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close this bookThe Courier N 127 May - June 1991- Dossier 'New' ACP Export Products - Country Reports Cape Verde - Namibia (EC Courier, 1991, 104 p.)
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View the documentThe growth of non-traditional exports in the Caribbean
View the documentJamaica - manufacturing: almost exclusively for export
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Jamaica - manufacturing: almost exclusively for export

by Christopher STEVENS

Non-traditional exports have a smaller share in the exports of Jamaica to the European Community than of all the countries studied by the Overseas Development Institute. They are also of very recent origin. This is for three reasons. First, two of the main traditional exports to the Community - bananas and sugar - are covered by special regimes under which prices have held up much better throughout the 1980s than has been the case with the ACP’s other traditional exports. Second, although there has been a very rapid growth of non-traditional exports from Jamaica, it has, until very recently, been directed almost exclusively to the United States. Third, and most important, government policy changed away from import substitution to favour export growth only in the early 1980s.

The dominance of the US as a market for Jamaica´s non-traditional exports is a primary focus for this article. What are the reasons for this emphasis? Is it due solely to the fact that the US is a very large market on Jamaica’s doorstep that has absorbed all of the output that Jamaica has managed to produce or have there been especially favourable characteristics of US trade policy, or negative features of EC policy?

Jamaica’s non-traditional exports, at least outside the Caricom area, are almost exclusively of manufactures, notably garments. Processed agricultural exports (apart from rum) are still at a fledgling stage. Manufacturing’s share of GDP has fluctuated at around 16%, but its share of exports doubled between 1982 and 1987, reaching 20% by 1988. This growth contrasts sharply with the overall performance of exports during this period. The volume of total exports declined steadily to 1985, and although it then increased the rise was of only 12% in the three years to 1988.

Jamaican statistics do not allow a precise calculation of the share of manufacturing output, or employment, accounted for by exports because, of course, some companies are involved in both domestic and foreign markets. However, it is possible to identify the impact of those manufacturers operating within the export free zones established during the second part of the 1980s. Since these companies account for a very large part of the growth in manufactured exports of recent years, figures on the free zones provide a broadly accurate picture of the overall impact of export-oriented manufacturing. Net foreign exchange earnings from the free zones increased from $1.1 million in 1982 to a peak of $31.6 million in 1987, with a slight downturn thereafter. By 1987 these earnings were equivalent to some 10% of the trade deficit. Employment in the free zones, also largely absorbed with export-oriented manufacturing, has likewise grown rapidly from virtually nil in the early 1980s to 11 400 by 1987, again with a dip in the following year. In early 1987 it was reported that over 18000 people, mainly women, were employed in clothing either in the free zones or in the rest of Jamaica.

The Policy Environment Jamaican policies

During the 1960s and most of the 1970s the emphasis of Jamaican government policy was on import substitution. Through a combination of tariffs and quotas on the one hand and an overvalued exchange rate on the other, the government both increased the attractions of the domestic market for local manufacturing and reduced its capacity to compete on world markets. Although Jamaica has always been a highly trade-dependent economy (with an average ratio of trade to GNP of over 100% throughout the 1970s), exports outside the Caribbean region were almost exclusively based on sugar, bauxite/alumina and bananas. As the external balance worsened during the 1970s, import licensing proliferated. By 1980, 370 items were covered by licensing, compared to only 60 in 1970. The volume of exports has declined steadily since Lom was signed. Until 1984 the nominal exchange rate changed hardly at all vis-is the US dollar, even though the annual rate of inflation was well into double digits.

From 1977 onwards a number of attempts have been made to reorient the economy by whichever government was in power. Export stimulation has been a declared objective of policy for most of this period although actual policies, moulded under pressure from resource constraints and/or political demands, have not always been so supportive. Moreover, policy changes (such as devaluation and the removal of import controls) have often failed to overcome the expectations of businessmen sufficiently for them to reorient their attention from the domestic to the export market.

