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Driving Forces Of The Jamaican Economy

Paper Type: Free Essay Subject: Economics
Wordcount: 5382 words Published: 18th Apr 2017

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The purpose of this research is to do an analysis of the investment setting of the local economy . This will be done through an analysis of the macro economy, industry analysis and company analysis. This research seeks to identify the three industries which have the greatest potential for growth for the period 2013- 2016. From the three industries identified, the industry with the greatest growth potential will be analysed further and a company chosen from this industry for fundamental analysis. The results presented from the research should be treated as conclusive but rather as an hypothesis or best guess for the direction of the economy during the period 2013- 2016.

Economic Analysis is the study of general economic conditions that is used in the valuation of common stock. The macro economy is the environment in which all firms operate and it has a great influence on profits and the firm’s relative performance within the industry.

Driving Forces of the Jamaican Economy

Jamaica is a small developing economy with a lot of potential for growth if resources are used more effectively. Over the years it is evident that the economy has been growing, however, there are areas that seem to be crippling. The major drivers of growth in the economy are agriculture, forestry and fishing. On the other hand it is expected that mining, quarrying, hotels, restaurants and electricity will expand. Over the past years the contribution of agriculture to GDP ranges from 6.5% – 8.5%. If this number is to grow the economy would have to get in the frame of mind of eating what we grow which will help to decrease imports, however exports would have to increase since it would not be beneficial to stop importing but do nothing about exporting. Industries make up 29.5 % and services makes up 64.7% of GDP. The economy depends mostly on services which include restaurants and hotels which make up the greater portion of GDP. However the country generates most of its foreign exchange from tourism and bauxite.

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Although the economy is growing it would be better if there were not so many hindering factors. These factors include crime and corruption, large-scale unemployment and underemployment. Instead of seeing a decline, the economy is experiencing growth in those factors, and these affect the economy negatively. According to a paper on national security it stated “Jamaica has a culture of crime”, this high crime rate in the economy causes there to be fewer investments which results in a slow growth of the economy.

As a small economy with so much potential to grow but little resources and few modern technology there are some corrective measures that should be in place if the economy should grow. According to Paul Allen a business reporter these measures include: embracing competitiveness and taking the necessary measures to achieve and maintain it, companies need to move away from targeting the local market and focus more internationally, make better uses of resources invested in economic activities and adopting policies that encourage innovation and cohesion. In implementing these measures the economy will be sure to see growth. It may not show currently but it will show over a period of time if implemented at the right time and with the right precautions.


Unemployment rate is the percentage of the total labour force that is unemployed but actively seeking employment and willing to work. Decreasing unemployment in Jamaica has always been one of the major economic factors that the Jamaican government have always tried to solve.

The graph [1] shows the movement of unemployment rates between the years 2009-2013. The figures show a gradual increase in unemployment over a three year period and also a forecasted increase over a two year period.

According to the PIOJ in an article in the Jamaican Observer dated August 22, 2012 the economy is going through a transformation in which sectors growing the fastest are the ones shedding jobs due to modernisation taking place. Compared to other Caribbean countries Jamaica has been experiencing the slowest economic growth and the country will continue to face challenges for years to come.

To combat this problem the current government will be maintaining a broadly market friendly policy stance and reducing Jamaica’s high unemployment rate a priority. They have found $4 billion funding for the Jamaican Emergency Employment Programme (JEEP) in the efforts to solve this problem and as such the projections for unemployment for 2012 and 2013 are 13% and 14% respectively.

Interest Rates

Interest rate is a rate which is charged or paid for the use of money and is often expressed as an annual percentage of the principal. The lending interest rates for Jamaica over three years are graphically represented [2] . These figures show a gradual decrease in interest rates which can have both negative and positive effects.

Low interest rates increases borrowing by consumers and thus increase consumer spending, it will prompt investors to invest more in equities and businesses will be able to finance expansions and so on at cheaper rates all of which will help to expand the economy and increase GDP as they can borrow for less money to finance these activities. On the other hand lower interest rates also indicates that persons will begin to save less as they will not be receiving much return and it can also weaken the dollar.

