Special Double Issue: Poverty and Inequality in Latin America || Economic Reforms in Jamaica

Economic Reforms in JamaicaAuthor(s): Anders DanielsonSource: Journal of Interamerican Studies and World Affairs, Vol. 38, No. 2/3, Special DoubleIssue: Poverty and Inequality in Latin America (Summer - Autumn, 1996), pp. 97-108Published by: Center for Latin American Studies at the University of MiamiStable URL: http://www.jstor.org/stable/166362 .

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Economic Reforms inJamaica Anders Danielson

ABSTRAC

This paper briefly discusses the economic reforms that have taken place in Jamaica for the past 15 years and argues that the reforms, at least so far, are mixed, particularly with regard to the elimination of poverty. The basic problems are (1) a slow response of exports to large, frequent adjustments in the exchange rate, which prohibits low-wage labor, in the informal sector, from being absorbed into the formal sector; and (2) the large budget deficit, with the associated demands for large cuts in expenditures, which primarily affects the rural poor. It is suggested that the principal reason that reforms have been slow is because of the political price to be paid for unpopular measures in a competitive democracy

I. INTRODUCION

he 1980s was a decade of economic reforms for many countries in Latin America and the Caribbean. In the 1980s, the Americas south

of the United States, together with sub-Saharan Africa, accounted for 70% of all stabilization programs supported by the International Monetary Fund (IMF) and 4/5ths of all adjustment programs supported by the World Bank (Stewart, 1995:6). The design and impact of these programs have been so extensively discussed and analyzed that it seems as if, thus far, at least three broad conclusions can be drawn regarding their effectiveness (for a useful summary, see also Killick, 1995: 48-53).

First, the basic objectives of these programs have been to accom-

plish two things: (1) to establish a stable macroeconomic environment

(which essentially means low inflation and a viable external position) and (2) to shift resources gradually from the nontradeables to the

Anders Danielson is Associate Professor of Economics and Natural Resources at the Royal Agricultural University in Copenhagen (Denmark) and Professor of Economics at the University of Lund (Sweden). He is the author of The Political Economy of Development Finance (Westview Press, 1993) as well as of many published articles.

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tradeables sector, and from public to private control. There seems to be broad agreement (e.g., World Bank, 1993; Mosley et al., 1991) that neither stabilization nor adjustment have occurred at the expected rate, even though there are some exceptions.

Second, while the reasons for this delay are debated, one major factor seems to be timing: the countries that have agreed to programs under the Bretton Woods institutions are generally in very bad shape - with high inflation, a rapidly deteriorating external position, a large and inefficient public sector, and worsening living conditions for the

majority of the population. Countries seem to turn to the World Bank and the IMF only after all other sources of assistance have been

exhausted; in this sense, these two institutions are really lenders of last resort. Given that the policy conditionalities insisted upon by these

organizations often involve harsh measures, it is not surprising that borrowers are hesitant to enter into these agreements. However, it is

possible that the record with regard to reforms might have been different had these countries subscribed to such agreements earlier. Successful negotiations with the IMF and the World Bank may be

perceived, therefore, as a signal that the government is unable to handle the economic situation: a loan may have been negotiated not because the government is committed to reform, but because it cannot raise external funds from other sources. Hence, the inability of the government to signal commitment seems likely to be a central problem for

reforming countries and may well explain the dismal performance, particularly in sub-Saharan Africa, of foreign investment (for a discussion of credibility and signalling problems, see Rodrik, 1989).

Third, the consequences of "slippage" - meaning nonfulfillment of contract conditions - worsened during the 1980s. The basic reason is that an increasing number of bilateral donors made grants contingent upon successful implementation of World Bank reforms (cross-conditionality). Hence, countries that, for some reason, failed to meet World Bank conditions now risk losing not only concessionary loans, but

grants from bilateral donors as well (Avramovich, 1989).

One of the more persistent criticisms of the Bretton Woods institutions is that conditions are formulated, and insisted upon, without any regard for the particulars of the country in question. Thus, critics

argue, Mauritius - which is a very small economy with one major export good - is confronted with virtually the same list of conditions as Brazil, a huge country with a relatively diversified list of exports. According to this view, one reason why reform programs fail to meet



DANIELSON: ECONOMIC REFORMS INJAMAICA

objectives is that the Bank and the Fund fail to take into account country- specific characteristics without which one cannot understand the

functioning of any specific economy (see, in particular, the case studies in Taylor, 1993).

