Caribbean & Central America - June 2011 (ISSN 1741-4458)

Last month we reported on a paper published by the Washington-based Center for Economic and Policy Research (CEPR) that was strongly critical of the pro-cyclical nature of the IMF’s programme for Jamaica [RC-11-05].  There is, as yet, little sign that such siren voices are having an impact on Jamaica’s policymakers.

Jamaica’s main problem is its high public debt, amounting to 129% of GDP in 2009/10 with interest on this debt absorbing 17% of GDP.  But for the CEPR, the tough fiscal policies advocated by the IMF are counter-productive.  It says: “Pro-cyclical macroeconomic policies implemented under the auspices of the IMF have...damaged Jamaica’s recent and current economic prospects”.

But however attractive a bit of backsliding might sound to the government, it appears to be sticking to the prescribed regime.  Speaking at a World Bank training workshop in Kingston in mid-May Finance and Public Service Minister Audley Shaw said: “We have for the first time put in parliament a fiscal policy paper that outlines the macroeconomic programme, outlines the medium-term economic programme, and is signed by the minister of finance, and it says that we are committed to prudent management practices and if we don’t do it...then I subject myself to impeachment.”

Shaw added that the positive side of this programme is that Jamaica now has adequate gross foreign exchange reserves, an exchange rate moving slowly upwards (by almost 5% over the last year), interest rates that are trending down, and inflation that is stable “even though it has to be lower”.

Shaw repeated this message at the 25-26 May annual general meeting of the Caribbean Development Bank (CDB).  He said: “The initiatives of [Jamaica’s medium-term economic programme] have begun to yield positive results.  For the first time in a long time, all the macroeconomic variables are simultaneously pointed in the right direction; our exchange rate is stable, we have record foreign exchange reserves, interest rates are falling to historically low levels, our fiscal deficit is being contained, inflation is falling, employment is rising, and after 13 consecutive quarters of economic decline, the economy is estimated to have recorded growth of 1.5% during the March quarter of this year.”

Earlier in the month, speaking in the budget debate in parliament, Prime Minister Bruce Golding pointed out that the Debt/GDP ratio of 128% was well within the ceiling of 139% set out by the IMF in the Standby Agreement and that the government was on target to reduce the ratio to 100% by 2016, as envisaged in the IMF programme.  He added: “If we focus our efforts seriously on investment and growth, we will reach that target even sooner.”

The news on inflation is also encouraging.  According to Brian Wynter, the governor of the Bank of Jamaica, inflation should continue to fall this year, although by not as much as in 2010 when it fell 5.5 percentage points to 7.8%.

Recently published US diplomatic cables indicate the degree to which Jamaica’s economic difficulties had come to alarm Washington at the height of the global economic crisis.  A US diplomatic cable sent from the embassy in Kingston to Washington in April 2008 warned: “If the current JLP [Jamaica Labour Party] government fails in its economic and national security reform efforts and Golding loses the next election…Jamaica could go the way of Haiti: fatally driven by crime, poverty, drugs, gangs, social disintegration, and emigration – all more reasons for strong US support for Golding’s ongoing reforms.”

The wider challenges
Meanwhile, back at the CDB’s annual general meeting, World Bank Managing Director Dr Ngozi Okonjo-Iweala gave a lecture on 24 May in which he outlined what he saw as the Caribbean region’s main challenges.

During the global financial crisis (or the Great Recession, as Okonjo-Iweala called it), the Caribbean’s growth rate of 6% per annum for the years 2006-08 fell to around zero in 2009.  This was then followed by a sluggish recovery of 3.5% in 2010-12, compared with 4.5% for the main Latin American countries.

However, for the World Bank’s managing director, the Caribbean’s problems pre-date the crisis.  For instance, in 1980 the Caribbean’s average per capita income was twice as high as that of the average developing country.  Now it is only one third higher.  Since 1970, the region has averaged just 2% growth compared to a global average of 3.5%.

A key problem, relevant in particular to the region’s fiscal deficits, is that the small size of the region’s economies makes for a high fixed cost of government and providing public services.  It is estimated, for instance, that small states spend on average 3.7 percentage points more of their GDP compared to large states.

On top of this, the Caribbean suffers from recurring natural disasters such as tropical storm Ivan which in 2004 destroyed the equivalent of 250% of Grenada’s GDP and affected 60% of its population.  The 2010 earthquake in Haiti caused damage equivalent to 120% of Haiti’s GDP.

Okonjo-Iweala argued that fiscal discipline must underpin economic policy – and he pointed out that of the 15 member states of Caricom, 10 have a public debt-to-GDP ratio of over 60%.  Beyond that, he urged greater regional integration as “the only viable way to create scale for your economies”; more innovative ways of engaging the private sector to fuel growth; and improved governance and institutions.

The importance of tourism to the Caribbean was emphasized (it now accounts for 29% of the region’s exports), but maximizing this potential must involve two things.  First, more collaboration (to the outside world, the recognized ‘brand’ is the Caribbean, not the individual countries of the region).  Secondly, the Caribbean must broaden its appeal beyond its traditional markets in North America and Europe.

Okonjo-Iweala pointed out that while the US contributed 36% of the world’s GDP in the 1990s, this proportion had now fallen back to 21%.  On the other hand, the share of China and India had increased from 5% in the 1980s to 32% today.  Yet, against this “shifting economic geography”, Caribbean exports are still going primarily to the US and Europe (54% and 19% respectively).  The proportion for China and India is less than 1%, and, perhaps more surprisingly still, the proportion going to neighbouring Argentina, Brazil, and Mexico combined is only 3%.

A final point made by the World Bank managing director is that the Caribbean is still lagging badly behind when it comes to access to (and affordability of) technology.  Broadband penetration in OECD (Organization for Economic Co-operation and Development) countries is over 30%; in the Caribbean it is around 8%.  Worse, the average price of one megabit down-speed service in the Caribbean is US$36 per month, which is nearly three times as expensive as in the US and seven times the price in the UK.