According to Bryan Wynter the Governor of The Bank of Jamaica, He stated in an article dated June 14, 2012 Jamaica will sustain low levels of interest rates. Jamaica is expected to continue stable/decreasing levels of interest rates. Interest rate for Jamaica is currently 17.55% as of August 2012.


Gross Domestic Product is the measure of the economy’s total production of goods and services. Rapidly growing GDP indicates an expanding economy with ample opportunity for a firm to increase sales. The Jamaican economy is heavily dependent on services which accounts for about 60% of GDP.

GDP in Jamaica 2009 was reported at -2.6 % this shows that the level of production in the economy was declining compared to -1.7 % in 2008. In 2010 GDP was -0.6% this contraction was reflected in low economic demand, job losses and reduced disposable income. In 2011 however GDP increased to 1.3 % this was due to improved international economic conditions, particularly in the first half of the year. Domestic demand for goods and services, although weak, continued to improve throughout the year, it was also influenced by sustained growth in remittance inflows to Jamaica. According to the Bank of Jamaica, GDP is projected to be within the range of -0.5% to 0.5%.


According to Mankiw inflation is the overall increase in price levels. Inflation may cause the value of investments to fall. Government deficit and rising cost of productive inputs are causes of inflation in Jamaica. When the government’s expenditure exceeds its revenue, the government is said to be running a fiscal deficit. In order to finance this deficit, the government has the option of either borrowing from the Bank of Jamaica or borrowing from local or international financial institutions or from the general public. If the government borrows heavily from the local sources outside the Bank of Jamaica, it may lead to an increase in domestic interest rates. If the government decides to borrow funds from the Bank of Jamaica to finance its deficit, the process of ‘printing money’ may have to be done. This is not a preferred option as the process usually leads to inflation because it represents an increase in money balances without a corresponding increase in the quantity of goods in the economy, that is, more money chasing too few goods.

Inflation also arises out of increases in the cost of production inputs. The price of any final good or service will depend upon the cost of the inputs used to produce that good. The more expensive the inputs are to the producer, the higher the cost of the product to the consumer. This therefore means that continued increases in the cost of productive inputs would result in continued increases in the price of the good and hence causes inflation. [3] 

According to the Bank of Jamaica the inflation rate in 2009 was 10.2 % which decreased from 16.8% in 2008. This decline was a result of the declining in prices of import commodities and an increase in productivity and output in the agricultural sector. In 2010 however inflation increased to 11.7%, this was a result of domestic weather shocks this included drought conditions and a tropical storm which affected food supplies. In 2011 inflation decreased to 6.0% this was influenced by the impact of excess supply on agricultural prices which means there was a high supply of agricultural produce. Domestic demand also was remained low during this period. Projected inflation for year the years 2012 to 2013 is estimated to range from 10% to 12 %.

National Debt – Debt to GDP

According to Ken Chaplin in an article dated Tuesday November 15, 2011, the country is not doing well when a lot of its economic and financial activities are measured against the GDP for instance the debt.

In 2008 Jamaica had a debt to GDP ratio of 128 percent. Total debt for 2010 was 128.3% of GDP compared with 129.3% of GDP in 2009. The projection for 2011/12 is 122.8% of debt to GDP and the projection for 2015/16 is 95.1 percent of debt to GDP. [4] 

Total debt stock for 2009 was $1,434,755.8 million compared with $1,570,368.30 in 2010 and a projected $1,639,502.5 in 2011. All of these figures broke the debt ceiling of l00 percent. In 2009 the domestic debt ratio to GDP was 68.4%, in 2010 66.1%, and for 2011the projection is 65%.

