Ian Boyne

Jamaica cannot continue its dialogue on economic policy outside of the wider global context and the lessons learned over the last four decades in international economic strategising.

There is overall consensus globally and in our Jamaican context about some of the imperatives of economic growth. The world has learned its painful lessons from leftist economic adventurism, particularly in the 1970s, and it is now a truism that you cannot have development without robust economic growth and some form of private enterprise.

For sure, the neo-liberal orthodoxy needs to be questioned and the naive optimism about the developmental prospects of the Washington Consensus has been tested by hard reality. But some things are undeniable. The outstanding Harvard economist Dani Rodrik, one of the pre-eminent demythologisers of the neo-liberal model, makes this important admission in his paper 'Rethinking Growth Strategies(2005 World Institute for Development Economics Research Distinguished Lecture):' I think it is possible to come up with certain general principles that have applied in all (successful ) cases.

"All successful countries have in one form or another provided for effective property rights protection and contract enforcement; all successful countries have maintained macroeconomic stability; they have all sought to integrate in the world economy; they have had a supportive environment for private enterprise and private investment; they have provided for effective prudential regulation of their financial sectors, etc."

Former Harvard President Lawrence Summers puts it this way in his 2003 Godkin Lecture at the university's Kennedy School of Government, "I will suggest that the rate at which countries grow is substantially determined by three things: their ability to integrate with the global economy through trade; their capacity to maintain sustainable government finances and sound money; and their ability to put in place an institutional environment in which contracts can be enforced and property rights can be established. I would challenge anyone to identify a country that has done all three of these things and has not grown at a substantial rate".

a Utopian myth

The old Marxist aversion to private enterprise and private investment, and the belief that it was the command economy that would produce economic transformation in the developing world has been proved to be a Utopian myth. Market mechanisms are necessary for sustained economic growth. And while one can point to the inadequacies of the Washington Consensus, the fact is that certain of its elements are critical to economic growth. But the countries which have grown have had to demonstrate creativity and flexibility in implementing its economic policies and strategies. It has been the pursuit of heterodox economic policies which have been respon- sible for the success of not only China and India, but other countries like Vietnam, which maintained high rates of import barriers including quantitative restrictions.

Rodrik in his paper characterises the successful globalisers as, "Deploying unorthodox policies in the service of orthodox ends - such as openness, macroeconomic stability, and private entrepreneurship and so on". Continues Rodrik: "Does the ability to integrate with the world economy come necessarily with openness to imports and capital flows? Does sustainable finance and sound money imply independent central banks, floating exchange rates and inflation targeting? Does a good institutional environment mean an Anglo-American type corporate governance regime or even a legal system based on private property? Not if the experience of the growth champions of the last half a century is a guide."

Giving the example of China, Rodrik says any neo-liberal policy adviser would have recommended the liberalisation of the agricultural price system to deal with the matter of low agricultural productivity. This would have been followed with the recommendation to privatise the land. Then there would be the recommendation for tax reform, trade liberalisation and financial sector reforms.

two-track system

"We know that the Chinese did reform but they did not do any of what we have just covered. Rather than liberalising markets wholesale and eliminating central planning, what they did was to institute a two-track system and they grafted a market pricing system on top of the state order system. They did not eliminate central planning. The nice thing about that was that two-track pricing insulates public finance from the provision of private incentives. This was a practical solution they arrived at experimentally by having confidence in their ability to generate home-grown reforms."

Indeed, Rodrik has demonstrated in several papers that the globalisers in Asia have not followed the neo-liberal model. India began its growth surge in the 1980s before its trade liberalisation reforms of 1991. And China broke almost every rule in the neo-liberal book. In terms of property rights, Asia governmental authority can override those rights (South Korea is a prime example).

