Policy Memo to Michael Manley, on the Eve of IMF Negotiations
by Lisa Sandoval
December 15, 2017
This policy memo is a thought experiment whereby I travel back in time to the year 1977 as an aid to Michael Manley, prime minister of Jamaica from 1972-1980 and 1989-1992, to explore the policy options available at that time and imagine what other paths Jamaica could have taken to avoid entering into a Structural Adjustment Program (SAP) with the International Monetary Fund (IMF). It is not intended to be a fully realistic statement that would have been possible to make in 1977, since it relies on analysis generated after the fact.
MEMORANDUM TO THE PRIME MINISTER
DATE: April 4, 1977
FROM: Lisa Sandoval
SUBJECT: Rethinking the Upcoming IMF Negotiations
The Current Crisis:
The Jamaican government is facing a balance of payments problem of huge proportions. To summarize our situation: the oil price shocks of 1973, besides causing a huge outflow of foreign exchange from our country, led to the flow of millions of dollars from OPEC countries to American and European banks who have been most happy to lend these funds to us in pursuit of their own profits. Despite using these loans for infrastructure and social services, our economic growth has not been able to outpace negative domestic and international trends. We now find ourselves unable to service our loans. This year, debt servicing is projected to exceed new income from borrowing by J$5 million.
The worldwide economic recession is leading our creditors to raise our initially attractive interest rates as well as decreasing our tourism revenue. Income from exported goods has decreased because their prices have fallen, while at the same time our export volumes have lessened. Unemployment has risen. Domestic inflation has not continued to fall from last year’s rate of 10%, probably due to the continued rise of import prices at an annual average rate of 25% since 1970 and the expansion of domestic credit from J$277 million in 1970 (25% of GNP) to J$1,281 million this year (49% of GNP). This level of credit is too high for our domestic monetary resources. We are nearly unable to finance penicillin for our hospitals. The situation is clearly critical.
We find ourselves pressured both internationally and domestically to borrow massive quantities of additional funding to cover our deficit. More borrowing to cover our deficit and service our prior loans is not the answer and the structural adjustment program to which we would be required to comply cannot possibly create the level of economic growth needed to pay off our unsustainable debt - indeed, no program could possibly create that level of economic growth without serious social and environmental costs.
Committing to an IMF Structural Adjustment Program (SAP) is to be avoided at all costs. Indeed, the economy was growing at a rate of 5% when the PNP [People’s National Party] was voted into office on a platform of social responsibility and reducing inequality. This alone suggests that that rate of growth was more than Jamaican society could accommodate. As you know, the SAP involves reduced government spending, civil service layoffs, elimination of price controls and subsidies, privatization of state-owned enterprises, wage deflation, monetary devaluation, and opening our markets completely to foreign competition. Some of these elements may indeed prove helpful to our future economic growth; however, to be forced to implement all of them on a tight schedule with no flexibility for local needs cannot possibly be the best remedy for our current situation. The Jamaican people would suffer, their quality of life would decline, local producers would be decimated, and Jamaica’s self-sufficiency would be forever jeopardized.
In short, entering into a Standby Agreement with the IMF runs counter to everything that you and the PNP stand for. Just as you have declared that Jamaica is not for sale, so let not the PNP sell out to those who will offer loans in exchange for opening the economy to serve their own interests.
It is worth repeating that the likelihood is slim that the proposed economic changes could cause such incredible growth as to eliminate our budget deficit and allow us to pay off even higher volumes of loans. You yourself have stated, at the Conference of the Non-Aligned Movement in Algiers in 1973, that the terms of trade are skewed against primary-producing countries, as primary good prices inevitably fall while those of value-added goods and services rise. It seems unlikely that an austerity program could change that fact, nor help Jamaica move up the ladder in terms of value-added exports. Second, the Jamaican economy has not done so badly since independence, so a sudden austerity program is counterintuitive. Sugar production did well at the beginning of your first term in office, GNI per capita has been rising for the seven years leading up to 1975, and the economy’s strong rate of growth did not begin to contract until 1972. This contraction coincides with several events: 1) the oil price shocks, 2) the global recession, and 3) higher government spending during your term in office.
The Path of Independence
Jamaica’s political economy will require significant changes in order to balance the budget until the economy picks up again; however, Jamaica’s structural adjustment program should be on its own terms. Without going deeper into debt, we can restructure Jamaica’s economy to promote financial sustainability. It is better to endure a short-term crisis than to sign away Jamaica’s independence. To this end, Jamaica needs to wipe out its debt and restructure its economy to meet domestic needs.
Declare sovereign debt default. Jamaica’s debts are unsustainably large and unacceptable, and impossible to repay - to even attempt to do so would involve taking substantial sums out of public investment and putting them towards lining the coffers of the richest members of American and European society. We can imagine, further, that repaying these elites is the primary focus of the Bretton Woods institutions at this time. In the name of all that is right and fair in the world, Jamaica should not be responsible.
There are serious consequences to sovereign debt default, but they may turn out to be no less problematic than the current situation.
The first cost is that of difficulty borrowing in the future, due to the loss of reputation that would ensue from default. Rates will be higher, and conditions of repayment more stringent. We may also find ourselves sued in the future for the return of some of the funds. And yet, in defaulting on our debts we reject the reliance on funds borrowed from abroad and therefore plan not to engage in considerable borrowing in the future.
The second cost will be exclusion from international trade as punishment for defaulting. The United States will most likely impose an embargo and attempt to influence other countries to do the same, with some success. We will find it more difficult to increase our export earnings and obtain needed imports. We may, however, find some opening by aligning ourselves with Cuba and/or the non-aligned nations.
