lR77F7,171"11 TO l) | Pu? TUm75 T)sK| Xtl s raPY RE?S TRICT ED Jfl~"~T1777T7 'DESKI il TP WTHv ii ft JJJLI UVA s CA9 I O W E Vol. 1 This report is for official use only by the Bank Group and specificaly authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. NTTP.M?NArTTC0NAT. RANK PFOR RCON.TR1ITCT1N AND nlV1PI T-PM1NJT TNTP1N ATTCNA T. TPV:T-OPMT:NT AqqC!TATION CURRENT ECONOMIC POSITION AND PROSPECTS OF JAMAICA (in four volumes) VOLUME I MAIN REPORT T. A . I n 7 I Junie ±, 1971 Central America and Caribbean Department CURRENCY EQUIVALENTS US$1 = 0.83 Jamaica Dollars (J$) J$l = 1.20 T3S$ FISCAL YEAR April 1 - March 31 TABLE OF CONTENTS Page No. BASIC DATA MAP SUMMARY AND CONCLUSIONS ............................. i - iii I. INTRODUCTION ........................................ 1 II. ECONOMIC GROWTI AND EMPLOYMENT .... ............ 2 Trends and Targets ................................. 2 Structural Change ................................... 4 Public Policy ....................................... 6 III. AGRICULTURE ......................................... a IV. TOURISM ............................................. 11 V. BAUXITE AND ALUMINA ................................. 14 VI. MANUFACTURING ....................................... 17 VII. EDUCATION ........................................... 20 VITiT TRANSPORT ........................................... 22 IX. PLTBLIC UTTLTTIES ........ 25 X. PUBTLIC INVESTMENT ANND FINANCE ........................ 27 Public- Tnvestmpent e.- 27 Public Savings ................ .. ................... 30 Public Debt . . 32 XI. MONE-Y A-ND EXTERNAT. PAYMENTS ,......... ................ 34 Caital Flows- 34 The Current Account ................................. 36 Monetary Policy- 39 XII. PROSPECTS AND CREDITWORTHINESS . 41 This report is based on the findings of a mission which visited Jamaica in October=November 1970. The mission was composed of Messrs. Hans 0. Sch-.itt (chief), Timothy King (balance of payments, industry, tourism), Rex L. Bosson (inves'Lmen't offitcer), TJoerg"-Uwe Rchter (public fin-ance, educatior.), .w>ym.ond ~±ILV~LLUV LL UJ- A.~J U WX .. I - *C * D. Crotty (consultant, agriculture), Philip Malone (consultant, public admiri'nLstrat'Lor,) anld Mi.ss Lydia C. ari.s(eetv. TABLE OF CONTENTS (Contrd) I APPENDICES A. Changes in Taxation B. Measures of Unemployment C. Tourist Demand JAMAICA BASIC DATA Area and population Area 11,1124 square kilometers Population 1,861,300 1/ (1970) Population density 163 per square kilometers Economic indicators GNP per capita US$572 Origin of GDP (1969) (percent) Agriculture 9 Mining, quarrying and refinina 12 Manufacturing 15 Construction 13 Transport and communication 7 Public Administration 9 Distribution 14 Other services 21 Ratios to GDP (1969) Exports of goods and services 36.8 Imports of goods and services L5.1 Central Government current revenue 2/ 19.6 Central Government current exoenditure 2/ 16.5 External public debt (end of year) 13.8 Gross national savings 17.0 Private (11.2) Public (28) Gross fixed investment 28.6 Private (2)4.3) Public (4.3) Changes in stocks 1.1 Money and quasi-money 35.0 Average Annual changes in ennnomic indinatnrR 1965-67 1968 1969 (percent) Real GDP 3.3 4.8 4.5 Real GDP per capita 1.6 3.1 2.8 GDP at current prices 7.6 10.4 9.8 T)mestic expenditulre at cuirren+ prices 8.8 13.7 11.8 Investment 17.3 29.9 19.3 onsnm.ption 6.7 9.0 9.2 v I *Pre nr c enu- -'nr ,-. 2/ Fiscal year. Average 1965-68 1969 1970 (percent) Cost of living (consumer price index Kingston) h.L 9.h 7.3 (consumer price index rural) 4.5 7.8 9.0 Central Government current revenue 1/ 10.8 21.2 23.0 Central Government current expenditure 1/ 12.2 13.5 19.7 Central Government caDital exDenditure 1/ 13.7 22.1 25.2 Money and quasi-money 19.1 19.0 13.6 Money 15.r5 16.6 1L.2 Quasi-money 19.1 21.2 18.2 Net domestic bank assets 9.3 2/ 23.7 13.5 Credit to public sector (net) (2.8)2/ (2.9) (4.8) C'rediH1t, tr) private. sec.tor (7=-7) 95/ (25-8-) (12=5) Merchandise exports (f.o.b.) o.6 16.0 16.5 Merchandise imports (c.i.f.) 9-9 15.3 15.3 10AR 19Ao 1 °70 Central Government finances 1J! (J$ million) Current revenue 150.2 182.1 224.0 Current e.xpenditulre 13h.4 152.6A 12q .6 Current account surplus 15.8 29.5 41.h Capital expendituire !47.5 58.0 72.6 Overall surplus or deficit (-) 31.7 28.5 31.2 xternal financl.ng (net) 13.6 1' 9 7.8 Internal financing (net) 23.2 20.0 25.4 1 OAR b10oAo -1 07rn Balance of payments (Uss million) Merchandise exports (f.o.b.) 221.8 257.2 299.6 Cjmmd.Lty conc41 Lation: l/ Bauxite and alumina 50 percent Ct__.. 7_ __ -1' .JU ,,i ±f I t-I U1 D Merchandise imports (c.i.f.) -382.5 -440.9 -508.2 -r--.es (..&\ 7'n r'r-'r _r"~,'7 .Ljves UMtz IIUOIincome (IntU) 4 ( ., -5.0U - 5 I Other services (net) 88.4 96.7 106.4 C-urrernt 'UrEans'ers (net)1. 14.3 18. Current account balance -107.2 -127.7 -1h1.4 rrivaue capital (net) 129.2 io8.5 2.4 Official capital (net) 16.0 6.9 3.2 Errors and omissions -4.1 -1.6 7.3 Change in net reserves (increase -) -33.9 13.9 -21.5 1/ Fiscal year. zj Average 1966-1968. 3/ Capital revenue and cash balances. 4/ Average 1967-69. 1968 -1969 1970 External public debt (TIit, million) l Debt including undisbursed 151.7 153.9 171.5 excluding l-nd11)ib7 121.9 128.0 Debt service 13.2 13.8 15.3 Debt service rat4o (pre Y383.635 Ba,-king system reserve psczei +-n inn-100.8 87 Ji 108 5 fl> ol9m.ed CormnMi + +d IBRD operations (December 31, 1970) US$30.7 US$42.7 2/ IMF data (December 31, 1970) Quota- U5 mVlion cumulative drawings US$ 3.8 million Fund holdings P Tf JAmc as8 cnt o qo -t - Eu' U11SV|Ws U- Uc21110JCtsau si>V 9 S avv Allocation of SDR'S SDR 6.h million flU U.LI~~ U-. L)."J.H - .JAL. ~j . L4 IL.4..J~ Social indicators 1950 1960 1969 Population growth rate % p.a. 2.1 1.9 1.7 Rate of natural increase % p.a. 3.0 3.3 2.7 Birth rate per 1,000 popln. 33.5 42.1 35.9 3/ Death rate per 1,000 popln. 12.0 8.8 7.1 3/ Hospital beds per 1,000 popln. n.a. 4.0 4i n.a. Life expectancy years 57.3 64.7 n.a. Doctors per 10,000 popln. 2.6 5/ 3.9 5.0 6/ Nurses per 10,000 popln. n.a. 24.7 hi n.a. Income of: more than US$i,200 p.a. % of respondents n.a. 3.3 4/ n.a. less than US$ 280 p.a. % of respondents n.a. 20.3 17/ n.a. Unemployment rate % n.a. 13 14-15 1/ As percent of exports of goods and services net of investment income payments. 2/ Net of repayments of US$0.9 million. 3/ 1967. 17 196h. T/ 195h. Z/ 1965. Social indlcators cantbid.) i950 i96 iL6OU Literacy rate % adult popin. 77.0 86.0 n.a. School. enrollment: % of school age Primary popln. ) 70.0 85.o y/ % of school age ) 69.0 Secondary popin. ) 10.0 9.2 2/ International relations Member of the British Commonwealth, GATT, and Caribbean Free Trade Association (CARIFTA) Joined OAS and IDB in 1969 Joined the Caribbean Development Bank as a founding member in January 1970 1/ Public schools only. 2/ Second cycle only. 1 X M 0 ; ; C t ty SUMMARY AN)D CONCLUSIONS 1. Over the past decade the Jamaican economy has experienced major changes. Bauxite mining, alumina production and tourism, as well as non- food manufacturing expanded rapidly, while agriculture has stagnated and agricultural exports, notably of sugar, have declined. The shift in the production pattern has been associated with emigration from rural areas, rapid urbanization, and growing unemployment. The population of metropo- litan Kingston now accounts for one-third of the population and two-thirds of all manufacturing employment. Three-quarters of the natural increment to the labor force emigrated out of the country altogether, however, so that the labor force at home increased at an average of only just over one percent annually over the past decade. The exodus is taking a particularly large proportion of the skilled and semi-skilled grades. Because of the lack of complementary managerial and technical skills, unemployment of the unskilled labor force has grown more sharply, while at the same time wages have risen at an accelerating rate over time because of the strong and politically active trade union movement. 2. The overall short-term growth prospects are good in view of the very large investments made in recent years, particularly in mining and hotels, but also in utilities and to a lesser extent in the transport sys- tem. Looking over the first half of the 1970's, a 6 percent annual growth rate should be attainable compared to less than 5 percent over the last decade. This higher rate would be consistent with balance of payments equilibrium if the rate of inflation can be reduced from its present 6 per- cent yearly to about 4 percent. and if national savinas are maintained at least at their current level of 17-18 percent of GNP. These aims can be 4eopardized by excessive wage increases as much as by failure to maintain realistic credit policies. The projected real growth rate, even if achieved over the next 2-1 ypars renuiires Rtpnnpd-uin npb14ir inupetmpnt if it is to be sustained thereafter, as investment in mining and tourism is likely to fall off before it can pick un azain in the second half of the decade. 3. Publir investment more than doubled over the five vearn to 1970; rising in proportion to GDP from less than 4 to more than 5 percent, and keepnina nace with an enually rapid innreane in fixed private investment financed mainly from abroad. While such a rate of increase in public in- vestment exceedsI normal growth requirements- the extent of the nrnspertiUe slowdown may still be too large. A formal development plan for 1971-75 is still being forTm..ulated. At present nripeas fived niihlic investment is like- ly to stabilize over the next five years at about J$60 million annually, compared to the current level of T$55 million. A tally of pro4ects in pro- cess or planned in the various executing agencies, shows that the allocation of fixed public investment wilundergo cags W som s-co r----sI th n-ar future. The most significant shifts will be in education, the share of ,Wfi.ich is "likely Lto decline from. 19 Lto 1 percent, and in urlbuan infrastructure, the share of which will increase from 20 to 27 percent. Transport retains its shlare of 2-2 percent. nower an' telecommEun,ications facilities are priv= ately owned. and UL not enter intoL the total.~1ILU ~ L~±L.L~~.LLL.V. ately owned and do not enter into the total. 4. The authorities have become increasingly sensitive to the dual problems of brain drain and unemployment and have begun to tackle them on a broad front. First, family planning in order to reduce the popula- tion growth rate has been official policy since the early sixties. Second, a major educational effort has begun in recent years, with increasing em- phasis on technical training, to supply the market both with specific skills and a quickly trainable work force. In part these efforts will com- pensate for the drain of qualified personnel abroad. Third, to slow down the movement of population from the land, the authorities have recently introduced a package of programs to promote "viable" farms. Fourth, in- dustrialization and tourist development are being encouraged with active government support, including fiscal incentives as well as tariffs and quotas, to expand urban job opportunities and incomes. Finally, the effort progressively to Jamaicanize ownership and management of enterprises has been launched, with a start in the banking sector, to some extent in order to induce qualified Jamaicans to remain at home. Though the success of this program is not guaranteed, no important policy options appear to be omitted. 5. Fiscal constraints have not been a serious brake on public invest- ment in the recent past. Public savings grew from about one percent of GNP to just over four in five years, despite very rapid current expenditure increases in real terms. The even faster rise in current revenues resulted mainly from increased exports of bauxite, increased personal incomes, the impact of the 1967 devaluation on customs duties. and from tax reforms that began to be introduced in 1969. The chief constraint on accelerated public investment is now one of qualified personnel. To ensure a competent civil service, however, the authorities will have to increase salaries sub- qtnntinllvy nour n nprind when the growth of current revenues is also likelv to slow down. The buoyancy of tax receipts will be difficult to sustain aftpr thp initin1 imnqrt of the current reforms has worn off; nartlv he- cause of a prospective levelling off in bauxite production and of continued liberal incentive crhemes fnr alumin2, tourisnj and maniifnrturing industry, the costs and benefits of which should be re-examined. 6. Foreign assistance has as yet played only a modest part in finan- cing publ4c investment, and a neglgi-le o ne 4in f4nanir.4 the current ac- count deficit in the balance of payments. Net proceeds from foreign loans addl -u e.Jd 'A.le.sJs thIL-Ian 5 percent to currentI revenues of tChAe Central G-overnment bDe- tween 1965 and 1969. Though current account savings of the public sector coveredL on'Ly sor[e 40 percent ofL capital expenditures, almost as ruchl was raised by borrowing in the domestic market, mainly from the social insur- ance systeLi, Lea-v'ng 'less than 15 percent to be covereU by extLern.al orrow- ing net of amortization payments. The resource transfer to Jamaica, net of amortization ana interest, came to auout UD$1-iu6 millionL over the last five years taken together. While the totals have been increasing over the last few years, tne net contriDution of foreign borrowing to pUDiiC invest- ment is unlikely to rise very far above 20 percent on average over the next few years. The reliance on foreign assistance in tne jamaican investment program will continue, therefore, to be relatively modest. - iii - 7. The Jamaican external debt outstanding at the end of 1970 came to US$171.5 million, or about 14.7 percent of GNP, including undisbursed. The service on it came to no more than US$15.3 million in 1970, or to 3.5 per- cent of exports of goods and services net of investment income payments. With a public investment program of the size and composition that appears to be feasible over the next five years, the debt total is unlikely to in- crease much beyond US$400 million and, if most of it is drawn - as planned - from international development institutions, the service on it should not exceed US$36 million or 5.5 percent of exports of goods and non-factor serv- ices by 1975. As a ratio to current revenues of the Central Government, debt service would then have risen from nearly 6.0 to 7.0 percent. With a service burden almost certain to remain as light as this, Jamaica is creditworthy for all the external borrowing it can productively absorb. With accelerated project preparation, progressively larger borrowing at conventional terms would appear to be fully justified. T TmTJnODCTrTTN 1. Jamaica, the third largest Caribbean island, covers an area of 4, 410 .- s qu a re mil es S it ex-_terd s f or a- ma_-xi.m.um. 1 5 n 4-4 le s fro att t and 55 miles from north to south. A mountain ridge, about 2,500 feet high, rurLs Lror east to west, separatir.gt- th .C O J..e isLLd iL&6%, toLL LnorLt L h -, dsutLh.L.LI coastal areas. The country's natural resources include a tropical climate, Ueaches suita.lble Lfor t-ouriLsr primarily adLong the nortLhL coast, .nUd uauxiL te deposits scattered in various locations in the central area of the island. o. _ _ .J __ _ _._ _ ___-_ _-__ _ L.L_ __ _ 1 _ L. oUgarL pdllLdLantUtio ULIUpy 'arge8 propUo LULos Uo UULII b Ut castay pldins, UUL a substantial part of the population lives in the central highlands on very sma±lL Iarrns TILLe Niflgb Lto 1DmLXpol_iLLi area, situated oilL the southeast coast, is the sole metropolis. It has a population of 600,000 in a country with a total population of about 2 million. The natural growth rate of the population has declined from about 3.2 percent in the early 1960's to 2.6 percent in recent years. The net rate of increase has been about one percent below these rates due to emigration. 2. Jamaica shares the political traditions and social and economic structure of other Caribbean Coimmonwealth countries: high population density, a colonial plantation heritage, and enclave mining and tourist operations. Foreign management of much of the island's natural resources and industrial capital has been basic to the island's economic development thus far. With the current decline of the traditional plantation economy, based mainly on sugar, and the emergence of a more modern economy, economic power has begun to shift somewhat. A new group of mainly U.S. and Canadian companies active in bauxite mining, hotels and some manufacturing, has gained on the original plantation sector. An emerging group of Jamaicans has also benefitted from structural shifts in the economy and from political independence. However, a large part of the population, living on small hill farms, have barely improved their material standards. With improved education and large migration from the countryside to the urban centers, substantial unemployment of an increasingly alert people has intensified social problems. 3. Jamaica has been an independent country within the British Commonwealth since 1962. Self-government had been in preparation for some two decades and the transition to independence was a smooth one. The popular vote is still about evenly divided between two main parties, both of which rely heavily on trade union support. The Peoples National Party (PNP) was voted out of office in 1961: it had sought independence in the context of a proposed West Indies Federation which was then abandoned. The Jamaican Labour Party (JLP) was returned to office again in the 1967 elections and has now been in office almost ten years. There has been little ideological difference between the parties. Both support a predomi- nant role for private enterprise in the economy and its gradual Jamaicani- zation through expanded equity participation. Extra-parliamentary opposi- tion has so far been weak and mainly concentrated at the university. Violent crime became a problem in Kingston briefly in 1968, but was curbed by vigorous law enforcement in 1969. - 2 - I. ECONOMIC GROWTH! AND EMIPLUYMENT Trends and Targets 4. The per capita GNP of Jamaica is currently about US$540. The growth of real GDP at factor cost in both 1968 and 1969 appears to have been close to the 1962/67 average of about 4.5 percent. With a rate of population growth of 1.6 percent per annum, per capita output has still expanded at nearly 3 percent yearly, a respectable performance. Invest- ment during 1968 and 1969 was high at 26-27 percent of gross domestic expenditure, compared with 20 percent on average in 1961-67, and was financed by high levels both of national savings and of net capital inflow. A savings rate of over 17 percent of GNP was maintained through most of the past decade. The larger part of investment has gone into the mining sector, and to a lesser extent into power and telecommunications, roads and hotels. With output from these investments coming on stream, the prospects for accelerated growth in the near future are good. Roughly 6 percent a year in real growth of GDP should be attainable over the next few years. Agriculture has been the weakest sector: its output declined with adverse weather conditions in recent years, but should at least stabilize in the coming years. 5. The Jamaican economy is a very open one. Imports of goods and services average about 40 percent of total domestic expenditure, and exports about 40 percent of GDP at factor cost. Hence economic growth is heavily dependent on export trends. Over the past decade both exports, measured in domestic currency, and GDP at current market prices increased at an average annual rate of just over 8 percent. This rate was achieved despite an absolute decline in agricultural exports, notably of sugar, mainly through a rapid expansion of bauxite and alumina exports and of tourist arrivals. With no further decline in agriculture, exports may be expected to grow at 10-11 percent over the next five years. Combined with likely receipts on capital account, this will finance imports consistent with a 10 percent annual growth rate of money GDP. To realize a 6 percent erowth rate of GDP in real terms; therefore- annual price increases, measured by the GDP deflator, must be reduced from their current rate of over 6 nercent to about 4 nercent. To attain the nrice target; the nronortion of voluntary savings in GNP will have to be maintained at the present realized rate of 17-18 nperrent, MACRO-ECONOILC INDICATORS J$ millions in Amounts Growth Rates current prices 1965 1970 1975 1965-70 1970-75 Consumption Expenditures 539 807 1,284 8.4 9.8 Gross Domestic Investment 129 320 434 19.9 6.3 Net Capital Flow (- in) -13 -96 -52 GDP 656 1,031 1,666 9.4 10.1 Net Factor Payments 19 57 108 GNP 637 974 1,558 8.9 9.3 Gross National Savings 97 167 274 11.5 10.4 Source: Volume II, Tables 2.4 and 2.11. 