'Rhis paper is preparcd for the Bank's internal use and is not for publication. The views are those of the author and not necessarily those of the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT INTERNATIONAL DEVELOPMENT ASSOCIATION Economics Department Working Paper No. 50 NOTES ON A MACRO-ECONOMIC MIODEL USED TO PROJECT THE POSSEIBE PERFORNIUCE OF THE JAM1AICAN ECONOMY 1968-1973 October 21, 1969 This paper explains in detail the implicit methodology and calculations behind the projections con-tained in the Bank MIission report on Jamaica in 1968. It is presented as an example of how such projections might be made in situations wehere there is at least a moderate amount of available data. Prepared by: Nicholas G. Cartber Quantitative Techniques and Analy8is Division 1. lTiis paper is a description of a quantitative economic model, its evolution, ardu its intlegration into a country economic analysis in the World Bank-Y To those who routinely make such a7nalyses wihat is presented here contains nothing particularly novel. The purpose of the paper is not to suggest new methods of making country economic analyses, but rather to make explicit the steps by wihich this type of activity is carried out- (at least by the more quanititative among the count v economists), particularly in situations where the data base is reasonably good. In such situationis the analysis can be a fruitful combination of quantitative and qualitative economics. Thus we try to describe in detail an existing methodology rather than to suggest a new one. 2. Most economic projections involve some kind of model, often very simple and, in the case of the Bank, often implicit. These models, a blend of qualitative and quantitative elements,, usually begin with past, measurable, structure, Te parameters of this structure are then modified by desirable and feasible policy for the future, and comnbined with estimates of probable availabilities of development resources,, such as savings and foreign exchanage, to obtain possible outcomes for the various indicators of economic and social activity. Tnis process is most often carried out in the framework of national income and public sector accounts0 1/ I am indebted to E&K. Hawikins and P.D. Henderson for their helpful comments and criticis.mo, and more particularly to Murray Ross who inspired this paper and provided many helpful comments during its preparation0 I maintain, however,, all responsibility for errors. The model that forms an integral part of the r'eport of the 1968 Bank mission to Jamaica,3 although possibly somewhat less sophisticated than would be warranted by the data,/ follows these same general lines. I-t is this model which is discussed in the following pages. It should be taken as an example of a methodology, rather than a blueprint or prescribed form for all country economic analysis. 3. At the outset it is important to stress that while the creation of such a model is an integral part of country economic analysis, it must not precede a lnumber of imaportant preliminary phases of the analysis. Simply to create a model of a country and then expect it to be "usedri in the analysis of that country, or by a mission studying the country,' is to be quite naive. Models are of no use unless they are an integral part of the thinking of those involved in the analysis and then only if they are created during the analysis and serve to illuninate arnd check the colnsist- ency of the conclusions and findings of the mission. 4e Ihere are two important poinits here, (1) Almost always -the most recent data are available only to a mission and are not published until sometimie later, Thus a model made a priori from available sources will tend to be dealing wit-h stale information and will inevitably be faced with a gap of at least ttwo to three years bebween the end of the model and the present. A mission oni the other hand can not only get more inforrnation, but- often can get local best estimates of the probable behavior of certain 1/ WI-187, September 1968 (available only to Bank staff). 2/ Jamaica has a well elaborated set of national accounts, and an input- outbput table. -3- aggrf ates in the nrear future. (2) A more impoftant point is that a model, to be of any use, must have a focus. Usually this will be on the central problems of economic developmnent, pointing to bottlenecks to growth and to their likely magnitudes. From this point the descriptive system can proceed, s1lowing the consequences of particular constraint,s and the likely gains to be made from alleviating them, Tt is hard hoi4ever to identify the specific problems beforehand, Usually the model builder must proceed as a mermiber of the mission, gathering data and information for some time before it becomes apparent to him and to the mission exactly what the focus of the mission and thus of the model should be, Only at this point can the model be made, and as such it serves to quantify the genieral hypotheses and conclusions of the mission and to identify the relative magnitudes of the problems involved. 5e Thus the essential element in projection models is -bo identif-y the key constraint to development. After this has been done, an equation is set up describing this problem, and froom this point the rest of the model is set forth. Once one defines the relevant constraint variable, most other lcey variables are dependent, via the structure of model, upon it. For example, in an economy with a balance of payments corn.straint., the central relationship is the supply of and demand for foreign exchange. Since exports are usually treated as exogenous, the central equation serves to provide the limits for the import equations, and thus for the foreipn Sxc:iinge available for investment and growth. In this fashion an entire riodel can be outlined. Similarly , in a savings constrained economy,, a table setting out the sources and uses of savings (sometimes called ';financing of inve4tmnent i) becomes the central part of the model. Ihat ---- -----.