Tue | Dec 12, 2017

Briefing | Political stability and corruption control necessary for economic growth

Published:Wednesday | October 11, 2017 | 12:00 AMDr Andre Haughton
Corruption
Corruption
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The world is constantly evolving. Now more than ever, countries and their bi-lateral partners are beginning to realise more and more that there are no one-size-fits-all approach to positive economic transition and country-specific idiosyncrasies must be accounted for to increase the applicability of policy prescriptions. Chapter three of Developing Sustainable Balance of Payments in Small Countries: Lessons from Macroeconomic Deadlock in Jamaica identifies the variables that influence the current account balance in the long run.

What is the impact of political stability?

Political stability is important for macroeconomic stability, which is necessary for economic growth. The results from my research indicate that political stability is a necessary determinant of Jamaica's current account balance. Jamaica has experienced varying patterns of political stability over the last two decades; the People's National Party governed the country for 13 years (1996-2007 and 2011-2013), while the Jamaica Labour Party governed between 2007-2011 and, more recently, from 2015 to present. Despite the short-term periods of stability, Jamaica continued to experience frequent political turmoil which might have contributed to the country's low levels of economic growth.

What about corruption control?

Corruption is defined by what public officials do for private gain. Corruption benefits the parties involved in the short run, but comes at a cost in the long run. There are direct costs and indirect costs. Corruption control is an important determinant of Jamaica's current account imbalances in the long run. Corruption is still prevalent in Jamaica. The IMF highlights that corruption is more prevalent when stadiums and conference centres are built instead of hospitals and schools.

How is the country impacted by public debt?

A large external debt makes it difficult to finance current account deficits. This also means that servicing the debt takes away from further investment in the country.

With Jamaica being one of the most indebted countries in the world, sustaining the current account is made even more difficult. For Jamaica, total external debt is measured as debt owed to non-residents repayable in currency, goods or services. It is the sum of public, publicly guaranteed and private non-guaranteed long-term debt, use of IMF credit and short-term debt.

What about openness and trade?

The openness variable is measured as the ratio of net exports to GDP. The higher the ratio, the more open the economy. The degree of openness is also a determinant variable for the current account imbalance in the long run. A high degree of openness increases the vulnerability of the country to external stimuli/shocks that often come in the form of crises.

This is more likely to occur in countries with a thin export base as a result of the over-reliance on one-commodity or traditional exports. This vulnerability will increase, and the ability of the country to sustain deficits will weaken, if the country has a narrow export base and is particularly dependent on imported raw materials. It is reduced if the country's composition of trade is well diversified across commodities.

What about the real exchange rate?

The REER is a weighted average of a country's currency adjusted for inflation. Adedeji and Handa (2008) described a real appreciation of the exchange rate as being associated with a large current account deficit. The Jamaican experience is different - the 1992 and 1994 appreciation in the REER occurred with current account surpluses.

This counterargument lends support to Henry and Longmore's (2003) suggestion that policies in Jamaica that are directed at promoting current account sustainability through the real exchange rate changes may be ineffective. The evidence shows that as the REER appreciates in the long run, given the current political climate, Jamaica's current account position improves to some extent.

How does the level of investment affect Jamaica's current account?

Increased investment domestically appears to have a positive impact on the long-run sustainability of Jamaica's current account as illustrated by the results. The current account balance is the difference between national savings and domestic investment. Investment levels can have major implications for current account sustainability. High levels of investment imply higher future growth through the build-up of a larger productive capacity; they enhance solvency.

Is economic growth significant?

As GDP grows, we expect that the country should be exporting more, given that it is producing more. In this case, there is a positive relationship between GDP growth and Jamaica's current account balance. The relationship is both economically and statistically significant; the higher a country's GDP growth rate, the greater the current account imbalance it can sustain without increasing its external debt-to GDP ratio. Also, a high GDP growth may reflect sustained capital accumulation rates driven by expectations of high profitability. If the growth rate exceeds (is less than) the real rate of interest on the external debt, then the addition to total GDP is greater (less) than that of external debt.

- 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.