Aaron Kreider ECON 308 April 1995 Economic Country Study of Jamaica: "Rat Race." Introduction: Summary of major economic strategies Jamaica is a small Caribbean island with only 2.5 million people. Its small size limits its freedom to experiment with alternative economic policies, due to the effect of the international economy upon the island. The post-world war II period, fueled by the start of the bauxite-alumina industry, was a time of rapid economic growth lasting until 1972. In 1972 Michael Manley became prime minister and tried to implement measures to redistribute the economic gains that the country had been making during the past twenty years. He sought to end Jamaica's dependency on foreign companies and replace capitalism with democratic socialism. However, his policies failed due to over ambitious governmental expansion, external pressures caused by his socialist rhetoric, and poor implementation of the programs. These failures caused Jamaica to enter an economic decline that lasted until the late 1980's. Jamaica and its people Jamaica is a small island of 10830 sq. km, in the Caribbean, to the south of Cuba. The population in 1994 was approximately 2,560,000 (Jamaica 2). The population growth rate is 1% when emigration of 0.6% is considered (Jamaica 2). Migration was 195,000 between 1943-1960, 280,000 between 1960-1970, and 325,000 between 1970-1982 (Anderson 17, ctd. in Boyd 13). Migration has relieved a lot of the population pressure from Jamaica and has also helped reduce the country's very high unemployment rate. Life expectancy is in the same range as developed countries at 74 years (Jamaica 3). Jamaica has a mixed ethnic heritage with over 90% of the population being of African or mixed Afro- European descent (Jamaica 4). The percent of the population who was 0-14 or over 65 years was 45.4% in 1960, 51.4% in 1970, and 45.2% in 1982 (Planning Institute of Jamaica 1984, ctd. in Boyd 136). This dependency burden is higher than in developed countries, but lower than many developing countries. The need to care for these dependents slows growth as consumption increases at the cost of less investment. Jamaican History and Politics Jamaica was a colony for 450 years, first under Spain, then it became British in the mid 1600's (Forbes 5). As part of the British West Indies, in the 18th century Jamaica became the largest sugar producer in the world (Forbes 5). The sugar economy was one of slavery and the tensions between slave and master still influence the country and its economy (Forbes 6). Throughout Jamaica's history, Jamaicans have not been the entrepreneurial type and have been less prone to taking risks necessary for development (Forbes 6). Jamaica's government and democracy were solidly rooted in the island's British heritage (Forbes 6). In 1945 the Jamaican Labour Party (JLP) won Jamaica's first general election with universal suffrage (Forbes 10). In the same year a stable two party system emerged out of the personal competition between Norman Manley of the People's National Party (PNP), and Alexander Bustamante of the JLP (Forbes 10). Both parties held similar centrist views during the Forties, Fifties, and Sixties (Forbes 11). In the Seventies, the PNP under Michael Manley became left-wing and the JLP moved to the right. Government has switched regularly between the two parties throughout Jamaican postwar history until the present. Economic Vibrancy The growth of new industries such as tourism and bauxite, led to a rapid postwar economic expansion in Jamaica (Thomas 211). Meanwhile agriculture fell in importance from 96% of exports in 1945, to 37% in the Sixties (Thomas 211), and from 24% of GDP in 1950, to 7% in 1969 (Source: Department of Statistics, ctd. in Boyd 6-7). Mining fueled the economic boom increasing from 2% of GDP in 1953 to 10% in 1960 (Source: Department of Statistics, ctd. in Boyd 6-7). Jamaica had rapid economic growth averaging 7% from 1950-1972 (Forbes 3). Investment was pouring in, and in concert with the United States' long boom, Jamaica prospered. Unemployment fell from 25% in 1943 to 13.5% in 1960, but rose to 23.5% in 1972 as UK vastly reduced its immigration (Forbes 13). However, unfortunately "the trickle down effect has never worked very well in Jamaica." (Forbes 14) And during a period of remarkable growth, the average real income of the bottom 30% of the population went from 32 Jamaican dollars in 1958, to J$ 25 in 1968 (Thomas 211). Bauxite and Growth Bauxite fueled the boom in Jamaica, but it was also a typical example of the dominating role of foreign corporations in Jamaica's economy. In 1952, multinational companies started mining for bauxite in Jamaica, and the US Bureau of Mines estimated at the time that Jamaica had a fifth of the world's reserves (Manley 19). Bauxite mining was, from the start, done by MNCs for their own profit, despite the interests of the Jamaican people and government (Manley 19). The Jamaican government limited the companies' influence with a royalty agreement in 1950 (Manley 23). However, the agreement was very generous to the companies, and it fixed the government's revenues at only 37 cents per ton for the next five years (Manley 22-23). In 1957, the PNP government of Norman Manley, negotiated an increase to approximately $1.96 per ton, dependent on the price of aluminum (Manley 