SOME ASPECTS OF THE POST-WAR ECONOMIC DEVELOPMENT OF JAMAICA

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This paper aims at sketching in broad outline the development of the Jamaican economy during the post-war period and assessing some features of economic policy in the light of the actual and potential performance of the economy. It is useful at the very start to comment briefly on some current notions of economic development. In the vast literature on the subject, economic development is usually measured by such indicators as the rate of growth of real income per person and of capital formation and industrial production. It is hoped to show that such indicators, while not unimportant, are inadequate for measuring the progress of the Jamaican economy; and additional criteria will be suggested.

I

Between 1950 and 1965, Jamaica’s gross domestic product (the total value of goods and services produced within the economy) increased at an annual rate of about 7.2 percent. When allowance has been made for the steady rise in prices, for population growth and the portion of the domestic product which accrues to foreign owners of factors of production located in the country, we find that the real national income per head of population increased by 4.5 percent per annum. During the same period gross investment expenditure as a percentage of gross domestic product increased from 11 percent in 1950 to 21 percent in 1965.

The leading sectors in the growth process can easily be identified. The bauxite-alumina industry which was non-existent in 1950 grew so quickly that by 1965 the mining sector accounted for 10 percent of gross product. The manufacturing sector which was in its infancy in the early post-war period currently contributes more to total product than any other sector. The construction and tourist industries were also leading growth sectors. The expansion of all these activities was associated with heavy capital inflows mainly from North America and generally in the form of direct investment.

The performances listed so far are impressive when viewed in the context of the traditional indicators of growth or compared with developments in other countries. But undue concentration on averages can obscure fundamental relationships. For example, the rate of growth of per-capita national income tells us nothing about the distribution of such income among households or occupational groups or between urban and rural groups. Similarly, consideration of the average rate as growth of national income over a fifteen year period gives no clue as to whether such growth was evenly maintained over the entire period or was heavily concentrated in some years.

For example, if the period 1950 to 1965 is broken down into five year periods, we discover that rate of growth of per capita national income for the period 1950-55 was of the order of 7 percent, for 1955-60 it was 3.7 percent, and for 1960-65 it was 3.0 percent. In other words, starting from a low base in 1950 and with the introduction of new sectors such as bauxite-alumina and the rejuvenation of others such as tourism, the rate of growth of output was pronounced in the early stages. But the subsequent slowing down of the rate of growth of the mining sector, the levelling off of construction activity, the continued sluggishness of the agricultural sector, the worsening terms of trade and the increase in population growth (as emigration outlets dried up) have all combined to bring about a slower rate of growth of per-capita real income in each successive five-year period. There was a noticeable recovery in 1964 and 1965 after three relatively lean years, but it remains to be seen whether this can be maintained.

But even if the growth of per capita income can be maintained or accelerated there is no guarantee that the benefits will be distributed in an equitable manner among the different sectors of the economy. It is even possible that some groups become worse off as price levels rise faster than their income. The available data suggests that income in Jamaica is very unevenly distributed relative to advanced countries and even to those at a roughly similar stage of development. A study of income distribution in Jamaica in 1958 indicated that the upper 5 percent of households accounted for 30 percent of total income and the upper 10 percent of households for 43 percent of income while the bottom 60 percent had to share 19 percent of the total.

One does not have to probe too deeply to discover the reasons for the uneven spread of income. For example, in 1960 approximately 40 percent of the labour force was employed in agriculture but that sector generated only 13 percent of the country’s gross domestic product. When account is taken of the tendency towards larger families in the agricultural sector it appears that per capita incomes in that sector are only about one-fifth of the level prevailing in the rest of the economy.

But even within the agricultural sector the distribution of income appears to be very lopsided. The Agricultural Census of 1961/62 indicated that 71 % of the country’s farms were smaller than 5 acres each and occupied only 12 percent of the total farm acreage. On the other hand, one fifth of one percent of the farms were over 500 acres in size and accounted for 45 percent of total acreage. The larger farms tend to contain land of superior quality. The implications are obvious. Not only is there a wider spread between average levels of living in urban and rural areas but even within the rural sector there appears to be a substantial degree of inequality.

