Change failed economic strategy now!
Edward Seaga, Contributor
Recent international ratings have positioned Jamaica at the bottom, or near last, on lists of economic growth and indebtedness. What is the framework within which these failures occurred?
Jamaica has many top-rated products which are strong assets for growth:
Agricultural crops (coffee, cocoa, ginger, pimento, citrus, peppers and other spices);
Substantial mineral resources (bauxite/alumina, limestone);
Tourism (sand, sea, hospitable environment and geographical beauty);
People (resourceful, culturally creative, ambitious and exceptional athletes).
It should be noteworthy in any assessment that in the past 50 years of Independence, mining, tourism, cultural creativity and athletic prowess have been involved in outstanding national performance. The historical problem of the Jamaican economy has been the intractable burden of heavy unemployment.
But what is overlooked in every assessment is that since Independence, the economy of Jamaica has had an overload of calamities in every decade, which have combined to disorient its development compass:
The heavy flow of migrants to England in the 1950s, which accounted for some 60,000 Jamaicans seeking work in the United Kingdom, ceased in 1962 (Independence year) when the UK called a halt to unbridled migration. This deprived the 1960s the expected buoyant flow of the bounty of foreign-exchange earnings enjoyed in the 1950s and the extra opportunities for employment which the migration would have provided. Retention of those migrants who would have migrated exacerbated the chronic state of unemployment, as a larger number of workers remained to compete for jobs available.
The situation worsened when the two mainstay export earners, sugar and bananas, began to slide on a slippery slope, wiping them out eventually as mainstay crops, and further reducing export earnings.
Together, these two calamities shocked the economy of the young independent nation.
It was expected that within the next decade, the emergence of tourism and mining as major industries would compensate for the resulting loss of foreign exchange earnings. But there was a sweeping change of political direction in the 1970s, strongly embracing a non-productive ideology, socialism. The economic fallout from this ideological changeover ended the decade with an 18 per cent fiscal deficit, one of the worst globally, and a wipeout of all the net reserves of foreign exchange at the Bank of Jamaica - both major calamities.
Coupled with a dramatic increase in the price of oil and a series of years of no growth, little growth and negative growth, the economy in that decade plunged to the lowest level, and the State began to disintegrate economically, socially and politically;
The 1980s were shocked in a similar manner. The worst recession to date since the Great Depression of 1929, and the worst hurricane ever, in 1988, were the twin disasters of that period. Together, they wiped out the principal gains of the recuperating economy: Revenue lost was 44 per cent of projected earnings for the decade; foreign-exchange receipts fell short of estimates by 36 per cent over the 10-year period; and Gilbert cost US$1 billion for restoration (J$85 billion in today's currency). These were mega calamities.
Nor were the 1990s spared its dose of calamities, the worst of them being the egregious errors of political misjudgement by leadership which brought the economy to a state of meltdown: 40 of 44 financial institutions collapsed. The cost to Government was $144 billion, 44 per cent of the GDP, the third worst such calamity globally. One of the principal causes was the devaluation of the currency unleashed by political naivety which caused the Jamaican dollar to plunge from $5.50 to $37.25 equal to US$1 between 1988 and 1996 with staggering costs, resulting from adverse currency movements.
It may have been believed that four such calamities, in four decades, three of which were driven by global dynamics affecting a small country, were more than could be borne. But the first decade of the 21st century opened with another global bang: the Great Recession, again the worst since 1929, which almost brought the global financial system to its knees and is still lurking in the wings apprehensively to afflict further damage.
I doubt if there is another small struggling country which has experienced such a continuous run of calamities. And I doubt if the International Monetary Fund (IMF) has ever taken into account this distressing background and the damage inflicted on the economy by five sets of calamities sapping the economic strength of the country in rapid succession.
While this is not an excuse for the misguided directions and the inappropriate policies of inept leadership which diverted the nation from a path of growth, the sequencing of 36 years of shocks in the last 50 years, allowing only 14 years to recoup, is sound enough reason for special consideration to be given to Jamaica in current assessments of its progress. It is timely to raise this background in the light of the current predicament in concluding a new IMF agreement.
Abandon failed strategies
I make this point because it does not appear that the Jamaican public is aware of the impending crisis the economy faces if it cannot create meaningful, sustained growth within the next two years to provide the confidence on which further multilateral funding and private investment flows will depend. Lower interest rates alone are not sufficient to drive investment. The country needs a clear picture of where it is going and how it is getting there. Only credible economic performance as a base for future confidence can do this.
The first step in creating a credible vision is to abandon economic policies that have failed. It cannot be correct for planners to continue to target low-price inflation, which requires the support of increased debt to sop up excess cash as a means of keeping prices in line. The economy needs to reduce, not increase, debt.
And it cannot be right to continue the standard policy to fight price increases by boosting interest rates and depreciating the value of the dollar so as to curtail consumption. In reality, depreciating the value of the dollar increases debt, which increases costs, setting up a vicious circle of further debt and further costs so that, like the wagga-wagga bird chasing its own tail. The circular motion continues round and round, but the circle is never closed. The last 21 painful years should have told us this.
The answer to this wagga-wagga circus is no secret. Peg the rate of exchange to a stable currency with low inflation, to stabilise the dollar, constrain prices, decrease indebtedness, and open the door to huge investment flows. These are all positives which the economy needs if it is to pull itself up out of the deep hole it is in. For a strategy of pegging to succeed, however, policy has to keep a tight control of expenditure.
There are economists and policymakers who fear a decision to peg the dollar, but they should be reminded that the smaller CARICOM territories which used to look up to the Jamaican economy as superior are now in a far better position and can afford to look down on Jamaica. These are countries that maintained a pegged dollar throughout all the turbulence of two global recessions and failing agricultural sectors, yet prospered while the Jamaican policy was failing.
It is the best time now to make this bold move because the international financial market is in the doldrums, offering rates of interest too low to attract capital flight or promote a black market. Once the cross-border exchange risk has been removed, by pegging the dollar, the inflow of capital will swell. Inflows of low-interest mortgage funds to stimulate building construction and generate employment will follow, and agriculture will grow with cheap international funding. Then, watch Jamaica grow!
Pegging the exchange rate is not, in itself, a vision, but it is a credible foundation without which no vision can be created. If a vision is 'knowing where you are going and how you are getting there', the vision must be represented by an increase in the value of growth, and 'how you are getting there' is by pegging the exchange rate.
This is the foundation of a dynamic vision to encourage growth of the economy and jobs for the people.
Edward Seaga is a former prime minister. He is now chancellor of the University of Technology and a distinguished fellow at the UWI. Email feedback to firstname.lastname@example.org and email@example.com.