The Jamaican Economy Encountered Challenges Economics Essay

The Jamaican economy encountered challenges such as low growth especially in 2009 and 2010, increased inflation, interest rates, and unemployment. Our debt-to-GDP ratio is more than 120% and Jamaica’s debt is ranked as the fourth highest in the world on a per capita basis. This is as a result of government having to bailout ailing sectors of the economy, in particular, the financial sector in the mid-to-late 1990s.

Growth in the Jamaican economy will be 1.0% in 2012 and is projected to be the same for 2013. Following the expiration of the $1.27 billion International Monetary Fund (IMF) stand-by agreement in May 2012, some decline in GDP is likely. The Bank of Jamaica sought to reduce interest rates in order to stimulate investment by the private sector on the heels of the IMF agreement and the successful implementation of the Jamaica Debt Exchange (JDX).

GDP Growth

The contraction of the Jamaican economy was estimated at 1.3% in 2010, an improvement from the decline of 3.0% the previous year. This was due to a decline in Mining and Quarrying, Manufacturing and Construction. The largest overall decline occurred in Indirect Financial Intermediation Services (9.5%), followed by Electricity, Gas and Water (4.3%) and Finance and Insurance (2.5%) and this reflected low domestic demand and low economic activity. However, for the fiscal year 2011/2012 the economy expanded by 1.5%, and this was as a result of an increase in Agriculture, Forestry and Fishing, Electricity and Water Supply and Transport, and Hotels and Restaurants.

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Furthermore, within the goods sector, agriculture, forestry and fishing was the only sector that experienced positive growth (2.2%), although it was far lower than the 12.1% recorded in 2009. Mining and Quarry declined by 4% in 2010. The contribution of Agriculture to GDP was just over 6%. Also, Manufacturing and Construction were down by 3.2% and 4.2 % respectively, but both sectors showed smaller declines than in 2009 and this may reflect an easing of the recessive conditions in the economy. Additionally, GDP is forecasted to grow to 1.0% in 2012/2013 as a result of Agriculture and Tourism as these are expected to grow somewhat in 2013

Debt to GDP

Jamaica has been burdened by heavy debt servicing costs due to both the size of its debt and very high interest rates. The economy has long suffered from low growth and high debt.

Bank of Jamaica (BOJ) estimates the real GDP growth to be -3.1%, -1.4%, 1.5%, and 1% respectively for 2009, 2010, 2011 and 2012. The table below illustrates the general government gross debt as a percentage of GDP.

However, the public deficit which is otherwise referred to as the general government net lending/borrowing as a percentage of GDP indicates a percentage of -11% in 2009, -6.4% in 2010, -6.5% in 2011 and -8.3% in 2012.

Interest Rates

In the recent years statistics have shown a significant reduction in Jamaica’s interest rates. This is due to the fact that the Government of Jamaica seeks to encourage and increase the economic and social development of the country. As a result, the Banks continues to provide affordable funding to feasible projects that facilitate growth and development in all areas of the economy.

According to the bank of Jamaica the open market interest rate at 2009 was 10.50%. This was down from 17% the previous year. In 2010 the rate was reduced even further to 7.50%. According to the same report, at the December 2011 the rate was 6.25%. This reducing rate over these recent years is due to the economic recession and by reducing the interest rate is a great way to provide money at cheap rate so that it will promote investment. Based on the fact that up to the last first quarter of this year the rate remains at 6.25, it is expected to remain low for the rest of this as to continue facilitate the economy to grow out of the recession.

Inflation

The year-on-year inflation rate during October 2011 was 7.7%, however, the year-to-date inflation rate reflected only 5.1% which resulted in the sharpest price causing an increase occurring in housing and related expenses (11.6%) and clothing and footwear (7.1%). The expected year-end inflation rate for 2011 is 8%.

The Bank of Jamaica (BOJ) publication in the gleaner dated Friday, June 15, 2012 exposed that inflation for the June quarter is projected to be in the range of 3-5%, double the 1.5% to 2.5% initially forecasted by BOJ, and is directly attributable to the new and adjusted taxes falling under the new General Consumption Tax (GCT) regime announced during the Budget Debate.