6. Factors that have accelerated price increases in recent years include (i) an upward surge of wages, (ii) the 1967 devaluation to maintain parity with sterling, and (iii) a steady expansion particularly of consumer credit. Wage restraint is difficult to impose, given the existence of two strong unions of about equal size. Each is allied to opposing political parties, and both compete vigorously to secure plant bargaining rights by offering to obtain higher benefits for their members. Over a third of the labor force is presently organized. For the purpose of bargaining with employers, employees vote to select the union to represent them. Employers will then withhold the dues of the union chosen by the majority directly from their paychecks. As a result. union wage rates in a number of sectors already appear to be relatively high for a country with Jamaica's per capita income, and further increases could well make it difficult for most Jamaican industries and tourism to compete internationally. The Government is nevertheless unlikely to ieopardize its political support by advocating an incomes policy to restrain wages. 7. The 1967 devaluation was prompted by a desire to maintain parity with sterlin2- not induced by immediate balance of navments reauirenmnts- Any windfall effect on the balance of payments proved to be temporary, hnwever, as domestir wages and nrices qulcklv resonnnded to the inrrrepasd cost of imports. The deficit on current account continued to widen steandilv from TTS$45 million in 19A5 to UTSA128 million in 1969. Some of this trend was due to factors not directly related to exchange rates. The proportion. of total emrn,rt in (ThP vrm4i nal cons ta!4nt instea of ricing, but partly because unfavorable weather reduced the sugar and banana crops. -4- The proportion of imports in total expenditure actually increased instead of declining. This was due not only to increased local currency prices for imported consumer goods, but also to the heavy import requirements of stepped-up investments in the mining and processing of bauxite. Even abstracting from these special circumstances, however, the net improvement in the current account appears to have been small. 8. The money supply rose at an average rate of nearly 16 percent an- nually in 1965-69. The main cause was a rapid increase in credit to the private sector. Government borrowed mainly from the National Insurance Scheme and to a limited extent only from the banking system. The impact of credit expansion to the private sector was partially offset also by an in- creased readiness of the public to hold financial assets. The ratio of mon- ey supply to GNP increased from less than 10 to over 12 percent in four years. The growth in quasi-money holdings was even more impressive: private claims on banks and other intermediaries rose from 31 to 45 percent of GNP over the same period. For the commercial banks alone, none of the incre- ment in credit outstanding to the private sector went to agriculture; some 13 percent was absorbed by construction and land development; nearly 24 percent was accounted for by industry; but 30 percent went in personal and professional loans mainly to finance consumer durables. There appears to have been some scope for credit restraint. therefore, to moderate inflationary pressures. Restrictive measures have already succeeded in reducing the rate of growth in the money supply to less than 9 percent in the twelve months to August 1970. Structural Change 9. The pivotal position of wage labor in the Jamaican economy must be seen in the renntext nf the m-aqqive noniplation shifts that have taken place over the past decade. Only preliminary results of the 1970 Census are avail2ble. These indirct-p e nnnaolntinn total of ahniit 1-9 million, and hence a population growth rate of 1.7 percent annually over the last decade. It co.mpares with a rate of 29 nperrent that would have been experienced given the natural increase and no emigration. Under-recording o%f nnnr,i.1 Ac".r f..rt ,-c hr. n n-- r, nn nnn-rD t 4c 4 mnnll i A f thii ra aic r,^nt- is of ~ ~ -- annua deatrsb bout - percent is ipidi h esscuti correct. Migration statistics show predominantly male emigration to the Un4 ited K4nrAr.-n gijvin ay to- pnredlnantly Fnm,lo am4graot4n" to th-ei TTe4tdA States. This has contributed to a decrease in the ratio of females to mrles in the jama4caic populat4in From 1.07 to I .4 and to a L decline in the birth rate. A larger proportion of emigrants than of the population as a wt.ole are m.embers of the work force. TLence, though the population expands at a comparatively low rate, the dependency ratio among th_ose re,-,aining is no 'less hi-4, I- a +- wo_uldb ihasusAtal LLLJ~£~I.L.i~ 0ir I~0 1.LnLL tOIL tan L. WrJuJ.l 'De with.L a. substant LO all higher rate, and creates similar problems. 10. Some three-quarters of the potential increment to the labor force appears to Ihave Ligratedu out ofL the country aLtoget'Ler. ILe fLorce remaining grew at an average rate of only just above one percent annually -5- over the last decade. Emigrants abroad, like internal migrants, have drawn a disproportionate share from the higher-skilled grades. In 1967, some 20 percent of rural-urban migrants were found to have a secondary education or better, as compared with 13 percent of the receiving metro- politan population. In the two years 1967 and 1968, the number of profes- sional and technical Dersonnel who emigrated abroad eaualled about three- quarters the number of new entrants in that occupational category. As a result, there has been an increasing scarcity of skilled labor as well as managerial personnel throughout the economy. The resultant upward pressure on wages has provided the basis on which a strong labor movement could thrive. A lack of complementary managerial and other skills has at the same time exacerbated the nroblem of rural and urban unemplovment among the lesser skills. The lack of funds and technical assistance which would have made nossible the estahlishment nf qelf-emnlnved nperons nr sma1l firms has also contributed to the situation. Unemployment particularly among the unskilled would have heen iihQtantfil in qnu rc2s in a situaqtinn of rapid changes in the structure of production. 11. Rising wage rates have reinforced a bias in investment towards cpnita-isnter.sive -tnechniqiesa n-sA ndroduts that was nlalnAy inhenrert 4n the country's natural resource endowment. The lack of resilience of agriculture i. the face of adverse weather conditions can in large part be accounted for by acute shortages of labor at wage rates the sector can afford to pay. Over the lanst ten years thenrea 1 . no ineena 4-r. 4vaue --,AdA by- ariculture exports declined, and Jamaica has recently become a net importer of food. Th&e contribution to GDP of m.ning, quarrying ar.d refir.ing expandd fAA rom,. i to 12 percent, that of non-food manufacturing from 7 to 9 percent, while the OlaCLC V- a;,L±L. A.LL * LC.LJ. LU IS. L. 0 " L5LLULL U A.&*0L to exports dropped from 41 to 22 percent in 1963-69, while bauxite and alu- m,Lina inc % r LCea-LsCed thlers f. Lrom 40 LU jj pretzL. , adLu manufactLUr.gLL6 Lfrom 17l to 19 percent. A capital-intensive bias, together with technological and mar- ketir.g audvantages, has ter.ded to La-vor Lore'gi.i owri.erslILp ' the growth sec- tors, as local investors do not dispose over adequate concentrations of capita l U Lad LItUecoogy Lto cUILpetL eqUaJ.Ly Ly iI t 1- - 12. Thre r.zovemlent of population ara eisi aiaa mv..n IS.. ILi JSU~SSIL U. jU JU.L CLU I U A.i~ UC 6± J= ALLM .5L5 .JdLUSU.L%., "O CZ S0VSIC of people off the land to the cities. Over the last decade 15 percent of new eXsuployi-nent was absorbed by the mining industr-y and JV pLcetL Uby Lanu- facturing, though mining still absorbs less than 2 percent of the total labor force ana manulacturing 15 percent. Agriculture, which still engages some 30 percent of the total, absorbed none of the increase. As a result o0 internal migration, the population 0f NinLgston and its suUurUbs hIs growL at an annual rate in 1960-68 of about 2.7 percent, compared with just over one percent for the rest of the country, and now accounts for aimost one- third of the total population and for two-thirds of all manufacturing em- ployment. Of the net addition to the labor force over this period, however, only a little over half have found any jobs at all. Unemployment therefore remains high and may have increased slightly from 13 percent in 1960 to per- haps 14-15 percent in 1970. The figure of 20 percent sometimes quoted ap- pears to be an exaggeration (see Appendix B). It tends to be concentrated among recent migrants, and among the uneducated and the young. - 6 - 13. The concentration of production on capital-intensive sectors such as bauxite-alumina and tourism may be expected to intensify in future. In the absence of compensatory policies, an already skewed income distribu- tion would thereby be distorted further. In 1968, perhaps three-quarters of the Jamaican population earned less than the country's average income. A day's wages in the sugar industry can be earned in less than an hour with a bauxite or alumina company, and in less than 2-1/2 hours in many of the larger factories. In 1963-64, 8 percent of households in the metropolitan area were estimated to earn less than J$200 annually; 17 percent did so in the other main towns and 32 percent in the rural areas. The unemployed find themselves at the bottom of the scale. They sustain themselves from the produce of tiny hill farms, occasional earnings on public works proiects, or by sharing the incomes of family members in better paid employment. Public Policy 14. Wage pressures are part of a more complex set of forces affecting nonulation and amnlovment. The authorities have resnonded on a broad front. First, family planning, privately promoted since 1939, was organized under government auspices after independence in 1964, and with IBRD financial assistance since 1970. It probably played a part in the decline of the crude birth rate from 42 in 1960 to 39 in 1966, and more sharnlv to 33 in 1969. Other factors have included a high proportion of male emigration in the earlyv ixties Th-s redc,epd the ratio of male5 to females in thp mar- riageable age group well below its level in the population as a whole, and thereby contributed to high female nqrtiripation rates in the 1abor foree and most recently to sharply accelerated female emigration. The decline in fertility has come Iater than in Trinidad and Tobago: wnperienrc there suggests that the process, once begun, is likely to continue to much lower levelcs th-an the one presently obtain4ng in Jamaica. A dclt-1 ina 4i the na- tural growth rate from 2.7 percent now to slightly below 2 percent in the 1980's is probable and would make an appreciable contribution toward event- ually easing the pressure of new entrants into the labor market. 15. In response to shortages of skilled manpower on the one hand and Lthe lackl of7 opportuniti4 . es for untrained youth on ithLe other, education anA training have been considerably expanded in recent years, with increasing em ha i on te h i c1_ c- IL - .._ >: _ T_ J __ T- _ 1 - aza I - __: 1__.. ----I __ 1 _ eLmpIIadL0 LLA LU§IIIdla CUULL%_W.LELL. .LLL L.LM ±LCLL I WUVJ 0, ji.1 ML IIVay 0cILUL CL LLVaL-L ments exceeded 85 percent of the relevant age group and first-cycle second- udary schilooUl enroL'L.menL L 80i percentL. Enrollments were stL iL 'l or.ly abo utL 1U percent in second-cycle secondary schools, however, and 7 percent in higher education. ouverrLLment policy asLLL at coLupulsoLy dUUcaLtULn LtILUUgLL primary and first-cycle secondary curricula by 1980, a second-cycle second- ary enrollment of at least 20 percent of the relevant age group, and a shift in secondary education towards science, technical and vocational subjects. It is hoped in this way to compensate in part for the sizeable drain of qualified personnel abroad. The IBRD has provided financial assistance for the requisite restructuring of the educationai system. A severe iack of suitably trained and experienced teachers continues at all levels and is recognized. Without further attention to primary education, primary school leavers are also likely to remain poorly prepared for entrance into secondary schools or direct employment. -7- la. To slow down tne movement ol' population irom the lanU, Lhe au- thorities have recently introduced programs to promote "viable farms," and have negotiated financial assistance in support oI them from IDB as well as the IBRD. These programs exclude farms of less than 5 acres in size. Tnough these number 145,000 out of a total of 185,000 farm holdings, they appear for the most part to offer only part-time employment to their owners. Mainly for social reasons they will continue to benefit from traditional subsidized credit and price support programs. Farms above the 5-acre threshold begin to employ wage labor, and it is on these that rising wage expectations pose the most serious problems. The authorities have there- fore focused attention on increasing productivity on these farms through expanded credit and extension programs to promote the cultivation of com- mercial food crops, tree crops for local and export markets, and livestock. The programs also exclude farms larger than 300 acres and bars sugar, in which large estates tend to specialize, from the crops to be promoted. Only with its recent reverses has the sugar industry begun to receive public assistance, to prevent further decline at first, but increasingly to foster the technical and institutional innovations necessary to put it on a profitable basis once more. 17. To provide employment opportunities at home competitive with those abroad, the growth of a modern manufacturing sector is recognized to be vital. The Government provides two sorts of direct assistance to manufacturing industry: first, a substantial measure of protection against imports through a combination of customs duties and import licensing, and second, generous tax allowances including exemptions for firms which produce exclusively for exports. A wider market for Jamaican exports has been opened up with the creation of the Caribbean Free Trade Association (CARIFTA), but even this remains small. For the longer future, the authorities hope to attract to Jamaica some of the general engineering industries, particularly tool-making where wage costs are becoming very high in the United States. Under an Industrial Engineering Apprentice Scheme, nearly 200 trainees have been sent to the United Kingdom since 1963 to acquire the necessary mechan- ical, electrical and civil engineering skills. A major bottleneck to indus- trial advance at present, however, is the inadequacy of infrastructure, notably in power and telecommunications. In addition a substantial effort is required in improving urban facilities, including housing, water and sewerage, if industrialization is not to create excessive social strains. 18. An effort progressively to Jamaicanize personnel and ownership has been launched in order to strengthen a sense of identification among Jamaicans with their home economy. All foreigners are required to have work permits, renewable every three years, which are granted only when proof exists that Jamaicans with equivalent skills are not available, and which may be conditioned on training schemes being set up to correct the deficiency (see Volume III Public Administration, particularly pp. 7-8). Legislation has been passed to limit foreign ownership of real estate. A partiTular effort concentrates on increasine local Darticipation in banking and insurance. With only one exception, the eight foreign commercial banks - 8 - o a..ra . in Jaruaica h.av in principle ag-red to t -ransorm lo _l bn.h into subsidiaries and to offer shares in them to local purchasers. Two have areauy ue S o. A u-..4 A. r u.. t As rcentl creAtie unAer goverA mnt auspices with financial and technical assistance from abroad, to concentrate the resources of sr,all .LocaUL sa-vers fLor LaJor investmLents iLn Jamaica andU, potentially, overseas as well. Its units wvere initially offered in minimum Lots OL J4, IUU WIL[h thile adueU indUUcee1LnLLt UL o L[incom,,e tax free earnings ofL up to J$250 annually. A stock exchange has been in operation for 2 years, and though trading on it is still light, its r-ole 's expected to expanpd as the economy, and local participation in it, continue to grow. !II. AGRICULTURE 19. Of the 4,410 square miles on the island, agricultural holdings occupy a little over half including perhaps one-fifth in waste and scrub- land; less than 10 percent of the island is in natural forest, and more than a quarter is scrub woodland and abandoned waste outside farms. Vari- able soil qualities, topographical and rainfall conditions are conducive to a high degree of diversification. In addition to sugar and bananas, which account for 22 and 10 percent respectively of the gross value of agricultural production, citrus, coffee, cocoa, coconut, pimento, tobacco, a variety of fruits and vegetables, and grass-fed beef are also produced commercially. There are 185,000 agricultural holdings, some 145,UU0 ot them less than five acres in size, wqhich all told support about half the population and employ over 30 percent ot the labor torce. Agriculture con- tributes only 22 percent of exports, however, and less than 10 percent of GNP. These proportions have declined from 41 percent and 13 percent re- spectively less than a decade ago as other sectors have outperformed agri- culture. Total employment, though still relatively large, appears to have remained constant over the last decade. Apparently none of the increase in the labor force over this period was absorbed in agricultural employment. 20. Jamaica's agricultural output has been disappointing. From 1963 to 1966 value added in agriculture grew at approximately 5 percent annually, but this was preceded by several years of stagnation, and in every year since 1966 output has in fact declined. Drought affected the sugarcane yield in 1967 and 1968, and in 1969 heavy rains seriously reduced the sucrose content of the cane, with the result that sugar production fell from over 500,000 long tons in 1965 to about 360,000 in 1969, not enough to meet all quota entitlements in Britain, Canada and the United States. Of the 16 sugar mills in the country , three shut down. Sugar production is now almost equally divided between estates and independent farmers; all of it is marketed through a Sugar Manufacturers Association. Due to high labor costs and antiquated techniques, Jamaica is not an efficient producer of sugar. At present prices and production levels only exports to the United States are still profitable; for the rest subsidies are required. The in- dustry now receives excise duty rebates, the domestic sugar price has been raised, and the income tax allowance against new investment was also in- -9- creased. These measures DUy time in wnich the industry can once more be put on a profitable basis. A prohibition on the import of modern equip- ment for employment reasons has prevented its modernization in the past. This restriction has recently been relaxed on an experimental basis. 