THE RECENTLY-released Intensified Surveillance Report prepared by the International Monetary Fund (IMF) has given rise to mostly positive opinions on the state of the Jamaican economy at this time. What the report says is that the economy is becoming stable as the main problem areas, the perennial fiscal deficit and stubbornly high debt to GDP ratio, seem to have better prospects for improvement now than before. This will help to achieve greater stability.
The stability rests on the performance of a number of economic variables, of which, converting the fiscal deficit to a surplus and reducing the debt ratio from one of the highest in the world to a moderate level, while maintaining low inflation, are three of the most important. If those objectives are achieved then this could be considered a sign of the essential forward movement which the economy needs. After all, remember that converting the deficit to a surplus has proven elusive for nine years and reducing the debt ratio from the peak level on which it has been perched for even more years has also been unsuccessful. So any meaningful reduction must be cause for elation.
However, before the cheering section starts to pop champagne, let it be noted that when a fiscal surplus is achieved, as projected in two years, new ground would not be broken. There was an eight-year run of surpluses in the fiscal account from 1988 to 1995. So what is now hoped to be accomplished is to simply return to where the economy was eight years ago and should have continued to be to the present without any reversion to a deficit in the interim.
To be fully understood, this IMF report must be set in the circumstances in which it occurs:
Firstly, the report must be read not only as a current statement on the economy but also on what it projects will occur over the next five years. After all, we already know what is happening today. What we want to know is what will be happening over the next five years.
PROBLEMS OF
ECONOMIC INSTABILITY
Secondly, the specific role of the IMF must be recognised. It is concerned with problems of economic instability and solutions to restore stability. The IMF does not focus on economic growth. Other institutions do so, such as the World Bank. This report, therefore, must not be assessed on whether it prescribes solutions to enhance economic growth, which has averaged a little over one per cent for the last 15 years.
Dealing with the projections of the report for the next five years, three particular features can be quickly noted:
Economic growth is projected to be a steady 3.5 per cent for the next five years, higher than the 1.3 per cent of the past five-year period;
The ratio of debt to GDP would then be reduced over five years from one of the highest in the world, 137 per cent, to a still excessive, but not as dangerous, 100 per cent. The lower debt ratio means a lower rate of borrowing and hence more revenue available for investment and
growth instead of servicing debt;
3. Expenditure is to be reduced from 31 per cent to 27 per cent of GDP to allow more revenue to be available replace new borrowings;
4. These achievements would be accomplished while maintaining low inflation. Without low inflation growth would be reduced.
5. Interest rates would fall by three percent over the five-year period, from 13 per cent to 10 per cent. The interest rate in reference is the Bank of Jamaica rate. The lending rate at commercial banks would, even with the three per cent reduction, continue to be more or less around 20 per cent, still a prohibitive rate for investment.
This appears to be a positive economic package, except that there are weaknesses:
a) The projected reduction of expenditure will prevent any meaningful attack on social problems: education, health, justice, unemployment. At present only 10 per cent of revenue is spent on development programmes including social programmes. 90 per cent is required to service debt and pay salaries. The Memorandum of Understanding signed between government and the Unions to restrain wage increases would have to be renewed again and again over the five year period to keep expenditure within target.
b) The very modest interest reduction would not be sufficiently attractive to spur private investment to generate more growth. The modest growth level of 3.5 per cent projected is what can be hoped to achieve.
This brings into focus the question of boosting growth particularly because of the need to create new employment. Employment generation is one of the over-arching objectives of the development process.
As previously stated, IMF programmes are not prescriptions for growth. They focus on stability which is the precondition for growth. But an IMF stabilisation model can repress growth as, indeed, is the case here. Let me explain.
The model used by the government is called the Inflation Targeting Model. This means maintaining a low rate of inflation as the primary objective of the model. Other targets must complement this primary objective. But to maintain low inflation in the Jamaican case means that interest rates have to be relatively high, which in turn discourages economic growth. The business sector, particularly manufacturers who have been pressing for reduction of interest rates will have to continue to live with rates at the commercial banks which are unlikely to fall to much below 20 per cent over the next five years. This is still too high for attracting private investments. Hence, projections of economic growth will only be a modest three to five per cent and employment creation will continue to lag.
