Where has all the money gone?

JAMAICA’S NATIONAL debt now stands at J$2 trillion. This is $740,000 apiece owed by every man, woman and child in the resident population of 2.7 million citizens.

Paying down this debt is now taking 48 cents from every budget dollar. But debt-servicing costs has been as high as two-thirds of the Budget. We have had to borrow more money simply to pay down on what we have borrowed already. That’s why the IMF has been called in back.

State borrowing is a global issue, and one of the really, really huge problems of ‘democracy’. Just about every country in the world has a public debt. I could find on the Internet only five little places that have no public debt at all: Brunei, the British Virgin Islands, Liechtenstein, Macao, and Palau.

In absolute dollar terms, the country with the world’s biggest economy has the world’s biggest debt, the United States of America, with some US$19 trillion of debt. But it is more usual to rank countries not by the absolute dollar amount of the debt, since national economies vary so much in size, but by the debt-to-GDP ratio. That is, how the amount of debt compares to the total annual value of the national output of goods and services, the gross domestic product.

In our case, GDP is grossly undercalculated because of the massive size of the non-formal economy, for which there can be no accurate official statistics on output.

When the ratio of debt to official GDP is taken, it is not Greece that leads the world, as you might be quick to think based on the heavy news coverage of the Greek debt crisis. According to World Economic Forum mid-2015 data, it is Japan, with a debt-to-GDP ratio of 246 per cent. Japan, until recently the second-largest national economy in the world, historically, has been a big lender, and, despite having the highest debt-to-GDP ratio, is, in fact, a net creditor. It is owed more than it owes. Greece comes in second with a ratio of 173 per cent. Jamaica is naturally on the WEF list of the 20 countries with the highest public debt as a percentage of GDP at 133 per cent. We are at No. 4 from the top.

The usual developed countries with stressed economies from the 2008 global recession and financial crisis are on the top-20 list: Greece, Italy, Ireland, Portugal, and Spain. But so are the United States at No. 15 with a debt-to-GDP ratio of 105 per cent, Belgium at 106 per cent, Barbados at 103 per cent, France at 97 per cent; and, surprise(!), Singapore at 98 per cent (numbers rounded).

QUICK TO BLAME

Jamaica’s debt load has been progressively growing since at least the 1970s. Where has all the money gone? The average Jamaican is quick to blame corruption and waste as the real reasons why we have had to borrow so much while the economy is still struggling. And, yes, there have been plenty of both. We will see what, if anything, the Panama Papers have to say about Jamaican public officials seeking the services of the law firm Mossack Fonseca to conceal any unaccounted-for wealth in offshore companies. MOCA is moving and the NIA is nudging.

Governments in competitive democracies, driven by escalating public expectations, deliver public services at a faster rate and more extensively than tax revenues can pay for. So they borrow to do so. The assumption and hope always is that the economic growth, measured as an expansion of GDP, which is expected to flow from public investments financed by debt, will allow for paying off the debt from increased tax revenue inflows. What happens when this does not happen?

The World Bank overview on the Jamaican economy last updated on March 30 notes that, “for decades, Jamaica has struggled with low growth, high public debt and many external shocks that further weakened the economy. Over the last 30 years, real per-capita GDP increased at an average of just one per cent per year, making Jamaica one of the slowest-growing developing countries in the world”.

The first big loan that the government of independent Jamaica took out in the 1960s was from the World Bank to build 50 junior secondary schools. Education was supposed to make the country grow. Since then, the stock of secondary level schools has grown from the 40 or so grammar schools at Independence to 165 now, plus the growth in the number of primary schools and tertiary-level institutions and the construction of new school plants to replace church buildings which had been widely used as schools. And most of this with borrowed money.

Literacy levels have gone up. Access to secondary education has moved from around 2,000 Common Entrance places in the early 1960s to near universal access for around 35,000 students annually. Tertiary access has grown from under five per cent in the 1960s to more than 20 per cent now.

With the growth of post-primary student numbers and school plants came a massive expansion of staffing and operational expenses as a permanent recurrent budgetary expenditure. And post-primary education has been provided free or at low subcommercial costs.

And it’s not only in education. Debt has facilitated the almost constant growth of the public service since the 1960s. For good reason, the IMF is now insisting on a reduction of the public-sector wage bill as a proportion of GDP as part of the country’s debt-management strategy.

Like the growth in schools and the education sector, health facilities have been laid down in large numbers across the country and staffed. We have eradicated a number of tropical infectious diseases, taken immunisation to First-World levels, drastically reduced infant and maternal mortality, raised life expectancy from mid-60s in the 1960s to First-World mid-70s now.

DEBT TRAP

And we offer high-tech secondary and tertiary medical care. And all mostly free or at low costs which bear no relationship to cost of delivery and without any national health insurance support. Debt has paid for making a lot of this possible.

Jamaica has one of the most dense road networks in the world, criss-crossing topographically challenging terrain. Since the 1960s, large numbers of rural walk-foot parochial roads have been upgraded to driving roads, unpaved roads converted to paved thoroughfares, and urban roadways expanded and upgraded. Bridges have been built, urban drainage improved, sea walls and other protective structures erected, seaports and airports expanded and upgraded, rural electrification and water supply delivered, all at faster rates and more extensively than tax dollars could pay for.

So we have borrowed heavily for infrastructure development on the assumption that growth facilitated by these investments would provide for payback.

The return on investments from massive capital outlays for ‘development’ across multiple sectors and the correlated growth of associated recurrent expenditure has not permitted a comfortable paying down of the debt incurred to make these things possible. Most of the money didn’t just disappear down a sinkhole to nowhere or into people’s pockets.

We’ve been caught in a debt trap. And the fundamental reason is that Government has delivered public goods and services more extensively and faster than tax revenues could pay for.

By borrowing, we’ve spent tomorrow’s income before earning it. And the return on investment, measured as GDP growth, has been much less than expected, for all kinds of reasons which will have to be the subject of another column.