Lest we forget
Jamaica’s path to economic stability
The following is a contribution from Alvin Wint, emeritus professor of international business at The University of the West Indies, on Jamaica’s more than two-decade effort to attain macro-economic stability.
AS NUMEROUS commentators have pointed out, Jamaica is clearly reaping the benefits of the economic stabilisation and reform programme on which the country embarked, in earnest, six years ago. Several key economic and social indicators are moving in the right direction. This movement – whether in economic growth, inflation, unemployment, net international reserves, exchange rate stability, poverty is not accidental but is a direct consequence of the efforts to stabilise and reform the economy.
The year 2012 was not the first year that Jamaica was embroiled in an economic crisis, and so, the relative success of this period raises the question of why Jamaica has been more successful this time around. One response is that in 2012, Jamaica’s leaders looked at the precipice the country was about to fall off, and decided that all efforts had to be employed to ensure that we did not fall, given the traumatic consequences that could ensue.
This response would be parallel to the response of Edward Seaga and Michael Manley in 1979, when they looked over the precipice at the consequences of a continuing process of the party in government having control over the electoral system, and decided that continuing such a process would create a major challenge to Jamaica’s democracy, and so they changed the country’s electoral management oversight structure.
While there is merit to the ‘precipice explanation’ of the relative success of the 2012-2018 stabilisation programme, it is an incomplete explanation because Jamaica has had other economic crises to which there have been less-than-appropriate responses, and these crises have resulted in severe economic trauma. The ‘precipice explanation’ needs to be joined with an explanation focused on the extent to which Jamaica has learnt from past crises and the degree to which local consensus-building and political leadership has coupled with external forces to foster an environment conducive to stabilisation and reform.
IMPORTANT COUNTERPOINT
The economic crisis Jamaica experienced in the early 1990s provides an important counterpoint that illustrates the lessons that the country has learned. Between 1991 and 1995, inflation in Jamaica averaged 42 per cent per year, the treasury bill rate averaged 32 per cent, and the lending rate averaged 44 per cent. The Jamaican currency declined precipitously in value moving from an exchange rate of $7.184 per US$ in 1990 to $37.1 per US$ in 1995. To put this level of exchange rate depreciation in context, it would be the equivalent of the Jamaican dollar moving from $127 to US$1 to $656 to the US$1 over a five-year period.
The Jamaican Government responded to the economic crisis by focusing on the importance of a programme of macroeconomic stabilisation as the first phase of a national effort to enhance the country’s competitiveness. The policies to be used to stabilise the economy, as articulated in the 1996 National Industrial Policy, included:
I The Government adopting a binding anti-inflationary position.
I The continued use of fiscal policies as a key weapon in inflation control.
I Tight fiscal policies to be complemented by other efforts to control the growth of money supply, for example, the sterilisation of acquisition of foreign exchange reserves. I The institutionalisation of the Government’s antiinflationary position through the establishment of the Bank of Jamaica as an independent central bank, whose principal objectives were to be the control of money supply and management of the foreign exchange rate system.
I The breaking of the cycle of inflationary expectations by establishing a social partnership oriented to achieving a balanced adjustment of prices and incomes, with the government leading by putting in place specific measures to build policy credibility.