27). In 1969, government revenue was increased again from $3.85 to $5.00 (Manley 37). Bauxite and Economic Nationalism Multinational corporations were exploiting Jamaica's bauxite and exporting it in unprocessed form. Jamaica's government still felt that it was getting a raw deal on its bauxite resources, over which it had little control. So in 1974 Jamaica founded the International Bauxite Association. It was designed for bauxite producing countries to increase their power, share knowledge, take joint actions, and to place the bauxite industry under government or national private control (Manley 46). In 1974, the government's revenue was only $2 a ton, compared to the $5 agreed in 1969 (Manley 54). This was because the mining companies never made any taxable profits due to depreciation, transfer pricing and other accounting factors (Manley 54). So when the bauxite companies refused to make major revenue concessions to the government, the parliament passed a levy on their production (Manley 50). After much complaining from the companies over the levy, the government reached an agreement allowing it to purchase stakes in the companies, and to buy unused mining land cheaply (Manley 53). The levy combined with a worldwide decline in demand, resulted in lower production and plant closures in Jamaica (Manley 56). Also competition increased as bauxite was found in Australia, Guinea, Brazil, and India (Manley 58). Even so government revenue from bauxite increased from J$ 27 million in 1973, to J$ 187 million in 1974 (Source: Jamaica Bauxite Institute, 1976, ctd. in Manley 61). The levy provided a short-term stimulus to the government's revenues and placed the bauxite industry more in Jamaican hands, but it had negative long term effects as it scared potential foreign investors. Manley First Years 1972-1976 The world political and economic system . . . is structured to achieve certain results. Chief among these is the consequence that all economic activity is geared to the advantage of the great centers of industrial power, which also were the centers of economic power, while the peripheral economies were developed as suppliers of raw materials and basic commodities. (Manley xii) Michael Manley was elected leader of the PNP in 1969, succeeding his father (Forbes 15). He came into leadership at a moment of popular desire for distributing the economic gains of the past two decades (Forbes 16). People wanted not only growth but also development. He was very popular and formed government after PNP won the election in 1972 on a platform of economic justice. Manley's popularity allowed him to plan a new course for Jamaica's economic development. His hold on the country was so great in 1972 and 1973 that one commentator wrote that much of the population would willingly have followed the new prime minister had he marched into the Caribbean Sea. (Forbes 17). Nationalization Government intervention in the economy is based on the idea that the market supplies too few of certain goods, because it does not include the benefit to society from producing them. The JLP government in the Sixties had already nationalized sugar plantations and several utilities (Stephens 282). Manley believed that Jamaica should use government intervention to divert more of its economic resources to food, housing, and education (Stephens 3-4). With that in mind, the PNP government implemented a program of nationalization of the "controlling heights" of the economy (Forbes 18). Jamaica's dependency on foreign companies was reduced with the nationalization of monopolistic utilities, foreign owned sugar plantations, textile factories, financial institutions, and parts of the tourism industry that were saved from bankruptcy (Thomas 213). Foreign Control The importance of foreign control and the influence of the Jamaican elite in the country's economy in 1972, was without question. Only 6 of 219 CEOs in Jamaica came from the 90% of the country's population who were black (Thomas 212). Foreigners owned 100% of the mining, 75% of the industry, 2/3 of the financial services, 2/3 of the transport, and 40% of the sugar production (Thomas 212). Foreign Policy Jamaica adopted an independent foreign policy with the idea of diversifying trade partners to minimize its "dependence" (Stephens 6). "Independence" would reduce problems with foreign reserve shortages and lower the harm of external fluctuations (Stephens 4). As an example of Jamaica's third world outlook, Manley embraced Castro and cooperated with Cuba, greatly annoying the US (Forbes 22). As long as I'm party leader I can promise you that we will walk through the world on our feet and not on our knees. Everyone is worried about us vexing the Americans. We are not vexing the Americans. They are vexing themselves (Borosage 28). Worker Empowerment, Real Wage Increases The people had given Manley's government a mandate to distribute the economic gains that Jamaica had made in from 1945-1972. The government passed legislation that favoured labour and tried to increase worker control of production (Stephens 286). However this plan failed due to union leaders' and employers' opposition (Stephens 286). An example of a government policy designed to favour the lower income earners was the introduction of a minimum wage (Forbes 19). The government politically supported