From the exchange rate to economic growth - Part III

... Competitiveness, labour productivity and economic growth

David Wong, Contributor

Before I continue the discussion, let me remind readers that what I am talking about is the problem of how to grow income faster than planned expenditures in order to improve the living standards of the people of Jamaica and stabilise its exchange rate. The online comments of several individuals on Part II appeared to have confused this problem with that of merely growing income.

However, remember that Jamaica's own recent experience, prior to the present Great Recession, shows that even if its national income grows at one or two percent a year, problems such as raising the living standards of its working people and stabilising its exchange rate won't be solved.

The fact is that any real prospect for sustained improvement in the lot of the Jamaican working people so as to meet their aspiration for a better life for themselves and their children requires steady growth in labour productivity. So, the question before us is the following: How is labour productivity determined in a capitalist economy and how can it be increased? Labour productivity is output per unit of labour time. It is ultimately under the control of employers in their establishments. Modern capitalists are interested in increasing labour productivity because that is one of the major sources of their profits in an ever more competitive global economy. Unit production cost varies inversely with labour productivity, and market price is necessarily driven down to the level of unit cost in a competitive global economy. In order to be a competitive commodity producer on the global market, unit production cost has to be reduced. Also, since the profit rate tends to fall as competition intensifies, a firm must increase the productivity of its workers, i.e., get more work out of them for each hour of work, in order to keep up its profit rate.

Labour productivity is basically determined by factors such as: the level of technology and organisation, the physical capital employed in production; labour time, including the skill, training, and ability of workers; the legal, moral, and (cultural) institutional constraints on the capitalists; the state of the class struggle between capitalists and their workers; and the state of the struggle between the capitalists themselves, especially those in the same and related industries. In a basic sense, every capitalist is in competition with every other capitalist along a wide spectrum of dimensions such as access to finance, raw materials, skilled labour power, etc., no matter what specific industry the individual capitalist may be engaged in, or where the individual capitalist may be located around the globe. In essence, globalization of capitalism has generalised the competition between capitalists among themselves and spread the conflict between capitalists, on one side, and workers, on the other side, across the globe in the struggle over the organisation of commodity production to generate profits, and accumulate profits as capital.

Capitalist economy

In this new competitive global capitalist economy, reducing unit production costs is an imperative for all capitalists around the globe. Because Jamaica uses mainly labour-intensive production techniques, and labour costs are a large component of overall costs, if wages cannot fall to Chinese level or lower, then other costs such as interest and energy costs must fall and labour productivity must increase in order to achieve competitiveness. Given the extent of unionisation and workers' natural resistance to wage cuts, increasing labour productivity is going to be the main way of reducing Jamaica's commodity prices and increasing the competitiveness of its products.

Increasing competitiveness is clearly a major factor determining Jamaica's international trade balance. The more competitive the country's exports are on the global market, the more it can expect to export. Moreover, imports may also be reduced as Jamaicans substitute competitive domestic products for similar imported ones. Other things being equal, a more competitive economy will boost exports, reduce imports, and improve the trade balance. Reducing the trade deficit and increasing foreign investments in the country are the main ways to relieve pressure on the Jamaica dollar to depreciate, and to stabilise the exchange rate.

The competitiveness of Jamaican products is basically determined by the ratio of its commodity prices to the US prices for similar goods multiplied by the Jamaica dollar price of a US dollar-the exchange rate. When the Jamaican dollar depreciates, the competitiveness of its products increases because the denominator of the competitiveness ratio increases. As Jamaica's products become relatively cheaper than similar foreign products, consumers at home and abroad substitute the cheaper products for more expensive ones. However, the Jamaica dollar cannot be depreciated indefinitely in order to increase the competitiveness of its industries, since that amounts to giving away Jamaica's goods and the embodied labour of its workers, which makes no sense if improvement in the standard of living of Jamaicans is the objective of economic policy. The only sustainable way to improve the competitiveness of Jamaica's industries is, therefore, to reduce the prices of their products.

Competitiveness

Pegging the exchange rate cannot improve the competitiveness of Jamaican products if its commodity prices are too high due to a combination of high labour costs, prevalence of labour-intensive production techniques, and resulting low labour productivity. Whatever merits a pegged exchange rate may have, improving competitiveness of Jamaica's industries is not one. Moreover, unless competitiveness is improved continuously, Jamaica's national income is not going to grow very fast. Ultimately, sustained improvement in the standard of living of Jamaican working people requires sustained improvement in labour productivity and the resulting increased competitiveness of its industries whether they are export-oriented or import-competing.

Increasing labour productivity is a contradictory process. It is of grave concern to workers, because they are the ones who must ultimately bear the suffering and pain associated with increasing productivity. It is workers who are required to become one with the machines, tools, computers, and so on that are ever changing due to the relentless intensification of capitalist competition, and the requisite technical and organisational changes that result. It is workers who have to adjust to the constant reorganisation of their work processes, by attending training seminars and workshops, and to do other on-the-job or off-the-job training that are aimed at improving their productivity by speeding up their work, but which mainly results in driving them nuts and alienated from themselves at the end of the day.

Nevertheless, it is through steady improvement in labour productivity and getting more output per unit of labour time that the economy's income can increase on a sustainable basis, and the living standards of workers be improved in a capitalist economy. This fact provides the basis for organised workers and their employers to negotiate over the contentious matter of increasing labour productivity, by agreeing on how employers and employees should share out the increasing income made possible by productivity growth. Generally, government will need to facilitate these types of agreements.

Economic growth that results from improving labour productivity is called intensive growth. It differs from extensive growth, which increases income by doing more of the same things in the same way by using more production inputs. The economy needs both types of growth to succeed in producing jobs and a larger and faster growing income that can outpace net population growth in the country, and raise the per capita income of its people. Intensive growth, by itself, is generally labour-replacing, so extensive growth in the scale of business operation is necessary for job growth. This will require Jamaican firms to produce for the global economy in areas where the market is expanding.

Contradictions

So-called import-substituting production for the local market, based upon labour-intensive production techniques, is not going to allow Jamaican industries to achieve the type of economies of scale and scope that are required to moderate the contradictions in the process of raising labour productivity. No purely inward-looking strategy for developing capitalist production can work in a small country such as Jamaica in the present globalised capitalist economy.

If the objective of economic policy is to raise the living standards of the Jamaican working people, it is nothing but misplaced nationalism to seek economic growth by looking inward to find growth poles. The only viable path for developing the Jamaican economy today is to integrate it into the expanding global division of labour of global capitalism as a competitive entity. This is exactly what the so-called emerging market economies of China, India, and Brazil are doing, and what many other less developed countries are trying to do.

The discussion to this point raises the important question of whether or not the capitalist class and the state in Jamaica are up to the task of integrating the economy into the global capitalist economy and managing the inevitable contradictions that attend this process. In Part IV, I'll address these and other related issues.

David Wong is a professor of economics at California State University, Fullerton, and a participant of the Caribbean Dialogues forum moderated by Trevor Campbell. Feedback may be sent to dwong@fullerton.edu or columns@gleanerjm.com

CAPTION: Because Jamaica uses mainly labour-intensive production techniques and labour costs are a large component of overall costs, if wages cannot fall to Chinese level or lower, then other costs such as interest and energy costs must fall, and labour productivity must increase in order to achieve competitiveness. - Contriibuted