Download IMF, Debt, Budget, Alternatives - Campaign for Social and Economic

CSEJ / Liberty Hall
Forum : 21 March 2010
The Debt ,
The IMF,
Alternatives,
The Budget
Re-kindling the spirit of 1938
www.csej-jamaica.org
[email protected]
1
Say NO to the IMF!!
The government’s response to Jamaica’s severe debt burden
and the global recession is to run to the IMF, to give cover
to a policy approach that has failed in the past. Despite
promises of a ‘new’ IMF, the present package means just
the same – jobs cuts and a wage freeze in the public
sector, higher taxes, cuts in services and higher prices.
This IMF package, the coming budget and the three minibudgets last year on which the IMF loan depended, mean
just one thing – more hardship for those who can
least afford it.
We are being told that we must pay for the greed of others,
and a system that has failed. Why should those who have
not caused the problems being asked to pay, and pay for
a ‘solution’ that cannot work?
2
Jamaica’s Debt Trap
To allow us to look more objectively at Jamaica’s debt
problem, we turn first to an analysis of the debt
before examing the current IMF agreement and an
alternative approach.
•
What is the extent and composition of Jamaica’s
public debt?
•
What is the effect of the public debt on services,
public investment and growth?
•
What options exist to allow Jamaica to break out
of the debt trap?
3
A radical approach is needed
Public debt in Jamaica is now over J$1,300bn, that is J$481,000
for every single woman, man and child in Jamaica. Interest
rates are still much too high for businesses to borrow.
Investment by the government and the private sector is very
low. Reducing the debt through growth, as some have
suggested, is almost impossible with currrent policies.
Not only debt. Jamaica is now rated at 173 out of 181 countries
for not paying taxes. We are doing equally badly in terms of
poor productivity and an adverse trade balance, not to mention
corruption and crime (partly a result of limited opportunity).
Bound by the constitution, and the need to maintain confidence to
facilitate new loans, the debate on debt in Jamaica has always
been deliberately stifled. But with the DXC there may the
beginnings of a more open approach.
4
Debt trap… 1999… a long-time problem
5
2009-10 Budget Estimates
Total Expenditure including the Debt
only 14% on education
2009 Budget Memorandum
6
2009-10 Budget Estimates
Total Expenditure without the Debt
as it should be - 35% on education
2009 Budget Memorandum
7
Debt Stock in J$
now J$1.3 trillion (2010)
Total Debt
per person
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Total Public Debt
Domestic Debt
External Debt
2010
J$481,000
2009
Nat. Min. Wage
J$211,640
19
80
19
84
19
88
19
92
19
96
20
00
20
04
20
08
J$ mn
Debt Stock in J$ : 1980-2010
8
Debt Stock in US$
Total Debt
per person
Debt Stock in US$ : 1980-2008
16,000
2009
US$4,995
14,000
US$ mn
12,000
10,000
Total Public Debt
8,000
Domestic Debt
6,000
External Debt
4,000
2,000
2009
Nat. Min. Wage
$2,351
0
80 983 986 989 992 995 998 001 004 007
9
1
1
1
1
1
1
1
2
2
2
9
Debt Stock as % of GDP
Debt Stock as % of GDP : 1980-2008
250.0
150.0
Total Public Debt
Domestic Debt
100.0
External Debt
50.0
0.0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
% GDP
200.0
10
Debt service payments
as % of budget
Debt Service / Budget (including loans)
80.0
60.0
50.0
Total
40.0
30.0
Domestic
External
20.0
10.0
20
06
20
02
20
04
19
98
20
00
19
96
19
90
19
92
19
94
0.0
19
88
% of Budget
70.0
11
Primary Surpluses
but still the debt grows
Budget Balances : J$mn : 1988/9 - 2008/9
250000
200000
J$m
150000
Loan Receipts
Amortisation
100000
Primary Surplus
50000
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
0
12
The composition of Jamaica’s
External Debt (1)
External Debt Sources : US$m : 1996-2008
7,000
6,000
4,000
3,000
2,000
1,000
External Debt (US$)
Multilateral
Bilateral
Bonds
Commercial Banks
0
19
96
/
19 97
97
/
19 98
98
/
19 99
99
/
20 00
00
/
20 01
01
/
20 02
0
20 2/0
03 3
/2
0
20 04
04
20 /05
05
/
20 06
06
/
20 07
07
/
20 08
08
/0
9
US$m
5,000
13
The composition of Jamaica’s
External Debt (2)
2010 Budget Memorandum
14
Holders of Jamaica’s
Domestic Debt (1)
Holders of GOJ Domestic Bonds - Sept 2009
40
35
30
%
25
20
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15
Holders of Jamaica’s
Domestic Debt (2)
2009 Budget Memorandum
16
Maturity profile of Jamaica’s
Domestic Debt
2009
Budget Memorandum
17
Debt and the Primary Surplus
Sahay (2005) notes that in Jamaica, ‘despite generating
primary surpluses of 8-13% of GDP for many years, public
debt has continued to rise because of high interest rates
and low growth’.