Since the mid-1980s the export-oriented policies have paid off, at least in respect of foreign capital. For domestic manufacturers the net effect of government policies has been the stimulus to exports involved in rolling down protection and devaluing, balanced against the constraints associated with severe foreign exchange shortages and sharp measures to restrict demand, such as high interest rates. Following an agreement with the IMF in 1987, for example, the government reduced tariffs affecting the manufacturing sector. Tariffs on raw materials were reduced from 16% to 10% over one year, and those on capital goods were reduced to 20% over four years. In 1988, capital goods imports were also relieved of consumption duty (which was formerly set at 15% ad valorem), as well as excise duty and sales tax where applicable. Stamp duty was also reduced (from 30% to 20%), and there were duty concessions on ‘high use’ capital goods, i.e. those quickly consumed in the production process such as sewing machine needles. At the same time, however, interest rates are extremely high (31 % at the time of research), and the capacity to import inputs and capital equipment is restricted by the shortages of foreign exchange and the effect of devaluation.

Fiscal incentives to export

The government has established two regimes for companies engaged exclusively in exports, together with special arrangements for those engaged in supplying both the domestic and export market. These provisions have had to be dovetailed into the requirements of Caricom.

Under the Export Industry Encouragement Act (EIEA) 1956, a company producing exclusively for export outside Jamaica and Caricom may be declared an ‘approved export manufacturer’ in relation to ‘an approved export product’. Such firms, which may be located anywhere on the island, are exempt from the payment of income tax on profits for ten years and, until 1987, could elect either to import duty free, a range of inputs or to claim a tax rebate on exports outside Caricom. In 1987, as part of the agreement with the IMF, a twin-track approach was introduced. New companies establishing under the EIEA are now given the option of either accepting the pre-existing concessions or of paying full import duty on raw materials but recovering a proportion of this under the Export Rebate Scheme whilst continuing to benefit from the tax exemptions. The tax rebate on exports is currently set at the rate of 7.5%. The IMF reasoning was that the existing scheme was an inefficient way of promoting exports and that a rebate on tax paid would be more effective.

More recently, a number of export free zones have been created under the Jamaica Export Free Zone Act of 1988. As with the EIEA, beneficiary companies must export their entire output. There are currently four principal free zones: two in Kingston, one in Montego Bay (which has recently become host to a teleport high speed data transmission service) and one in Hayes. In addition, a number of large companies have been designated export free zones in their own right, e.g. the Tropicana ethanol plant. Companies within the free zone rent their infrastructure from the government on advantageous terms (made possible because the free zones have been constructed using the profits from Kingston port and concessional financing from the World Bank) and their imports and exports outside Caricom are entirely free of tax and duty. The companies also enjoy total exemption from income tax in perpetuity.

The principal difference between the two systems concerns the handling of foreign exchange. Companies in the free zones must pay for all their local costs in foreign exchange, but there are no controls on the repatriation of profits. Companies approved under the EIEA, by contrast, can pay for inputs in local currency but require permission to repatriate profits. For these reasons, the free zones are particularly attractive to those foreign companies that have established in Jamaica to undertake outward processing in the garments sector for re-export to the US. All of the companies in free zones are foreign-owned or joint ventures in which the foreign partner is dominant, while those established under the EIEA are a mixture of foreign and indigenous.

Institutional support

Export promotion is currently undertaken by a single parastatal, Jamaica Promotions (JAMPRO) Limited, formed in 1988 from the merger of three agencies dating from the early 1980s with overlapping responsibility in the field: Jamaica National Investment Promotion Limited (JNIP), the Jamaica National Export Corporation (JNEC) and the Jamaica Industrial Development Corporation (JIDC). It provides a range of services including investment promotion (such as assistance in obtaining permits, identifying local investment partners, locating land and factory space), and trade promotion (including certification, market intelligence, and training).

JAMPRO has been particularly active in encouraging export-oriented clothing manufacture. It is reported that US industry sources consider the Jamaican programme to be the most sophisticated of those mounted by the Caribbean suppliers. Among the facilities it provides, JAMPRO has retained the services of Kurt Salmon Associates to provide management consultant support for larger firms. For smaller companies, it works in partnership with USAID to develop management and operator training programmes. A more general training function is provided by the Garmex Academy under the government’s Heart youth training programme, which is funded by a special payroll levy. These technical assistance programmes are not without their critics, but they appear to have had a significant impact on building up the country’s competitiveness as a garment producer and exporter.