It further stated that inflation is expected to slow down within subsequent quarters, reflecting a sharp return to normal levels as the inflationary impulses from the tax measures subside. Nonetheless, projections have been revised upward within a range of 10% to 12% for the fiscal year, compared with the bank’s earlier projection of 6 to 8 percent.

Inflation for the last fiscal year was projected to be 7.3%, within the range forecast by the central bank. The last time Jamaica experienced double-digit inflation was in 2010 when it came in at 11.7%. BOJ further illustrates the forecast for the current year inflation is expected to lapse to the six to eight percent range for the fiscal year 2013-14.

Unemployment Rates

In an annual report by the Statistical Institute of Jamaica, it illustrated that in the year 2009 the unemployment rate stood at 11.4%, this figure further increased in the year 2010 as it rose substantially to 12%, demonstrating a 0.6% shift in the amount of Jamaicans joining the unemployment line. Then in 2011 the figures had grown immensely to 12.8% displaying a fairly worrying trend as it climbed by 0.8%, in the eyes of many these figures would be considered as a very grim sign of what was to come. Now in the present year 2012 a quarterly report in April revealed a 14.3% climb in the unemployment rate, it is evident that the negative trend continues on its path. Whilst the year has not ended, the projection for the unemployment rate is currently 13.9% by January 2013. This stands to reason that due to the continuous contractions within the economy and an increased reduction in the country’s GDP the unemployment figures continue to soar, if measures are not taken to effectively curb the issue.

Monetary Policy

Given the global financial climate the BOJ had publicized measures which it had planned to implement during the fiscal year 2011/2012. The measures were seen as an attempt to offset any future hindrances the country might face as a result of the world wide recession. These measures included:

A strict maintenance of the interest rate payable on its 30-day Certificate of Deposit at 6.25% throughout the March quarter.

Having the interest rates on overnight placements at a constant rate of .25%

Maintaining their cash reserves at a rate of 12%

Keeping their liquid reserve requirement at 26%

Within the fiscal year 2012 however some of these requirements were susceptible to change as the attention of the globe shifted to the European Union and its debt crisis.

Industry Analysis

Agricultural Sector Review

The Agricultural sector is an important part of the GDP which provides employment, foreign exchange earnings and a better standard of living for the people in Jamaica. However it has been reported that a number of challenges has resulted in a reduction of output and direct contribution to GDP over recent years up to 2008.

There has been a steady decline in the contribution of agriculture to GDP in Jamaica, from 9.2% in 1996 to 4.8% in 2008. Factors such as poor quality planting material and soil conditions, poor harvesting strategies and increasing occurrence of hurricanes and other disasters have contributed to the week agricultural performance. This allows for Jamaica to be greatly dependent on imported food. The sector also encounters other problems such as misuse of technologies, radial larceny, high cost of starting up and necessary research. This sector is very fragile to weather and other disastrous conditions.

However there has been a recovery of the agricultural sector and its contribution to the national economy from 2009. This is due to the new management, techniques and advance technology. During 2009 the agricultural sector recorded a 13% growth and also showed decline of 75% in fresh food imports. The Jamaican Agriculture sector value added contributed 6.18% to the GDP in 2009 according to the World Bank published in 2012. The sector still employs 18% of the Jamaican population.  In spite of the sector fairly small contribution to Jamaica´s GDP, the sector is accountable for an 18% (over 220, 000 of the 1,239,000 people employed) of the countries employed labour force (STATIN, 2011) and indirectly provides a source of livelihood for thousands of others. The agricultural sector value added contribution to GDP further rise by .11% to 6.29% in 2010. However there was a slight fall by .42% to 5.87% in 2011. It is strongly believed that this is because of the change in climate that affected Jamaica during this period.