21. The production of bananas, next to sugar the most important crop, has for a number of years stagnated around 235,000 tons; it dropped to 190,000 tons in 1969. Bananas are raised on a large number of farms, most of them small, but marketing is concentrated in the Banana Board, a public institution. In the wake of the drought the principal marketing agent in Britain, where the entire Jamaican crop is normally sold, threatened to cancel its contract because of poor quality and insufficient supplies, but the dispute has since been settled on a constructive basis. Government has intervened to guarantee a minimum price to farmers above the prevailing market price; it is sponsoring a 10,000-acre replanting scheme to introduce the higher yielding Valery strain, and has instituted stricter quality con- trols on exported fruit. Other export crops meanwhile have similarly stag- nated, the coconut industry additionally suffering from plant disease. Agricultural imports have grown rapidly, with the result that Jamaica has become a net importer of food for the first time. Three-quarters of food imports are accounted for by cereals, meat, dairy products and fish. 22. The lack of resilience of Jamaican agriculture in the face of adverse weather conditions reflects problems of longer standing. Although unemployment is substantial, there has been an acute lack of skilled and semi-skilled labor. The wage it can command in alternative employments has raised labor costs in agriculture as well. Farms unable to pay com- petitive wages have gone out of production. The acreage in farms has ac- cordingly declined: it was reported at 1.8 million acres in 1954, at 1.7 million in 1961, and at only 1.5 million in 1968. The bulk of the 300,000 acres lost appears to have been concentrated in the 5-500 acre category. Only the largest sugar estates extend beyond this range; and below it small holders do not contract wage labor. The most rapid productivity in- creases were achieved within the 5-500 range, both per acre and per head, but progress was not rapid enough to forestall a sharp decline in the num- ber of holdings, by nearly a third in less than a generation. Farms above 500 acres declined by only 10 percent, while those below the 5-acre thres- hold slightly increased in number despite a 10 percent loss of land. However, since the total number of farms is only slightly less than the agricultural labor force, despite the importance of wage employment in the larger size categories, many of the smallest holdings must clearly be part-time ac- tivities only. 23. - While government policy is unlikely to reverse the shift in the composition of output and employment towards other sectors, it should be able to stem further declines in the absolute level of agricultural produc- tion and export. The Ministry of Agriculture and Lands was in 1969 divided intn twon spparate Ministries; one for Rural Land Develonment (MRLD), the other for Agriculture and Fisheries (MAF). The MRLD is primarily respon- sib1e for agr1rii1tuirl extennion and the rehabilitation of smaller farms. For this purpose, it will work through 13 Regional Land Authorities that - 10 - cover the whole island, all but two of them newly established. Simultane- ously, the Cocoa and Coffee Industry Boards operating under the MAF have begun to undertake extension work, with former Ministry staff seconded to them and a government grant made to cover their salaries. Two processes of devolution are therefore taking place at once, one geographically, the other functionally, both aimed at improving effectiveness by dispersing responsibility. The dichotomy between extension and marketing has had an especially adverse effect in the past, and allowing more of the marketing boards to operate their own extension services should therefore be encouraged. Increased emphasis on commodity and market-oriented extension may facilitate zoning of the island to promote more regional specialization. A more limited range of more efficient extension services could in this way be made avail- able in most parts of the island. 24. The principal source of credit in agriculture has been the Agri- cultural Credit Board (ACB); the commercial banking system supplies only sugar producers and some of the larger commercial operations. With a marked deterioration in the ACB's arrears position since 1968, the Government has felt obliged to extend credits and outright grants to farmers directly on a temporary basis, but has now instituted a major policy overhaul. The Self-Supporting Farmers Development Program will henceforth concentrate resources much more than in the past on potentially viable farms in the middle-size range. The former Development Finance Company was reorganized into the Jamaica Development Bank (JDB) and, with IBRD assistance, is to service farms of 100-300 acres under the new program. The ACB has tradi- tionally operated a revolving fund fed by its own loan recoveries and gov- ernment grants, mainly to service 100 small credit cooperatives (Peoples Cooperative Banks) and other approved intermediaries. It, too, is to be reorganized, and with IDB assistance will service farms of 5-100 acres under the Self-Supporting Farmers Scheme. A total of nearly 10,000 farms is to be covered by the two institutions together. Production on these farms will concentrate on domestic food crops, tree crops for local and export markets, dairy and livestock. 25. The marketing of the major crops, notably sugar and bananas, is already highly organized in statutory marketing boards that are normally self-financing and pass to producers export realizations less the cost of processing and exporting. In addition, the Agricultural Marketing Corpora- tion (MIC), operating under the Ministry of Agriculture and Fisheries, seeks to. provide reliable markets mainly to small farmers producing for local con- sumption. The AMC maintains a network of purchasing, storage, and distribu- tion centers throughout the country. It intervenes in the market when ne- cessary to support prices: a guaranteed price is currently paid for corn and some other croDs. and contracts are offered to producers of certain fruits and vegetables. Trading losses are borne by the Government. The Cornoration still lacks both the resources and the organization to handle very large quantities of farm produce, however. Food distributors are in- creasingly setting uin their own processing nlants instead of relving on ex- ternal suppliers, but an organized market with adequate storage and canning - 11 - far'4l it4Dc~ Ar%eo -nnti x7t a,v4af- TlDand t-n tffr%r*c,f-i t 4i- facilities ---- ---- eit Dsie fot to encourage -amr to sup- ply what for example hotels need, food remains a major import item. An ef- fective program of import substitution should prob-ably concentrate on a few crops that will in time be exported, such as beef, or citrus, or winter vegetabfles. IV. TOURISM 26. * iurL,ng the last decadue JaiLta-Lica LhLas slared i h LLt LUULr.Ls LU common to all Caribbean islands. Tourism is based mainly on the ability to provide sun, sea anud sand holidays to tourists from the northern hemi- sphere during winter. Jamaica now receives 400,000 visitors annually, luurLtn in tuie Cariubean ail'er Ltne Bahamas anu ruerLto Ri¶o WILt over a 1wil- lion each, and the U.S. Virgin Islands with 800,000. These major competi- tors are all in close vicinity of the U.S. and beneritting from cneaper air fares based on domestic U.S. rates. Of total tourist arrivals to jamaica in 1969, 24 percent were cruise passengers, 8 percent members of the armed forces, and 5 percent were short-stay visitors for 3 days or less. Some 255,000, or 63 percent, were long-stay visitors remaining on the island about 9 days out of the year on average, and spending an esti- mated US$43 per day. Tne number of long-stay visitors rose by 16 percent annually between 1960 and 1969, 10 percent annually between 1965 and 1969, and 8 percent annually in 1967 to 1969. While their growth slowed down, that of short-stay visitors accelerated, from 12.5 percent annually be- tween 1965 and 1969 to 17 percent in 1967 to 1969. The nationality com- position of tourists in 1969 was typical of previous years also. Nearly 80 percent originated in the United States and nearly 10 percent in Canada. Jamaica's main resort areas are on the North Coast, with Montego Bay and Ocho Rios the main destinations for tourists, almost all of whom come by air. Only one in four stays in Kingston. 27. The traditional winter tourist has been a repeat visitor, coming to the island between December and mid-April for a stay of about 14 days. Costs in season range up to US$115 daily for this kind of visitor, but average US$65 to US$75, for double-room accommodations on a modified Amer- ican plan (MAP) 1/ including exclusive access to hotel beaches, nightly floor shows, and sports facilities such as golf courses, tennis courts, and equipment for sea sports. Occupancy rates vary greatly between a low in summer and the peak in March but on the whole have been high by inter- national standards. The enclave nature of these distinctive, typically 40-room hotels has probably been the most appropriate way to exploit the island's resort assets. Jamaica's resources do not appear particularly well suited for large-scale development since, despite reclamation, beaches 1/ MAP includes breakfast and dinner. - 12 - are often narrow, with a quick drop-off and sharp coral as well as algae- Particularly on the North Coast, available beaches have now been largely bought iin. 28= Risino inrnme levers, the grnwth nf ipt transnnrt and the pelati- city of demand to air tariff reductions, as well as increasing group travel, hnvr p11 hAlnimd tn Pxnnnd t-hm tf-niiriict- qilnnlihr mqrkTP-t (Thr niimrhpr of tourists arriving from the U.S. seems to be statistically related mainly to per capita incomes in and air fares from their states of origin - see Appendix C.) These new tourists require lower prices and have rejected the "ernle natuilro" nf witnter hoetol in pernfor osvr rmnril4t-x and greater contact with Jamaican life. Jamaica has begun to respond to the trends towards r.*ss tourism. LoTwer prices have been offered, particularly during the off-season, and there has been some diversification of supply of tourist accommod.ations. New convention-size hotels of up to f-C560 rooms are being constructed, cottages for rent are being developed, recreation facil- ities oul stsid e h1otels are being expanAded, an the inero of th islar. -__ls_4 - .5. .t- J. L J.u Li1 L _0 L Li _LJL1, ~ 1 u~ , antL LLL. 51~ LL L ..LUJL_L IJ.t L1L 0 L..LC&LLU -.LO being opened up for excursions. 29. The proportion of gross receipts from tourism has risen from 13 percent of exports of gooAs and non-fac-or services 4n 1954 to 21 perce-- in 1969, and now ranks second only to bauxite and alumina. Prospects are somrexvh at clouded) hoevr TiL-,- 11-e 1968/6-9 soigdown of tourist arri2va's 50mCw11.1L 1.XLUUU1~~~~~~~~~~~~~U, I1~LUWUVCL . iIIt 7VOUU V2 Z:.LUW.LIL1, IUUWI UtLUL £ LL£~± may be attributed to several factors, mainly perhaps to recession in the UniLtedU SDates, but also to competiftio,, from adir fLares to Europe, hLgh prLces charged in terms of service received compared to Europe or Mexico, and press reports o' social unirest in thLe Caribbean generally. On the basi's of our analysis of the long-term factors underlying tourist arrivals in Jamaica, continuation of tne long-run growtn rate in U.S. tourism to 'auial±ca oU aDOUL 13-14 percent over the last decade would seem to be attainable as long as U.S. per capita incomies increase at no iess tnan 3 percent per annum, and no significant changes in air fares are introduced. This assumes no sig- nificant shift in consumer preferences. Some of tne projections made by ADELATEC, Pan American Airways, Lamarre-Valois International, and Arthur D. Little, are more optimistic. Without exception, nowever, tney snow tnat demand for tourism will tend to grow less for several years than presently planned additions to capacity in Jamaica. 30. A sharp reduction in air fares from the United States in 1965 began a substantial increase in visitor traffic that led to a shortage of accommodation two years later. In response to the shortage, the Hotel Incentive Act was passed in 1968 to give hotel enterprises relief from income tax and customs duties for periods of 10-15 years. An Urban Development Corporation was also set up, which among its other duties pro- moted tourist development based on government-financed infrastructure de- velopinent. As a result, though room capacity expanded by only 7 percent annually in 1967-69, it is now expected to increase by over 28 percent per year between 1969 and 1972, if plans are executed per schedule, raising the number of hotel rooms from a little over 4,000 in 1969 to at least - 13 - 8,500 by 1972. If all present construction Dlans are comnleted. caDacity may well reach more than 13,000 rooms in 1977. The capacity of resort cottages increased in addition bv over a third In 1969 alnne, to nearlv 1,900 beds, and is drawing guests that otherwise might have stayed in hotels~. 31= The reqponnnsiility for nresent nvprrcnnritv and fOr fiurthpr plans to increase hotel construction rests in good part with the public sector. A lack of coordination between the Urban Developmer.t Corporation and the Jamaica Tourist Board has led each to promote the development of new tourist areas - including convntio4-nn center 4i4nRinstn - wit.hou adequate o nsid- eration of what takes place elsewhere on the island or in the Caribbean. The efforts of the Jamaica Tourist Board in promotion, in the creation of more recreational facilities outside hotels, and in publicizing the advan- tages of tour4sr. to Jamaicans, --.re nearly operate ni the right A4recti4on. Prior to planning any further major expansion, however, a general market ~ LUUy LIJL L1 LU MaLL)~I a.- a1 WiLLJ.L=, J.LL WLLJL.ii .JC&11Li.L_L~ [LrLl L PCdL t.L_L1JALjJd . sudy for thle Cariben sawhl, nwic amiar,gt atciae would clearly be desirable. In addition, the need for lower tariffs is free'Ly acknowleUdged as vital to the success of .Jam.aiLcan touriULm in thULe next few years, and effective control over them should be considered, perhaps as a condition for rece'LviuLg fiscal incer,tiLves. kAt the sarme time, the contribution of the Hotel Incentive Act to national income and employ- ment should carefully be reviewed, and thne need for incentives more clearly established than it now is. Recently the Bank of Jamaica has challenged tne net benefits accruing to tne economy from foreign-ownea new notels. A 1958 survey by the UWI suggested that 58 cents of each tourist dollar remained in Jamaica. Tnis appears confirmed by information gatnered by the mission. 32. The dramatic increase in capacity coincides with a slowdown in the growth of long-stay visitors, and a fall in their average length of stay. Hotel occupancy rates have begun to fall. Still, efforts to get hotels to reduce rates in order to make the island more competitive with other tourist destinations have not thus far shown much effect. The demand for luxury tourism in winter may not in fact be highly price elastic in any case; however, the demand for the type of accommodation which has resulted from the 1968 Hotel Incentives Act almost certainly is. One of the main reasons for high tariffs in the past has been the short winter season; profits were made from December to April, after which hotels closed. Some reduction in average prices has begun by hotels staying open and offering preferential rates outside the winter season. For the rest, however, hotel managers attribute high tariffs to costs of hotel construction as well as operation, and cite the size of the wage bill as a major contributing factor. Inadequate public utilities, particularly water supply in Montego Bay, have induced some hotels to install their own facilities, raising both capital and possibly operating costs in the process. - 14 - 33. The distribution of hotel ownershin is now estimated to be 53 percent local, 39 percent foreign, and 8 percent joint; on a roormi or canital-invostod1 basqis thl foreign sharP is iinlikplv to be lss th:n half- Although tourism is considered a labor-intensive industry, it appears less so in .Tmq-ira than in other tou,riqm-orienrPti PrnnnmiPe Tnuestm nt consts per hotel room currently average about US$17,500, but may rise to US$20,000 on recent construction. i4rect eploniymant per rom ic fa11lng Co .pai d to an overall average of nearly 2 per room, the ratio is nearer 1.2:1 in the newer hotels. Indirect income generation and employment by the r toris industry are difficult to gauge. Previously, with enclave hotels, the use of services outside hotels was limited. Given greater mobility and activi- ty by tourists, the growth in employment in tourist services is likely to expand more rapidly thb an thle in.reLasc iLn aAdd.ition -to acc.t tiL--AO. Som.e additional investment is required for them, too. 34. The high capital costs in Jamaica's hotel industry are largely tLhe resuLt ofL thIe very highL prices - by 1ikLCLionl standards - charged by the construction industry. The construction boom of recent years, the rem-,arkably hILgh labor costs, and the dependence on im-ported equipment and materials appear to be the primary factors for the high costs of construc- tlon. tI Liloroughl investigatLion ofL costs in thiL 'Ls industry appears to be desirable. Ty Avfl,-rrrT Ann A TT"f--xA V . DBIUALIT tuNiJ ALtUI'1IN11 35. Bauxite and alumina production has been the most dynamic element in the economy, and is likely to remain so for some time. At present, bauxite yields 23 percent and alumina 33 percent of gross commodity export earnings. Together they account for about 9 percent or GDP at market prices and contribute nearly 14 percent of Central Government current revenues in royalties and income taxes. Growth has been impressive. Export earnings from this sector increased at an average annual rate of 12-13 percent in 1963-69 and are likely to accelerate to 14-15 percent annually in 1969-75. The composition has been changing. After reaching a peak of 8.1 million long tons in 1971, bauxite exports are to be stabilized around 7.5 million tons; the entire increment in production thereafter is scheduled to be pro- cessed into alumina before being shipped abroad. Consequently, by 1975 the share of bauxite in total exports will have dropped to 19 percent as alumina rises to 50 percent. Their combined share will have increased from about one- half to well over two-thirds of commodity export earnings. However, a shift from bauxite which is taxed to alumina which enjoys fiscal incentives, will cause their joint contribution to Central Government current revenues to de- cline from 14 to 11 percent by the mid-1970's. 36. Jamaica is the world's largest producer of bauxite, and supplies about 42 percent of the raw material needs of the aluminum industry of North America which in turn produces 60 percent of world aluminium output. Jamaica's particular advantage lies in the accessibility of its deposits. They lie close to the surface, the coast, and North American markets. - 15 - Jamaican ores are relatively low in alumina, and although their silica con- tent is also low, they do not constitute the world's richest reserves. Com- petition from Africa and Australia has been increasing, a trend that would argue for maximum exploitation now. As late as the mid-sixties, however, it was thought that Jamaican reserves could be depleted in 50 years at the then current rates of output, and in 24 years if the then rate of increase in exploitation would continue. With recent innovations in recovery tech- niques, at least one billion tons of exploitable bauxite have now been re- ported on the island, or nearly a century's supply at current rates of pro- duction. Depletion, therefore, and its attendant dislocations no longer seems quite as imminent a peril as they did before. The optimal rate of exploitations from the Jamaican point of view nevertheless continues to depend, at least in part, on balancing present sales at lower stages of pro- cessing against prospects for increasing the degree of local processing in future. 37. Local processing would substantially increase the domestic income generated per ton of bauxite mined. A study carried out by the UWI concludes that, for the Caribbean as a whole, the share of gross income created from mining through semi-fabrication of its bauxite output was only 6 percent in the mid-sixties. This reflects the region's concentration on mining rather than on processing. Of total world income generated by the industry, less than 4 percent was created by mining and drying, some 9 percent by refining into alumina, perhaps 30 percent by smelting into aluminium, and 57 percent by semi-fabricating. To match the value added generated by processing a single ton of bauxite all the way through to semi-fabrication, requires an estimated 2.4 tons if processing is carried through to smelting only, some 8 tons if onlv mining and refining are included, and 30 tons if bauxite is mined and dried without any processing at all. The required capital in- vestment is large and lumpy, however. While nlant for smelting is more divisible than for refining, the need for cheap and plentiful power typi- callv requ,ires hydrn-elertrir farilitipe varving from 150-790 MW nonti- nous generating capacity for an associated smelter size of 60,000 to 300(000 tons annual metal nanacitv. The scale of investment reauired has favored ownership by large international enterprises. The cost of power is also r rirt-ir'l fAetoFr= 38. Th.e production and use of Jamniran hbiivite ic cncentrated in fnor companies: Kaiser with 40 percent, Alcan of Canada with 23, Reynolds with 22, and Alcoa with 12 ercent- of the baxite- min4ed. Of these, only the Canadians have for any length of time produced alumina within Jamaica. Others have more recently come to respond to liber1al1 t2ax incentives offefnred by the Government. In 1969, a consortium of Kaiser, Reynolds and Anaconda (AT APT) onedAna 4in TJami4- n on f the largest alumna ulant, ever plr csruc- ted, with a capacity of 950,000 tons; in 1971 a newcomer, Revere Copper and Brass, plans to put a 2010,00-0-t-on plant- into production; ar.d in 1071 Alcoa intends to open one for 390,000 tons. Further expansion beyond 1975 is p.Lanneu by all Liu Ir. tobir.LU.LLMU theirCLk... Lc b cpi from Just0 s1hort of 2 million tons to nearly 5 million by 1980. The Alcoa plant presently under constructLion Ls particU.LdL.Ly iLLLerLsigL.LL1 fLor iLs cLapacLLty Lt. process a low grade of bauxite with a higher silica content, which thereby expands the - 16 - known. reserves of commerciral r-e. Tn 4 it cntract wlth the Cn.vnnr.nnn Re-. ere also agreed to make alumina available to a smelter if and when one is built, buC t t Cer Ais ni I-.miL.L by an y a- t t*o c.onstruct it. 39. In extending processin beyond tLIe stage of aluminumL. refin-ing, thLe possibility of conflicts of interest between the companies and the Jamaican G1overnm,ent .must bDe considered1. A A45 percent wei'ght reductior. from a`u,-ina JV~.IiiL~LL IU~L I~ LILLU Li eu* it ~+J EI EiL L LEUL L.LUI IL UL 1LUML.Lici to metal is the main argument for material-based rather than raarket-based smelting; the absence of a cheUap surce Uo pUWeL inL JaliL. LLLthe ilai obLsa- cle to it. The possibility of using imported liquid natural gas, or atomic enLergy, h'ias been discussed but their feasibility is not yet established. The opportunity costs considered by the Government or the companies in making their Juugments couiu differ substantially. The companies miust Lor example consider their sunk costs, including their hydro-electric facilities elsewhere in the world before investing in Jamaica. For the Government, the iack of alternative opportunities within the country for domestic labor and skills are apt to weigh proportionately more in the balance. For hne present, at- tention in Jamaica continues to be focused on encouraging expansion of alumina refining and increasing the tax yieid. 