It was the high interest rates from 1997 that added to the
debt accumulation, rather than a low primary balance, as
in other highly-indebted countries. It would have taken an
even larger primary surplus of 23% to reduce public debt
to more respectable 60% of GDP over the five years from
2003-8.
But the 'healthy' primary balance in Jamaica comes at a
price, possibly a serious one in terms of longer-term
growth prospects. Government capital expenditures have
dwindled towards almost zero.
18
Debt and GDP Growth
Generally it is found that at low levels of external debt,
borrowing can promote growth, but not above a
threshold of debt to GDP above about 50 %. When a
large proportion of the debt is domestic, the
downwards effects on growth will be more likely as
investment is crowded out and domestic interest
rates are too high for businesses to borrow.
Low growth in Jamaica appears to result from
‘investment’ going into less dynamic sectors which
provide safe returns. Bank lending to the
manufacturing sector fell from 13% in 1993 to 3%
in 2004. Public investment also fell, dropping from
6% of GDP in 1988 to 1.5% in 2004.
19
Debt and GDP growth
Jamaica in the wrong place…
20
Public investment
Jamaica in the wrong place…again
21
Public Investment
much less than debt interest payments
22
Public Investment 2009-10
79% of the capital budget on debt repayments
2009 Budget Memorandum
23
Debt versus Development ??
The World Bank (2007) put the matter of debt and
development very bluntly. Developing countries need
to develop for which they need resources, but they
should not build up an unsustainable debt - which is
quite a challenge.
‘Low-income countries must overcome many hurdles in
pursuit of the Millennium Development Goals; one of
these is to raise sufficient external financial resources
without building up debt that imposes too great a
burden in the future’
It is not surprising that in many cases, the right balance
is not struck so that debt grows exponentially.
24
Growing out of debt?
It would take a primary surplus of 23% of GDP, rather than
the current 11% to reduce debt significantly (Sahay 2005).
But increasing the primary surplus would require even
more cuts in government services, inhibiting future
growth. Or better tax collection which remains elusive
even after 14 years of the TRN system.
There is substantial growth only in the informal sector, but
by its very definition, it contributes little to debt reduction
possibilities. Thus neither a greater primary surplus, nor
greater informal growth are immediate routes towards
less debt.
This suggests that a more radical debt restructuring is
required in Jamaica.
25
Strategies to reduce debt burden
Bernal (1987) provides a comprehensive list. But with most debt
now domestic, and most foreign debt held by anonymous banks
and bond-holders, some measures are of little significance.
9.
Cancellation by lenders
Rescheduling
Global debt restructuring
Debt into equity
Limiting debt service
Pegging debt service to export earnings
Capping interest rates
Moratoria
Collective default
10.
Default / repudiation
1.
2.
3.
4.
5.
6.
7.
8.
26
Fiscal compression, Cancellation
Fiscal compression to pay the debt is largely selfdefeating if it cuts into public investment
programmes. For growth, spending is needed to
enhance education and infrastructure, to catalyse
private investment, to focus on projects with
positive returns.
Some debt has been cancelled /written off,
especially to the highly-indebted poor countries
(HIPC), and encouraged by the decisions of the G8
ministers in London in 2005. But the PRSP (Poverty
Reduction Strategy Papers) that often ‘guides’ such
forgiveness are found to outweigh the benefits of
the debt write-off, which is often small in any case.
27
Rescheduling / Restructuring
In 2001, the IMF proposed the Sovereign Debt
Restructuring Mechanism (SDRM) 'to ensure the orderly
and timely restructuring of unsustainable sovereign
debts'.
It would facilitate collective action by making the decision of
a qualified majority of creditors binding on all, but it
would only cover external debt.