Another rather powerful criticism often appears under the label

"adjustment with a human face" (thus implying that Bank adjustment programs do not have a human face). The core of the argument here is that the austerity imposed has long-run implications that are detrimental to the functioning of the economy (for discussion, see Cornia et al., 1987; and Stewart, 1995). To give but one example: if low-income families see their real income deteriorate during reform, they will take action to counteract this situation. One measure they may take is to increase the number of family members working, using, in particular, young children. Hence, if families fight increasing poverty by increasing the amount of work hours supplied, the formation of human capital and, thus, the long-run growth prospects of the economy, may suffer.

The purpose of this paper is to review, briefly, the experience of

Jamaica in the area of stabilization and structural adjustment - a

program that began in 1978 and still continues today. Section II discusses the development of the Jamaican economy, while Section III

analyses - tentatively, and from a rather meager data base - the impact of reforms on the poor. Section IV, finally, offers some concluding remarks.

I. MACROECONOMIC PERFORMANCE

rom independence (which took place in 1962) to the early 1970s, the Jamaican economy grew at an average rate of almost 5% per

annum. Although the majority of the population was engaged in working on plantations and in small-scale agriculture, the economy increasingly diversified during the 1960s, with a rapidly growing mining sector and a budding manufacturing sector that sheltered behind

relatively high tariff walls.

The election of 1972 saw a shift of power from the Jamaican Labour Party (JLP) to the People's National Party (PNP). Although both

parties had their origins in the labor movements of the 1930s, the PNP adopted a markedly more radical profile, particular with regard to the distribution of income and control of the commanding heights of the economy (Danielson, 1993: Chapter 3). The shift of power came at about the same time as the world economy entered into deep recession,

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in the wake of the first oil crisis. The extent to which the deterioration in the external environment was responsible for Jamaica's dismal

performance during the 1970s is open to dispute. For instance, Harrigan claims that

[t]he advent of Manley's People's National Party (PNP) Govern- ment in 1972 did not represent, as some believe, a fundamental radicalisation ofJamaica's political economy, but rather an intensi- fication of past policies (Harrigan, 1991: 313),

while Danielson argues that Jamaica fared worse than comparable economies due precisely to the fact that domestic policies were

inappropriate (Danielson, 1993: Chapters 4-5).

The situation in Jamaica did indeed deteriorate in the 1970s. Danielson (1991) calculates that, in 1972, the average productivity of labor wasJ$9,770 as measured in 1980 prices. In 1980 (the year that the

JLP returned to power), the average labor productivity was J$7,240, which represented a negative growth rate of over 3% annually. As a

consequence, "average labor productivity in 1980 was only 18% higher than in 1960, and almost 25% lower than in 1972" (Danielson, 1991:69). Even though both labor productivity and incomes increased during the

1960s, the social problems worsened. This is mainly due to the fact that the driving force behind the growth in the 1960s was the expansion of the mining sector, an activity that is characterized by high capital intensity and low flexibility with regard to factor substitution. As a

result, and in spite of the rapid growth of incomes, formal sector

unemployment increased from some 13%, at the time of independence, to 23% in 1972, and to almost 30% in 1980 (Jefferson, 1972: 28; Kaufman, 1985: 246).

To what extent the PNP's policies during the 1970s actually contributed to the deteriorating situation does not need to concern us here; we shall only note that when Edward Seaga became Prime Minister (in 1980), the economy was in disarray: rates were high for both

unemployment and inflation, the budget deficit was approaching gigan- tic proportions, the external position was not viable, as was clear from the mounting external debt, and an increasing proportion of the rural

population was being marginalized - i.e., forced to eke out a living either in the informal sector, or as small-scale farmers on the infertile

slopes of the island.

Although negotiations with the IMF had already begun during the PNP government, it was not until the shift in power took place in 1980 that the political authorities committed themselves to instituting eco-




nomic reform. The first Extended Fund Facility (EFF) was negotiated with the IMF in 1981; this was followed by two structural adjustment loans, in 1982-83, that totalled almost US$140 million. Throughout the 1980s, Jamaica received 6 adjustment loans from the World Bank and no less than 8 loans from the IMF (Stewart, 1995: 172). Even if the policies that the PNP pursued in the 1970s were a continuation of policies initiated by the JLP in the 1960s, the 1980 election, in which Edward

Seaga was elected Prime Minister, may be regarded as a watershed for, in that decade, the nation's policies were heavily influenced by conditionalities imposed by the World Bank - dismantling of trade barriers, unifying the exchange rate, and reducing state control of the economy.

