Developing Sustainable Balance of Payments in Small Countries: Lessons from Macroeconomic Deadlock in Jamaica

210 Pages·2017·11.867 MB·English

by  Andre Haughton (auth.)

Developing Sustainable Balance
of Payments in Small Countries
AndreHaughton
Developing
Sustainable Balance
of Payments in Small
Countries
Lessons from Macroeconomic Deadlock in Jamaica
AndreHaughton
UniversityoftheWestIndies
Mona,Jamaica
ISBN978-3-319-53030-7 ISBN978-3-319-53031-4(eBook)
DOI10.1007/978-3-319-53031-4
LibraryofCongressControlNumber:2017936951
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F
OREWORD
Jamaica is a relatively small island of approximately 4,000 square miles
with a population of three million people. It is reasonably endowed with
productive resources for external earnings: bauxite and alumina, tourism,
somehighlyfanciedagriculturalcropsandthesupport ofadiasporaofas
many Jamaicans abroad as those who live in Jamaica. But despite this
pleasant scenario of the external account, the economy still experiences a
deficiencyofexternalfunding.Thisleadstoheavyborrowingtoclosethe
gap to meet high import levels, public debt servicing and other external
costs. This is the signal indicating the vulnerability of the Jamaican econ-
omy, which has only averaged 0.7 percent growth annually over the past
50years.
Understanding and closing this gap is what this book, Developing
Sustainable Balance of Payments in Small Countries: Lessons from
Macroeconomic Deadlock in Jamaica, is about. It examines all the main
variables that affect the Balance of Payments of the Jamaican economy,
especially the deviationsproduced bythe exchange ratepolicies.
Itisusefultonotethatthemostsignificantimpactontheeconomyhas
its roots in the political culture because of deep antagonism between the
socialistliberalleftandthecapitalistliberalrightpoliticalpartiesleadingto
aonestepforward,onestepbackwardpatternofstagnationwhengovern-
mentschange.
Itisalsoimportanttonotethattheliberalsignificanceofbothpolitical
partiescontainsagenerousdoseofpopulism,whichhasbeenresponsible
forhigh expenditure.
vii
viii FOREWORD
Since1980,the socialisttendencyhasbeenlargelydormantbecauseof
the demise of socialism virtually worldwide. As a result, this has created
two partisan political groupings: a committed liberal capitalist party that
has sustained its beliefs since its inception 72 years ago while the demo-
cratic socialists group has restructured itself to a repentant socialist reluc-
tant capitalist political group. This has narrowed the political dichotomy,
which augurswell fornew growth.
Nowthatthepoliticalsystemhasbecomemorebalancedgreateratten-
tioncanbegiventoaligningoftheproductivesystem,whichiswherethe
discussionsof thisbookleads us.
The rangeof discussionsfocuseson economic growthandincludes:
(cid:129) The level of external debt and the Net International Reserves that
wouldbeadequatetoavoidexcessononehand,andinadequacyon
the other;
(cid:129) Foreign Direct Investments, capital formation, national savings and
realgrowth;
(cid:129) Exchange rate and monetary policies and their effect on movement
ofthe rateof exchange anditsimpacton economic growth;
(cid:129) Theimportandexporttrade,andpoliciestonarrowthegapforthe
improvement ofbalanceof payments.
These, and other issues, are the key variables to be analyzed to create a
sustainable Balance of Payment for growth. The author, Dr. Andre
Haughton, has tackled the problem of gaps in analysis that do not ade-
quately deal with questions requiring deeper quantitative assessment for
proper empirical analysis. This will enable a more lucid understanding to
overcomethe mysteries ofgrowth.
The Most Honourable Edward Seaga ON, PC, LL.D. (Hon), D.Litt.
(Hon)
Director
EdwardSeagaReseachInstitute
P
REFACE
ManydevelopingcountriesseekBalanceofPayments(BOP)andstability
support from the International Monetary Fund (IMF) and other multi-
lateral institutions. In practice, this is due to these countries’ inability to
generatesufficientintrinsicforeigncurrencynecessarytoconducttransac-
tionswithothercountriesandstrengthentheirNetInternationalReserves
(NIR). Over the last 40 years, Jamaica has entered into 14 successive
arrangementswiththeIMF,whichhasprovidednotjustforeigncurrency
supportthroughSpecialDrawingRights(SDRs)anddrawdowns,buthas
also provided guidelines along the way geared towards increasing the
indebtednation’smacroeconomicstability,whichisnecessarytoenhance
itseconomic growthpotential.
Throughout this time, however, Jamaica has only managed to gen-
erate 0.7 percent growth in Gross Domestic Product (GDP) on average
per annum. The country has endured chronic macroeconomic instabil-
ity and has experienced low and sometimes negative total factor pro-
ductivity growth from 1974 to present. The amount of goods and
services sold to the rest of the world per annum has been declining.
Asaresult,thenation hasnot beenearningenoughtoincreaseitsstock
of capital beyond depreciation annually. This is essentially the desirable
scenarioifJamaicaisevertomovefrombeingadevelopingcountrytoa
fully developed nation.
The high economic growth rates Jamaica experienced in the 1960s
averaging more than 5 percent per annum were reduced by high public
