Jamaica and Elusive GDP growth

October 29th, 2019

The Editorial on September 12, 2019 – ‘Economic Growth Council and GDP trends’ highlights a disturbing paradox in our economy. How can we be spending so much on infrastructure but seeing any improvement in economic growth. Your question comes from the expectation, described in Keynesian economic theory, that government spending on infrastructure is the fastest way to stimulate an economy – The expenditure goes straight to GDP, increases employment and jump-starts the economy but in our case we see virtually no impact, much like turning on a hose to fill a bucket but seeing the water level remain unchanged.
This reality can only be explained in two ways – either we are not spending enough or the flow of funds is not hitting enough of the economy.
In the case of the former, government infrastructure spending in the last few years has been substantial with projects like -

• Palisadoes Shoreline project
• Construction of the Montego Bay Conference Centre
• The Trelawny Multi-purpose stadium
• Mona Road rehabilitation
• Mandela Highway
• Barbican Road expansion
• Constant Spring expansion
• Hagley Park Road
• The new ten-story Headquarters of the Ministry of Foreign Affairs
• Manor Park road expansion

And this infrastructure upgrade has not been limited to the physical environment but also in our digital space as well –

• ASYCUDA – Customs
• RAIS – Tax Administration of Jamaica
• Human Capital Management Enterprise System (HCMES)
• National Identification System (NIDS)
• Central Treasury Management System (CTMS)

These projects amount to hundreds of millions of US dollars, that in an economy as small as ours should definitely have been enough to spark growth but instead not even a ripple. We can only surmise one thing there’s a hole in the economic bucket.

So where is the gap in execution in relation to the lack of translation to economic growth? To answer that we need to follow the money

Efficiencies or Multiplier

Infrastructure spending produces a positive impact in the economy in two ways –

• Efficiencies in the economy – Expenditure reducing the cost of doing business or reducing the size/cost of government.
• The ‘Multiplier Effect’ – The increase in economic activity created by the injection of money into the economy. This feature produces faster impact that 1. and is a key component to the simulant becoming sustainable economic growth.

In the case of efficiencies in the economy, our construction activities will produce marginal efficiencies in our economy and therefore virtually no increase in productivity and certainly not anything visible in the short term. Similarly, the technology upgrades have not produced any reduction in labor cost in the government and no significant efficiencies in the cost of doing business.

With the exception being the CTMS, which has substantially transformed the way the government manages funds significantly improving the government’s cash management and delivering significant levels of efficiencies.

As for the Multiplier Effect, the analysis shows that the Jamaican economy will receive scant benefit as the majority of the millions spent flows out of our economy as quickly as it flows in.

In the case of construction, the projects are financed and executed by the Chinese with local contractors playing bit roles. A similar scenario exists in the digital frontier as funds are borrowed from the Inter-American Development Bank (IADB) and the contracts awarded to foreign companies, interestingly the only exception being the CTMS, which was executed by a local firm – RMP & Associates Limited (paradoxically, the cheapest contract (two hundred thousand US dollars, by comparison the next smallest was five million US dollars for HCMES and the most impactful).

So, here then is the hole in our economy, infrastructure improvement has not significantly boosted efficiencies and the funds flow in and out so effectively that there is no opportunity for any positive impact on our economy. This flow is so effective that it seems the bucket analogy was incorrect we don’t have a bucket with a hole we have a conduit.

The scenario described above is all the more interesting when juxtaposed with the recent comments from our Prime Minister at the signing of another multi-million dollar road project awarded of course to China Harbour. Where he bemoaned the poor quality of local construction companies seemingly as justification for awarding the contract to China Harbour with their ‘first world’ expertise. The Prime Minister forgets that as old-time people say – China Harbor never ‘born big’.

He ignores that not too long ago, China was also a developing country and that China Harbour and the other Chinese companies were nowhere near international standards. But unlike Jamaica China, facilitated the growth of their corporations by providing a protected market thus allowing China’s infant industries the space to grow without being crowded out by then superior foreign competition and now they boast world-class corporations and the second largest economy in the world.

So, in analyzing the paradox of massive infrastructure expenditure with no growth we may have also discovered the key to Jamaica’s chronic anemic growth rate – A rapacious appetite for foreign goods and services unfettered by any checks or balances which has choked the growth of local corporations and by extension our economy.

A reality that obtains in spite of the constant rhetoric about the need to grow local companies, especially the Small to Medium Enterprises (SMEs). It seems the government does not put its money where its mouth is and maybe this is at the core feature of a developing country. I can only hope that we take away some knowledge growth from this decade of spending since we didn’t get any economic growth.

Tags: economy, infrastructure