Table 1 presents some indicators that show the results of reform.

Jamaica enjoyed steady growth in its gross domestic product (GDP) throughout the 1980s (with the exception of 1985) at an average rate of some 2% per annum, whileper capita incomes increased at almost

3%per annum between 1985 and 1993. Although reforms have taken

place in various areas of the economy, unification of the exchange rate

is, arguably, the most important, at least from the point of view of the

private sector (World Bank, 1994: 239). The real exchange rate has

depreciated steadily ever since reforms began in the late 1970s although this process has halted due to an inability to curb domestic inflation. It should also be noted that, although international competitiveness (as reflected in the real exchange rate) has increased by approximately 14%

annually since 1982, exports have not responded to any significant extent: in 1993, revenues from exports were scarcely any higher than those of 1982. However, there have been significant changes in the structure of trade. "Traditional" export products (bauxite, alumina, sugar and bananas), which accounted for more than 3/4ths of the total

export trade in the early 1980s, have gradually been replaced by other sources of revenue, such as that derived from clothing; by the late 1980s, "non-traditional" products accounted for almost 40% of the

country's total exports (Page, 1994: 237). This suggests that the intro- duction of exchange rate reforms in Jamaica has done less to increase the volume of exports than to change the structure of the export sector

away from traditional, price inelastic, primary products. Hence, to the extent that exchange rate reforms have aimed at changing the compo- sition of exports, rather than curing deficits in the balance of payments, the strategy has been a success.

The most disappointing development thus far seems to come from failure to reduce the size of the public sector. As shown in Table 1,

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Table 1. Macroeconomic Indicators, selected years

1980 1982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

REERa 63 54 92 94 88 95 82 88 100 194 123 140

GDP (million J$)b 23,993 24,848 25,192 24,029 24,436 26,322 27,082 28,934 30,513 30,670 31,252 31,465

GDP per Capita (J$)b 11,236 11,346 11,049 10,402 10,443 11,201 11,475 12,106 12,661 12,941 13,076 13,056

Inflation 21% 9% 35% 26% 22% 11% 14% 12% 24% 44% 61% 31%

Current Accountc -2% -12% -7% -10% 2% 0% -4% -11% -4% -8% 2% -8%

Exportsd 1,068 1,140 1,026 1,083 1,088 1,077 1,247 1,265 1,388 648 1,675 1,279

Government Consumptione 4,854 5,458 4,173 3,738 3,754 3,943 4,217 4,016 4,308 3,860 2,963 4,131

Source: Calculated from International Financial Statistics Yearbook, 1995, Washington DC: IMF a = Real Exchange Rate. Index, 1990 = 100. An increase is a depreciation. b = 1990 prices c = Percent of GDP d = Current US$ million e =J$ million, 1990 prices

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government consumption shows no clear declining trend, and, more- over, there appears to be a clear, positive relationship between government consumption and the rate of inflation. The reason, of course, is that the government finances most of its deficit by borrowing from the Bank of Jamaica, virtually the only option open to the government in a

financially less-developed economy.

During the PNP regime of the 1970s, the public sector expanded rapidly, in terms of both expenditures and employment. As Danielson has shown, employment in the public sector increased by 45% during the PNP regime, and the wage bill of the public sector increased (in 1980

prices) from J$552 million in 1972 to a high ofJ$753 million in 1982 (Danielson, 1993: Table 6.8). This rapid expansion was due not only to the ambition of the PNP government to recapture the "commanding heights" of the economy, but also to the kind of populism that is all too

frequent in competitive democracies. It has often been pointed out that, in a democracy, political parties tend to pursue a course designed to maximize votes, which leads them to favor certain groups, and to follow certain policies, that are not necessarily growth-enhancing from the

standpoint of the economy (Danielson and Lundahl, 1994: 68-72). The exact type (and mix) of policies chosen depends, of course, on the

specific context, but inJamaica the PNP rewarded loyal voters with handouts, subsidies and, above all, employment in the public sector (Danielson and Lundahl, 1994: 61-63). For reasons discussed in more detail below, the JLP regime, which came to power in 1980, was unable (or unwilling) to reverse this tendency toward public sector employment.