-- is important is that projection models typically procecd from a previously identified crucial constraint to a description of possible performance. 6. In formal sense, one would create a complete simultancous model, with constraint equations for all development resources, and then would supply all the pertinan:ru externaml conditions and then proceed tUo calculate the maximum rate of growtith corn,istent with all these conditions. However, the purpose of project,ion models (at least in the Bank) is illustration and explanation of the non-quantita'Give conclusions of a mission rather than simple mathematical solution0 Therefore, it is very important to detail the model by proceeding from, what is felt to be the key constraint to developnent. 7. In the case of Jamaica, an analysis based solely on information available publicly outside the count.ry appeared to indicate that Jamn-iica t s groTwth was being hind'3red by a possible 'Lack of foreign. exchlaMge. Oiice t;he mission carried out its field work it was apparent that this was not the case and that both foreicn exchange and savings were reasonably abundant. Jamaica was tlhus in the position of having a good supply of the obvious development resources and yet her growth, while good, was not outstanding. In particular it; was notued that the investment ratio was quite high (2%51) and yet t'he growuth w-Tas only just a1bove 5 percent per annum in real. terms. ihrtherr.cre, there were ncticeable shortages in infrastructure such as roads, water and power; and these, it was clear, wiere real constraints to growth. 6o I.ost of theie shortages, upon inspection, could be traced either toV the failure of the public sector to plan and carry oub infrastructure investme:.t or to the failure of that sector to make the necessary polic, decisions so that the private sector could proceed wvitlh certain inhrest- ments. An inspection of the Independence Plan (1963-1968) showed substan- tial shortfalls in infrastructure investment and also in the inflow of foreign official financing. Such financing is typically best suited for infrastructure in-vestment, and all evidence available from the sources of external finance indicated a far greater potential supply than that which was actually lent. These phenomena all suggested a substantial lack of£ the requisite skilled manpower in the public sector for the preparation and implementation of infrastructure projects. To be more specific, the public sector was, and still is, in great need of individuals who are skilled in decision-making and implementation. With independence only a recent phenomenon in Jamaica's long history, the public sector has not yet had adequate experience in decision-making, nor has it been able to obtain sufficient numbers of skilled administrators to carry out fully the necessary extent of its activities. Recent years represent a transition perind during which most of the energies of the people have been devoted to the political aspects of nation building and thus economic infrastructure has lagged behind. 9. In the private sector there has also been a skill shortage, but its nature has been more of a need for technical skills, and its intensity has been much less than the skill shortage in the public sector. It should be noted that the eirploymr,ent structure in Jamaica is not typical of most underdeveloped count;ries. In most such countries the prestige and the good salaries are generally to be found in the public sector- and shortages of skills, particularly the technical ones are more apparent in the private sector. In Jamaica the opposite seems to be the case; thus an i.1slanz3--wae shortarge of0 slilLt,d ruar-tx wer is s)st noti.eahlo Jii the pCC'.z veo, or - 6 10, This manpowTer shorta-ge is a serious problem to which there do not seem to be any clear solutions. Part ol the shortage arises from the nature of the education system. A heritage of the colonial period, this system continues to produce consumers rather than producers; i.e., there is a strong bias towards liberal arts and only recently has there been an increased emphasis on technical anid vocational education. All too often the graduates of the system have neither the frame of mind nor the technical 1/ skills necessary for modern Jamaica, 11. The general shortage of skilled manpower is intensified by competition from North America, which is hard to meet, particularly in view of what is felt to be a lack of opportunities in Jamaica. Jamaica boasts of a relatively low rate of growth of population, but the difference between the natural rate of growzth (2¢8/) and the actual rate (1.8,'), a full one percent of the populationi per an.-num, hardly represents the stcady drain of skills to North America.2/ 12. In this general scarcity of necessary skills the public sector is clearly worse off. Its ability to cormipete is hampered by less flexibility than the privato sector with respect to salaries and by a much greater lack of perceived opportunity for skilled administrators wiliin the public sector. 1/ There are numerous obvious entrepreneurial opportunitbies in Jamaica, yet the education system, like many systems with a liberal arts emphasis, seems to have removed entrepreneurial instincts from those who have passed through it. The more successful entrepreneurs are those with less education, and even among these the primary activity is real estate, a characteristic of "businessrn"nn in, much less developed countries. 2/ i.e, Tne proportion of skilled emigrants is much more than one percent of the pcpulation of skilled people. 