BOJ Says Studies Blame Low Productivity for Weak Growth

KINGSTON — A number of studies undertaken to explain the contradiction of high investment and low growth in the Jamaican economy, have all concluded that the country’s weak growth performance has been due largely to low productivity.

This was disclosed by Governor of the Bank of Jamaica, Brian Wynter, during his presentation to an Institute of Chartered Accountants of Jamaica (ICAJ) Forum on Wednesday, October 5. The Central Bank Governor explained that this low productivity was “linked to under-investment in social capital” such as education and training and health care delivery.

He said that the global recession during 2008 and 2009 served to expose the vulnerabilities in the Jamaican economy, and contributed to contractions in domestic output of 3.0 per cent and 1.2 per cent in 2009 and 2010, respectively.  He also noted that while the performance in those two years was primarily the result of the global recession, economic growth before that period was relatively modest, averaging 1.5 per cent per year over the previous eight years.

He observed that the performance of the Jamaican economy over the period was significantly weaker than that of its Caribbean neighbours, and other emerging market economies, despite the country’s relatively high rate of investment.

He stated that a number of studies had been undertaken to explain the paradox of high investment and low growth in the economy. He said that they all concluded that Jamaica’s weak growth performance has been due largely to low productivity which is, in turn, linked to under-investment in social capital, given the high levels of public debt obligations.

Speaking on the theme, “Stability, Interest Rates and Growth”, Mr. Wynter noted the “timeliness” of the theme, with respect to Jamaica’s economic history and the global financial crisis in 2008 and 2009, which continues to hurt many economies, including Jamaica’s.

“That crisis also resulted in the broadening of the mandate of many central banks, to include an increasing role in facilitating sustainable growth and fostering overall financial system stability, while focusing on the primary objective of price stability,” he said.                                               

The Central Bank Governor said that the global recession, during 2008 and 2009, exposed the vulnerabilities in the Jamaican economy and contributed to “contractions in domestic output of 3.0 per cent and 1.2 per cent, in 2009 and 2010, respectively.”

He said that while the performance in the two years was primarily the result of the global recession, economic growth before that was relatively modest, averaging 1.5 per cent per year over the previous eight years.

“The performance over that period was significantly weaker than that of our Caribbean neighbours and other emerging market economies, despite our relatively high rates of investment,” he noted. 

Mr. Wynter observed that over the period 2001-2010, Jamaica’s annual inflation averaged 12.0 per cent, well above that of its major trading partners. This partly reflected the country’s vulnerability to external and domestic shocks, including the impact of fiscal expansion and debt accumulation. 

“The economy has been particularly vulnerable to periodic episodes of financial market and economic instability, given the persistence of large fiscal and current account deficits, in other words, the twin-deficit problem. Unsustainable public debt levels, as well as the large fiscal and current account deficits contributed to bouts of exchange rate instability, which impacted inflation and interest rates,” Mr. Wynter stated.

This instability biased private investment decisions toward “short-term, rent-seeking and portfolio hedging activities”, he observed, noting that, in addition, high and variable inflation impeded growth, as it was difficult for economic agents to undertake proper long-term planning. 

Mr. Wynter explained that in such an “inflationary and consequently unpredictable environment”, it was impossible to sustain low interest rates, as savers demanded a premium on their resources.

The Central Bank Governor reflected that to reverse the cycle of large fiscal deficits and unsustainable debt, the Government embarked on a comprehensive economic transformation programme at the end of 2009. This was supported by the International Monetary Fund (IMF) and the other international development partners, such as the World Bank, the Inter American Development Bank (IDB) and the Caribbean Development Bank (CDB). 

“The objective of the programme is to secure long-term macroeconomic stability, thus creating an environment that is conducive to the low interest rates and long-term investment that are critical requirements for sustainable economic growth,” he said.

Mr. Wynter identified the main pillars of the transformation programme as: eliminating the fiscal deficit over a four-year period and institutionalising prudent fiscal practices which will translate into sustained reductions in the debt to GDP ratio; and enhancing financial system stability and creating an enabling business environment.

Assessing the Government’s performance, he opined that, in the main, the Government has made a strong start to the programme, achieving most of the quantitative targets under the IMF Stand-By Agreement.

This includes the “extraordinary success” of the voluntary Jamaica Debt Exchange (JDX) in February last year, which contributed to a trend decline in market interest rates. From the time that a programme was agreed with IMF Staff in December 2009, Bank of Jamaica’s 30-day signal rate has reduced from 12.50 per cent to 6.25 per cent, and now a fall of 625 basis points.

“The rate on market-determined 180-day Treasury Bills declined even more sharply, by 1,024 basis points from 16.80 per cent in December 2009 to 6.56 per cent at the most recent auction last month. Interest rates in the private money market and on deposits and loans also fell.  The result is a substantially reduced cost of capital, which is needed to encourage increased long-term investment and growth,” Mr. Wynter said.

He emphasised that the decline in interest rates is linked to the positive trends and outlook for inflation.

“Annual inflation declined to 7.8 per cent in August, from 12.6 per cent a year earlier, and is expected to fall further during this fiscal year to settle within the target band of 6.0 per cent to 8.0 per cent,” he stated. 

He also advised that, for the medium-term, inflation is targeted to continue its fall towards the average inflation rate of major trading partners.

He assured that given the Bank’s commitment to price stability, it has been gradually shifting its monetary policy framework towards an inflation targeting framework, in order to firmly entrench the achievement of low and stable inflation as the primary objective of monetary policy.

This was supported by international examples, which have demonstrated that low and stable inflation ensures the competitiveness of the economy and contributes to sustainable growth and development, he said.

 

By Allan Brooks, JIS Senior Reporter