THE SUNDAY Herald carried recently a very good investigative piece on Air Jamaica losing $33 billion over 10 years.
It should be noted the last time Air Jamaica made a net profit was in 1974 of US$250,000 under President Guillermo 'Bigge' Machado (a Jamaican president). The government has come out and said clearly it will continue to support Air Jamaica.
Not mentioned in the article was that IATA has stated that world airlines for 2004 will lose US$5 billion. More importantly this speaks to a greater issue of government spending and its effect or lack thereof.
In contrast to the vast literature on determinants of economic growth, there has been less research on the cyclical behaviour of macroeconomic aggregates (inflation, unemployment and production) in developing
countries.
One reason for this is the relatively weak quality of data and their
frequency in many developing countries. For example, quarterly GDP data are available for only a limited number of countries, and even when they are available, they are usually of significantly lower quality and reliability than annual estimates. Another constraining factor is that developing countries often experience abrupt economic changes, making it particularly difficult to separate cyclical influences from structural breaks.
MACROECONOMIC AGGREGATES
A better understanding of the factors underlying the cyclical pattern of macroeconomic aggregates is useful for at least two purposes.
First, examining the relationship between overall economic activity and fiscal and monetary aggregates has analytical value from the perspective of business cycle modelling.
Second, as Agenor and Montiel (1996) argue, this type of analysis can make a valuable contribution to the design of stabilisation and adjustment programmes (which Jamaica has had numerous problems with over the past 25 years)
In examining data from 51
countries, a number of areas were paramount:
(1) Co-movements of government spending and output.
(2) The short-term variations between government spending and output from any longer-term
relationship.
(3) The variation in the relationship between government spending and output by focusing on key political and economic determinants.
STUDIES
With few exceptions (mostly for Latin America), existing studies of developing countries like Jamaica have either focused on the long-run relationship between spending and output, or have examined the
volatility of growth and the relationship to the volatility of various fiscal aggregates (see, for example, Fatas and Mihov, 2003), without examining the factors underlying the cyclical behaviour of the latter.
Three policy implications can be drawn from this argument:
1) In many countries there may be scope for fiscal rules or fiscal responsibility laws that limit the discretion for procyclical fiscal policy during upswings in the business cycle.
2) A strengthening of checks and balances that is, a greater dispersion of power is fully compatible with good economic policy making, since it helps reduce the cyclicality of government outlays.
3) In many countries there is a long-term relationship between the level of output and government spending. In these countries, short-term cuts in spending, or surges in government outlays, will eventually be erased as the government spending/GDP ratio return to its long-term average.
SPECIAL CARE
In countries like Jamaica, special care will need to be taken to ensure that spending cuts achieved over the short run are accompanied by longer-term structural reforms to ensure these savings are durable.
Peter Jones is the executive director of the Economic Development Institute, a non-profit Jamaican economic development consultancy. Mr. Jones holds post-graduate degrees in economics and business administration and is the author of 'Jamaica: Social, Political and Economic Issues for Future Development'.
