Running on empty: balancing expectations with reality

Colin Bullock, Contributor

Some three decades and five years ago, an incumbent Government of Jamaica ran a brilliant and hugely successful campaign for re-election. It ran on its substantial record of social reform. Who can forget the political anthem, 'My Leader Born Ya', in which there were exhortations to 'jook dem' wid di Cuban school, micro dam, JAMAL, etc., and that "everyone lawful".

Those social programmes were advanced in a context of weak fidelity to 'fiscal prudence' and the re-elected Government, in early 1977, found itself without official foreign-exchange reserves and juggling between an 'alternative path' of an Emergency Production Plan and the engagement of an IMF borrowing agreement. At that time, our circumstance was attributed almost entirely to external economic factors beyond our control. Nobody who heard it then would have forgotten the brilliant simplicity of Prime Minister Manley's explanation of declining terms of trade. Some years prior, one ton of sugar would purchase one tractor, but in 1977, it required ten tons of sugar to buy a similar tractor.

The Government, despite its claim of continuing adherence to an alternative path, effectively submitted to IMF 'conditionalities'. In a context of sharp adjustment that the populace had not assumed from the successful re-election campaign, rigid and increasing IMF 'conditionalities' and internal violent political conflict against the international backclash of the Cold War, the Government suffered significant political reversal in the general election of 1980.

Jamaica's external debt, which had doubled in the late 1970s, again doubled in the early 1980s. Extremely skilful leverage of Jamaica's geopolitical position (Sir Alexander Bustamante in 1962 had summarily declared that "We are with the West") facilitated substantial foreign-exchange inflows which appeared to have financed consumption rather than investment. By 1983, the public-sector deficit, rather than being reduced from levels in 1980, was now tending towards 20 per cent of GDP. Again, the Government, but this time of a different colour, explained fiscal and macroeconomic underperformance by factors external to Jamaica, and beyond our control. There was an oil-price shock, international recession and a collapse of bauxite-alumina shipments and prices.

imf adjustment

By 1983, IMF patience had run out, requiring extremely sharp adjustment in 1984 and 1985. Prime Minister Seaga, in an act of political courage (some may say foolhardiness), faithfully implemented the adjustment programme, returning some semblance of stability to the economy. This included significant retrenchment of public-sector employment (recommended by the IMF but not implemented in 1979), wage controls and price liberalisation. Following this stabilisation effort and in a context of international economic recovery, there was stronger growth from 1986-1988. This economic recovery was not accompanied by a recovery in Mr Seaga's political fortunes that appeared to have been affected by implementation of sharp adjustment in 1984 and 1985.

Let us now fast-forward to 2011 and the imminent prospect of a general election. There has been a recent change in the occupant of the prime minister's office, but the Government has continued substantially unchanged since September 2007. The Government appears to be running on the freshness and youthfulness of its new leadership, and yet, almost paradoxically, it is also running on its record. Loosely paraphrasing from the Budget speech of the minister of finance in April 2011, we have won the victory of stabilisation and have laid the foundation for growth. More recently, we are being encouraged by indicators of a resumption of and a quickening of economic growth.

The general election of 2007 appeared to have continued a tradition of 'promises to keep' without betrayal to the electorate of the fundamental fiscal resource constraints. This created a need for Government to eventually honour its commitments for public-sector wage settlements and for ongoing tension regarding the affordability and quality of publicly provided health care and education. There has also been the initiation of at least one major expenditure project outside original budgetary provision, weather-related disruption and the cost of the Tivoli incursion.