Tourism Sector Review

Nature of Industry

Unlike other industries in Jamaica, tourism has long been a mainstay of the Jamaican economy. However, prior to 1890, the industry was not organized. Available infrastructure was inadequate and much needed services were unavailable. The industry at that time largely comprised a number of lodging houses and inns which numbered in excess of 1400 in 1830. However, with the passing of the Hotels Act of 1890, Hotels were opened in Kingston, Spanish Town, Moneague, Mandeville and Port Antonio.

Today, tourism is one of Jamaica’s leading industries. More than three million visitors are welcomed to our shores each year. Some of the elements of the tourism product include: accommodation, transportation, attractions and tours, dining and entertainment inclusive of festivals and events, and the support services. As tourism flourishes, linkages with other industries continue to grow and this integration provides a stable basis for the industry and tangible benefits for the people of Jamaica.

Regulation of Industry

The tourism industry is regulated under the following acts:

Tourism Enhancement Act,

Jamaica Tourist Board Act

Hotel Incentives Act

Resort Cottages (Incentives) Act

Jamaica Tourist Board Law and Regulation

Hotel keeper’s Liability Act

Tourist Shopping Regulation

Travel Agency Law and Regulation

River Rafting Regulation

Natural Resources Conservation (Permits and Licenses)

Role Labour plays in the Industry

The tourism board next contract according to National Development Plan is the policy making in the Industry as it continues to be guided by Vision 2030 Jamaica – National Development Plan and the Tourism Master Plan. Both plans attempts/seeks to stimulate interest in tourism and engender support for the industry. Vision 2030 Jamaica is our country’s first long-term national development plan with an aim of enabling the Jamaican society to achieve a developed country status by 2030. It is based on a comprehensive vision: “Jamaica, the place of choice to live, work, raise families, and do business”.

Technological Developments

The importance of technological developments in the tourism industry is as such:

To trail industry performance and gather market intelligence so that new and emerging consumer trends are determined and strategies are modified accordingly.

To sustain a comprehensive tourism database to aid decision-making and policy formulation at both government and private sector levels.

To enhance/improve the organization’s capabilities to exploit the Internet and related technologies as marketing channel.

Economic Impacts

The journal article entitled “The Economic Impacts of Tourism” written by David Harcombe, states that unlike some of its environmental and socio-cultural effects, tourisms economic impacts are mainly considered to be beneficial. These are:

The generation of foreign exchange,

The creation of new job and employment opportunities,

The stimulation of trade, income and entrepreneurship, especially in the service and small business sectors,

The provision of new infrastructure which is available for non-tourism use

Increased regional development , particularly in isolated areas

Greater tax revenues permitting greater government spending or reduced taxes on other activities, and

The operation of what is called the multiplier effect.

Master Plan for Sustainable Tourism Development, Jamaica indicates the objective of the master plan is to return the industry to the rapid rates of growth achieved during the 1980’s so that it outperforms the Caribbean average. The critical indicator for the economic contribution is visitor expenditure.

To spread the benefits from the tourism more widely, the following measures are envisaged:

Increasing the amount of agricultural produce supplied to the industry through alerting farmers and intermediaries of industry needs and assisting them to meet supply requirements;

Assisting the development of arts and crafts, improving merchandising and business management skills of vendor and helping them access finance;

Assisting the large number of self-employed and small business in the formal and informal sector who supply goods and services to the industry improve the livelihoods they earn from the industry by working with business support agencies targeting micro and small business;

Launching a programme to ensure that all existing and new attractions, scenic routes and circuits and themed trails provide opportunities for local people to sell goods and services to visitors.

Designing a logo that would identify all infrastructure and social services provided as a result of the funds and economic rationale provided by tourism.

Financial Considerations

The industry has grown significantly since then and today Brand Jamaica is known, recognized and loved all over the world. Below is a table illustrating the financials over a number of years according to the tourism board of Jamaica website.

