lR77F7,171"11 TO l)| Pu? TUm75 T)sK| Xtl s raPY RE?S TRICT ED

Jfl~"~T1777T7 'DESKI il TPWTHv 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 organizationsor persons. It may not be published, quoted or cited without Bank Group authorization. TheBank 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 IJunie ±, 1971

Central America and Caribbean Department

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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 TaxationB. Measures of UnemploymentC. Tourist Demand

JAMAICABASIC DATA

Area and population

Area 11,1124 square kilometersPopulation 1,861,300 1/ (1970)Population density 163 per square kilometers

Economic indicators

GNP per capita US$572

Origin of GDP (1969) (percent)Agriculture 9Mining, quarrying and refinina 12Manufacturing 15Construction 13Transport and communication 7Public Administration 9Distribution 14Other services 21

Ratios to GDP (1969)Exports of goods and services 36.8Imports of goods and services L5.1Central Government current revenue 2/ 19.6Central Government current exoenditure 2/ 16.5External public debt (end of year) 13.8Gross national savings 17.0

Private (11.2)Public (28)

Gross fixed investment 28.6Private (2)4.3)Public (4.3)

Changes in stocks 1.1Money and quasi-money 35.0

AverageAnnual changes in ennnomic indinatnrR 1965-67 1968 1969

(percent)

Real GDP 3.3 4.8 4.5Real GDP per capita 1.6 3.1 2.8GDP at current prices 7.6 10.4 9.8T)mestic expenditulre at cuirren+ prices 8.8 13.7 11.8Investment 17.3 29.9 19.3onsnm.ption 6.7 9.0 9.2

v I *Pre nr c enu- -'nr ,-.

2/ Fiscal year.

Average1965-68 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 23.0Central Government current expenditure 1/ 12.2 13.5 19.7Central Government caDital exDenditure 1/ 13.7 22.1 25.2Money and quasi-money 19.1 19.0 13.6

Money 15.r5 16.6 1L.2Quasi-money 19.1 21.2 18.2

Net domestic bank assets 9.3 2/ 23.7 13.5Credit 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 16.5Merchandise imports (c.i.f.) 9-9 15.3 15.3

10AR 19Ao 1 °70

Central Government finances 1J! (J$ million)

Current revenue 150.2 182.1 224.0Current e.xpenditulre 13h.4 152.6A 12q .6Current account surplus 15.8 29.5 41.hCapital expendituire !47.5 58.0 72.6Overall surplus or deficit (-) 31.7 28.5 31.2xternal 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.) 221.8 257.2 299.6Cjmmd.Lty conc41 Lation: l/

Bauxite and alumina 50 percentCt__.. 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 96.7 106.4C-urrernt 'UrEans'ers (net)1. 14.3 18.Current account balance -107.2 -127.7 -1h1.4rrivaue capital (net) 129.2 io8.5 2.4Official capital (net) 16.0 6.9 3.2Errors and omissions -4.1 -1.6 7.3Change 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 1970External public debt (TIit, million) l

Debtincluding undisbursed 151.7 153.9 171.5excluding l-nd11)ib7 121.9 128.0

Debt service 13.2 13.8 15.3Debt 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 millionFund 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 millionflU 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, andCaribbean Free Trade Association (CARIFTA)Joined OAS and IDB in 1969Joined 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 majorchanges. Bauxite mining, alumina production and tourism, as well as non-food manufacturing expanded rapidly, while agriculture has stagnated andagricultural exports, notably of sugar, have declined. The shift in theproduction 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-thirdsof all manufacturing employment. Three-quarters of the natural incrementto the labor force emigrated out of the country altogether, however, sothat the labor force at home increased at an average of only just over onepercent annually over the past decade. The exodus is taking a particularlylarge proportion of the skilled and semi-skilled grades. Because of thelack of complementary managerial and technical skills, unemployment of theunskilled labor force has grown more sharply, while at the same time wageshave risen at an accelerating rate over time because of the strong andpolitically active trade union movement.

2. The overall short-term growth prospects are good in view of thevery large investments made in recent years, particularly in mining andhotels, 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 growthrate should be attainable compared to less than 5 percent over the lastdecade. This higher rate would be consistent with balance of paymentsequilibrium 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 atleast at their current level of 17-18 percent of GNP. These aims can be4eopardized by excessive wage increases as much as by failure to maintainrealistic credit policies. The projected real growth rate, even if achievedover 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 tofall 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, andkeepnina nace with an enually rapid innreane in fixed private investmentfinanced 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 isstill 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 allocationof 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 retainsits 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 dualproblems of brain drain and unemployment and have begun to tackle themon 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 specificskills and a quickly trainable work force. In part these efforts will com-pensate for the drain of qualified personnel abroad. Third, to slow downthe movement of population from the land, the authorities have recentlyintroduced a package of programs to promote "viable" farms. Fourth, in-dustrialization and tourist development are being encouraged with activegovernment support, including fiscal incentives as well as tariffs andquotas, to expand urban job opportunities and incomes. Finally, the effortprogressively to Jamaicanize ownership and management of enterprises hasbeen launched, with a start in the banking sector, to some extent in orderto induce qualified Jamaicans to remain at home. Though the success of thisprogram 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 GNPto just over four in five years, despite very rapid current expenditureincreases in real terms. The even faster rise in current revenues resultedmainly from increased exports of bauxite, increased personal incomes, theimpact of the 1967 devaluation on customs duties. and from tax reformsthat began to be introduced in 1969. The chief constraint on acceleratedpublic investment is now one of qualified personnel. To ensure a competentcivil service, however, the authorities will have to increase salaries sub-qtnntinllvy nour n nprind when the growth of current revenues is also likelvto slow down. The buoyancy of tax receipts will be difficult to sustainaftpr thp initin1 imnqrt of the current reforms has worn off; nartlv he-cause of a prospective levelling off in bauxite production and of continuedliberal 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-c i ng publ4c investment, and a neglgi-le o ne 4in f

4 nanir.4 the current ac-

count deficit in the balance of payments. Net proceeds from foreign loansaddl -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 sectorcoveredL on'Ly sor[e 40 percent ofL capital expenditures, almost as ruchl wasraised 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 ofamortization ana interest, came to auout UD$1-iu6 millionL over the lastfive years taken together. While the totals have been increasing over thelast 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 nextfew years. The reliance on foreign assistance in tne jamaican investmentprogram will continue, therefore, to be relatively modest.

- iii -

7. The Jamaican external debt outstanding at the end of 1970 came toUS$171.5 million, or about 14.7 percent of GNP, including undisbursed. Theservice 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 appearsto 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 notexceed 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. Witha service burden almost certain to remain as light as this, Jamaica iscreditworthy for all the external borrowing it can productively absorb.With accelerated project preparation, progressively larger borrowing atconventional terms would appear to be fully justified.

T TmTJnODCTrTTN

1. Jamaica, the third largest Caribbean island, covers an area of4, 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 tand 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 tedeposits 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 verysma±lL Iarrns TILLe Niflgb Lto 1DmLXpol_iLLi area, situated oilL the southeastcoast, is the sole metropolis. It has a population of 600,000 in a countrywith a total population of about 2 million. The natural growth rate ofthe population has declined from about 3.2 percent in the early 1960's to2.6 percent in recent years. The net rate of increase has been about onepercent below these rates due to emigration.

2. Jamaica shares the political traditions and social and economicstructure of other Caribbean Coimmonwealth countries: high populationdensity, a colonial plantation heritage, and enclave mining and touristoperations. Foreign management of much of the island's natural resourcesand industrial capital has been basic to the island's economic developmentthus far. With the current decline of the traditional plantation economy,based mainly on sugar, and the emergence of a more modern economy, economicpower has begun to shift somewhat. A new group of mainly U.S. and Canadiancompanies active in bauxite mining, hotels and some manufacturing, hasgained on the original plantation sector. An emerging group of Jamaicanshas also benefitted from structural shifts in the economy and from politicalindependence. However, a large part of the population, living on smallhill farms, have barely improved their material standards. With improvededucation and large migration from the countryside to the urban centers,substantial unemployment of an increasingly alert people has intensifiedsocial problems.

3. Jamaica has been an independent country within the BritishCommonwealth since 1962. Self-government had been in preparation for sometwo decades and the transition to independence was a smooth one. Thepopular vote is still about evenly divided between two main parties, bothof which rely heavily on trade union support. The Peoples National Party(PNP) was voted out of office in 1961: it had sought independence in thecontext of a proposed West Indies Federation which was then abandoned.The Jamaican Labour Party (JLP) was returned to office again in the 1967elections and has now been in office almost ten years. There has beenlittle 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 curbedby 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. Thegrowth of real GDP at factor cost in both 1968 and 1969 appears to havebeen close to the 1962/67 average of about 4.5 percent. With a rate ofpopulation growth of 1.6 percent per annum, per capita output has stillexpanded at nearly 3 percent yearly, a respectable performance. Invest-ment during 1968 and 1969 was high at 26-27 percent of gross domesticexpenditure, compared with 20 percent on average in 1961-67, and wasfinanced 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 ofthe past decade. The larger part of investment has gone into the miningsector, and to a lesser extent into power and telecommunications, roadsand hotels. With output from these investments coming on stream, theprospects for accelerated growth in the near future are good. Roughly 6percent a year in real growth of GDP should be attainable over the nextfew years. Agriculture has been the weakest sector: its output declinedwith adverse weather conditions in recent years, but should at leaststabilize in the coming years.

5. The Jamaican economy is a very open one. Imports of goods andservices average about 40 percent of total domestic expenditure, andexports about 40 percent of GDP at factor cost. Hence economic growth isheavily dependent on export trends. Over the past decade both exports,measured in domestic currency, and GDP at current market prices increasedat an average annual rate of just over 8 percent. This rate was achieveddespite an absolute decline in agricultural exports, notably of sugar,mainly through a rapid expansion of bauxite and alumina exports and oftourist arrivals. With no further decline in agriculture, exports may beexpected to grow at 10-11 percent over the next five years. Combined withlikely receipts on capital account, this will finance imports consistentwith a 10 percent annual growth rate of money GDP. To realize a 6 percenterowth rate of GDP in real terms; therefore- annual price increases, measuredby the GDP deflator, must be reduced from their current rate of over 6nercent to about 4 nercent. To attain the nrice target; the nronortion ofvoluntary savings in GNP will have to be maintained at the present realizedrate of 17-18 nperrent,

MACRO-ECONOILC INDICATORS

J$ millions in Amounts Growth Ratescurrent 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 yearsinclude (i) an upward surge of wages, (ii) the 1967 devaluation to maintainparity with sterling, and (iii) a steady expansion particularly of consumercredit. Wage restraint is difficult to impose, given the existence of twostrong unions of about equal size. Each is allied to opposing politicalparties, and both compete vigorously to secure plant bargaining rights byoffering to obtain higher benefits for their members. Over a third of thelabor force is presently organized. For the purpose of bargaining withemployers, employees vote to select the union to represent them. Employerswill then withhold the dues of the union chosen by the majority directlyfrom their paychecks. As a result. union wage rates in a number of sectorsalready appear to be relatively high for a country with Jamaica's percapita income, and further increases could well make it difficult for mostJamaican industries and tourism to compete internationally. The Governmentis nevertheless unlikely to ieopardize its political support by advocatingan incomes policy to restrain wages.