There are close, incestuous government-business relations in Asia, contrary to the arms-length, rules-based relationship favoured by the neo-liberals. The financial system is not deregulated, securities-based but is bank-based with restricted entry, directed lending, heavy government control and weak formal regulation. Labour markets are not uniformly decentralised and flexible but you have Japan's well-known lifetime employment system. In Asia, international capital flows were restricted until the 1990s and in terms of industrial organisation, the cartels and chaebols are well-known in some Asian countries, as opposed to the decentralised, competitive anti-trust environment which is favoured by the Washington Consensus.

Says Rodrik: "One could expand the discussion to the earlier period of growth miracles and talk about the East Asian tigers of Taiwan and Singapore, where the policy frameworks were also quite anomalous, essentially combining many of the unorthodox ideas about outward orientation and the importance of the private sector with considerable macroeconomic interventions, industrial policies trade protection and so forth".

In November, senior lecturer in Economics at the School of Oriental and African Studies at the University of London, Dr. Dic Lo, challenged another popular myth among neo-liberals - that foreign direct investment has been a key factor in China's economic growth. In a paper titled 'China as a Model of Utilising Capital for Economic development: Perceptions, Observations and Interpretations', Dr. Lo says, "Prima facie, immediate macroeconomic indicators do not support the view that FDI (foreign direct investment) has been an important factor in China's overall economic development. As a ratio of gross fixed capital formation, FDI flows were of rather small magnitudes from 1979 to 1991. Massive increases have occurred from 1992 with the ratio averaging 13 per cent for the years until 2005.

This action was twice as large for all developing countries. Nevertheless, because they were only a fraction of gross fixed capital formation and the latter was in turn only a fraction of GDP, FDI flows could not account for a significant part of China's economic growth".

most successful country

Lo notes that, "In recent years China has been widely regarded as the most successful country in the world in utilising foreign direct investment for economic development. In particular, it has been portrayed and praised by the orthodox establishment of globalisation as a 'model' in this regard for the rest of the developing world."

States have to adopt a measure of pragmatism and have to be innovative in applying a mix of policies and must know how to sequence those policies. Following sound macroeconomic policies is not "bourgeois". It is common sense and imperative to economic growth. We cannot alleviate or eradicate poverty unless we have economic growth and we cannot have economic growth without macroeconomic stability.

In the Latin American region, Chile has been a model of macroeconomic stability and fiscal discipline while not neglecting the social sector. Chile has shown that sensitivity can be shown to both the economic fundamentals and the social fundamentals. According to the latest Global Competitiveness Report, Chile is the most competitive economy in the Latin American region.

economic fundamentals

Fortunately for us in Jamaica, our two main political parties are agreed on the economic fundamentals. This is in contrast to the old divisions of the 1970s which spilled over into the 1980s. Both parties are committed to the market and both see the importance of social safety nets. The disagreements are not really funda- mental in terms of economic strategy, though it is not in the interest of the Jamaica Labour Party to admit this. The JLP has a more state interventionist and activist mindset than the PNP (and the empirical evidence favours their approach), but the PNP is no mindless implementer of neo-liberal policies either.

The present administration is highly sensitive to social policy, with the Prime Minister being a strong advocate of pro-poor policies. And Omar Davies, fiscally conservative as he is, knows, as a widely-read person, that even the World Bank and the IMF now acknowledge the importance of not starving the social sector.

Recklessness in economic policy under the guise of helping the poor will only retard the poor who suffer most from fiscal irresponsibility.

In an IMF working paper recently published, 'Sustaining Latin America's Resurgence: Some Historical Perspectives', Anoop Singh and Martin Cerisola say, "The state did play an important role in a number of ways in many Asian countries through more controversial activist industrial and credit policies. However, these policies and other governance concerns did not distract the state from steadily advancing overall reforms, maintaining macroeconomic stability, including low inflation and exchange rate stability and ensuring a business environment that has been broadly investor friendly and competitive".

Jamaica needs to look at what has worked globally and what have been the key lessons learned in economic history, so that our policies can be evidence-based rather than merely faith-based.

ianboyne1@yahoo.com.