40. Just over half of the nominal value of exports by the bauxite and alumina industry currently remains within Jamaica. The domestic share has marginally declined with an increase in the import content of production as alumina refining has gained in importance. The division of proceeds net of imports has remained virtually constant over the last six years: 31 percent for direct local expenditures on wages, salaries, materials and services, 22 percent tor taxes and royalties, and 47 percent remitted as profits abroad. Over the next six years, however, the policy of restric- ting further increases in bauxite exports, and of expanding alumina exports in their place, is likely to have more marked effects. The same shift is projected to raise import requirements to over 22 percent. Net of these, the distribution of proceeds will in addition tend to favor direct local expenditures at the expense both of tax yields and of profits. The share of profits seems likely to decline to 43 percent, that of government reve- nues to 20, while the share of wages, salaries, materials and services may well rise to 37 percent. Such calculations take export prices as given. These are only notional prices, however, at which transfers take place with- in each company in the absence of an open market for the products involved. Less than 40 percent of domestic payments by the companies is in taxes and royalties, a proportion that may well decline to 35 percent by 1975. As a result the proportion of public revenue contributed by the indus- try is likely to decline from about 13 to about 11 percent. A major reason for a relatively sluggish growth in tax yields lies with the incentives gran- ted to companies setting up alumina refineries, combined with much slower growth of direct bauxite exports once the refineries are set up. Only Alcan pays income tax on its alumina production at present. Under their incentive agreements, ALPART will not begin to pay until 1973 and neither Alcoa nor - 17 - Revere will pay any income tax at all until after 1975. For bauxite, income tax is payable on exports only, not on production. The Government is at pre- sent seeking to renegotiate the transfer price in order to increase tax yields on those operations not already exempt. As this price affects the tax lia- bility of the companies as consumers of bauxite in the United States. acqui- escence by the U.S. Internal Revenue is being sought to avoid double taxation. 42. Per ton of bauxite mined, even now, the domestic yield from export earnings from bauxite and alumina has increased from J$4.1 in 1963 to J$5.4 in 1969, and 'as processing continues to expand, this is likely to increase further to J$7.6 by 1975. Nevertheless, the contribution to employment remains small. A rough estimate suggests that an alumina plant in full op- eration will emnlov one man ner lOOO tons annual canacity; an even rougher estimate for bauxite mining is 4,000-5,000 tons per man. By implication, therefore- un to 3-500 men are at nresent directlv emnloved by the industrvy or about one-half of one percent of the Jamaican labor force, a figure that may rise to 7-000-8-000 by 1975- or an increase of nearlv 1 -oo0 ner vear. Total employment by the companies is currently reported as close to ten thou- sand. hnwever- inrluriding an insne4rified number of ronstrriirtion and ag1ririiltui- ral workers. Between them the companies now hold about 7 percent of the island'q siurface in ronneqiono. nnlv some 10 nperrent is being s-qed for mining and company installations. The rest, the companies are legally bound to uie for agricultural purpos whenever possible Ahmit 30 prcent is directly farmed by them, and a further 40 percent is cultivated by tenants. VT . MANTUACTURING 43. Performance in the manufacturing sector has also been impressive. The share of manufacturing in GDP increased in 1960-68 from 11.1 percent to 13.6 percent excluding sugar; including it, the shares were 13.6 and 14.6 per.ent respectively --Azt the beginr.ing and at the -4 of -th peri. SuarC apart, value added increased at an average rate of 7.6 percent annually, compared with G-DP growth of only 44 -h 4. real tem. The industries showing the greatest advances were chemical products, cement and cay) produLctsL, UalCI produts,and miscellaneous ite*m. Textiles, which. contribute 8-9 percent of value added, also expanded somewhat faster than average, but traditional fJoodU products, thLough stll accountIr.g Lor 20 per= cent of the total, lagged somewhat. In the last two years, growth in manu- LacL.ur.Lng as a whole slowedU dUown co.siluderably, hLowever. Elven w.ithout sugar, the rate dropped to 4.7 percent in 1968, and may have been as low as 2 per- cent ir, 1969. T%.e ,-uainly to -h vy rapid exasinin b-auxite and alu.m.ina, ..IL LU7 VW .JU~ LU LLL LUV L.LC V=Ly A.LF.LU =JApduL0.LUL1 .LL U~U L~ dIU d.&ULL"LLLa, the proportion of manufactures in total exports has declined from 19.2 to 18.4percent sirn.ce 196J not counting sugar, as the propor'. of exports in manufacturing production fell from 9.4 to 7.7 percent. This decline was mainly concentrated in the traditional fooa processing Lnuustries; chemical and metal products, cement and paper products were less affected. It has nevertheless given rise to concern about the long run prospects of an in- dustrialization process as concentrated as the Jamaican on supplying fin- ished consumer goods to the domestic market. 44. Thp efferct of indistriq1izatinn on emnlnyment h alreadv been encouraging. The proportion of the employed labor force in manufacturing was renanrtdrl as 15 nprront in thp 19fln (1n4 w,u T pnbnier 43 nprrpnt nf thncp who identified with the manufacturing sector were enmployers or self-employed, and S norpecnt of thoqis acgin were wnmnfomn rimng thomn droescsmnkers and nthor.- that would in other circumstances have been subsumed under services. Stric- liy compnnraMb dati- hrav nft- c-nro thein boeen nrnroidurd RBasod lolely nn mnlce employment, household surveys conducted in 1968 and 1969 suggest a growth ln manI¶afact11r,nn 0mpm1 i nt of roughly9 9. percent nor year between 1960 and 1968, compared with 1.1 percent for the labor force as a whole, and reaching about 11.6 percent of total m-ale employment in the terminal year. It is probable that employment in larger factories has grown even faster than this. independent figures for establishmLents of ten or. m0r.e people show a 10.4 percent increase in 1964, a 2.9 percent increase in 1965, and 5.7 ercent per year in 1966-67. Employm.ent 4n those firms approved for tax relief rose 11.0 percent in 1965, 16.0 percent in 1966, 8.5 percent in 1967, and16 percent in 1969e. Lvn then Ct accounteu Ifor only 20 percent of total manufacturing employment. 45. The Government has talcen an active role in the promotion of in- dustrlal development. TIpor --- C pre[ented [r li..itC L ---- AIF. prohibitions or quantitative restrictions to the extent, in principle, that ±local r,anufacturing capacity is deeUnLed adequale to supply tIe Uom,eslic mar'-el at a price no higher than the import price plus tariff. On raw materials arltU £ILterLmUdiLae gUUU:s Lell ll[ildl LdL tar i S UsUdsualXy L2 rcilL UL o t'Less, on finished manufactures it is more often in the region of 30 percent, but rlses higher f'or iterms 3udged to bue lxre,nldi -.trcr. I rises 111511C1 LUL I LCI It., U C L U LUAUL _LUb, JL(:LLIC_LUI[5 LILULUL 1.;LS * £1 addition, there are a number of industrial incentive schemes. The Pioneer Industries Encourage,,ent IAct (1:9I49) provides Lor accelerateu write-offs of capital in new lines of production; the Industrial Incentives Act (1956) offers income tax holidays of between 7 and 19 years for approved industries established in Jamaica; and the Export Industries Encouragement Act (1956) provides relief from customs duties, and income tax for firms which produce exclusively for exports. By 1970, some 186 companies had invested over J$73 million under these laws. They employed 13,000 workers or about one-fifth of the industrial labor force, and contributed perhaps one-third to the gross value of industrial sales, and a fifth to exports of manufactured pro- ducts. 46. There is very little information on the revenues foregone under the incentive laws in recent years. An earlier study estimated the loss to Government to have averaged J$1.1 million annually from 1953 to 1962, and to have reached nearly J$3.7 million in 1962. The program now covers more than twice the number of firms with a higher level of concessions: if revenue losses have risen proportionately to the number of firms, they would have reached about J$8.2 million in 1969. To the extent that these sums accrue to foreign companies, they are remitted abroad. A provisional estimate of the 1969 ownership of fixed capital investment under all incen- tive laws gives about one-third as wholly foreign-owned and almost one-half financed jointly by domestic and foreign investors. Beneficiaries of the Pioneer Industries and Industrial Incentives Schemes include a lower pro- portion of foreign-owned companies than the Export Industries program, but - 19 - their share of total investment is greater, hence the foreign component with them may still be in the range of 50-55 percent. Firms under the Export Industries Encouragement Act have, as intended, almost exclusively been small subsidiaries of U.S.-based enterprises. The share of tax incentives received is unlikely to have come to less than J$3 million annually in the former cat- egory, with perhaps J$1.5 million going to the latter. 47. One major purpose for seeking to attract foreign capital-is un- doubtedly the employment it creates. For firms under the Pioneer Industries and Industrial Incentive Schemes, tariffs and quotas may have been a more important benefit than tax concessions: over 90 percent of their production was sold on the domestic market. Since it is more than likely that half would have come in any case, all of the J$3 million in revenues foregone would have to be charged against the 1,900 jobs created by the remainder, at an average cost per job of J$1,580 or nearly the same as the payroll per man employed. Employment was purchased more cheaply with the Export Indus- tries program, if none of the firms affected can be assumed to have come without it. As an integral component of enterprises abroad, they carry on only certain labor-intensive processes, often renting their factory from the Jamaica Industrial Development Corporation (JIDC) rather than bringing in their own capital, and with raw materials and intermediate goods almost entirely imported from abroad. If their share of J$1.5 million in tax ex- emptions is prorated to the 6,400 workers they employ, the cost per job of J$235 would come to only half the payroll paid per employee, which was ra- ther lower here than in alternative schemes. With little stake in the economy, however, these firms can leave at short notice and little cost to themselves, as a number have done or threatened to do as soon as the in- centive period is up. 48. The higher cost of labor under the Pioneer Industries and Indus- trial Incentives Schemes reflects the substantially higher capital-intensity of investment in its predominantly import-substituting industries. Fixed capital invested per man here came to over J$10,000, compared with less than J$400 under the Export Industry Encouragement Law, not counting the capital cost of rented factories. The export component of output under the first two schemes is about the same as for industry generally. Export incentives did nothing to affect this proportion, which reflects mainly the effect of tariffs and quotas on the inducement to invest. Protection, however, tends to divert domestic investment from those industries in which Jamaica has more of a comparative advantage to those in which it has less. It might be better, therefore, to abolish fiscal incentives altogether for sales to the protected domestic market, retaining them only as a parallel incentive for exports. This change might best be achieved by rescinding the Pioneer Industries and Industrial Incentives Laws outright, and amending the Export Industries Encouragement Act to qualify firms that produce for the domestic as well as for foreign markets, at least for that portion of their output which they export. In addition to fiscal exemptions, however, improved market information and nromotional services abroad are also needed. These the recently created Jamaica National Export Corporation is intended to spinnlv in timp - 20 - 49. The flow of credit to domestic industry is also receiving increased attention by the authorities. For short-term credits the sector continues to rely on the commercial banks. The share of manufacturing in total bank credit to the private sector has fluctuated around 21-22 percent for some years, with a declining proportion directed to the sugar industry made up by increases to other enterprises. Sugar apart, bank financing rose from 7-8 percent of manufacturing sales in 1966 and 1967 to 12.5 percent at the end of 1969, paralleling a sharp increase in bank lending generally. Longer- term credit and some equity capital was until September 1969 supplied by the Development Finance Corporation (DFC), a public institution since reorganized into the new Jamaica Development Bank (JDB). The JUB's authorized capital is J$10 million. Its lending powers have been expanded to include commer- cial agriculture as well as industry and tourism; it has obtained assistance for both from the IDB and the World Bank. The authorities have in addition encouraged the creation of merchant banks in the private sector two of which were set up in the course of 1970. A unit trust was created to channel small savings into the capital market. And a stock exchange was established in 1969, some 35-40 issues are now traded on it, but prices thus far have tended to fall. 50. tThile the flow of public and private resources to industry should soon be adequate, therefore, the problem of markets remains acute. Creation of the Caribbean Free Trade Association (CARIFTA) in 1968, to include most of the formerly British territories in the region, has already more than doubled the market open to Jamaican industry in terms of population. The targets is to eliminate all trade restrictions, subject to a reserved pro- duction list, for the more developed member countries in five years, and in ten for the smaller islands. Jamaican exports to the market rose from US$5.8 million to US$8.7 million, imports from it from US$3.7 million to US$5.8 million, in its first year of operation. It accounts for just over 2 percent of Jamaica's total trade. To achieve economies of scale and effective com- petition over a broader range of production, Jamaica must look to markets beyond CARIFTA. It may be possible for Jamaica to develop a general engi- neering capability to attract some of the tool-making industries, for exam- ple, whose wage costs are becoming excessively high particularly in the United States. An Industrial Engineering Apprentice Scheme has already sent 200 trainees to the United Kingdom to acquire the necessary skills. The success of initiatives of this kind is conditioned on the premise, however, that skills can be acquired without simultaneously pricing themselves out of the Jamaican market. VII. EDUCATION U1 Thr twin nrnhl mA nf high uinemnlovympnt and .ki11 Qhnrt-.qcP rptnii1rp unusual efforts in education and training in order to be overcome. The strongn position nf t-hp twjro mTarin lhnr iininrsg t-n whirh a third nf t-hp lbhnr force belong, has encouraged closed-shop practices that tend to restrict access to 4obs ar.l therefo-ro nn-the-nob training. Private indiiiftry, with the exception of bauxite companies, rarely conducts apprenticeship programs. - 21 - At JoULnt program supportedu biy a vo'Luntary payroll tax as iin Venezuela 15 presently under consideration. Labor exchanges have recently been created lor Ltne rlrst time, in order more errectlvely to bring workers and jobs in contact with each other, and their operation should increase in efficiency withi time. A service has been established wnich informs jamaicans living abroad about vacancies in both the public and the private sectors at home. Thne response thus far has been slight. The main emphasis therefore will have to be placed on education, to supply the market with a quickly train- able labor force as well as with specific skills in short supply, despite high costs and low implicit returns per unit that a high attrition rate will continue to imply. 52. The number of persons who receive education and training has con- siderably increased in recent years, with a growing emphasis on technical education. In 1967, enrollment in primary schools exceeded 85 percent of the 6-11 age group, and 80 percent of the 12-14 year olds received first- cycle secondary education, although seven-tenths of the latter group were still in senior departments of primary schools. Actual attendance is much lower, however, and is about 60 percent in primary schools. Enrollments were still only about 10 percent in second-cycle secondary schools and 7 percent in higher education. Industrial arts and home economics are part of first-cycle secondary education; technical and vocational subjects are taught in technical high schools, vocational schools and in some streams of the upper forms in comprehensive schools. The curriculum of most of the traditionally autonomous high schools remains, however, largely academic. Training outside the formal education system has intensified in recent years. Trade training centers of the Ministry of Labour run six to nine-month courses in trades for which demand is highest, with changing em- phasis according to short-term changes in demand. Youth camps for 15 to 17 year olds provide some elementary skill training. Jamaican apprentices are also trained in Great Britain and Canada. The Government also carries out in-service training for civil service and health personnel. 53. The principal weakness of the system lies in a severe lack of ex- perienced teachers and instructors at all levels. Attrition from the tea- ching profession, estimated at about 10 percent annually, is caused mainly by low salaries and limited promotion prospects in comparison to other sec- tors. Expatriate teachers, who are contracted for a limited period only, make up a rather high proportion of the teaching force in secondary schools. Primary education is handicapped in particular by a gross inadequacy of ex- isting buildings and teaching aids. Hence, there is a shortage of people able to acquire basic industrial and commercial skills, and the proper func- tioning of the successive stages of education is also impaired. Junior se- condary schools were introduced in order to carry out functions which primary schools cannot fulfill, i.e., the provision of a basic vocational education. The very creation of junior secondary schools has aggravated the teacher shortages in primary schools, at least in the short and medium term, as many trained primary school teachers have left them to teach in junior secondary schools. Furthermore, a serious bottleneck has developed in second-cycle secondary education where not enough places are available for first-cycle graduates who want to continue their education. As a result, there still - 22 - is an insufficient number of -ersons t.rItl, completmed secondaryn- ecii n available for further studies and for middle-level jobs in the labor market. 