As far as external debt is concerned, the debt to GDP ratio was 60.9% in 2009, 62.2% in 2010 and the projection for 2011is 57.7%. The government projects that by the year 2015/16 the debt to GDP ratio will be 95.1%, but this is not sufficient. In every respect the extent of the debt is a heavy burden with which the country is struggling to maintain.

Industry Analysis

An industry analysis is an analytical tool used to identify various attributes within an industry. In Jamaica we have many industries, and there success and growth are often dependent on a number of factors. The more common factors considered for an industry include the level and type of technology employed, type of labour force employed, government regulations and the like. The three industries identified in this research paper, are the three industries that the authors of this paper felt had a better chance to do better than all other industries during the period 2013- 2016.

These industries are the financial industry, manufacturing industry and the telecommunications industry. These three industries have shown the greatest potential for sustained growth over the projected horizon.

Financial Industry

The finance sector is regulated by the Financial Regulations Division (FRD) this division deals with the development of the regulatory framework, which influences the operations of the country’s financial sector.

Jamaica’s financial sector is made up of merchant banks, commercial banks, credit unions, building societies that are license under the financial institution act. The sector also includes non-deposit taking institutions including insurance companies, development bank and securities dealers.

The Bank of Jamaica Financial Stability Report for 2011, states that the general financial stability environment in 2011, although remaining stable, was dominated by higher credit risks. The credit risk conditions permeating the financial markets in 2011 were affected by domestic economic conditions pertaining to uncertainty surrounding the status of the Stand By Arrangement with the International Monetary Fund (IMF), deteriorating debt indicators, the delay of other key economic reforms and the less than favourable strength of economic recovery.

It further stated that the annual change in Jamaica’s gross domestic product (GDP) returned to positive growth rates at end 2011. In addition, economic activity appeared to be trending to levels recorded prior to the international financial crisis that started in 2007.

Improved performance was reflected within the financial sector for 2011. Compared to 2010, profitability rose for financial institutions. Increased profits were mainly due to:

activities in the banking sector which realized accelerated growth in the asset base;

continued reduction in risks related to the cost of financing in 2011, despite low aggregate demand and unfavorable performance on interest bearing assets; and

lower market interest rates during 2011, thus generating lower interest expense relative to 2010.

Despite several risks identified for the period under review, the financial sector was adequately capitalized. Two of the major risks were the protracted uncertainty due to the status of reviews of the country’s medium term programme by the International Monetary Fund; and the evident increase in Non-Performing Loans, specifically to corporations.

This industry is driven by technology, as is evident from the various machines utilized by the various financial institutions to ensure the continued operations of its business. This technology includes internet banking and telebanking facilities which allow customers to shop and pay bills from the comfort of their own home.

Manufacturing Industry

The manufacturing industry is comprised of any and all organizations that engage in production activities. In view of this definition, this industry would include organizations involved in food processing such as Grace Foods and Lasco Manufacturing, outdoor signage companies such as National Outdoor, furniture making companies and the like.

The manufacturing industry, also known as the secondary industry, employs a lot of labour especially unskilled labour which is used to produce the wide variety of manufactured goods found within our local economy. Technology is also employed to this sector to aid in production but, the industry remains very labour intensive and is the main source of income for many within the local economy. The contributions made by the manufacturing industry as showed steady declines since 1990 at 21.3% to 8% in 2011. The importance of this industry is however underscored by the president of the Jamaica Manufacturing Association as the largest contributor to GDP of all the goods producing sector.

This industry is regulated by the Jamaica Manufacturers Association, which is responsible for ensuring that companies within this industry are properly licensed to do business and also acting as an agent of the government on behalf of the stakeholders of this industry. Since the Jamaica debt exchange in 2009, businesses and individuals who formerly depended on earnings from government debentures have had to shift their focus as they desire to gain greater returns on capital. The industry has benefitted from this has some manufacturing businesses have sought to increase their capacity, and in so doing generate more income. (Edwards, 2010)

The major players in this industry enjoy greater market share and economies of scale. Nevertheless the industry is not yet saturated and more and more players are entering the market with a view to earning income and gaining greater market share. There are little barriers to entry within this industry and it has become a worthwhile alternative employment for those who did not benefit from an acceptable level of secular education.

