Edward Seaga, Contributor
Edward Seaga
THE JAMAICA Manufacturers' Association (JMA) paid me the great honour of holding a special luncheon as a tribute to my 45 years of contribution to public life. The luncheon was held on Thursday, April 21. My address briefly outlined the history of the manufacturing sector and looked at possible solutions to present problems.
The JMA was founded nearly 60 years ago, in 1947, with Harry Vendryes as the first president. It had 40 members. There were few manufacturers then, but the
establishment of an industrial development corporation in 1952 was a sign of things to come.
NEW FACTORIES
By the last half of the 1950s, manufacturing was expanding rapidly as many new factories came on stream. As a general rule, they all aimed at manufacturing goods locally which could replace imports. Government policy substantially increased import duties to protect local production and, where this was not desirable, established restrictive quotas on imports.
These policies were a nightmare to traders and consumers who found their imported supplies greatly reduced. Trading in import licences also introduced much corruption. Consumers, being restricted substantially to local production, had to buy local goods and manufacturers were happy.
The JMA launched a 'Buy Jamaican' campaign in the late 1950s to attract more consumer support.
After Independence in 1962, expansion of the manufacturing sector was even stronger. So too was the reaction against local goods by consumers. The JMA fought back by holding, in the National Arena, the first exhibition entirely dedicated to showcasing Jamaican products.
But another reaction was developing by the late 1960s. The considerable support given by Government to the sector in protection from imports was based on the expectation that job creation would be substantial. This was not the case as a great many of the manufacturing
operations were nothing more than 'screwdriver' industries in which the product was imported in component parts and screwed together here. Naturally, very
little employment was involved. Meanwhile, Government was giving up considerable revenue through tax reliefs on company profits and import duties.
All this was taking place at a time when the mass migration
to the United Kingdom had
virtually ceased frustrating thousands of erstwhile migrants remaining in Jamaica for whom jobs now had to be found. New thinking was required on the future of these policies. But before any changes could be made, the government changed. The Jamaica Labour Party (JLP) was out and the People's National Party (PNP) in, led by Michael Manley.
The policies supporting local production with tax reliefs were not changed by the Manley Government but a number of reversals occurred exposing the manufacturing sector to its most testing period.
The era of the 1970s was marked by a continuous decline in the economy over the period to the end of the decade. With this came a severe shortage of foreign exchange for imported raw materials, spare parts, machinery and fuel. Factories laid off workers. Many closed. Some were abandoned in the heat of deteriorating labour relations prompted by thousands of workers who were laid off or made redundant. This was a turbulent decade of shortages, stoppages and outages.
ANTICIPATING A CHANGE
Another change took place in 1980 when the JLP won with the largest majority ever in a general election. The size of the majority equalled the size of the expectations as many anticipated that conditions would return to where the sector left off in the 1960s: generous tax reliefs and protection against imports.
As the new Prime Minister, I had to break the news to the beleaguered sector that this could not be done. Jamaica was entering the era of liberalisation which was directed at supporting
products that were competitive internationally which could be geared to the larger export
market rather than the smaller local marketplace, in order to earn more desperately needed foreign exchange.
The rationale was sound. To make it more enticing, the Caribbean Basin Initiative (CBI), which I was involved in initiating with the U.S. government, was launched in 1981. It offered an unbelievable incentive: duty free exports to the U.S.A. from Caribbean countries without any reciprocal arrangement these countries to reduce duties on U.S. imports. In other words, Jamaican goods could be exported without paying duty in the U.S.A., but American goods imported into Jamaica paid full duties in Jamaica. It was a dream scheme.
But few Caribbean countries were able to benefit. Their goods were not competitively priced. The CBI passed us by with some benefit, but not the substantial improvements hoped for.
To create new manufacturing, the JLP government had to virtually create a new sub-sector: garment exports. This was an overwhelming success in export earnings and jobs created. Foreign exchange earnings increased from under US$10 million to over US$100 million per annum over the decade and substantially more thereafter. Employment leaped from 4,000 to 40,000, almost entirely women, thereby reducing unemployment substantially for the first time in the female workforce. A record 100,000 jobs were created in 3 years.