7 13. There is no simple answer to the skill shortage in Jamaica.l/ Clearly t«here must be an increasing emphasis on technical anid Vocational education -and furthermore both the private and public sector alike must becorne increasingly flexible in offering opportunities for skilled Jamaicans. 1. In the short run within the public sector there is clearly a lot to be gained through improvements in the way in which public business is carried out. A mission from the UNDP clearly outlined this in 1967 and the Bank Mission in 1968 concurred in this view. It was felt that it wTould be reasonablp to expect the public sector to take steps in thlis direction (this has in fact begun) and that tais would go a good way toward alleviating the bottlernecks in the public sector. 15. A lack of effective administrative anld managerial manpower is a concept that is difficult to measure in a quantitative sense, particularly with little or no data on the labor force. It can perhaps be represented by its effect on the capital-out;put ratio; that is, if one assumes no effective savings conistraint, in which case the transformation of capital incremetlis to output increments is mosb likely related to the nature of the skilled labor available. / 1/ 14hatever it is, it is not to indulge in technical assistance. 'Ihe governrment of Jamaica has large nluabers of foreign technical assistarnce personnrel working for it, particularly in agriculture. The results have bcon very unimpressive. This has partly been caused by the administrative shortage itself, and this can only be resolved by Jamaicans. 2/ Chenery aand Strout in their "!Foreign Assistance and Econoimic DevelopmsntV' try to deal with the same problem, which they called "skill constr.aint"% In their analysis they chose to specify the maximun rate of growth of inves-tment wTith a constant incremenital capital-output ratio. In the prescnt work we chose to use a constant inies-tmcnt rate and a cl.ui 1C00. The two approaches ase equiivalenb. 8- 16. The analysis begins with a consideration of the incremental capital-output ratioY- Over the past five years this ratio in real terms 2/ 1teek has been about 4O., and in 1967,, as a result of certain boutlenecks, and some exogenous innfluences, it reached 4h5. After some deliberation by the mission about desired ard feasible growth paths, and about potential produntivity in the public sector' it was decided that as a nmoderate target it would be reasonable to postulate a fall in the capital to output ratio frorn 4.5 to 3.5 over the six years 1968-973/ This reflects the existence of early bottlenecks, w¢ithl an assumed continuous improvemelnt particularly in the effectiveness of the public sector; furthermore, as some of the near future inivestment will be in mining with a lonig gestation period, the later years are expected to shc'w tl{he results of this early investmenit anid thus the capital-output ratio should be lower0 17e The next step is to es!limate the investment ratio. Over the past this raatio has been steadily ris. ng, from just und2r 20 percent of GDP at market prices to almost 25 percent. Some of this rise has been due to an increasing admixture of mining, but with the very generous investment laws recent-ly enacted, especially in hotels, it was felt by the mission that the ratio would not fall -very much even though investment in the mining sector was expected to decline. Thus the investlment ratio was 1/ The incremental capital-oubput ratio (k), is defined and measured here as referring to the year of the income increment, not the capital increment. In formal terms, k-, = It1-/(Yt Y-t!l) 2/ See Table 7. 3/ TLis is approximately eqtuivalent to a rate of decline, asymptotic to 3.0, in the ICOR of 17 percentL per annumr -9- specified to remain constaxnt at the roeccnt figure of 24e5 percent of GDP for the years 1969-1973. (For 1968 there was enough partial information to be able to estimate independently the gross value of investment and it turned out to be 24.7 percent of GDP.) Since the average incremental capital-output ratio over the projection period is about 4h0, -the grow%th of the economny should be about six percent, i.e., g = (I/Y)/1 = 24/4O- 6.1 (1) 18, From these assunptions we can now build up year-by-year a first approximation of the probable path of C-DP and investment. It should be emphasized here -that this initial calculation, following equation (1) is to obtain -the growTbh path or trend, nob the actual year-to-year figures0 Over the projection period the actual path may well fluctuate around the one indicated by (1). In some years higher exogenous demand for exports or a shift in timing of' investment may produce an actual level of GNDP hi er than that of' the rowth1 path,t while in other years bottlenecks or export shortfalls may produce the opposite effect.i/ 19. The reasons for calculating this median path are: (1) that some of' the aggregates of the economy such as consumption and non-capitaIl imports are likely to be more closely related to the average path than to the annual fluctuations; (2) that the long-run grow-th of the economyr is more related to this path than to thle year-to-year, largely exogenous, shifts in exports and investment; (3) that the key to growth, as asserted 1/ This of course assumes that there is no supply problem with exports, w-hich is t;he case for most of Jamaica&s commodities, and that any im- expectedly large inicrease in investment is associated with foreign enterprises and tUhus is iunaffected by the constraints referred to above -s investment is brought in from abroad. 10 abover, is skilled manpower raather than savings or foreign e-:.lchan-ce, so that long-run growth is not likely to be noticeably affected by short-term fluctuations in the amounts of those two resources, and (4) a minor point, that the mathematical computations becomre considerably more complicated if long-riun growqth is calculated simultaneously with the other national incoir,e aggregates. 