Under its trade agreements with the US, Jamaica has export quotas for specific clothing items. The existence of these quotas has provided the government with a tool for encouraging the clothing firms operating in the country to develop in preferred directions. The global quotas for each product are distributed between clothing manufacturers by JAMPRO. Whilst the main criterion for determining each company’s quota is its historical level of supply, a number of additional criteria are also applied in order to encourage certain areas of activity. These are:

- diversifying exports to non-US markets;
- for those producers in the free zones, sub-contracting to companies outside the zones;
- giving higher local added value in employment;
- including non-restricted items in the export mix;
- the use of US capital and other material and equipment;
- location outside the Kingston corporate area.

Hence, the government has deliberately used its allocation of the US quotas inter alia to encourage the geographical diversification of clothing exports to the European Community.

Other aspects of the institutional framework for exporting are less supportive. Export administration is highly complex. The Third National Export Plan of 1987-89 even described it as a disincentive to exporting in its own right. Partly because of the demands made by the authorities in the countries with which Jamaica has preferential trade agreements (US, Canada and the EC - see the article that follows), there are a large number of forms which have to be completed and hurdles that have to be overcome. Progress along this course is hindered because of a lack of automaticity in the system and a relatively high degree of administrative discretion.

Registering as an exporter with the Trade Board is fairly straightforward but to obtain a certificate of Jamaican origin for exports is more difficult, involving two steps. First, all exporters of textile products have to be registered as being capable of producing the goods they wish to export, and stringent criteria are applied in this test. Second, each individual shipment has to be certified as being of Jamaican origin (except in the case of 807 shipments - explained in the next article - which are specifically exempted because of the limited processing undergone in Jamaica). For exports to the US, a special visa and certification system has been established to ascertain the appropriate import regime to be applied. To obtain many of the exporters’ incentives made available by the government, exporters have to obtain a Bank of Jamaica compliance certificate, verifying that export earnings have been sold to the Bank at prevailing rates of exchange, and tax compliance certificates.

Additionally, customs clearance tends to be more onerous than in many countries because of the problem of drugs. Jamaica has been adversely affected by the stringent penalties now imposed by US authorities on import consignments in which drugs are found to be concealed. In May 1988, US customs imposed a fine of $65 million on a shipping line after finding ganja in three sealed containers from a Jamaican biscuit company. The result was that the company discontinued its Caribbean service with effect from July 1988. This was a severe blow since it was the largest carrier on the Jamaica-USA route, handling 75% of the containers shipped in 1987. Following negotiations with the government, the decision to pull out of Jamaica completely was reversed but the company resumed only on a scaled-down service. Later in the year, the Jamaican government introduced stringent measures designed to curb the export of drugs. All containers are now stripped before loading. When first introduced, this caused considerable logistical problems for exporters. Not only did the inspection cause delays but, more seriously, it introduced a significant element of uncertainty into logistical planning. It appears that the system has now been improved so that it is a hardship, for exporters but not a major handicap.

The performance of clothing exports

The story of clothing exports is essentially one of the 1980s. In the 1970s’ import substitution policies, combined with an overvalued exchange rate and increasing economic dislocation, kept exports outside the Caribbean area to a low level.

The growth of exports has been largely synonymous with the takeoff of exports to the US from 1984. Total clothing exports increased from $5.1 m in 1979 to $11.3 m in 1983; they then increased very rapidly in the following years to reach $221.7 m by 1988.

Until very recently, the growth was due almost exclusively to exports to the US’ but a start has now been made in exporting to the EC. After several years of virtually zero sales, exports to the EC increased to $2.8 m in 1987 and then $10.1 m in 1988. By 1988 the EC accounted for 5% of Jamaica’s clothing exports, making it the only significant market after the US (which held a commanding 93% of the total). Partial figures for 1989 show that the growth of exports to the EC has continued.