Year

Total Stopover

Arrivals

Total Cruise Arrivals

Total Visitor Arrivals

Total

Visitor Expenditure

1955

86,793

35,356**

122,149

£6,718,190

1963

131,865

70,464**

202,329

£13,500,000*

1975

395,809

150,433

553,258

US$128,706,000

1984

603,436

231,039

843,774

US$406,600,000

1994

976,635

595,036

1,108,871

US$919,000,000

2003

1,350,285

1,132,596

2,482,881

US$1,336,000,000

2009

1,831,097

922,349

2,753,446

US$1,925,423,000

SWOT Analysis of the Jamaica Tourism Sector

Strengths

Diversity of natural attractions, topography, flora, fauna, and accommodation which provides the basis for expansion of sub sector.

Climate and Warmth/hospitality of people.

Jamaica is an English-speaking country.

Easily trained staff.

Cultural/historical heritage i.e. exotic cuisine, music, art, etc.

Regulatory framework for attractions including health, fire, safety and security.

Weakness

Insufficient scheduled air service from some markets.

Lack of man-made attractions/ development of natural attractions.

Lack of enough large facilities to adequately host large meetings and conventions.

Need for improved attention to environmental protection and involvement of local communities in tourism development.

Opportunities

Possible for development of existing markets.

Growing world market for heritage tourism.

New infrastructure development/privatization.

Threats

High Crime Rate and visitor harassment.

Growth of competition.

Pollution of Environment.

Unsuitable development of attraction sites.

Damage to natural and cultural heritage resources by mining, agriculture and housing development.

Manufacturing Sector Review

The overall essence of manufacturing is the conversion of raw or unprocessed material into finished products used for or to assist in consumption. Mass conversion of raw materials, is seen as an important contributor towards growth in an economy. Many recognize the manufacturing industry as the productive/industrious powerhouse of an economy. As it relates to Jamaica, it is one of the core components which attributes to its economic standing. Its existence to Jamaica is vital as most economists would agree that the strength of an economy is its ability to produce.

The manufacturing sector of Jamaica in recent times has been hard hit as a result of various factors, ranging from increasing cost in production to high interest rates. These negative factors have hard pressed the industry to a great extent making it difficult for the industry as a whole to be able to compete on a global scale.

Although these factors may negatively impact the industry we have seen some improvement in the industries. Jamaican companies, though few, have made significant impacts on the global market. This goes to illustrate how resilient the sector can be; granted proper facilities and funding are provided.

Statistical Analysis

The manufacturing sector grew by 1.4% during 2011 and contributed 8.6% to Gross Domestic Product (GDP). Total GDP increased to $739.2 million up from $646.7 million in 2010. This was as a result of increased earnings from traditional and non-traditional manufactured exports due to increased external demand. The increase in demand was as a result of growth in the Mining and Agriculture sector which positively impacted the demand for manufactured goods. In regard to the supply side, its increase was as a result of favourable weather conditions which resulted in increased production mainly in the food, beverage and tobacco sub-sector.

Also, the performance of the manufacturing industry conveyed in the Producer Price Index (PPI) showed an increase of 8.9% compared to a 6.1% in 2010. The positive movement in the PPI resulted from higher cost of fuel on local manufacturing operations with the highest movements in the following:

Refined petroleum products which increased by 32.0%

Wood, wood products and furniture increased by 7.5%

Food, beverage and tobacco which increased by 7.1%

Paper and paper products which increased by 10.7%

Regulatory Bodies

According to the Industry Division of the government of Jamaica, the manufacturing sector is made up of a broad spectrum of companies, which are categorized in to various segments. The segments include agro-processing, construction, and food processing, these listed are only a minor portion of the industry’s overall make up. The body in charge of regulating such a wide spread portfolio is the Ministry of Industry Investment and Commerce. The Industry divisions primary aim is boosting small business development and to facilitate further development of the manufacturing sector.