20. In calculating this path we take investment in period t and apply the value of k in period (t+l) to obtain the change in income betwjeen (t) and (t+l). Tlus investment in 1968 wa- astimated to be £96.6 millionV/ and we postulated k for 1969 at 4.3. This means that the cheange in income would be £96.6/4L3 =£222.5 million0 Since the estimate for 1968 GDP iwas £390.7 million -ve get an estimate for 1969 of £1413.2 million. To this we apply the investment rate to get investment in 1969; £1413.2 million 7 .216 - £101.2 million. This process then conitinues until we have the entire serie s/ 1/ It later turned out that bhis was a substantial underestimute, but most of the difference was due to earlier pha-inig of already pl,anned private sector investment, Over the five-year period the aggregate amriount of growth and in->vestment probably will not deviate noticeably from that set forth in the model. Furthlermore, the extra investment in 1963 will simply raise (k) rather than the grow,th rate. 2/ Using the notation above, the increase in GDP in the span of a year can described as: It- it- t yt1 + kt ar. t t Y1 + kt- t + It- + It-2 yo + , i-1 i-l1it. now I.; - t-yt iwhere at is the invoestment ratio in time period it. This, iwhen put into (2) gives: 3. yt - YOD TT (3. + i In th-lie special case wxhere ,Ict ' , a.ad k-t = k.L. e'bCtc. We get h0 Y, w3 re g a and this is the same JC L01 ndr-l 4 . k,1 Table 1: POENTIAL GRO"011 PATH, 1968-1973 19 8J16T 1970 l971 9l92 l973 GDP (f million) 390.7 413.2 437.9 465-5 496.3 5310 I/Z .247 .245 ,2l5 .245 .245 .245 I (z million) 96.6 100.2 107a3 ijA4.0 121,4 129,0 ICOR 4.5 4.3 4h1 3.9 3.7 365 The inmplicit grow^Jth rate of'G DP is 615 percent per annum, a rate wihich is feasible in the light of past experience. Over the period 1962-1967 the economy grew by 5.3 percent per annmi, and this included the year 1967 when real growt.rh was only one nercent. Li earlier periods groiwth rat.es of seven percent and over have not been unconmon, 21. The investment series can be brolkc"i dowm into Several functional componernbs using othcr information derived by the mission, specifically, the estimates of the likely course of realized (as distinct from forecast) public sector investiccmnt, and the estimates of' mining investment as given to the mission by the aluminum companies. Table 2: DISTRIBIT.ON OF I1VESTIJEINT, 1968-1973 (PJ million) 1970 97(1 1972 1973 Investment 96.6 100.2 107.3 11ll40 121,4 129e0 Public 29,2 29.0 29,5 30,0 30,8 32.0 Nlining 20.0 2060 20.0 15.0 10.0 5a0 Other Private 47.4 51.2 57.8 69.o 80.6 92.0 12 - 22. The above i.s howXever only the long-run growth path. For plamning purposes we need to know actual annual levels of the GNP aggregates. 03. In looking at expenditures we shall focus on the national income identity for GNP from the expenditure side. GNIP = C + I + E - M (2) where C is consuxmption, I is invostment, E and 14 are exports and imports defined here as inicluding goods and services, but not tranisfers. Invest- ment has been calculated above. Consurption consists of public and private cosumptbion and will be calculated separately. Once we have all the items on the right hand side of equation (2) the actual year-to-year levels of GliP (as distinct from the long-run grouth path levels calculated in equation (1)) can be calculated. 24. The first elcment of expendituxes to be considered is personal consumption expenditure. Our main assumption was that this iterm would maintain a steady relationrship to the long-term growth path of tlhe econony'r Thus since we are using a particull-a- growtbh rate for the econom,y over the five-year period., we assiuiic the growtih of consumiption to be reIlated to this growfth rate,, and not to be rosponsive to year-by-yeair fluctuationls in GDP as these tend to be generated by externa, factors wihich do not feed back imnedia l; -Iy into per sonal disposable income. Over the past the elasticity of personal consumption wibh respect to GDP has been about o096 (this implies tlhab the marginal savings rate is higher than the average).1/ Thus if wfe postulate long-term growth at 6cl5 percent, bhen the grotlh of personal consumption expenditure cani be set at 5.9 percent per amurnn This weries, with 19658 as a base, is sho,m in Table lO1 ;. Dc- ived from, fiCullrcs :;ii Tahblc 7 , - 13 - 25. In the case of public sector consumption a more detailed analysis was undortaken. In the first place the mission had a lot of information, and in the second place w,.Te felt that the government budget needed t.ight- ening and thus w.e had to examine ib closely in order to find out where the possibilities for improvement lay. It will be noted thiat in the case of Jamaica,, as in the case of manny countries, the current expenditures of the public sector are not identical with the item of public consumption in the national income accounts. The latter does not include transfers and interest payments anl also exeludes certain capital items that public authorities often place in the current accoun Thus there is always a job of translation from one definition to the other, rzather than go into a myriad of details wJe took advantage of the fact that uhe two series are highly correlated £and tend to have the same gro.4th rate. Thus the approach was to determine how bhe governmont currenit exnenditures nmight move over the five-year pzriod and to apply the irmplied growth rate to the series f or public consumption. 