Earl M. Bartley, Contributor
OPPORTUNITY COST is a concept in economics that means that there are alternative uses for any given amount of resources. A piece of land for instance, can be used for farming, to build houses or a hotel, or it may be used to build a road or school. Likewise, an amount of cash or capital may be used for any number of similar purposes.
Once a resource has been used or committed to a particular use it generally becomes unavailable for alternative uses. The piece of land that was used to build a hotel cannot now be used for farming, nor can the money that was used to buy a car, be used to pay for a vacation. In other words, the benefit that one gains from using resources in a particular way generally entails a cost or a loss of its use for other purposes.
Considering that resources are scarce and that there are costs to the use of resources, the key optimising function of political and administrative management is to ensure that resources are used in the most efficient and beneficial ways. Non-optimising use of resources in either the public or private sectors can result in slow growth, business failures, anaemic job creation, diminished revenues and even social instability.
In Jamaica there has been a high degree of non-optimising use of resources in the public sector, especially over the past decade. As regards development aid, the World Bank estimates that only about 53 cents out of every $1 yields discernible benefit to the society. A Finance Ministry official once estimated that waste within the public sector amounts to three per cent to five per cent of government expenditure, that is about $6 to $10 billion per year in today's money.
That this level of waste is not exaggerated is confirmed by the reported cost over-runs associated with many of the government's road construction and building projects; and the reported waste and profligacy associated with Operation Pride and Netserv; not to mention those routine instances of waste and inefficiency where output falls short of input.
What might have been the gains to society had even $5 billion of the resources wasted in the 1990s been used in a more optimising way? We will examine these possibilities in relation to economic growth; employment creation; and revenue generation.
A main assumption is that the $5 billion per year is instead invested in community-based income generating projects as I have been advocating. That level of investment could create about 100 very substantial $50 million resource processing projects. Our focus on community development is justified on the grounds that lack of job opportunities in our communities is one of the main causes of family breakdown (especially the problems of absentee fathers); the rural-urban drift; and crime and violence. Growth
Economic growth is directly related to the levels and incidence of net investment, that is, on the volume of investment and where it is located. Because of the small volume of this investment, measuring their growth impact by this method would be difficult. A cruder method that gives clearer indication of the impact of these investment is to assume the average 20 per cent profit rate on investment, compute and accumulate this yield over a 12-year period, and then compare it to current GDP.
When this is done these investments would add 20 percentage points to GDP or an average of two per cent per year. Of course, in the early years the growth impact would be insignificant, but by the latter half of the 1990s the cumulative impact would have become quite significant.
EMPLOYMENT
Assuming that each of these 100 projects could create 50 sustainable jobs, combined direct job creation would amount to 5,000. Through creating backward and forward linkages with other sectors of the economy, and assuming a modest two to one multiplier effect, total jobs resulting annually from these projects would be about 15,000, two thirds of the annual increment to the labour force. Cumulatively, over the 12 years the projects would have created some 180,000 jobs. Again, assuming the same level of job creation in the other sectors, and the same death rate and levels of migration, Jamaica would be close to or now experiencing full employment. Revenues
If 180,000 jobs are created during the 12 years by the projects, then the average number of persons employed in any year is 90,000. Assuming an average salary over the period of $2,500, and a tax rate of 20 per cent, then weekly deduction is $500 or $2,000 per month for each person. Annual income tax contribution for all persons would be $2.140 billion. Correspondingly, GCT paid by the group would be approximately $1.350 billion. Combined annual tax revenues generated from the group would be $3.5 billion, or approximately $42 billion over the twelve-year period.
This amount seems small compared for the almost $800 billion in revenues collected over the period. But considering that the bulk of these project revenues would come in the latter half of the decade -especially after 1996 when the fiscal deficit emerged, these revenues would have been helpful in mitigating the amount of the deficit and reduce the amount of national borrowing by $40 to $50 billion.
One could go on to speculate about the possible impact of these community based projects on the levels of foreign exchange earnings, but the speculation would be less concrete, and therefore less worthwhile. What is obvious, is these projects could create substantial employment, and contribute to tax revenue and to growth. They could also have contributed to diversification of the economy, structurally, socially and geographically, and in reversing social anomie in our communities.
Unfortunately, this opportunity was not grasped by a People's National Party (PNP) government, which only a few years ago reaffirmed their Democratic Socialist ideology. Among the reasons suggested for the PNP avoiding more extensive development of these projects are: (a) the PNP did not have much success with community-based projects in the 1970s and did not want to cause alarm and revive ideological fears about its intentions and direction; (b) that the demise of the communist and socialist countries affirms the superiority of market mechanisms in allocating resources and achieving productive efficiency. Even Michael Manley, it is argued, had declared that the "agenda of the 1970s was dead."
I am not sure what Manley meant by that statement. But I know that despite his rhetorical excesses and flights of fancy, Michael Manley was above all else, a 'practical ideologist.' In other words, whilst he appreciated the visionary and futuristic aspects of ideology, he knew that its programme content had to be realistic and that it had to serve people's needs. Michael Manley did fulminate against the "capitalist system." But his opposition was not so much against the free-market mechanism, but more so against the self-serving capitalist motive that would over-ride group objectives and social concerns.
With the manifest failure of extensive state ownership and control of economic enterprises that was observable in the world by the late 1980s, Manley would quite likely have jettisoned notions of the "state owning the commanding heights of the economy". But given his strong emphasis on community development and on the spirit of co-operation in national development it is unlikely that Manley would have thrown out the potentially dynamic and market oriented community enterprise organisation (CEOs) he had introduced in the waning days of his 1970s administration.
But one of the main problems of the 1990s is similar to the 1970s, what V.S. Naipaul called the syndrome of the "Mimic Men." In the 1970's many of our so-called "best and brightest" willingly shackled their intellects to a turgid and inflexible ideology unrelated to our people's history, circumstances and inclinations. In the 1990s, many of these same individuals, now inseparable from their 'penguin suits' have similarly enslaved themselves to a rigid neo-classical orthodoxy unresponsive to our people's needs and possibilities. Well, if our people were repulsed by "dutty-shut" socialism, they are being marginalised in droves by "stuff shirt" neo-classicism.
What the Stalinist-mimics succeeded in doing in the 1970s was to drag the movement for transformation of the Jamaican economy off course and make it easier for self-serving reactionaries to pass themselves off as moderate level-headed pragmatists. Today, the neo-classical mimics have completed the circle, making it easier for the self-servers to operate indifferent to the people's needs, on the grounds that in an atomistic free-market system -every man has to pull himself up by his bootstraps.
Economics does not operate with a concept of time as money, nor with the multi-dimensional space-time relativism of Einstein. In economics, time is linear-short, medium and long-term, which means that hope springs eternal in economics. What is not done today can be done tomorrow.
I am afraid though that after 14 years of misspending and wasting resources, which could have gone towards developing community economic enterprises, the PNP has really exhausted the patience and time of the people. That being the case, they are about to discover that opportunity cost is opportunity lost.