workers, allowing them to achieve large increases in their real wage in the early years of Manley's government, even during the first inflationary oil price shock (Boyd 18). The downside for the economy was that wage increases combined with a fixed exchange rate made business in Jamaica less profitable (Boyd 18). Meanwhile, the early gains made in income distribution were reversed due to the implementation of the IMF agreements' conditions. Source: Department of Statistics, 1976, 1980. (ctd. in Boyd 102) Income Distribution Decile 1958 1971/1972 1975 1 0.6 0.5 1.3 2 1.6 1.5 2.8 3 2.5 2.0 3.9 4 3.5 3.0 5.1 5 4.7 4.0 6.3 6 6.1 6.5 7.9 7 8.3 9.0 9.9 8 11.2 9.5 12.5 9 18.0 14.0 16.9 10 43.5 50.0 33.3 Source: E. Ahiram (1964); C.E. McLure (1977); Statistical Institute of Jamaica (1975-1977). (ctd. in Boyd 100) During years of strong economic growth, from 1958 to 1971/1972, the lowest half of the population decreased their share of the national income. As an example of the inequality of income distribution, by 1972 the richest 10 percent of people were making the same total income as the lowest 90%. Under Manley's first several years, from 1971/1972 to 1975, all the bottom nine deciles of the population increased their share of the national income. Manley's alternative path for economic development resulted in the four lowest deciles almost doubling their share of the national income in several years. Manley and the IMF 1976-1980 Manley's government had been able to implement their policies for several years, but in 1976 they ran into a financial crunch. From 1972 to 1976 Michael Manley had been able to avoid having to make an agreement with the IMF (Boyd 22). An agreement with the IMF would entail devaluation, wage freezes, and reducing the government deficit. These policies were exactly opposed to the ones the Jamaican government had been implementing. However in March 1976, Jamaica's foreign reserves became negative, and in December 1976 the PNP government signed a two year Standby Agreement with the IMF (Boyd 23, 26). The agreement's conditions were a currency devaluation between 20-40% and a reduction in the government's deficit (Boyd 26). The PNP won the election in 1976, and then changed its mind on following the IMF conditions (Boyd 26). In January 1977, it tried its own non-IMF program and placed controls on trade, stopped foreign debt payment for eighteen months, reduced wage growth, and sought out aid from sympathetic left-wing governments (Boyd 27). Indeed, for a country very deeply in debt it may be almost impossible, on its own, to find financial assistance outside the IMF-Western commercial banking system at anywhere near the level available within the system (Stephens 282). However, these measures were insufficient to cover the foreign exchange need, so in August 1977 the government signed a standby agreement with the IMF that called for 0% monetary growth for the first six months, reduced government expenditure, and devaluation (Boyd 27, Forbes 26). In 1977, Jamaica sought support from sympathetic newly oil-rich Venezuela and Trinidad and Tobago, and hoped that popular mobilization behind the Emergency Production Plan would resurrect the economy (Manley 156). Jamaica failed the IMF criteria again, and in 1978 signed a strict deal for $250 million U.S. under the Extended Fund Facility (EFF) (Manley 28, 29). It was necessary as Manley (161) pictures a "crisis scenario" for Jamaica's economy, with a shortage of raw materials, replacement parts, causing economic decline (163). The requirements were replacing the dual-exchange rate with a single one, a 15% devaluation the first year, another 15% in the second year, removal of price controls, limiting wage increases to 15% over the two years, tax hikes to increase government revenues, and reducing monetary growth (Boyd 29). Manley's government followed the criteria, but real GDP fell 1.6%, the current account deficit grew, and government revenues increased less than expected (Boyd 30). This was replaced by another EFF in 1979 that provided further funds to boost the Jamaican economy, but Jamaica failed the criteria in December (Boyd 30). The End of Manley's Government Had there been a violent upheaval, this would not even have appeared as a statistic on any IMF chart of relevance. The consequences for the Jamaican people, however, would have been incalculable (Manley 145). In March 1980, the government withdrew from its IMF agreement because it felt devaluation was not the solution for economic growth, and that austerity would hurt the disadvantaged by lowering social spending and freezing wages (Manley 155). The "IMF election" in October 1980, was won by a large margin by the pro-IMF, and optimism swept the country (Boyd 33). The JLP won on its platform of rebuilding the economy, anti-communism, and change (Forbes 32). Reasons for PNP's Failure The Extent of the Failure The PNP government's failure with its plans for economic reform are obvious as GDP fell 26% from 1974-1980 (Forbes 19). It had failed due to its over expansionist monetary and fiscal policy, nationalization, bad management, external pressures, a large recurrent current account deficit, Manley's scary rhetoric, and the need to meet short-term needs of consumption and simultaneously invest for future growth. Unemployment reached its worst level under