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Taming Jamaica’s Debt
Published: Sunday | January 15, 2012
Byron Blake
Byron Blake, Guest Columnist
Both the incoming and outgoing administrations have identified the national debt as a major challenge which must be addressed for the economy to grow. That’s true. But debt is a symptom, not a condition. The fundamental condition is that we have been consuming, each year, much more than we have been producing or investing in Jamaica. To understand the magnitude of the difference between our consumption and our production, we need to add remittances, net foreign investment and other gifts, including from bilateral agencies. That level and pattern of consumption is unsustainable.
Both political parties, in their manifestos, promised to resolve the
Both political parties, in their manifestos, promised to resolve the
as a matter of priority. Their manifestos and platform statements did not, however, reveal a full appreciation of the depth of the problem. The lack of understanding seemed more glaring on the part of the Jamaica Labour Party, which consistently took the position that the debt problem originated in the mid-1990s with the People’s National Party mismanaging the banking crisis and introducing FINSAC.
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In reality, the crisis has been at least twice as old. The global economic crises of 1973-74 and 1979-80 exposed one fundamental element of the nature of the problem. Jamaicans have an insatiable appetite and a revealed preference for other people’s products and services. This is coupled with a disdain for local products and a fear of long-term investment without guarantee of monopoly profits. They resist strongly any effort to constrain their access to such products and refuse to recognise that these have to be purchased with foreign currency – earned, borrowed or begged.
The socially oriented PNP administration of the 1970s, faced with two international economic crises, sought simultaneously to reduce the disparity in wealth, rein in the conspicuous consumption, and curtail access to foreign goods. The resistance, in significant measure, accounted for the removal of the PNP from office and the installation of a JLP administration at the beginning of the 1980s.
The JLP administration was forced to liberalise the economy in many ways, even though it was just emerging from an international crisis which had put great pressure on the balance of payments and foreign-exchange availability.
The international community – multilateral agencies, bilateral agencies, private creditors, including commercial banks – was anxious to facilitate in support of its policies of liberalisation and structural adjustment.
Debt-to-GDP ratio doubled
World Bank data show that from 1982 to 1984, the debt-to-GDP ratio more than doubled – moving from approximately 100 per cent in 1980 and 1981 to 220 per cent. The foreign debt component exceeded 150 per cent. That debt-to-GDP ratio has not been approached since under either a JLP or PNP administration.
Analysis of the debt-to-GDP ratio from 1980 to 2010 suggests that after the extraordinary build-up in the 1982-1985 period, there has been an effort to tame the debt. The JLP lost the local government election in 1986. This prompted a shift in the policy of unfettered liberalisation most clearly seen in the foreign-exchange market.
The debt-to-GDP ratio fell from 210 percent in 1985 to 150 per cent in 1988. The private sector switched allegiance with the tighter management by the Seaga administration.
The PNP administration of 1989 continued and accelerated the rate of decline in the debt-to-GDP ratio, however. With the exception of 1991 when the ratio jumped from 130 per cent in 1990 to 170 per cent, there was a steady decline which took the ratio to 100 per cent in 1992. With the exception of 1993, the ratio was maintained below 100 per cent until 2000.
In spite of the liberalisation of the Jamaican dollar and accession to the WTO, the 1990s witnessed the longest sustained period of the debt-to-GDP ratio at less than 100 per cent. The lowest ratio of 70 per cent was achieved in 1996, with the two succeeding years recording approximately 75 per cent. The tumultuous year 2001 witnessed a jump from 85 per cent in 2000 to 120 per cent and then 125 per cent in 2002. The ratio hovered between 120 and 125 from 2001 to 2009. The ratio of 125 per cent in 2009 was a steep movement from 110 in 2008 and estimates are that the ratios would have jumped again in 2010 and 2011 towards levels of the later part of the 1980s.
The evidence suggests that the debt-to-GDP ratio can be lowered, but it will be nigh impossible to get and maintain it within the 70 per cent which the international community would deem sustainable. The new Government cannot set too ambitious a target. Getting the ratio back to the 70 per cent achieved in 1986 will require strong and consistent policy action in a range of areas. These would include:[/color]
(1) A policy decision to cap the debt-to-GDP ratio and the import-to-GDP ratio at current levels;
(2) A policy decision to begin to reduce both at an accelerating rate with the debt-to-GDP ratio to reach 70 per cent in about six years;
(3) Strong measures, including targeted incentives to increase domestic production of goods and services for the local, including tourist and export markets.
