Wesley Hughes, Contributor[The following is the first part of an extract from a speech presented by Dr. Wesley Hughes, director general of the Planning Institute of Jamaicaj to the Conference on Globalisation and the Problems of Development. The conference was convened by La Asociacion Nacional de Economistas y Contadores (ANEC), February 6-10, 2006, Havana, Cuba]
Development, by definition, is a dynamic process. However, the process can stagnate when it becomes encumbered by the past. Jamaica, a small, vulnerable Caribbean island state, faces myriad challenges and obstacles to move beyond the post-colonial model of development. Strategic structural transformation occurs when both the contribution of each sector to GDP and employment and the composition of the output are radically changed over time.
Strategic structural transformation is a process of dynamic development where a very strong interrelationship exists between strategicallyselected areas and macroeconomic goals. It is premised on a neo-Darwinist selection of strategic areas or issues which can be defined as those which, when implemented, make a big difference or have a macro effect, in terms of having multi-sectoral linkages. This is what is known as sectoral dynamism. One of Jamaica's major developmental challenges has been, and remains, how to accelerate economic growth, through sectoral dynamism, as a basis for eliminating poverty.
Three broad strategic areas have been identified as critical to the transformation of the present Jamaican economy. These are: transport infrastructure, human resources and new knowledge-driven industries. The collective transformation of these three strategic areas has to be largely state-assisted because of the degree of risk associated with globalisation. In addition, this transformation has to be informed by the global and historical contexts that impinge on the development process.
POST-INDEPENDENCE DEVELOPMENT
Jamaica's development process represents something of a paradox. The small island state, with an open and externally driven economy, is richly endowed with natural resources, a vibrant culture, creative people, a relatively stable democratic system, along with a good strategic location. The country has, however, failed to take advantage of these features to accelerate growth on a sustained basis in the post-independence period.
The country, which gained independence in 1962, had average annual growth rates of over 6 per cent during the period 1955 to 1970 - driven largely by: foreign direct investment in the development of the mining and processing of bauxite; hotels; and small-scale import substituting manufacturing. The success of this model in generating growth was exhausted by the start of the 1970s.
The model had failed to generate sufficient wealth to address the legacy of social deficits generated by colonialism. These include high levels of poverty, unemployment, illiteracy and inequality. By the end of the 1960s, not only were the economic possibilities exhausted, but also the system was facing a major social crisis. What was required was a fundamental policy shift away from the import-substitution development model to an export-led approach built around strong social cohesion.
By the early to mid 1970s, the exhausted economic and social model of development was exacerbated by the crisis in the world economy. Jamaica's policy response at the time to these crises was to vigorously apply the policy levers that reinforced the import substitution model: trade restrictions, high tariffs, loose fiscal policies as the government sought to protect the poor.
This approach to macroeconomic management led to an overvaluation of the currency at a time when capital flight was taking root as a consequence of the internal instability. The attempt to stabilise the situation by imposing higher taxes on the tradable sectors undermined the competitiveness of the economy as a whole. All these negative trends led to a severe economic and social crisis by the end of the 1970s.
The failure to pursue a fundamental policy shift from low value-added commodity exports, combined with small-scale import substitution based on low wages, had a profound impact on the development trajectory of Jamaica for over a generation. The failure to make this radical shift was partly related to a few episodes of relief provided by temporary increases in commodity prices and increased aid flows in the 1970s and 1980s. In essence, it was a major failure of leadership at a crucial moment. The increased resource flows provided short-term policy spaces which were used largely to avoid making the major changes required.
The post independence economic structure was a direct outgrowth of the plantation type economic system in the slavery/colonial era. The entire economic structure after slavery was built on commodity production using cheap and abundant labour. Colonial policies up to the 1950s actively discouraged industrial development. Raw material imports from the colonies into Britain were given preferences and attracted little or no import duties. On the other hand, manufactured imports were very heavily taxed. For example, neither sugar nor cocoa as raw material attracted duties. However, when combined to make chocolate, they attracted British import duties of up to 40 per cent during the 1940s.
The same differential was applied to the import of leather as raw material from the colonies, as against shoes manufactured in the colonies. These are just two examples of why, despite significant integration into the world economy, Jamaica, like other colonies, made limited progress in developing a successful industrial base. The context and nature of integration of a country into the world economy is important to understand.