7. The 1967 devaluation was prompted by a desire to maintain paritywith 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 inrrrepasdcost of imports. The deficit on current account continued to widensteandilv from TTS$45 million in 19A5 to UTSA128 million in 1969. Some ofthis trend was due to factors not directly related to exchange rates. Theproportion. 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 insteadof declining. This was due not only to increased local currency pricesfor imported consumer goods, but also to the heavy import requirements ofstepped-up investments in the mining and processing of bauxite. Evenabstracting from these special circumstances, however, the net improvementin 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 theprivate sector. Government borrowed mainly from the National InsuranceScheme and to a limited extent only from the banking system. The impact ofcredit 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 fouryears. The growth in quasi-money holdings was even more impressive: privateclaims on banks and other intermediaries rose from 31 to 45 percent of GNPover the same period. For the commercial banks alone, none of the incre-ment in credit outstanding to the private sector went to agriculture; some13 percent was absorbed by construction and land development; nearly 24percent was accounted for by industry; but 30 percent went in personal andprofessional loans mainly to finance consumer durables. There appearsto have been some scope for credit restraint. therefore, to moderateinflationary pressures. Restrictive measures have already succeeded inreducing the rate of growth in the money supply to less than 9 percentin the twelve months to August 1970.

Structural Change

9. The pivotal position of wage labor in the Jamaican economy mustbe seen in the renntext nf the m-aqqive noniplation shifts that have takenplace over the past decade. Only preliminary results of the 1970 Censusare 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 lastdecade. It co.mpares with a rate of 29 nperrent that would have beenexperienced given the natural increase and no emigration. Under-recordingo%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- isof ~ ~ -- annua deatrsb bout - percent is ipidi h esscuti

correct. Migration statistics show predominantly male emigration to theUn4 ited K4nrAr.-n gijvin ay to- pnredlnantly Fnm,lo am

4graot4n" to th-ei TTe4tdA

States. This has contributed to a decrease in the ratio of females tomrles in the ja m a4caic populat4in From 1.07 to I .4 and to a L

decline in the birth rate. A larger proportion of emigrants than of thepopulation as a wt.ole are m.embers of the work force. TLence, though the

population expands at a comparatively low rate, the dependency ratio amongth_ose re,-,aining is no 'less hi-4, I- a +- wo_uldb ihasusAtalLLLJ~£~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 laborforce 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, havedrawn a disproportionate share from the higher-skilled grades. In 1967,some 20 percent of rural-urban migrants were found to have a secondaryeducation 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 aresult, there has been an increasing scarcity of skilled labor as well asmanagerial personnel throughout the economy. The resultant upward pressureon 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 timeexacerbated the nroblem of rural and urban unemplovment among the lesserskills. The lack of funds and technical assistance which would have madenossible the estahlishment nf qelf-emnlnved nperons nr sma1l firms has alsocontributed to the situation. Unemployment particularly among the unskilledwould have heen iihQtantfil in qnu rc2s in a situaqtinn of rapid changes inthe structure of production.

11. Rising wage rates have reinforced a bias in investment towardscpnita-isnter.sive -tnechniqiesa n-sA ndroduts that was nlalnAy inhenrert 4n the

country's natural resource endowment. The lack of resilience of agriculturei. the face of adverse weather conditions can in large part be accounted forby acute shortages of labor at wage rates the sector can afford to pay. Overthe 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,. ito 12 percent, that of non-food manufacturing from 7 to 9 percent, while theOlaCLC V- a;,L±L. A.LL * LC.LJ. LU IS. L. 0 " L5 LLULL 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 ofcapita l U Lad LItUecoogy Lto cUILpetL eqUaJ.Ly Ly iI t 1- -

12. Thre r.zovemlent of population ara eisi aiaa mv..nIS.. 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 ofnew 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 totallabor force ana manulacturing 15 percent. Agriculture, which still engagessome 30 percent of the total, absorbed none of the increase. As a resulto0 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 overone 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 thereforeremains 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 concentratedamong recent migrants, and among the uneducated and the young.

- 6 -

13. The concentration of production on capital-intensive sectorssuch 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-quartersof 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 witha bauxite or alumina company, and in less than 2-1/2 hours in many of thelarger factories. In 1963-64, 8 percent of households in the metropolitanarea were estimated to earn less than J$200 annually; 17 percent did so inthe other main towns and 32 percent in the rural areas. The unemployedfind themselves at the bottom of the scale. They sustain themselves fromthe 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 affectingnonulation and amnlovment. The authorities have resnonded on a broad front.First, family planning, privately promoted since 1939, was organized undergovernment auspices after independence in 1964, and with IBRD financialassistance since 1970. It probably played a part in the decline of thecrude birth rate from 42 in 1960 to 39 in 1966, and more sharnlv to 33 in1969. Other factors have included a high proportion of male emigration inthe 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, andthereby contributed to high female nqrtiripation rates in the 1abor foreeand most recently to sharply accelerated female emigration. The declinein fertility has come Iater than in Trinidad and Tobago: wnperienrc theresuggests that the process, once begun, is likely to continue to much lowerlevelcs 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 the1980'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 andLthe lackl of7 opportuniti4 . es for untrained youth on ithLe other, education anAtraining have been considerably expanded in recent years, with increasingem 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 highereducation. 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 shiftin secondary education towards science, technical and vocational subjects.It is hoped in this way to compensate in part for the sizeable drain ofqualified personnel abroad. The IBRD has provided financial assistancefor the requisite restructuring of the educationai system. A severe iackof suitably trained and experienced teachers continues at all levels andis recognized. Without further attention to primary education, primaryschool leavers are also likely to remain poorly prepared for entranceinto 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," andhave negotiated financial assistance in support oI them from IDB as wellas 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, theyappear for the most part to offer only part-time employment to their owners.Mainly for social reasons they will continue to benefit from traditionalsubsidized credit and price support programs. Farms above the 5-acrethreshold begin to employ wage labor, and it is on these that rising wageexpectations pose the most serious problems. The authorities have there-fore focused attention on increasing productivity on these farms throughexpanded 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, inwhich large estates tend to specialize, from the crops to be promoted.Only with its recent reverses has the sugar industry begun to receivepublic assistance, to prevent further decline at first, but increasinglyto foster the technical and institutional innovations necessary to put iton a profitable basis once more.

17. To provide employment opportunities at home competitive withthose abroad, the growth of a modern manufacturing sector is recognizedto be vital. The Government provides two sorts of direct assistance tomanufacturing industry: first, a substantial measure of protection againstimports through a combination of customs duties and import licensing, andsecond, generous tax allowances including exemptions for firms which produceexclusively for exports. A wider market for Jamaican exports has been openedup with the creation of the Caribbean Free Trade Association (CARIFTA), buteven this remains small. For the longer future, the authorities hope toattract to Jamaica some of the general engineering industries, particularlytool-making where wage costs are becoming very high in the United States.Under an Industrial Engineering Apprentice Scheme, nearly 200 trainees havebeen 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 effortis required in improving urban facilities, including housing, water andsewerage, if industrialization is not to create excessive social strains.

18. An effort progressively to Jamaicanize personnel and ownershiphas been launched in order to strengthen a sense of identification amongJamaicans with their home economy. All foreigners are required to havework permits, renewable every three years, which are granted only whenproof exists that Jamaicans with equivalent skills are not available, andwhich may be conditioned on training schemes being set up to correct thedeficiency (see Volume III Public Administration, particularly pp. 7-8).Legislation has been passed to limit foreign ownership of real estate. ApartiTular effort concentrates on increasine local Darticipation in bankingand 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. Twohave 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 concentratethe resources of sr,all .LocaUL sa-vers fLor LaJor investmLents iLn Jamaica andU,potentially, overseas as well. Its units wvere initially offered in minimumLots 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, andthough trading on it is still light, its r-ole 's expected to expanpd as theeconomy, and local participation in it, continue to grow.

!II. AGRICULTURE

19. Of the 4,410 square miles on the island, agricultural holdingsoccupy 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 morethan a quarter is scrub woodland and abandoned waste outside farms. Vari-able soil qualities, topographical and rainfall conditions are conduciveto a high degree of diversification. In addition to sugar and bananas,which account for 22 and 10 percent respectively of the gross value ofagricultural production, citrus, coffee, cocoa, coconut, pimento, tobacco,a variety of fruits and vegetables, and grass-fed beef are also producedcommercially. There are 185,000 agricultural holdings, some 145,UU0 otthem less than five acres in size, wqhich all told support about half thepopulation and employ over 30 percent ot the labor torce. Agriculture con-tributes only 22 percent of exports, however, and less than 10 percent ofGNP. 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 haveremained constant over the last decade. Apparently none of the increasein the labor force over this period was absorbed in agricultural employment.

20. Jamaica's agricultural output has been disappointing. From 1963to 1966 value added in agriculture grew at approximately 5 percent annually,but this was preceded by several years of stagnation, and in every yearsince 1966 output has in fact declined. Drought affected the sugarcaneyield in 1967 and 1968, and in 1969 heavy rains seriously reduced the sucrosecontent of the cane, with the result that sugar production fell from over500,000 long tons in 1965 to about 360,000 in 1969, not enough to meet allquota entitlements in Britain, Canada and the United States. Of the 16sugar mills in the country , three shut down. Sugar production is nowalmost equally divided between estates and independent farmers; all of itis marketed through a Sugar Manufacturers Association. Due to high laborcosts and antiquated techniques, Jamaica is not an efficient producer ofsugar. At present prices and production levels only exports to the UnitedStates are still profitable; for the rest subsidies are required. The in-dustry now receives excise duty rebates, the domestic sugar price has beenraised, and the income tax allowance against new investment was also in-

-9-

creased. These measures DUy time in wnich the industry can once more beput 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 to190,000 tons in 1969. Bananas are raised on a large number of farms, mostof them small, but marketing is concentrated in the Banana Board, a publicinstitution. In the wake of the drought the principal marketing agent inBritain, where the entire Jamaican crop is normally sold, threatened tocancel its contract because of poor quality and insufficient supplies, butthe dispute has since been settled on a constructive basis. Government hasintervened to guarantee a minimum price to farmers above the prevailingmarket price; it is sponsoring a 10,000-acre replanting scheme to introducethe 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 hasbecome a net importer of food for the first time. Three-quarters of foodimports are accounted for by cereals, meat, dairy products and fish.

22. The lack of resilience of Jamaican agriculture in the face ofadverse weather conditions reflects problems of longer standing. Althoughunemployment is substantial, there has been an acute lack of skilled andsemi-skilled labor. The wage it can command in alternative employmentshas 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 1.7million in 1961, and at only 1.5 million in 1968. The bulk of the 300,000acres lost appears to have been concentrated in the 5-500 acre category.Only the largest sugar estates extend beyond this range; and below itsmall 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 above500 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 agriculturallabor force, despite the importance of wage employment in the larger sizecategories, many of the smallest holdings must clearly be part-time ac-tivities only.

23. - While government policy is unlikely to reverse the shift in thecomposition of output and employment towards other sectors, it should beable to stem further declines in the absolute level of agricultural produc-tion and export. The Ministry of Agriculture and Lands was in 1969 dividedintn twon spparate Ministries; one for Rural Land Develonment (MRLD), theother 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 havebegun to undertake extension work, with former Ministry staff seconded tothem and a government grant made to cover their salaries. Two processesof devolution are therefore taking place at once, one geographically, theother functionally, both aimed at improving effectiveness by dispersingresponsibility. The dichotomy between extension and marketing has had anespecially adverse effect in the past, and allowing more of the marketingboards to operate their own extension services should therefore be encouraged.Increased emphasis on commodity and market-oriented extension may facilitatezoning of the island to promote more regional specialization. A more limitedrange 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 onlysugar producers and some of the larger commercial operations. With a markeddeterioration in the ACB's arrears position since 1968, the Government hasfelt obliged to extend credits and outright grants to farmers directly ona temporary basis, but has now instituted a major policy overhaul. TheSelf-Supporting Farmers Development Program will henceforth concentrateresources much more than in the past on potentially viable farms in themiddle-size range. The former Development Finance Company was reorganizedinto the Jamaica Development Bank (JDB) and, with IBRD assistance, is toservice 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 (PeoplesCooperative Banks) and other approved intermediaries. It, too, is to bereorganized, and with IDB assistance will service farms of 5-100 acresunder the Self-Supporting Farmers Scheme. A total of nearly 10,000 farmsis to be covered by the two institutions together. Production on thesefarms will concentrate on domestic food crops, tree crops for local andexport 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 normallyself-financing and pass to producers export realizations less the cost ofprocessing and exporting. In addition, the Agricultural Marketing Corpora-tion (MIC), operating under the Ministry of Agriculture and Fisheries, seeksto. 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 cornand some other croDs. and contracts are offered to producers of certainfruits and vegetables. Trading losses are borne by the Government. TheCornoration still lacks both the resources and the organization to handlevery 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 4

i-

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 wintervegetabfles.