(4) Strong and consistent measures to increase productivity and reduce costs through investments in human resource development and short-term training, access to productivity enhancing technologies such as ICT, and development and application of more efficient energy sources and technologies and the management of energy use.
The socially oriented PNP administration of the 1970s, faced with two international economic crises, sought simultaneously to reduce the disparity in wealth, rein in the conspicuous consumption, and curtail access to foreign goods. The resistance, in significant measure, accounted for the removal of the PNP from office and the installation of a JLP administration at the beginning of the 1980s.
The JLP administration was forced to liberalise the economy in many ways, even though it was just emerging from an international crisis which had put great pressure on the balance of payments and foreign-exchange availability.
The international community – multilateral agencies, bilateral agencies, private creditors, including commercial banks – was anxious to facilitate in support of its policies of liberalisation and structural adjustment.
Debt-to-GDP ratio doubled
World Bank data show that from 1982 to 1984, the debt-to-GDP ratio more than doubled – moving from approximately 100 per cent in 1980 and 1981 to 220 per cent. The foreign debt component exceeded 150 per cent. That debt-to-GDP ratio has not been approached since under either a JLP or PNP administration.
Analysis of the debt-to-GDP ratio from 1980 to 2010 suggests that after the extraordinary build-up in the 1982-1985 period, there has been an effort to tame the debt. The JLP lost the local government election in 1986. This prompted a shift in the policy of unfettered liberalisation most clearly seen in the foreign-exchange market.
The debt-to-GDP ratio fell from 210 percent in 1985 to 150 per cent in 1988. The private sector switched allegiance with the tighter management by the Seaga administration.
The PNP administration of 1989 continued and accelerated the rate of decline in the debt-to-GDP ratio, however. With the exception of 1991 when the ratio jumped from 130 per cent in 1990 to 170 per cent, there was a steady decline which took the ratio to 100 per cent in 1992. With the exception of 1993, the ratio was maintained below 100 per cent until 2000.
In spite of the liberalisation of the Jamaican dollar and accession to the WTO, the 1990s witnessed the longest sustained period of the debt-to-GDP ratio at less than 100 per cent. The lowest ratio of 70 per cent was achieved in 1996, with the two succeeding years recording approximately 75 per cent. The tumultuous year 2001 witnessed a jump from 85 per cent in 2000 to 120 per cent and then 125 per cent in 2002. The ratio hovered between 120 and 125 from 2001 to 2009. The ratio of 125 per cent in 2009 was a steep movement from 110 in 2008 and estimates are that the ratios would have jumped again in 2010 and 2011 towards levels of the later part of the 1980s.
The evidence suggests that the debt-to-GDP ratio can be lowered, but it will be nigh impossible to get and maintain it within the 70 per cent which the international community would deem sustainable. The new Government cannot set too ambitious a target. Getting the ratio back to the 70 per cent achieved in 1986 will require strong and consistent policy action in a range of areas. These would include:[/color]
(1) A policy decision to cap the debt-to-GDP ratio and the import-to-GDP ratio at current levels;
(2) A policy decision to begin to reduce both at an accelerating rate with the debt-to-GDP ratio to reach 70 per cent in about six years;
(3) Strong measures, including targeted incentives to increase domestic production of goods and services for the local, including tourist and export markets.
(4) Strong and consistent measures to increase productivity and reduce costs through investments in human resource development and short-term training, access to productivity enhancing technologies such as ICT, and development and application of more efficient energy sources and technologies and the management of energy use.
(5) Major investments in entrepreneurial development and in research and application of technology in the energy, agro-industry, cultural, sporting and entertainment sectors; and
(6) Negotiation of an appropriate medium-term social compact for industrial harmony involving the Government, private sector and labour at different levels.
The elaboration and implementation of these policies will require fortitude.
The history of the behaviour of the debt over the last 30 years suggests that the PNP should do a better job in seeking to tame the debt in the immediate future. This will not be easy, however, and will require a willingness to cooperate and to share in confronting the challenges going forward.
■ Byron Blake is a former assistant secretary general of CARICOM. Email feedback to columns@gleanerjm.com.[/color]
The history of the behaviour of the debt over the last 30 years suggests that the PNP should do a better job in seeking to tame the debt in the immediate future. This will not be easy, however, and will require a willingness to cooperate and to share in confronting the challenges going forward.
■ Byron Blake is a former assistant secretary general of CARICOM. Email feedback to columns@gleanerjm.com.[/color]
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