Shaw
Audley Shaw, Contributor
IN DECEMBER 2001, political riots and crisis erupted in Argentina that resulted in the resignation of the President and the collapse of the Government.
Most commentators agree that the crisis resulted from the extremely high debt level in Argentina (US$132 billion or 46 per cent of GDP) and the inability of the Government to meet its debt obligations. This economic and political crisis was exacerbated by severe spending cuts and an increasing unemployment rate that fuelled the riots in the streets.
There is no question that Jamaica's position today is worse in many respects than the conditions that obtained in Argentina before its collapse. In terms of debt, Jamaica's total national debt of approximately J$510 billion represents approximately 160 per cent of GDP, more than three times that of Argentina in proportional terms. In addition, Jamaica's unemployment rate of 16 per cent was higher than Argentina's unemployment of 15 per cent early last year, which rapidly increased to its current rate of 18 per cent.
Lack of jobs
Jamaica's lack of employment has hit crisis levels. Between 1996 and 2000, Jamaica lost nearly 30,000 jobs, a record in our history. Between 1999 and 2000, nearly 10,000 net jobs were lost, a record for a single year. This serious lack of employment has come at the same time that the Government has been promising 40,000 jobs. Once again, we have received promises, not performance.
The Minister of Finance has argued in the media that the crisis in Argentina is indicative of what would have happened in Jamaica if the money bills introduced by Mr. Seaga into Parliament in 1994 had been implemented.
The Minister either lacks a basic understanding of economics or is deliberately trying to mislead the people of Jamaica. This is so because the money bills do not advocate the main reason that Argentina is in the position it has found itself: the decision to peg the currency (the peso) to the US dollar in 1991.
It is worth reviewing the JLP's money bills and the Argentina economic reform plans to understand the critical differences. On one hand, the money bills advocated a severe restriction in money supply by advocating an independent central bank (supported by the present Governor), a restriction on central bank lending to the Government, and a prohibition on printing local currency unless backed by foreign reserves. But the money bills did not address the value of money by fixing the exchange rate.
The JLP solution
The first part of the JLP's solution to ensuring monetary stability - restricting money supply - was instrumental in the substantial advances Argentina made after the reforms were introduced in 1991. Inflation was reduced from hyper-inflation to single digits and in the early 1990s, Argentina's growth rate exceeded 10 per cent in most of those years. The economy grew and did well.
Argentina's problem arose from the rigidity of its exchange rate, particularly after its neighbour, Brazil, devalued its currency the real in the late 1990s. Because Argentina and Brazil are members of a trading group known as Mercosur, the comparative devaluation made Argentina's export far less competitive compared to Brazil. In addition, nine of Argentina's top 10 exports are commodities - where value added is minimal - and thus there was little Argentina could do after with a rigid currency.
Another factor exacerbated Argentina's crisis. Argentina has a separation of powers model with an elected president, something that many advocate for Jamaica. This separation of powers resulted in an election in which the elected president, Fernando de la Rua, was a member of a party (the Radical party) that did not control the legislature (the Peronist party). This lack of support in the legislature prevented the executive branch from effectively passing important legislation that may have avoided the crisis.
All those who advocate separation of powers should understand this weakness, particularly in vulnerable economies such as Jamaica's. We cannot afford gridlock at a time when the Government can barely finance its debt.
Excessive debt and unemployment
Of all the factors that contributed to Argentina's crisis, however, the two most fundamental were: 1. the rapid increase in debt and the fiscal crisis to crisis proportions and 2. the failure to attract meaningful investment to create jobs. Apart from the crime rate, these are the two most important problems we face under this Government.
Between 1989 and 2001, Jamaica's total debt more than doubled from approximately US$4.5 billion to over US$10 billion. The Government recently increased the loan ceiling to J$400 billion. This unchecked spending has resulted in a projected fiscal deficit of nearly five per cent. Jamaica cannot grow by mortgaging our children's future without their permission.
In addition, the Government has failed to attract meaningful levels of investment to create jobs. Argentina, like Jamaica, has over the past decade cited high levels of investment, at the top of the South American and Caribbean tables respectively. The vast majority of this "investment" has been portfolio investment, not productive, job-creating investment. The "investment" by Trinidadian and Barbadian companies in Jamaica's financial sector looks good on the league tables, but has not resulted in massive infrastructure development and, in most instances, has resulted in a loss of jobs, not an increase.
So the main lessons we can learn from Argentina are: 1. We need to seriously address our debt situation, 2. We need to attract meaningful investment to create jobs, 3. We should avoid adopting a fixed exchange rate, and 4. We should avoid implementing a separation of powers system. Jamaica has suffered over the past decade from the first two of these problems and it is the responsibility of the Government to ensure that the political crisis that engulfed Argentina does not occur in our country.
Audley Shaw is the Opposition Spokesman on Finance.
