Tue | Mar 31, 2020

The recession: The Problem

Published:Sunday | November 7, 2010 | 12:00 AM
Seaga
1986: Then Prime Minister Edward Seaga with Governor of Puerto Rico, Rafael Hernandez Colon (left), as he arrived at the Norman Manley International Airport in Kingston. Partly hidden at centre is Hector Luis Acevedo, secretary of state in Puerto Rico. - File
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In an address which I gave at the Bank of Jamaica auditorium on February 9, 1984, I reported on the Jamaican outcome over the first three years, 1981-83, compared with that of other countries.

"It must be remembered that in the period of which we speak, 1981 to 1983, the world experienced the most savage recession of the last 50 years. No country was spared. Jamaica was badly hurt by this recession, particularly in 1982 and 1983.

The common feature of this recession (was) that in countries throughout the world, positive growth in economies had turned negative - investment had decreased, unemployment had increased, in the United States by 50 per cent; Canada 87 per cent; the United Kingdom 30 per cent; the Federal Republic of Germany 70 per cent; France 30 per cent and Barbados 26 per cent.

But in Jamaica, in the last three years we accomplished just the opposite. Economic growth increased, not decreased, for three consecutive years. Investment increased, not decreased, for three consecutive years, and the unemployment rate decreased, not increased. Unemployment fell in 1981 and 1983, despite the fact that over that period net migration fell drastically by half, because more Jamaicans who migrated earlier, returned home and more who are at home were staying home, resulting in yet more jobs to be found.

Against this background of performance, I asked the World Bank to advise me which of the other 150-odd countries throughout the world, over the years of this shattering recession, 1981-1983, had achieved increased economic growth in each of the three years, increased investment and reduced unemployment. The data submitted by the World Bank showed that of the more than 150 countries in the world, only eight achieved those results and Jamaica was one of them.

The right direction

The others were: Saudi Arabia, Bahrain, South Korea, the Maldive Islands, Cameroon, Syria and the Yemen Arab Republic.

The economic-recovery programme, therefore, not only turned around the economy successfully in the right direction, but it did so to an extent equalled only by seven other countries throughout the world.

But let us not be satisfied by this. Let us return to the (real) question.

Have we achieved the targets we set for ourselves in 1981 for the first three years of the International Monetary Fund (IMF) programme?

I dare say no country in the world has performed, over this period, to the extent of the targets set in 1981 before the recession had begun to run its course. Jamaica was no exception. We too failed to achieve some of our targets which we set in 1981 before the recession commenced to hurt. Nonetheless, I want to examine the extent to which we did not achieve some of the levels of performance targeted.

Notwithstanding the fact that no country succeeded in meeting all the targets, I want to compare our level of performance (for each major target set in 1981) because it tells a most-revealing story which will not only provides a deeper understanding of what happened in the Jamaican economy but will place the economic strategies being pursued in a proper perspective.

In each case, (it was found that) there was a shortfall between target and performance. We must ask ourselves if the reason for the shortfalls was a wrong strategy or not; and if not, then, what other factors could have been responsible?

I (earlier) demonstrated that the strategies employed by government effected an economic turnaround (between 1981-83). This was one of the targets of economic recovery. In this period, the net international reserves were the only area of the economy that continued to fall. This was traced directly to the drastic fall in bauxite exports from 12 million tonnes in 1980 to 7.3 million tonnes in 1983. In turn, this dramatic reduction in bauxite exports can be linked directly to the stinging impact of the international recession.

(But) what if bauxite production had not fallen? What if production had continued at the level of the targets set in 1981 for 12 to 13 million tonnes per annum?

I asked the National Planning Agency to calculate the impact on the major economic indicators if bauxite production had been at the target level, during 1981 to 1983, in order to determine what this would have meant to achievement of the IMF targets.

The results showed that not one IMF test would have been failed; no devaluation would have been necessary, no intense credit restrictions. In short, the economy would have been on a smooth course of gradual recovery.