In sum, then, Jamaica's economy underwent significant changes during the 1980s. By the end of the PNP period (1979-80), the economy was in very bad shape, with high inflation, a dwindling export sector, a widening gap between public expenditures and tax revenues, and a

rapidly expanding external debt. The JLP government was able to

negotiate, successfully, several loans with both the IMF and the World Bank, and it indicated a willingness to undertake economic reforms. From a macroeconomic viewpoint, however, these reforms have en-

joyed but mixed success. While the exchange rate reforms have created a more diversified export sector, which seems to have good prospects for growth in the future (World Bank, 1994), reconstruction of the

public sector has been slow, and the fact that tax revenues are far from sufficient for the current size of public expenditures means that inflation remains in the double digits. It seems as if the budget deficit, or, more precisely, the level of public expenditures, is the critical

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variable for successful reform. An inability to finance current expenditures out of tax revenues means a continuation of high inflation. This, in turn, threatens the improvements in international competitiveness which were achieved during the 1980s. As the following section will argue, however, public sector reforms, on the scale desirable for Jamaica, are difficult to attain without severe, although not necessarily undesirable, consequences for the redistribution of income. Because the political price to be paid for such a redistribution may be extremely high, the credibility of such reforms is consequently low.

II. REFORMS: RELUCTANCE AND REDISTRIBUTION

olitically, Jamaica is a democracy with two major political parties that compete for power. Since independence was achieved in

1962, neither of these parties has been able to hold on to powerfor more than two successive periods. As is to be expected in a competitive democracy, marginalvoters (i.e., those who are independent or without party affiliation) are extremely important to the outcome of elections, and much time and effort is expended to attract these groups during election campaigns. This means that promises of concrete benefits - such as protection, subsidies, employment, and the like - are made to groups that are perceived to fall into this marginal camp.

Not only are marginal voters wooed at election time, but each party also has a large, loyal cadre of voters who receive benefits in the form of handouts, employment and social benefits. Since towns and cities (Kingston, in particular) are largely divided according to political preference, it is not uncommon to promise benefits in the form of improved housing (a useful taxonomy regarding "safe" and "marginal" voters is provided by Danielson and Lundahl, 1994: 62; Stone, 1981). Since competition for marginal voters is strenuous, and since loyal voters are rewarded with pecuniary benefits, the Jamaican economy is characterized by strong, but complex, links between the government and the private sector, particularly those segments of the latter that are perceived as having political influence. Because these relationships are so complex, making it difficult to foresee the redistributional consequences of reform, the political administration may be quite reluctant to dismantle trade barriers or remove subsidies.

It would seem reasonable for voters to be interested in the efficiency of the general economy as well as in their own welfare. Since benefits are given to particular groups, but costs are shared by all members of society (through an inefficient allocation of resources),



DANIELSON: ECONOMIC REFORMS IN JAMAICA

granting benefits to one group may be politically costly if other groups discover how resources are being used. As Danielson and Lundahl

(1994) have suggested, one stratagem the government may use to conceal its real intentions is to make it costly for opponents to reveal the

likely, if not actual, consequences of government action.

Over time, of course, opponents will learn just how and when to disclose the real cost of government actions, particularly if that disclosure will enhance opposition chances to win over a sufficient number of

marginal voters in the next election. This then provokes the regime in

power, in its turn, to resort to increasingly costly methods of redistribut-

ing incomes to specific groups. Following Magee, Brock and Young (1989) and, to some extent, Glazer (1990), Danielson and Lundahl (1994) call this the "obfuscation effect" and go on to show how successive

governments in, inter alia, Jamaica have used this method to favor certain groups without, at the same time, forfeiting the support of other, more marginal, groups. The basic problem here is that the politically efficient strategy (i.e., the one that maximizes the chance for re-election) is also one that is inefficient economically (in the Pareto sense). Thus, in a competitive democracy, the designing of credible reforms must also take into consideration the problem of providing incentives for the

political parties to act in ways that may be politically costly.

It is difficult to do more than speculate about the social effects of reform, because data regarding income distribution and the activities of the public sector in Jamaica are surprisingly scarce. Up to the mid-

1980s, data was abundant and of surprisingly high quality but, from 1986 onwards, virtually no data on the public sector are available in international publications (such as the IMF Government Financial Statistics Yearbook). However, given the nature of reforms in Jamaica and the structure of its economy, some remarks on the impact on the distribution of income can be made.