In recent times the financial stability of Jamaica seems to be hinging on an IMF deal. As a result vision 2030 which is a mandate of sorts for growth in the manufacturing industry has taken on greater meaning. It is the desire of the government to see this industry expand it capacity and export more and import less. (Edwards, 2010)

Telecommunications Industry

In 1986 LIME then known had Cable and Wireless Jamaica enjoyed a monopoly position within the industry. This was however sanctioned by an act of parliament, and in 1999, CWJ was asked to give up their monopoly status and liberalize the market. (Country Profile Jamaica, 2007) By the end of 2005 Jamaica was described by the International Telecommunication Union (ITU) as having the highest usage of cell phones than any other country within the American region.

The Jamaican mobile sector which includes companies such LIME and Digicel are credited with the extensive growth in the telecommunications industry, despite the global recession during the periods 2007-2011. According to (Business Wire, 2011) the mobile sector is poised for strong growth during the periods 2011- 2016. Factors contributing to this projected sustained growth are the 3G and 4G deployments by the mobile sector.

As noted by (Country Profile. Jamaica, 2007), in 2007, Digicel was market leader with a customer base of 1.7 million Jamaicans and LIME followed with a customer base of 700,000. In the ensuing years there have been slight fluctuations, but Digicel remains as market leader.

The telecoms industry in Jamaica is regulated by the Fair Trading Commission (FTC) and the Office of Utilities Regulation (OUR). The fair trading commission asses the market and ensures that as companies within this industry interacts fairness exists and that no entity is able to cause negative impacts to other players in the market. The Office of Utilities Regulation focuses on the interaction between industry players and the consumer society. At times they may set rates for service providers or approve rate increases. However, as a result of the competitive nature of this industry, there is not much if any interference from the regulator in this regard.

As mentioned before there is a high level of competition within this industry with the major competitors being, LIME vs. Digicel, LIME vs. Flow, LIME vs. Digicel vs. Flow, and offcourse the list goes on. Success in this industry is however dependent on technology employed and the corporation with the greatest investment in technology is poised to see the greatest return on investments.

In Depth Analysis of chosen Industry (Manufacturing)

In the view of the members of this group, the manufacturing industry is positioned to do better than the other two industries assessed during the periods 2013- 2016. Our decision was drawn from past and present activities within the economy and we hypothesize that the manufacturing industry will be the leading industry at the end of the projected period.

Manufacturing in Jamaica has grown from small beginnings to the well oiled machinery that now exists. In times past it was about trial and error. Bringing things to the market and hoping that sales would be made. This industry is however faced with the reality that it does not have unlimited resources for trial and error. As a result, corporations within this industry have diversified to gain greater economies of scale. Within this industry we have food processors. Leading in this area are companies such as Jamaica producers, Grace Foods, Lasco Manufacturing, Polyfoods and offcourse the list goes on. We have beverage companies such as Pepsi, Jamaica Beverage, Wysinco, Grace and still others. Not to be outdone is the industrial giant Tankweld Metals which produces all type of steel to be used in the construction industry. Time would not allow us to go into every sub sector within this vast and expanding industry.

This industry benefits from various government concessions as an inducement to ensure sustained growth of the sector. In the vision 2030 that was drafted, the manufacturing industry was viewed as a critical area that the government would be looking to make investments in to ensure growth of the sector, through its manufacturing task force (vision 2030, 2009).

As noted by (Country Profile Jamaica, 2005), the manufacturing industry is the second largest contributor to GDP growth. Despite this second place status on the issue of GDP growth, the industry is still growing and there are incentives available for growth which underlay the potential for it to become an industry leader during the projected period.