Sachs (1990) says that voluntary restructuring schemes are
doomed to failure because of the free-rider problem.
In its proposals for SDRM, the IMF acknowledges that the
shift towards anonymous bond-based debt, issued
in a range of jurisdictions, makes restructuring coordination difficult.
28
Debt-for-poverty swap
As with debt-for-nature swaps, debt can be converted into
spending on social and infra-structural enhancement, if a
willing donor can be found. Egypt, for example, has come
to such agreements with several European governments
(ULT Cairo 2006).
Given the interest shown by the World Bank and even Europe
concerning poverty reduction, countries which are yet to
meet their international aid targets of 0.7% of GDP could
be encouraged to buy part of Jamaica's debt, whether it
be external or internal.
29
Debt swap and aid targets
Aid as proportion of Gross National Income (GNI) in 2006 for OECD donor countries
%
1.03
1.00
0.90
0.89
0.89
0.81
0.80
0.80
UN target =0.7%
0.70
0.60
0.53
0.50
0.52
0.50
0.48
0.47
average country effort = 0.46%
0.40
0.39
0.39
0.36
0.32
0.30
0.30
0.30
0.27
0.25
0.21
0.20
0.20
0.17
0.16
0.10
0.00
30
Odious Debt
In a World Bank discussion paper the term “odious debts”,
in its initial use, identified
those debts that a state or a government had contracted with
a view to attaining objectives that were prejudicial to the
major interests of the successor state or government or of
the local population. PRMED (2007)
Such debts can be categorized as
'regime debts' (contracted for the benefit of a despotic regime)
'subjugation debts' (used to keep down part of a territory), and
'war debts'
31
Odious Debt
An expanded view may refer to 'illegitimate debt' to include:
criminal debt (corruption)
unfair debt (inappropriate, unacceptable conditions, high
interest rates, against national law) and
ineffective debt (not fulfilling its purpose).
In each case, the lender is felt to be responsible for the debt if
they were either aware of a potential problem, or had
unused leverage to prevent it. Ineffective debt could also
include cases where a loan has come bundled with some
advice that subsequently failed.
A recent example (2007) of the acceptance of the odious debt
principle is provided by Norway which forgave US$78m from
five countries (including Jamaica) because a shipping project
was considered a policy failure on their part.
32
Odious / Criminal Debt in Jamaica
Financial Audit needed?
Criminal debt in Jamaica is possibly a major source of our
economic failure over the years.
Not only borrowed money that is siphoned off by corrupt
politicians and contractors, but budget money which
disappears in a similar way, leading thereafter to the
need for additional borrowing.
There is every good reason to call for a financial audit
of Jamaica’s public debt, identifying the purpose,
destination and effectiveness of every new loan for the
past 30 years.
33
Odious Debt
Reparations by the IMF/World Bank
Externally, there should be space to take up the odious debt
argument. Metropolitan countries have finally expressed
regret for the ravages of the slave trade, and may
eventually be persuaded to offer real recompense, as has
been done already in other situations.
In the same way, the destruction caused in Jamaica by
IMF/World Bank policies, which the government was
pressured into adopting in the early 1990s, can surely be
classified as ineffective.
Similarly the external debt incurred in the 1970s, followed by
unilateral interest rate hikes, can be classified as both
unfair and ineffective.
34
Reparations by the IMF/World Bank
Bernal, writing in 1987, says that whilst there was some
optimistic borrowing by developing country governments,
‘the IMF and multilateral development agencies have not
yet assumed their obvious responsibilities. Whilst
monetarism and petty nationalism in the developed
countries are partly to blame, the seeds of the crisis lie in
the defects and inadequacies of the institutions charged
with monitoring and regulating the world economy,
namely the IMF, the World Bank and GATT’.
But note: now that bonds comprise the largest proportion of
our external debt, this makes the situation a little more
difficult as we have already noted (Kruger 2002).
35
Interest rate ceiling
on domestic debt?
Domestic debt is now a large proportion of public debt and
with the JDX the maturity structure has been extended
and interest rates reduced. But not enough to help the
productive side of the economy, or even the budget.
Given that most of the domestic debt is held by 'non-crucial'
entities, that is by commercial and merchant banks, an
interest rate ceiling could be introduced without unduly
harming the more vulnerable.