There are many other regulatory agencies that exist to ensure that the industry operates in an effective and efficient manner. One other such agency is the Bureau of Standards Jamaica. Established by the Standards Act of 1969, the Bureau was formulated to promote and encourage standardization in relation to, commodities, processes, and practices. However over the years its role has expanded to include the provision of services in relation to conformity assessment and metrology. The Bureau is responsible for facilitating the timely development, promulgation, promotion and implementation of national and regional standards for goods, services, processes and practices. (Bureau of Standards Jamaica, 2008)

The Jamaica Manufacturers Association (JMA) was established in 1947 as a limited liability company to promote the development of the manufacturing sector and increase its contribution to the socio-economic welfare of the country by creating jobs and improving the standard of living of all. The core function of the JMA is to promote the development of the manufacturing industry in Jamaica. They achieve this by, encouraging and assisting members in the use of the efficient and modern production methods and the maintenance of excellent product quality and proper standards of safety. They also assist in making representation to government about legislation and regulations that affect the manufacturing sector. Their key role is acting as a liaison between the membership and government ministries and agencies.

Competitive Structure of the Manufacturing Industry:

In a global economy it has become extremely difficult for manufacturing firms across the global spectrum. This is no different for Jamaican manufacturing firms as they face similar conditions. With high interest rates and rising production, it makes difficult for a firm to maintain a competitive stance. According to Porters theory there are five key factors which drive competitiveness in an industry.

Threat of new Entrants: Globalization has contributed to an increase in the number of foreign entities being able to gain access to the domestic markets, resulting in a high level of competition being experienced by the existing local firms.

Threats of substitute products or services: There is an increasing demand for some cheaper alternative goods and services, as a result the companies who are able to provide such commodities at a reduce cost have an edge as it relates to their competitors. Being in a global market many firms have the advantage of cheapened labour and reduced production cost, thus this makes them more efficient and effective in their delivery of particular goods and services. The local industry has been plagued by the fast growing rate of substitute goods gaining entry within the local sphere.

Bargaining Power Buyers: Consumers are essential in building a thriving industry, their continued consumption or use of the product or service contributes towards growth in an industry. In terms of the local manufacturing industry, the growth at times has been very minimal as consumers have now found solace in the fact that they no longer, have to be dependent on locally produced goods, they now are granted with options and are not shy about them. High manufacturing cost have made it difficult for cheap domestic goods to be provided to the buyers, which makes them shy away from localized produce, to more cost efficient products.

Bargaining Power of Suppliers: Suppliers provide the necessary material that aid in the period. Provision of such material has attached to it a cost, many of which make it difficult for some in the industry to conduct business as they may be unable to service these charge. The fact of the matter is that if supplies are shortened then factories or companies will not be able to meet the demands of their customers, thus the relationship between company and supplier is very important. From understanding the importance of the relationship it is now understood that the supplier has some level of control in the way the industry operates.

Rivalry amongst existing competitors: The manufacturing industry is relatively large, whilst at the same time it’s segmented. Whilst one category may be highly competitive another might be dominated by a single player e.g. the cement industry is dominated by Caribbean Cement Company Limited, unlike the food or beverages sector which is dominated by many large and powerful companies such as Grace Limited, Lascelles Limited, Wray and Nephew Limited and so on. It would be a fair assumption to state that there is a low-medium level of competition in the local manufacturing industry as it regard to the cement sector.

Economic Forces and its Impact on the Manufacturing Industry:

The manufacturing industry has greatly been affected by global melt down which occurred a few years ago. Spikes in the price of raw materials made conducting business difficult, as maintaining a profitable company while dealing with increased production cost proved a hard task to manage. Continuous civil on rest in the Arab nations greatly increased the cost of oil, pegging many local manufacturing firms into financial difficulty, as not only did they have to deal with increases in the supply of raw materials but also, there were significant increases in the cost of energy, which lead to numerous firms being closed down.

Increasing interest rates have been an issue for many in the industry, as the cost of capital was too great. Many firms within the industry needed to make much needed upgrades to their plant facilities, which could only be funded via the use of loans and so forth. The result; many firms had to differ any planned upgrades to their facilities or scrapped certain projects all together.

In a competitive global economy, the industry faces many difficulties stemming from agreements with the World Trade Organization (WTO) and also agreements made with CARICOM as it relates to trade in the region These agreements have opened up a window of opportunity for new entrants to make way into the domestic market, which subsequently lead to a reduction in the market share held by most firms.