26, Table 8, anid more particularly Tible 6, show the manner in which the analysis wTas carried out,O The entire set of accounts, classified by economiic fuinction , was dcflat-ed to constant prices using the sector value- added deflator for the wage and salary component and the GDP deflator for the residual. This having been1 done, tlhe implied growtha rates of each item iwere extracted. At this point a number of decisions were made as to the desirable future trends. In particular current expenditures for health and educabion were growring vcery sloIrly nid it was felt that in the light of obvious nIeeTh1c they }1C1iould. growJ faoster. On the other hand current expcndituirc: on gnceral adninistration and on certain "cconlomic sector,) - l4 - were felt to have been growing too rapidly, especially in viiew of the low effectiveness of such excpenses, and thus the grot;h rates were ruduced for the projection period. Outright oubsidics, such as those carried by agriculture as part of the welfare budget, and transfers to local govern- ments have shorn th,,:m3elves to be ineffective and their growth rates t;ere sharply cut. 'Te specific historical rates and those chose-n for the future can be seen in Table 6. The projection of' the specific items can be seen in Table 8, 27, One problem that arose was that part of current expenditure is interest on debt. This cannot be knot*m exactly for the future uhitil calculations are made as to what the debt w:ill be and this foll-ows from the magnitude of the curren-t and capital deficits, -the former of wlhich cannot be determnined without ! Eidi .:u; ia-. : EB kA .t.S.as*...-ioHKsAwis.eRd.l. tsS daE invisibles, t-he item of freight sand insm,'7.noo is a simple proportion of the c.i.f. value of goods landed. Factor incoiiie payiic.'ntb are relatrd tbo the level of external debt (i-erC had an explicit series detailed by each debt instrument)-/ and to the le-vel1of maniufacturir±g output (as most Jamaican manufacturing has a high degree of foreign participation) and to previous foreign capitzal inflow0 Other items were projected exogenously generally on the basis of past t3rends, 33. As the central part of this model is a skill constraint, and as we have assumned that the balance of paynents Twill not be a bindiing constraint, the balance on current account for the balance of payments becomes a variable tha'-, is determired by bhe rmodel, and to tho extlentJ that we know the long-tirm capital flous,, the changes in eserves (in this particular case they are increar-cs) blccom,? determined. Tlus the balance of'} paymncts picture is not the main focus of the analysis. 34. Having the necessary information on imports. exports, factor income paymi-ents, and transfers, Tie then are able to asscienl GN? and GDP from the experditure side, and are thus able to get the resultant capital- output ratios, growth rates, and savings rates. These are shown in Table 10. Note th,at the incremental capital-output ratiios are somewlhat different frorm oujr initial ctimates, especially in 1969 an.d 1970. This is because of the fluctuations in expo2ts. Tnese variations cause chantges in the I/ Here again the slight error in estimation arises due to not knowing at this point the exact tnmount of future debt cor-mmitments. Again the error is small, part:tcularly as the balance of payents .is not a major developmelnt constraint. - 17 level of demand and as tlhere is no scarcity of fore-ignL ea chanoe thhere is no reason for imports to make corresponding changes, so that the fluctuations are reflected in CDP. As most of these ex-port changles are from enclave sectors w:ith no supply constraint (such as aluminum), and as such are not the result of ilnvestment in the immediately preceding year, the fluctuations show up in the apparent or realized incromental capital-output ratios. As mentioned above the essenrbial part of the analysis is the overall long-run growth of output and thus thc overall growth of personal and public con- sumption. Tihese are depende-nt on the original, skill-limited, estimates oL the capital-output ratios. Those that appear on Table 5 are more of the nature of ex post ratios0 35.. Having now determined income an-d all the Gn? aggregates, it remains to caicsi.:;-l?r the remaining operationis of the public sector. 36. Given the actual levels of GDP projected for 1968-1973, we no'w have a base for public sector revenues, and we can look at the finan.-icing picture of the public sector. Thie revenues of this sector (and we are actually talking just of the central government - tho local governxucnts have virtually no significant independent sources of income) can be rotLghly classified in six categories. Under the general headingT of taxes w,e have personal income taxes, corporrte income ta.xes, customs and excise (thase two items are treated as one because of the substantial shifts, particularly in petroleun, that have beern erncouLntered during the process of irlmport substitution), and other taxes (these are items likrge licenses, royalties, etc.). In addition there are miscella.neous items of non-tax revcnue, such as earningys of governmerrt dcpartmentst:, and capital revenues (which are largely the earniings on investments and sinking funds). 18 37. For each of the six cator;ories a regresIsion estirmate was made over the previous five--ycar period of the elasticity of the rcvcrue it,em, with respect to GzDP, In certain cases GDP is prob.bILv not the appropriate base, but the errors arisi.lg from this source were thought bo be less than those that wculd be encou=ntered in projecting other bases. For personal income tax the derived elasticity was about 105 anld itb was felt that with continuing incrcaced coverage that this elasticity co-uld be ex1pected to continue Corporate income taxes on the other hand showtued-an elasticity of 0°7s largely because of tlhe increasing use of tax holidars as industrial incentivees. It was felt that durinig the period in question this phenormenon would probably continue and thus the projection asE.r 0.7 for corporate taxes. Customs duties and excise taxes-I pZ-c6cic.