Is there an alternative to the Inflation Targeting Model which could ensure higher growth rates? The Fixed Exchange Rate model has the advantage of dramatically reducing interest rates to levels which are competitive with Jamaica's trading partners enabling greater competitiveness, increased exports and more jobs. CARICOM trading partners enjoy lending rates by commercial banks which are generally half the interest rate available in Jamaica. This alone rules out competitiveness of Jamaican exports of goods and services.
The contradictory position of the Jamaican authorities is evident. Participation in the CSME will require a fixed exchange rate to match up with the model used by nine of 13 CARICOM countries. Jamaica, Guyana and Suriname have no fixed exchange rate systems. They are the weakest economies in CARICOM, have worst inflation rates, highest bank lending rates. They also have lower standards of living than those countries with fixed exchange rates. Why then is there a delay in adopting a model now which can produce dramatic results in economic growth, when it is recognised that the change-over from the Inflation Targeting Model to the Fixed Exchange Rate model is inevitable in the CSME? There is a real danger of a missed mega opportunity in continuing the stabilisation Inflation Targeting Model for another five years, beyond its period of usefulness. This exact situation occurred in the mid 1980s.
The IMF had a stabilisation programme with the government in the 1980s. The prime target was to convert to a surplus the massive fiscal deficit of 15 per cent inherited with the change of government in 1980. Concurrently, the World Bank programme with the government on structural adjustment of the economy was designed to generate growth. The objective of the structural adjustment programme was to shift the economy away from reliance on one sector as the dominant export earner by developing other export earning sectors. Bauxite/Alumina at the time earned 70 per cent of the export earnings in the economy. Coincidentally, Bauxite/Alumina fell into deep problems at around the same time due to the impact of the worst global recession in 50 years. The structural adjustment programme enabled the addition of a revived and enhanced tourism industry together with a greatly expanded garment export programme to come to the fore front as major export earners and contributors to economic growth which increased dramatically to an average of some five per cent in the last four years of the 1980s Hurricane Gilbert impact included.
But what is important is that this dramatic improvement occurred concurrently with the introduction of a virtually fixed rate of J$5.50 to US$1 over that period. The certainty of an exchange rate which could be relied on was the crucial psychological determinant that provided the incentive for growth.
The delay in the inevitable switch over is likely to lose a grand window of opportunity for achieving the high levels of growth of the last half of the 1960s and 1980s when the Jamaican economy really grew substantially. In those two periods, economic growth was a factor of high investment levels as measured by gross capital formation, which exceeded 30 per cent of GDP in each case, a recognised level of excellent high performance.
Average as % GDP
Gross Capital Formation Economic Growth
| 1966-71 | 32.95% | 5.08% | 1986-90 | 31.58% (including 'Gilbert') | 4.84% | 1999-03 | 22.16% | 1.3% |
Much of the investment expected from the many new mega projects announced may not have yet come on stream, hence, the current low GCF.
But when the announced highway, hotel, alumina and energy investments do come fully on stream, the GCF might reach the 30 per cent bench mark for strong investment. However, that will not necessarily translate into the more robust growth of the previous two periods if interest rates are not lowered to invite low cost, small investments into the mix. These are active producers of growth and employment at little capital cost.
There is an obvious choice to be made now. Move quickly to lower interest rates by switching the model from an Inflation Target to a Fixed Exchange Rate Model. This will reduce interest rates and provide the additive of smaller local investments to the mega-foreign investment projects (highways, hotels, etc.) to ensure higher growth rates and more employment creation. The alternative is persist with stabilisation of the economy as the primary objective and allow the high growth period to escape.
Heavy investment inflows are not everyday occurrences, in the historical experience of the Jamaican economy. Neither is any sustained period of high investment. When it comes, the opportunity must be seized with both hands for the Jamaican economy to take a great leap forward and, thereafter, hold the course. This is what was intended in the two golden periods of the last half of the 1960s and 1980s. But we know what wrecked the glorious opportunity that was set to follow in the 1970s, and 1990s.
If not, for the third time in our history an excellent opportunity to make the leap would have been wasted along with the efforts and hopes of Jamaican longing to see good days come again and a revival of pride in their country.
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the UWI. E-mail: veritasja@lycos.com
Edward Seaga
