Barbados' lesson for Jamaica

An economic growth strategy that focuses on economic fundamentals (such as balanced budgets and low inflation) may not solve every economic problem a poor country has to face, but it is the best strategy for achieving long-term growth. That's why Barbados is more than twice as rich as Jamaica.

Ian Boyne, writing in The Sunday Gleaner of February 23, 2014, tries to use the current contraction (falling output and rising unemployment) of the Barbados economy to undermine this idea. He suggests that there are lessons for Jamaica in the current stumbling of the Barbados economy. The lesson, apparently, is that adhering to these so-called neo-liberal policies does not inoculate an economy from a possible contraction, so Jamaica should be wary of applying such policies.

Since Mr Boyne specifically associates my name with those neo-liberal policies, I am presuming that he is referring to the suite of policies I have long advocated that focus on the underlying environment for business - balanced budgets, low inflation, good infrastructure, rule of law, and liberal trade (which were articulated on my behalf in a recent Gleaner article), instead of temporary stimulants and winner-picking.

economic fundamentals

The argument in favour of economic fundamentals, though, is not that they ensure that a country never endures a cyclical downturn. Rather, it is that despite the greater exposure to such downturns, the economy grows more in the long run, and the country thereby becomes wealthier. Good fundamentals are not falter-insurance; they are merely growth promoting.

To the extent that Barbados is elevated as an example of good economic policymaking, it is because it has a long history of good fundamentals - smaller fiscal deficits than Jamaica, lower inflation (underpinning the four-decade-long stability of their exchange rate), better infrastructure, and stronger adherence to the rule of law.

As a result of that greater adherence to a sound economic platform, the Barbados economy has consistently experienced faster growth than Jamaica, to the point where average income per person in Barbados is now 21⁄2 times Jamaica's. And this is the gap AFTER the current stumble. Meanwhile, Barbados has avoided state trade monopolies, national airlines, and much of the other folly that Jamaica has wasted public resources on instead of paying attention to economic fundamentals.

A case for this argument, that fundamentals promote growth, can paradoxically be drawn from Barbados' current wobble. The data cited by Mr Boyne himself reveal that this once-admired country has taken its eyes off the prize. The Barbados government's budget deficit was up to 8% of GDP last year, higher than Jamaica's own sorry level, and is expected to hit 10% this year. Meanwhile, their traditional low inflation rate, the pillar of their stable exchange rate, has risen from zero in 2003 to 9% currently.

unattractive domestic production

As an inevitable consequence of this inflation, which affects only domestic production and not imports, is that domestic production has become unattractively expensive compared to imports. When locals (and foreigners, too) cut back on buying locally produced goods, the economy stagnates. In summary, weak fiscal policy (the budget gap) and loose monetary policy (the inflation rate) have undermined the long-standing stability that has underpinned Barbados' previous stellar performance.

So when Mr Boyne argues that "those neo-liberal messiahs who believe that all we have to do is to set our economic house in order and we will have sustainable growth are leading us down the garden path", he is contradicted not only by the historical comparison of Jamaica and Barbados, but also by the experience of Barbados itself, which has let its house get out of order. (He is also contradicted by an enormous amount of international empirical evidence, but never mind that.)

But don't lose any sleep over the fate of Barbados. As Mr Boyne points out, their government is aggressively retrenching - freezing public-sector salaries, cutting public employment, and raising taxes. You may note that those are precisely the actions that three Jamaican administrations failed to take for a dozen years while running large budget deficits year after year. It is that very capacity to quickly right its wayward ship why Barbados will shortly resume its path of impressive long-run growth, and so continue to be the envy of Jamaicans.

Damien King is head of the Department of Economics at the University of the West Indies, Mona. Email feedback to columns@gleanerjm.com and damien.king@uwimona.edu.jm.