Alvin Wint | Lest we forget - Jamaica's path to economic stability
The following is a contribution from Alvin Wint, Emeritus Professor of International Business at the University of the West Indies, on Jamaica's more than two-decade effort to attain macro-economic stability.
As numerous commentators have pointed out, Jamaica is clearly reaping the benefits of the economic stabilisation and reform programme on which the country embarked, in earnest, six years ago. Several key economic and social indicators are moving in the right direction. This movement, whether in economic growth, inflation, unemployment, net international reserves, exchange rate stability, poverty, is not accidental, but is a direct consequence of the efforts to stabilise and reform the economy.
The year 2012 was not the first year that Jamaica was embroiled in an economic crisis, and so the relative success of this period raises the question of why has Jamaica been more successful this time around. One response is that in 2012 Jamaica's leaders looked at the precipice Jamaica was about to fall off, and decided that all efforts had to be employed to ensure that we did not fall, given the traumatic consequences that would ensue. This response would be parallel to the response of Edward Seaga and Michael Manley in 1979, when they looked over the precipice at the consequences of a continuing process of the party in government having control over the electoral system, and decided that continuing such a process would create a major challenge to Jamaica's democracy, and so they changed the country's electoral management oversight structure.
While there is merit to the "precipice explanation" of the relative success of the 2012-2018 stabilisation programme, it is an incomplete explanation because Jamaica has had other economic crises to which there have been less than appropriate responses, and these crises have resulted in severe economic trauma. The "precipice explanation" needs to be joined with an explanation focused on the extent to which Jamaica has learnt from past crises, and the degree to which local consensus-building and political leadership has coupled with external forces to foster an environment conducive to stabilisation and reform.
The economic crisis Jamaica experienced in the early 1990s provides an important counterpoint that illustrates the lessons that the country has learned. Between 1991 and 1995, inflation in Jamaica averaged 42 per cent per year; the treasury bill rate averaged 32 per cent and the lending rate averaged 44 per cent. The Jamaican currency declined precipitously in value moving from an exchange rate of J$7.184 per US$ in 1990 to J$37.1 per US$ in 1995. To put this level of exchange rate depreciation in context, it would be the equivalent of the J$ moving from J$127 to US$1 to J$656 to the US$1 over a five-year period.
The Jamaican government responded to the economic crisis by focusing on the importance of a programme of macroeconomic stabilisation, as the first phase of a national effort to enhance the country's competitiveness. The policies to be used to stabilise the economy, as articulated in the 1996 National Industrial Policy, included:
- The Government adopting a binding anti-inflationary position
- The continued use of fiscal policies as a key weapon in inflation control
- Tight fiscal policies to be complemented by other efforts to control the growth of money supply, for example, the sterilisation of acquisition of foreign exchange reserves
- The institutionalisation of the Government's anti-inflationary position through the establishment of the Bank of Jamaica as an independent central bank, whose principal objectives were to be the control of money supply and management of the foreign exchange rate system.
- The breaking of the cycle of inflationary expectations by establishing a social partnership oriented to achieving a balanced adjustment of prices and incomes, with the government leading by putting in place specific measures to build policy credibility
The 1996 National Industrial Policy never achieved the macro-economic stabilisation results that were to be the foundation on which the entire policy rested. The efforts to establish a national social partnership faltered. The Central Bank moved aggressively to pursue a policy of controlling money supply growth, but without the benefit of the fiscal policy support that was anticipated, programmed and desperately required. The net result was that interest rates continued to be very high. These high interest rates played a role in the financial sector crisis that Jamaica experienced in the late 1990s.
The lesson that Jamaica learnt from this failed process of macro-economic stabilisation was that a much greater level of social dialogue was needed to gain support for a programme of social partnership and macro-economic stabilisation in a country like Jamaica which had extreme levels of distrust among sectors and high levels of economic inequality, which levels had been worsened by years of macro-economic instability.
The years that followed saw numerous efforts to engender social dialogue among economic actors. In 1997, Ward Mills began a movement called ACORN, in which leaders of the Country's labour unions, private sector and academia have met together continuously over the last twenty-one years, focusing on building social capital and trust among actors in key sectors of the Jamaican society in pursuit of national growth and competitiveness.
