Reggae Boyz economy
in turmoil
Jamaicans find it easy to agree that the greatest musical rhythm on earth is the reggae. They also firmly believe that their national football team, the Reggae Boyz, will be bringing home the prized World Cup the next time around. However, when it comes to bread and butter issues and the direction in which their economy should go - conflict abounds.
In the words of reggae superstar the Legendary Bob Marley, "every where is war... ."
So two weeks ago arsonists tossed homemade bombs into Gordon House,
the seat of Parliament, several hours before a scheduled sitting
of the House of Representatives. Two molotov cocktails were thrown
at the front door of the building at about 1:30 a.m. The resulting
blaze destroyed the door, damaged a metal detector at the entrance
and glass windows. Graffiti painted in red across the wall screamed,
"Lazarus, Lazarus, Lazarus enough."
Leader of government business Dr. Peter Phillips deplored the
bombing and told his colleagues that it represented an attack
"on the democracy of our people and country."
He found support in unusual quarters. Karl Samuda, Leader of
Opposition Business, described the bombing as a new level of disrespect
for the sanctity of Parliament. On Wednesday November 11, 1998
the police intercepted notes circulating in the capital, Kingston,
which indicated that the bombing represented a "protest of
the way in which the government is managing the affairs of this
country."
Jamaica is an independent, English-speaking Caribbean island which
has a total area of 10,990.5 sq. km. It forms part of the Greater
Antilles which includes Cuba, Hispaniola (Haiti and the Dominica
Republic), and Puerto Rico. The population of Jamaica is estimated
at 2.5 million with a work force of 1.1 million.
Since its independence in 1962, Jamaica adopted, as its form of
government, a parliamentary democracy based on the Westminster
model.
There have also been several phases to the country's development.
Jamaica was under Spanish rule from 1494 to 1655, and subsequently
under British rule from 1655 to 1962. For more than 180 years
after 1655, Jamaica was primarily a plantation economy based on
the cultivation of sugar cane and export of sugar using slave
labour. With the abolition of slavery in 1838 and the decline
of sugar, until the 1940's, Jamaica progressively diversified
into the production of other export crops such as coffee, cocoa,
logwood, bananas and citrus.
Tourism became an increasingly important industry after the turn
of the century. From the 950s, and for nearly 35 years, bauxite
mining and alumina production was the island's most important
earner of foreign exchange. In 1985, it was surpassed by tourism.
During the 1950s and 1960s, economic and trade policies were designed
to promote import substitution for domestic consumption and export
promotion with the emphasis on labour intensive industries. In
the 1970's, Jamaica continued on the path of a mixed economy but
with increased state participation.
Since the 1980's and throughout the early 1990's, Jamaica underwent
an accelerated programme of structural adjustment reforms to adapt
to the global trend towards liberalization.
The reforms consisted of a nationwide programme of privatization
and divestment which facilitated the deregulation of sectors which
previous administrations felt were of critical development importance
to the island state. These include agriculture, tourism, transportation,
banking, manufacturing and communications.
This have resulted in the liberalization of markets, the elimination
of price controls and subsidies, and the reduction and removal
of tariffs and non-tariff barriers to trade. Other measures include
a simplification of the tax system, financial sector reforms to
enhance the prudential and supervisory role of the Bank of Jamaica,
and the strengthening of monetary policy.
Economic breakdown
Things fell apart shortly after the Jamaican government attempted
to make these significant changes to their macro policy.
A recent preliminary report by the UN's Economic Commission on
Latin America and the Caribbean notes that Jamaica's national
output contracted in 1997, while the current account for the first
half of 1996 was converted into a deficit for 1997.
The report emphasized the poor performance of the economy by outlining
the fact that 1997, likely, produced zero growth. Sectoral performance
experienced decreased investment spending. The only good news
is the low consumption spending brought about by a tight macro
economic strategy. Agriculture recorded a decline of 11 percent.
Bauxite production decreased by 0.2 percent and the manufacturing
sector continued to stagnate presumably as a result of competition
from imports (some analyst believe that the pressure of imports
is a greater factor than the macro strategy of high interest rates).
It also mentioned the difficulties resulting from the insolvency
of a number of financial institutions. Fiscal balances deteriorated
owing to supplementary expenditure incurred as a consequence of
the financial crisis.
In the first six months of 1997 the fiscal accounts deteriorated
considerably compared to the same period of 1996. The supplementary
expenditure was naturally incurred in order to establish a body
to restructure the various insolvent financial institutions.
Capital expenditure increased by 300 percent as a result. During
the period under review, the current account increased by more
than 2 percent.