Insufficient data exists for a precise assessment of whether the trend is towards more or less inequality. But such indicators as are available suggest that property owners, professionals and highly organised wage earners have been moving ahead much faster than peasant farmers and agricultural workers. It would be surprising if the depressed state of markets for most agricultural exports has not resulted in a further widening of the gap between urban and rural incomes despite the evidence of some increase in domestic food production within recent years.

Averages of per capita income also tend to obscure the gravest problem facing the country – the persistence of chronic unemployment. Accurate data on unemployment in Jamaica is very difficult to compile because of such factors as the seasonal nature of many activities and the high proportion of self-employed workers. It is certain, however, that its incidence has been at a high level since at least the nineteen thirties. The Census of 1943 indicated an unemployment ratio of about 25 percent of the labour force. In 1952, it was estimated at between 15 and 20 percent and in 1960 at 13 percent.

Unemployment rates have to be viewed against the background of movements of population. Between 1950 and 1961 net emigration from Jamaica was in the vicinity of 164,000 representing about one-third of the total natural increase of the population during that period. This massive emigration held down the rate of population growth to less than 2 percent and provided a breathing space during which employment opportunities could catch up with the labour force. But yet at the end of the decade unemployment was as high as 13 percent in spite of unprecedented activity in mining, manufacturing, construction and tourism.

Furthermore, figures on unemployment conceal almost as much as they reveal. The problem of underemployment is also very serious. In addition to those who have no gainful employment of any kind, there are at least as many who are employed for three days or less in any given week. Underemployment of this nature is largely concentrated in the rural areas among unskilled farm hands and own – account workers. The service sector of the economy is crowded with people whose contribution to the total product is negligible. Incipient industrialisation in the urban area holds out promises of jobs resulting in migration from the rural areas but in most cases the demand for a job is not satisfied. In such cases underemployment in the rural areas is converted into open unemployment in the urban areas adding to the slums and providing the potential for an increase in social unrest. It is noteworthy that at the last recorded count unemployment in the urban areas was 19% compared with 10% in the rural sector.

A recurring phenomenon in Jamaica in recent years has been the co-existence of chronic unemployment and shortages of skilled manpower. The emigration of the fifties undoubtedly drained the economy of a high percentage of its skilled labour and there has been insufficient technical education to replace the lost skills and provide for the needs of an expanding economy. The shortage of unskilled labour in some parts of the rural sector is a more complex phenomenon to which we shall return later.

II

In 1950 the mining industry in Jamaica was almost non-existent. The discovery of bauxite and the inflow of American and Canadian capital to exploit these resources resulted in the rapid expansion of the sector with the result that it now accounts for 10 percent of the gross domestic product and 47 percent of domestic exports. However, these figures tend to overstate the contribution of the industry to the Jamaican economy since because of foreign ownership and its capital-intensive nature, only about 50 percent of the value of its output accrues to Jamaican residents. Furthermore, it provides employment for less than l% of the labour force.

The expansion of output in the manufacturing sector has also been rapid. Its 15% contribution to the gross domestic product in 1965 was the largest in any sector. This sector warrants further consideration not only because of the above-mentioned fact but because it is the sector on which successive governments have lavished most attention and which it was hoped would contribute substantially to the solution of unemployment.

In the forties and early fifties in Jamaica the view became fashionable that the agricultural sector offered little prospect for employment creation and that the solution had to be found in the expansion of other sectors and in particular manufacturing industry. The major bottlenecks retarding the expansion of this sector were diagnosed as the small size of the domestic market and the absence of capital and entrepreneurship. Government policy aimed at correcting these alleged deficiencies involved a series of incentive legislation granting tax holidays, accelerated depreciation allowances, duty-free importation of raw materials, a protected domestic market, subsidised factory space and non-interference with exports of profits. Special incentives were provided for industries producing exclusively for export. These inducements, together with the availability of cheap labour, were expected to lead to such an expansion as would make a sizeable dent into the unemployment problem.