The increase in exports is also closely associated with the free zones, although exports from the Jamaican customs territory have also increased. In 1982 the free zones accounted for only 3% of Jamaican clothing exports. By 1988 this had increased to 50%.

There has also been a shift in the structure of production. The share of CMT (Cut, Make and Trim) in total exports has risen slowly. In 1986 Jamaica exported only $40 m of CMT goods; by 1988 this had risen to $91 m, giving CMT 44% of the total. About half of the major firms are now involved in some CMT activities.

The increased share of CMT is associated with the development of exports to the EC. CMT exports to the USA are limited since the products fall outside Super 807 and may be subject to quotas. In the case of the EC, however, there is no such problem. Because of the rules of origin, exports to the EC are concentrated in knitted goods, notably sweaters and T-shirts. Exports to the USA, by contrast, are much more broadly based: in 1987 the principal items were trousers, slacks and shorts, bras, shirts/blouses and coats/jackets.

How far has this growth of exports benefited the economy? Like other outward processing promotion schemes, 807 and Super 807 assume that there is scope for enlightened self-interest by encouraging domestic manufacturers to undertake part of their operations in lower-cost third countries. The US industry is assumed to benefit because, by lowering its total production costs, it is better able to compete with cheap imports. And the third party host is also assumed to benefit through the establishment of labour-absorbing, export-oriented manufacturing and the vehicle that this provides for US technical, managerial and marketing skills.

The criticism most often levelled at outward-processing is that it creates a dependent industry in the host that becomes familiar with only part of the production process (assembly and sewing), gaining little experience of design, cutting, marketing, and that operates on very low profit margins at a high level of vulnerability to sudden changes in demand over which it has no control. In short, the industry creates (possibly temporary) employment but little else.

The strength of this criticism can be reduced if the host industry develops from simple assembly to more complex operations, such as CMT. In 1987 it was estimated that the import content of 807 exports was as high as 85% of the fob value, whilst for CMT the figure was lower, at 40-60%. Although few of the US companies that have established in the Caribbean region under 807 have moved into CMT, there is a major exception in Jamaica, where one large American company has done so. Moreover, four Hong Kong-based firms signed an agreement with JNEC in 1985 both to diversify into Europe and to increase CMT exports. In 1983 virtually all Jamaica’s clothing exports to the US were of simple assembled articles; by 1988 CMT accounted for 48% of export value. And exports to the EC are exclusively CMT.

Other non-traditional exports to the EC

There are not, as yet, any major nontraditional exports other than garments to the EC, even though a number of attempts have been made to initiate them and there do exist some other nontraditional exports to the US. The problems that the two biscuit companies have run into with the EC’s rules of origin are instructive.

Among the non-traditional goods that Jamaica has begun to export to North America, but not yet to the EC, are ornamental plants and furniture. By 1987 exports of ornamental plants had reached $3.8 m, of which two-thirds were to the US and one-quarter to Canada; exports to the EC were only $200 000, or 5% of the total. There are twenty-six companies established in the commercial ornamental nursery business, with 523 acres. The main plants are heliconia, ornamental foliage and anthurium, plus small areas of orchids, chrysanthemums, roses and other flowers. About 7000 people are employed in the industry.

The attractions of the North American markets are related to both policy and geography. Ornamental plants receive favourable duty concessions under the CBI. Moreover, Jamaica is close to the major horticultural centre of Miami. Finally, there is a market demand for the type of product Jamaica can grow.

The main constraint on accessing the EC market is distance. JAMPRO’s view is that the volume of production must increase before it makes commercial sense to attempt to export to Europe on a significant scale. One company, which exports primarily to the US and, to a lesser extent, to Canada, did export to the UK during the 1970s. But it had two unfortunate experiences with its commercial associate there. This led it to suspend exports to the UK and it has been wary of restarting.

The export furniture business involves some 35 firms employing 3500 people, largely skilled labour, and concentrating on reproduction antique wooden furniture for the top end of the US and Bermudan markets. This appears to be a sensible market orientation and there appears little reason to develop exports to the EC. The North American market is the best one for high-priced reproduction furniture, and the obvious development strategy for the Jamaican industry is to increase its capacity to supply that market.