The deficit on visible trade increased by 17 percent. The value
of exports fell by 3.7 percent. Traditional exports, including,
bauxite, sugar, and bananas showed a marked decline in output
as well. Non traditional exports declined by 8 percent while
imports swelled by over 80 percent. Consumer goods purchased
expanded 69 percent and capital goods by 43 percent. Unfortunately,
raw material imports for productive purposes shrank by 28 percent,
reflecting a significant slow-down in economic activity.
Public finances were significantly reduced last year as Government
yielded to pressures from labour organizations and agreed to a
20 percent rise in wages and salaries. The agreement was linked
to linked to retroactive payments awarded to public sector employees,
and a 16 percent increase in interest payments. The result was
a 12 percent increase in Government's recurrent expenditure.
Dennis Morrison, a senior economist attached to the Jamaica Bauxite
Institute said "it is not difficult to project that the budget
deficit will be in the region of J$25 billion."
He added that the deficit will most certainly be covered by debt.
"Everyone is concerned about the huge internal debt and
the rapid rate at which it is growing- debt servicing is eating
up a large slice of recurrent expenditure."
In fact, interest charges paid by central government increased
by nearly 300 percent in the four periods from 1992/93 to 1996/96
or from some $6.9 billion to $27.3 billion. On top of this, the
wage bill has also risen sharply from $4 billion in 1992/93 to
$24 billion in 1996/97 or 500 percent.
This, coupled with the stats released on the poor performance
of the economy paints a picture of serious inflationary pressures
at least in the short term.
"It is quite clear that in the last year, government has
been borrowing to pay wages and salaries and to service its debt.
This clearly means that Government has to hold a very tight reign
on its finances. If the labour sector persist in aggressively
pursuing these expectations it will create additional confrontation
and antagonism. It will further limit the Government's ability
to pay or provide the flexibility for the private sector to expand."
Policy mix
In November, nine private sector groups publicly objected to
the policy mix being pursued by government as they felt ti would
not lead to economic growth.
"I don't think that the model as it currently exist will
lead to growth. Growth will only come through investments,"
said Cliff Cameron, president of the Private Sector Organization
of Jamaica, while speaking to a group of journalist last month.
"There is consensus (among the private groups) that the real
interest rate is considerably too high and is creating a dis-incentive
to investment and contributing to the erosion of capital,"
added Cameron.
The International Monetary Fund (IMF) in the latest examination
of the economy reported that: "Directors shared concerns
that the revenue projections in the budget are very optimistic
and the wage and interest payments were underestimated. Authorities
should reinforce their announced fiscal actions by introducing
additional tax measures, eliminating tax exemptions, and taking
steps to reduce expenditure to meet its fiscal objectives."
The Jamaican Minister of Finance, Dr Omar Davis, insisted that
he would not increase taxes during this fiscal year but conceded
that the government would make significant cuts in expenditure
to offset the shortfall in taxes.
"We do not believe that a new tax package would serve any
useful purpose," said the Finance Minister.
The Funds directors, advised Davis that "greater exchange
rate flexibility would be desirable" to enhance competitiveness
- a euphemistic way of saying that there should be a sharp devaluation
of the Jamaican dollar which has been relatively steady for months
at J$36.5 = US$1.
The Fund had pointed out that while the Jamaican dollar had, in
nominal terms, depreciated by four per cent during the 1997/98
fiscal year, it had in real terms appreciated by approximately
10 per cent.
"Our history of devaluation provides more than adequate evidence
that it does not lead to increased competitiveness and production,"
Davies emphasized.
Now everyone has an opinion about this island in the sun. On
November 9, 1998, Bear Stearns, a leading investment house on
Wall Street, reported to its clients that, "the Bank of Jamaica
(BOJ) and the Government, in our opinion, are making large strides
in building credibility by adhering to a consistent economic policy."
However, this shot in the arm for the government followed a more
pessimistic view by Wall Street powerhouse, Merrill Lynch. The
investment house recently said in its Emerging Markets Daily briefing
sent out to clients that despite improvements in some areas, it
still remains cautious on Jamaica's economic prospects.
The summary and outlook highlighted key difficulties the economy
faced and cast doubt on the Moody Investor Service rating of Ba3
assigned to Jamaica's sovereign debt in March this year.
However, Bear Stearns notes that "the anti-inflationary programme
launched in 1995 has not been without cost, but it has succeeded
in reducing inflation expectations in the economy - a critical
step in boosting domestic investment."
The impact of the last few years of economic adjustment can also
be seen in human terms. The process has been particularly hard
on the lower income sectors which make up the vast majority of
the population.
Almost everyday there are protests for drinking water, better
roads and other social services. Some 26% of the population are
living in poverty. Most of the poor live in the rural areas, approximately
20% of them in the capital and another 16% in other towns.
By Lloyd Nicholas
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