IV. TOURISM

26. * iurL,ng the last decadue JaiLta-Lica LhLas slared i h LLt LUULr.Ls LUcommon to all Caribbean islands. Tourism is based mainly on the abilityto 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 cneaperair fares based on domestic U.S. rates. Of total tourist arrivals tojamaica in 1969, 24 percent were cruise passengers, 8 percent members ofthe armed forces, and 5 percent were short-stay visitors for 3 days orless. Some 255,000, or 63 percent, were long-stay visitors remaining onthe 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 percentannually 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. Nearly80 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 andOcho Rios the main destinations for tourists, almost all of whom come byair. Only one in four stays in Kingston.

27. The traditional winter tourist has been a repeat visitor, comingto 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, butaverage US$65 to US$75, for double-room accommodations on a modified Amer-ican plan (MAP) 1/ including exclusive access to hotel beaches, nightlyfloor shows, and sports facilities such as golf courses, tennis courts,and equipment for sea sports. Occupancy rates vary greatly between a lowin summer and the peak in March but on the whole have been high by inter-national standards. The enclave nature of these distinctive, typically40-room hotels has probably been the most appropriate way to exploit theisland's resort assets. Jamaica's resources do not appear particularlywell 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 largelybought 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 mainlyto per capita incomes in and air fares from their states of origin - seeAppendix C.) These new tourists require lower prices and have rejectedthe "ernle natuilro" nf witnter hoetol in pernfor osvr rmnril4t-x and

greater contact with Jamaican life. Jamaica has begun to respond to thetrends towards r.*ss tourism. LoTwer prices have been offered, particularlyduring the off-season, and there has been some diversification of supply oftourist accommod.ations. New convention-size hotels of up to f-C560 rooms arebeing 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 13percent 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 aresomrexvh at clouded) hoevr TiL-,- 11-e 1968/6-9 soigdown of tourist arri2va's50mCw11.1L 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 theUniLtedU SDates, but also to competiftio,, from adir fLares to Europe, hLgh prLcescharged in terms of service received compared to Europe or Mexico, and pressreports o' social unirest in thLe Caribbean generally. On the basi's of ouranalysis 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 aDOUL13-14 percent over the last decade would seem to be attainable as long asU.S. per capita incomies increase at no iess tnan 3 percent per annum, andno significant changes in air fares are introduced. This assumes no sig-nificant shift in consumer preferences. Some of tne projections made byADELATEC, Pan American Airways, Lamarre-Valois International, and ArthurD. Little, are more optimistic. Without exception, nowever, tney snow tnatdemand for tourism will tend to grow less for several years than presentlyplanned additions to capacity in Jamaica.

30. A sharp reduction in air fares from the United States in 1965began a substantial increase in visitor traffic that led to a shortageof accommodation two years later. In response to the shortage, theHotel Incentive Act was passed in 1968 to give hotel enterprises relieffrom income tax and customs duties for periods of 10-15 years. An UrbanDevelopment 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 percentannually in 1967-69, it is now expected to increase by over 28 percent peryear between 1969 and 1972, if plans are executed per schedule, raisingthe 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. caDacitymay well reach more than 13,000 rooms in 1977. The capacity of resortcottages increased in addition bv over a third In 1969 alnne, to nearlv1,900 beds, and is drawing guests that otherwise might have stayed inhotels~.

31= The reqponnnsiility for nresent nvprrcnnritv and fOr fiurthpr plansto increase hotel construction rests in good part with the public sector.A lack of coordination between the Urban Developmer.t Corporation and theJamaica Tourist Board has led each to promote the development of new touristareas - 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 ofmore recreational facilities outside hotels, and in publicizing the advan-tages of tour4sr. to Jamaicans, --.re nearly operate ni the ri g ht 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 isfree'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 clearlyestablished than it now is. Recently the Bank of Jamaica has challengedtne net benefits accruing to tne economy from foreign-ownea new notels.A 1958 survey by the UWI suggested that 58 cents of each tourist dollarremained in Jamaica. Tnis appears confirmed by information gatnered bythe mission.

32. The dramatic increase in capacity coincides with a slowdown inthe growth of long-stay visitors, and a fall in their average length ofstay. Hotel occupancy rates have begun to fall. Still, efforts to gethotels to reduce rates in order to make the island more competitive withother tourist destinations have not thus far shown much effect. The demandfor luxury tourism in winter may not in fact be highly price elastic inany case; however, the demand for the type of accommodation which hasresulted from the 1968 Hotel Incentives Act almost certainly is. One ofthe main reasons for high tariffs in the past has been the short winterseason; profits were made from December to April, after which hotelsclosed. Some reduction in average prices has begun by hotels stayingopen and offering preferential rates outside the winter season. For therest, however, hotel managers attribute high tariffs to costs of hotelconstruction as well as operation, and cite the size of the wage bill asa major contributing factor. Inadequate public utilities, particularlywater supply in Montego Bay, have induced some hotels to install theirown facilities, raising both capital and possibly operating costs in theprocess.

- 14 -

33. The distribution of hotel ownershin is now estimated to be 53percent local, 39 percent foreign, and 8 percent joint; on a roormi orcanital-invostod1 basqis thl foreign sharP is iinlikplv to be lss th:n half-Although tourism is considered a labor-intensive industry, it appears lessso 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$20,000on recent construction. i4rect eploniymant per rom ic fa11lng Co .pai dto an overall average of nearly 2 per room, the ratio is nearer 1.2:1 inthe newer hotels. Indirect income generation and employment by the r torisindustry are difficult to gauge. Previously, with enclave hotels, the useof services outside hotels was limited. Given greater mobility and activi-ty by tourists, the growth in employment in tourist services is likely toexpand 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 largelytLhe resuLt ofL thIe very highL prices - by 1ikLCLionl standards - charged

by the construction industry. The construction boom of recent years, therem-,arkably hILgh labor costs, and the dependence on im-ported equipment andmaterials 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--xAV . DBIUALIT tuNiJ ALtUI'1IN11

35. Bauxite and alumina production has been the most dynamic elementin the economy, and is likely to remain so for some time. At present,bauxite yields 23 percent and alumina 33 percent of gross commodity exportearnings. Together they account for about 9 percent or GDP at market pricesand contribute nearly 14 percent of Central Government current revenues inroyalties and income taxes. Growth has been impressive. Export earningsfrom this sector increased at an average annual rate of 12-13 percent in1963-69 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 millionlong tons in 1971, bauxite exports are to be stabilized around 7.5 milliontons; the entire increment in production thereafter is scheduled to be pro-cessed into alumina before being shipped abroad. Consequently, by 1975 theshare of bauxite in total exports will have dropped to 19 percent as aluminarises to 50 percent. Their combined share will have increased from about one-half to well over two-thirds of commodity export earnings. However, a shiftfrom bauxite which is taxed to alumina which enjoys fiscal incentives, willcause 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 suppliesabout 42 percent of the raw material needs of the aluminum industry ofNorth 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 wouldargue for maximum exploitation now. As late as the mid-sixties, however,it was thought that Jamaican reserves could be depleted in 50 years at thethen current rates of output, and in 24 years if the then rate of increasein 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 longerseems quite as imminent a peril as they did before. The optimal rate ofexploitations from the Jamaican point of view nevertheless continues todepend, at least in part, on balancing present sales at lower stages of pro-cessing against prospects for increasing the degree of local processing infuture.

37. Local processing would substantially increase the domestic incomegenerated per ton of bauxite mined. A study carried out by the UWI concludesthat, for the Caribbean as a whole, the share of gross income created frommining through semi-fabrication of its bauxite output was only 6 percent inthe mid-sixties. This reflects the region's concentration on mining ratherthan on processing. Of total world income generated by the industry, lessthan 4 percent was created by mining and drying, some 9 percent by refininginto alumina, perhaps 30 percent by smelting into aluminium, and 57 percentby semi-fabricating. To match the value added generated by processing asingle ton of bauxite all the way through to semi-fabrication, requires anestimated 2.4 tons if processing is carried through to smelting only, some8 tons if onlv mining and refining are included, and 30 tons if bauxite ismined and dried without any processing at all. The required capital in-vestment is large and lumpy, however. While nlant for smelting is moredivisible 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 to300(000 tons annual metal nanacitv. The scale of investment reauired hasfavored ownership by large international enterprises. The cost of poweris also r rirt-ir'l fAetoFr=

38. Th.e production and use of Jamniran hbiivite ic cncentrated in fnorcompanies: Kaiser with 40 percent, Alcan of Canada with 23, Reynolds with22, and Alcoa with 12 ercent- of the baxite- min4ed. Of these, only theCanadians 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 andBrass, plans to put a 2010,00-0-t-on plant- into production; ar.d in 1071 Alcoaintends to open one for 390,000 tons. Further expansion beyond 1975 isp.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 underconstructLion 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

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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 isbuilt, 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, thLepossibility of conflicts of interest between the companies and the JamaicanG1overnm,ent .must bDe considered1. A A45 percent wei'ght reductior. from a`u,-inaJV~.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-basedsmelting; 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 atomicenLergy, h'ias been discussed but their feasibility is not yet established.

The opportunity costs considered by the Government or the companies in makingtheir Juugments couiu differ substantially. The companies miust Lor exampleconsider their sunk costs, including their hydro-electric facilities elsewherein the world before investing in Jamaica. For the Government, the iack ofalternative opportunities within the country for domestic labor and skillsare apt to weigh proportionately more in the balance. For hne present, at-tention in Jamaica continues to be focused on encouraging expansion ofalumina refining and increasing the tax yieid.

