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Jamaica's debt propelled economic model is no longer sustainable
(Part 1)
Keith Collister
Sunday, November 01, 2009
Just over two weeks ago, the Jamaica Chamber of Commerce held a very important seminar on the issue of Jamaica's 'Fiscal Debt Challenge' and 'Export-led Growth'.
Whilst the seminar got quite extensive coverage in the written media, perhaps unsurprisingly, the focus was on former Russian finance minister Alexander Livshits's remarks on debt restructuring. This was despite the Observer's editorial of Tuesday, October 13th that correctly signalled the much broader focus of the seminar with its headline "Debt - propelled economic model no longer sustainable".
The consequence of the media focus on Dr Livshits comments on debt restructuring (a position that is not supported by the Jamaica Chamber of Commerce and which is addressed in detail in my Business Observer article "Jamaica should refinance, not restructure, its debt") was that the far more important presentation by Jamaican Donald Harris, based on his paper "Towards an Export-led Strategy for Jamaica: lessons from Experience with the National Industrial Policy" has so far been neglected.
In his paper, Professor Harris (an emeritus Professor at Stanford), argues that Jamaica has been on what he calls a strategy of a "debt- propelled economy" for "a very long time" and that our failure to wean ourselves off it means that "we now have to face squarely its consequences and the task of cleaning up the results it has produced. And what an immense task that is turning out to be".
Referring to his previous studies of long-term trends up to 1989, Harris's starting point is to note that there was "a dramatic change in economic performance" that occurred around 1974 -75, represented most significantly by a decline in the long-term growth rate of exports from a previous average of 9.3 per cent per annum to a much lower rate of 2.4 per cent, while GDP went into a steep decline at a rate of -0.24 per cent.
Slower export growth continued for a while based on the growth of bauxite and tourism and the newly emerging but fragile apparel industry, despite the traditional vessels of bananas and sugar having already sprung major leaks.
"The only real hope for creating new momentum was to bolster some of the ongoing export activities that could foresee good prospects and to diversify strategically into new product lines, ie by pursuing an export-led growth strategy."
According to Harris, this was precisely what Jamaica's National Industrial Policy (NIP), adopted by the government in 1996, aimed to do. In his words, it was designed "to break out of the mould of the past" and "was aggressively, assertively and explicitly based on a strategy of export-led growth and efficient import substitution".
Instead, Harris notes, Jamaica's actual economic performance over the period can be summarised by three conspicuous facts.
*Total public debt mushrooms exponentially after 1994/5, reaching a peak of US$14 billion in the last two years, three times the size of the early '90s.
*Gross domestic product remains nearly flat, growing at a negligible rate of 0.9 per cent on average for the whole period.
*The (nominal) exchange rate falls through the floor. The Jamaican dollar, which was worth US$0.14 in 1990, falls to slightly more than 1ยข.
Harris does not mince words. "This is a dismal performance by any standard, whether viewed (a) in terms of the pay-off to the country as a whole from accumulation of a vast amount of debt, or (b) in comparison with other countries that were able to take advantage of the opportunities available in a time of rapid growth in the world economy to grow themselves at a high rate. In fact, it would not be too much of an exaggeration to say that an economic catastrophe was wreaked on the country, because . the country is now left with the obligation of an enormous mountain of debt to pay back and the responsibility to clean up the damage that was thereby created." He argues that behind the mushrooming public debt, there is a government addicted to deficit spending.
On the production side, he notes that "there is an extraordinary and phenomenal transformation in the structure of the economy. In 1992-1993, manufacture is 1.7 times the size of finance and insurance. By 2007, the situation is completely reversed: finance and insurance become 1.4 times the size of manufacture."
A similar process of relative decline occurs in agriculture, starting in 1997.
"Looking at the actual sector shares in 2007: finance and insurance (11.2 per cent) is almost as big as Government (11.7 per cent) and slightly less than transport and communication (12.3 per cent). The biggest sector is distribution (wholesale, retail, etc = 18.9 per cent), and the financial sector is approaching it very closely if you add in financial intermediation services."
Critically, he adds, in foreign trade "the overall pattern is one of relatively stagnant exports and rapidly growing imports, such as to create an ever-growing trade gap to be paid for by inflows of credit and other finances. Remittances served as a cushion throughout the period to support this gap."
In future articles, we will explain how this happened, and what can be done to improve matters.