54. The Government has recently received a second IBRD loan to create 9-SOO ndditionn1 second-cvryl serondarv nplces. With these- most of the demand from the labor market and for further studies could be met at least uinti1 1975- even assuming higher Pduirational requirements for the lahnr forre and a continuing flow of trained manpower abroad. The same project also provides for 8,R00 new first-cycle secondary nlace,c for additional training of technical and primary school teachers to help overcome teacher shortages in the most cr4tical areas of the educational system, and for tearhing aids such as instructional television for use mainly in primary and first-cycle seconda-.y schools. Ass4itance. wjth 30 nn d dniiit-in ni nr4mnruy scchronl places is being sought from the Canadian Government. IDB has already extended a 1- f US.f IC. 7 i- 1 1 4,-. to ac$-oh1 4ch n, rirnl1iT4na lnn f.inrl fnrr ,nct-arncnAnrt, students. The Government also plans considerably to strengthen its training program.s. The capacmty of trade trcaining centers is t-o be trebled at -last, with further IL assistance. UNDP has agreed to assist in the construction of aAudditionai yout camps. TLhe creation of a nurses' training .ollege is envisaged towards the close of the current five-year period. 55. The implementation of these targets will, however, require increased ei..a. ciLency in planning and adii4astration. i t. present thlere is 1li.le coor- dination between the education and training programs of various agencies, and b-oth coordination an' rationalization are needed. sA coordi1nating body, the_ uU LI L UXU 1ILUL dLU L JL UIaL-L L _LL'tai ieu u )r LLUL.LaLJ.-LL LJUUY , LLIC: National Industrial Training Board, is limited mainly to advisory functions dLIU idy [dV~ L LJ~ iveiL Z:UlIL= tCA&:L_UL.LVC_ pLIWUL JLI ~LL L, LU UJC;CL L L C andu mlay h'ave t o Lb e gi'Lven som exctvepw r if Et is tob ffcie Within the system of formal education some shifts in emphasis appear to be necessary. The improvUertent of pr-ir,y educaion, espcially in the upper forms, should be given urgent priority since the bulk of entrants into the labor market will continue for some tiLme to LhIave cor.p'LetedU pL.aLrLy edUULciLoUL only. Improved basic education is therefore necessary if Jamaica is going to succeed in developing a manufacturlng Industry which ls internationally competitive. It would also release secondary education from its present task of remedying primary school deficiencies. It seems also necessary to give more inducement than hitherto to prevent qualified personnel from em- igrating, which would result in an effective decrease in the costs of educ- ating and training skilled manpower. VIII. TRANSPORT 56. Jamaica's transport system consists of over 7,000 miles of main and village roads, a railroad, i5 active ports, and four airports with scheduled flights, of which two are international. Most of the island's internal transport needs are met by roads. In recent years the railroad has lost nearly all its general traffic and is now mainly a contract carrier for bauxite mining companies. The greater part of the bauxite shipped is still handled by private facilities, however, independent of the public system. Railway operations are costly because of the relatively short handling distances and the island's topography. Most of Jamaica's ports are privately owned and highly specialized, but the need to cut down I,andlit tng and shipping costs 'as prom.pted a trend towards Joint use of mi-oderr. IL1 U.I.L±L~ au IL )9LLL, IJ- L dLi~ ~JL.j LU L. ~IU LL~ Ub J .A.IL b LLIUL facilities. The airports of Montego Bay and, to a somewhat lesser degree, o.f YlLngston are the principal gate.ways fLor international touriLsts, Uut Kingston handles most of the non-tourist traffic to and from abroad. Al- though the general layout of the transport system seems adequate, major parts are old and cannot satisfactorily serve present traffic volumes. In preparation for major investments in tne system, the Government engaged con- sultants in 1969/70 to carry out the first stage of a General Transport Sur- vey financed by tne Canadian Internationai Development Agency (CIDA). It covered all transport modes, made a detailed analysis of the commodity and passenger flows on the present system, and prepared traffic projections to 1979. The second phase of the Survey consists of feasibility studies of major projects identified by the tirst. 57. the Ministry of Communications and Works is responsible for the planning, design, construction and maintenance of the road system, which comprises about 2,7U00 miles ot roads ot which roughly 1,9U0 miles are paved. In addition, about 4,500 miles of village roads are under the jurisdiction of parish councils. The layout of the highway network is adequate: it connects major population and production centers and ports. Serpentine curves, steep gradients, and narrow and shoulderless roadways on poor foundation nevertheless cause high transport and maintenance costs. The number of motor vehicles in Jamaica is not known exactly. Vehicle registration and safety inspection records indicate a total of about 80,000 vehicles, of wiich about three-quarters are motor cars. Vehicle registrations increased at rates of over 10 percent annually over the last five years. The highest traffic density on the road network is found near Kingston and ranges from 5,000 to 12,000 vehicles per day (vpd). Traffic on the North Coast road is about 2,000 vpd, that on the main cross-island connection about 5,000 vpd, and less than 1,000 vpd elsewhere. Although maintenance expenditures increased by well over a third in the last five years, the condition of the roads is beginning to deteriorate. The main reasons are inadequate standards for the network, rapid traffic growth, and old maintenance equipment. A comprehensive maintenance program remains to be instituted. 58. Jamaica does not have a formal road user charges policy. Revenues from taxes imposed on the use and ownership of motor vehicles exceed road expenditures. In 1967/68 the proceeds from fuel tax and license and regis- tration fees amounted to J$10.2 million. Import duties on motor vehicles produced an additional J$4.8 million. In the same year the Ministry of Communications and Works spent J$8.2 million for administration, maintenance and construction of main roads, and the Ministries of Local Government and Agriculture J$2.8 million for parish council and development roads. A con- siderable portion of present road-user tax revenues is collected in urban centers and spent on roads in rural areas. However, the investment needs for urban roads as well as rural are growing. For the period up to 1979 the Transport Survey recommends construction and reconstruction of 340 miles of roads at a cost of J$43 million. It also recommends reconstruction of about 430 miles of low volume feeder roads. Stage two of the Survey comprises - 24 - reasibility studies ror up to 120 miles or arteriai roads and 320 miles of feeder roads to begin in mid-1971. The Government intends to submit the former for financing to the Bank, and the latter to 1DB. At that time a review of road-user charges might be appropriate. 59. Jamaica's railroad system consists of 205 miles of 4'8' standard gauge single track, most ot which was built in the second half of the last century. A formally autonomous Crown corporation, the Jamaica Railway Corporation (JRC), which is presently supervised by the Ministry of Public Utilities and Housing, has operated the system since 1960. The system pro- vides access to main mining and agricultural areas and connects 8 of Jamaica's 15 major towns. JRC's freight traffic in 1967 totalled more than 2.6 mil- lion tons, of which over 95 percent was bauxite and alumina. With the expansion of the mining industry, this traffic increased at an average rate of 14 percent annually between 1960 and 1967. Other commodities, mainly agricultural, have increasingly been diverted to road transport, with the result that non-mining traffic on the railroad decreased at an average 17 percent annually during the same period. Passenger traffic declined in the early sixties, but recovered with better service on new rail cars. Annual volumes now fluctuate around 1.1 million passengers. About two-thirds of all passenger movement occurs on the Kingston-Montego Bay line. Exact data on average travel distances are not available, but may be about 50 miles overall. JRC expects passenger traffic to increase at over 5 percent annually over the next five years, assuming no change in the present low rate structure. 60. Total revenues barely cover working expenses of the railroad excluding overhead. Government subsidies roughly provide the remaining cash outlays, in addition to capital contributions in the form of loans, loan guarantees and debt cancellations. The rates for mining traffic as late as 1968 did not cover the full cost of the services rendered, but have been renegotiated since to do so. Passenger fares are government controlled and have not been changed for 18 yearsz a revised rate schedule is still pending approval. 114ining traffic alone should give the railroad a sufficient basis for existence, provided it is either relieved of or adequately compensated for operating uneconomic lines and employing more staff than it needs. Tracks are maintained by antiquated methods and naintenance crews are overstaffed. Earlier rationalization proposals foundered on the Government's employment policies, but the railroad is now engaged in a substantial track rehabilitation program as an essential precondition for more mechanized working procedures. Trains are operated with reasonable efficiency. JRC plans to run longer bauxite trains as an economy measure to increase line capacity. This requires investment by the railroad in locomotives. and by the companies in cars and sidings. JRC has already ordered six new locomotives to be financed by the Canadian REnnrt Denvelnnment Cnornornttinn (EhDC(. The mininq onmnanies are inve.tivat- ing their requirements. 61. The port of Kingston handles over 80 percent of the island's imports or 2.6 million long tons in 1968, and 7 npcernt of ift exports or 0.7 million tons. Nearly all general cargo passes over two wharves in Kingston whose combined capacity is more than 1.0 million tons, 70 percent of xwhich is presently used. A second general cargo port is being built at Montego Bay. The 13 other ports are specialized to handle mainly Dauxite and alumina exports. Five are owned by mining companies which also receive some of their supplies through them. Most of the remaining eight are much smaller and older ports and some are very inefficient. They handle mainly agricultural exports including sugar, molasses, and bananas. In addition, five lighterage ports will probably be abandoned in the near future. All port facilities are privately owned; the one exception is a wharf in Kingston that is leased to private operators. Government's role in the port sector is mainly supervisory. Public investment is being con- sidered only to improve one of the Kingston wharves tor cruise ships and to modernize facilities for banana shipments. The Government intends in due course to combine all aspects of port administration under one authority. Meanwhile there are three. The Ministry of Trade and Industry, through the Port Authority, supervises operations and approves rates on public wharves. The Ministry of Communications and Works is responsible for maintaining and signalizing channels. And the Ministry of Finance and Planning, through the Marine Board, supervises shipping operations. 62. Jamaica's two international airports, at Kingston and Montego Bay, are served by 12 scheduled foreign airlines and the national carrier Air Jamaica. Flight connections between them and two domestic airports, at Ocho Rios and Port Antonio, are provided by the internal airline, Jamaica Air Services. All public airports are operated by the Civil Aviation De- partment of the Ministry of Communications and Works, whose financial posi- tion appears to be sound. In line with trends in tourism since 1963 pas- senger movements in Kingston grew at an average rate of 15 percent annually to a total of 431,000 in 1968; and in Montego Bay at 25 percent annually to 466,000. Freight movement and general aviation traffic also increased considerably. The steep increase in traffic has now run up against serious constraints in aircraft ground operations and passenger handling despite the fact that both airports are relatively new. Kingston's Palisadoes Airport was inaugurated in 1961 and has a 7,600 ft. runway and a modern terminal building. Montego Bay's terminal building and apron facilities were built in 1959, with an extension to the runway completed in 1967. Government is seeking external assistance for expansion at both airports, and terms of reference for a study have been agreed between the Government and CIDA. Interim improvements will be needed mainly to accommodate high capacity jet aircraft, some of which have already been initiated. IX. PUBLIC UTILITIES 63. Two private utilities, one in power and the other in telecommu- nications, operate under license from and under the supervision of a Public Utilities Commission (PUC) created in 1966. Public telephone, telex and teleprinter services are provided by the Jamaica Telephone Company (JTC). Under its auspices, the number of telephones increased at an average rate of 7 nercent annually over the last decade to a total of 70,000 by late - 26 - 1970, or rrom a density of 2.2 to 3.5 per nundred popuiation. Foliowing a period of very slow expansion in 1960-66, pending the outcome of nego- tiations for a new license, the Company changed ownership, and plans for a Bank-financed expansion program were cancelled in favor of a larger one supported by the new U.S.-based parent company. The addition of new switch- ing equipment on old facilities has created serious interface problems, however, and the new equipment has not yet been placed In service. Hence all of the expansion of telephones installed has had to be on the old facil- ities with consequent problems of overloading. The Company estimates a total existing demand for 186,000 telephones compared to 70,000 in service, rising to 266,000 by 1975. JTC's plans for futher expansion are very limited by comparison, and should probably be expanded. The company proposes to provide no more than 9,000-10,000 additional telephones per year. 64. Electric power services also remain inadequate despite rapid expansion. Total installed capacity now approximates 400 MW, of which some 240 MW are held by the Jamaica Public Service Company (JPSC), some 110 MW by the bauxite-alumina companies, the rest by various industrial concerns. The JPSC is the sole supplier of public power in the island. With assistance from the Bank and the U.S. Export-Import Bank it has been able to increase supply at an annual rate of over 12 percent to 880 million kwh over the last decade. The JPSC has drawn up an investment program that would continue to expand supply at the same rate. A small program of rural electrification will also be continued as required by license. If in fact growth in power demand reaches 15 percent annually, as the PUC expects, reserve capacity would be exhausted by 1975. Frequent outages have already become a serious problem with the public. Major reasons for poor service include inadequate maintenance, insufficient transmission and distribution facilities, a chronic shortage of suitably trained staff, and excessive dependence for local decisions on a New York-based company holding a con- trolling interest. W4orking relations with Government have also deteriorated over the past years. 65. In order to cover the cost of an adequate maintenance program, the Company applied for an 11 percent rate increase in spring 1970. The original six-month limit within which the PUC would have had to make a ruling was re- pealed subsequent to the application. There is now no time limit for PUC to act and, since any increase would not be retroactive, the company's fi- nancial position is in suspense. For a time the company collected an 8 per- cent surcharge under special legislation to recover certain frequency con- version costs, but this lapsed in February 1971. In addition, legislation has been proposed by which all public utilities would become liable by civil suit for liquidated damages resulting from interruption of services. Legisla- tion of this kind is unprecedented and would expose the company to unlimited claims. Its financial uncertainty makes it virtually impossible for JPSC tn raise Pniity, and wnuld prohablv nprelude pro.spnetive lenders from con- sidering future loans to the company. Under the circumstances, JPSC is un- able to proceed with itQ PeXnnsnin plans. - 27 - 66. The present situation of a financially weak company with serious management problems carries rnncidprnh1p dangprs fnr JTmiir2B'S nnwer ser- tor and the economy as a whole. The Government has indicated that it wishes to havo onA{rz Atlnt annprasnl made of the fInancial onditIon of the com- pany and of the efficiency with which it is run. Government has further in.dicated that it is abut t dei4Ad how to approach the p^wer sector prob- lem. It could assist the existing company through constructive regulatory and legislative m.easures to improve its financial and operating position. Alternatively it could purchase a controlling interest in the company or fully nation.alize it s a bsis for m.king t1he k.Lflf refor, thLou Aghl Government control will not in itself solve the basic issues of operating efficier,cy ar.d firanclal viablit44.y. Delays on this decision can or,ly fur= ~L .L .LL±L 4LU L±L.L L L± V±GU.LJ.J.L. L L * L L-LA UI.LLJL cL FLLy U ther weaken the power sector and possibly the telecommunications sector as weL.L, -.L.LI LJ.LbJ UJIL UJU.J UL..L.LLLY Lt.6U.LaL.LULI* £,VCLL Wi.LLLIULP aswell, WLL.ich 'Ls ailso subject to pub' licL utilt reuain Eve without - --I j- this complication, inadequacies in both sectors already constitute a major obstac'le to acceLeratedu proress in industly, couullerce andU touri'sru. X. PUBLIC INVESTMENT AND FINANCE 67. Despite remaining problems, puDJlic polcies toward the private sector have on the whole operated in the right direction. The reaction to adversity in agriculture was prompt: thne extension services have been decentralized to make them more flexible in dealing with local problems; agricultural credit institutions have been overhauled and properly focused on promoting viable farms; agricultural marketing, particularly of small holder produce, remains the main unresolved issue. Policies toward indus- try have concentrated on fiscal incentives and import quotas and tariffs. Industrial growth in response has already been encouraging; the need for wider markets to ensure its continuation has been recognized, and a begin- ning made with CAKIFTA. Negotiations with the bauxite companies have yielded, in return for ample tax privileges, considerable expansion in the local processing of ore into alumina; the question of a possible smelter remains pending. Tourism has expanded rapidly also, though in response to liberal tax incentives excess hotel capacity has now begun to emerge. The major obstacles to further growth are still found in infrastructure: the expansion of power and telecommunications in particular, though rapid, has been inadequate and the status of the private power company is under review. Public Investment 68. Public investment has performed an increasingly important support- ing function in the economy. The 1966 national accounts record fixed capital formation in public administration at J$23.2 million, or less than 16 per- cent of gross domestic fixed investment. For the 1966/67 fiscal year, fixed public investment as drawn from government accounts came to J$25.6 million. This more than doubled over the five years to 1970, just keeping pace with an equally rapid increase in fixed private investment, mainly financed from abroad, but rising in proportion to GDP from less than 4 to - 28 - m.ore thar. 5 percent. Such a rate ofU i[ncrease needU not ue sustaiLnedu, in the public anymore than in the private sector, though the extent of the prospect've slowdownL I-may well be excesive. At presenit prices, fixed public investment is likely to stabilize over the next five years at about T e fCC 1I -I~r T r 1 J$yu65 miillion arinually, compareu to thle present level o0f J$5 million. Some of this slowdown will be compensated for by increased loans and grants to the private sector: they may average as much as i$17 million compared with J$10 million in 1970. The total, including miscellaneous capital expendi- tures, would still only average just over J$90 mliiion annually, compared to just under J$80 million now. ALLOCATION OF FIXED PUBLIC INVESTMENT i$ millions 196.6/67- 990j71- I97Ij72-I 75J76 Total Percent Total Percent (J$ million) (J$ million) Agriculture 16 8 22 7 Industry 3 2 6 2 Tourism 5 3 17 5 Subtotal 24 13 45 14 Education 34 19 41 13 Housing, Water, etc. 35 20 86 27 Transport 38 21 81 25 Subtotal 107 60 208 65 Other 50 27 69 21 Total 181 100 322 100 /1 current prices /2 1970/71 prices Source: Volume II, Table 5.1 69. The rapid increase in public investment over the last few years was not based on an official development program extending beyond the Central Government's annual capital budget. A tally of projects in process or planned in the various executing agencies shows that the allocation of fixed public investment will remain broadly similar in the near future as it has been in the recent past. The directly productive sectors includ- ing agriculture, industry, and tourism will not significantly change their share of 13-14 percent, any slippage in agriculture being offset by in- creased activity in support of tourism, particularly by the Urban Develop- ment Corporation. The major emphasis in public investment will continue to be placed on education, urban development, and transportation, which together take up 60-62 percent of the total, but with a marked shift from - 29 - education to urban infrastructure. Capital expenditures on education are csely- 14ir.keA to extern.al f4nar.4ing TI-e peak in 1970/71 -A -4ai 4ir 1973/74 due entirely to the phasing of IBRD-financed projects. Once these have been completed, it is possible that education expenA4tures will begin to exhibit a more steady trend. Meanwhile, the share of education in fixed public 4vsmn is- 141-ly A decne fro". fJUom*19 to 13 -------- 70W. FixedA public 4r.vestmer.t for urban development, mear.whi-le , i8 115. rI.L4.. " aU .L.L L AV6.U~& .LJA LALSL U 4...J L .