40. Just over half of the nominal value of exports by the bauxite andalumina industry currently remains within Jamaica. The domestic share hasmarginally declined with an increase in the import content of production asalumina refining has gained in importance. The division of proceeds netof imports has remained virtually constant over the last six years: 31percent for direct local expenditures on wages, salaries, materials andservices, 22 percent tor taxes and royalties, and 47 percent remitted asprofits abroad. Over the next six years, however, the policy of restric-ting further increases in bauxite exports, and of expanding alumina exportsin their place, is likely to have more marked effects. The same shift isprojected to raise import requirements to over 22 percent. Net of these,the distribution of proceeds will in addition tend to favor direct localexpenditures at the expense both of tax yields and of profits. The shareof profits seems likely to decline to 43 percent, that of government reve-nues to 20, while the share of wages, salaries, materials and services maywell 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 intaxes and royalties, a proportion that may well decline to 35 percent by1975. 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 reasonfor a relatively sluggish growth in tax yields lies with the incentives gran-ted to companies setting up alumina refineries, combined with much slowergrowth of direct bauxite exports once the refineries are set up. Only Alcanpays income tax on its alumina production at present. Under their incentiveagreements, ALPART will not begin to pay until 1973 and neither Alcoa nor

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Revere will pay any income tax at all until after 1975. For bauxite, incometax 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 yieldson 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 exportearnings from bauxite and alumina has increased from J$4.1 in 1963 to J$5.4in 1969, and 'as processing continues to expand, this is likely to increasefurther to J$7.6 by 1975. Nevertheless, the contribution to employmentremains small. A rough estimate suggests that an alumina plant in full op-eration will emnlov one man ner lOOO tons annual canacity; an even rougherestimate 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 industrvyor about one-half of one percent of the Jamaican labor force, a figure thatmay 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 theisland'q siurface in ronneqiono. nnlv some 10 nperrent is being s-qed for

mining and company installations. The rest, the companies are legally boundto uie for agricultural purpos whenever possible Ahmit 30 prcent isdirectly 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 to13.6 percent excluding sugar; including it, the shares were 13.6 and 14.6per.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. Theindustries showing the greatest advances were chemical products, cementand cay) produLctsL, UalCI produts,and miscellaneous ite*m. Textiles, which.contribute 8-9 percent of value added, also expanded somewhat faster thanaverage, 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 to18.4percent sirn.ce 196J not counting sugar, as the propor'. of exports

in manufacturing production fell from 9.4 to 7.7 percent. This decline wasmainly concentrated in the traditional fooa processing Lnuustries; chemicaland metal products, cement and paper products were less affected. It hasnevertheless 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 manufacturingwas 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 growthln manI¶afact11r,nn 0mpm1 i nt of roughly9 9. percent nor year between 1960and 1968, compared with 1.1 percent for the labor force as a whole, andreaching about 11.6 percent of total m-ale employment in the terminal year.It is probable that employment in larger factories has grown even fasterthan 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, and5.7 ercent per year in 1966-67. Employm.ent 4

n those firms approved for

tax relief rose 11.0 percent in 1965, 16.0 percent in 1966, 8.5 percent in1967, and16 percent in 1969e. Lvn then Ct accounteu Ifor only 20 percentof 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'-elat a price no higher than the import price plus tariff. On raw materialsarltU £ILterLmUdiLae gUUU:s Lell ll[ildl LdL tar i S UsUdsualXy L2 rcilL UL o t'Less, onfinished manufactures it is more often in the region of 30 percent, butrlses higher f'or iterms 3udged to bue lxre,nldi -. trcr. Irises 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 PioneerIndustries 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 industriesestablished in Jamaica; and the Export Industries Encouragement Act (1956)provides relief from customs duties, and income tax for firms which produceexclusively for exports. By 1970, some 186 companies had invested over J$73million under these laws. They employed 13,000 workers or about one-fifthof the industrial labor force, and contributed perhaps one-third to thegross value of industrial sales, and a fifth to exports of manufactured pro-ducts.

46. There is very little information on the revenues foregone underthe incentive laws in recent years. An earlier study estimated the lossto 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 coversmore than twice the number of firms with a higher level of concessions:if revenue losses have risen proportionately to the number of firms, theywould have reached about J$8.2 million in 1969. To the extent that thesesums accrue to foreign companies, they are remitted abroad. A provisionalestimate of the 1969 ownership of fixed capital investment under all incen-tive laws gives about one-third as wholly foreign-owned and almost one-halffinanced jointly by domestic and foreign investors. Beneficiaries of thePioneer Industries and Industrial Incentives Schemes include a lower pro-portion of foreign-owned companies than the Export Industries program, but

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their share of total investment is greater, hence the foreign component withthem may still be in the range of 50-55 percent. Firms under the ExportIndustries Encouragement Act have, as intended, almost exclusively been smallsubsidiaries of U.S.-based enterprises. The share of tax incentives receivedis 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 Industriesand Industrial Incentive Schemes, tariffs and quotas may have been a moreimportant benefit than tax concessions: over 90 percent of their productionwas sold on the domestic market. Since it is more than likely that halfwould have come in any case, all of the J$3 million in revenues foregonewould 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 perman employed. Employment was purchased more cheaply with the Export Indus-tries program, if none of the firms affected can be assumed to have comewithout it. As an integral component of enterprises abroad, they carry ononly certain labor-intensive processes, often renting their factory fromthe Jamaica Industrial Development Corporation (JIDC) rather than bringingin their own capital, and with raw materials and intermediate goods almostentirely 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 ofJ$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 theeconomy, however, these firms can leave at short notice and little cost tothemselves, 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-intensityof investment in its predominantly import-substituting industries. Fixedcapital invested per man here came to over J$10,000, compared with less thanJ$400 under the Export Industry Encouragement Law, not counting the capitalcost of rented factories. The export component of output under the firsttwo schemes is about the same as for industry generally. Export incentivesdid nothing to affect this proportion, which reflects mainly the effect oftariffs and quotas on the inducement to invest. Protection, however, tendsto divert domestic investment from those industries in which Jamaica hasmore of a comparative advantage to those in which it has less. It mightbe better, therefore, to abolish fiscal incentives altogether for sales tothe protected domestic market, retaining them only as a parallel incentivefor exports. This change might best be achieved by rescinding the PioneerIndustries and Industrial Incentives Laws outright, and amending the ExportIndustries Encouragement Act to qualify firms that produce for the domesticas well as for foreign markets, at least for that portion of their outputwhich they export. In addition to fiscal exemptions, however, improvedmarket information and nromotional services abroad are also needed. Thesethe recently created Jamaica National Export Corporation is intended tospinnlv in timp

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49. The flow of credit to domestic industry is also receiving increasedattention by the authorities. For short-term credits the sector continuesto rely on the commercial banks. The share of manufacturing in total bankcredit to the private sector has fluctuated around 21-22 percent for someyears, with a declining proportion directed to the sugar industry made upby increases to other enterprises. Sugar apart, bank financing rose from7-8 percent of manufacturing sales in 1966 and 1967 to 12.5 percent at theend of 1969, paralleling a sharp increase in bank lending generally. Longer-term credit and some equity capital was until September 1969 supplied by theDevelopment Finance Corporation (DFC), a public institution since reorganizedinto the new Jamaica Development Bank (JDB). The JUB's authorized capitalis J$10 million. Its lending powers have been expanded to include commer-cial agriculture as well as industry and tourism; it has obtained assistancefor both from the IDB and the World Bank. The authorities have in additionencouraged the creation of merchant banks in the private sector two of whichwere set up in the course of 1970. A unit trust was created to channelsmall savings into the capital market. And a stock exchange was establishedin 1969, some 35-40 issues are now traded on it, but prices thus far havetended to fall.

50. tThile the flow of public and private resources to industry shouldsoon be adequate, therefore, the problem of markets remains acute. Creationof the Caribbean Free Trade Association (CARIFTA) in 1968, to include mostof the formerly British territories in the region, has already more thandoubled the market open to Jamaican industry in terms of population. Thetargets is to eliminate all trade restrictions, subject to a reserved pro-duction list, for the more developed member countries in five years, and inten for the smaller islands. Jamaican exports to the market rose from US$5.8million to US$8.7 million, imports from it from US$3.7 million to US$5.8million, in its first year of operation. It accounts for just over 2 percentof Jamaica's total trade. To achieve economies of scale and effective com-petition over a broader range of production, Jamaica must look to marketsbeyond 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 theUnited States. An Industrial Engineering Apprentice Scheme has already sent200 trainees to the United Kingdom to acquire the necessary skills. Thesuccess of initiatives of this kind is conditioned on the premise, however,that skills can be acquired without simultaneously pricing themselves outof the Jamaican market.

VII. EDUCATION

U1 Thr twin nrnhl mA nf high uinemnlovympnt and .ki11 Qhnrt-.qcP rptnii1rpunusual efforts in education and training in order to be overcome. Thestrongn 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 restrictaccess to 4obs ar.l therefo-ro nn-the-nob training. Private indiiiftry, with

the exception of bauxite companies, rarely conducts apprenticeship programs.

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At JoULnt program supportedu biy a vo'Luntary payroll tax as iin Venezuela 15

presently under consideration. Labor exchanges have recently been createdlor Ltne rlrst time, in order more errectlvely to bring workers and jobs incontact with each other, and their operation should increase in efficiencywithi time. A service has been established wnich informs jamaicans livingabroad about vacancies in both the public and the private sectors at home.Thne response thus far has been slight. The main emphasis therefore willhave 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, despitehigh costs and low implicit returns per unit that a high attrition rate willcontinue to imply.

52. The number of persons who receive education and training has con-siderably increased in recent years, with a growing emphasis on technicaleducation. In 1967, enrollment in primary schools exceeded 85 percent ofthe 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 werestill in senior departments of primary schools. Actual attendance is muchlower, however, and is about 60 percent in primary schools. Enrollmentswere still only about 10 percent in second-cycle secondary schools and 7percent in higher education. Industrial arts and home economics are partof first-cycle secondary education; technical and vocational subjects aretaught in technical high schools, vocational schools and in some streamsof the upper forms in comprehensive schools. The curriculum of most ofthe traditionally autonomous high schools remains, however, largelyacademic. Training outside the formal education system has intensified inrecent years. Trade training centers of the Ministry of Labour run six tonine-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 17year olds provide some elementary skill training. Jamaican apprentices arealso trained in Great Britain and Canada. The Government also carries outin-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 mainlyby 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 peopleable 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 primaryschools cannot fulfill, i.e., the provision of a basic vocational education.The very creation of junior secondary schools has aggravated the teachershortages in primary schools, at least in the short and medium term, as manytrained primary school teachers have left them to teach in junior secondaryschools. Furthermore, a serious bottleneck has developed in second-cyclesecondary education where not enough places are available for first-cyclegraduates who want to continue their education. As a result, there still

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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 create9-SOO ndditionn1 second-cvryl serondarv nplces. With these- most of thedemand from the labor market and for further studies could be met at leastuinti1 1975- even assuming higher Pduirational requirements for the lahnr forreand a continuing flow of trained manpower abroad. The same project alsoprovides for 8,R00 new first-cycle secondary nlace,c for additional trainingof technical and primary school teachers to help overcome teacher shortagesin the most cr4tical areas of the educational system, and for tearhing aidssuch as instructional television for use mainly in primary and first-cycleseconda-.y schools. Ass4itance. wjth 30 nn d dniiit-in ni nr4mnruy scchronl places

is being sought from the Canadian Government. IDB has already extended a1- 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 trainingprogram.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 constructionof 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 increasedei..a. ciLency in planning and adii4astration. i t. present thlere is 1li.le coor-dination between the education and training programs of various agencies, andb-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 functionsdLIU idy [dV~ L LJ~ iveiL Z:UlIL= tCA&:L_UL.LVC_ pLIWUL JLI ~LL L, LU UJC;CL L L Candu 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 benecessary. The improvUertent of pr-ir,y educaion, espcially in the upper

forms, should be given urgent priority since the bulk of entrants into thelabor market will continue for some tiLme to LhIave cor.p'LetedU pL.aLrLy edUULciLoUL

only. Improved basic education is therefore necessary if Jamaica is goingto succeed in developing a manufacturlng Industry which ls internationallycompetitive. It would also release secondary education from its presenttask of remedying primary school deficiencies. It seems also necessary togive 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 mainand village roads, a railroad, i5 active ports, and four airports withscheduled flights, of which two are international. Most of the island'sinternal transport needs are met by roads. In recent years the railroadhas lost nearly all its general traffic and is now mainly a contractcarrier for bauxite mining companies. The greater part of the bauxiteshipped is still handled by private facilities, however, independent ofthe public system. Railway operations are costly because of the relativelyshort handling distances and the island's topography. Most of Jamaica's

ports are privately owned and highly specialized, but the need to cut downI,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, UutKingston handles most of the non-tourist traffic to and from abroad. Al-though the general layout of the transport system seems adequate, majorparts are old and cannot satisfactorily serve present traffic volumes. Inpreparation 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). Itcovered all transport modes, made a detailed analysis of the commodity andpassenger flows on the present system, and prepared traffic projections to1979. The second phase of the Survey consists of feasibility studies ofmajor projects identified by the tirst.

