauxite industry, the third-largest source of foreign-exchange inflows, from both its exports and investment activity. Less obvious, though just as important, is the pressure on the tourist industry, which is now discounting rates heavily to attract visitors. And remittances, the key source of cash foreign-exchange inflows, are slipping faster than expected. What will be the responses of the Jamaican state and private sector to these challenges?

The reopening of closed bauxite plants will depend on recovery in world aluminium consumption, especially in the automobile and housing industries, as well as the finances of the companies. These are outside of our control, but the activism of the State in the shaping of investment plans, especially in energy diversification, will be critical in determining the industry's future competitiveness and viability.

While the State will need to coordinate energy policy, it does not have capital to invest. Are Jamaica's private sector, and especially its financial institutions, ready to forego instalment-type lending with its wide interest rate spreads and government paper for such long-term investment activity? Are they ready to put money into projects to modernise alumina plants or in supporting industries?

No Jamaican private-sector entities have ever shown the slightest interest in the industry as investors, and this is a major difference to Singapore.

Crutches

The well-rehearsed responses to such questions have been that Jamaica's macroeconomic instability and the Government's borrowing to finance the budget deficit have blocked the way. These arguments have elements of truth in them but have become crutches to support the dominant tendency of those who preside over the allocation of the country's savings to replicate existing patterns. In other words, they will say that government borrowing is crowding out the private sector but do not have any ideas as to where to invest other than in government instruments or in foreign exchange.

We were told in the 1990s that if only inflation were controlled, investment would flow to boost production, but much lower inflation rates for nearly 10 years did not do the trick. Investment opportunities in lucrative and expanding activities like telecoms were instead conceded to foreigners. Now the storyline has switched to the budget deficit. As the Jamaican people brace for tough times and try to cope with the adjustments needed to cut the budget deficit, are we likely to see the private sector preparing investment plans to expand the economy when the global economy recovers?

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.