~ L~ LWX&~.LJ) .A.~ likely to increase from 20 to 27 percent. The program would benefit from imp-roved. coordir.natLion. Ni-ne-tenth of th pouato IC the ngston .LLUrLLJV U UUJLLUL* 1N±LL -LiLL1 L L1l-A jJUPUcLaL.LonI oL LILtC N.LL~~LbLon metropolitan area are now served with potable water, and the supply is in creas-ing rap-1dly in- th-e rest or the cut as well. .T"eepasono .L tL=ab.Jd_LL16 Lclp.LUJLY .LL1 LiL J. U LIC LUUULIL.Ly il Wt!L.L. LLIC UA4JdLL.~Lon1 oU sewerage facilities has been less satisfactory. Such facilities do not extend outs'de the i-LLetropo'Ltan area now, dLLU everL withiLLL it, coverage L limited. An increasing density of seepage pits in the Kingston area, and tle: resuiLanL riSK of grounud water pollution, is to De tackled by a 35- year program for sewering the city. A substantial renewal program for the KiIngston waterfront is already under way. UrDan transport programs, however, remain very limited in scope. Earlier studies proposed very large investments in urban freeways, wnose cost dissuaded tne Government at the time. Individual housing projects continue to be promoted on a piecemeal basis, some under government auspices, but an adequate housing program for the metropolitan area as a whole is still lacking. The annual increase in low-income urban housing demand is estimated at 4,000 units, compared with public construction of only 500 units. 71. Given the small size of the country and the mobility of its population, there is no great danger that the continued growth ot the metropolis will leave pockets of exceptional poverty elsewhere. Conges- tion can, nevertheless, be ameliorated by cutting the cost of distance through improved transport and communication links with the rest of the island. The share of transport in fixed public investment is likely to increase from 21 to 25 percent comparing the last five years with the next. The bulk of it is for roads: major portions of the network no longer adequately serve present traffic volumes. The targets in health are relatively modest: except for an expansion in the supply ot auxiliary nurses, the aim is to hold the line in terms of the ratio of health per- sonnel to population while improving service. The proportion ot fixed capital investment here, including a large modern hospital in Montego Bay, is likely to stay at 5-6 percent of the total. The remainder of fixed public investment is shown as rising more slowly in absolute terms, and hence declining in relative importance from 27 to 21 percent, comparing five-year periods. An assortment of programs is found here, including posts and telegraphs, prisons, courts and police stations, as well as youth and other community centers. 72. Fixed investment will account for a smaller portion of public capital expenditures as grants and credits to the private sector increase their contribution from 11 to 17 percent of the total; they supplement direct investment mainly in agriculture, industry, tourism and education. Within the fixed investment category, a parallel shift towards greater - 30 - rel.iance on aulonomous publi c agenci4es and statutory board's 'Ls allso 1ikNe ILy to continue, with the Central Government's share declining from 66 to less than 65' percent; thI e r e st UofJ Government takes --4- --- .o responsibility for LLI~LI UJ ~ LIL~ ~ L LIL 'JUV~LI1UL .1 L r.C .v_C IJLJ L 0PUIL~LU.LLJL.L.LL_ LUL public investment in housing, health, and sanitation, and in tourism and Jnidustry. Coordination of agencies andU progras remaLins defective, Iow- ever. The last comprehensive investment plan covered the years 1963-68; a new five-year plan was scheduled for completion in spring 1971. The lack of formal planning has not thus far been a deterrent to rapid expansion of reasonably well-conceived public investment. However, tne prospective slowdown in capital expenditures by the public sector reflects in part the neglect of background studies in tne 9o3-667 period. Aew studles are beginning to near completion once again, notably the Transport Survey and a uNDP-sponsored physical planning study. Tne need for central coordina- tion in their implementation remains. Public Savings 73. Despite the rapid increase in public investment over the last tive years, tiscal constraints have not thus far been a problem. Over the 1966-70 period, public sector savings increased from J$8.2 million to J$34.7 million to finance 43 percent of public sector capital expenditures as a whole. They gained not only relative to public investment. Their contribution to national savings increased from 7 to nearly 25 percent, and as a ratio to GNP it grew from just over one percent to just over four. Most of this development was due to the Central Government alone; the rest of Government together has run increasing current account deficits. The rest of Government by itself could not have financed any capital expenditure at all. Its current account deficit exceeded its capital expenditures over the last five years by a small margin. Before current transfers to the rest of Government, Central Government savings may have reached over 35 percent of national savings in 1970, and over 6 percent of GNP. The Central Government surplus even after transfers still quadrupled over five years to finance nearly 60 percent of its own capital expenditures in 1970/71. 74. The Central Government's savings record was achieved despite current expenditures increasing at an average rate of 11 percent annually in real terms. Over the same period current revenues in real terms in- creased at over 14 percent annually, reaching 20 percent of GNP in 1969. The increase in revenues until 1968 resulted mainly from increased exports by the bauxite and alumina companies, from the increase in personal incomes, and from the effect of devaluation on customs duties. As a result of various incentive schemes, however, other companies have been taxed fairly lightly. The income tax left wide scope in any case for tax avoidance by companies and self-employed persons. Equity considerations therefore prompted the Government to start introducing far-reaching tax changes in 1969 (see Appendix A). An increase in the notional sales price which serves as the basis of profits taxation on the bauxite and alumina com- panies was negotiated, and tax assessments for all companies except mining companies were changed from a previous to a current year basis. Legisla- tion against tax avoidance, a new company prorits tax, a capital gains tax on transfers of land and shares were introduced, and a non-development tax - 31 - on idle land is pending. Already, however, the share of direct taxes in current revenue has increraed from 14 to 40 npercent- at the expense of indirect taxation whose share declined from 55 to 48 percent. 75. In the view of the authorities, the chief constraint on accele- rated public 4nvstm~.ent has not been a scarcity of finance so mu_ha of qualified personnel. Though this has been a problem of long standing, there is some evidence to suggest that the problem hAs_ been increasing in_ severity, at least for some types of employment. The primary cause appears to be the loAw level of governUment salaries i compriso ------ ths offered in the expanding private sector, and abroad. The Government responded iniatially bAy creating variLous statutoiy boes anA other quasi-overnVmenL agencies where civil service pay scales do not apply, and increasingly also Ib expanding g adU credits to thLCe prLivate sector. MLiore recently, the Government has initiated a comprehensive position classification and pa-y survey with Canaudiann technical assistance, andlu as a stopgap Leasure is granting pay increases to be spread over three years. This interim ad- JustmLent ±Lncreases 'Vase pa-y fror,, 2L to 50 percet, wLil hi'gher percentages going to higher present pay rates. While these pay increases will be the .Largest by £'ar that thLe Go-vernri,ierit haLs ever gLaedLLU, iLL dappear5 LU bC fully understood and accepted that further increases, perhaps substantial ones, are probable after the pay survey is concluded. 76. Pay adjustments of the magnitude contemplated will ensure that the rise in current expenditures is unlikely to slow down, despite the fact that expansion of administration and of social services, the main factors in the past, are likely to play a lesser role henceforth. Wages and salaries paid to government employees rose by roughly 10 percent annually since 1966. Education required increasing allocations of funds to meet rapidly increasing enrollments and to pay for organizational innovations related to the expansion program for junior secondary schools. Continued growth of primary, secondary and post-secondary education and increasingly of vocational training will still require additional staff and operating funds. So will the installation ot new hospital and tamily planning tacil- ities. Allocation of current expenditures to economic services has lagged in the past, with deleterious consequences for road maintenance, tor example, a situation that will also have to be corrected. Other infrastructural deficiencies particularly in urban tacilities will, it corrected, require higher current expenditures for maintenance and operation. Transfers to local governments may have to be stepped up, given their tight financial situation and the resulting backlog of operations. 77. The authorities will therefore be faced with a difficult dilemma. The increases in current expenditures required to attract qualified person- nel to plan and to implement priority investments will at the same time reduce the public savings necessary to finance them. The buoyancy of tax receipts in recent years will be difficult to maintain after the initial impact of recent reforms has worn off, not least because of a prospective levelling off in bauxite production and of continued liberal incentive schemes for alumina and other manufactures. Even so, the ratio of GNP taken in current revenues is likely to rise from 22 to 24 percent, a pro- portion difficult to improve upon in a country at Jamaica's level of devel- opment. If, despite strong pressures upon them, current expenditures are - 32 - held to a rate of increase not far different in real terms from that of the recent past, public savings should still be able to finance about 42 per- cent of public sector investment over the next five years as they approxi- mately did over the last (see Volume II Statistical Tables, Table 5.2). Capital receipts, mainly interest payments on expanded public lending to the private sector, should cover another 8 percent, leaving 50 percent for debt financing at home and abroad. Public Debt 78. Despite rapid increases in recent years, the Jamaican public debt remains relatively light. The total internal and external debt of the Central Government came to J$252.6 million in early 1970; the service on it amounted to J$21 million or 12 percent of 1969/70 current revenues. Net local borrowing, almost exclusively on Central Government account alone, doubled in five years to finance nearly 40 percent of past public capital expenditures. This counts National Insurance as part of the finan- cial system; if it were consolidated with the public sector, public savings would have financed 62 percent of public investment, and local borrowing 19 percent. Less than one-quarter of the internal debt is short-term, mainly in Treasury bills, the bulk of which is held by commercial banks. The Bank of Jamaica has thus far absorbed only very limited amounts, al- though its statutes permit sizeable investment in government securities. Of medium- and long-term securities issued in the last five years, the National Insurance has absorbed one half; the rest has been divided about equally among the conmercial banks, the Government Savings Bank, and other intermediaries including insurance companies. Purchases by private indi- viduals have been negligible. 79. The internal debt has grown in line with increases in the liabili- ties of the banking system to the private sector, that is at just over 20 percent a year. A major part of the increase was facilitated by introduc- tion of the Government's compulsory insurance scheme, however, whose in- cremental growth henceforth is certain to be much less. The authorities consequently see only limited scope for increasing domestic borrowing in the future much above the present level of some J$25-30 million annually gross. The Government will increasingly have to compete for funds with mortgage banks, unit trusts and other new financial institutions serving mainly the private sector. Some relief will be provided by new legislation obliging nrivate insurance comnanies to invest Dart of their surnluses in government securities. Starting with J$30 million, it should still be possible to expand dnmpetir borrowing in sten with GNP; sufficient that is to finance without inflationary effects up to 30 percent of capital expenditures over the next five years. Whilp this is less than has been arhipvpd hbfore, it would in combination with increased public savings and capital receipts leave a gap of about 24 percent to hp financed fronm abroad cnmpared to some 15 percent in the recent past. 80. For external borrowing to reach this target will require gross annrual disbursements of n.eal- US$50,; m4iior. bpy 193/4 m.o tha. nfou,r times t cr - o- ti an than o- times the current level. To this an additional US$17 million yearly on q s -3 - J-. average may be added for power and telecommunications, not all of which, Lhowever, 'Ls necessarL 'Ly governLmeLnt guaranteeU. Theexternal public anu publicly guaranteed debt outstanding at the end of 1970 came to US$171.5 UIM±LUlon, 'inClUUdiLLn UOS$s4.5 m1iLlloU uLLUsbursedU. Vver the: preceuing five years it had increased rapidly by US$75 million, or nearly 80 percent. ITne service on it still came to little more than US$15 million in 1970, or to 3.5 percent of exports of goods and services net of investment income payments. Tne composition of the debt also changed significantly over this period. At the end of 1965, nearly three-quarters of the public debt consisted of long-term market loans raised mostly in London. Long-term project loans, mainly from the U.S. and U.K. Governments, made up most of the rest. Since then, however, the share of market loans in the total has declined to just over 40 percent by the end of 1970. Despite expanded aid from Canada, bilateral lending now contributes only somewhat more than a fifth; but commercial bank borrowing now accounts for nearly 10 percent of the outstanding debt, and IBRD lending for 23 percent. The rest consists of government guaranteed suppliers' credits. 81. The shift in sources of financing in part reflects the increasing difficulty of borrowing in international capital markets. The last market loan, for US$7 million, was raised in London in early 1968. The Government turned instead to borrowing from U.S. commercial banks, and drew US$11.1 million in 1968 and US$8.9 million in 1969. These loans were mainly in the form of lines of credit, carrying interest rates at 1.25-1.5 percent above the New York prime rate, and repayable in 5-7 years with the option in some cases of renegotiation at maturity. The relatively shorter maturities and high interest rates on these loans have been a major factor in raising debt service payments in the past three years. They have there- fore been viewed as strictly interim measures, and no fresh drawings are contemplated. Though some market loans may again be taken up, commercial bank borrowing is not expected to contribute to the financing of public investment in the next five years. The necessary amounts are overwhelm- ingly to be raised from bilateral sources, mainly the Canadian Government, and from international institutions, including in addition to IBRD also the Inter-American Development Bank, which Jamaica has joined at the end of 1969. 82. Major reliance on official sourices should prevent the debt serv- ice ratio from rising above 5.5 percent from the present 3.5 percent level by 1975, even assuming all borrowing for power and telecommunications to be government guaranteed. The necessary increase in project lending can be achieved by spreading it into sectors that have been relatively neglected in the past. Power and telecommunications, though not part of the public sector, absorbed nearly one-half of foreign assistance over the last five years; nearly a third was accounted for by market loans without sectoral identification. A tally of proilects ongoing or planned suggests that over the next five years the share of the public utilities may well decline to about a third. Some 10-12 percent each will then be taken up by agricul- ture, industry, transport, water and sewerage, and education. The low debt service burden suggests, however, that ample borrowing capacity remains un- utilized even then. More financing could probably be attracted once im- nroved planning and nroneit nrenaration have restored buoyancy to the nublic - 34 - investment program as a whole. As experience is gained with external aid agencies in a variety of sectors, and by a range of public institutions, this may well be the natural consequence. XI. MONEY AND EXTERNAL PAYMENTS 83. Private direct investment from abroad has been the dominant force affecting the balance of payments. It continues overwhelmingly to be the largest flow in the capital account. Foreign investment initiated most of the major shifts in export production in recent years, which, together with the attendant fluctuations in the import of capital goods, largely determine the current account as well. Subtracting direct investment-financed capi- tal goods from total imports, would turn the current account deficit into a modest surplus over the last four years. The direct impact of public finan- ce continues to be small: imports and exports on public account are an in- significant proportion of the total, and so is public borrowing abroad. The main effort to expand the indigenous role in the economy has thus far focused on intensified mobilization of local capital and on facilitating its partici- pation in key enterprises, mainly commercial banks for a start. A concerted effort to transform foreign branch banks into subsidiaries with local equity has begun to bear fruit. The major task of monetary policy continues to be, however, to keep local demand outside the foreign and public sectors from exceeding the supply of goods and services available to it. This task is proving increasingly difficult to perform unless monetary measures are com- plemented by wage restraint. Capital Flows 84. The Jamaican dollar is convertible into sterling at par; exchange rates for other currencies are based upon buying and selling rates in the London exchange market. The Jamaican pound was devalued along with sterling and by the same margin in 1967; it was decimalized in 1969 at a ratio of two new dollars to the pound. Foreign exchange reserves have been increasing with only a temporarv interruntion in 1969. despite the fact that the current account deficit in the balance payments has widened steadily, rising from US$3t Tnillinn in 1965 ton TU12R millinn in 1969. By end-1970. they came to about US$120 million or equivalent to about three months' imports. As a mem.ber of the sterling area, Jamaira has sinc-e September 1968 undertaken to hold 57 percent of total official reserves in sterling. In return, the United Kf4-gdom a1-s gnrantee-dr tha IT-j- edollair Pneiqunvlpnt of that norM onn of Jamaica's official sterling reserves which exceeds 10 percent of the country's external reserves. Jamaican rese.res were for this purnoe delpfinped sompwhat more restrictively than they usually are. All reserves are held in the form OC -A +- - J Ot;e ^IhAaA t-rnnrh_ "nc4 t-4nn 3thh Fm of foreign ehga s Ities, the gold tranche p-n iFun and SDRs'. Jamaica's SDR allocations came to US$6.4 million in 1970 and to US.J9.J. U7 U1lLJ.l on -In 19 7 1 85. From a balance of payments point of view, government borrowing has so Car been sr..all. Over the five years 1965-69, Central Government borrow- ing abroad, net of amortization, came to less than the accumulation of foreign exchange reserves. NIet of 4nterest pzayments the resource transfer wa only some US$15-16 million in five years, or about a third of the increment in reserves. If borrowirng by the rest of the public sector and by the private sector under government guarantee are taken into account, the net transfer was still only US$38… million compared to US$50 4llXon i tonal e over the period. The low burden of external debt is illustrated also by a debt service ratio that averageu on'Ly 3 percent ofL ex-ports nLet of 'Ivestlent income payments over the period. The situation has begun to change, however. The net transfer on public account in 1971-75 may well rise to US$1J 25mill'ion; public borrowing net of amortization contribute up to a quarter of the coun- tryts projected capital requirements; and the debt service rat'o rise to 5.5 percent by the middle of the decade. 