the PNP, peaking at 27.4% (Forbes 25). GDP per capita fell even further and in 1980 it fell to the same level it had been in the mid Sixties. GRAPH WITH PER CAPITA GDP(inverse V)!!! USE A BLANK PAGE!. Big Expansionist Government The relative size of the Jamaican government in the economy leapt from 8% of GDP in 1972 to 19% in the 1979-1985 period (Department of Statistics, ctd. in Boyd 6-7). The government deficit increased as revenue did not keep pace with expenditure. Government fiscal policy was very expansionist as the deficit went as high as the 24% of GDP one in 1976. Sources: National Planning Agency, 1980, 1981, 1982, and 1983; Bank of Jamaica July 1980, October 1984. (ctd. in Boyd 19) Also the government ran an expansionist monetary policy, sometimes using money creation to pay for its deficits. Inflation averaged 22% during the 1972-1980 time period. It fluctuated widely, making it very difficult to predict interest rates and price changes in advance, slowing long-term economic growth. (World Tables 1992 344-345) Nationalization Nationalization was a primary aspect of the big government philosophy of the PNP. The dollar costs of compensation for nationalized companies, loaded the government with debt (Stephens 271). Privatization is currently the trend as it has been widely recognized that the public sector is very inefficient. The transition costs of nationalization were augmented by the loss of efficiency in the newly government owned companies. Nationalization was partly to blame for the economic decline from 1972-1980. Bad Management Jamaica lacked the efficient management needed to properly run a large government and implement new social and economic programs. Land reform was poorly managed with land being granted to people who did not want it (Forbes 19). Because of bad agriculture policy, sugar production fell from 4 million tons to 2.7, and banana production from 370,000 tons to 172,000 during Manley's government (Forbes 19). In another example of bad management, the plan for community development organizations, as an alternative form of development to pure capitalism, did not get off the ground (Thomas 218). The PNP paid too much for companies in the red and then lacked the qualified managers to run them (Thomas 220). The Global Capitalist Economy External factors make it impossible for a small country such as Jamaica to stand against the international dominance of capitalism without massive assistance from sympathetic governments (Forbes 19). The IMF, whose approval is necessary for the large bank loans that Jamaica needed, worked to open Jamaica's economy to foreign investment and increased dependency, while the Jamaican government wanted to free its economy from foreign influence (Stephens 273). The IMF and Manley's government were always clashing with each other during the PNP's last term. Devaluation The IMF repeatedly prescribed large currency devaluations for Jamaica. However, devaluation increased debt payments in J$, didn't increase exports much, and was less successful than micro-economic policies aimed at a sector level would have been (Boyd 53,54,56). Bauxite composed 75% of Jamaica's exports in the late seventies, and its production was not greatly affected by devaluation as capacity was fixed in the short run (Manley 77). TRADE Jamaica faced declining terms of trade during the 1972 to 1980 time periods. The country's exports earned it less money, while its imports cost more. Source: Bank of Jamaica 113. (ctd. in Manley 89) Meanwhile Jamaica's exports were not increasing as fast as its imports. Jamaica imports 99% of its energy, and its oils bill increased 800% due to the two oil price shocks. 500 million dollars of capital left the island from 1972- 1980, while in 1971 foreign investment was $175 million US (Forbes 25). The trade and current account deficits hurt Jamaica as it had to seek external financing from the only source available: the IMF. (World Table 1992, 346-347) (World Table 1992, 346-347) The Dilemma of Investing or Consuming Jamaica has a high marginal propensity to consume rather than invest, and it has had a balance of payments deficit for a longtime except for 1963 (Manley 142). During the Fifties and Sixties foreign investment inflows for mining helped balance Jamaica's current account For redistribution to work without overwhelming opposition, Jamaica needed investment to stimulate economic growth (Thomas 217). Under Manley's government foreign investment plummeted, and the coalition between poor and rich collapsed as the Jamaican economy declined. If the government had invested more money, then economic growth would have lowered pressure from the rich, resulting in more foreign investment and less emigration of skilled workers (Stephens 319). The investment could have been funded by the windfall increase in revenues from the bauxite levy, instead of using the money for social spending (Stephens 287). On the other hand, a policy of investment for the long-term would have been politically very difficult with current unemployment over 20%. Rhetoric Manley's rhetoric may have helped domestically, but external costs overwhelmed domestic benefits (Thomas 224). Due to his rhetoric, the IMF took a more strict stance in dealing with Jamaica, investment flowed out of the country rather than in, and the US government did