By Dennis Morrison, Contributor 
New growth in hotels will strengthen the sector. - File
IN A PREVIOUS article I had indicated the critical need for increased revenues if the government is to wipe out the significant fiscal deficit that exists and undertake increased expenditure on the priority areas of education and security. This is a major challenge that also has serious implications for the efforts to accelerate economic growth since the relatively high interest rates are an impediment to business expansion. And interest rates will only come down if the level of government borrowing is sharply curtailed.
There are some obvious areas where revenues can be increased. These include personal income taxes from self-employed persons in both the formal and informal economy. In the formal economy, it is still the case that large numbers of doctors, dentists, consultants in various fields and other professionals are hiding from the tax man. So is the growing list of providers of many types of personal services at beauty shops, etc. The burgeoning informal sector is an even more obvious area of tax evasion and it must be systematically analysed in order to devise effective tax collection strategies.
In both the formal and informal economy, the government is being ripped off in terms of General Consumption Tax (GCT) collections. New initiatives are required to cut down on the leakage of revenues in this area and boost compliance. The application of GCT could also be widened to include more goods which are now exempt.
The other areas where increased revenues can be generated include the wide range of services provided by government for which user fees are charged. In many cases, these fees do not reflect the costs of providing the services and are woefully out of date. The merit of this option is that it only affects those who use the services and does not represent a general increase in the tax burden.
While there is the need to lighten the impact of interest rates on businesses and government as an important step to pump oxygen into the production process, performance in the various sectors of the economy has been affected by domestic macro-economic and international factors. Indeed, the growth rates of the individual sectors have varied significantly over the 1989-2001 period and the variations in the results are not reflected in the overall (Gross Domestic product) GDP growth from year to year. Whereas the annual average growth in the overall GDP was 1.3 per cent in this period, a look at the performance of individual sectors in the attached table showed the following:
Agriculture 1.5%
Manufacturing 0.5%
Mining & Quarrying 5.9%
Construction & Installation 0.5%
Financial Institutions 8.0%
Electricity & Water 4.3%
Transportation, Storage
& Communication 6 .5%
Distribution 2.1%
Real Estate Services 2.2%
Miscellaneous Services 2.5%
Based on the above figures, it is clear that the manufacturing sector was the weakest area of the economy, followed by construction and agriculture, while the financial sector, mining, electricity and water, and transportation and
communication showed strong performances. The manufacturing sector has been the main casualty of the trade liberalisation measures of the 1990s and the repressive monetary policies used to stabilise the macro-economy. Its vulnerability to trade liberalisation was rooted in the fact that it had grown under excessive protection and had become inefficient, highly import dependent and capital intensive.
The rebuilding of the sector is going to require targeted strategies to build competitive advantages in those areas that can be integrated with agriculture and agro-processing, tourism, mining and telecommunications. The apparel industry which has suffered because of competition from low labour cost producers in Central America and security problems in Jamaica can be revitalised by switching to new production systems involving full package rather than concentration on 807-type arrangements. The sector could also benefit from the establishment of partnerships with foreign firms that would facilitate access to capital, modern technology and markets, and adoption of new management practises.
The agricultural sector has been hurt by the opening up of the domestic market and reduction of duties, and by severe droughts in 1997 and 1999, as well as by flood rains in 1998, 2001 and 2002. The vagaries of the weather which have been aggravated by global climate changes will remain a constant threat to the sector. However, action is needed to expedite the introduction of new technology in plant culture and the most productive areas must be provided with irrigation services. There is also the need to rationalise agricultural crops and to move to serious zoning of production.
IRRIGATION
Indications are that major irrigation projects are ready for implementation in St. Elizabeth, Manchester and St. Catherine, and that new irrigation technology will also be introduced in the sugar industry. The effects of these projects will be important to the production of agricultural produce and the control of inflation. Drastic seasonally-driven supply disruptions continue to be a significant structural impediment in the way of reductions in inflation to low single-digit levels of say three per cent to four per cent. Based on the high cost of using monetary policy to contain domestic inflation, removal of this structural impediment is attractive in terms of cost/benefit.
As far as the construction sector is concerned, I have grave doubts about the accuracy of the official statistics because they show the sector declining in some years when domestic cement sales and the importation of construction materials have increased. In other words, there is an inverse relationship between production by the sector and the consumption of inputs used by it. It is well known in international circles that this is usually an indication of a high degree of 'informalisation' of an economy or of the 'cooking of books' to facilitate large-scale tax-erosion.
The massive infrastructure programme now under way involving roads, sea ports, airports, electricity plants and so on will boost activity in the sector for the medium term. The major housing programme, including the New Town in Clarendon and new hotels, will further strengthen growth in the sector.
FALLOUT
What is surprising is the fact that in spite of the fallout in the financial sector in the late 1990s there was annual average growth of eight per cent. The strong growth in mining is also not in tune with the public perception of the pace of activity in the bauxite industry, which is the dominant part of the sector. This is perhaps due to the fact that some of the growth represents recovery of ground lost in the mid-1980s when there was a shakedown in the world aluminium industry. Alumina production in particular grew strongly from 1.5 million tonnes in 1988 to a record 3.6 million tonnes in 2000 based on the re-opening of the Alpart refinery, but also on the expansion of that refinery by 50 per cent and a similar situation at JAMALCO.
Not surprisingly, growth has been strongest in the telecommunications sub-sector where there has been a doubling of economic activity and a transformation of the infrastructure of the country. Progress has also been made in electricity and water. Overall, the mediocre performance of agriculture and the decline in manufacturing, combined with the robust growth in the services sectors, have served to make the economy more service-orientated. The substantial expansion of tourism, particularly in the early to mid-1990s, has contributed to this shift although the full impact of this factor is not reflected in the official GDP data which still do not directly measure output in the sector.
The heavy weighting of the manufacturing sector in the GDP and the decline in that sector were important factors that partly explain the modest overall GDP growth rate for the period. Also, the slowdown in the growth rate of tourism in the late 1990s would have deprived the economy of added momentum in those years. In moving forward, this sector will have to be re-energised if strong growth is to be achieved. The softness of the world economy at this time and the after effects of the September 11 incidents in the USA on the world travel industry are serious constraints to a rebound in the sector. Indeed, Jamaica has fared much better than many other Caribbean countries in terms of visitor arrivals for the first half of 2002. In this regard, Air Jamaica has been a critical tool in ensuring airlift which is not the case with our Caribbean neighbours. The high crime rate also represents an obstacle to the expansion of the sector and partly explains the relatively low occupancy rate of under 60 per cent in our hotels.
On the positive side, there are significant investments being made in the physical infrastructure to support the sector, including roads, water supplies and airports. This must be matched by private investments in expanding the range of attractions. The state apparatus for promotion and marketing should also be revamped to meet the changing requirements of the industry. In terms of new growth sectors, much has been said about telecommunications and these and other issues will be assessed.