An even more concerning cost is the possibility of setting off a domestic financial crisis and a bank run.
The final cost is a political one. The PNP will assuredly lose power in the next elections as social programs are scaled back and you will be perceived as having failed to deal effectively with the problem, unless economic improvement comes quickly, which is unlikely. This concern, however, should be negligible because 1) acting in the best interests of Jamaica over the long-term is more important and 2) the current crisis has most likely already ensured that the JLP [Jamaica Labour Party] will take power in the next elections.
The severity of the first three costs is expected to decline as time passes.
Move to correct the balance of payments issues. A basic solution to the balance of payments problem is to reduce imports while expanding exports, to create a net inflow of foreign reserves. Imports can be decreased selectively through tariffs and physical quotas or bans, to encourage domestic consumption of domestic goods. Increasing exports is a difficult question at this time, due to the unfavorable global economic situation. However, it might be possible to increase exports since production volumes themselves have been falling. Reducing imports will require using import substitution to decrease our reliance on imports for the inputs in our export products. Changing the exchange rate from a peg to a managed float will also allow us more flexibility. From there, devaluing the Jamaican dollar would help to correct the deficit by lowering the price of our exports while discouraging imports, although this action may not be able to be taken as long as our exports remain dependent on inputs from imports such as oil, whose cost is high. Although interest rates would normally be raised in this situation try to prevent the value of the Jamaican dollar from declining, it may be more beneficial to try lowering them to encourage local economic activity.
Close the deficit by retrenching ambitious social programs and promoting a pro-business approach. The socialist democratic ideals of this party may have to be softened in order to be deal with the current capitalist system that is experiencing a crisis. Our social programs are good ones, but we have done too much, too soon, without creating a corresponding increase in government revenues. Too much faith has been placed in the ability of the state to create employment and we have not been able to deliver. Therefore, our option now is to shift to placing more trust in the power of individuals and collectives to create the needed employment, and offer incentives for them to do so. At the same time, government spending will have to be cut back, and a compromise made on income redistribution and reduction of inequality in favor of increasing business profits to reap subsequent gains in corporate tax revenue. Loosening domestic price rigidities such as minimum wages will encourage businesses, and may not have too serious an effect on workers as recent wage increases have in some cases outpaced inflation. The temporary unemployment relief program may need to be cut back.
A new pro-business approach does not have to run contrary to your values, because it can create profits while simultaneously introducing greater equality into our society. By focusing on small and medium sized enterprises (SMEs) and collectives, the great income disparities created by larger corporations are minimized. A small business can create employment without accumulating so much profit as to make the owner very much richer than the employees. And collectives co-owned by the people who do the work produce a situation in which people are motivated to innovate, be successful and make a profit, but within the business profits are equitably shared instead of going to a select few. Special incentives should be given to collectives, and incentives should also be given to SMEs.
Reassure the domestic business sector by softening the party’s socialist democratic rhetoric and silencing the more radical socialist members of the PNP. The party’s desire to control public utilities and other key areas is being seen by the Jamaican business sector as a threat to the private sector, a fear which is being further reinforced by the Bauxite Production Levy. Therefore, the PNP needs to cultivate a more pro-business face by enacting some policies to encourage business profit and devising a longer-term, more conservative timeline for social programs and income redistribution. Additionally, although it is against your nature and your democratic ideals, those members of the PNP whose rhetoric tends in the direction of communism must be required to cease sharing their views or be expelled from the party, because they are contributing to capital flight and an anti-entrepreneurial environment.
Move Jamaica’s economy towards self-sufficiency. Great Britain designed Jamaica’s economy for the mass-production of a few primary export crops, which leaves Jamaica dependent upon imports for survival and upon global commodity prices for income. While export monocultures should not be abandoned, every effort must be made to promote businesses that provide for local needs, including food, clothing, housing, and manufacturing. Entrepreneurs interested in producing value-added products that can diversify our exports should be encouraged, but the primary focus should remain on producing Jamaican goods for Jamaicans. Import restrictions on anything that is or could possibly be produced domestically need to be created or remain in place.
Brace for the consequences of defying the United States. US Secretary of the State Henry Kissinger has already warned you not to threaten US interests, and we detected an increase in CIA agents in Kingston after you did so in 1975. We can only assume this will happen again. Unfortunately, this is a danger that is almost impossible to defend against. Making public claims of CIA interference will be used against you by the JLP as proof of you looking to cover up your own mistakes, while the CIA interference itself is hard to stop. A policy to consider would be close monitoring of all foreigners entering Jamaica, although this could fail to be effective while also putting a damper on tourism.
Many in the public expect us to resort to the IMF and maintain the hope that new loans will solve Jamaica’s problems. New loans would provide a temporary fix we would soon regret when we start to face even higher debt servicing. It is highly unlikely that austerity measures could make our economy grow at such an incredible rate as to provide the government with enough revenue to repay even higher amounts, and we might not even have the option of keeping those social programs such as free secondary education and health care which are in themselves so key to economic growth. The path of independence is fraught with challenges but it is possible, and the goal of a self-sufficient island of Jamaica, free from the bondage of dependency on the colonial master, can become a rallying cry to unite our citizens through the challenges ahead, knowing we are on the path of a “free Jamaica!”
Amatzya Mezahav, Radio and Structural Adjustment in Fairy Hill, Jamaica, Dissertation, University of Oregon, 2001, 44, ProQuest.
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Mezahav,Radio and Structural Adjustment, 49.
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The Michael Manley Foundation, “World Statesman.”