57. the Ministry of Communications and Works is responsible for theplanning, design, construction and maintenance of the road system, whichcomprises about 2,7U00 miles ot roads ot which roughly 1,9U0 miles arepaved. In addition, about 4,500 miles of village roads are under thejurisdiction of parish councils. The layout of the highway network isadequate: it connects major population and production centers and ports.Serpentine curves, steep gradients, and narrow and shoulderless roadwayson poor foundation nevertheless cause high transport and maintenance costs.The number of motor vehicles in Jamaica is not known exactly. Vehicleregistration and safety inspection records indicate a total of about80,000 vehicles, of wiich about three-quarters are motor cars. Vehicleregistrations increased at rates of over 10 percent annually over the lastfive years. The highest traffic density on the road network is found nearKingston and ranges from 5,000 to 12,000 vehicles per day (vpd). Trafficon the North Coast road is about 2,000 vpd, that on the main cross-islandconnection about 5,000 vpd, and less than 1,000 vpd elsewhere. Althoughmaintenance expenditures increased by well over a third in the last fiveyears, the condition of the roads is beginning to deteriorate. The mainreasons are inadequate standards for the network, rapid traffic growth,and old maintenance equipment. A comprehensive maintenance program remainsto be instituted.

58. Jamaica does not have a formal road user charges policy. Revenuesfrom taxes imposed on the use and ownership of motor vehicles exceed roadexpenditures. In 1967/68 the proceeds from fuel tax and license and regis-tration fees amounted to J$10.2 million. Import duties on motor vehiclesproduced an additional J$4.8 million. In the same year the Ministry ofCommunications and Works spent J$8.2 million for administration, maintenanceand construction of main roads, and the Ministries of Local Government andAgriculture J$2.8 million for parish council and development roads. A con-siderable portion of present road-user tax revenues is collected in urbancenters and spent on roads in rural areas. However, the investment needs forurban roads as well as rural are growing. For the period up to 1979 theTransport Survey recommends construction and reconstruction of 340 miles ofroads at a cost of J$43 million. It also recommends reconstruction of about430 miles of low volume feeder roads. Stage two of the Survey comprises

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reasibility studies ror up to 120 miles or arteriai roads and 320 miles offeeder roads to begin in mid-1971. The Government intends to submit theformer for financing to the Bank, and the latter to 1DB. At that time areview of road-user charges might be appropriate.

59. Jamaica's railroad system consists of 205 miles of 4'8' standardgauge single track, most ot which was built in the second half of the lastcentury. A formally autonomous Crown corporation, the Jamaica RailwayCorporation (JRC), which is presently supervised by the Ministry of PublicUtilities and Housing, has operated the system since 1960. The system pro-vides access to main mining and agricultural areas and connects 8 of Jamaica's15 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 theexpansion of the mining industry, this traffic increased at an averagerate 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 anaverage 17 percent annually during the same period. Passenger trafficdeclined in the early sixties, but recovered with better service on newrail cars. Annual volumes now fluctuate around 1.1 million passengers.About two-thirds of all passenger movement occurs on the Kingston-MontegoBay line. Exact data on average travel distances are not available, butmay be about 50 miles overall. JRC expects passenger traffic to increaseat over 5 percent annually over the next five years, assuming no change inthe present low rate structure.

60. Total revenues barely cover working expenses of the railroadexcluding overhead. Government subsidies roughly provide the remainingcash outlays, in addition to capital contributions in the form of loans,loan guarantees and debt cancellations. The rates for mining traffic aslate as 1968 did not cover the full cost of the services rendered, buthave been renegotiated since to do so. Passenger fares are governmentcontrolled and have not been changed for 18 yearsz a revised rate scheduleis still pending approval. 114ining traffic alone should give the railroada sufficient basis for existence, provided it is either relieved of oradequately compensated for operating uneconomic lines and employing morestaff than it needs. Tracks are maintained by antiquated methods andnaintenance crews are overstaffed. Earlier rationalization proposalsfoundered on the Government's employment policies, but the railroad isnow engaged in a substantial track rehabilitation program as an essentialprecondition for more mechanized working procedures. Trains are operatedwith reasonable efficiency. JRC plans to run longer bauxite trains asan economy measure to increase line capacity. This requires investmentby the railroad in locomotives. and by the companies in cars and sidings.JRC has already ordered six new locomotives to be financed by the CanadianREnnrt Denvelnnment Cnornornttinn (EhDC(. The mininq onmnanies are inve.tivat-ing their requirements.

61. The port of Kingston handles over 80 percent of the island'simports or 2.6 million long tons in 1968, and 7 npcernt of ift exportsor 0.7 million tons. Nearly all general cargo passes over two wharves

in Kingston whose combined capacity is more than 1.0 million tons, 70percent of xwhich is presently used. A second general cargo port is beingbuilt at Montego Bay. The 13 other ports are specialized to handle mainlyDauxite and alumina exports. Five are owned by mining companies whichalso receive some of their supplies through them. Most of the remainingeight are much smaller and older ports and some are very inefficient. Theyhandle mainly agricultural exports including sugar, molasses, and bananas.In addition, five lighterage ports will probably be abandoned in the nearfuture. All port facilities are privately owned; the one exception is awharf in Kingston that is leased to private operators. Government's rolein the port sector is mainly supervisory. Public investment is being con-sidered only to improve one of the Kingston wharves tor cruise ships and tomodernize facilities for banana shipments. The Government intends in duecourse to combine all aspects of port administration under one authority.Meanwhile there are three. The Ministry of Trade and Industry, throughthe Port Authority, supervises operations and approves rates on publicwharves. The Ministry of Communications and Works is responsible formaintaining and signalizing channels. And the Ministry of Finance andPlanning, through the Marine Board, supervises shipping operations.

62. Jamaica's two international airports, at Kingston and MontegoBay, are served by 12 scheduled foreign airlines and the national carrierAir Jamaica. Flight connections between them and two domestic airports,at Ocho Rios and Port Antonio, are provided by the internal airline, JamaicaAir 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 annuallyto a total of 431,000 in 1968; and in Montego Bay at 25 percent annuallyto 466,000. Freight movement and general aviation traffic also increasedconsiderably. The steep increase in traffic has now run up against seriousconstraints in aircraft ground operations and passenger handling despitethe fact that both airports are relatively new. Kingston's PalisadoesAirport was inaugurated in 1961 and has a 7,600 ft. runway and a modernterminal building. Montego Bay's terminal building and apron facilitieswere 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 Governmentand CIDA. Interim improvements will be needed mainly to accommodate highcapacity 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 PublicUtilities Commission (PUC) created in 1966. Public telephone, telex andteleprinter services are provided by the Jamaica Telephone Company (JTC).Under its auspices, the number of telephones increased at an average rateof 7 nercent annually over the last decade to a total of 70,000 by late

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1970, or rrom a density of 2.2 to 3.5 per nundred popuiation. Foliowinga period of very slow expansion in 1960-66, pending the outcome of nego-tiations for a new license, the Company changed ownership, and plans fora Bank-financed expansion program were cancelled in favor of a larger onesupported 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. Henceall of the expansion of telephones installed has had to be on the old facil-ities with consequent problems of overloading. The Company estimates atotal 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 limitedby comparison, and should probably be expanded. The company proposes toprovide no more than 9,000-10,000 additional telephones per year.

64. Electric power services also remain inadequate despite rapidexpansion. Total installed capacity now approximates 400 MW, of whichsome 240 MW are held by the Jamaica Public Service Company (JPSC), some110 MW by the bauxite-alumina companies, the rest by various industrialconcerns. 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 beenable to increase supply at an annual rate of over 12 percent to 880 millionkwh over the last decade. The JPSC has drawn up an investment program thatwould continue to expand supply at the same rate. A small program of ruralelectrification will also be continued as required by license. If in factgrowth in power demand reaches 15 percent annually, as the PUC expects,reserve capacity would be exhausted by 1975. Frequent outages have alreadybecome a serious problem with the public. Major reasons for poor serviceinclude inadequate maintenance, insufficient transmission and distributionfacilities, a chronic shortage of suitably trained staff, and excessivedependence for local decisions on a New York-based company holding a con-trolling interest. W4orking relations with Government have also deterioratedover the past years.

65. In order to cover the cost of an adequate maintenance program, theCompany applied for an 11 percent rate increase in spring 1970. The originalsix-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 PUCto 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, legislationhas been proposed by which all public utilities would become liable by civilsuit for liquidated damages resulting from interruption of services. Legisla-tion of this kind is unprecedented and would expose the company to unlimitedclaims. Its financial uncertainty makes it virtually impossible for JPSCtn 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 seriousmanagement problems carries rnncidprnh1p dangprs fnr JTmiir2B'S nnwer ser-

tor and the economy as a whole. The Government has indicated that it wishesto 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 furtherin.dicated that it is abut t dei4Ad how to approach the p^wer sector prob-lem. It could assist the existing company through constructive regulatoryand legislative m.easures to improve its financial and operating position.Alternatively it could purchase a controlling interest in the company orfully nation.alize it s a bsis for m.king t1he k.Lflf refor, thLou AghlGovernment control will not in itself solve the basic issues of operatingefficier,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 sectoras weL.L, -. L.LI LJ.LbJ UJIL UJU.J UL..L.LLLY Lt.6U.LaL.LULI* £,VCLL Wi.LLLIULPaswell, WLL.ich 'Ls ailso subject to pub' licL utilt reuain Eve without - -- I j-

this complication, inadequacies in both sectors already constitute a majorobstac'le to acceLeratedu proress in industly, couullerce andU touri'sru.

X. PUBLIC INVESTMENT AND FINANCE

67. Despite remaining problems, puDJlic polcies toward the privatesector have on the whole operated in the right direction. The reactionto adversity in agriculture was prompt: thne extension services have beendecentralized to make them more flexible in dealing with local problems;agricultural credit institutions have been overhauled and properly focusedon promoting viable farms; agricultural marketing, particularly of smallholder 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 forwider markets to ensure its continuation has been recognized, and a begin-ning made with CAKIFTA. Negotiations with the bauxite companies haveyielded, in return for ample tax privileges, considerable expansion in thelocal processing of ore into alumina; the question of a possible smelterremains pending. Tourism has expanded rapidly also, though in responseto 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 underreview.

Public Investment

68. Public investment has performed an increasingly important support-ing function in the economy. The 1966 national accounts record fixed capitalformation 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$25.6million. This more than doubled over the five years to 1970, just keepingpace with an equally rapid increase in fixed private investment, mainlyfinanced 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, inthe public anymore than in the private sector, though the extent of theprospect've slowdownL I-may well be excesive. At presenit prices, fixedpublic investment is likely to stabilize over the next five years at aboutT e fCC 1I -I~r T r 1J$yu65 miillion arinually, compareu to thle present level o0f J$5 million. Someof this slowdown will be compensated for by increased loans and grants tothe private sector: they may average as much as i$17 million compared withJ$10 million in 1970. The total, including miscellaneous capital expendi-tures, would still only average just over J$90 mliiion annually, comparedto just under J$80 million now.