86. Direct private foreign investment has, net, more than covered the current account deficit in all years except 1969. On a gross basis direct investment amounted to US$423 million in 1965-69, of which possibly US$310 million was invested in mining and refining, the rest in hotels, manufactu- ring and real estate. The completion of an alumina refinery brought the total down in 1969, but this was partially offset by Air Canada's purchase of an aircraft for Air Jamaica. Completion of other major direct investments in hotels and alumina plants will further slow down both imports and capitai inflows over the next few years, at least until 1974 when another round of expansion in those two sectors is expected. The net inflow of direct private investment is also likely to be reduced somewhat by the Jamaicanization pro- gram, currently centered on increasing local participation in the banking sector, though with its present handling no damage to investor confidence need be expected. There already has been some outflow of direct investment funds in 1968 and 1969, probably representing capital withdrawals including disinvestment in the sugar industry, but with at least a partial recovery in agriculture this flow should cease in the next few years. 87. The rest of the private capital account has shown a tendency to turn negative, as there are few Jamaican firms large enough to attract port- folio investments or deposits from overseas. The largest single long-term credit privately contracted abroad was an IBRD loan to the Jamaica Public Service Company for capacity expansion. Short-term private capital trans- actions produced sizeable net outflows prior to devaluation; since then there has been some reversal. Nevertheless, for the four years 1966-69 combined, the net outflow of short-term funds including errors and omis- sions, still totalled US$22 million, only partly offset by net long-term borrowing of US$15 million. The reversal was reinforced by a series of policy measures to offset the effect of high interest rates abroad on the direction of the flow of funds. When the commercial banks reduced their domestic liquidity in early 1969 to improve their foreign asset position, the Bank of Jamaica raised the required domestic liquid asset ratio, the first time it has used this power. When it became evident that foreign- controlled firms were increasingly borrowing in Jamaica instead of finan- cing themselves abroad, a ceiling was placed on commercial Bank lending to them, for the first time including sterling area firms. - 36 - 88. The outflow of portfolio and short-term capital might have been larger without exchange control, which is administered by the Bank of Jamaica on behalf of the Mfinistry of Finance and Planning. Export pioceeds must be surrendered within six months of the date of shipment, payable in non-sterling currencies for exports to non-sterling destinations. Current payments above certain limits are authorized only if the authorities are satisfied that no capital flight is involved. Investments in the sterling area by residents are not normally restricted, but investments in non-sterling area countries, direct or in securities, require the approval of the exchange control autho- rities and may be made only through the investment currency market in the United Kingdom. Direct investments in Jamaica by non-residents require the approval of the authorities only if approved status is sought; for such ap- proved foreign investments repatriation of capital is permitted at any time. The exemption of the rest of the sterling area from exchange control is no longer complete, however. Restrictions on commercial bank lending to non- resident owned companies now exempt other CARIFTA countries only, and the exchange surrender requirement, at least for visible exports, exempts no one anymore. The Current Account 89. Direct private foreign investment not only dominates the capital account: it largely determines exports and imports as well. The banana industry led in exports until World War II; disease and the loss of the U.K. market all but destroyed it then; recovery at its 1966 peak reached only 80 percent of prewar exports. Sugar took its place in a major expansion that supplied the prime drive for economic growth in the decade to 1955; but sugar in turn was passed by bauxite and alumina in 1957, and by tourism in 1964, the two major sectors to attract foreign capital since the War. The concen- tration of exports on bauxite and alumina, and on tourism, is likely to in- tensify over the next decade. From 30 and 20 percent respectively, their gross shares in the export of goods and services are likely to rise to 40 and 25 percent by 1976. Capacity expansion until 1974 is already under cons- truction for alumina, markets are controlled by the producing companies them- selves, and prospects even with some growth of competition from other bauxite sources remain buoyant. Tourist accommodations are no longer a constraint, and with economic expansion in prospect in North America, gross tourist receipts have been nrnipr tpd to orow at an aver2g 14 nercent annually for some years ahead. However, this will depend on Jamaica maintaining a competitive posi- tinn in t-he tonuriQt m2rkpt (see par2gr2ph 32 above). COMMODITY EXPORTS J$ millions Ratios Growth R>es 1970 1975 1970 1975 1970/75 Bauxite/Alumina 153 273 63 69 12.2 Sugar 30 31 12 8 0.9 Bananas 10 16 4 4 9.8 Other Agriculture 7 0 3 2.7 Manufactures 45 66 18 17 8.0 Total (gross) 245 395 100 100 10.0 Re-exports 4 4 Total (net) 249 399 Source: Volume H, Table 3.6 90. The bauxite-alumina and tourist industries are both growth sectors in the world economy; hence Jamaican growth prospects seem much brighter than they would if sugar and bananas remained the country's staple exports. The shift to sectors that are considerably more capital-intensive than the tra- ditional ones will tend to create labor redundancies, however. To a certain extent the work force affected can emigrate. Emigrants remittances now con- tribute 5 percent to current account earnings, though as more and more de- pendents join the outflow, the share is likely to fall below 4 percent by mid-decade even with emigration continuing at present rates. The loss of complementary skills reduces employment opportunities for those remaining, furthermore, and cannot therefore be accepted with equanimity. The task of reversing the recent decline in agriculture remains a pressing one, there- fore, though even with a recovery the sector's contribution to exports will at best continue to decline, from 12 to perhaps 7 percent by mid-decade. Industrialization in turn will require a formidable effort to ensure ade- quate supplies of both physical and human infrastructure. Preventing its contribution to current account earnings from declining much below the pres- ent 10 percent may be possible, but will have to be considered a major success if achieved. 91. An increasing concentration of exports on a few commodities entails a greater risk of fluctuations in export earnings with major consequences for an economy where some 40 percent of GDP at factor cost is normally exported abroad. Bauxite and alumina production is less sensitive to the weather than sugar or bananas. Expansion has nevertheless been irregular over two decades: it peaked in the early fifties, sixties, and seventies, with marked slowdowns in between, in part reflecting shifts in the geographic incidence of invest- ment decisions by international companies. Tourism has had an almost comple- mentary cycle with rapid growth in the late fifties, the mid-sixties, and -- 38 - stagnation in between. Althoug,h the -t ' cleno h-,,e tended to offset on- ar.o ther to some extent, GDP growth in real terms has been very erratic: some 6-7 percent.l 4in 196 LJ0; down to 1-2 percent in 1962; up again to a peak 8 percent in 1965; and down to 1-2 once more in 1967. In the last two years the rate .uay have been 4-5 percent, ve. sim..ilar to the average a-hieved over the 1960's. Given the pace of recent investment activity, however, both in alu- L-ILcIna aIrL in tourism as well as in other sectors,L real G11]DP growd th of-.UL au percent should be attainable over the next few years. 92. Earnings from exports of goods and services can probably be expected to £Lncrease at a'Dout L0 peLcer.t per aninumi on buaLance over thile next half-decaUde, which combined with likely capital inflows will cover the import requirements for growtth of money GDP at about the sarmle rate. TLLe smlailLness of the econUoly ensures a high overspill of growth into imports: imports of goods and servi- ces averaged about 37 percent of total expendi-ture in 1963-67, DUt afLer de- valuation rose to 41 percent in 1968-69, showing that despite the increase in local currency prices of imports, there was little opportunity to replace them with domestic goods. The import content of gross domestic investment rose from a low of 43 percent in 1965 to nearly 53 percent following devalua- tion, and must probably be assumed to continue at least at 50 percent for the next few years, equal to tneir 1969 level. Tle requirements for imported fuel and raw materials increased steadily from 8 percent in 1962 to 12 percent in 1969, reflecting import substitution in the finai stages or production and a sharp boost in import prices as a result of devaluation. As Jamaican prices catch up, and as import substitution moves into certain intermediate goods, the ratio may well begin to stabilize. 93. Capital inflows have normally financed about 40 percent of gross domestic investment compared with an import content of about 50 percent in recent years. Direct private foreign investment imports directly most of its own capital goods requirements. It is tor this reason that the rapid accele- ration in imports, from a rate of increase 11 percent annually over the last five years to 12 and 15 percent in 1968 and 1969, did not place more pressure on the balance of payments. The proportion of capital goods rose from 29 per- cent of total imports to 37 percent in 1969, as the share of consumer goods fell from 44 to 33 percent. The major danger to the balance of payments in the course of growth will therefore arise in the consumer goods category, where fortunately the greatest degree of flexibility also is possible. Consumer goods imports have fluctuated as a proportion of total consumption expenditures. They rose from less than 17 percent in 1962-63 to over 18 percent in 1964-66; fell to less than 16 percent in 1968; only to rise again to 17 and 18 percent following devaluation. Apart from devaluation, two great bursts of expansion in consumer installment credit, in 1964-66 and in 1968-69, have been primarily responsible for this variation. With little effort they should be held to 17 percent in future. - 39 - Monetary Policy 94. In order to reconcile the ceiling on the growth of money GDP of 10 percent per annuimL on bUa'Lance of. paydments grounLds , wiL thL'W a potent'ia'L growth ofL real GDP of 6 percent based on capacity expansion, the rate of increase in the general priLce 'leve'l I-as to be k-ept lowr. to -le assu..Lred trend' 'n ir-port prices ~~I~L J. 1 LL~L~V.L I4 LI_ u~ I.~j _ uIJ LI. L_& ~UIU LIUI .LIIIULIjL£ of 4 percent yearly. The GDP deflator showed less than that in 1964-68, but the rate [hdas tenu,edU to acce'Lerate since devaluation, andu last year reached 6U percent. Consumer price indices show a similar acceleration. Following three years oL relatively slow rlses aveLaging less than 3 percent, the indices turned up to register 5 percent in 1967 and in 1968, jumping to almost 7 percent in 1970 in Kingston alLone. 1/ Devaluation in 1967 was at lirst combi- ned with a comprehensive price freeze, but this was progressively relaxed in the course of 1969 and substantial price increases followed in many cases. Credit extended to the private sector by the commercial banks expanded drama- tically following devaluation, from 6-9 percent in 1966-67, to i9 percent in 1968 and 41 percent in 1969. The pace of wage increases also seems to have accelerated. Collective bargaining settlements raised wages 11 percent in 1967 but 14.5 percent in 1968 and 13.4 percent in 1969. 95. Part of the need for price and credit increases, particularly in the construction sector, can be traced to wage demands that have intensified in the wake of devaluation. Monetary policy can do little to counter the wage push without jeopardizing growth prospects. It can, however, seek to amelio- rate its impact on the balance of payments by encouraging savings at the expen- se of consumer demand. National savings have been over 17 percent of GNP in recent years; associated with rapid expansion of consumer credit they dropped to nearly 15 percent in 1964-65; aided by rising surpluses on government ac- count, they rose to 19 percent in the last two years. A reasonably restric- tive monetary policy could probably hold them at 18 percent for some years coming. A move in this direction has been the permission recently granted the commercial banks to compete freely for time deposits with a maturity of six months or more. This will reinforce a trend that has already raised the flow of financial savings from less than 3 percent of GNP in 1965 to over 9 percent in 1968, including insurance companies. Financial savings increased from less than a quarter of total private savings in 1963-65, to more than half in 1968 and almost as much in 1969. 96. An increase in financial savings will not aid the growth of the national economy, however, if the proceeds are invested more remuneratively abroad. A restrictive monetary policy can contribute towards keeping them at home. The growth in financial savings in recent years suggest an increa- sing willingness of the private sector to hold Jamaican assets. In part this reflects the influx of funds following devaluation, and quite likely liquida- tion of speculative balances rather than a long-time trend. In part it also reflects the somewhat delayed response of Jamaican interest rates to conditions 1/ There exist separate consumer price indices for the metropolitan area and for rural areas. - 40 - in riuoney markets overseas. Jaimaican rates ha-ve, s±ince uevaluaLtIon, movea some- what more independently of the London Market than before, when major reliance was placed on manipulating sterling exchange commission rates. But the gap between them and the high rates prevailing in major financial centers has only recently been allowed to narrow somewhat. Following devaluation, Bank rate was increased from 5 to 6 percent and, with a short intermission, has been held there since. Even then it has been necessary to reinforce this measure with quantitive ceilings on lending to non-resident controlled companies oper- ating in Jamaica. 97. The ceiling on interest rates consistent with growth is set by the profitability of investment, which in turn is limited by the rate at which wages continue to push up beyond the post-devaluation adjustment period. Too high a wage will accelerate capital outflows; too low a wage encourage a greater migration ot skilled workers abroad. The rapid development ot tinan- cial institutions currently promoted by the authorities presupposes that a reasonable balance can be struck between avoiding the emigration of skills and capital flows abroad. Between 1966 and 1970 commercial banks as a group increased their branches from about 80 to 120; the number of deposits rose by 53 percent and the total amount in private sector deposits by 77 percent over the same period. Commercial banks have been instrumental in the crea- tion of five trust companies, and more recently in the establishment of two merchant banks. A unit trust to channel smail savings into the capital mar- ket has also been organized, and a stock exchange established. The intention is that they should eventually grow into a financial center serving more than the Jamaican economy alone. Without a reasonable degree of wage and price stability, the danger is that they should serve as channels to take savings abroad. 98. To the extent that price increases have been induced by the immedi- ate impact of devaluation, they should abate as the effects of devaluation work themselves out in the economy. The immediate task of monetary policy will therefore be to ensure that credit expansion does not exceed the minimum necessary to permit that adjustment. Virtually all of the increase in credit in 1968 and 1969 was attributable to the commercial banks; and taking the two years together, all of it was directed to the private sector. The increase was associated with marked shifts in the distribution of the total. Credit to commerce and finance lost ground relatively; and credit to agriculture fell in absolute terms. Lending to industry held its share of around 21 and 22 percent, however, as borrowing expanded in response to sudden increases in the local currency costs of imported materials and equipment. Personal and pro- fessional loans rose even faster. Associated with a major expansion of in- stallment credit by commercial banks, their share grew from 14 in 1965 to 22 percent in 1969. Credit to construction, land development, and hotel ex- pansion also gained substantially, increasing from 13 percent in 1967 to 16 percent of the total in 1969. Credit ceilings on installment credit, at least for imported consumer durables, have now been imposed. - 41 - XII. PROSPECTS AND CREDITWORTHINESS 99. The short-term growth prospects of Jamaica are good in view of the very large investments made in recent years, particularly in mining and ho- tels, but also in utilities and to a lesser extent in the transport system. Looking over the first half of the 1970's, a 6 percent annual growth rate should be attainable, compared with less than 5 percent annually over the last decade. However, this higher rate is consistent with balance of pay- ments equilibrium only if the rate of inflation, as measured by the GDP deflator, is reduced from its present 6 percent yearly to about 4 percent, that is only if voluntary savings are maintained at the current actual rate of 17-18 percent of GNP. This target can be jeopardized by excessive wage increases as much as by failure to maintain appropriate credit policies. The projected growth rate, even if achieved over the next 2-3 years, requires stepped-up public investment if it is to be sustained thereafter, as private investment in mining and tourism is likely to level off before it can pick up again in the middle of the decade. 