Arrangements could be made to adjust the interest paid on
debt held in pension funds for example (a 'crucial'
entities) on a gradual, rather than one-off basis.
If done as part of a moral suasion campaign (as Girvan
suggested in 1999), and with a continuing premium above
international rates (see below), capital flight would not
necessarily be a problem.
36
Interest rate ceiling
on domestic debt?
If set at a premium of 2% above international rates of about
3%, domestic interest rates would be halved from their
current value. The 'premium' would offer some solace to
investors, which is the important word here.
Investors are, after all, paid on the basis of taking some risk,
but buying very safe government debt reduces the risk to
almost zero. In hard times, commercial investors expect
low or no returns. In the same way, investors in Jamaica
plc can reasonably be expected to face low returns until
the economy takes off. A further analogy is the MOU
scenario, limiting public sector wage increases over recent
years. If workers are asked to take less for some years,
why not investors?
Sachs (1990) describes a reduction of interest rates on
existing debt to sub-market levels as 'nearly ideal'.
37
Budget 2009-10 (as presented)
2009-10 BUDGET : J$554 bn (now J$593bn)
Primary Surplus = J$ 83 bn
(Projections – March 2009)
INCOME
Taxes etc
New Loans
SPENDING
321
216
186 Domestic
29 External
Spending on Services
245
Spending on Interest
159
Paying off old Loans
150
__________________________________________________________________________________
TOTAL
537
TOTAL
554
56 % on Debt
43 % on Services
2009 Budget Memorandum
38
Budget 2009-10
cutting interest payments by 50%
2009-10 BUDGET : J$471 bn
Primary Surplus = J$ 80 bn
(Projections)
INCOME
Taxes etc
New Loans
SPENDING
321
150
Spending on Services
241
Spending on Interest
80
Paying off old Loans
150
__________________________________________________________________________________
TOTAL
471
TOTAL
471
49 % on Debt
51 % on Services
39
Or cut interest payments by 100%?
But does that go far enough, if we are also trying not
to borrow more? Spending on government services
would not increase. And cutting interest payments
by 50% would likely be met with so much resistance
that it simply would not work. Borrowing to roll-over
the debt would probably be impossible. I
In any case, why should local investors only be
targetted, not foreign investors, as has happened
with the recnt debt exchange?
Perhaps a full-scale moratorium (or repudiation) is
needed, with no interest being paid until the patient
(Jamaica) recovers. This would also mean no new
borrowing and therefore no repayment of principle.
40
Budget 2009-10
cutting interest payments by 100%
2009-10 BUDGET : J$321 bn
INCOME
Taxes etc
New Loans
Primary Surplus = J$ 0 bn
SPENDING
321
0
Spending on Services
321 (up from 245)
Spending on Interest
0
Paying off old Loans
0
__________________________________________________________________________________
TOTAL
321
TOTAL
321
0 % on Debt
100 % on Services
41
Bound by the Constitution?
42
Bound by the Constitution,
or our politicians?
1.
The local newscast on February 27, 2003 carried a
story by the Economic Intelligence Unit (EIU), which
stated that Jamaica’s debt burden could soon force the
Government to default on its debt payments.
The Ministry of Finance and Planning said: Jamaica has never
defaulted on its domestic or external debt payments. The
Constitution stipulates that debt servicing is the first
charge on the resources of the country.
2. “The people of Jamaica deserve better, but more
importantly, our creditors deserve better”.
Omar Davies,News at Ten, TVJ 19 April 2002
43
The IMF Agreement
January 2010
The government’s response to Jamaica’s severe debt burden
and the global recession is to run to the IMF, to give cover
to a policy approach that has failed in the past. Despite
promises of a ‘new’ IMF, the present package means just
the same – jobs cuts and a wage freeze in the public
sector, higher taxes, cuts in services and higher prices.
This IMF package, the coming budget and the three minibudgets last year on which the IMF loan depended, mean
just one thing – more hardship for those who can
least afford it.
We are being told that we must pay for the greed of others,
and a system that has failed. Why should those who have
not caused the problems being asked to pay, and pay for
a ‘solution’ that cannot work?
44
The IMF Agreement
January 2010



Overall, the package may provide a breathing space for the
government to address its fiscal (budgetary) and trade (foreign
exchange) challenges.
But no fundamental weaknesses are addressed in terms of
production, productivity and the resulting trade imbalance There
is little in it for growth since interest rates are still not low enough
for business investment and much needed educational
expenditures will be cut.
