Left: Prime Minister of Jamaica, Bruce Golding. Right: Prime Minister of Barbados, David Thompson. - File photos

One of the aspects of the current macroeconomic environment that had led to heated public debate on the way forward for the Jamaican economy is the high interest-rate policy and its impact on the 'managed-float' exchange-rate policy.

The key question is whether Jamaica can continue to maintain the current high interest-rate regime for very much longer.

There are two views. If interest rates are reduced, this will increase the demand for US dollars and the exchange rate will fly through the roof, some analysts posit. Others say, however, that the movement in the exchange rate reflects the reality of Jamaica's inflationary situation vis-à-vis its major trading partners, and is therefore not worrisome.

No alternative

Most commentators have taken the position that there is no alternative to the current regime in light of the precarious state of the Jamaican economy. But this has implication for wages, job-cuts, taxation, export competitiveness, etc.

As we ponder these things, it might be useful to take a look as some of the conclusions drawn in a recent working paper published by the Brookings Institute in January 2009 titled Institutions versus Policies: A Tale of Two Islands by Peter Blair Henry and Conrad Miller.

This paper examines the divergent macroeconomic paths that have been taken by Jamaica and Barbados since independence.

It posits that while both countries started in 1960 from a similar colonial heritage - including property rights and legal institutions - and a similar small-island economic base, they experienced "starkly different growth trajectories in the aftermath of independence. From 1960 to 2002, Barbados' gross domestic product, per capita grew roughly three times as fast as Jamaica's. Consequently, the income gap between Barbados and Jamaica is now almost five times larger than at the time of independence."

Drop in standard of living

One striking feature highlighted in the report is the sharp decline in the standard of living for Jamaicans after 1972.

Though both countries were impacted by the first oil shock in 1973, which precipitated a global economic slowdown, Henry and Miller point out that Jamaica's growth slowed much more dramatically than that of Barbados.

"While Jamaica's economy contracted at a rate of 2.3 per cent per year from 1972 to 1987, Barbados, whose economy has a similar structure and was subject to the same external shocks, grew by 1.2 per cent per year," the report said.

"In other words, for a 15-year period, income per head in Barbados grew by 3.5 percentage points faster than it did in Jamaica."

As such, the per capita income gap between the two countries moved from real per capita GDP in 1960 of US$3,395 in Barbados, compared to US$2,208 in Jamaica - that is, an income gap of US$1,187 - to a situation in 2002 where the Barbados real per capita GDP stood at US$8,434, versus US$3,165 in Jamaica - an income gap of US$5,269.

In essence, the income gap between the two countries now exceeds the overall level of Jamaica's per capita GDP.

In analysing the factors that might account for the variation in the growth trajectory of the two economies, the authors posit that "countries have no control over their geographic location, colonial heritage or legal origin, but they do have agency over the policies that they implement. Of particular importance for small, open economies (that is, most countries in the world), is the response of policy to macroeconomic shocks such as a fall in the terms of trade. Pedestrian as it may seem to say, changes in policy, even those that do not have a permanent effect on growth rates of GDP per capita, can have a significant impact on a country's standard of living within a single generation."

The Golding administration is faced, now or in the near future, with some of the tough decisions that Barbados had to make back 1993 when the International Monetary Fund recommended that they devalue their currency in order to stimulate production and return the economy to full employment.

Wage and Price Protocol

Barbados resisted this and came up with its own solution. Under the 'Wage and Price Protocol', workers and unions assented to "a one-time cut in real wages of about nine per cent and agreed to keep their demands for future pay rises in line with increases in productivity. Firms promised to moderate their price increases, the government maintained the parity of the currency, and all parties agreed to the creation of a national productivity board to provide better data on which to base future negotiations."

The protocol came with a steep cost for all parties, and was even fought in the courts. However, the actions led to overall monetary restraint, fiscal discipline, wage cuts which helped to restore competitiveness and openness to trade.

And, and as Henry and Miller wrote, this "had the side effect of enabling the monetary authority to maintain the exchange-rate parity without losing external competitiveness. In contrast, Jamaica's policies were never consistent with maintaining commitment to any parity the government might have wanted to adopt."

This is certainly food for thought.