borrowing in the early 1970s. Today, Jamaica is among the top five
indebted nations in the world with a total debt ratio of 128 percent
ix
x PREFACE
of GDP. With a gradually depreciating currency, Jamaica’s foreign
currency debt servicing requirements continue to increase. Jamaica,
once a positive example to other developing countries who needed a
recipe for development, is now an example of what is not to be done if
a country wants its economy to remain stable with low debt, high
growth rates and positive development results.
This book analyzes Jamaica’s ability to satisfy its short- and long-run
foreign currency obligations in light of recurrent BOP support from the
IMFandotherinternationallendingagencies.ItanalyzesJamaica’slong-
standing relationship with these multilateral lending agencies, which
shouldserveasausefulcasestudyforotherdevelopingcountries,govern-
ment officials, economists, economics students and practitioners
worldwide.
This book is novel in that it analyzes the sustainability of foreign
currency flows between Jamaica and the rest of the world from 1962 to
2015 in light of the country’s adverse economic growth, stability and
development pursuits. It provides an understanding of the underlying
factorsthatinfluencethelevelofforeigncurrencyflowsacrosstime,and
determines the conditions necessary for the stream of inflows to offset
thestreamofoutflows sustainablythroughdifferentavenuesinthelong
run. The research analyzes the adequacy of the nation’s NIR accumula-
tion strategy and establishes an equilibrium point that might exist. It
examinesthegoods market byanalyzingthe impact of real and nominal
exchange rate movements on the nation’s prices, imports, exports and
output growth.Theresearchinvestigatestheloanablefundsmarketand
provides an understanding of the impact of interest rates on the avail-
ability of credit for domestic investment. The impact of Foreign Direct
Investment (FDI) on economic growth is also analyzed. The research
providesrecommendationsonhowJamaicaandothercountriesthatfind
themselves in this deadlock position should strategize to improve their
economic conditions.
This research began as an investigation into Jamaica’s approach to
earning or generating foreign currency amidst hesitation by the IMF to
sign a foreign currency loan agreement without conditionality in 2013.
HavingreturnedtoJamaicafromtheUKin2011afterwritingmyPhDon
‘Essays on Monetary Policy in the Caribbean Region’, at the University of
Essex, I observed handicaps in Jamaica’s interest rate determination rela-
tivetoothercountries.Iwasinquisitiveaboutthecausesofandsolutions
to the nation’s foreign currency debt problem and deficiencies in the
PREFACE xi
nation’sGDP growthand exportstrategies. In 2012, I beganwriting for
the Jamaica Gleaner newspaper; simplifying and explaining issues affect-
ingthelocaleconomyinaglobalcontext.Writingtheseweekly‘Briefings’
heightened my inquiry, which enabled me to delve deeper to ascertain
Jamaica’slong-termeconomic strategyfornationaldevelopmentsince its
independence from Britain in 1962. To my surprise, after independence
there was no long-term strategy to place the country on a path towards
sustainabledevelopment.Indeed,itwasonlyrecently(2009)thatJamaica
laidoutits Vision2030goals.
Over the last 40 years, Jamaica has encountered significant internal as
wellasexternalchallengesinitsattempttoconcurrentlyachieveeconomic
growth, economic stability and economic development. Failure of both
fiscal and monetary policies in their attempt to balance the market
mechanism has given the ‘invisible hand’ the freedom to determine eco-
nomicoutcomeinsomeinstances,andithas.Theglobalmarkethassold
more goods and services to Jamaica than Jamaica sold to it. This has
resulted in insufficient accumulation of foreign currency needed to con-
duct international business creating foreign currency liquidity problems.
Sufficiency of the nation’s foreign currency earnings has been a cause for
concern and is now more questionable since the latest signed Extended
FundFacility(EFF)agreementwiththeIMF,whichexpiresin2017.This
programme disburses an agreed-upon quota of foreign currency on a
quarterly basis from 2013 to 2017 on condition that Jamaica passes
quarterlyreview tests.
Now let us assume that Jamaica satisfies all the conditions stipulated
in the EFF by the IMF, which concludes in 2017; then what? Will the
implementation of these conditionalities be sufficient to ensure long-
run solvency? What strategies are being implemented to ensure that if
the IMF decides not to enter a new loan agreement, Jamaica can
generate enough foreign currency on its own to satisfy demand and
foreign obligations? The issue of liquidity management has brought
itself to the forefront. In order to get a deeper understanding of how
to approach the situation, it is important to review the economic
policies and exchange rate strategies that Jamaica has pursued leading
up to the current situation. The country must create more ways to earn
or generate foreign currency or must revert to more borrowings when
the current EFF expires.
Theapproachofthegovernmentthusfarhasbeentoborrowtoprovide
foreign currency in an economy where exchange rates are market