Developing Sustainable Balance of Payments in Small Countries: Lessons from Macroeconomic Deadlock in Jamaica PDF
Preview Developing Sustainable Balance of Payments in Small Countries: Lessons from Macroeconomic Deadlock in Jamaica
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 ©TheEditor(s)(ifapplicable)andtheAuthor(s)2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher,whetherthewholeorpartofthematerialisconcerned,specificallytherightsof translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthis publicationdoesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesare exemptfromtherelevantprotectivelawsandregulationsandthereforefreeforgeneraluse. Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformation in this book are believed to be true and accurate at the date of publication. Neither the publishernortheauthorsortheeditorsgiveawarranty,expressorimplied,withrespectto thematerialcontainedhereinorforanyerrorsoromissionsthatmayhavebeenmade.The publisherremainsneutralwithregardtojurisdictionalclaimsinpublishedmapsandinstitu- tionalaffiliations. Coverillustration©vkstudio/AlamyStockPhoto Printedonacid-freepaper ThisPalgraveMacmillanimprintispublishedbySpringerNature TheregisteredcompanyisSpringerInternationalPublishingAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Dedicatedto PrincessAura 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
The list of books you might like