Let us look at some of the results. By 1966 a total of 149 factories had been established under the various incentive laws, involving a capital outlay of approximately £15.0 million. Exports of manufactured goods increased from £850,000 in 1955 to more than £6.0 million in 1965. But total employment in industries established under the incentive laws amounted to only about 9,000. This employment figure appears in proper perspective when it is remembered that the labour force is growing by at least 20,000 annually. In other words, the incentive programme has been unable to provide in 14 years sufficient jobs for the current annual addition to the labour force in l year. Furthermore, during the same period more than 10,000 jobs were destroyed in the sugar industry alone through the impact of mechanisation. Judged from the standpoint of employment-creation the programme has clearly not had the impact which was anticipated. But this is not surprising if attention is paid to the experience of others who have tried a similar path. The Jamaican programme was clearly modelled on Puerto Rico’s OPERATION BOOTSTRAP. Puerto Rico enjoys unique advantages not shared by Jamaica such as its position as a low-wage part of the United States customs area and the free movement of capital and of population between the island and the mainland. The Puerto Rican programme got underway in 1947. During the first 10 years 446 new plants were established and 35,000 jobs were created. But despite this degree of success and the added factor of emigration of 500,000 persons to the United States, unemployment still amounted to 14 percent of the labour force at the end of the period.

Any assessment of the merits of an industrialisation programme based on incentive legislation on the Puerto Rican model has to take into account a host of factors other than direct employment such as the net contribution to national income and to foreign exchange earnings as well as the boost which such a programme may give to other sectors through the linkage effect as well as the development of a skilled labour force. Such an exercise poses severe problems because it is always difficult to say whether an industry would be attracted in the absence of the generous incentive legislation.

If we concede that Jamaica is short of capital, it may be necessary to give incentives to attract foreign investment as long as other countries are doing so. In the post-war period there has been feverish competition among many developing countries to offer incentives to foreign capital. Knowledgeable observers have pointed out that because of the alleged riskiness of investment in underdeveloped countries foreign capitalists expect to make a much higher rate of profit than that with which they would be satisfied in a more developed country. The Director of the Puerto Rico Planning Board is reported to have told a conference on development planning in Jamaica in 1957 that a return of at least 30% on investment must be reasonably assured to well-managed firms in order to attract outside capital. In the absence of generous incentive legislation such a rate of return is unlikely except in a few choice sectors.

But it is questionable whether capital should be attracted at all cost without a careful assessment of its potential contribution to the economy. Some industries do make this contribution. But in others the costs definitely outweigh the benefits. If an industry imports all its raw materials, pays no direct or indirect taxes, exports its profits and pays relatively low wages, its contribution to the domestic economy is likely to be negligible; and there is no guarantee that it will remain in operation after the tax holiday is over especially if, in the meantime, wage rates are moving upwards to an appreciable extent.

A more fundamental criticism of incentive legislation as it has operated in Jamaica over the past decade or so is the constraint which it imposes on the use of some policy instruments which may be crucial for promoting development along desirable lines. For example, the provisions regarding unrestricted export of profits and repatriation of capital imposes severe constraints on the operation of a monetary and commercial policy tailored to the needs of the country.

This is not an argument against incentives to industry. Rather the need is for a more discriminating attitude in the granting of incentives. Ideally each case should be examined on its merits and incentives granted only when it can be clearly shown that the industry will make a substantial contribution to the economy in terms of direct employment, foreign exchange earnings, use of local raw materials or other such criteria.

Within recent years some emphasis has been given towards sitting industrial plants in rural areas. This limited aim has met with some measure of success but the impact on the countryside has been slight. A much closer co-ordination of agriculture and industrial development is needed so that the output of the farm will provide a much larger share of inputs into industrial plants thus spreading the benefits of the growth of secondary industry over a wider segment of the population.

III

Despite the manifestations of growth in other sectors Jamaica is still an agricultural country. We saw earlier that more than 50 percent of the population depends on this sector for the bulk of its income. At the moment, agricultural products account for approximately 50 percent of effective export earnings- that is if the outflow of investment income is deducted from the total exports.

In view of these considerations the sluggishness of the sector during the post-war period has to be viewed with alarm. Between 1950 and 1965, agriculture’s share of the gross domestic product fell from 27 to 12 percent. In some quarters this has been regarded as a sign of progress because the experience of industrial countries has been that agriculture’s share of total product shows a secular tendency towards decline as development proceeds. In the case of Jamaica, it is not a sufficient cause for rejoicing. It would be so only if it could be shown that there had also been a proportionate decrease in the number of people dependent on agriculture for a living. The adequacy of food production for domestic consumption would also have to be taken into account.