ALLOCATION OF FIXED PUBLIC INVESTMENT

i$ millions 196.6/67- 990j71- I97Ij72-I 75J76Total Percent Total Percent

(J$ million) (J$ million)

Agriculture 16 8 22 7Industry 3 2 6 2Tourism 5 3 17 5

Subtotal 24 13 45 14

Education 34 19 41 13Housing, Water, etc. 35 20 86 27Transport 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 pricesSource: Volume II, Table 5.1

69. The rapid increase in public investment over the last few yearswas not based on an official development program extending beyond theCentral Government's annual capital budget. A tally of projects in processor planned in the various executing agencies shows that the allocationof fixed public investment will remain broadly similar in the near futureas it has been in the recent past. The directly productive sectors includ-ing agriculture, industry, and tourism will not significantly change theirshare 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 continueto be placed on education, urban development, and transportation, whichtogether take up 60-62 percent of the total, but with a marked shift from

- 29 -

education to urban infrastructure. Capital expenditures on education arecsely- 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 thesehave been completed, it is possible that education expenA4 tures will beginto 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 , i8115. 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 fromimp-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 isin 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 oUsewerage facilities has been less satisfactory. Such facilities do notextend 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, andtle: resuiLanL riSK of grounud water pollution, is to De tackled by a 35-year program for sewering the city. A substantial renewal program forthe KiIngston waterfront is already under way. UrDan transport programs,however, remain very limited in scope. Earlier studies proposed verylarge investments in urban freeways, wnose cost dissuaded tne Governmentat the time. Individual housing projects continue to be promoted on apiecemeal basis, some under government auspices, but an adequate housingprogram for the metropolitan area as a whole is still lacking. The annualincrease 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 itspopulation, there is no great danger that the continued growth ot themetropolis will leave pockets of exceptional poverty elsewhere. Conges-tion can, nevertheless, be ameliorated by cutting the cost of distancethrough improved transport and communication links with the rest of theisland. The share of transport in fixed public investment is likely toincrease from 21 to 25 percent comparing the last five years with thenext. The bulk of it is for roads: major portions of the network nolonger adequately serve present traffic volumes. The targets in healthare relatively modest: except for an expansion in the supply ot auxiliarynurses, the aim is to hold the line in terms of the ratio of health per-sonnel to population while improving service. The proportion ot fixedcapital investment here, including a large modern hospital in Montego Bay,is likely to stay at 5-6 percent of the total. The remainder of fixedpublic investment is shown as rising more slowly in absolute terms, andhence declining in relative importance from 27 to 21 percent, comparingfive-year periods. An assortment of programs is found here, includingposts and telegraphs, prisons, courts and police stations, as well asyouth and other community centers.

72. Fixed investment will account for a smaller portion of publiccapital expenditures as grants and credits to the private sector increasetheir contribution from 11 to 17 percent of the total; they supplementdirect 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 lessthan 65' percent; thI e r e st UofJ Government takes -- 4- --- .o responsibility forLLI~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 andJnidustry. Coordination of agencies andU progras remaLins defective, Iow-ever. The last comprehensive investment plan covered the years 1963-68; anew five-year plan was scheduled for completion in spring 1971. The lackof formal planning has not thus far been a deterrent to rapid expansion ofreasonably well-conceived public investment. However, tne prospectiveslowdown in capital expenditures by the public sector reflects in partthe neglect of background studies in tne 9o3-667 period. Aew studles arebeginning to near completion once again, notably the Transport Survey anda 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 lasttive years, tiscal constraints have not thus far been a problem. Overthe 1966-70 period, public sector savings increased from J$8.2 million toJ$34.7 million to finance 43 percent of public sector capital expendituresas a whole. They gained not only relative to public investment. Theircontribution 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 restof Government together has run increasing current account deficits. Therest of Government by itself could not have financed any capital expenditureat all. Its current account deficit exceeded its capital expenditures overthe last five years by a small margin. Before current transfers to therest of Government, Central Government savings may have reached over 35percent of national savings in 1970, and over 6 percent of GNP. The CentralGovernment surplus even after transfers still quadrupled over five years tofinance nearly 60 percent of its own capital expenditures in 1970/71.

74. The Central Government's savings record was achieved despitecurrent expenditures increasing at an average rate of 11 percent annuallyin 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 exportsby the bauxite and alumina companies, from the increase in personal incomes,and from the effect of devaluation on customs duties. As a result ofvarious incentive schemes, however, other companies have been taxed fairlylightly. The income tax left wide scope in any case for tax avoidance bycompanies and self-employed persons. Equity considerations thereforeprompted the Government to start introducing far-reaching tax changes in1969 (see Appendix A). An increase in the notional sales price whichserves as the basis of profits taxation on the bauxite and alumina com-panies was negotiated, and tax assessments for all companies except miningcompanies were changed from a previous to a current year basis. Legisla-tion against tax avoidance, a new company prorits tax, a capital gains taxon 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 incurrent 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_haof 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 appearsto be the loAw level of governUment salaries i compriso ------ ths offered

in the expanding private sector, and abroad. The Government respondediniatially bAy creating variLous statutoiy boes anA other quasi-overnVmenLagencies where civil service pay scales do not apply, and increasinglyalso Ib expanding g adU credits to thLCe prLivate sector. MLiore recently,

the Government has initiated a comprehensive position classification andpa-y survey with Canaudiann technical assistance, andlu as a stopgap Leasureis 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 percentagesgoing 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 substantialones, are probable after the pay survey is concluded.

76. Pay adjustments of the magnitude contemplated will ensure thatthe rise in current expenditures is unlikely to slow down, despite thefact that expansion of administration and of social services, the mainfactors in the past, are likely to play a lesser role henceforth. Wagesand salaries paid to government employees rose by roughly 10 percent annuallysince 1966. Education required increasing allocations of funds to meetrapidly increasing enrollments and to pay for organizational innovationsrelated to the expansion program for junior secondary schools. Continuedgrowth of primary, secondary and post-secondary education and increasinglyof vocational training will still require additional staff and operatingfunds. So will the installation ot new hospital and tamily planning tacil-ities. Allocation of current expenditures to economic services has laggedin the past, with deleterious consequences for road maintenance, tor example,a situation that will also have to be corrected. Other infrastructuraldeficiencies particularly in urban tacilities will, it corrected, requirehigher current expenditures for maintenance and operation. Transfers tolocal governments may have to be stepped up, given their tight financialsituation 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 timereduce the public savings necessary to finance them. The buoyancy of taxreceipts in recent years will be difficult to maintain after the initialimpact of recent reforms has worn off, not least because of a prospectivelevelling off in bauxite production and of continued liberal incentiveschemes for alumina and other manufactures. Even so, the ratio of GNPtaken 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 therecent 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 lendingto the private sector, should cover another 8 percent, leaving 50 percentfor debt financing at home and abroad.

Public Debt

78. Despite rapid increases in recent years, the Jamaican publicdebt remains relatively light. The total internal and external debt ofthe Central Government came to J$252.6 million in early 1970; the serviceon it amounted to J$21 million or 12 percent of 1969/70 current revenues.Net local borrowing, almost exclusively on Central Government accountalone, doubled in five years to finance nearly 40 percent of past publiccapital expenditures. This counts National Insurance as part of the finan-cial system; if it were consolidated with the public sector, public savingswould have financed 62 percent of public investment, and local borrowing19 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, theNational Insurance has absorbed one half; the rest has been divided aboutequally among the conmercial banks, the Government Savings Bank, and otherintermediaries 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 20percent 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 authoritiesconsequently see only limited scope for increasing domestic borrowing in thefuture much above the present level of some J$25-30 million annually gross.The Government will increasingly have to compete for funds with mortgagebanks, unit trusts and other new financial institutions serving mainly theprivate sector. Some relief will be provided by new legislation obligingnrivate insurance comnanies to invest Dart of their surnluses in governmentsecurities. Starting with J$30 million, it should still be possible toexpand dnmpetir borrowing in sten with GNP; sufficient that is to financewithout inflationary effects up to 30 percent of capital expenditures overthe next five years. Whilp this is less than has been arhipvpd hbfore,it would in combination with increased public savings and capital receiptsleave a gap of about 24 percent to hp financed fronm abroad cnmpared tosome 15 percent in the recent past.

80. For external borrowing to reach this target will require grossannrual disbursements of n.eal- US$50,; m4iior. bpy 193/4 m.o tha. nfou,rtimes 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$171.5UIM±LUlon, 'inClUUdiLLn UOS$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, orto 3.5 percent of exports of goods and services net of investment incomepayments. Tne composition of the debt also changed significantly overthis period. At the end of 1965, nearly three-quarters of the public debtconsisted of long-term market loans raised mostly in London. Long-termproject loans, mainly from the U.S. and U.K. Governments, made up most ofthe rest. Since then, however, the share of market loans in the total hasdeclined to just over 40 percent by the end of 1970. Despite expanded aidfrom Canada, bilateral lending now contributes only somewhat more than afifth; but commercial bank borrowing now accounts for nearly 10 percent ofthe outstanding debt, and IBRD lending for 23 percent. The rest consistsof government guaranteed suppliers' credits.

81. The shift in sources of financing in part reflects the increasingdifficulty of borrowing in international capital markets. The last marketloan, for US$7 million, was raised in London in early 1968. The Governmentturned instead to borrowing from U.S. commercial banks, and drew US$11.1million in 1968 and US$8.9 million in 1969. These loans were mainly inthe form of lines of credit, carrying interest rates at 1.25-1.5 percentabove the New York prime rate, and repayable in 5-7 years with the optionin some cases of renegotiation at maturity. The relatively shortermaturities and high interest rates on these loans have been a major factorin raising debt service payments in the past three years. They have there-fore been viewed as strictly interim measures, and no fresh drawings arecontemplated. Though some market loans may again be taken up, commercialbank borrowing is not expected to contribute to the financing of publicinvestment 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 theInter-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 levelby 1975, even assuming all borrowing for power and telecommunications to begovernment guaranteed. The necessary increase in project lending can beachieved by spreading it into sectors that have been relatively neglectedin the past. Power and telecommunications, though not part of the publicsector, absorbed nearly one-half of foreign assistance over the last fiveyears; nearly a third was accounted for by market loans without sectoralidentification. A tally of proilects ongoing or planned suggests that overthe next five years the share of the public utilities may well decline toabout a third. Some 10-12 percent each will then be taken up by agricul-ture, industry, transport, water and sewerage, and education. The low debtservice 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 aidagencies 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 forceaffecting the balance of payments. It continues overwhelmingly to be thelargest flow in the capital account. Foreign investment initiated most ofthe major shifts in export production in recent years, which, together withthe attendant fluctuations in the import of capital goods, largely determinethe current account as well. Subtracting direct investment-financed capi-tal goods from total imports, would turn the current account deficit into amodest 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. Themain effort to expand the indigenous role in the economy has thus far focusedon intensified mobilization of local capital and on facilitating its partici-pation in key enterprises, mainly commercial banks for a start. A concertedeffort to transform foreign branch banks into subsidiaries with local equityhas begun to bear fruit. The major task of monetary policy continues to be,however, to keep local demand outside the foreign and public sectors fromexceeding the supply of goods and services available to it. This task isproving 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; exchangerates for other currencies are based upon buying and selling rates in theLondon exchange market. The Jamaican pound was devalued along with sterlingand by the same margin in 1967; it was decimalized in 1969 at a ratio oftwo new dollars to the pound. Foreign exchange reserves have been increasingwith only a temporarv interruntion in 1969. despite the fact that the currentaccount deficit in the balance payments has widened steadily, rising fromUS$3t Tnillinn in 1965 ton TU12R millinn in 1969. By end-1970. they cameto about US$120 million or equivalent to about three months' imports. As amem.ber of the sterling area, Jamaira has sinc-e September 1968 undertaken tohold 57 percent of total official reserves in sterling. In return, theUnited Kf4-gdom a1-s gnrantee-dr tha IT-j- edollair Pneiqunvlpnt of that norM onn ofJamaica's official sterling reserves which exceeds 10 percent of the country'sexternal reserves. Jamaican rese.res were for this purnoe delpfinped sompwhatmore restrictively than they usually are. All reserves are held in the form

OC -A +- -J Ot;e ^IhAaA t-rnnrh_ "nc4 t-4nn 3thh Fmof foreign ehga s Ities, the gold tranche p-n iFunand SDRs'. Jamaica's SDR allocations came to US$6.4 million in 1970 and toUS.J9.J. U7 U1lLJ.l on -In 19 7 1

85. From a balance of payments point of view, government borrowing hasso 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 foreignexchange 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 inreserves. If borrowirng by the rest of the public sector and by the privatesector under government guarantee are taken into account, the net transferwas 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 adebt service ratio that averageu on'Ly 3 percent ofL ex-ports nLet of 'Ivestlentincome 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 thecurrent account deficit in all years except 1969. On a gross basis directinvestment amounted to US$423 million in 1965-69, of which possibly US$310million was invested in mining and refining, the rest in hotels, manufactu-ring and real estate. The completion of an alumina refinery brought thetotal down in 1969, but this was partially offset by Air Canada's purchaseof an aircraft for Air Jamaica. Completion of other major direct investmentsin hotels and alumina plants will further slow down both imports and capitaiinflows over the next few years, at least until 1974 when another round ofexpansion in those two sectors is expected. The net inflow of direct privateinvestment is also likely to be reduced somewhat by the Jamaicanization pro-gram, currently centered on increasing local participation in the bankingsector, though with its present handling no damage to investor confidenceneed be expected. There already has been some outflow of direct investmentfunds in 1968 and 1969, probably representing capital withdrawals includingdisinvestment in the sugar industry, but with at least a partial recovery inagriculture this flow should cease in the next few years.

