(Jamaica Observer) The World Bank (WB), in its Country Economic Memorandum (CEM) on Jamaica dismisses claims by Jamaican firms that access to financing, or crowding out, is a major hindrance to business development, pointing instead to crime, the high cost of electricity and low workers’ skills as the top three major constraints and noted that Jamaican firms complain more than other firms.
The report, published May 26, 2011 and recently launched at the University of the West Indies, Mona campus concluded that as a small open economy, the overall funds available to Jamaica do not seem to be a binding constraint on growth and an analysis of real interest rates and credit flows to the private sector, as well as international comparisons, do not support the crowding out theory.
The study also concluded, contrary to widespread opinion, that real interest rates in Jamaica are not high.
The report, published May 26, 2011 was recently launched at the University of the West Indies, Mona campus.
According to the World Bank, with the large inflows of foreign direct investments (FDI), workers’ remittances and the presence of large financial institutions with available funding, there is no shortage of capital in Jamaica for investment purposes. Instead the WB pointed to possible ‘distortions’ in the financial markets which affect the allocation of capital.
For example, the WB found that there is a distortion in the distribution of loans in the domestic financial sector as credit is concentrated in a few sectors at the expense of others.
In 2008, tourism and distribution accounted for more than 50 per cent of the stock of loans to the private sector. Tourism accounted for 30.3 per cent of loans, distribution for 20.5 per cent, professional and other services 13.4 per cent and construction 11.9 per cent.
However, in the same year, entertainment accounted for 0.4 per cent, mining for 0.6, agriculture for 3.1 per cent and electricity, gas and water 2.5 per cent.
“This might reflect problems for some firms in Jamaica, even if there is enough financing at the macroeconomic level. It might be a signal that there are some distortions in the allocation of credit among firms,” noted the World Bank.
Some Ja companies get favourable tax treatment
The capital distortions also extend to the way in which some businesses get favoured tax treatment over others, causing the perception that some companies are more progressive.