Formal structures were established to allow for on-going dialogue between the Government and the trade union movement. The trade union movement consolidated the majority of the country's trade unions under the Joint Confederation of Trade Unions (JCTU), which focused its efforts not only on short-term approaches to enhance worker compensation, but also on longer-term projects associated with improving the competitiveness of enterprises and the entire country. Omar Davies and Dwight Nelson negotiated several memoranda of understanding between the Government and unions representing public sector workers, which focused not only on issues of compensation, but also worker training and other initiatives geared toward workplace transformation.
The efforts to establish a social partnership continued. By early 2000, these became institutionalised in an initiative driven by the PSOJ, under the leadership of Beverly Lopez, which involved the first investigation into how Jamaica could relieve its debt burden through a debt exchange conducted in a manner that would not lead to a decapitalisation of the country's financial institutions or a closure of the country's access to international capital markets. Key initiators of this debt exchange investigation were Damien King and Peter Melhado.
In 2009, Prime Minister Bruce Golding agreed, for the first time in Jamaica's history, to have prime ministerial oversight of a national partnership council. He went on to preside over the signing of a Partnership Code of Conduct in 2011. Prime Ministers Portia Simpson Miller and Andrew Holness continued this oversight function and signed, on behalf of the Government of Jamaica, Jamaica's first and second national social partnership agreements in 2013 and 2016, respectively, along with representatives of the JCTU, the Private Sector Organisation of Jamaica (PSOJ) and civil society. Both the 2013 and 2016 agreements place emphasis on prudent fiscal management of the affairs of the country and incorporate debt reduction targets. The opposition has played an observing and participatory role in Jamaica's national partnership council from its inception in 2009 to the present.
The debt crisis confronting the country became clearer by the early 2000s, resulting from years of borrowing on international capital markets to finance unsustainable, in the context of the unstable Jamaican economy, levels of recurrent expenditure; the costs associated with extricating the country from the late 1990s financial crisis; the costs of rehabilitating the country from weather-related shocks; and the cost associated with the financing of contingent liabilities the Government of Jamaica accepted with the implicit or explicit guarantee of losses in previously privatised and nationally owned enterprises.
As the debt crisis simmered, with Jamaica moving into the position of one of the World's most indebted economies, the Jamaican media became ardent advocates of economic reform and debt reduction, with The Gleaner, in particular, devoting numerous editorials to the subject in the 2011-2013 period.
The academic and research community contributed significantly. The Caribbean Policy Research Institute played an important role in the developing consensus, in the context of a seminal study on the debt problems across the Caribbean region, and key insights into how careful management could create an inflexion point that would transform a vicious cycle of increasing indebtedness to a virtuous cycle of improved debt dynamics.
The almost two decades of effort to engage in social dialogue, technical advocacy and consensus building around the need for a national effort to enhance Jamaica's national competitiveness by first stabilising the economy provided a platform upon which successive Jamaican administrations, under the leadership of Peter Phillips, Audley Shaw and Nigel Clarke, with the strong support of Prime Ministers Portia Simpson Miller and Andrew Holness, have taken decisive steps in implementing a programme of reform. These efforts also contributed to the ability of the trade union movement and the financial sector to see the virtue in agreeing to the prior action items of wage constraint and debt exchange that the International Monetary Fund required of Jamaica before it would enter into the 2013 enhanced funding facility programme.
It is the cumulation of these efforts that help explain why Jamaica has had more success in economic stabilisation in the current period, than in any prior period during which it has operated a liberal market economy. But Jamaica has no victory it can yet celebrate. The Country's average income per person is about U$$5,000. The average income per person in the Cayman Islands, over which pre-independent Jamaica had administrative control, and Jamaica in 1960 had an income per person advantage, is about US$57,000. The Cayman Islands is now considered by the United Nations as one of the ten wealthiest territories/countries in the World.
Jamaica's economic reform programme is still nascent and needs the continuing support of constituents across the country. With an income per person of only US$5,000 Jamaica continues to be unable to meet the reasonable aspirations for compensation, service provision and infrastructure development of its citizens. Jamaica has no mechanism for funding these aspirations other than through a growing economy. It has tried to meet the aspirations of its citizens through inflation and through borrowing. Neither of these approaches lead to sustainable development; indeed, their consequences are dire. Macro-economic and macro-social stability will create the foundation upon which Jamaica can grow its economy. All hands still need to stay on deck to achieve this stability and growth.
- Alvin Wint, Emeritus Professor of International Business, UWI.