Why IMF-Driven Economic Reforms Paid Off for Jamaica This Time
Good economic news out of the Caribbean has been few and far-between in recent years. For most countries in the region, the aftermath of the global financial crisis has been full of vicious cycles of slow growth, rising debt, increased unemployment, mounting crime and falling foreign direct investment. Attempts to break out of this pattern have largely failed, leading to increased misery for those who stay and the uncertainty of emigration for those who leave. While Puerto Rico attracts much of the media attention, the situation is just as dire in a dozen or more Caribbean countries.
In September, the unease prompted Jamaica and several other highly indebted middle-income countries to plead their case for assistance at the United Nations General Assembly. Highly indebted middle-income countries are on the threshold of growth, but held back by crippling debt levels that drain government budgets to service that debt, leaving little money for productive investments.
Yet while this may have described Jamaica several years ago, the country is in fact currently transitioning into a pattern of solid growth, with deeper reforms rather than foreign aid having been the key to assuring sustainable growth. Although some positive signs were appearing by early 2014, Jamaica’s recent success was largely unanticipated. The country’s growth had been subpar and declining for decades: From 1967 to 1999, growth averaged a paltry 0.82 percent, falling off to 0.33 percent on average since 2000.
The underlying causes of Jamaica’s economic malaise were wide-ranging. The country’s business community pointed to the introduction of socialist policies in the 1970s, while liberal groups contend anti-social business greed was to blame. The two dominant political parties, the social-democratic People’s National Party (PNP) and the conservative Jamaica Labour Party (JLP), blamed the short-sightedness and incompetence of the other. Until quite recently, everyone was quite comfortable blaming the International Monetary Fund. Jamaica has attempted to stabilize its economy and restart growth by undertaking more than a dozen IMF programs since the 1970s; each one has ended in failure after seemingly making the country’s dire economic situation even worse.
It’s easy to see why eyebrows were raised when, in May 2013, the country agreed to a 48-month, $932 million “extended agreement” with the IMF, which imposed harsh austerity measures. Yet the success of the program is even more startling. After three years, most macroeconomic indicators have shown significant improvement. Inflation, at 4.7 percent in 2015, is considerably below its long-run average of 17.4 percent from 1980 to 2014. The current account deficit of 4.3 percent of GDP is well below its 7.5 percent average from 1980 to 2014. Similarly, government debt is down to 124.3 percent of GDP from a high of 145.3 percent in 2012. Debt reduction has been rewarded with improved credit ratings and a significant reduction in the country’s bond risk premium. The turnaround has been so profound that Jamaican authorities are considering an extension of the IMF program next year.
While Puerto Rico attracts much of the media attention, the economic situation is just as dire in a dozen or more Caribbean countries.
On the surface, there would seem to be little difference between the current program and the failures of the past. There are the usual austerity measures of reduced spending and higher taxes. But a closer look reveals some subtle distinctions. Jamaica entered previous programs grudgingly and out of desperation for funds to maintain essential imports and service debt. Stagnant growth created a zero-sum atmosphere, with each domestic constituency trying to protect its interests. Lack of transparency on the part of both the government and the IMF created an atmosphere of mistrust.
By contrast, Jamaica has taken more ownership of the current program. It created an Economic Program Oversight Committee, or EPOC, made up of representatives from diverse groups, such as the private sector, civil society and government workers. EPOC is designed to devise a plan for joint burden-sharing, monitor the program for compliance, and maintain transparency. Now, each interest group in Jamaica can see the sacrifices made by others—and how its contribution to the program aids in its overall success.
Cooperation has enabled Jamaica to get through the hard initial years of IMF reform, where austerity only produces improvements in macroeconomic indicators, but not gains in employment or standards of living. Now that there is macroeconomic stability, though, economic growth is returning. After expanding at 0.2 percent in 2013 and 0.5 percent in 2014, the economy grew at 1.1 percent last year; the IMF is forecasting further growth of 2.2 percent in 2016 and 2.5 percent in 2017. A cycle of growth brings the promise of a transition out of stagnation, and would also provide more resources for servicing debt and attracting increased levels of foreign direct investment.
The key here was the Jamaican government’s buy-back of large chunks of its outstanding debt. That move signaled to foreign and domestic companies that the government was serious about creating a stable environment for investment. Admittedly, this is a high-risk strategy, and it may not be appropriate for all highly indebted middle-income countries, especially those where entrepreneurship or an active diaspora are in short supply.
There are still economic risks. The government must stimulate private investment because, in buying back debt, it is diverting much of its budget from potentially productive investments. If the surge in private investment does not materialize, there will not be a sufficient uptick in growth to escape another downturn. The other risk is political. The PNP government that agreed to and implemented the IMF’s austerity program was voted out of office early this year, just when its successes were beginning to take hold.
But what of the initiative proposed recently by highly indebted middle-income countries to give them access to outside development assistance, thus avoiding all the pain associated with IMF-led stabilization programs? Jamaican Prime Minister Andrew Holness urged U.N. members to back the proposal during the General Assembly last month, which could allow Jamaica and other countries to receive economic lifelines through favorable investment, trade, technology transfer and energy deals. But is this a more efficient way to jump-start growth and development? Probably not, especially if the assistance does not induce the reforms and internal cooperation that Jamaica, with its back to the wall and out of options, had to implement.
Robert Looney is a distinguished professor at the Naval Postgraduate School in Monterey, California. He specializes in issues relating to energy security and economic development in the Middle East, Africa, South Asia and Latin America.