By Guest Contributor Cecil Charles
FOR years, productivity was a term reserved for the esoteric conversations of academics, of little interest to anyone else, but no longer. Within recent years productivity has been at the forefront of the discussions of policy-makers, politicians and even the layman. The latest (2008) financial crisis and the period of hardship which ensued have exposed the vulnerabilities of Caribbean economies of which low growth and high debt top the list. This has prompted policy-makers to take a closer look at productivity and evaluate its relevance to the region. It is the belief that the Caribbean’s comatose growth is a symptom of the region’s low productivity. Barbados’ Prime Minister Freundel Stuart previously admitted that Caribbean economies have been lagging behind in initiatives intended to boost productivity levels and drive the region’s trade competitiveness and economic development.
There is an urgent need for the Caribbean to undergo a period of introspection with the intention to identify the root of our low productivity and putting forward ideas and policies to remedy this deficiency. This article is one such attempt at self-examination, but is by no means a complete diagnosis of the region’s deficiency. Rather, the article is a mere snapshot into the Caribbean’s low productivity which will hopefully inspire further discussion. The article will look briefly at the cause, effect and solutions to low productivity within the Caribbean; not necessarily in that order.
A good starting point for this review is perhaps to define productivity. The simplest definitions is that productivity is the rate within which inputs can be converted into output. The higher the conversion rate of inputs to output the more productive an individual, organisation or economy.
As was established above, low growth is one of the side-effects of low productivity. In order to appreciate the seriousness of low growth we shall consider the following. In the 1960s income per capita in Latin America and the Caribbean was almost one quarter that of the United States; compared to present day income per capita which is a mere one-sixth of the United States of America’s income per capita. This can be juxtaposed against East Asian countries which in the 1960s had income levels well below those of Latin America and the Caribbean; now, these very same countries are fast approaching the income levels of developed countries. Had productivity in the region grown at-least at the same rate as the United States of America, the income per capita of the region relative to the United States would have remained roughly at one-quarter after 50 years. Instead, our income per capita has worsened considerably in relation to the United States of America and many other economies and regions globally.
Within the Caribbean we have paid dearly for our lacklustre economic growth which has resulted from low productivity. One side effect which comes to the fore is rising public debt. Since our growth within the region has been constrained, occasionally we are forced to borrow to survive; not only to cover capital projects but at times we borrow to meet recurrent expenditure.
One response taken by most Caribbean nations at one time or another to combat low growth was the provision of tax incentives to attract foreign direct investment, with the intention of increasing activity within the respective country and thereby propelling growth. These measures although well-intentioned can be harmful in the long run. For example from the 1970s and 1980s Jamaica’s industrial policy was based on two pillars: granting tax incentives to attract foreign direct investment and export promotion. This has resulted in a complex system of tax incentives which have distorted the country’s structure of taxation. Jamaica’s tax system consists of over 200,000 different incentives all in the name of attracting foregn direct investment; unfortunately, these incentives on average result in the government forgoing approximately 20% of its annual revenue. This lost revenue again leads to state borrowing, but also robs citizens of revenues which could have otherwise gone into infrastructural development, health care, education and any other number of causes.
The effects of low productivity are felt not only by the state and policy-makers, but also by the common man. Low productivity countries will normally have a lower standard of living and a more diminished quality of life in comparison to similar countries which enjoy higher levels of productivity. This is evident from the differences which would arise in income per capita from the above example; if using this as a proxy for standard of living. Eventually the population will realise the inability of the state to provide the quality or extent of services that more productive countries are delivering, which then results in a diminished sense of wellbeing and quite possibly migration in search of more lucrative opportunities. Once again this scenario is representative of the Caribbean, where in previous decades entirely families uprooted in droves en-route to the developed world in search of a better life.
Of-course there are a number of other side effects from low productivity, apart from the few mentioned above, but brevity must take precedence. The root causes of low productivity are just as sobering as the effects. If the question of “What causes low productivity within the Caribbean” is posed to the average Caribbean citizen, he or she may not hesitate to finger the government or the laziness of Caribbean people. However, the causes of the deficiency are far broader and extend well beyond the bad habits which we have adopted as a society.
Poor allocative efficiency can be credited as the overarching causes of low productivity within the region. What this means is that the allocation of resources within the region has been or is being done in such a way that the maximum benefit from resources is not being obtained, resulting in Caribbean individuals, firms and governments paying a premium for lost output as a result of input resources not being assigned to where they would provide the highest value and return.
The second and final part of this article will be published next Tuesday