The package is also deflationary, meaning that effective
demand will be depressed, lowering the incentives for business to
expand, and also lowering tax take which will throw off the
budget calculations. Meanwhile, richer countries are boosting
their economies…
45
The IMF Agreement



And all this at a large cost for the poorer sections of
society. Much higher taxes and fares, lost jobs and real wage
cuts. Those with more financial resources will take a modest cut,
especially in their unearned income, but except for pensioners
(who could have been given special consideration) the blow is
less serious
The hope for recovery through growth is no better than it
has been for the last 20 years and more.
Finally, what a sell-out on our supposed independence. Our
so-called leaders handing back the reins to the colonial powers
(financial capital) in new clothing. Strong economic action is
surely required, but is the government itself so bankrupt of ideas
that it can’t find a way without the IMF’s poisonous ‘help’?
46
The IMF Letter of Intent
quotes and commentary




Para 2: puts debt levels on a downward path… and yet we
are borrowing much more than any reduction in interest rates will
compensate. And our interest payments are likely to increase
rather than decrease.
Para 4: the gov’t stands ready to take additional
measures… so we haven’t yet seen the worst
Para 4: the gov’t will provide the Fund… with all the
relevant information… but not to the Opposition and certainly
not to the people of Jamaica
Para 5: no exchange restrictions…no bilateral agreements…
no trade restrictions… so this is the IMF agenda - to keep the
economy completely open, and therefore vulnerable
47
The IMF Memorandum
quotes and commentary




Section 35: $1.3bn for IMF, $1.1bn from WB/IDB/CDB,
more from PetroCaribe, more from external private markets and
local private markets. Quite an additional debt package,
especially when converted to J$: 216bn
Section 5: seems that growth / recovery will depend mostly on a
global recovery, but what if that doesn’t happen?
Section 6: inflation should indeed trend down if the economy is
deflated so much… big deal!
Section 7: So if the primary surplus is to rise, then this means
the debt servicing component of the budget is also rising. Is this
to pay interest on the larger debt?
48
The IMF Memorandum
quotes and commentary



Section 9: reduce public sector deficit from 12 ¾ % of GDP
to 5% of GDP by FY2011-12.., reducing government spending
by nearly 8% of GDP in such a short period would mean a serious
cut in services, or a massive rise in taxes. The better way is to
repudiate the debt and reduce the public sector deficit to zero
immediately.
Section 9: reduce public debt ratio from 140% of GDP to
136% by FY2011-12… still much too high and a strange goal
for a strategy that is supposed to reduce the debt significantly.
Section 9: primary surplus to rise from 6 ¼% to 7 ¾ % of
GDP by FY2011-12… simply means more of our taxes paying
debt and even less spent on services
49
The IMF Memorandum
quotes and commentary



Section 14: the debt exchange (DXC) aims to reduce
interest payments to the extent of 3% GDP is a move in the
right direction. And it helps to create more equity of sacrifice.
Section 15: But the DXC must not de-stabilise the banking
system. Thus the US1bn Financial Sector Support Fund
(FSSF). Just about all the initial IMF money is to support the
banking sector (Obama’s Wall Street) and none for production /
growth (Obama’s Main Street).
Section 16: No access to the FSSF unless you engage in the
DXC. No wonder the take-up was so good.
50
The IMF Memorandum
quotes and commentary


Section 4: the burden is effectively shared… by the DXC, or the
new income tax bands? Maybe a small beginning. Just need to take
the progressive income tax approach further and reduce regressive
consumption taxes (GCT).
Sections 24/25: better tax collection – this would also help to
share the burden, providing it is not targeted at the poor.
And yet what we also have are

Section 10: more consumption taxes which are regressive and are
to yield 1.7% GDP (0.5 GCT, 0.9 fuel, 0.3 other) whereas the higher
income taxes for higher earners are to yield only 0.1% GDP. Is this
sharing the burden?
51
The IMF Memorandum
quotes and commentary



Section 7: employment reforms… means loss of public sector jobs,
most of which are in education and health care.
Section 22: reducing the wage bill from 11.5% to 9.5% by 201112: This is a reduction of 17%, meaning more than 17% cut in the
number of public sector jobs, since it will no doubt be lower level
employees who are deemed most expendable.