Once again, Jamaican manufacturers did not participate in this bonanza. The manufacturers involved came predominantly from the Far East. Local manufacturers were exhorted to set up factories, hire technically skilled management to be sourced with help from JAMPRO, and to enter into production on a contract basis with overseas companies. JAMPRO would help in making these arrangements. A few Jamaican firms tried to be involved, but nearly all gave up saying it was too hard. The production discipline required was not there.
CONSUMERS WERE HAPPY
Meanwhile, the market was being liberalised: import restrictions were being lifted, quotas abolished almost entirely and duties reduced to make Jamaica ready for competitive exports. Consumers were happy. To a large extent consumers had been beating the restrictions by sourcing goods, particularly shoes and garments, through shopping trips to Miami. This impacted heavily on local sales. It was inevitable that non-competitive industries would fold because they offered a narrow choice of goods, relatively little employment and required much foreign exchange, which they did not earn, to import raw materials, spare parts and equipment.
Government changed again at the end of the 1980s, restoring the Manley government which pledged to continue the liberalisation policies. But new hazards began to appear early.
The mishandling of monetary policy caused interest rates and inflation to suddenly increase to extreme levels. The removal of restrictions on exchange control, demanded by the private sector, backfired, as dollars fled the country while a helpless Bank of Jamaica, with no back-up foreign exchange reserves watched the exchange rate go through the roof. A financial meltdown was in the making.
The Stock Exchange virtually lost all its value. A copy of the Daily Gleaner cost more than a Gleaner share. Forty banking institutions collapsed and the exchange rate of the Jamaican dollar began a wayward flight to dizzy heights.
Raw materials, fuels, spare parts and capital goods were priced out of the market, energy costs increased and interest rates became unbearably high. While these developments were taking place in Jamaica, stability reigned among the other CARICOM trading partners. As a consequence, the favourable balance of trade which Jamaica had enjoyed over the past in CARICOM trading, turned negative. Other Caribbean producers became the exporters, and Jamaica the importer. Manufacturing dwindled further, and Caribbean goods replaced Jamaican products at home.
What is left of the manufacturing sector now more than ever, has to survive the forbidding hurdle of uncompetitive costs. The cost of doing business in Jamaica, according to a JMA study, is 54 per cent higher than the competition, without considering the further impact of excessive interest rates.
Utilities 167% higher
Security 110% higher
Telephone 34% higher
Operating personnel 22-42 higher
Social costs &
fringe benefits 93% higher
These are non-manufacturing costs, outside the control of manufacturers.
Add to that, interest rates which are 300 per cent-350 per cent higher than in competing countries: 24 per cent in Jamaica, 7-8 per cent in competing countries.
But excessive interest rates is the one area which is capable of adjustment. A readily available adjustment is possible. The Minister of Finance is required statutorily to maintain on deposit in the Bank of Jamaica, assets of the banking system, as follows:
9% cash reserves
23% liquid assets reserve
32% total reserves
The current reserves now held by the BoJ total 42 per cent or 10 per cent larger than required. This leaves room for the Minister of Finance to reduce the reserves by 10 per cent on a timely basis, adding substantial liquidity to the system which would automatically result in the reduction of interest rates as banks would have to compete by lowering rates to lend the additional deposits. Any such move would put life back into the beleaguered manufacturing sector, which despite all the odds, is still the second highest contributor to the economy and a substantial employer of labour.
COERCION WILL NOT WORK
Trying to coerce the banks into reduced rates will not work because their lending capacity is restricted 58 per cent of deposits, since the BoJ holds 42 per cent in prudential reserves. Reducing the reserves as suggested to 32 per cent would increase lending capacity to 68 per cent of deposits which would compensate for loans at lower interest rates. Further, banks like any other business are subject to the same 167 per cent higher costs of doing business in Jamaica, which makes them uncompetitive with Caribbean banks. This is a chronic feature of the impaired economy created in the 1990s which has wrecked the competitiveness of the productive sector.
The manufacturing sector has been battered from the
beginning by consumer resistance, reversals in government policies, introduction of global policies and adverse economic conditions of the worse type. Yet they continue.
It is time to give them the support that they need in the battle for survival.
Edward Seaga is a former Prime Minister. He is now
a Distinguished Fellow at
the UWI. Please send
your feedback to
editor@gleanerjm.com.