First, in the mid-1970s, social indicators in Jamaica compared favorably with those of other Latin American countries. This was due

mainly to the efforts of the first PNP government, which came to power in 1972. A drive was initiated to improve and expand schools, infrastruc-

ture, and health facilities. As a result, literacy rates improved and life

expectancy rose. As the economy started to decline in the mid-1970s (a recession reached crisis proportions in the late 1970s), the budget deficit increased sharply, and severe cuts were made in both the current and capital accounts. As a result, the social progress that had been made some years earlier was virtually wiped out, and the distribution of welfare was turned against the poor classes of society. Though some

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progress was made in the late 1980s, the terms of the conditionalities demanded by multilateral banking institutions still force a focus on short-term, macro objectives, such as inflation. [This had been even more true in the early 1990s, thanks to the recent upsurge in inflation; see Table 1.]

Second, the Jamaican economy is a dualistic one, and there are

sharp differences between the high-wage, capital-intensive, and formal sector on the one hand, and the low-wage, labor-intensive, and informal sector on the other. Although both sectors are strongly integrated in the international economy, there is very little interaction between them, which suggests that the informal sector will not necessarily be elimi- nated only through expansion of the formal sector. Naturally, the

majority of those working in the informal sector are poor and, in

addition, are predominately rural. This is a problem in itself since the

budget cuts associated with reform have fallen disproportionately on schools and health clinics in rural areas. Because the major export products were bauxite and alumina (the extraction and processing of which requiring very little labor) for such a long time, the strategy of the

early 1980s - of expansion through growing exports - did not attract labor from the informal sector. Hence, the export-oriented strategy, where the focus was on traditional export products, did in fact increase the disparities in income earned between the formal and informal sectors. As already noted, the recent drive towards stimulating non- traditional exports seems more promising as the major new exports (textile, tourism) are relatively labor-intensive.

Third, while multilateral lenders have insisted on large cuts in the national budget, these do not seem to have had a noticeable effect on

public employment. The reason appears to lie in the fact that this is a

highly sensitive political issue. However, since deregulation of the

economy is well underway, some rents have been redistributed; thus, it seems reasonable that the poorer strata of the population are likely to

gain from further liberalization.

Fourth, and finally, it is a bit ironic that the democratic socialist

strategy employed by the PNP government in the 1970s actually widened the welfare gap between the middle-income and low-income

groups. In the final analysis, it is clear that low-income holders did not benefit because the redistribution of income from firms to those in the middle-income groups (via expansion of the public sector) created a

stagnant economy, so low-income holders were prevented from leaving the informal, low-wage sector.




IV. CONCLUDING REMARKS

Jamaica is an extremely open economy, with exports and imports accounting for close to 75% of its GDP. This makes the economy extremely sensitive to changes in the international environment, and it also means that the key to successful development lies in the trade sector. Even though reforms have been going on for close to 15 years, and even though adjustments of the exchange rate have been a key feature of this reform, the performance of the export sector can hardly be described as "successful." More than in many other middle-income

economies, the key to success in Jamaica lies in export-led growth. Not

only will this ease the burden of external debt, but it will also allow a

larger share of the labor force to be absorbed into the formal sector, and it will give the government a chance to close the fiscal deficit and to restore social services.

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CORNIA, G. A., R. JOLLY and F. STEWART (1987) Adjustment with a Human Face. Oxford, England: Oxford University Press

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(1991) Public Sector Expansion and Economic Development; Sources and Consequences of Development Finance in Jamaica, 1962-84 (Lund Economic Studies #46). Lund, Sweden: University of Lund, Department of Economics.

DANIELSON, A. and M. LUNDAHL (1994) "Endogenous Policy Formation and the Principle of Optimal Obfuscation: Theory and Some Evidence From Haiti and Jamaica." Comparative Economic Studies 36: 51-78.

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HARRIGAN,J. (1991) "Jamaica," in P. Mosley,J. Harrigan andJ. Toye (eds.) Aid and Power: The World Bank and Policy-based Lending. London, England: Routledge.

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Special Double Issue: Poverty and Inequality in Latin America || Economic Reforms in Jamaica