The period of the 1980s and 1990s, which saw Jamaica relying heavily on a reform agenda approved by the International Financial Institutions, under the rubric of the Washington Consensus, was a period of growth stagnation. While the weak performance can also be related to internal policy failures and the impact of globalisation, the weakening of the capacity of the state to play its critical developmental role was a major factor. The role of the state, in an economy like Jamaica's, is of crucial importance for achieving rapid growth and development.
Sustainable development and growth cannot be attained in a commodity-dependent system but rather in one which emphasises capital-intensive production. This necessitates a stable macroeconomic framework which is achieved by systematic, deliberate action of the state in collaboration with other non-governmental entities. A principal role of the state, from the neo-structuralist perspective, is to mediate between various stakeholders and, in doing so, ensure that the interests of the weak and vulnerable are taken into consideration.
The Government has to evaluate trade-offs and make strategic choices so that: the benefits to the future and the whole society are not ignored in favour of the presentand the interests of particular sectors. Poverty eradication and social protection are thus responsibilities of public policy. Therefore, the fight against poverty should be embedded in a strategy of development which is built around social cohesion.
GLOBALISATION AND JAMAICA
Any analysis of the Jamaican economy over the last 20 years has to be within the context of globalisation, which is here referred to as the increased flow of trade, capital, information, skills and values across national borders. Globalisation is a powerful force that is driven by technological, social and political changes along with the influence of multilateral institutions such as the IMF, the World Bank and the WTO, and powerful governments. These forces have had a significant impact on domestic economies and societies - destroying inefficient industries, weakening national decision-making processes and forcing all sectors to face and compete with the rest of the world on terms largely determined in the industrial countries.
In the process, old norms and structures are being destroyed, often before new ones can be created. As a result, integration into the world economy by small states is an uneven and difficult process. Global flows and events have a disproportionate impact on small economies, most of which are unable to influence these trends significantly.
Jamaica, like the whole global economy, has undergone profound structural changes over the last two decades with the economy becoming significantly integrated into the global economy. In the 1970s and early 1980s, Jamaica's international trade and payments were conducted under severely restricted regimes.
Starting in the late 1980s and accelerating in the 1990s, trade and payments have been almost fully liberalised. Jamaica's average tariff levels fell from 29.1 per cent in 1991 to 15.5 per cent at the end of the 1990s. In 1991, capital controls were lifted and by the end of 1992, foreign exchange markets were fully liberalised. Over the period 1991 to 2005, Jamaica's net foreign reserves moved from negative US$443 million to positive US$2.1 billion as both private and official capital flows accelerated into the country.
With the liberalisation of the Jamaican economy, the world economy is likely to increase demand for goods and services that are efficiently produced and which meet international standards. This, by itself, is seen by the proponents of globalisation as providing significant opportunities for investment and growth. This has yet to take place on a grand scale in Jamaica. The major question then becomes, why hasn't this happened?
The Jamaica Human Development Report 2005 (JHDR2005) highlights the dialectic between integration and globalisation as the former demands a one-time adjustment in the structure of production while the latter constantly demands readjustment and redeployment. There is a necessary lag between the release of resources by declining industries and their absorption by the new. As a result, there is a tendency to endure a period of contraction and resource unemployment or underemployment during the adjustment process. The severity of the fallout will be a function of the flexibility of factor markets - land, labour, credit.
EFFICIENCY, EFFECTIVENESS
A most significant determinant of the adjustment process is the efficiency and effectiveness of the state. If the very process of globalisation has weakened the state's ability to provide basic infrastructure, an educated labour force and the capacity to facilitate investment, then the adjustment process will be long and difficult and the country may never realise its full growth potential.
The whole process of realising the potential growth from integration into the world economy may become stalled if the cyclical turbulence of the global system undermines macroeconomic and social stability. In the case of Jamaica, in addition to these external risks, the country experienced, during much of the 1990s, a severe banking system crisis which was resolved by significantly raising the public debt.
This development, and the way it was resolved, pre-empted resources by the state towards productive investments. Part of the concern about resolving the crisis quickly, and in using the state to resolve the problem, was to minimise loss of confidence in the country's external bonds and to prevent capital flight. This was a clear case where domestic policy had to be very aware of the demands of the global market and deliberately fashion policies with high developmental costs over the long term.
