Tue | Oct 17, 2017

Briefing | Developing sustainable balance of payments in small countries

Published:Wednesday | July 26, 2017 | 12:00 AM

Dr Andre Haughton's recently completed book Developing Sustainable Balance of Payments in Small Countries: Lessons from Macroeconomic Deadlock in Jamaica has been published by Palgrave Macmillan 2017. The book can be purchased in soft copy or hard copy online. Look out for the book launch in September 2017.

WHAT IS THIS

BOOK ABOUT?

This book analyses Jamaica's ability to satisfy its short- and long-run foreign-currency obligations in light of recurrent balance of payment support from international lending agencies. Many developing countries seek balance of payments (BOP) and stability support from the International Monetary Fund (IMF) and other multilateral institutions due to their inability to generate sufficient intrinsic foreign currency necessary to conduct transactions with other countries and strengthen their net international reserves (NIR).

Over the last 40 years, Jamaica has entered 13 successive arrangements with the IMF, which has provided not just foreign currency support through special drawing rights and draw downs, but has also provided guidelines along the way to help increase the indebted nation's macroeconomic stability, which is necessary to enhance its growth, development, and stability pursuits. But sometimes, mainstream economics is inapplicable to small countries, and this book recognises that these small countries need their own remedies to survive in this hostile global economic and geopolitical environment.

WHY IS JAMAICA A GOOD CASE STUDY?

Jamaica is one of the top-five indebted nations in the world, and despite receiving four decades of loan and stability support from multilaterals, Jamaica's depreciating currency continues to drive up debt-servicing requirements. The nation's longstanding relationship with multilateral lending agencies like the IMF serves as a case study for other developing countries that are unable to generate sufficient intrinsic net international reserves, and, consequently, suffer from incredibly low GDP growth per annum.

Jamaica has endured chronic macroeconomic instability and has experienced low negative total factor productivity growth from 1974 to present. The amount of goods and service it sells to the rest of the world per annum has been declining. As a result, the nation has not been earning enough to increase its stock of capital beyond depreciation annually. This is essentially the desirable scenario if Jamaica is ever to improve itself from a developing country gradually to a developed nation.

Jamaica, once a positive example to other developing countries that needed a recipe for development, is now an example of what not to do if a country wants its economy to remain stable with low debt, high growth rates, and positive development efforts.

WHY IS THE BOOK NOVEL?

This book is novel in that it analyses the sustainability of foreign-currency flows between Jamaica and the rest of the world from 1962 to 2015 in light of the country's adverse economic growth, stability, and development pursuits. It provides an understanding of the underlying factors that influence the level of foreign currency flows across time and determines the conditions necessary for the stream of inflows to offset the stream of outflows sustainably through different avenues in the long run.

The research analyses the adequacy of the nation's net international reserve accumulation strategy and establishes an equilibrium point that might exist. It examines the impact of a depreciating currency on the nation's prices, imports, exports, and output growth. The impact of roreign direct investment (FDI) on economic growth and the impact of interest-rate changes on the availability of capital credit for domestic investment are also investigated.

WHAT PERTINENT QUESTIONS ARE ANSWERED IN THE BOOK?

The research unravels questions like: what is the optimal level of net international reserves? How effective is the monetary policy transmission mechanism? What is the impact of interest-rate changes on the availability of credit for domestic investment? Most important, how should Jamaica and other countries that find themselves in this deadlock position and strategise to improve its economic condition. Macroeconomic Deadlock provides policy recommendations as to the best way forward in the context of the local economic objective within the constraints of the global geopolitical environment.

HOW DID THE RESEARCH BEGIN?

The research began as an investigation into Jamaica's approach to earning or generating foreign currency amidst hesitance by the IMF to sign a foreign-currency loan agreement without conditionality in 2013.

Having returned to Jamaica from the United Kingdom in 2011 after writing my PhD on 'Essays on Monetary Policy in the Caribbean Region', I observed handicaps in Jamaica's interest-rate determination relative to other countries. I was inquisitive about the causes of, and solutions to the nation's foreign currency debt problem and deficiencies in the nation's GDP growth and export strategy.

In 2012, I began writing for The Gleaner, simplifying and explaining issues affecting the local economy in a global context. Writing these weekly 'Briefings' heightened my inquiry, which enabled me to delve deeper to ascertain Jamaica's long-term economic strategy for national development since its independence from Britain in 1962.

To my surprise, after Independence, there was no long-term strategy to place the country on a path towards sustainable development. Indeed, it was only recently (2009) that Jamaica laid out its Vision 2030 goals. The book analysis will continue next week.

- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona Campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email editorial@gleanerjm.com.