Section 11: freeze on public sector salaries for two years whilst
inflation continues at at least 8% means a cut in real wages of 16%
over the two years. And this will save another 1% of GDP, making
the poor now bear 2.7% of GDP, with the rich still at 0.1%
52
The IMF Memorandum
quotes and commentary




Section 4: expanding the social safety net… what kind of pride
can we have as individuals, or a nation, if we are to officially live on
handouts when we would rather work for our living? This indicates a
real failure of the policy even before it starts.
Section 12: PATH expansion - so 360,000 of us forced to live on
handouts… wonderful!
Section 11: : freeze on tertiary subsidies and reduction in
funding of core school exam fees… so what hope for longer term,
skill-driven growth? With a more progressive income tax, funding for
education could be increased, and in a more equitable way.
Section 13: JUTC bus fares up by 40% - could be the beginnings
of the revolution, since we are now hearing 100% or more
53
The IMF Memorandum
quotes and commentary


Section 13: Divesting Air Jamaica, Sugar factories at give-away
prices? Why not arrange for workers’ co-operatives to take over,
once the debt is written off, as it will be for any financial investor
And also Petrojam – so the expansion of capacity put off.
Section 23: closing more than 50 inactive enterprises – are
people being paid? They must be or else closing them would be of
no significance to the IMF
54
Alternatives to the IMF
To repeat, the IMF package, the coming
budget and the three budgets from last
year on which the IMF loan depended,
mean just one thing – more hardship for
those who can least afford it.
We are being told that we must pay for the
greed of others, and a system that has
failed. Why should those who have not
caused the problems being asked to pay,
and pay for a ‘solution’ that cannot
work?
55
Alternatives to the IMF
A different set of policies is needed, including the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Repudiation, or a moratorium on the debt
Radical tax collection measures
Radical anti-corruption measures
Nationalisation of the banks to make affordable finance available
Exchange controls
Import controls
Radical land reform
Major gov’t sponsorship of agriculture and agri-processing
A ‘developmental state’ approach to governance
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Alternatives to the IMF
Not paying the debt would of course mean that no new
borrowing is possible. But government could still
operate we have seen. We have a PRIMARY
SURPLUS which means that the government collects
more in taxes than it spends (leaving debt out of the
calculation).
With better tax collection (see Judges urged to get
tougher on financial crimes, Gleaner 19 March 2010) and
less corruption, there would even more to spend on
vital services such as education on which our future
depends. There can be no growth, no new jobs
tomorrow without an investment in people today.
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Alternatives to the IMF
Not paying the debt would mean having to nationalise
the banking sector and impose exchange controls,
without which money would dry up or run away. A
nationalised banking system would provide
affordable money for production rather than
speculation.
Then we need to deal with the trade imbalance by
drawing back from unwise WTO commitments which
have wreaked havoc on our economy. We need fair
trade, not so-called free trade (which gives more
power to the powerful).
58
Alternatives to the IMF
And finally we need to really encourage the agriculture
sector with land for those who want to farm, coupled
with a vibrant food-processing industry. Along with
lower interest rates, this would mean jobs and
growth.
Most of all we need an active developmental state, not
one that serves the interests of foreign and local
finance capital, rather than the people of Jamaica.
59
Budget 2009-10
cutting interest payments by 100%
2009-10 BUDGET : J$321 bn
INCOME
Taxes etc
New Loans
Primary Surplus = J$ 0 bn
SPENDING
321
0
Spending on Services
321 (up from 245)
Spending on Interest
0
Paying off old Loans
0
__________________________________________________________________________________
TOTAL
321
TOTAL
321
0 % on Debt
100 % on Services
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Alternatives: a new EPP / PPP?
The alternative to the IMF cannot just involve putting
government finances in better share. We need
more production and better productivity to
provide the means to better jobs, better
wages, better government services, a better
life.
In early 1977, after the sweeping PNP election victory
based on the promise of democratic socialism, an
Emergency Production Plan was developed as an
alternative to the IMF. It was very much a Peoples’
Production Plan, drawing on the input of 7000
individuals, as well as UWI economists and
government departments.
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The 1977 EPP – and its demise
The EPP recognised what has always been obvious,
that IMF assistance does not address the real,
productive economy. Whilst propping up government
finances, its conditionalities reduce the chance of
growth and development.