Industry Comparison

Doing an overview of all three industries it is shown that they all have strengths and weaknesses with various economic factors. Advanced in Technology, social influences and a competitive market is found in the Agricultural, Tourism and Manufacturing industry, and these factors affect the industries in a variety of ways which can cause a positive outcome or vice versa.

In Jamaica’s Manufacturing Sector advance technology is used to produce raw material and other goods in great amount and on a timely basis, and also ensure that the quality of the goods produce is of high standard. Technology has not only been implemented in the manufacturing industry but also in the agricultural and tourism sector to increase time efficiency, product quality and improve services to consumers. The competitive market of the tourism and manufacturing sector is very high; this is as a result of new entrant in the markets and threat of product or service substitution from competitors, this is however good for consumers as the constant competition will decrease the prices of products, which will result in a higher demand of goods from consumers. Nevertheless throughout all this all three industries are affected by the social influences of the economy that is crime, increased cost of energy, less access to affordable credit and the economic recession.

In order to highlight the top industry in Jamaica, a few questions were answered to take under the consideration of variables. They are as follows:

What are the industry’s dominant economic traits?

What are the forces of change in the industry and what impact will they have?

Who is likely to make competitive moves next?

How attractive is the industry in terms of its prospects for above average profitability?

What are the industry’s dominant economic traits?

The dominant economic trait of the tourism industry is that it has larger market potential when compared with the other industries as three million visitors’ visit the island per year, there is a variety of product and services offered though entertainment, art, recreational and educational purposes. The agricultural industry employ over 18% of the countries labour force and provide a source of livelihood for thousands more who depend on it indirectly. While the manufacturing industry employs over 60,000 employees, they produce a wide mixture of products and as such this sector is diverse and has the opportunity to expand its companies in various sectors such as transport, chemical, construction, beverages and so on.

What are the forces of change in the industry and what impact will they have?

Throughout the economic outlook for Jamaica it was shown that for the projected year of 2013 – 2016 interest rates will increase and so will inflation, as such for companies within each industry to gain a profit or a break-even throughout these years companies will need to find creative ways to generate constant growth through demand. A force that can constantly generate change in an industry is technology; therefore companies must ensure that they are up to date on the latest technological change in order to be on top off their sector. All three industries have adopted the technological change however because technological change occurs often some of these industries such as the agricultural and manufacturing industry have a wide technological gap, and should this gap be closed or rather minimise theses industries would become more profitable in the foreseeable future.

Who is likely to make competitive moves next?

The industries that are in a current position to make a competitive move, though investment from potential investors are the tourism industry and the manufacturing industry through the adaptation of technological change.

How attractive is the industry in terms of its prospects for above average profitability?

The tourism industry is very attractive in terms of its prospects for above average profitability, through the investment of technological change, potential investors and market advertising the tourism industry can achieve above average profitability. This is also possible for the manufacturing industry as well, with technology, investors, efficient labour and government aid. The agricultural industry can be profitable if the citizen of the country supports the “Eat what we grow” campaign by the Ministry of Agriculture and Fisheries and the import of products from abroad is reduce significantly and export increase.

Throughout this comparison it was shown that of all the three industries introduced to us, that is the tourism industry, agricultural industry and the manufacturing industry two of the three industries showed more potential of begin profitable in the projected time of 2013-2016, and these were the tourism industry and the manufacturing industry. Of these two industries we choose to look at the manufacturing industry which produces a wide mixture of goods. Throughout the research it was shown that the manufacturing industry of Jamaica decline in 1972-1980 along with the economic conditions of that time, this was not for long however as the sector recovered significantly and contributed 20% to GDP in 1982. However, since then the Jamaican manufacturing sector has decline, and many analyst have lost faith in the sector, with Vision 2030 the government hopes to restore that faith and help the economy to grow.

A SWOT analyse was done of the manufacturing industry to determine the internal environment that is the strength and weakness of the sector and also the external environment that is the opportunities and threats.

Strength

Access to high Jamaican raw material such as cement, limestone and agricultural products.

The sector maintains a strong supply relat