Can Jamaica's record of performance be salvaged? (Part 3)

Edward Seaga, Contributor

For the past 35 years, the Jamaican economy has been experiencing severe external stress and internal strain on a sustained basis, except for the last half of the decade of the 1980s. The causes were grossly inappropriate fiscal and monetary policies, unexpected increases in the price of oil, dramatic reduction in bauxite and alumina earnings, and reckless political adventures in the 1970s.

Economic growth in the 46 years since independence, dwindled drastically from robust levels in the 1960s, to sustained negative growth in the last eight years of the 1970s, regaining strength in the closing half of the 1980s, before returning to a pattern of negative growth, little growth or no growth to the present time.

During the post-independence period covering nearly 50 years, fiscal expenditure was in excess of domestic revenue for 35 years and foreign-exchange current outflows were less than current receipts for every year except 1988, 1992 and 1994. This necessitated huge increases in the national debt to close the resulting gaps, positioning Jamaica in the exclusive category of one of the three most indebted nations in the world.

Critical measures

These are critical measures of the economic barometer of any country. In the case of Jamaica, the pattern of these decades has been one of an intractable failure to deal with domestic and external deficits, resulting in the build-up of chronic debt. These conditions are characteristic of a prolonged recession.

The conclusion can be drawn that Jamaica has been experiencing recessionary conditions for at least most of the last 40 years. The current global recession is, therefore, really an overlay of this long-standing underlying recessionary condition. This positions Jamaica in a unique situation in that the support from the International Monetary Fund (IMF) which other countries will receive to close current recession-driven gaps would be, in Jamaica's case, only sufficient to deal with the overlying crisis, not the historic underlying recession, because of insurmountable deficits.

It is essential to view the future through the perspective of the dynamics of inadequacies of insufficient inflows and excessive outflows in both internal and external accounts.

Over the decades, Jamaica has tried different economic strategies to lift the country to prosperity. Growth in the 1950s and 1960s was strategised to create employment by inviting investments which would be encouraged through incentives. In the latter part of the 1960s, the result of a cost-benefit study by Paul Chen-Young showed that the cost to the state in revenue and foreign exchange exceeded the benefits to the economy by a ratio of 53:47. Jobs created by this strategy was relatively minimal. The major benefits of the period flowed from policies of quantitative restrictions and prohibitive protective import tariffs, not import substitution. These produced significant growth and reduction of the unemployment rate.

Not sustainable

But the strategy, however, failed to produce goods cheap enough, or sufficiently attractive to consumers. It was, therefore, not sustainable.

The following decade saw a radical shift to what Michael Manley called, "democratic socialism." This was sold to the people as "love", a concept reinforced by huge unaffordable expenditures and a budget-busting free-education scheme.

There was a significant increase in employment through costly make-work schemes which soon had to be discontinued. This increased the impact of the rising unemployment created by growing uncertainties in the private sector. A drift to fiscal bankruptcy ensued which was made worse by a flight of foreign exchange, reducing the reserves in the Bank of Jamaica (BOJ) to a negative balance for the first time.

Little help

The considerable increase in revenue and foreign-exchange earnings, which flowed from Manley's renegotiation of the bauxite levy in 1973, was of little help as the dramatic threefold increase in the cost of oil in 1974 ($1,236 million) had to be met from the increase in bauxite earnings ($1,106 million).

The democratic socialist strategy was, as a consequence, another failure.

In the 1980s, the economy was liberalised as a new strategic initiative. This required, among other things, removal of import controls and price controls, except for a few indispensable essentials in each case. The elimination of each control was carried out without disruption to the economy, by choosing the correct time to implement the decision. Restoration of economic growth in 1981-83, the first positive outcome in a decade, made a significant contribution to the turn-around of the economy from the perennial negative growth of the 1970s.

But what was termed the worst recession of the previous 50 years since The Great Depression, clobbered the Jamaican economy in 1984 and 1985, wiping out, over the decade, 44 per cent of revenues and 36 per cent of foreign-exchange earnings as a result of the virtual collapse of the bauxite/alumina industry.

Prompt decisions to implement severe expenditure cuts and to introduce successful new foreign exchange earning prospects were carried out. These two initiatives worked hand-in-hand with the IMF and World Bank programmes to help lift the economy out of its depressed state, returning to positive growth in 1986.

There was one further policy initiative to be taken to move the economy forward. Repeated depreciation of the exchange rate of the Jamaican dollar, which the IMF deemed to be essential to restoring growth, was initially successful in restoring a true value to the Jamaican currency. But by the mid- 1980s, having achieved this parity, the strategy of depreciation was no longer necessary. Further depreciations caused increased cost inflation without adding any improvement in foreign-exchange inflows, since, traditionally, all the major foreign exchange earners (tourism, bauxite/alumina, export garments) were already denominated in United States dollars. I told the IMF that their policy, while initially useful, was now counter productive and impeding the recovery process.

Serious confrontation

This confrontation became serious. I threatened to withhold certain payments to the IMF until they relented. After a drawn-out period of several months, the IMF gave way, discontinuing the depreciation of the rate of exchange, allowing Jamaica to peg its exchange rate at J$5.50: US$1. This was done in January 1987, and the economy took a sharp upswing. Significant growth followed from 1987 to the end of the decade, averaging four per cent per annum, except for 1988 when Hurricane Gilbert reduced growth to a lower level.

With the removal of import controls, price controls, and the pegging of the exchange rate, a combination of growth stimuli were in place to restore sustained economic health which had occurred in the last half of the decade.

However, one more restriction had to be removed to allow the economy to be fully liberalised - certain exchange-control provisions had to be rescinded to allow foreign exchange to flow in and out of the country freely. The Bank of Jamaica was reporting an improved net position of US$100 million annually. On this basis, the BOJ would have restored the international reserves to a positive balance by 1994.

With the change of government in 1989, Manley resumed leadership. He declared that socialism was "dead" and immediately allowed himself to fall under the IMF spell because of his lack of experiences with the market system economy. He made two decisions which unravelled the controls to keep the exchange rate stable.

Bad timing

An essential component of the strategy was to maintain a stable exchange rate, at least until the BOJ could wipe out its negative reserve balance and create some surplus. This was targeted for 1994. Manley, removed the foreign exchange auction system designed by the BOJ in 1987 to control the pegged rate at J$5.50. This allowed the exchange rate to zoom from $5.82 in February, 1989, to $13.76 in September, 1991, when he panicked.

With IMF prompting, he removed exchange-rate control over the free movement of foreign exchange, having been told that there would be more inflows than outflows which, of course, would strengthen the Jamaican dollar. I tried to convince Manley that the time was not right and that the opposite would occur. The BOJ had to accumulate a net surplus in its reserves to weather the outflows before taking this step. He did not take my advice.

In the first three months after the September enactment allowed the dollar to move freely, the exchange rate zoomed from $16.87 to $21.57. These were early reversals that within the next two years, rocketed to levels which caused an unprecedented meltdown of the economy and economic chaos. Forty financial institutions collapsed, including major banks and insurance companies. This set the stage for the negative growth, little growth, and no growth that followed for the next fifteen years to the present.

With this dismal background, a new initiative would now be urgently required to put the economy back on track with a record of meaningful growth where it last was in the late 1980s when a pegged exchange rate was in place.

Edward Seaga is a former prime minister. He is now the pro-chancellor of The University of Technology and a Distinguished Fellow at the University of the West Indies. Email: odf@uwimona.edu.jm or columns@gleanerjm.com.