A recent occurrence that has had a negative impact on the manufacturing industry includes the recent passing of hurricane Sandy. Hurricane Sandy has washed away crops, blown down structures and damaged parts of some factories. This has caused setbacks within the industry and may inevitably lead to increases in cost of products produced. However in times past, these situations have levelled off and normalcy returned. Similarly the effects of Sandy will be a thing of the past.

Social Influences

The manufacturing industry is impacted by the need of many to have employment in order to support their families. Many secondary school graduates first job is in the manufacturing industry as unskilled labourers. There they have an opportunity to learn industry relevant skills that will benefit them in later years. The Manufacturing industry however is not to be viewed as a day-care centre for the nation’s youth. It is in fact a very well paying industry for those who have qualified themselves in that area through skills training or tertiary learning. The success of this industry will inevitably depend on those individuals with new knowledge and innovative ideas to keep it moving forward. A very important part of the economy is growth in gross domestic product. The more developed this industry becomes, the greater will be GDP. Of special note also is the fact that the manufacturing is the single largest employer of human labour.

Technology Employed

Like other industries, the manufacturing industry is aware of the benefits derived from the use of technology in its operations. The use of technology in this area is complemented by human labour, the two works hand in hand. In times of long ago, the adage “many hands make work light” had real meaning. It took many hands to get things done at that time. In this modern economy, the usage of technology has increased capacity within the various companies within the manufacturing industry. As a consequence many have had to learn how to operate and maintain these machines in order to secure their employment within the industry. Others have left to find their place in other industries such has the service industry. It is with the aid of technology that firms within this industry can gain economies of scale. These include industry giants such as Grace Kennedy, Lascelles, Lasco and much more.

Regulatory Environment

In Jamaica, there are incentives to be gained from the government if the thing being produced is deemed to be in the national interest (Chen-Young). Government officials have on numerous occasions spoken about the need for Jamaicans to capitalize on the benefits that can be gained from producing more and importing less. Linked to its national policy, we are admonished to be self sufficient to the extent possible.

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On a more serious note we have the Bureau of Standards, This institutions sets the standards that must be met for goods that are to be used by the public (bsj.org.jm). In the case of building blocks built by Carib Cement, there is a certain level of pressure that each block should be able to withstand before it breaks. The standards set by the Bureau are in the best interest of the nation and they are not burdensome to implement.

Forces Driving Competition

Mr Porter identified five forces which drive competition within an industry, these are also known as Porter’s five forces. These are the; bargaining power of buyers, bargaining power of suppliers, threat from potential entrants, threat from substitutes of products or services, and intense competition among existing companies within an industry.

Bargaining Power of Buyers

As a result of the buyer’s knowledge of the market and the competitors thereof, the buyer is able to make demands on the business. Buyers are more sensitised to the various facets of the manufacturing industry and the many niche markets that have sprung. The buyer therefore has the option to shop around and get the best deals.

Bargaining Power of Suppliers

Suppliers are aware that they do not have a monopoly market on raw materials needed by companies within the manufacturing industry. As such suppliers seek to form partnerships with companies in order to secure further business. As such the bargaining power of suppliers is moderate.

Threat from Potential Entrants

Threat from potential entrant is low. This is because a sizable investment is needed to enter this market and not everyone can afford to set up shop and manufacture their own goods to be sold to consumers.

Threat from Substitute Products

There is a high level of threat from substitute products. As a result the consumer can go elsewhere if not satisfied with what is being offered for sale. This forces the company to be sensitive to the needs of consumers since there needs can be filled elsewhere which would result in a loss of revenue.

Intense competition among existing companies within the industry

There is intense competition within the industry, with the exception of those that operate as monopolies. In every subsector of this industry, there is intense rivalry and the consumer only stands to benefit. Those that have however established themselves within the industry see favourable returns despite the intense rivalry. These companies include Pepsi and Wysinco from the beverage sector.