87. The rest of the private capital account has shown a tendency toturn negative, as there are few Jamaican firms large enough to attract port-folio investments or deposits from overseas. The largest single long-termcredit privately contracted abroad was an IBRD loan to the Jamaica PublicService Company for capacity expansion. Short-term private capital trans-actions produced sizeable net outflows prior to devaluation; since thenthere has been some reversal. Nevertheless, for the four years 1966-69combined, the net outflow of short-term funds including errors and omis-sions, still totalled US$22 million, only partly offset by net long-termborrowing of US$15 million. The reversal was reinforced by a series ofpolicy measures to offset the effect of high interest rates abroad on thedirection of the flow of funds. When the commercial banks reduced theirdomestic liquidity in early 1969 to improve their foreign asset position,the Bank of Jamaica raised the required domestic liquid asset ratio, thefirst 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 tothem, for the first time including sterling area firms.

- 36 -

88. The outflow of portfolio and short-term capital might have beenlarger without exchange control, which is administered by the Bank of Jamaicaon behalf of the Mfinistry of Finance and Planning. Export pioceeds must besurrendered within six months of the date of shipment, payable in non-sterlingcurrencies for exports to non-sterling destinations. Current payments abovecertain limits are authorized only if the authorities are satisfied that nocapital flight is involved. Investments in the sterling area by residentsare 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 theUnited Kingdom. Direct investments in Jamaica by non-residents require theapproval 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 nolonger complete, however. Restrictions on commercial bank lending to non-resident owned companies now exempt other CARIFTA countries only, and theexchange surrender requirement, at least for visible exports, exempts noone anymore.

The Current Account

89. Direct private foreign investment not only dominates the capitalaccount: it largely determines exports and imports as well. The bananaindustry 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 80percent of prewar exports. Sugar took its place in a major expansion thatsupplied the prime drive for economic growth in the decade to 1955; but sugarin 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, theirgross shares in the export of goods and services are likely to rise to 40and 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 bauxitesources remain buoyant. Tourist accommodations are no longer a constraint,and with economic expansion in prospect in North America, gross tourist receiptshave been nrnipr tpd to orow at an aver2g 14 nercent annually for some yearsahead. 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 GrowthR>es

1970 1975 1970 1975 1970/75

Bauxite/Alumina 153 273 63 69 12.2Sugar 30 31 12 8 0.9Bananas 10 16 4 4 9.8Other Agriculture 7 0 3 2.7Manufactures 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 sectorsin the world economy; hence Jamaican growth prospects seem much brighter thanthey would if sugar and bananas remained the country's staple exports. Theshift to sectors that are considerably more capital-intensive than the tra-ditional ones will tend to create labor redundancies, however. To a certainextent 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 bymid-decade even with emigration continuing at present rates. The loss ofcomplementary skills reduces employment opportunities for those remaining,furthermore, and cannot therefore be accepted with equanimity. The task ofreversing the recent decline in agriculture remains a pressing one, there-fore, though even with a recovery the sector's contribution to exports willat 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 itscontribution to current account earnings from declining much below the pres-ent 10 percent may be possible, but will have to be considered a major successif achieved.

91. An increasing concentration of exports on a few commodities entailsa greater risk of fluctuations in export earnings with major consequences foran economy where some 40 percent of GDP at factor cost is normally exportedabroad. Bauxite and alumina production is less sensitive to the weather thansugar or bananas. Expansion has nevertheless been irregular over two decades:it peaked in the early fifties, sixties, and seventies, with marked slowdownsin 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 th e -t ' cleno h-,,e tended to offset on- ar.o

ther to some extent, GDP growth in real terms has been very erratic: some 6-7percent.l 4in 196 LJ0; down to 1-2 percent in 1962; up again to a peak 8 percentin 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 the1960'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 expectedto £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 requirementsfor growtth of money GDP at about the sarmle rate. TLLe smlailLness of the econUolyensures 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 increasein local currency prices of imports, there was little opportunity to replacethem with domestic goods. The import content of gross domestic investmentrose 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 thenext few years, equal to tneir 1969 level. Tle requirements for importedfuel and raw materials increased steadily from 8 percent in 1962 to 12 percentin 1969, reflecting import substitution in the finai stages or production anda sharp boost in import prices as a result of devaluation. As Jamaican pricescatch 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 grossdomestic investment compared with an import content of about 50 percent inrecent years. Direct private foreign investment imports directly most of itsown 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 lastfive years to 12 and 15 percent in 1968 and 1969, did not place more pressureon 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 goodsfell from 44 to 33 percent. The major danger to the balance of payments inthe course of growth will therefore arise in the consumer goods category, wherefortunately the greatest degree of flexibility also is possible. Consumergoods 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 percentfollowing devaluation. Apart from devaluation, two great bursts of expansionin consumer installment credit, in 1964-66 and in 1968-69, have been primarilyresponsible for this variation. With little effort they should be held to 17percent in future.

- 39 -

Monetary Policy

94. In order to reconcile the ceiling on the growth of money GDP of 10percent per annuimL on bUa'Lance of. paydments grounLds , wiL thL'W a potent'ia'L growth ofLreal GDP of 6 percent based on capacity expansion, the rate of increase in thegeneral 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, butthe rate [hdas tenu,edU to acce'Lerate since devaluation, andu last year reached 6Upercent. Consumer price indices show a similar acceleration. Following threeyears oL relatively slow rlses aveLaging less than 3 percent, the indicesturned up to register 5 percent in 1967 and in 1968, jumping to almost 7percent in 1970 in Kingston alLone. 1/ Devaluation in 1967 was at lirst combi-ned with a comprehensive price freeze, but this was progressively relaxed inthe 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 in1968 and 41 percent in 1969. The pace of wage increases also seems to haveaccelerated. Collective bargaining settlements raised wages 11 percent in1967 but 14.5 percent in 1968 and 13.4 percent in 1969.

95. Part of the need for price and credit increases, particularly inthe construction sector, can be traced to wage demands that have intensifiedin the wake of devaluation. Monetary policy can do little to counter the wagepush 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 inrecent years; associated with rapid expansion of consumer credit they droppedto 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 yearscoming. A move in this direction has been the permission recently grantedthe commercial banks to compete freely for time deposits with a maturityof six months or more. This will reinforce a trend that has already raisedthe flow of financial savings from less than 3 percent of GNP in 1965 toover 9 percent in 1968, including insurance companies. Financial savingsincreased from less than a quarter of total private savings in 1963-65, tomore than half in 1968 and almost as much in 1969.

96. An increase in financial savings will not aid the growth of thenational economy, however, if the proceeds are invested more remunerativelyabroad. A restrictive monetary policy can contribute towards keeping themat home. The growth in financial savings in recent years suggest an increa-sing willingness of the private sector to hold Jamaican assets. In part thisreflects the influx of funds following devaluation, and quite likely liquida-tion of speculative balances rather than a long-time trend. In part it alsoreflects the somewhat delayed response of Jamaican interest rates to conditions

1/ There exist separate consumer price indices for the metropolitan areaand 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 reliancewas placed on manipulating sterling exchange commission rates. But the gapbetween them and the high rates prevailing in major financial centers has onlyrecently been allowed to narrow somewhat. Following devaluation, Bank ratewas increased from 5 to 6 percent and, with a short intermission, has beenheld there since. Even then it has been necessary to reinforce this measurewith quantitive ceilings on lending to non-resident controlled companies oper-ating in Jamaica.

97. The ceiling on interest rates consistent with growth is set bythe profitability of investment, which in turn is limited by the rate atwhich wages continue to push up beyond the post-devaluation adjustment period.Too high a wage will accelerate capital outflows; too low a wage encourage agreater migration ot skilled workers abroad. The rapid development ot tinan-cial institutions currently promoted by the authorities presupposes that areasonable balance can be struck between avoiding the emigration of skillsand capital flows abroad. Between 1966 and 1970 commercial banks as a groupincreased their branches from about 80 to 120; the number of deposits roseby 53 percent and the total amount in private sector deposits by 77 percentover the same period. Commercial banks have been instrumental in the crea-tion of five trust companies, and more recently in the establishment of twomerchant banks. A unit trust to channel smail savings into the capital mar-ket has also been organized, and a stock exchange established. The intentionis that they should eventually grow into a financial center serving more thanthe Jamaican economy alone. Without a reasonable degree of wage and pricestability, the danger is that they should serve as channels to take savingsabroad.

98. To the extent that price increases have been induced by the immedi-ate impact of devaluation, they should abate as the effects of devaluationwork themselves out in the economy. The immediate task of monetary policywill therefore be to ensure that credit expansion does not exceed the minimumnecessary to permit that adjustment. Virtually all of the increase in creditin 1968 and 1969 was attributable to the commercial banks; and taking the twoyears together, all of it was directed to the private sector. The increasewas associated with marked shifts in the distribution of the total. Creditto commerce and finance lost ground relatively; and credit to agriculture fellin absolute terms. Lending to industry held its share of around 21 and 22percent, however, as borrowing expanded in response to sudden increases in thelocal 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 to22 percent in 1969. Credit to construction, land development, and hotel ex-pansion also gained substantially, increasing from 13 percent in 1967 to 16percent of the total in 1969. Credit ceilings on installment credit, atleast 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 thevery 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 rateshould be attainable, compared with less than 5 percent annually over thelast decade. However, this higher rate is consistent with balance of pay-ments equilibrium only if the rate of inflation, as measured by the GDPdeflator, is reduced from its present 6 percent yearly to about 4 percent,that is only if voluntary savings are maintained at the current actual rateof 17-18 percent of GNP. This target can be jeopardized by excessive wageincreases as much as by failure to maintain appropriate credit policies.The projected growth rate, even if achieved over the next 2-3 years, requiresstepped-up public investment if it is to be sustained thereafter, as privateinvestment in mining and tourism is likely to level off before it can pickup 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 loansadded barely 5 percent to current revenues of the Central Government.Though current account savings of the public sector covered only some 40percent of capital expenditures, almost as much was raised by borrowing inthe domestic market, mainly from the social insurance system, leaving lessthan 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, thenet contribution of foreign borrowing to public investment is unlikely torise above 25 percent on average over the next few years. The reliance onforei2n 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 toUS$171.5 million, or about 14.7 nercent of GNP, including undisbursed. Theservice on it came to no more than US$15.3 million in 1970, or to 3.5 percentof exports of goods and services net of investment incom-e navments. With apublic 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 muchbeyond 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 revenuesof the en.t-ral rover.rnment, sovice nn avternal debt wnuild then have risenfrom nearly 7 to 9 percent. With a service burden almost certain to remainas 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 preparedfor.

