Edward Seaga
THE JAMAICAN economy is entering a stage where paradigm changes can be expected. An indication of this arises out of the report of an announcement by Minister of Finance, Omar Davies, that he intends to introduce a shift in economic policy.
Next year, he is reported to have said, the objective will be to repair the country's infrastructure, not to balance the budget. This statement is a complete reversal of the current policy which targets a balanced budget, with some surplus, as the ultimate objective of the economic model which has been pursued for the past decade. The whole thrust has been to eliminate the persistent budget deficit by producing a budget surplus. This has completely failed except for one year, 2001, when there was a slight surplus of 1.4 per cent. It now appears that what was the prime objective of macro-economic policy is to be abandoned. The reason has not been stated and in the absence of explanation, different reasons can be adduced, each of which has grave economic implications for the future.
INCREASE IN EXPENDITURE
Two possible reasons are:
The Minister of Finance recognizes that the new administration of his government is very likely to want an increase in expenditure to be able to tackle urgently some serious areas of neglect, like road repairs, job creation, or other areas of pressing problems. In such a case, loan financing would have to be found as it would prove impossible to find these funds from current revenue. The consequence of this would be to sustain or increase the deficit incurring all the damage which that implies.
There is another possible explanation. After struggling unsuccessfully for a decade to bring the budget under control, the possibility would now exist for the minister to get rid of this seemingly insurmountable problem in a manner which can relieve him of blame for any harmful consequences by arguing that he was under pressure to make the reversal.
Whether this radical reversal is being done voluntarily, or out of inducements to try an easier course, or indeed, simply in response to directives,
the consequences could be shattering.
Deficit financing was the economic strategy of the 1970s, particularly in the last half when it was an even more deliberate policy. I should say no more than that in order to signal the danger this poses. But there are a great number of younger people who are not aware of what happened then and for their benefit I will inform them now.
In the period 1972-1980, the Jamaican economy was run into the ground. It was categorised by the president of the World Bank in 1980, as "the second worst in the world." In this decade of reckless adventure and inappropriate policies:
The economy generated a monumental fiscal deficit of 15 per cent, one of the highest in the world.
This produced inflation levels never before experienced, peaking at 50 per cent in 1978.
It also created a record unemployment rate of 28 per cent.
Non-payment of salaries, fuel, electricity, spare parts, other supplies, and capital goods, accumulated. Eventually, these were followed by a regular series of shortages, outages and stoppages.
A wipe out occurred of all the foreign exchange reserves in the Bank of Jamaica. Only US$11 million was in the BoJ on October 30, 1980 the date of the change of government a contribution from the government of Iraq which was withheld to arrive on October 29.
Negative growth plagued the economy for eight consecutive years, the worst performance across the globe.
The end result was that the national debt increased 20 fold between 1971 and 1980 and the debt to GDP ratio jumped from a very low 22 per cent to a very high 123 per cent over the same period.
Endurance reached the breaking point for thousands of Jamaicans as 25 per cent of the equivalent of all the skilled labour force in the country migrated between 1977-1980.
DEFICIT FINANCING
Having spelled out the dire consequences of this period, the impact of which is still affecting the Jamaican economy today, I can only urge that we do not go back to that route. It would be a great disaster, particularly after the last 15 years of economic stagnation averaging less than 1 per cent growth per annum, another worst performance in the world for that decade. If there is to be a shift of policy, let it be a shift from the present failed policy to a policy with future hope, not one of return to the great failure of the past.
In the absence of any fulsome explanation by the Minister of Finance on precisely what is intended, I am entitled to draw the conclusions which I have set out. But I recognise that there is a less harmful path which may be followed, along the same lines. It may be that what is intended is to abandon the achievement of a balanced budget, while maintaining the current level of deficit, which is less damaging. But this would still entail a shift of policy to one of deliberately operating a strategy of deficit financing.
Note must be taken that a policy of deficit financing would most likely face rejection by the IMF, downgrading by the financial rating agencies and abandonment by the international capital market. Support by the IMF and the international capital market, particularly the bond agencies, have enabled the government to borrow hundreds of millions of United States dollars annually for budget support, without which Jamaica would have been an economic basket case.
All these agencies have unequivocally said that their support for the Jamaican macro-economic programme is based on attainment of a balanced budget, which should have been, according to plan, achieved this fiscal year ending March 31. This will not happen, as the budget, once again, will be in deficit, requiring more borrowings to close the fiscal gap and incrementally adding to the national debt, which is already the third highest in the world.
Are we to understand that the IMF and bond agencies are now to give support to a deficit financing policy? Even if the IMF should temporarily soften its resolve on a balanced budget somewhat, the hard-nose bond agencies and others who support Jamaica's loan financing programmes will not, once there is an abandonment of the policy to balance the budget. Worse yet, the rating agencies, like Moodie's and Standard and Poor's have fixed policies for the analysis of sovereign debt which cannot be varied from client to client. A downgrade in the rating of Jamaican bonds would start a domino effect and price collapse. Let it also be noted that in the early years after the change of government in 1972 the deficit exploded from 3.7 per cent to 13 per cent in five years and continued in double figures for several years thereafter leaving a trail of economic wreckage. At that time, the same motive existed: increasing expenditure excessively to deal with felt needs.
A deficit that begins small, will, mark my word, grow bigger and bigger, year by year and if there is no policy to deflate it, the bloated balloon of over expenditure, excess borrowing and insufficient revenue will finally explode with a bang.
TIPPING POINT
All this experimentation, born out of uncertainty and failure, need not be the course to take. The failures of the past can be overcome by a different approach which promises to be a turning point, not a tipping point.
As I have pointed out so many times in the past, the alternative strategy is to peg or fix the exchange rate. This is the economic model used by 30 out of 36 states in this region. Academic studies show that almost all these countries have low inflation, low double digit commercial bank lending rates and higher standards of living than Jamaica, Guyana, Suriname and Haiti. These four are prominent among the six countries which do not peg or fix their exchange rate. Why is Jamaica in the failed group rather than on the successful team?
A MODEL OF PROVEN SUCCESS
When I used what was virtually a pegged exchange rate model in the 1980s to fix the exchange rate at $5.50 to US$1, the economy zoomed into high gear with a 5 per cent average rate of economic growth in the last half of the decade producing 30,000 jobs per annum, twice the current level. Nothing should prevent that success from being repeated again if the failed economic model used over the last decade is abandoned for a model of proven success in 30 states.
I add one thing more. If the Jamaican rate of exchange was pegged or fixed during the current fiscal year ending March 31, 2006, the revenues of the economy would have increased by $16-18 billion, greatly relieving current economic problems. A forecast for this coming fiscal year beginning April 1, should hardly be much different. This would provide much of the revenues required to deal meaningfully with the urgent problems of roads, jobs, education, agriculture and crime during this coming fiscal year and some years to come.
I am told that many persons in the leadership group of the government accept this model, but because it has been proposed by me, it cannot be adopted. If this was so in the past, I am certain that the new Prime Minister does not accept this kind of thinking. What I propose is in the interest of rebuilding a country which does not deserve to suffer any more. It is time to change the past in order to change the future.
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the University of the West Indies. E-mail: odf@uwimona.edu.jm