Company Analysis

The company chosen from the industry that is believed to outperform the other two industries is Lasco Manufacturing. This company exists as a major player within the food manufacturing sector of the manufacturing industry despite being quite young when compared to its major competitors. It has as its vision, “to become a global corporate leader through innovation and entrepreneurship”.

Lasco Manufacturing came into existence as a consequence of a decision that was made to reorganize the Lasco companies in the year 2010. The board of directors entered into and amalgamation agreement which in effect led to Lasco Foods being made responsible for its own activities the name was thereafter changed to Lasco Manufacturing.

The chairman for the Lasco manufacturing company is Mr. Lascelles Chin; he is also the founder of the Lasco Affiliated Companies. A recipient of the Order of Jamaica for the work he did in the development of commerce in Jamaica. This man along with his qualified team of directors and committed staff are positioned to take this company to new heights during the projected period of 2013- 2016.

Economic and Industry Influences

Lasco Manufacturing, like all other business are affected by the economic climate. The countries inability to secure an IMF deal will result negatively on its operations as it relates to its importation of raw materials for its business. The countries net international reserves are getting low and this may lead to further downgrades in on Jamaica as a place for doing business and Lasco Manufacturing will be affected.

The recent passage of hurricane Sandy left damages that the government is still paying some of which will remain unchanged. Many manufacturing companies including Lasco Manufacturing were affected by Sandy. Food prices are expected to rise and this company will not escape this reality if it comes to fuition. The economy has been in worst state before and was revived, the authors of this paper are confident that normality will return to Jamaica and this company will continue to thrive.

There has been an influx of brands which are rival to our company under consideration. However the Lasco brand is an household name and as a result still enjoys a favourable position within the market. The company however has to maintain a strategic focus because not all consumers will be loyal to a brand and as the consuming public become more educated and aware they will make greater demand on the producers of goods and services.

Structural Influences

Firms Competitive Strategies

SWOT Analysis

A SWOT analysis is a tool used to make an assessment of the strategic position of an organization. This assessment is used as a guide to position or reposition the organization in a profitable direction, taking into consideration availability of resources.


Dominates the powered milk market.

Well recognized brand locally.

Company is more distribution oriented; this is positive considering the high manufacturing cost in Jamaica


Products have a stigma of being low ended.

Concentration in one product type; milk powder.

Low regional diversification, revenues are concentrated in Jamaica.

Alliance between chairman and managing director.


Tax break from listing on the JSE for the next 10 years.

Stronger profit growth to fund retooling and business expansion.


Though Lasco benefits from weak demand, continued weakness in the Jamaican economy could impact them.

Favourable Attributes of the Firm

Generally, the favourable attributes of a company look at its unique qualities or characteristic that makes it the preferred choice for its customers and it is this same uniqueness that lures its potential customers. The major qualities or characteristics that contribute to a company’s favourable attributes are its competitive advantage, exceeding management styles and market leadership. Competitive advantage can be further subdivided into differentiation advantage and cost advantage. Differentiation advantage is when the company offers superior product and services at the same price in the market. In contrast, cost advantage is when the company offers the same goods and services like its competitors but for a lower price. Above average management speaks to the level of managerial approach which is used within the company and it also looks at the level of mentorship that the existing managers can provide to the next generation of managers. The attribute of market leadership gives an overview of the overall marketing styles which the company uses to builds its reputation and thus making it a priceless entity. ( Annonymous, 2008)

Now when we use the definition of favorable attribute to scan Lasco manufacturing limited it was observed that it portrays numerous qualities which contributed to its uniqueness. In the first place, it can be seen that Lasco’s attribute of competitive advantage exemplifies a cost differentiation style in which it offers a variety of low price products on the market. The majority of these products which they offer are a part of the food basket of the average Jamaican consumers and so they have created a guaranteed market in that spectrum. This attribute has branded Lasco products as ‘cheap’ and therefore gives them a huge competitive advantage among some of the major manufactures in Jamaica such as Seprod Ltd, Nestle and Grace Kennedy


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