Between 1950 and 1965, agricultural production increased at an annual rate of only 2.4 percent. This compares with increase of more than 8 percent in manufacturing and construction and of 7 percent for the product of all sectors combined. That sector of agriculture producing for export increased its output by about 4½ percent annually while the output of domestic agriculture increased by a mere 2 percent.

A rough calculation based on the growth of population and per capita national income indicates that the demand for food has been increasing at the rate of approximately 5 percent per annum. With domestic food production increasing by only 2 percent per annum it is not surprising that the import bill for food has been increasing both in absolute and relative terms. In 1965, imports of food amounted to £20.4 million representing about 27 percent of total food consumption. By way of comparison, in 1950 the country had imported only about 17 percent of its food requirements.

There is nothing intrinsically wrong in importing food if one’s labour force and land resources are being fully utilized, and if the demand for one’s exports, the terms of trade and the balance of payments are in a healthy condition. None of these conditions apply to Jamaica. There is chronic unemployment in the labour force. There are large tracks of unused or grossly underutilized land. The demand for her major agricultural exports is increasing very slowly and excess supply on the world market has driven their price to, exceedingly low levels. The terms of trade declined from 100 in 1954 to 84 in 1964.

In such circumstances it appears that a massive assault is needed so as to continue the idle resources with the aim of boosting food production. In 1965, Jamaica spent about £ l l.0 million on imported meat, dairy products, fresh fruit and vegetables. The bulk of this could be produced locally with substantial benefit to employment, income and the balance of payments.

The argument about food production is sometimes conducted as if increased production for the home market necessarily means a reduction on production for export. This would be so only if all lands were now fully utilized. The available evidence suggests that quite apart from lands which are presently idle, additional land could be freed for domestic production if only the most suitable lands were used for each crop and a determined effort made to increase yields on such lands. The need is for careful assessment of the export prospects for the various crops and the framing of policy aimed at keeping production within reasonable bounds. A system of zoning together with carefully worked out pricing policies would appear to be necessary ingredients of any policy aimed at getting the right balance between food production for export and for home consumption.

The failure of the costly Farm Development and land Settlement schemes which have characterized post-war agricultural policy is a warning that plans which are not based on an intimate knowledge of the factors affecting decision making in the farm sector are not likely to succeed. A high proportion of the subsidies given to farmers to encourage production appear to have found its way into consumption expenditure. The reported increase in the production of certain crops following on the establishment of the Agricultural Marketing Corporation gives an indication of the kind of stimuli to which the farmer is likely to respond.

One of the factors which are likely to militate against the expansion of food production is the reported disinclination of workers to accept agricultural employment. There are frequent reports of shortage of labour at the same time that massive unemployment exists. Small farmers are most affected since they cannot keep pace with the upward drift of wages in response to development in other sectors such as bauxite and tourism. The demonstration effect of the living standards of the relatively well-paid workers leads to a high “reserve” price of labour which the small farmer cannot afford. The unemployed worker sometimes prefers to remain in that condition rather than work for the offered wages.

There is no easy clear-cut solution to this problem, but it is certain that it will not be solved by the operation of free-market forces since in present circumstances these forces will tend to raise the “reserve” price of labour rather than to lower it.

Because of the tendency towards monopoly in large segments of the Jamaican economy, incomes in those sectors bear little relationship to what the factors of production could earn in alternative employments since, within wide limits, increased costs can easily be passed on to the consumer. In such circumstances, income in those sectors tend to be based on what employers regard as a desirable standard of living for certain categories of employees without reference to productivity in any meaningful sense or to the direct or indirect effect on other sectors of the economy.

The demonstration effect of living standards based on relatively high incomes in the favoured sectors together with the effect on the cost of living of high profit margins in certain key areas of manufacturing and distribution trigger off claims for increased wages elsewhere. Only strongly-organized workers can keep ahead in the race and in many cases the increased costs resulting therefrom are passed on to the consumer thus adding to the wage-price spiral. Needless to say, unorganized workers get left behind in the race and the gap tends to widen between the two groups. As mentioned earlier the “reserve” price of labour rises with each successive round of wage increases. Medium and small farmers find it difficult to recruit labour at a price which they can afford to pay and unemployed workers choose idleness in preference to prevailing wages in the agricultural sector.