not send much foreign aid. According to Marable, Jamaica was punished by US for supporting Cuba's decision to send its army to help the Angolan government versus the UNITA rebels in 1975 (Marable 25). Mr. Manley's radical foreign policy clothed his relatively moderate democratic economic and social policies in an aura of leftist radicalism far removed from the reality of what he attempted to implement. But the image of a radical, Marxist orientation to domestic social policies was sharpened by both the leftist rhetoric of Mr. Manley and his party spokesman and by self-serving interpretations of what was happening in Jamaica promoted by the North American media and the Jamaican bourgeoisie (Stone 288, qtd. in Thomas 224). Seaga's Government Under Seaga's newly formed government, Jamaica went through the same process of making and breaking IMF agreements as it had under the previous PNP administration. The economy did better, but growth was flat or very little. US aid was a big boost, averaging 200 million dollars from 1981 to 1984, compared to 47 million in 1979 when Manley was in power (Forbes 27,36). The failure of the IMF's program was evident in the government deficit of 1983, which at 24% of GDP vastly differed from the IMF's prediction in 1980 of a 1% surplus (Boyd 53,58). Thomas concludes that Jamaica was just as worse under Seaga as under Manley (235). Manley's Capitalist Conversion "If you are in desperate need of money and there is only one banker in town, you can argue with that banker, but you cannot quarrel with him" (Manley, qtd. in Borosage 29). Michael Manley learned from his government's failures and admitted that, "the great error I made was I grossly overestimated what the state could do, how I could use the state as an economic machine, as a form of shortcut to development." (Marable 26) Manley blamed the lack of qualified motivated managers, for the public sector's failure (NPQ 46,47). Also, he recognized that the increase in the public sector was offset by a decrease in the private sector (NPQ 47). Manley now favors capitalist development with some modifications for empowering workers and poor people and dissipating the power of oppressive monopolies (NPQ 47,48). Manley swept the 1989 elections as Seaga's reforms weren't producing the desired economic gains for Jamaica (Borosage 28). Manley's new government practiced privatization to pay for government investment. The current PNP government is much more moderate than the Manley government of the Seventies, and is encouraging foreign investment with renewed economic growth to show for it (Scott 22). Jamaica's Permanent Problems It is a small island country of 2.5 million people that does not have too many resources other than bauxite. It has to rely on trade to develop and consider the international economy, notably the United States (Thomas 231). High unemployment and poverty call for short term solutions that would reduce investment and hurt long term growth (Thomas 231). The island has continual current account deficits and lacks foreign exchange (Thomas 231). Jamaica needs to develop agriculture and light manufacturing (Forbes 47). Jamaica needs optimism to keep people and their money in the country (Forbes 48). Good relations with the US are essential due to its essential economic role with trade and aid (Forbes 48). The economy has to rely on sectors that undergo great variation, like bauxite and tourism. Jamaica's prospects look bright as the tourism industry has doubled in the past several years. Tourism is not only fueling the economy but also providing Jamaica with foreign currency necessary to meet its large trade deficit. Conclusion In 1972-1980, Manley's government tried to find an alternate form of economic development and failed. The program that they tried to carry out would not have succeeded even if efficiently managed due to the role of the external influence on Jamaica's economy. Jamaica has since began to recover from the decline of the seventies and eighties and with the help of a tourist boom, the country is growing again. Jamaica's best hopes lie in establishing a friendly policy towards investment and trade, without interfering much in its economy. Works Cited "Adam Smith was right." New Perspectives Quarterly Summer 1992: 46-51. Borosage, Robert and Saul Landau. "Lonely Manley." Mother Jones March-April 1991: 26-28. Boyd, Derick. Economic management, income distribution, and poverty in Jamaica. New York: Praeger, 1988. Forbes, John D. Jamaica: managing political and economic change. Washington: American Enterprise Institute for Public Policy Research, 1985. "Jamaica", an excerpt on the WWW from the CIA Factbook. Manley, Michael. Up the down escalator: development and the international economy: a Jamaican case study. Washington: Howard University Press, 1987. Marable, Manning. "Michael Manley." The Progressive July 1993: 23-27. Scott, Matthew S. and Nicole Lewis. "Growth for Jamaica?" Black Enterprise Dec 1992: 22. Stephens, Evelyne Huber & John D. Democratic Socialism in Jamaica: the political movement and social transformation in dependent capitalism. Princeton, NJ: Princeton University Press, 1986. Thomas, Clive Y. The Poor and the Powerless. New York: Monthly Review Press, 1988. World Tables 1992. Baltimore, Maryland: The John Hopkins University Press, 1992. 12 11