PIOJ Growth-Inducement Strategy - Planning Institute of Jamaica

Chapter 7
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Resolving the Supposed “Puzzle” of Low Growth Rate
and High Investment Rate in the Jamaican Economy
Donald J. Harris
Professor Emeritus of Economics, Stanford University
1.0 The Problem and a Proposed Solution
A number of authors have pointed to a supposed “paradox”, “anomaly” or “puzzle”
concerning the persistence of a low growth rate of GDP in the Jamaican economy
accompanied by an apparently high rate of capital investment. In the absence of an
acceptable resolution of this problem, it remains an open question as to what set of
economic policies might be considered appropriate and necessary to deal with the
economic situation prevailing in the country today.
This paper seeks to provide an explanatory framework that helps to resolve this seeming
puzzle. The broad aim is to place the discussion of this problem on a more rigorous
analytical level and, at the same time, to sharpen the focus on the policy issues involved.
Accordingly, the paper presents an analysis that identifies a specific set of conditions
which may account for the coexistence of slow growth and high investment as a
necessary outcome of those conditions. Simply stated, the answer to the puzzle proposed
here is that the effective rate of investment is lower than it might appear to be from
observing the measured rate of investment, and lower than it could conceivably be under
ideal conditions. It is argued that this result is not only, if at all, the possible consequence
of measurement errors but also, and more importantly, the consequence of specific,
identifiable, and quantifiable conditions prevailing in the economy. In particular, these
conditions are: (a) the chronic state of fiscal balance, (b) underutilization of productive
capacity, (c) economic waste of capital, and (d) concentration of capital investment in
highly capital-intensive sectors and economic enclaves.
On this basis, the analysis provides some key indicators for focusing policy geared to
improving growth performance of the Jamaican economy.
2.0 Capital Investment as the Driver of Economic Growth
In approaching this issue, it is necessary to start from a base of conceptual clarity
grounded in a relevant theory of the growth process. In this connection, it must be noted
that the basic and implicit assumption which motivates the notion of a puzzle in the
record of Jamaica’s economic-growth performance is the idea that there exists a positive
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