Of course, this is not the whole story. The stigma attached to agricultural work is well known and can be countered only in the long run by basic changes in the approach to education. But in the short run, an incomes policy aimed at closing the gap between the so-called “modern” and “traditional” sectors would appear to be a necessary component of any plan of development which has as its focus full utilization of the country’s productive resources.

IV

As indicated earlier the tourist industry has been one of the high growth sectors during the post-war period. The available data indicates that the number of tourists visiting the Island increased from about 75 thousand in 1950 to 316 thousand in 1965. Estimates of tourist expenditure are less reliable than estimates of arrivals; but figures which exist, suggest that it increased from about £3 million in 1950 to £23 million in 1965. Even allowing for a substantial margin of error the increase is a sizeable one.

Of course, not all expenditure by tourists benefits the Jamaican economy. To the extent the tourists consume imported foods or purchase imported merchandise the benefits accrue abroad. Furthermore foreign shareholders in hotels and other facilities have to be remunerated. On the basis of data for 1958, it was estimated that the import-content of tourist expenditure was about 40 percent.

The volatility of the industry is demonstrated by the experience during the years 1961-63, when tourist arrivals declined in each succeeding year allegedly as a result of disturbances in other parts of the Caribbean. Recovery in the years 1964 and 1965 has resulted in a situation where demand as now said to be pressing hard on capacity and prospective tourists are being turned away. Paradoxically there is no evidence of any movement towards substantial increases in tourist capacity. Plans for the development of the Negril Area on the Island’s south-west coast have apparently been shelved.

The tourist industry offers a good opportunity for increasing income and employment in Jamaica, as well as contributing to improvement of the balance of payment situation. But the social and other costs involved will have to be carefully watched. The alienation of some of Jamaica’s best beaches has caused an undesirable social situation. The impact of tourist expenditure tends to be associated with an almost intolerable rise in the cost of living in the areas concerned. Wage levels in the tourist industry pull up the “reserve” price of labour in neighbouring agricultural areas.

The Jamaican tourist industry has been built up as a luxury trade catering mainly to the wealthy. About 60% of tourist capacity is priced at a rate exceeding 20 dollars per day. The luxury trade is notoriously subject to changes in fashion, and future development of the industry should be aimed at providing facilities for middle and low-income tourists who are growing in relative importance numerically as the cost of air travel declines. Needless to say, there is also room for policies which will reduce the leakage from the income stream resulting mainly from import of food for hotels and remittances of profits to non-resident owners.

V

We have seen that there has been an impressive rate of growth of national income (in absolute and per-capita terms) since 1950 mainly as a result of the emergence of the bauxite-alumina complex, and the expansion of the tourist, manufacturing and construction sectors. Despite these favourable circumstances in conjunction with large scale emigration, mainly to the United Kingdom, the unemployment problem has remained intractable and is likely to worsen with the increasing rate of population growth. Furthermore, the sluggishness of the agricultural sector has tended to lead to a worsening of an already uneven distribution of income especially between urban and rural areas.

To a large extent, the growth of income has been induced by expansion of exports, visible and invisible. Some of these industries, for example, bauxite-alumina are very capital intensive and thus make little direct contribution to employment-creation. In some cases, as in sugar, the upward movement of wages as a result of union activity has induced some degree of mechanisation which has made serious inroads into the employed labour force.

Rising income levels have led to an even faster increase in the demand for durable consumer goods, which have to be imported. Taken together with the growing demand for foreign raw materials for industry and for food to close the gap between domestic production and consumption, the result has been a tendency for the adverse trade gap to widen.

The outflow of investment income to foreign owners of capital in Jamaica (£ l 6m. in 1965) has tended to become a higher proportion of export earnings over time. Despite the booming tourist industry and the substantial inflow of remittances mainly from Jamaican emigrants, the overall balance on current account has been unfavourable, the deficit being financed by inflows of foreign capital which will, of course, necessitate further outflows of factor income in the future.