- 42 -

If),. voreign assistance wlll m.axi..ize its cor,tribution to economLUcgrowth 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 incomein 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 provideurban infrastructure - water, sewage, power and telecommunications - is anessential prerequisite to expanding industrial joDs competitive with thoseabroad. 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 YieldNarae 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 : 4,000menit Act 1970 (an- January 1, 1970 tax law and to reduce evrasion and avoidance. Companies : 1,500ti--evasion and an- Individuals: 2,500ti.-avoLdance) These measures include:

(a) severe penalties, incltuding pr.ison sentenctss,for tax evasion

(b) specific anti-ELvoidance measures designed tomullify, for tELX purposes only,, the validityof trarLsactions which aim at avoiding taxa-tion, e.g. pension schemes., saLaries and loansto 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 : 3,00019'70 fundable profits tax of 35% and an "additional" prof-

its tax whose effective rate is 15% for closed comp- Bauxite/aluminaaniets, 12.4%' for "intermediate" companies and 9.75% companies : 1,000for open companies. The latter tax is borne by theshareholders to the extent tio which profits are dis- ODthertributed. Agricultural and sma:LL companies are tax- companies : 2,000ed at a lower rate and holding companies at a higherratet. The new system wnLll encourage companries to gopublic and rill raise tax liability of companies froma range of 4O - 42.',% as under the previous system to44.75 - 50%.

Income Tax on Retroactive to 1% on premium income for cormpan:Les iLncorporated and 150Insurance Comp- July 1, 1.970 resident in Jamaica with a substantial Xport:ion ofanies their paid-u1p caLpitEal benef.icially held by indivi-

duals domiciled in Jamaica, and 2% on th:e premiumincome for J'oreiLgn-owne(d companies.

-2-

Anticipated YieldName of Measure Eiiffective Date Description and Comments |J$ 000)

Motor Vehicle July 1, 1970 Increase in the rates as follows: 750Licetnsesr Former New

License LiceinseFee Fee

Automobiles not, deriving motivepower from an internal combustionengine worked by cylinder orcylinders ea. J$28.00 J$34L.00

Automobiles, where the cylindercapacity of the engine:

does not exceed 1,1951 c.c. ea. J$28.oo J$34.00

exceeds 1 ,199 c.c. but doesnot exceed 2,999 c.c. ea. J$44.00 J$48.C100

exceeds 2,999 c.c. buLt doesnot 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)00Relief for taxpayers, the following tax relief measures will beindividLLals taken:

Personal PersonsIncome Af'fectedJ1 ,000 2i0,000 Increase in personal allowance

from J$6oo to J$1 ,000. -1 ,350J$1 ,001 - J$1 ,200 9,000 Option givein to be taxed either

on existing provision of incometax lawr or to pay one-sixth ofamount by which income exceedsJ$1 ,00C).

Wife's earned income 5,00C Relief limit raised from J$400to J$800.

Surtaxable income 4, OCO Su.rtax limit raised but cormnenc:ingrate of' taxation raiseci also.

-3-

Anticipated YieldName of Measure Effective Date Description and Comments

Tax Base Retroactive to Revision of the notional price for computing the 3,()00January 1, 1962 taxablt3 profits of the bauxite and aluminaIn part companies. Negotiations with one companypending 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 2,200ment of landl (retroactive to not domiciled in the country, refundable to the

May 7, 1969) extent of 15 percent if development of' the landtabes place within a specific period. The entiretax may be eliminated if it is considered thati theproject itself is of economic benefit to the country.

Implementing legislation is presently beirgdrafted.

Comparny Registra- Pending legislation Annual graded tax to replace once-and-for alltion Fee registration fee; graded as foUowrs:

Issued capital Feiej$1, 001 JIo0,0bo J25D (600J$10,001 and above J$D00

Starnp Duxty Pending legislation Stamp Duty on Agreements for Sale at the same rates as 1150the duty on Conveyances. The duty will be ref'undableif no actual sale takes place and will. be set off againstthe 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 rendereddifficult by an unexpectedly low population census count, and by theconsequent uncertainty about the number of peopie of working age. Inaddition, there are some apparent processing errors in the only laborforce survey completed (July 1968) and subsequent surveys show lessunemployment. 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 1,609,814Population of 14 and over 454,601 520,508 975,109% of total population 58.8 62.2 60.6Total labor force 401,191 253,391 654,582% of population 14 and over 88.3 48.7 67.1Employed 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 definitionsof a great many countries, somebody saying he was unemployed and wantedwork but had not actually sought it in the week preceding the Census, wasincluded in the labor force. This contributes to the exceptionally highfemale participation rates found in Jamaica (as does an unbalanced sexratio).

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, andinitially directed to labor force data. The first survey had some pro-cessing errors. These were discovered when the first tabulations weremade from the two following surveys, but very little material from theseis available. The findings are, of course, proportionate ones derivedon a sample basis, to be turned into absolute numbers by the uses of es-timated parish populations. Recent census returns suggest that thoseused 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 StatisticsAssumption) 925,400 979,660 1,905,060

Population 14 and over (Dept. otStatistics Assumption) 509,430 556,030 1,065,460

% of total population 56.8 55.0 55.9Labor force 441,450 326,670 768,120% of population 14 and over 86.7 58.7 72.1Employed 379,720 211,370 591,090% of labor force employed 86.0 64.7 77.0% of labor force unemployed 14.0 35.3 23.0Of 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 participationrate - an increase of 10 percentage points or equivalent to nearly 56,000women - 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 Female1960 1968 1960 1968

14-19 67.8 66.6 47.2 40.820-24 96.7 95.2 64.4 78.025-34 98.0 97.9 55.4 73.935-44 97.5 96.7 51.8 69.845-54 95.7 95.2 48.3 66.755-64 87.5 89.0 37.4 54.065+ 54.9 63.8 13.8 21.0

It is likely that this has a great deal to do with the apparently dramaticrise in female unemployment from below 20 percent to over 35 percent of thelabor force; and at least part of the rise is due to an implicit differencein definition. The survey asked the individuals who were neither workingnnr activelv seeking work; whether they wanted it and could accent it,Although this should in principle be no different from the Census inclusionof thoqp whn "wnnted work", the greater attention paid 1b the qurvev tn thispoint may have encouraged some women to say that they could accept work whenin fact, beicaue nf dnmPnt1in repnnnR1bi1itjesq the range of sobs they could

APPENDIX BPag 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 ;;iuedtcemeu 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 aboutLAt 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 aLunemployment would then be 17 percent.

7. A comparison of the July 1968 survey with the preliminary resultsIC _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 forboth males and females than does the July 1968 survey. The population esti-mates underlying the surveys are not available. Participation rates cannottherefore be calculated precLsely, but the difference between the July andOctober 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 reasonablysimple to compare absolute numbers of tne July survey (Table 2) with thedata of the two which follow:

Table 4: Comparison of 1968 and 1969 Surveys

October 1968 Male Female Total

Labor force 419,660 322,990 742,650Employed 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 422,332 331,378 753,710Employed 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 differencebetween the labor force size in the July 1968 and the two later surveys,the difference lies entirely in the male labor force. The implicit femaleparticipation rates remain just as high. It is understood that the proces-sing errors are considered to be in the male unemployment rates at theyouthful end of the labor force. 1/ The difference is equivalent to about22,000. Correcting the July 1968 figures for this would make unemployment14.5 percent.

1/ Although the male participation rates appear very similar in the 1968survey and 1960 Census, it is indeed likely that they have fallen, asthe two later surveys suggest, as a result of increasing secondaryschool and university enrollments. There do, however, seem to be somedifferences between the July 1968 survey and the later two with respectto unemployment among men aged 50 and over, and until this is sortedout one dare not draw too precise conclusions.

APPENDIX BPage 4

Table 5: "Correcting" July 1968 Survey to Female Participation RatesCon s s-- n 4w-ht 1 Qior one. c r -rA T a-FoT CTA Q---

Tota! population 1,905Population 14 and over 1,065T-abor force (survey) 6Less correction for female

participat-oL. rate =56

Less correction for maleparticiation rate-22

Employment 590Unerup'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 areaccepted, the employed labor force would' then be 600,000 and unemployed90,000 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 laborforce of roughly 270,000 (Table 4 empioyment and femaie iabor rorce cor-rected to 1960 participation rates). This would imply that, in contrastto male unemployment rates, which rose, female unemployment rates fell.Given the high rate of female emigration in recent years, this is notimpossible, but one would need more evidence to be convinced by it, par-ticularly since there remain other unexplained discrepancies between theJuly 1968 survey and the other two surveys.

10. It is not easy to say what this might mean in terms of absolutenumbers in 1970. First there is the overall uncertainty about the 1970Census. The total population figure is probably fairly close to thatassumed by the Department of Statistics for July 1968 (Table 3). Thereare also the discrepancies between the three surveys, which show the em-ployed labor force to be between 591,000 and 613,000. Approximate estimatesare given below:

Table 6. Estimated rhange in Rmnlnvmpnt Pirtu,re 1960-70

1960 1970

Total population (millions) 1.61 1.9DpU..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 90-100,000I. _± UL LL _C __Aa4 ..I 1 J1 IC _ Ao v_L _dLUor Lorce= %,%,ensus U.-_,}sisp

APPENDIX BPage 5

11. In spite of the data uncertainties, the general conclusion isclear. Emigration has made for a very slow labor force growth; even withthis, unemployment has remained high and is probably growing slightly inrelative as well as in absolute terms. It is certainly possible to exag-gerate the degree of unemployment compared with other countries, becauseof differences in definition of the labor force and the unemployed, and toexaggerate the rate at which it is growing because this definition is chang-ing. Nevertheless the rate of labor absorption is very far below the naturalrate of increase of the labor force, and if the rate of emigration slows downagain 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. Thiswas slightly faster than the grow,th -4inovralea visis A-y -.er-n.-- A

forecast of about 14 percent continuing growth receives support from across section analysis relating Aifferences 4n the proprton olation 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 timeseries 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 toannua'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 faresamong states, accounts flor a 1 1/2 to percent differeunce in number ofvisitors.

2. The Jamaica Tourist Board collects statistics of the home state oflong-stay U.S. tourists to Jamaica. hne proportion of eacn state-s populationvisiting Jamaica was regressed on the per capita income of the state and onair Lares Lrom tne state capital to the is'land. This was done for the years1966-1969 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 resultsof the regression were reasonably close together in all cases. The mostgeneral 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)

2R - .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 roundtrip excursion fare where available, or the cheapest return air fare where not.

3. Individual years had usually much better fit. They also frequentlyhad higher values for the elasticities. Especially income elasticity wentup to about 4.7 in the weighted regressions, and price elasticities rangedbetween 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 CPage 2

The results suggest an income elasticity of demand for tourism of around4-0-4=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 thesame 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 othereffects 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 othertourist areas, some regressions ere al on rn ineludiing air fars to-n uropnnc

and Puerto Rico. These yielded significant coefficients of the expectedsign 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 s 6 )JLLXaLL LUL ISLL o. 5LreL .L.OLLUU.