Friday, November 23, 2012

Why is Jamaica back in recession?

THE recently released Planning Institute of Jamaica numbers show that Jamaica is technically back in recession. I say technically because although there has been no change in Jamaica's economic structure, and underlying problems since Independence, the technical definition of a recession is three consecutive quarters of decline.

We have joined the ranks of Great Britain and Spain who experienced double dip recessions also. I did not say Greece, because they really have never come out of recession, and therefore is still on their first dip. These countries got there because they contracted fiscal spending, and similarly this would have contributed to our own double dip.

An IMF agreement won’t solve Jamaica’s underlying challenges and create economic independence. (Photo: AP)

The fact, however, is that Jamaica's double dip recession is not caused by any fundamental change in the structure of our economy. The structure of the economy has remained the same since Independence and this is one of our primary problems. We have failed to transform the economy from a basic one to either an efficiency or innovation-driven economy, as is supported by the Global Competitiveness Report.

Over the period 1962 to 1972, and the mid 1980s to early 1990s, Jamaica saw its period of greatest growth, which was eroded significantly by the 1972 to mid 1980s decline, and recent period after the 2008 recession. It was not helped by the very slow growth period of the 1990s either.

But Jamaica's economy has not really been much different over these periods, and because of the lack of proper strategic policy and planning, even though we had periods of significant growth in the 1960s and late 1980s, we have failed to maintain the momentum. It would seem clear, therefore, that Jamaica's economy has suffered more from strategic policy failures than anything else. Or should I say governance.

Because of the underlying challenges in the economy, it was therefore, not difficult to predict that with uncertainty surrounding an IMF agreement, the dollar would have devalued and the economy declined. This is the same thing that would have happened in any part of Jamaica's history, if we had a lack of external capital (whether through debt or equity) coming to the country. So there is no difference really between the current situation and past ones, with the exception of the level of confidence that exists at any point in time. The 2008 global recession, consequent drying up of privately available capital, and higher risk aversion, would no doubt have made it much more difficult.

If you look at any of the decades, since Independence, and even before, you would see that Jamaica's economy is highly dependent on capital inflows. Whether it is classified as remittances, foreign direct investments, or other private capital flows such as deposits. Therefore, the only way that we have been able to keep our economy stable is either through borrowing, grants or remittances.

These are what have kept our consumption levels vibrant and our NIR high. Therefore, after the 2008 recession, when there was a (i) lack of private capital (as there was a flight to safety); (ii) slowdown of global investments; (iii) slowdown in remittances; and (iv) reduction in grants; then the only place that one could go to access any funds were the multilaterals. But the multilaterals will only lend to us if we have the seal of approval of the IMF. This is why the IMF has become so relevant globally again. Not because they have had successes, but rather they hold the key to funding for many countries.

If you look at the history this is also the reason why we were able to grow, when we did, and why we declined also. In the 1960s there was a lot of private capital (loans and equity) flowing into Jamaica as a result of banana, sugar, bauxite, and tourism. In the 1970s, because of the lack of confidence, created by the rhetoric of the policies then, that capital retreated. In the 1980s, the IMF seal of approval was in play and much capital flowed back into Jamaica, as showed up in our debt to GDP ratio, which hit 212 per cent in 1984. In the 1990s up to mid 2000s we again saw significant capital inflows, in the form of debt and direct investments. After the 2008 recession, however, that private capital dried up and only the multilaterals were left standing.

This analysis therefore shows us that public policy has failed to change the economy from external (colonial) dependence to independence. This also impacts our fiscal accounts, which is heavily dependent on taxes. The solution we have always pursued, to our fiscal challenge, is to either cut expenditure or tax more. Even during the growth period of the 1980s, our solution was to cut expenditure by reducing the public sector significantly. In the 1990s, we increased the public sector once again and sought to solve the fiscal problem by taxing more. This tax policy was carried into the current century and continues, where today it has come to a compulsory end as the economy has reached a point now where more taxes have a negative effect on the economy and revenues.

The reason why we have not been able to solve the fiscal crisis with this approach is because increased fiscal revenues primarily depend on growing the economy, which we have not been able to do.

It is for this reason I say that, even though an IMF agreement is necessary because we have made it so, it still will not solve the underlying challenge and create economic independence; which as Norman Manley said, should have been the mission of the generation after him.

To solve the problem, we need to change the equation in the balance of payments, and focus on creating a trade surplus. This is why solving energy, food imports, and law and order are critical to achieving a viable economy going forward.

Failing to do this will only continue our frustrated attempts to grapple with economic stability and the fiscal accounts, and we will never get rid of our economic masters.


mykalmit said...

Insightful article ... but the analysis makes it seem as if "public policy" has been constant over the past 50 years. You also make it seem as the various administrations had the same approach and should share the blame equally.
I happen to believe that the inability to sustain the momentum of the 60's and 80's was due to the ill-timed socialist policies of the 70's and the protracted high-interest rate of the 90's.

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