he classical economists such as, John Stuart Mill, David Ricardo and Jean Baptiste Say, were very pessimistic about economic growth because they did not know how to tame the business cycle. That is, how to prevent economies from moving from booms to bust-periods of rapid economic expansion and high levels of employment to periods of sluggish or declining economic growth and high levels of unemployment.
Cambridge University’s professor, John Maynard Keynes provided the answer when he released his landmark publication “The General Theory of Employment Interest and Money” in 1936.
Keynes contended inter alia, that growth is driven by an expansion in aggregate demand, which he defined as spending on public and private sector consumption and investment, as well as net exports-imports, minus exports. Simply put, an economy would grow if spending on consumption, investment and net exports is growing, based on the size of the domestic and foreign trade multipliers.
The multiplier or the marginal propensity to consume, which was developed by professor Richard “Lord” Kahn, who was then one of Keynes’ youngest disciples, is defined as the proportion of the additional dollar of income that is consumed rather than saved. Meanwhile, Keynes further contended that an economy would contract, if there is a fall in consumption, investment and government spending, as well as net exports.
NET EXPORTS US$B 2007
MERCHAN
TOURISM
REMITT
TOTAL
IMPORTS
NET
2.000
2.00
2.2
6.20
$6.00
0.200
This column contends that the government’s trade policies, particularly the upcoming signing of the Economic Partnership Agreement (EPA) with the European Union (EU) could lead to a vicious cycle of lower levels of investments, employment, economic growth and a deeper fiscal and balance of payments crisis.
This is even more so, given the current weak state of the economy and the low levels of technological competence of country’s labour force, as well as the small size of its economic enterprises and population.
The signing of the EPA will lead to an increase in imports and a reduction in exports, which will exacerbate the deterioration in the external accounts already being caused by the impact of the slowdown in the global economy on merchandise exports. It is however instructive to explain what is the EPA before deepening the analysis of its impact on the local and regional economies.
The EPA is an agreement to create a free trade area between the European Union, which has some 500 million consumers and Cariforum, which has less than 20 million consumers. Cariforum represents Caricom and the Dominican Republic (DR).
It replaces the non-reciprocal and discriminatory preferential trade agreements which were developed by the EU with the 77 countries of African, Caribbean and Pacific (ACP) region, which were former European colonies, under the Lome and Cotonou agreements.
These agreements are now said to be incompatible with the World Trade Organisation’s (WTO) rules, which call for free trade among partners. Under the EPA, all trade restrictions and preferential pricing arrangements developed between the EU and the ACP since 1975 will have to be phased out over a 25year period, in the case of Cariforum.
The EPA however poses a problem for the EU as to how to reconcile the special status of the ACP Group with its obligations to abide by the rules of the WTO. A decision was therefore taken to allow trade with the ACP to be only reciprocal enough to adhere to the rules of the WTO, giving limited protection for certain goods and services from EU exports.
The WTO compatibility clause allows different regions of the ACP group to enter into their own EPAs with the EU, based on the Cotonou principle, hence the upcoming signing of an EPA between Cariforum and the EU.
This agreement will definitely lead to a further deterioration in the country’s net exports because although it claims to facilitate two-way duty free trade, starting immediately for Cariforum exports and gradually over a 25 year period for 85 per cent of European exports, the region and Jamaica will not be able to take advantage of the access provided.
The region and the country simply do not have the size, population and technological, as well as entrepreneurial efficiency needed to compete with such a large and developed region, which gained an unfair advantage during the primitive accumulation phases of slavery, colonialism and neo colonialism and which still provides subsidies to exporters, particularly its farmers under the Common Agricultural Policy (CAP).
The signing of the EPA will also have serious negative implications for the country’s fiscal accounts, since international trade taxes would have to be gradually phased out during the next 25 years, if the agreement is signed in its present form. What will be used to replace the billions, which the government currently collects from these duties?
We need to think on these things carefully, while we commend the government for putting on this year’s smashing grand gala Independence Day celebrations because signing the current EPA could herald a return to the pre independence era, which was very bad for the majority of our people. Even the privileged few who now clamour for a return to those dark days will find it hard to survive in this new dispensation.
For example, the Most Favoured Nation (MFN) clause which requires that the region gives the same treatment to the EU that it would give to its southern neigbours is likely to have a negative impact on the regional integration process, as well as our trade relations with countries such as, Venezuela, China, India and Brazil.
This could affect vital life saving agreements such as, the Petro Caribe oil deal, which allows to the country to import oil from Venezuela under a higher purchase agreement that provides cash-flow relief, easing the pressure on the dollar, while allowing the country to fund certain critical development projects. These include the expansion of the Petrojam refinery and the refurbishing of the Independence Park, which houses the national stadium and the national arena, as well as the development alternative sources of energy.
Ralston Hyman - A Kingston College old boy is currently financial editor at the Sunday Herald Newspaper, head of the Power 106 Business Centre and the holder of several prestigious local and international journalism awards.