Constraints on production

There are well over 100 clothing manufacturers registered as exporters. They fall into three broad groups. The first consists of about 60 relatively large companies which compete successfully on the international market. Some are mainly 807 operators, while others have CMT activities as well. In 1987, 10 of the 65 CMT producers accounted for some 85% of such exports, while 10 companies were responsible for a similar share of 807 exports. They run factories with over 100 machines and employ between 150 and 3000 workers. The majority are foreignowned and have marketing organisations in their main market. The main source of foreign capital is the US, followed by Hong Kong and South Korea. In the second group come about 40 companies which are mainly locally-owned and operated. In the past they tended to concentrate on the domestic or Caricom markets. However, the combination of government enthusiasm and declining Caricom demand has led many of them to become 807 contractors and a few also to handle CMT orders. Very few have marketing links in their major markets. They have between 60 and 99 machines and employ between 60 and 188 workers. Many experienced financial difficulties in 1988 and some closed down. Finally, there is, in the third group a nucleus of small factories with under 60 machines.

The main constraints facing the clothing sector are financial. They arise because a significant number of companies have accumulated debts which are now unsustainable given, on the one hand, extremely high rates of interest and, on the other, the volatility of the 807 market and its very narrow profit margins. A review of the clothing industry’s problems in l 988 identified the main problem for those companies in difficulties as being debt consolidation and a cut in interest rates. At the present time, interest rates stand at 31 % and have been high for some years as part of successive governments’ demand control policies designed to accompany structural adjustment.

Other problems concern the labour force. The difficulty is not one of nominal remuneration rates: Jamaican wage rates are low relative to those of the US. A recent Analysis by Kurt Salmon Associates for JAMPRO suggests that savings over US manufacturing costs (excluding materials) for a range of products are between 55% and 65% for 807 production and between 30% and 38% for CMT. Prevailing Jamaican wages average just 13% of those in the USA.

The problem is rather one of the quality of labour: companies claim that there is room for improvement on this score. The 1988 report lists poor training, absenteeism and theft as subsidiary problems identified by the companies surveyed. There appears to be widespread criticism by companies of the training provided by the Garmex Institute.

Although organised labour traditionally has been politically powerful in Jamaica, the export-oriented clothing industry is relatively lightly unionised. There have been some labour disputes involving Asian companies operating in the free zone. In the mid 1980s, five major trade unions wrote to the government complaining that pay and conditions in the export-oriented industries were poor, albeit in line with minimum statutory wage rates. Their complaint was that much overtime is required and is low paid; they claim that employees are expected to work a minimum of 12 hours per day, six days per week, and that refusal to undertake overtime leads to dismissal.

Conclusions

After a long period of economic difficulties, Jamaica has achieved an impressive growth of non-traditional exports. Doubts have been expressed over the sustainability of this process in the light of rapid changes in the US clothing industry and the domestic problems of high interest rates, foreign exchange shortage, etc.. Nonetheless, in terms of the questions posed by the present study, Jamaica provides a clear example of an ACP State that has capacity to export competitively the kind of manufactured goods that the Lomonvention was intended to stimulate.

The question that then arises is why exports to the EC have been so feeble. In part, the explanation must be that the US has been able to absorb most of the goods that Jamaica has been able to produce. Nonetheless, it is also clear that part of the explanation lies in the difference between US policy and that of the EC. Whereas the US government has positively encouraged a partial shift in the international division of labour, the EC has been much more restrictive. The Lomules of origin have prevented Jamaica exporting to Europe the kind of clothing that has been most prominent in exports to the US and have failed to provide any preference to the two recent attempts to export non-traditional goods other than clothing. This failure is the more distressing because both US and Canada have provided more sympathetic treatment to Jamaica than has been meted out under the ‘special relationship’ of LomUnder 807 the US has given preferential treatment to woven clothing made from non-US fabric. Likewise, Canada has granted preferences on goods containing non-Canadian raw materials, as in the case of biscuits made from US wheat.

C.S.