(Part 1)
Keith Collister
Sunday, November 01, 2009
Just over two weeks ago, the Jamaica Chamber of Commerce held a very important seminar on the issue of Jamaica's 'Fiscal Debt Challenge' and 'Export-led Growth'.
Whilst the seminar got quite extensive coverage in the written media, perhaps unsurprisingly, the focus was on former Russian finance minister Alexander Livshits's remarks on debt restructuring. This was despite the Observer's editorial of Tuesday, October 13th that correctly signalled the much broader focus of the seminar with its headline "Debt - propelled economic model no longer sustainable".
The consequence of the media focus on Dr Livshits comments on debt restructuring (a position that is not supported by the Jamaica Chamber of Commerce and which is addressed in detail in my Business Observer article "Jamaica should refinance, not restructure, its debt") was that the far more important presentation by Jamaican Donald Harris, based on his paper "Towards an Export-led Strategy for Jamaica: lessons from Experience with the National Industrial Policy" has so far been neglected.
In his paper, Professor Harris (an emeritus Professor at Stanford), argues that Jamaica has been on what he calls a strategy of a "debt- propelled economy" for "a very long time" and that our failure to wean ourselves off it means that "we now have to face squarely its consequences and the task of cleaning up the results it has produced. And what an immense task that is turning out to be".
Referring to his previous studies of long-term trends up to 1989, Harris's starting point is to note that there was "a dramatic change in economic performance" that occurred around 1974 -75, represented most significantly by a decline in the long-term growth rate of exports from a previous average of 9.3 per cent per annum to a much lower rate of 2.4 per cent, while GDP went into a steep decline at a rate of -0.24 per cent.
Slower export growth continued for a while based on the growth of bauxite and tourism and the newly emerging but fragile apparel industry, despite the traditional vessels of bananas and sugar having already sprung major leaks.
"The only real hope for creating new momentum was to bolster some of the ongoing export activities that could foresee good prospects and to diversify strategically into new product lines, ie by pursuing an export-led growth strategy."
According to Harris, this was precisely what Jamaica's National Industrial Policy (NIP), adopted by the government in 1996, aimed to do. In his words, it was designed "to break out of the mould of the past" and "was aggressively, assertively and explicitly based on a strategy of export-led growth and efficient import substitution".
Instead, Harris notes, Jamaica's actual economic performance over the period can be summarised by three conspicuous facts.
*Total public debt mushrooms exponentially after 1994/5, reaching a peak of US$14 billion in the last two years, three times the size of the early '90s.
*Gross domestic product remains nearly flat, growing at a negligible rate of 0.9 per cent on average for the whole period.
*The (nominal) exchange rate falls through the floor. The Jamaican dollar, which was worth US$0.14 in 1990, falls to slightly more than 1ยข.
Harris does not mince words. "This is a dismal performance by any standard, whether viewed (a) in terms of the pay-off to the country as a whole from accumulation of a vast amount of debt, or (b) in comparison with other countries that were able to take advantage of the opportunities available in a time of rapid growth in the world economy to grow themselves at a high rate. In fact, it would not be too much of an exaggeration to say that an economic catastrophe was wreaked on the country, because . the country is now left with the obligation of an enormous mountain of debt to pay back and the responsibility to clean up the damage that was thereby created." He argues that behind the mushrooming public debt, there is a government addicted to deficit spending.
On the production side, he notes that "there is an extraordinary and phenomenal transformation in the structure of the economy. In 1992-1993, manufacture is 1.7 times the size of finance and insurance. By 2007, the situation is completely reversed: finance and insurance become 1.4 times the size of manufacture."
A similar process of relative decline occurs in agriculture, starting in 1997.
"Looking at the actual sector shares in 2007: finance and insurance (11.2 per cent) is almost as big as Government (11.7 per cent) and slightly less than transport and communication (12.3 per cent). The biggest sector is distribution (wholesale, retail, etc = 18.9 per cent), and the financial sector is approaching it very closely if you add in financial intermediation services."
Critically, he adds, in foreign trade "the overall pattern is one of relatively stagnant exports and rapidly growing imports, such as to create an ever-growing trade gap to be paid for by inflows of credit and other finances. Remittances served as a cushion throughout the period to support this gap."
In future articles, we will explain how this happened, and what can be done to improve matters.