Professor Donald Harris - File
This is the first of a three-part essay on Jamaica's debt problem and economic strategies pursued over the years.
JAMAICA NOW faces the critical issue of how to pull the economy out of the ditch of the current crisis and the painful adjustments that process will undoubtedly require. Meanwhile, it is necessary to examine how exactly the country got itself into this ditch.
The purpose of this exercise is not to assign blame. Rather, it is an essential prerequisite for understanding how to get out of the ditch and to move forward. Accordingly, in this series of three essays, I seek (a) to draw out some of the crucial lessons learned from our recent experience of economic policies actually pursued, and (b) to derive from this analysis some constructive proposals for action now.
key facts
Consumers have been feeling the pinch as a result of the recession. The only real hope for creating new momentum in th economy is to bolster some of the ongoing export activities, says Stanford Professor Donlad Harris. - File
I begin by placing some key facts on the table, about the actual record of recent economic performance, starting in the early '90s when concerted efforts were made to design a new economic-growth strategy, the National Industrial Policy (NIP), adopted by the government in 1996. The thrust of my analysis is that the core economic strategy actually pursued by the government, when examined in its totality, was very different from the announced strategy. The former I call the strategy of a debt-propelled economy; the latter a strategy of export-led growth. The actual strategy ultimately proved to be unsustainable, self-defeating, and undermined the very goals of the NIP. My proposals for action follow directly from this basic finding.
The debt-propelled economy is a path followed for a long time in Jamaica by a succession of different governments. Having failed to wean public policy off it, the country now has to face squarely its consequences and the task of cleaning up the results it has produced. And what an immense task that is turning out to be!
deep structural problems
It was evident all along that there were deep structural problems in the economy that were not being addressed by public policy, except by short-term measures. My studies of the actual record of long-term trends showed that there was a 'dramatic change in economic performance' around 1974-75. This break was marked by a decline in the long-term growth rate of exports from a previous average of 9.3 per cent per annum to a much lower rate of 2.4 per cent, while GDP went into a steep decline at a rate of -0.24 per cent.
It was clear also that export growth, at that weaker pace, could be carried along for a while by the continued growth of bauxite and tourism and by the newly emerging but fragile apparel industry, while the traditional vessels of bananas and sugar had already sprung major leaks. The only real hope for creating new momentum was to bolster some of the ongoing export activities that could foresee good prospects and to diversify strategically into new product lines, i.e. by pursuing an export-led growth strategy. The NIP aimed to break out of the mould of the past and to tackle aggressively the outstanding problems by pursuing such a strategy.
To be fair, it must be said that significant economic gains were made in some areas during the NIP period, particularly in investments in hotel facilities and in highway construction. However, a final accounting of these projects requires a thorough cost-benefit analysis not yet made, taking account of the actual cost-overruns involved, the quality of work done, the environmental effects and the opportunities forgone. Moreover, in the final analysis, the actual strategy must be judged by its total outcomes over the entire duration, not by picking and choosing the high or low points.
GDP remains nearly flat
The overall picture of economic performance can be summarised by three conspicuous features:
Total public debt mushrooms exponentially after 1994/5, reaching a peak of US$14 billion in the last two years, three times the size of the early '90s.
Meanwhile, gross domestic product remains nearly flat, growing at a negligible rate of 0.9 per cent on average for the whole period.
The (nominal) exchange rate falls through the floor; the Jamaican dollar, which was worth US$0.14 in 1990, falling to slightly more than 1¢.
This is a dismal performance by any standard, whether viewed (a) in terms of the pay-off to the country as a whole from accumulation of a vast amount of debt, or (b) in comparison with other countries that were able to take advantage of the opportunities available in a time of rapid growth in the world economy to grow themselves at a high rate.
Equally striking is the fact that finance houses did pretty well for themselves in terms of profitability, judging from the size of the average spread between lending and deposit rates, with a heavy bias in portfolios in favour of government debt. At the same time, depositors got hit with negative real returns on deposits. I infer from closer study of the actual performance and structure of the financial sector that the sector has been dominated by a few banks and finance houses which have been able to exercise a great deal of market power.
Looking at these two sets of outcomes, one finds that there are two basic things operating here. On the one side, behind the mushrooming public debt, is a government addicted to deficit spending. On the other side is a financial industry, with an apparently monopolistic market structure, that is feeding off the trough of government debt. These two things go hand in hand, and are mutually supportive of each other. I find this to be at once the most intriguing and yet the most revealing feature in the picture of what has been happening in the Jamaican economy in the period under review.
On the production side, there is a profound transformation in the structure of the economy. In 1992-1993, manufacture is 1.7 times the size of finance and insurance. By 2007, the situation is completely reversed: finance and insurance become 1.4 times the size of manufacture. A similar process of relative decline occurs in agriculture, starting in 1997. Looking at the actual sector shares in 2007: finance and insurance (11.2 per cent) is almost as big as Government (11.7 per cent) and slightly less than transport and communication (12.3 per cent). The biggest sector is distribution (wholesale, retail, etc. = 18.9 per cent), and the financial sector is approaching it very closely if you add in financial intermediation services.
In foreign trade, the overall pattern is one of relatively stagnant exports and rapidly growing imports, such as to create an ever-growing trade gap to be paid for by inflows of credit and other finances. Remittances served as a cushion throughout the period to support this gap.
government-financing operations
Finally, to fill out the picture, government-financing operations show a rising share of debt-service costs in total revenue, reaching a peak of 60 per cent in 2003/04, twice its initial level in 1990. Latest data indicate this peak may already be surpassed. The share of capital expenditure falls from an initial high of 18 per cent to a low of three per cent, recovering later to a level still below its earlier high point. The share of expenditure on programmes also falls. Clearly, debt service managed to crowd out all other major items of expenditure, except for wages and salaries, and remains today the dominant component.
In summary, this is the factual record of economic performance. I want to go on next to probe more deeply and answer the really basic question: how does one explain what is going on here?
Donald J. Harris, professor emeritus of economics, Stanford University.