-.d an elasticity substanbially in excess of unity, buLt in view of the obvious effect these ta:e:a h£ae had on the rate of incrcas;e in prices, and the gene:r-Il reluctance of 2-';e government at present bo contemplate addittional inncreasrcz, in indirect tax rates, the model uses an estimTatO of le0 for this elasticity. I-le ohucr three itenms, other ta,es, non-tax revenue, and capital revenue-, were fo-cn. to have elasticities of 1.25. 1.25 and 1GO respectively over the historical period; these elasticities were used for the projections. The- projections of these reveiaue items together with the elasticities can be found in Table 9e Starxting with lhe 1968 base each item was caiculated w:ith the following formula, Rit Rt_i(l + ejiryt) -wjher Rit is the re:venuc from the ith source in the tth period, and ei is the clasticity of t;hat reveinue itim wThile gyt stands for the estimate-l actual growth in income botuecil time t-1 and timne t. - 19 38$ At this point having the possible reveniues for the five-year period, it wTas ;1.eces;ary to return to the expenditure itemls of Table 8 and calculate the total expenditure including iiiterest on public debt. 'This latter itermi was calculated oin a year-by-year basis, To begin with we had a projection of the principal and interest due on debt existing as of the beginning of the model period. In each year of the calculation of the model we arrived at an mnount that had to be borrowJed in order to finance the capital budget. Assuming (after discussing waith the go-vernmen;t and the Central Bank) that all the borrow.ings would be 20-year money at seven percent, we could then calculate the addition to the public debt charges for' sbSequent ycars ./ Thus we could arrive at an estimate of probable current expendituLres for each year. 39. One more minor adjustment will be noted on Table 80 At pr es enlt the capital budget of the govcri-irnont of Jamaica incluCkr-.s about £2.2 millioon in subsidies to the agricultuiral sector0 The miscion felt it was de8irablo that these expenditures should be phased out over the f'ivc-year period. Thus we projected them bo decline by POL4 millionl per year, and in addition wie shifted them from the capital account to the current account, where tlhrey seem more properly to belong. Thus the penultimate line in Table 8 reflects these subsidies, 4O0 M;Ioving to Table 9, once we had the revenues and the current expenditure, t;hc gross savings of the public sector could be calculated, and klnowing the amortization payments due, the savings net of arnortization 1/ TWe assumcAd tlhat rep.yinent- of principal and interest would begin in the year follo;jing.l the borrutiinL, bub longe.r grace periods could have been built in had wJe felt that it was at all likely Jamaica would bn s.:'le to borio'i orn soft-er tcrisms - 20- could be estimated. Ihe final line in Table 9 illustrate,s the extcnt to which net savings in this sense cover the capital expenditure of the govern- ment excl.,sive of debt repa nr2nit The question then was one of how to finance the rest of the capital budget. The mission had estimated that in the coning six-year period exzternal sourccs, market and official aid, would provide about Zio46 million ($35 million) per year. In additioln the Iational Insurancee ScheVne (a kind of social security) could be expected to provTide about £L4 million per year. The residua.l was assumed to be borrow-ed locally, generally by rnarket issues. 41. Thus Table 9 outlines the entire financing picture for the private and public sectors of the Jamaican econory o-ver the next six years. It also points out; sorme potential problems that may arise in the financir, of 'tle latter0 If we look at the period 1968 through 1973, we get the follo,ring summary for pub11ic capital forrmation: Table 3: FINANCING OF PUI3LIC SECTOR INETSTIEIhIT 1968 3IROUGH 1973 1i4.illio.n Per c-: n Investment 180,5 100 Financed by: Foreign Borrowing 880 49 Pubblic Savings 29,8 17 N.I.S. 24.0 13 Domestic Borrowing/a 38.7 21 /a Residua3l. -21 - I-n the previous six-year period the pict-turc wa:ts as fo.llowc.3: Toblr 4: FIHA1''t^TCIT1G OF PDL31C Si!' CR lE;i)T,i'T 1962 'limoJull 1967 £, ilijllion Percenti. InvecL:1erit 97.6 100 Financed by: Domestic Borrowintolg/a 46.7 48 Foreign Dorrot%ring 19.4 20 Public S3a-ings 315. 32 /a Includes L.0o of IoS in 1967. 4.2. A comparison of the two tablcs ,shows a definitle Shift in the sources of finimnci.n,a iTn particulalr a more thani fourfold increase in foreign financing. Thiie of coir-se, as mentiorned earlier, is contingEMnt. upon the successful preparation and execution of projects, suitable for external financing,. by the public sector. A similar proportion of foreign official capital appeared in the Independence Plan (1963-1968) but a lack of project prepar bioin by the public sector caused a substantial shortfall of resources fro:m this source. Total spending was maintainied close to the level envisioned in the Plan,r but this was done by investing in fleasylt projects of dou-btfual priority, and ans largely financed from non-project capital markets. The result was the emorgence of severe bottlenecks in the economy as the crucial social overhead invest-ments were not made. 43. To the extcnt that the puablic sector continues to fail to carry out projects in. these kccy arcas, the economy ijill contintue tUo experiec.rce a -z--re con-straint to growth. The lack of sufficient social overhead -22- investnicnb, e.g. in roads, po~-rer and Twater wJill prevent the attainment of the high rate of grot-ith of v.hich Jamaica is cipabl.e. This will have a marlced effect on the path of the ecornonm,y, For exar.pl c, for lack of water, roads and power, a lot of planned investment will never materialize. Furthermore, continual shortages will disco-rage tourists from coming and will keep hoteliers from expanding. Finally., the amount- of investment necessary for a given output will rise as in-vrestors are forced to invest in the lacking infrastructure themselves and as these lacks cause delays and increased costs. 