Is Jamaica another Mexico?
THE country “was forced to make significant changes in its economy… the country proceeded aggressively to reduce the role of the State in the economy and to embrace global markets… liberalised foreign trade and investment… privatised a disparate collection of… State-owned enterprises”. They “succeeded in lowering inflation, maintaining fiscal discipline, reducing its external debt burden”.
You might think that the above is being written about Jamaica, but the country referred to is actually Mexico. These reforms started after the 1982 sovereign default.
The results unfortunately speak for themselves: “Alas, the growth never came.”
The Freakonomics blog on the New York Times website posted “Why Isn’t Mexico Rich?” on November 12 and pointed to the research paper by UC San Diego economist Gordon H Hanson which is where the above quotes come from (Download it at bit.ly/mexicorich or scan the QR code at the end of this column).
Previously I pointed out how Brazil had achieved extraordinary growth, even while saddled with interest rates higher than those of Jamaica, specifically to make the point that interest rates alone do not determine growth.
Now it is time to look at what else we are doing to encourage growth, and figure out if we might be overlooking some other ingredients.
Mexico can serve as a relevant guide, not just because of the above quotes that sound eerily like Jamaica, but the following pointed out by the paper:
* Between 1985 and 2008, Mexico managed an annual average growth rate in per capita GDP of just 1.1 per cent.
* Between 2001 and 2008, while the other comparison countries managed annual growth rates of 2.3 per cent or higher, Mexico was stuck at 1.3 per cent.
* Over the period 2001-2008, domestic credit to the private sector as a share of GDP averaged 18 per cent in Mexico, lower than all comparison countries except Argentina and Venezuela.
* Rapidly accumulating non-performing loans and the 1994 peso collapse contributed to widespread bank failures. The Government was later obligated to recapitalise the banking system.
* Mexico stands out for having high prices for electricity, high prices for telecommunications services, expensive and spotty Internet services, and a scarcity of skilled labour.
* Mexican students perform poorly in standardised tests relative to students in other nations at roughly similar income levels.
* Another factor potentially affecting Mexico’s supply of skilled labour is emigration.
* In the 1980s, as Mexico embarked upon a strategy of export-led development, it sought to emulate the successful industrialisers of East Asia.
* Large informal economy.
Aren’t these the exact same problems Jamaica is facing today? While no two countries can ever serve as exact comparisons, it is always wise to compare outcomes and understand what others pursuing the same policies/initiatives have done to achieve growth (or not).
Jamaica is enacting the same reforms and wants to pursue an export-led strategy. Many people call for more support for the manufacturing industry. It can only therefore make sense to compare Mexico to other export-led economies that have actually had growth, such as Korea, Taiwan and China.
Mexico’s goal was to follow the Korean lead where vertical integration drove exports but instead ended up mainly with assembly plants. The inputs would come from countries like the USA, cheap Mexican labour would be used to assemble the items and the finished goods would be shipped back to the USA. Not very different from the free zones that were “manufacturing” garments before companies like Jockey and Tommy Hilfiger left Jamaica for locations with cheaper labour.
Hong Kong and Taiwan also started out as assembly locations, but unlike Mexico they did manage to graduate to true manufacturing. Firms started to design more parts in-house and full products.
China is still an assembly location but its massive labour supply has allowed it to be cheaper than Mexico. China’s share of the US market has increased while Mexico’s has continued to decline.
Jamaica’s proponents of “export-led growth” must learn from these Mexican mistakes. This not only applies to the manufacturing sector but also sectors such as agriculture and even technology. Can our sugar be harvested cheaply enough to compete on world markets or can it be differentiated like our coffee to command a premium price? Should our sugar industry switch to exporting other products derived from sugar cane?
These are critical questions that must be answered before real growth will materialise in Jamaica. Mexico followed the recommendations of economists familiar with the “Washington Consensus” to which the IMF and World Bank both subscribed, yet there was little growth over decades. Jamaica is now following the same playbook and should not expect a different outcome unless we implement those recommendations as well as follow the lead of Taiwan, Korea, Brazil and Chile.
I also want to point out that Mexico has oil and that has not been a major boon for that country, so if Jamaica does in fact find oil off the shores, we should not expect to suddenly be in the clear.
It is impossible to single out any one factor that must be dealt with to unleash Jamaica’s potential: failing public education system, lack of access to capital, high costs of electricity, low availability of skilled labour, too much government red tape and so forth. All of these must be addressed, otherwise all the changes now being implemented will most certainly allow an economist to write “Why Isn’t Jamaica Rich?” in 20 years’ time and basically copy and paste from the paper I quote.
David Mullings is the Future Leaders Representative for the USA on the Jamaican Diaspora Advisory Board. He is co-founder of Random Media and Kaizen Interactive and has an MBA with concentrations on International Business and Marketing.
He is on Twitter at twitter.com/davidmullings and Facebook at facebook.com/InteractiveDialogue