The shortfall in achieving the level of performance set by the IMF agreement can be identified, therefore, as a result of the fall of bauxite production to almost one-half of the 1980 level. This, in turn, was as a result of the international recession, not the policy of the Government of Jamaica."

Table 2: Bauxite

Exports: 1980-1989

Bauxite and bauxite equivalent of alumina

Bauxite mined and processed into alumina

Year                          Volume 000 tonnes 

1980                            11,987.3
1981                           
11,606.0

1982                            8,334.4

1983
                            7,692.8

1984                           
8,734.9

1985                            6,239.3

1986                            6,963.9

1987                            7,659.9

1988                            7,408.4

1989
                            9,394.8

Total                            86,322.5

Source: Jamaica Bauxite Institute

A definitive statement on the singular damage created by the global recession, through the collapse of the bauxite-alumina market, came from a benchmark study done by Paul Chen Young and Associates on the macro effects in the fallout in the bauxite-alumina sector on the Structural Adjustment Programme 1981-1985. The question was what would be the annual economic growth rate if bauxite production had not collapsed? The question was answered with finality:

Growth would have been 

Eight per cent in 1982 as against one per cent

Four per cent in 1983 as against two per cent

Five per cent in 1984 as against -0.4 per cent

10 per cent in 1985 as against -4.7 per cent.

The difficulties of the first half of the 1980s posed an exceptional challenge. The situation worsened dramatically by 1985 with the demand for aluminium worldwide sharply deteriorating even further. The market for cars, planes, cans for containers, and other items made from aluminium, plunged deeper to lower levels. The consequence was a further fallout which so devastated production that the unthinkable happened - almost all the mining and processing operations in Jamaica ceased operations and plants were shut down. Total production in 1985 and 1986 were a bit more than half the production level of 1980, in each year. (See Table 2). These were the low points of the decade.

Continuous operations

Dr Carlton Davis, executive director of the Jamaica Bauxite Institute, reported on the collapse that was taking place, in his book, Jamaica Bauxite and Alumina Industry.

"Between December 1984 and September 1985, the following were experienced:

Reynolds (Mines) closed their bauxite operations in December, 1984, after 32 years of continuous operations, thereby putting some 2.5 million tonnes of bauxite out of production.

Alcoa unilaterally closed the 500,000 tonne-per-annum alumina plant in February 1985.

Alpart closed their alumina plant, then operating at 600,000 tonnes per annum, although it had a nominal capacity of 1,150,000 tonnes.

These closures resulted from:

(a) the international market situation for alumina, especially, and aluminium;

(b) the price of oil; and

(c) the level of the Jamaica levy vis-à-vis others."

The Alcoa decision was with 20 days' notice. I termed it "arrogant and offensive".

With only Alcan continuing operations, the bauxite industry was barely functioning and the very lifeline of the economy was in jeopardy. It was heart-rending to me and my team to have worked so hard in the 1970s to get the opportunity to correct the damage of that period, only to be confronted by even worse damage. But the consolation was that we had goodwill where it counted. With the expectation of reaching a low point of production in 1985, which could devastate the economy nationally, as a result of the shutdown of all but one plant, I took two steps:

I approached Washington to purchase Jamaican bauxite for its strategic mineral stockpile, and I took a further far-reaching step, to be discussed later, to keep Alcoa open.

In the critical year of 1985, the industry was at a point of collapse, producing only a paltry 2.9 million tonnes of bauxite. The US General Service Administration (GSA) purchased 3.6 million tonnes of Jamaican bauxite for the US strategic stockpile, increasing local production to 6.5 million tonnes for the year. Although this was the lowest production for the decade, it was sufficient for the industry and the economy to barely survive. Without this goodwill purchase at that time, the industry and economy would have been doomed.

Government also participated in barter deals. Again, the GSA came to the rescue, bartering American grain for two million tonnes of Jamaican bauxite. Not to be outdone, large numbers of Soviet-made Lada motor vehicles were bartered by the Soviet Union for Jamaican bauxite. Minister of Mining, Energy and Tourism Hugh Hart successfully participated in a spectacular barter which involved so many countries that it was depicted in an international cartoon.