100. Foreign assistance has as yet played only a modest part in finan- cing public investment, and a very small one in financing the current ac- count deficit in the balance of payments. Net proceeds from foreign loans added barely 5 percent to current revenues of the Central Government. Though current account savings of the public sector covered only some 40 percent of capital expenditures, almost as much was raised by borrowing in the domestic market, mainly from the social insurance system, leaving less than 15 percent to be covered by external borrowing net of amortization pay- ments. The resource transfer to Jamaica, net of amortization and interest, came to about US$15-16 million over the last five years taken together. The totals have been increasing over the last few years. Nevertheless, the net contribution of foreign borrowing to public investment is unlikely to rise above 25 percent on average over the next few years. The reliance on forei2n assistance in the Jamaican investment program will continue. there- fore, to be relatively modest. 101. The Jamaican external debt outstanding at the end of 1970 came to US$171.5 million, or about 14.7 nercent of GNP, including undisbursed. The service on it came to no more than US$15.3 million in 1970, or to 3.5 percent of exports of goods and services net of investment incom-e navments. With a public investment program of the size and composition that appears to be fea- sibhe over the next five vears- the deht total is unlikely to increa6e much beyond US$400 million and, if most of it is drawn from international develop- ment intituftions as planned- the seruire on it should not ereed UIS836 mil- lion or 5.5 percent of net exports by 1975. As a ratio to current revenues of the en.t-ral rover.rnment, sovice nn avternal debt wnuild then have risen from nearly 7 to 9 percent. With a service burden almost certain to remain as 4oiht as this, Jamaica remains crrtyaturnrthu' fnr nll tho evtevrn:l hnrrnv.1rino it can productively absorb. With improved project preparation and a conse- quent acceleration of public invest maents, p,rogressively lrnr bnrrowi ngt conventional terms would appear to be fully justified, and should be prepared for. - 42 - If),. voreign assistance wlll m.axi..ize its cor,tribution to economLUc growth if it is deployed in such a way as to maximize the training and re- tenLL ion ofb skilled personnejlJ I L il Lte country. F oLr wLit LliouL an increase ±in the supply of skilled personnel within Jamaica, economic growth will con- tin[ue to be biased towards capital-nteInisLve rLesource-usLng sLUctor, .inL cluding bauxite-alumina and tourism, distorting the distribution of income in the process anrd exacerbating the problem of unemployment am Long the un- skilled labor force. An increased effort in education is of pivotal im- portance to augment the supply of skills. A concentrated programll LO Sup- port the development of viable farms should minimize the flow of labor, particularly unskilled labor, to the cities. A major program to provide urban infrastructure - water, sewage, power and telecommunications - is an essential prerequisite to expanding industrial joDs competitive with those abroad. And a judicious program of Jamaicanization of ownership and per- sonnel in business enterprise will heip to strengtnen tne sense of identifi- cation of Jamaicans with their home economy. APPENDIX A CHANGES IN TAXATION, 19S69-7'l Anticipated Yield Narae of Measure Effective DELte Description and Comments (J$ 100°0) A. Implemented Income Tax Ameoad- Retroactive to Measures designed to close loopholes in the income Tota:l : 4,000 menit Act 1970 (an- January 1, 1970 tax law and to reduce evrasion and avoidance. Companies : 1,500 ti--evasion and an- Individuals: 2,500 ti.-avoLdance) These measures include: (a) severe penalties, incltuding pr.ison sentenctss, for tax evasion (b) specific anti-ELvoidance measures designed to mullify, for tELX purposes only,, the validity of trarLsactions which aim at avoiding taxa- tion, e.g. pension schemes., saLaries and loans to company directors Income Tax Amend- Retroactive to Separation of taLx liability of companies andL share- All comp- ment (ano. 2) Act, January 1., 1970 holdLers. Companies pay an unvarying andL non-re- anies : 3,000 19'70 fundable profits tax of 35% and an "additional" prof- its tax whose effective rate is 15% for closed comp- Bauxite/alumina aniets, 12.4%' for "intermediate" companies and 9.75% companies : 1,000 for open companies. The latter tax is borne by the shareholders to the extent tio which profits are dis- ODther tributed. Agricultural and sma:LL companies are tax- companies : 2,000 ed at a lower rate and holding companies at a higher ratet. The new system wnLll encourage companries to go public and rill raise tax liability of companies from a range of 4O - 42.',% as under the previous system to 44.75 - 50%. Income Tax on Retroactive to 1% on premium income for cormpan:Les iLncorporated and 150 Insurance Comp- July 1, 1.970 resident in Jamaica with a substantial Xport:ion of anies their paid-u1p caLpitEal benef.icially held by indivi- duals domiciled in Jamaica, and 2% on th:e premium income for J'oreiLgn-owne(d companies. -2- Anticipated Yield Name of Measure Eiiffective Date Description and Comments |J$ 000) Motor Vehicle July 1, 1970 Increase in the rates as follows: 750 Licetnsesr Former New License Liceinse Fee Fee Automobiles not, deriving motive power from an internal combustion engine worked by cylinder or cylinders ea. J$28.00 J$34L.00 Automobiles, where the cylinder capacity of the engine: does not exceed 1,1951 c.c. ea. J$28.oo J$34.00 exceeds 1 ,199 c.c. but does not exceed 2,999 c.c. ea. J$44.00 J$48.C100 exceeds 2,999 c.c. buLt does not exceed 3,999 c.c. ea. J$52.00 J$62.00 exceeds 3,999 c.c. ea. J$68.0o J$82.00 Income Tax Jaxmiary 1, '1970 For 38,000 persons out of the present t,otal. of 80,C)00 Relief for taxpayers, the following tax relief measures will be individLLals taken: Personal Persons Income Af'fected J1 ,000 2i0,000 Increase in personal allowance from J$6oo to J$1 ,000. -1 ,350 J$1 ,001 - J$1 ,200 9,000 Option givein to be taxed either on existing provision of income tax lawr or to pay one-sixth of amount by which income exceeds J$1 ,00C). Wife's earned income 5,00C Relief limit raised from J$400 to J$800. Surtaxable income 4, OCO Su.rtax limit raised but cormnenc:ing rate of' taxation raiseci also. -3- Anticipated Yield Name of Measure Effective Date Description and Comments Tax Base Retroactive to Revision of the notional price for computing the 3,()00 January 1, 1962 taxablt3 profits of the bauxite and alumina In part companies. Negotiations with one company pending negotiatio:n st:Lll pending. Transfer tax on Retroactive to Tax on capital gains resulting from transf'er 4,950/ land and shaLres April 1', 1970 of land and shares at 2.5% of sale price, or 5,950 alternatively 12.5%, whichever is less. .B. Pending Tax on nondevelop- Penading legislation St-amp duty of 20 percent on lands sold. to foreigners 2,200 ment of landl (retroactive to not domiciled in the country, refundable to the May 7, 1969) extent of 15 percent if development of' the land tabes place within a specific period. The entire tax may be eliminated if it is considered thati the project itself is of economic benefit to the country. Implementing legislation is presently beirg drafted. Comparny Registra- Pending legislation Annual graded tax to replace once-and-for all tion Fee registration fee; graded as foUowrs: Issued capital Feie j$1, 001 JIo0,0bo J25D (600 J$10,001 and above J$D00 Starnp Duxty Pending legislation Stamp Duty on Agreements for Sale at the same rates as 1150 the duty on Conveyances. The duty will be ref'undable if no actual sale takes place and will. be set off against the amount payable on the Conveyarnce. Land and Property Pending legislation Revaluation of taxable property to account for the 2,000/ Tax 1972/73 increase in land values. The revaLluation is Under- 3,000 way in Kingston and some of the Parishes. ;'-Arce: Ministry- of Finance and Intern3tional Monetary Fund. APPENDIX B MEASURES OF UNEMPLOYMENT 1. The measurement of unemUplo-ytient 'eve's in Jamaica is rendered difficult by an unexpectedly low population census count, and by the consequent uncertainty about the number of peopie of working age. In addition, there are some apparent processing errors in the only labor force survey completed (July 1968) and subsequent surveys show less unemployment. In consequence the following estimates are approximate. 2. These are data from the 1960 Census: Table 1: The 1960 Census Male Female Total Total population 773,439 836,375 1,609,814 Population of 14 and over 454,601 520,508 975,109 % of total population 58.8 62.2 60.6 Total labor force 401,191 253,391 654,582 % of population 14 and over 88.3 48.7 67.1 Employed 363,371 203,080 566,451 % of labor force employed 90.5 80.3 86.5 % who did not want work 0.5 0.5 0.5 % of labor force unemployed 9.0 19.2 13.0 Of which: First seekers (4.9) (11.0) (7.3) Experienced unemployed (4.1) (8.2) (5.7) 3. It should be noted that, contrary to the labor force definitions of a great many countries, somebody saying he was unemployed and wanted work but had not actually sought it in the week preceding the Census, was included in the labor force. This contributes to the exceptionally high female participation rates found in Jamaica (as does an unbalanced sex ratio). 4. The next year for which we have any information at all is 1968. In that year a series of twice-yearly household surveys was started, and initially directed to labor force data. The first survey had some pro- cessing errors. These were discovered when the first tabulations were made from the two following surveys, but very little material from these is available. The findings are, of course, proportionate ones derived on a sample basis, to be turned into absolute numbers by the uses of es- timated parish populations. Recent census returns suggest that those used were probably too high. The base population for 1968 would, however, probably be a fairly good approximation to the 1970 level. ArPENDIX B Page 2 5. The data from the July 1968 survey can be summarized as follows: Table 2: July 1968 Survey Males Females Total Total population (Dept. of Statistics Assumption) 925,400 979,660 1,905,060 Population 14 and over (Dept. ot Statistics Assumption) 509,430 556,030 1,065,460 % of total population 56.8 55.0 55.9 Labor force 441,450 326,670 768,120 % of population 14 and over 86.7 58.7 72.1 Employed 379,720 211,370 591,090 % of labor force employed 86.0 64.7 77.0 % of labor force unemployed 14.0 35.3 23.0 Of which: Experienced seekers (9.3) (7.7) (8.6) Experienced non-seekers (1.8) (16.8) (8.2) Inexperienced seekers (2.3) (3.9) (3.0) Inexperienced non-seekers (0.6) (6.9) (3.3) 6. The most immediate apparent change is in the female participation rate - an increase of 10 percentage points or equivalent to nearly 56,000 women - between 1960 and 1968, more details of which are given below. Table 3: Age-Specific Participation Rates (1960 Census and July 1968 Labor Force Survey) Male Female 1960 1968 1960 1968 14-19 67.8 66.6 47.2 40.8 20-24 96.7 95.2 64.4 78.0 25-34 98.0 97.9 55.4 73.9 35-44 97.5 96.7 51.8 69.8 45-54 95.7 95.2 48.3 66.7 55-64 87.5 89.0 37.4 54.0 65+ 54.9 63.8 13.8 21.0 It is likely that this has a great deal to do with the apparently dramatic rise in female unemployment from below 20 percent to over 35 percent of the labor force; and at least part of the rise is due to an implicit difference in definition. The survey asked the individuals who were neither working nnr activelv seeking work; whether they wanted it and could accent it, Although this should in principle be no different from the Census inclusion of thoqp whn "wnnted work", the greater attention paid 1b the qurvev tn this point may have encouraged some women to say that they could accept work when in fact, beicaue nf dnmPnt1in repnnnR1bi1itjesq the range of sobs they could APPENDIX B Pag e _3 or would accept might be very limited. If the participation rates are assu- me' to be the same as in 1960 an' th,e entire diffrerc ;;iuedtce meu LU U A L L L~A1~ ., Lu -LL A LULL LL.~U. Lerence~~LL attr'L'UtA LouAe finitional differences, then female unemployment would number only about LAt nAAA n~- 7A nAA _ _U 2) 2) - .C.L. It....)~... 60,000 out oLf 270,0v0 about A.A..2 percent of the 'labuor Lorce. U veL aL unemployment would then be 17 percent. 7. A comparison of the July 1968 survey with the preliminary results IC _L A. IflL _ 1 l__ _ .L t ILeuOtober 19760 andU April 17u67 su rveys sLLULtoLgy suggSL Ls L LLattiese figures are still too high. Both surveys show lower unemployment rates for both males and females than does the July 1968 survey. The population esti- mates underlying the surveys are not available. Participation rates cannot therefore be calculated precLsely, but the difference between the July and October 1968 or April 1969 populations will be very small, since the popu- lation was estimated to be growing at less than 2 percent a year, far less, in fact, than the sampling errors involved. It is therefore reasonably simple to compare absolute numbers of tne July survey (Table 2) with the data of the two which follow: Table 4: Comparison of 1968 and 1969 Surveys October 1968 Male Female Total Labor force 419,660 322,990 742,650 Employed 369,870 228,980 598,850 % Labor force 88.1 70.9 80.6 % Unemployed 11.9 29.1 19.4 April 1969 Labor force 422,332 331,378 753,710 Employed 379,091 234,410 613,501 % Labor force 89.8 70.7 81.4 % Unemployed 10.2 29.3 18.6 8. It can be seen that though there is a substantial difference between the labor force size in the July 1968 and the two later surveys, the difference lies entirely in the male labor force. The implicit female participation rates remain just as high. It is understood that the proces- sing errors are considered to be in the male unemployment rates at the youthful end of the labor force. 1/ The difference is equivalent to about 22,000. Correcting the July 1968 figures for this would make unemployment 14.5 percent. 1/ Although the male participation rates appear very similar in the 1968 survey and 1960 Census, it is indeed likely that they have fallen, as the two later surveys suggest, as a result of increasing secondary school and university enrollments. There do, however, seem to be some differences between the July 1968 survey and the later two with respect to unemployment among men aged 50 and over, and until this is sorted out one dare not draw too precise conclusions. APPENDIX B Page 4 Table 5: "Correcting" July 1968 Survey to Female Participation Rates Con s s-- n4 w-ht 1 Qior one. c r - rA T a-FoT CTA Q--- Tota! population 1,905 Population 14 and over 1,065 T-abor force (survey) 6 Less correction for female participat-oL. rate =56 Less correction for male particiation rate-22 Employment 590 Unerup'loyedu 100 U'nefploymenlt rate 1)4 9.rrtAI Th.i still :. lv soule q'estio. uasrd Te later surveys show a larger number of employed than in July 1968. If these figures are accepted, the employed labor force would' then be 600,000 and unemployed 90,000 or about 13 percent - similar to 1960. This may be going too far. While this would imply some rise in male unemployment over its 16u levelv , it would imply a fall of female unemployment to about 40,000 in a labor force of roughly 270,000 (Table 4 empioyment and femaie iabor rorce cor- rected to 1960 participation rates). This would imply that, in contrast to male unemployment rates, which rose, female unemployment rates fell. Given the high rate of female emigration in recent years, this is not impossible, but one would need more evidence to be convinced by it, par- ticularly since there remain other unexplained discrepancies between the July 1968 survey and the other two surveys. 10. It is not easy to say what this might mean in terms of absolute numbers in 1970. First there is the overall uncertainty about the 1970 Census. The total population figure is probably fairly close to that assumed by the Department of Statistics for July 1968 (Table 3). There are also the discrepancies between the three surveys, which show the em- ployed labor force to be between 591,000 and 613,000. Approximate estimates are given below: Table 6. Estimated rhange in Rmnlnvmpnt Pirtu,re 1960-70 1960 1970 Total population (millions) 1.61 1.9 DpU..1i-4at 4A and over (t 4114-aNa 0.975 1 nr. % total population 60.6 56.0 To,tal l.abwor force survey basi4s 750,000 Total labor force Census basis 655,000 690-700,000 Total unemployed 89,000 90-100,000 I. _± UL LL _C __Aa4 ..I 1 J1 IC _ Ao v_L _dLUor Lorce= %,%,ensus U.-_,}sisp APPENDIX B Page 5 11. In spite of the data uncertainties, the general conclusion is clear. Emigration has made for a very slow labor force growth; even with this, unemployment has remained high and is probably growing slightly in relative as well as in absolute terms. It is certainly possible to exag- gerate the degree of unemployment compared with other countries, because of differences in definition of the labor force and the unemployed, and to exaggerate the rate at which it is growing because this definition is chang- ing. Nevertheless the rate of labor absorption is very far below the natural rate of increase of the labor force, and if the rate of emigration slows down again the situation could get very serious indeed. APPENDIX C TOURIST DEMAND ESTIMATES 1. Takinrg the period 1960-69 as a wholle, the num..ber of llong-sta- visitors of 3 days or over grew at an annual rate of 13-14 percent. This was slightly faster than the grow,th -4inovralea visis A-y -.er-n.-- A forecast of about 14 percent continuing growth receives support from a cross section analysis relating Aifferences 4n the proprton o lation of different U.S. states who visit Jamaica, to differences in per capita i.co',e n air fLares. ths wo tfactCo_0rsO exp.Flain over UV per%cnt_ Vof the observed variation. Although one must be cautious about making time series pre'UictJ.ons roUiIL cross-section data, LtLh LULL suggetL LltaL j per- cent growth in U.S. per capita incomes, which is not an unreasonable expect- ation Lor tLe luture, woulU leaU to a per capita 'nLCre-ae inL i Uis..o about 13.5 percent. If air fares do not change greatly, this would lead to annua'l average i,ncreases iLn U.S . tourism to Jamaica of abuoLt 13-1 perce;t:LL. It is also interesting to note that a one percent difference in air fares among states, accounts flor a 1 1/2 to percent differeunce in number of visitors. 2. The Jamaica Tourist Board collects statistics of the home state of long-stay U.S. tourists to Jamaica. hne proportion of eacn state-s population visiting Jamaica was regressed on the per capita income of the state and on air Lares Lrom tne state capital to the is'land. This was done for the years 1966-1969 individually, and then pooled, in both linear and logarithmic forms. The exercise was also carried out weighting each state's average by the pro- portion of total visitors who came from that state each year. The results of the regression were reasonably close together in all cases. The most general equation (all years pooled) in its weighted logarithmic form was: Log V = 4.08672 + 3.63187 log Y - 1.55349 log E (93.36051) (-84.65664) 2 R - .76 SEE = .16962 F = 6469.62 Where V is the annual number of visitors from a state per 10 million popula- tion, Y the average per capita personal income of the state, and E the round trip excursion fare where available, or the cheapest return air fare where not. 3. Individual years had usually much better fit. They also frequently had higher values for the elasticities. Especially income elasticity went up to about 4.7 in the weighted regressions, and price elasticities ranged between 1.5 and nearly 2.0. For example, for 1967 the equation was: log V67 - 4.07247 + 4.69548 log Y67 - 1.64921 log E (97.95233) (-83.19264) R= .93 SEE = .09038 F=6464.0530 APPENDIX C Page 2 The results suggest an income elasticity of demand for tourism of around 4-0-4=S and a "n-irce" elasticity of around 1.5-2.0 using air fare as a proxy for price. For many tourists, air fares will approximately be the same or slightly less than their hotel bills, and it is temnting to conclude that an equivalent reduction in these would have the same effect on numbers. It should beo noted, however, first, that air fares are a proxy for the other effects of distance which may discourage travel apart from cost, and second, that peopile aexpecr.t "to agt wthar rheyx nan fnr" and no%t roesnnrl nociftivreliAy to- a change in hotel rates. 4. Although it was not feasible to collect identical data for other tourist areas, some regressions ere al on rn ineludiing air fars to-n uropnnc and Puerto Rico. These yielded significant coefficients of the expected sign bt th cros elasti citis 4i,-nvlve wre eon,l- , a-n r-la tivoly 141itt-1 was added in explanatory value. Climate was also tried as a variable. Again, -L. was s6)JLLXaLL LUL ISLL o. 5LreL .L.OLLUU.