Dillon Alleyne | Public policy and the quest for economic growth in Jamaica

Over the last three years, Jamaicans have withstood the devastating impact of Hurricanes Melissa and Beryl and tropical storm Raphael on the economy. These challenges raise an important question: How does public policy support growth in a small open economy (SoE) that is extremely vulnerable to external shocks and climate change?

Any answer must confront a simple fact: the Jamaican economy has not grown significantly for at least two decades. Discounting shocks from the 2008-2010 financial crisis and COVID-19, the story is one of anaemic growth. Between fiscal years 2010-11 and 2018-19, growth varied between -0.7 per cent and 2 per cent and was 1 per cent or less for seven of nine years. After an 11 per cent decline during COVID, recovery rates between 2020-21 and 2022-23 merely reflected a very low base. Growth then returned to -0.5 per cent in 2023-24 and 0.5 per cent in 2024-25. While Melissa’s full impact is unclear (56.7 per cent of GDP according to ECLAC), growth projections remain modest.

SOURCES OF GROWTH

Jamaica’s characteristics shape its growth path. It is a price taker: it cannot set international prices but can export competitively at current ones, so binding constraints are mostly on the supply side. The economy supplies three types of goods: a traded export good consumed abroad (largely tourism); a non-traded good (education, health, construction); and imports of consumption and intermediate goods, with little short-run substitution. Because almost all production depends on imports, diversification is difficult.

Since Jamaica is a price taker, the key is improving product quality not lowering price. Exports earn the foreign exchange needed to buy essential imports, so foreign exchange is a binding constraint. Relaxing it provides resources for growth. These economies must, therefore, expand export capacity by raising productivity through innovation alongside non-traded improvements like logistics and labour productivity that complement exports. Public policy can build domestic capability in these areas.

Several implications follow: firms that use or save foreign exchange efficiently should be encouraged, and because imports carry heavy weight in the price index, inflation cannot fall below that of Jamaica’s largest trading partner. Unsustainable fiscal deficits eventually drain foreign exchange, too, and when both crises converge (fiscal and balance of payments), the economy grinds to a halt absent the IMF route.

There is a high correlation between attainable GDP per capita and three interactive forces: resources devoted to domestic capital production (local capability), technology upgrading, and institutional strengthening. Successive governments have addressed the first and third through education, fiscal discipline, and bodies like an Independent Fiscal Commission, but is this enough? Across 171 countries in 2019, researchers found that every 1 per cent rise in per capita income accompanied 1.53 per cent export growth (Hausmann 2025). For Jamaica, between 1960 and 2024, export growth was just 1.04 per cent.

The quality of exports matters as much as the level. With respect to goods, Jamaica exports primary and natural-resource-based products. In services, it remains stuck in mass tourism, unable to break into higher-value areas. Building domestic capability should yield more exports in health, education, and creative services. Production is constrained by low productivity and a poor (though improving) business environment, long aggravated by high crime. The global literature is clear: countries must export not only more existing products but new products to new markets, especially now given uncertainty from US trade policy.

DECLINING PRODUCTIVITY

Low growth is tied to declining productivity, hence the case for greater domestic capability. Despite falling unemployment, many workers remain in low-wage, low-productivity activities. Output per unit of labour fell roughly 19.1 per cent between 2004 and 2020, with the decline intensifying after the 2008-2009 crisis. Total factor productivity (TFP) also fell between 2001 and 2019. Economists usually refer to TFP as ‘technology’ - a shift parameter that makes other factors more productive. Foreign exchange depends on too few sectors, reflecting weak diversification, the growth of tourism “enclaves” with limited spillovers, and an expanding low-productivity informal economy. Though investment has been relatively high, it has been inefficient: gross fixed capital formation (a measure of investment) rose from 21 per cent of GDP in 2015 to 24 per cent in 2019.

Years of fiscal stability have lowered the debt-to-GDP ratio and improved Jamaica’s risk profile. The question is how to spend the hard-won fiscal dividend. First, capital investment must prioritise building export capacity. The IFC notes that capacity constraints within ministries and agencies limit full use of the capital budget. What matters is not just spending but value for money. Second, Melissa underscores the need for adaptive expenditure. Each agency, public and private, must tag adaptive spending and assess effectiveness. Building resilience is a priority. Extreme events cost small island developing states an average 2 per cent of GDP annually - four times the rate for larger countries (IMF, 2016) - while each dollar invested in adaptation yields four in benefits (IDB). Resilience rests on financial protection (insurance) and structural protection (adaptation investment), a trade-off to optimise with robust export capacity at the centre. Despite the effort of government at sourcing adaptation finance, a financing gap remains, and the private sector must be incentivised to help - best done through growth - or face higher taxes.

Improving productivity, the business environment, partnerships, climate protection, and innovation requires deliberate government action through smart industrial policy without undermining markets. The most successful governments drive the conditions that enable innovation, operating with transparency, flexibility, and accountability. Such policy spans competitiveness, trade, FDI, training, and upgrading sectors like tourism and SMEs.

Jamaica cannot reach 6-7 per cent growth on its current configuration, dependent on a few foreign-exchange sources led by tourism. Existing industries need not be abandoned but must serve as springboards. The country cannot walk away from inherited structures. Instead, public policy, with the private sector, must create more value in existing sectors and search for new areas of competitiveness. It is not easy, but without it, growth will be far harder to sustain.

Prof. Dillon Alleyne is professor of applied economics and interim director of the UWI-Fiscal Research Centre, UWI, Mona. Send feedback to columns@gleanerjm.com