Keith Collister, Gleaner Writer

Collister

The Washington-based Council of Hemispheric Affairs (COHA) issued a report last week entitled "Jamaica: Debt, Economic Performance and Labour Productivity." Written by research associate and Jamaican national Michale Sheckleford, the report argued that Jamaica faces a "sombre future" as "since the 1960s, when the country enjoyed growth rates ranging from two per cent to eight per cent per annum, the island has been unable to sustain high growth rates over an extended period of time." It lists the primary economic problems facing our nation as our high internal debt, large trade deficit, "swollen" interest and inflation rates, "chronically elevated" unemployment levels, as well as low worker productivity, all of which it argues, fuels political unrest and "escalating" gang violence. It then goes on to argue that "ultimately, if Jamaica cannot solve its problems by conventional means, it may be persuaded to take the Argentine road of debt renunciation."

A quick response to the report would be to argue that the situation it describes more closely resembles the near crisis in 2003, and that the risk of an immediate economic crisis has substantially receded since that time. Jamaica has managed to reduce its debt-to-GDP ratio from a high of nearly 150 per cent in 2002 to slightly above 130 per cent in 2005 (along with a dramatic reduction in its fiscal deficit), although much of this fall in the debt to GDP is due to the effect of higher than expected inflation in increasing nominal GDP - the denominator in the debt-to-GDP equation. Moreover, despite the fact that political tension appears to have recently risen somewhat in the run- up to the election, it has so far not fuelled political unrest in the form of the extremely ugly incidents of past years. Indeed, one could argue that there is a greater degree of policy consensus, both across party and among the wider public, than we have had in living memory. Moreover, gang violence is no longer "escalating," and indeed seems to be reversing somewhat as part of a noticeably more determined effort to tackle crime since 2005.

Nevertheless, it is difficult to deny the report's conclusion that the debt crisis "currently affecting the Jamaican economy with respect to high debts, interest rates and burgeoning trade deficits, is grounded in the severe economic setbacks of the 1990s" which the report describes as a decade "characterised by negative or otherwise abysmal economic growth and high levels of unemployment." It goes on to remind us that other than debt, our central problem is our lack of economic growth. "After realising economic growth rates of 5.5 per cent in 1990, the next highest growth rate for the Jamaican economy was only two per cent in 1993" and that "Jamaica experienced negative growth rates in GDP during the 1996-1999 period."

Vicious circle

Indeed, a number of local private sector financial and economic analysts have for some time argued that Jamaica is trapped in a vicious circle or "debt trap." During the early 1990s, the Government abandoned the inflationary "printing press" as a means of financing government expenditure. The COHA report notes: "The benefit of controlling inflation, coupled with an increase in remittances from overseas, brought much of the population above the poverty line, which had declined from a peak of 44.6 per cent in 1991 to 16.7 per cent in 2001." However, due to the lack of economic growth, the Government is forced to incur a budget deficit which it now has to borrow to finance, the quantum of government borrowing reaching an unsustainably high level by early 2003.

High interest rates had also discouraged investment and hence economic growth as it made more sense to invest in government paper than to invest in a business. They also necessitated higher interest payments by Government and hence a larger budget deficit, which in turn led to further borrowing and even higher interest rates, with an even greater adverse effect on economic growth, thus completing the vicious cycle.

COHA notes that since the 1980s, the Government has undertaken the responsibility of limiting the state's role in the economy, promoting the development of export-driven production, reducing the fiscal and current account deficit, as well as eliminating poverty and inequality. "Thus far, these objectives mostly have been met with limited success. The debt situation is alarming and continues to hamper economic growth by drawing heavily upon resources that could be put to more productive uses. The debt overhang also limits the extension of credit to the weaker margins of the private sector, particularly towards medium and small borrowers."

Does not qualify

Despite being very highly indebted, Jamaica is not poor enough to qualify for debt cancellation. In fact, in some ways Jamaica's debt position can be described as the "the worst of both worlds," as while it is currently ineligible for debt cancellation, it is not rich enough to overcome the struggle of its overhanging debt burden.

Ironically, this unique position is partly due to Jamaica's success in managing its debt through tight fiscal policy, as a recent Moody's report on Jamaica emphasised that we would have a much lower rating based on purely quantitative factors. The primary surplus (budget surplus when interest costs are excluded) as a percentage of GDP has averaged about 10 per cent over the last several years, and has made Jamaica a contender for title of having the highest and most consistent primary surplus in the world, with the consequence that a Jamaican request for debt cancellation cannot be argued along the lines of Jamaica's inability to pay.

On track

Currently, Jamaica's debt servicing and macro programme appears to be on track, but the clear implication of the COHA report is that "ultimately" the social and political effects of continued economic failure might lead us to copy Argentina. However, it should be noted that unlike Argentina (or indeed the other recent regional sovereign defaults of the Dominican Republic, Grenada and Belize), Jamaica's very high debt is largely owned by Jamaicans. Therefore, a decision to default on either domestic or foreign debt would have a severely negative outcome on the just recovering local financial sector, and Jamaica generally, rather than the "shared pain" scenarios experienced in some other countries. A far better solution is to take the hard steps to increase economic growth (and thus taxes) by removing impediments to business.