414. To conclude this paper, let us try and quantify thi.s type of sitluation. Let us assune, for example , that instead of the long-ran growth outlined in Table 1, we project the econory as followJs: 1. Let the incremental capital--output ratio rise from 465 to 5.0 during 1968-73 instead of fca11J.ii5 to 36. 2. SiranulLt,neously let public sector investment be less by £14.6 ($35 mnillion) per year. This amount reprcentrLs the amount of foreign funds that would be forthcoming were the necessary public sector projects properly prepared anid executed, 3. Let privabae invrestment fall to 80 percent of its projected value, 4. Let the 2145 percent investment rat.io be recluced by tho shortfall in (2) and (3), This represents wihat we shall term the "tpessimal" case and its charact,er- istics are displayed in Table 5. - 23 Table 5: ALTENaTTE GR0OWTH PATH 196I 1969 1970 1971 1972 1973 GDP (, iillion) 390.7 40S55 420,5 435.7 451.1 466.7 Tnvestment Ratio .174 .174 .173 .173 .172 .172 I (}; rmillion) 68.1 70.5 72.8 75.3 77,8 80.3 ICOR 4 5 4. 6 4e7 4. 8 4.9 5eO A coraparison with Table 1 is strikihng, Eve.n taking into account the very rough nature of both tables, it is evidcnt that thouglh the imnpact of each of the four propositions above seerms minimal, taken together they prod.uce a serious negative impact on the econony. This p;ssi].la1 case represents perlaps an extreme, but it is quite feasiblo given a con- tinued failure to cre-ate infrastruc'ureui*. Under optimal assumptions about the ability of the public sector to invest in significa-nt infra- structure that arc im plicit in Table 1, we got a growirLh rate of just over 6 percontW. Under "peosinvail" assumuqtions of an inability to do this that are irmiplicit in Table 5v we get a growth rate of about, 33z percent, a shortfall of 40 percent fromn the level that the rAission felt twould be feasible and desirable for the economy. On a per capita basis the difference is even more dramatic, the pessimal assumptions only achiev- ing less than half the desirable growth rate in inconne: per head. Even granting that the actual outcome will be better than the "pessival pro- jection,"t it would appear that the role and performance of the public sector is crucial in the future growth of the econory. Table : PUBTLIC SCTrr:OR CURRENIT ACCOUINT (£ million, ccnstant 1961/64 prices)s? Pc r e nt Grso; f P , r A n num. 1963/6L4 1964/65 1965/66 1966/67 1967/68 1968/69 Past, F.-uture General General Administration 4,114 "5,773 h,740 5,291 5,608 5,514 6To 26,0 Defense 1,523 1,514 1,465' 1i480 1,519 1,628 1.3 1.3 Justice and Police 3,520 3,627 3,530 3,6Lo 4,088 3,999 2,5 2e5 Soci.al Fducation 6,779 6,984 7,130 7,683 7,811 8,226 3.9 6.0 Health 5,023 5,213 5,335 5,h51 5,602 5,696 2,5 45 Other Social and City 1,514 1,441 1,964 1,94h 2,385 2,265 8,14 2.5 Economic Transport & Communication 4,605 4,804 h,517 4>,513 4,551 4,717. 0.5 4h0 atler 71 111 159 lSh 1h6 139 14.b 15.0 Agriculture 2,039 2,266 2,151 2,321 2,814 4,072 17.0 0.0 Power and Fuel 79 69 50 50 42 h3 -1340 4.0 Plinerals 65 65 83 94 88 10G8 10 7 4.0 Other Economic 521 508 636 895 1,194 1,196 18.1 4.0 Other Public Debt Charges 3,389 [4,163 4,968 5,560 6,735 8,367 1928 Transfers to Local Gov't. 2,999 3,246 3,229 3,359 3,717 4,137 6.6 0.0 Current n.e.c. l1332 1,618 1,573 1,686 1,702 1,889 7.2 2.5 Total 37,579 41,402 41,530 1 48,002 6,9 /1 Public administration deflator for wages anO salaries, GDP deflator for the residual. /2 D2tJermined by debt profile. Table 7: HISTORICAL DAT.A (EJ million, Current prices) 196 l'96Th6hr3 96 16 .9c,2-6?7 CJDP 262.1 278,7 302,6 328,0 3514-3 371.1 CGrocE Investment 52.0 e 49.9 60o4 614.5 75.8 88o,3 lnvestment, Ratio (t) 19.8 17.9 20,0 19.7 22.0 23.8 TCOR/, - 3.1 2.1 21. 2,5 4.5 Public Investmernt 12.3 12,3 114.8 17.9 18.9 21.04 97e6 Private Investment 39.7 37.6 145.6 146.6 56.9 66,9 Mr.ing 6.8 10.5 3.2 5,7 10.5 25.0 Other 32,? 27,1 42.4 140,9 146A.1 41,9 Public Local Borrowing/2 14.2 8.5 6,o 5.1 10.4 12.5 46.7 Public Foreign Borrowing/3 2e9 0.4 149 3,7 314 141 19.4 'Total Public Borrowing 7.1 8.9 10.9 8,8 13,8 16,6 66.1 Public Current Expenditure 36,2 37.8 43.6 145.7 51,3 58.5 Public Revenue 42.6 142.9 50.8 56.5 58.8 67.2 Taxes 36.1 37,0 414,5 49,3 51.8 57.6 Personal 5.0 5.6 6ea 6,7 7,3 8.4 Corporate 101 8.6 10,8 12,6 11.7 13.7 Customs and Excise 18.5 19,8 24.4 26e,5 28.5 31.14 Other 2.5 3,0 3.2 3e5 14.3 14.1 Non-Tax Revenue 4.9 14,4 5.0 5.9 5,5 7e6 Capital Revenue 1.5 1.5 1.3 1.4 1.5 2,0 Gross Public Savings 6,14 5.1 7.2 10,9 705 8. 145.4 Debt Amortization 1,2 1,7 3°3 1,8 2.14 3,5 13.9 Net Public Savings/h 5.2 3.3 309 9.1 5.1 4,8 31.5 N.PO.31 as % of Capital Expenditure 42.3 26,8 26,14 50,8 27,0 22.14 Note: Governiment operations on fiscal year beginning in calendar years, /1 Overall (1962-67) ICOR is 2.78. /2 Includes use of government deposits, and National Insurance Scheme (1966, 1967), /3 Includes grants. /4 Net of amortization, /5 See Table 14 26 rabIe 8: PUBLIOC CURUR1T ACCOUNT, 1968-1973 (SJ 1000, 1968/69 constant prices) 719/69 1lQS9970 19T07 th1971772 1972/7-3 197B3/7h Ger.r ral:l Administration 7,076 7,218 7,362 7,509 7,659 7,812 Defense 2,089 2,116 2,144 2,172 2,200 2,229 Justice and Police 5,131 5,259 5,390 5,525 5,663 5,805 S2oci al EWt'cation 109556 11,189 11,860 12,572 13,326 14l,126 Health 7,309 7,638 7,982 8,341 8,716 9,108 Other Social and Comminunity 2,906 2,979 3,053 3,129 3,207 3,287 Econlom ic Trai8p'(rt and Commanications 6,053 6,295 6,547 65809 7,081 7,36)4 Watser 178 205 236 271 312 359 Agricultuire 3,473 3,0473 3,473 3,h73 3,h73 3,473 Power and Fuel 55 57 59 61 63 66 Minerals 138 144 150 1)6 162 168 Othepr Ecomnormiac 1,535 1,596 1,660 1,726 1,795 1,867 0 thnr Current n.e.c. 2,424 2,485 2,547 2,610 2,675 2,7142 Local Govcrmrient 090 53399 409 It 5309 SubITotal 54,232 55,963 57,772 59,663 61,641 63,715 Plus: RDpnditure Financed by Appro- priationsIn-Aid 2868 3037 322 337 349 38 Toltal (except debt) 57,100 59,000 61,000 63,000 65,100 67,200 Public Debt Charges (Interest) 60 7300 9,200 090 120 13,700 Total "urrent E.