The Garment Industry’s Multiplier Effect Of Money Within The CNMI Economy

The Garment Industry’s Multiplier Effect Of Money Within The CNMI Economy

For sometime I have been interested in the contribution of the garment industry to the Commonwealth’s economy, both in terms of what this industry means to government revenues and income for the private sector. Like an iceberg, seven eights of it’s contribution might be said to be hidden. In an attempt to peer beneath the surface, I have examined the so-called “multiplier effect” of this industry on our economy from a very conservative point of view and concluded that it’s contribution is quite significant.

For those unfamiliar with the term “multiplier” it basically operates on the principle that one individual’s expenditure is another individual’s income. The multiplier is a mathematical factor applied to represent one person, or firm’s, payments – or those of a group – which in turn becomes another’s income. The analysis is based on both a high and low factor, both of which have been conservatively estimated. It works like this. When you go to the store with part of your paycheck and spend $50, the store operator may use a portion of that money to pay his rent. The land lord receiving the rent spends part of his income on gasoline.

The service station operator also has expenses to meet such as payroll, utilities and the purchase of fuel stocks to replenish what he has sold. Economists refer to this exchange of money and its circulation within the economy as the multiplier effect. Eventually, money leaves the economy, often in the form of import purchases, vacations, gasoline and anything else purchased off island. Each time money changes hands within the economy it is known as a “round.” At some point a portion of the money is no longer circulating on the island and is “fugitive” – it leaves the island usually in the form of “off-island” purchases, (imports). The first round of expenditures represents the actual expenses related to the garment industry’s cost of doing business. For the 25 garment plants, their combined annual payments direct to the government has been estimated to total $49.6 million, (this is the actual payment – not high or low – which can be documented by the government). As this money is spent by the government, (and it is spent since the government has been operating at a deficit), this “induced” expenditure flowing through the economy accounts for an estimated additional expenditure of $39.9 million.

The total contribution to the government and the expenditures it induces is $89.5 million. The total direct contribution to the economy, both in generating revenues for the government and income for the private sector is estimated to be from $163.3 million (low) to $208.7 million (high), omitting the $79 million in remitted employee salaries. Annual payments by the garment industry for a myriad of goods and services has been estimated to total from $96.5 million, (low estimate) to a high estimate of $119.1 million annually. Considering that a five percent business gross revenue tax, (BGRT), is paid on most of this private sector income, from $4.8 million to $6 million is further generated for the government in BGRT. The entire concept is based on the premise that each level, or round, of expenditures induces further consumption although at a reduced level. Because the Commonwealth is a consumer oriented society and almost all consumption items are imported, the multiplier effect of monetary flows is not as pronounced as in the case of other areas that have the ability to substitute imports with locally produced goods and services and thus retain the money in circulation for a longer period. Finally, one arrives at the last and weakest round of transfers within this economic model.

For purposes of this representation we have elected not to go beyond a fourth round of currency flows to depict an ever diminishing impact which eventually results in much of the funds being fugitive as they leave circulation within the island economy in the form of import purchases and other external payments. Any measure of the multiplier effect is nothing more than an elaborate combination of estimates based on a mathematical multiplier known as a “factor.” To the extent that the “factor” is in error then the calculation will be erroneous. However, hazardous as it is, such estimates are an improvement over the intuitive method which some would employ without any attempt to measure the elements involved. The technique can provide a measure of the value of a particular industry to the economy as well as to the government. The analysis has been developed based on various “factored” formulas which are believed to represent conservative estimates of the various rounds of currency transactions throughout the economy. To avoid being overly optimistic, and in maintaining a conservative approach, low, (conservative) factors were developed to represent even the high estimates presented. The selection of conservative estimates of the multiplier largely negates the possibility of exaggerating the impact of the industry’s contribution to the economy. If anything, the figures are under estimated. Major payments by the industry direct to the government include: $27.2 million in User’s Fees (a form of export tax); $2.6 million in labor and immigration fees; $1/2 million in land lease payments; $4.4 million to CUC; $10.6 million in payroll taxes and $4.3 million in other expenses for a total of $49.6 million. In examining the contribution to the private sector, the annual payroll is $92.9 million.

Assuming industry workers send 85 percent of their wages to their home country there is still $13.9 million in circulation. The direct expenditures of the industry have been estimated as follows: $8 million on freight; $8 million on food; $3.2 million on housing; $3.9 million for air line tickets; $3 million in land lease payments; $2.8 million for repair and maintenance; $2.3 million in professional fees; $1.7 million in office supplies and materials; $1.6 million for petroleum products; $1.2 million for telecommunications and another $7.1 million for a variety of other expenses. The total direct private sector payments are $149.6 million less $79 million in remitted wages, (not in circulation), for a balance of $70.6 million in circulation at the first round. The above is where the multiplier comes in. This is the money that moves through the economy, up and down – in and out. And here it is- the $49.6 million paid to the government increases within the economy as the government spends the money to $89.5 million. The $149.6 million paid throughout the private sector, (less the $79 million remitted and thus not in circulation or $70.6 million available for circulation) increases to $119.1 million (high estimate). The low estimate for the private sector of $70.6 million available increases throughout the economy to $96.5 million. Where did I get the basic information on the industry expenditures for the first round?

From an industry questionnaire voluntarily submitted in a uniform format. I prepared the rest of the analysis from multipliers leading to the forward estimates. I’m sorry there are so many numbers but that’s what it’s all about. If you doubt these data – ask yourself this question. “Am I involved in an activity that does business directly with the garment industry?” If not, then there is no way for you to know how it effects you – but you can be certain that in all probability the multiplier effect does, indeed, effect you in one way or the other.

Compare the above with the 1997 government budget of $163.3 million for 4,551 employees and $74.1 million for other expenses for a total of $237.4 million, not including the autonomous agencies of Commonwealth Utilities Corp.; Mariana Islands Housing Authority; Commonwealth Ports Authority; Commonwealth Development Authority; Office of Public Auditor; Retirement Fund, the judiciary and the legislature. The $27.2 million in User’s Fees paid the government in 1997 represents 3.5 percent of the declared $777 million F.O.B. value of the garments manufactured. I don’t know the cost of imported textiles used to manufacture the clothing, but this information is not needed for this purpose since it is not in circulation within the economy and has no multiplier. The garment industry’s gross income is equal to 35.3 percent of the total $2.2 billion business gross revenue reported in 1996 by all sectors of the economy, (data for 1997 BGR was not available at the time of this report but it is expected to be less than that of 1996). The total estimated contribution of this industry within the economy ranges from a low estimate of $163.3 million to a high estimate of $208.7 million. These figures do not include the $79 million remitted overseas in salaries.