Why economic independence is key

Friday, March 15, 2019

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In his budget presentation last week, Finance Minister Nigel Clarke clearly articulated the mission that National Hero Norman Manley had argued should be for the next generation after him.

Roughly 50 years ago, Mr Manley observed that his generation had achieved political independence, and it would be the task of the next generation to achieve economic independence. Dr Clarke has now grasped the mantle, arguing that it would be his generation that finally achieved this almost forgotten call, stating “we will eventually produce aircraft components and medical devices right here in Jamaica… People will come here for jobs, rather than us migrating there”.

In a speech almost entirely free of partisan rhetoric, Dr Clarke emphasised the cross-party nature of the fiscal reform effort over the past decade, and the roots of both political parties in the trade union movement, which meant that they had always been about equity and growth.

As he observed, the argument that growth in Jamaica automatically comes at the expense of equity has wrought enormous economic damage in the past. He also noted, rightly, that attempts at short-term fixes to historical inequity had led to unsustainably high debt or high inflation, and had been most detrimental to equity over the long term, particularly for the poor, and those on fixed incomes like pensioners.

It is this critical understanding that drives his emphasis on key institutional reforms such as a fiscal council and an independent central bank.

The issue of how to achieve long-term social justice, or equity, in Jamaica was one that all thought had been settled. This was particularly so after Dr Peter Phillips, during his tenure as finance minister, had to impose immense fiscal austerity, thus worsening inequality, to correct an extraordinarily weak economy that had suffered from decades of low or non-existent growth, domestic financial crises, and which the global economic crisis had brought to near collapse through cutting off all but lender-of-last-resort financing of our already unsustainable debt burden.

It seems however that in view of the imminent by-election in Portland Eastern, we all need to be reminded as to how we got to where we are today. The argument that, having finally achieved some fiscal space, we should prioritise cutting consumption taxes over pro-growth policies to encourage investment, understandably, may be politically attractive to an Opposition party seeking power.

But it is economically flawed at this time. A central plank of the growth-inducement strategy prepared by the PIOJ in 2011, and reissued as a “growth” strategy during the subsequent PNP Administration is the reduction of the same financial transaction taxes, stamp duty and transfer tax that Minister Clarke has just reduced or abolished.

These overly high taxes have helped to stymie production through the creation of a vast amount of dead or underutilised capital in the form of land, buildings, businesses and other assets. Prioritising investment through their reduction, particularly in the current economic environment of sharply improving access to finance to drive faster economic growth, will very quickly produce even more jobs, faster growth, and much more fiscal space than the recently created meagre 1/2 per cent of GDP, allowing a future prudent cut in consumption taxes from the revenues of much greater production.

Most importantly, it is a large step towards making our still very fragile economy less vulnerable to external shocks, and creating a much larger cake that can be shared, rather than fighting over scraps, a key part the of mission Mr Norman Manley left us. Any responsible finance minister should choose such an option if he wants true economic independence and prosperity for all.

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