-mr-lndi t.urg 63,100 66,300 70,200 73,900 77,500 80o900 Agricultural Subsidies - - 1,800 140 1,000 800 400 Public Current EThcend- iture (Table 9) 65,300 68,100 71,600 74,900 78,300 81,300 Table 9: PROJECTI0'UWu , 1968-1 973 (ZJ millioPm, 1968 constant prices) 1_ 70 19 1 9 7T9 1973 1 9-7 Th7 GDP 390.8 402.7 432.7 469,1 498.6 532.6 ror Th'.r?si.nt 96.6 100,? 107,3 1 14. 0 121.4 129.0 I/Y (%) 24.7 24e9 24.4 24-3 24.3 24.2 IC4R 4.7 8.3 2.7 3.6 3.9 3.6 PUI)I. TnVnE; A.:'iAtJ 29.2 29.0 2965 30,0 30.8 32.0 180e5 Pri-!atc 1nvs5 ciT 67.4 71.? 77.8 84.0 90o6 97.0 Mining 20,0 20,0 20e.9 15.0 10.0 5.0 nthe?r 48.10 51.2 57e8 69,0 80o6 92.0 Public I,:Bil IV^vrxing 6,2 10,0 6.9 5.7 5.2 4.7 38,7 PubiJI.c Foreign. Borrowing 15e0 14.6 14.6 14.6 14.6 14.6 88,0 Forrowing, from National Int 3 Irc3 4.0 4.0 4.0 4.0 4.0 4,o 24.0 Total Public Borrowing 25e2 28.6 25 5 24.3 23,8 23,3 150.7 Pu.blic Current Bondj.ture 65,3 68,1. 71.6 74.9 78,3 81,3 Pubflic Revenv;s 7265 750o 82.2 88.1 94.1 10io8 Taix es (E1a.st:.Lcity) 62.6 64,7 70.13 75.8 80,8 8665 Peisoral- (1,5) 965 9.9 11.3 12.4 13.6 15.0 Corporato (0.7) 12.7 13.0 13.8 1465 15.c1 15.8 Custopis & E:ci;;e(1,0 35e5 36.6 39,9 42.6 45,3 48.4 Other (1.25) 5e0 5.2 5.8 6.3 6.8 7,3 Non -Tax Reveniue (1.95) 8,2 865 965 10,3 11,1 12,0 Capital Revcˇnut (1,0) 1.7 1.8 19 2.0 2.2 2e3 Groi:. Public Savings 7,2 6.9 10,6 13,2 15.8 1c9,5 73,2 Debt Amortization 3.2 665 6.6 765 8.o8 10,8 43.4 Net Public Savings/1 14.0 0.4 4.0 5I7 7.0 8e7 29.8 N.?PS. as % of Ca-ita1 L\cpenditure 14.0 1.4 13.6 19.0 22,7 2'7,2 /1 Net of amortization, /2 See Table 3, Table 10: PROJECTI(NiT, 1968-1973 1- 9t0 1 197 197 3 Perso'ial Coin--iimptAoi Expenditure 27L?4 290,7 307.9 326eL6.1 3 45. 3.. 36 57/1 Public Ccrllurnpbion 41.1 L2.29 14.a7 46.6 )48.6 50,772 Tnvesln,:n 96.6 10o,2 107.3 114.0 12l.4 129.0 Exports 170,3 180.Q3 21902 238.9 25598 276.)i Imports 202.4} 223e2 251.9 269.9 286.8 30h.1h Net Transfers e55 5r5 -5.5 -5.5 -55 - 5.5 GNP 374.6 385e)1 h"1'.7 4L50.2 478.8 .511e9 Factor Incomne 16.,2 17.1 18.0 18.9 19.8 20.7 GDP 390.8 40265 439.7 469l 498.6 532.6/3 Growth Rate GDP (%) 5.0 3.0 9.2 6.7 6,3 6.8/4 Investrment Ratio (d) 24.7 24.9 2h44 24.3 2h.3 24.2 In vesti-n nt 96.6 100.2 107.3 114 .0 121. it 129,0 Current Account Deficit 26.6 37.4 27.2 2565 25.5 22.5 S INational 70,0 62,8 80.1 88.5 95.9 106o5 S Public 4.0 0,L4 4.o 5.7 7.0 8. 7 S Priva tc 66.O 62,l4 76.1 82.8 88,9 97,8 ICOR 4.7 8,3 2,7 3.6 3,9 3.6 /1 Implicit growth 5e9 perceent. /2 Implicit growrth 4L3 percent. /3 Implicit growth 6.15 percent. /A Pattern of growth rates reflects recovery from 1967, then short-run bottleneck stagLation, then export boom, finally smooth grovwth, - 29 - Tab I o I e . i JEXPOulRT PRO. 0 `'T0LN{, 1i>'6-4l97 1 (Values £ 1000 f,o,0b., prices WJ per unit) Alumina: Value 29,000 59.,000 67,850 73,750 82,6o- Volume ('000 tons) 1,000 2 , 003. 2300 295D0 2,b 8$00 Price 2905o 29650 29650 29560 29.505 Bauxite: Value 23,400 214300 25,300 25,900 26,500 Volume (COO0 tons) 7,500 7,800 8,100 8,9300 8 , 500 Price 3.12 3,12 3,12 3.12 3.12 Total1 Valu1e Alumina and 13a. > 52 900 83 300 93 ' .a 0 99a650 109 100 Percent of Totual 4 63. 8 65.2 6 ,8 =67.1 A,Lic,1t1 lre SugLr: Value 16, ooo 17,3 00 18 ,000 18.,500 18,700 VolLrmie ( 000 tons) 360 400 410 420 425 Price (svcrageo) 1445o0 43.20 143,90 414.0 1414.0 Bananas: Value 6,700 6,900 6,900 6,900 6,9oo Volwne ('000 tonr) 195 200 200 200 200 Price 34e550 346o0 34.5o 34650 - 34650 Molazc's: Value 1,300 1,400 1, 450 1,500 1,500 Volumie ('000 tons) 130 140 145 150 150 Pride 1000 10.0 10.0 100 10.0 Pimento: Value 1,260 1,320 1,380 1:,1440 1, 9500 Voluvre (?000 lbs.) 14,200 4.,400 14,60 4,80-0 5o000 Price 0e30 0,30 0,30 0303 0.30 Canned Fruits: Val3ue 1,018 1,0145 1,100 1,155 1,20 Volume ('000 lbs.) 18,500 19,000 20,000 21,000 22Q,000 Price 0Q055 0.055 0.055 0O055 0.0o-Y, Fruit Juiices: Value 880 935 990 190145 1,1( 00 Volume ('000 gal.) 1,600 1,700 1,800 1 ,900 2,000 Price O55 0a.55 055 0.55 0.55 Citrus: Value 490 530 560 600 650 Volume ('000 pkg.) 390 1410 1430 460 500 Price 1.25 1.30 1.30 1.30 1,30 Coffee (Unroasted) Value 240 256 266 285 30( Volume ('000 lbs.) 1,300 1,350 1,140o 1$500 1,600 Price 1.85 1.90 1.90 1,90 1.90 Cocoa (Beans): Value 176 170 180. 190 200 Volume ('000 lbs.) 1,600 1,700 1 ,800 1,900 2,000 Price 0.110 0,10 0.10 0.10 0.13 Other Agricultural Products Value 1,136 1,2414 13214 1,335 1,4114 Total Valuie of A ricultLu;al&,ho_orts 29 0 32100 32_150 32.950 33 500) Percent of Total 30.1 23,8 22 21 .8 20.6 "Other" tl rts 1 5,100 16 200 17 500 18 800 20 Percent of Total 15< 12.14 12,3 12.14 122 Total Exporls 97,200 l39) 600 142,800 151,1400 1626o Percetv Clhangc,gt3 +507 4 +9,3 +60 Tl -t Average Annual Growth, 1969-73 (%)----12.2 --- - ' i'b t ih' t ,.; 4 ;f>'AtrA.%f.G;S,;;.zam ".t'i<"<'.'t' 5A'2-'5.:/ 2K -.. >s ~ Gs S. <0.. -.<*>.>< .... 9. r. . ... ....... . ...... Table 12: 11PORT PROJETlONSI (£ million) 1 9t 1970 1971 197214(3 Food 24e7 26.5 28.4 30X11 32.6 3):*9 Non-Durables 12e5 12.8 13.1 L3.i 13,7 114.0 Durables 22,5 25.3 28,4. 3109 35.8 l0,2 Raw Materials 35.9 39.4 43.2 47d4t 52.0 57.1 Capital Goods 142.5 48.6 53.9 55.1 55.6 56.7 TOtl1 (c,i.f.) 138,,1 152.6 167.0 178.2 189o7 202,9 Services 64.3 70.6 84..9 91.7 97.1 101.5 Transfers 2 2.9 3.1 3.2 3.3 3,4 3.5 Total 205.3 226e3 255.l 273,2 290,2 307.9 Tobal Excluding TransisfXrs 202.4 223.2 251.9 269,9 286.8 304,4