The question arises whether an economy which has failed to cope with unemployment despite the relatively favourable circumstances of ‘the post-war era is likely to cope with it in the future without a drastic re-orientation of economic policy. The post-war experience has shown that it cannot be assumed that if capital investment and output are increasing at a rapid rate that employment will take care of itself.

 Foreign capital tends to bring with it the technology suited to the country from which it comes. This technology tends to reflect the factor proportions in the country of origin viz, an abundance of capital and a relative shortage of labour. In the context of a country with an abundance of labour the result can be very disruptive as some of the very capital intensive industries give rise to a small wage elite which set the pace for movements of wages in other industries without reference to movements in productivity.

Inevitably the labour-surplus countries such as Jamaica, will have to develop technologies and forms of organisation suitable to their particular environment if they are to solve their unemployment problem. In the meantime, governments have to play a very creative role in ensuring that where the capital-intensive technology has to be used, for example, to preserve competitiveness in foreign markets, the increased returns to capital contribute substantially towards providing employment in others sectors for displaced workers. And there is the task, to be implemented through a conscious incomes policy, of keeping a reasonable balance between incomes in sectors employing different levels of technology.

The problems are especially acute for small labour surplus economies such as Jamaica which rely heavily on overseas markets, and as a consequence exhibit a certain degree of dependence which inhibits the use of certain policy instruments available to more self-contained economies. But we have to bear in mind the distinction pointed out by Mclntyre[1] between structural dependence (the dependence arising from the size and structure of the economy) and functional dependence (that which arises as a result of particular policies chosen by the countries concerned).

For example, it cannot be assumed that existing preferential agreements confer a net benefit on the economy. While such agreements do lead to higher rewards for the factors of production employed in the favoured industries, they may not be an unmixed blessing for the economy as a whole as they enable the economy to evade the need for basic structural changes without which vital issues cannot be satisfactorily resolved. And, of course, the reciprocal preferences which Jamaica concedes may result in purchases from relatively high cost sources thus frittering away some of the additional foreign exchange earned as a result of such agreements.

The need for a departure from the strategy of development which has characterized post-war economic policy in Jamaica is further underlined by international developments. All the trends in the world economy point to the conclusion that in the absence of unforeseen developments Jamaica will have to finance a larger proportion of investment from its own resources. The annual outflow of investment income is now considerably in excess of the net inflow of capital funds from abroad. The relatively high level of economic activity in the past few years has been nourished by relatively large amounts of foreign borrowing by the government.

Current interest rates in the major financial markets are punitive and Jamaica cannot get access to soft loans from certain financial institutions because of its relatively high per-capita income. Debt service payments are increasing both as a percentage of annual government revenue and of gross foreign exchange earnings.

There are two aspects of this problem. In the first place, if the public sector is to maintain or increase its expenditure on capital account it will have to absorb a larger share of the national income. Tax revenue as a percentage of national income has hardly changed over the post-war period largely as a result of tax holidays but also because of what appears to be a considerable degree of under-reporting of income to the tax authorities. With public expenditure growing at a fairly rapid rate the gap has had to be closed by public borrowing. In addition to the foreign borrowing already referred to, there has also been a substantial expansion of the internally held public debt. But financing by the latter route merely postpones the problem and contributes to an eventual worsening of the distribution of income.

The second aspect of the matter is that if there is no substantial improvement in the balance of payments situation, stricter controls on capital movements may have to be instituted and steps taken to ensure that scarce foreign exchange is directed towards the most productive uses.

VI

The preceding sections have touched on some of the problems facing Jamaica and some of the internal adjustments which need to be made. But the country should at the same time seek to collaborate with countries facing similar problems with a view to working out joint solutions. To give an example, the benefits that can be derived from regional co-operation in the Caribbean have never been thoroughly explored in the past. This task is now being carried out for the first time[2]. Preliminary analyses indicate that regional collaboration – if properly executed – can be of benefit to all the territories concerned. It is in the context of such a framework that planning for economic development in Jamaica should proceed.

 

[1] “Some lssues of Trade Policy in the Caribbean” – New World Quarterly, Croptime 1966.

[2] See the forthcoming studies on Economic Integration in the Caribbean to be published by the Institute of Social and Economic Research, UWI