Ian Boyne | Necessary but not sufficient
The International Monetary Fund (IMF) chief, Madame Christine Lagarde, one of the most powerful persons in the world, flew into the island last week for a high-level Caribbean forum amid fresh concerns about public-sector layoffs and a showdown between the Government and public-sector unions.
Public-sector workers have been holding strain for a number of years, and have not had any significant increases in quite a while. They don’t seem to be in the mood for any further belt-tightening.
The public-sector has been the elephant in the room for decades. But it’s an elephant no one wants to disturb, and successive governments have kept staring away from that elephant’s gaze. The IMF understands the Government’s dilemma and notes that in its 70-page second review issued recently. It says bluntly in its review: “Ongoing wage negotiations and the need to rationalise public-sector employment have the potential to create tensions as the Government makes difficult social choices about the best use of its limited resources.”
Further, the Fund urges that “the ongoing wage negotiations need to be accelerated and managed carefully to preserve social cohesion while achieving the Central Government wage bill target. The still-high public-sector wage bill continues to crowd out other spending given scarce public resources. There is need to right-size the large and inefficient public sector, exert better control over wages and allowances (including as part of the wage negotiations) … .”
GOVERNMENT's HANDS TIED
The Government’s fiscal hands will be tied this time, as it seems the IMF is not going to allow any dilly-dallying by this administration on the matter. I put that issue starkly to the IMF chief when I had the exclusive interview with her last week. This was some heavy lifting, she acknowledged, which needed to be done by the Government.
The IMF is quite cognisant about our political realities, and Madame Lagarde noted in her address to the public forum on Thursday morning that “politics and electoral cycles can have a strong impact on fiscal policies and economic outcomes — a phenomenon that has been observed around the world and has also played a major role in shaping economic development in the Caribbean”.
She went on to note - and I am sure to warn, with Prime Minister Holness in the audience - that, “Too often, promising reforms have been cut short by policy reversals driven by political pressures.” As she told me in that interview, she herself, as a former politician, understands those pressures and dynamics. Her team’s second review paper also warns that growth setbacks, “combined with high crime”, could generate “policy reversals and erode social support for difficult structural reforms”. Among the important structural reforms, the paper repeats, is a “much-needed overhaul of the public sector, which is already facing operational bottlenecks”. Public-sector rationalisation is clearly The Next Big Thing in the IMF reform programme.
How the Government navigates this will be its next major test. The IMF, in its second review paper, gushes, “After more than four years of difficult reforms, Jamaica’s programme implementation remains exemplary … . Strong domestic ownership of the reform agenda across two different governments and the broader society has helped entrench macroeconomic stability and fiscal discipline. The authorities’ sustained commitment, coupled with the ongoing programme monitoring by civil society, has paved the way for reforms to be increasingly domestically owned, designed and executed.”
Jamaicans have really made enormous sacrifices in the quest for macroeconomic stability, and our two political parties have accepted the IMF path to salvation. Despite the political rhetoric, there is significant consensus between PNP and JLP on economic strategy. And both parties know, while the Opposition could not let this golden moment to oppose slide, that the public sector has to be rationalised, with some people losing their jobs.
But the IMF is also recommending reforming the allowances of those who remain, which will no doubt cause some uproar among those who receive them. The IMF says there are 174 different types of allowances. Compensation allowances total two per cent of GDP, and a further one per cent is disbursed for travelling allowances. The IMF observes that, “In the past, allowances have been used as a means to reach agreement on public-sector employee compensation.” An interesting example is given of the inequities in allowances given to public-sector employees. For example, those working in legal and judiciary services average over $2 million in housing allowance per person (an eye-opener of me as my daughter went on the Bench this past week), while the same allowance for eligible Central Government employees averages about $94,000 per person.
The IMF says, “Some allowances appear to raise wage costs without clear motivation for their existence. For instance, the sizable overtime payments made to health-sector workers could imply that increasing the number of permanent staff may actually be cost-saving.” The second review report makes it abundantly clear that the IMF will be looking to the Holness administration to stop talking and start acting on public-sector right-sizing.
CARIBBEAN AN ECONOMIC LAGGARD
As we discuss economic strategies for Jamaica, a book just launched here last Friday should help with the discourse. Titled Unleashing Growth and Strengthening Resilience in the Caribbean, the book provides rich data in a variety of areas. (I was, thankfully, provided with an advance copy by the IMF.) The 3,634-page book makes the point that the Caribbean has been an economic laggard compared to other regions.
Interestingly, the book frankly acknowledges the external factors that contribute significantly to the Caribbean’s underperformance. Growth in the Caribbean has been 2.1 per cent since 2000, half that of emerging market and developing economies and two-thirds of that of non-Caribbean small states. Even in tourism, the region is lagging behind other regions, with our market steadily falling over the past 20 years. Part of the robustness of data is information provided on just how uncompetitive Caribbean tourism is in pricing. Our vacation costs are high, as is known by any Jamaicans who vacation here.
The chapter ‘Fiscal Challenges in the Caribbean: Coping with Natural Disasters’ is most interesting. It shows that since 1950, there have been 324 natural disasters in the region, killing almost 250,000 people and exceeding US$22 billion in constant dollars between 1950 and 2016. The Caribbean suffers disproportionately more from natural disasters than any other group, including other small states. The book acknowledges the adverse effects of natural disasters on economic growth.
This is one IMF publication that makes it clear that a country has to do more than just get its fiscal house in order. The international environment has to be hospitable to national development. This is why the policies of multilateral institutions like the IMF are critically important and why official development assistance needs to be increased.
Some kind of special debt-relief programme needs to implemented by the multilaterals and the international community, similar to what was done with the Heavily Indebted Poor Countries (HIPC) in Africa, which helped the continent significantly to reduce its debt. Cyrus Rustomjee, in his paper for the Centre for International Governance Innovation titled ‘Pathways Through the Silent Crisis: Innovations to Resolve Unsustainable Debt’, calls for special measures to help debt-ridden Caribbean states.
“Projections for future debt sustainability are also bleak. By 2020, debt will remain unsustainable in 11 of 13 Caribbean states.” He calls for a “more supportive international mechanisms to help maintain debt sustainability”. This IMF book, not surprisingly, gives shirt shrift to that. Among some of the useful chapters are those discussing tax incentives and the chapter on ‘Reinvigorating Growth in the Caribbean’.
I was delighted to see the IMF citing the work of one of its pre-eminent critics, Professor Dani Rodrik, and actually supporting what it calls “strategic bets”, which is a form of state-interventionist action. That would be heresy some years ago! Its new position is a tacit admission that the usual IMF polices are necessary but not sufficient unleash growth and resilience in the Caribbean.