Government has been variously criticised for slow reaction to the global financial crisis and for weak implementation of the resulting IMF programme. Thanks largely to the IMF itself, the status of the IMF agreement and its missing targets is no longer a mystery. It has been stated unequivocally that the IMF technical team is unable to submit Jamaica's programme to the IMF Board because of inability to say how Jamaica will compensate for significant unbudgeted expenditure and because of lags in implementation of structural adjustment objectives to underpin fiscal and debt sustainability. More recently, on the basis of the stalled IMF agreement, anaemic economic growth and what they regard as political uncertainty, Standard and Poor's has changed its outlook on Jamaica's debt rating from stable to negative.
It is worthy of note that the present Government, like that of the late 1970s and that of the early 1980s, lays the burden of responsibility for its economic fortune squarely at the feet of the unfavourable international economic environment. This is consistent with a self-portrait of flawless internal economic management that will bear fruit as soon as this international environment becomes more accommodating. There is a very real fear, therefore, of yet another electoral engagement with more 'promises to keep' and with the electorate entirely unprepared for the serious challenges facing the nation.

At the heart of Jamaica's economic challenge is the matter of facilitating debt sustainability in a context of weak economic growth. The Jamaica Debt Exchange presented a window of opportunity for undertaking the difficult structural changes in public finance. It was known at the outset of the standby agreement in February 2010 that the windfall of lower debt service would not extend beyond fiscal year 2012-13. Relative to initial programme expectations, the public-sector wage settlement and the delay in implementing structural changes have severely compromised attainment of objectives of fiscal balance and a public debt-GDP ratio of 115 per cent by 2016.

acute policy changes

The immediate policy challenges, possibly put on hold for the widely heralded and anticipated general election, are acute. Government, having facilitated a permanent increase in public-sector emolument commitments relative to the medium-term profile, is being challenged to identify an equally permanent cut in some other expenditure component or a permanent increase in revenue. If cutting expenditure means a continuation of cutting capital, prospects for economic growth will be further undermined. Substantial revenue enhancement compromises the objectives and feasibility of comprehensive tax reform. Desperation for enhanced revenue may run counter to the stated growth-enhancing efficiency objectives of tax reform. At the same time, efforts to increase revenue will raise considerations of balancing efficiency with equity and the possibility of negative social reaction.

Fundamental restructuring of the public sector is still outstanding. The work of the task force was seminally compromised by the absence from its terms of reference of a requirement to interrogate the scope, role and functions of public administration. Accordingly, we are still trying to accomplish the same functions (and some new ones too) with less money. In the context of the severe public financial constraint, this is not feasible.

There is indeed no 'science' in limiting the ratio of public-sector emoluments of GDP to nine per cent. What is true, however, is that recurrent expenditure dominated by emoluments and interest has usually exceeded revenue (borrowing for recurrent expenditure) and is compensated for by savaging growth-enhancing capital expenditure. With public employment being dominated by teachers, health-sector workers and the security forces, there are limited degrees of freedom in reducing public employment. Any such reduction will have financial consequences for Government (redundancy payments) and social consequences for displaced workers.

The imperative for public-sector pension reform, because of its rapid encroachment on recurrent expenditure, is comprehensively documented. There is the option of introducing new rules for new entrants, but unless Government is able to renegotiate the pension scheme with existing public servants, there will be no significant saving in the near term. We do not presume that any such negotiations will be easy or financially nebulous in resolution.

Perhaps the major outstanding issue from the stalled IMF borrowing agreement is the imperative to generate stronger economic growth. The IMF itself has a clearer responsibility for, and understanding of, stabilisation. The initial programme documentation appeared to imply that growth would flow naturally from effective stabilisation. The PIOJ has been carrying a mandate to define a Growtha Inducing Strategy, which is a work in progress. Any growth strategy will, however, be restricted by the severity of the Government's debt-induced resource constraint. This may require Government with narrower scope where limited resources are more effectively prioritised for the generation of economic growth in the near to medium term.

From all appearances, the election of a new government (of whatever hue) is imminent. It would be a tragedy for that government and the citizens of Jamaica, if it assumes power in a haze of euphoria with limited popular understanding of the severe challenges that we must face together as a nation.

Colin F. Bullock is a lecturer in the Department of Economics, UWI, Mona. Email feedback to columns@gleanerjm.com and colinb3@yahoo.co.uk.