The EPP, as an alternative, focussed on production with
the hope that financial relief would come from other
sources, and re-adjustment at home.
But in the end it was rejected by those who thought
the challenges too great, and too immediate.
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The 1997 EPP – the problems
But it was a risky venture. The foreign exchange gap of
US$150m proved to be the stumbling block. This was this
gap which motivated the initial approach to the IMF.
The EPP estimated that resulting shortages of imported raw
materials could result in lay-offs from manufacturing of
around 30,000 workers, or about one-third of all
manufacturing sector workers. That level of lay-offs from
the manufacturing sector was politically unacceptable.
As Norman Girvan, one of the main architects of the EPP
notes ‘At the time, I was disappointed by what I perceived
as a lack of political courage on Manley’s part. In
retrospect, I am sure that he was right - the prescription
came too late to do any good’.
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So to the IMF – June 1977
And so it happened. But after failing the first test in
December, the IMF suspended the agreement, and the
flow of World Bank and commercial credits was halted.
Harsher conditionalities and more devaluations were
demanded. The Minister of Finance complained that the
IMF’s terms were “unduly harsh”, but insisted that Jamaica
had no choice but to accept.
The new IMF programme was accepted and implemented in
full with a 15 percent devaluation right at the start. With
an inflation rate of 50% in the first year and wage
increases kept to 15 percent real wages fell by 35
percent.
The government kept conscientiously to the programme and
met all the performance targets. But the promised
economic recovery did not materialise.
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1980 - PNP swept out of office
With the second IMF agreement (June 1978) , the political
position of the PNP Government deteriorated rapidly. By
the end of 1978 the JLP had overtaken the Government in
popular support. In January 1979, violent mass protests
were triggered by a gas price increase.
In April 1980, the PNP National Executive rejected further
negotiations with the IMF and resolved to fight an election
on a platform of the “non-IMF path”. The subsequent
elections became the bloodiest in Jamaica’s history: 800
violent deaths were recorded for the year, many, if not
most, being politically motivated. In October 1980, the
PNP was swept out of office, the Seaga-led JLP winning by
a landslide. The Democratic Socialist experiment was
dead.
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The IMF, but then disaster
The elusiveness of sustained growth came in spite of not
one, but a whole series of what could be called “IMF
paths”. By the end of the 1980s Jamaica had “received
more IMF packages since 1977 than any other country.
Cross-conditionalities from the 1990 agreement resulted in
the disastrous currency liberalisation of 1990-1991 with
the Jamaican dollar plumetting from J$8 to J$30 to US$1
in little over one year, triggering run-away inflation.
The resulting high interest-rate regime together with the
over-loose financial liberalisation, led directly to the
liquidity and solvency crises of the Jamaican financial
sector of 1996-1998, with a cost that represented over
one-quarter of Jamaica’s annual GDP.
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Challenges to the non-IMF path
(Girvan)
Political tribalism
Such a path inevitably generates economic hardships
especially given the uncertainties in the supply of
imported food, oil, and other basic necessities, providing
ample ammunition for counter-mobilisation on the part of
political opponents
Ideological polarisation
Many in the middle and upper classes saw a “non-IMF” path
as a further sign that Jamaica was “going communist”.
The PNPs own supporters may not have gone along.
Popular support could only have been sustained with an
underlying belief in the EPP etc as a project for a new
society rather than one delivering bread and butter
benefits associated with the better social programmes
67
Challenges to the non-IMF path
Political unacceptability of urban unemployment.
The idea that some 30,000 urban workers could have been
redeployed to the countryside was evidently unrealistic.
Limited economic room to maneuvre.
The EPP could have succeeded in 1974 when the government
was flush with cash and foreign currency from the Bauxite
Levy. But by December 1976 there no foreign currency
reserves were exhausted, a huge government deficit, no
possibilities for borrowing, and a shortage of imported raw
materials.
Weak world commodity markets
International bauxite/alumina markets and sugar prices were
depressed.
68
The economic challenge
Jamaica is still caught on the horns of a cruel dilemma:
a) to maintain a too-high interest rate regime to attract
loans, support the exchange rate and limit inflation
leading to a stagnant, now growth economy, or
b) to attempt to stimulate growth by cutting interest
rates, but at the risk of devaluation and inflation,
increasing poverty and worsening distribution of income.
Clearly, successive Jamaican governments must accept the
major responsibility for the present situation by adopting
a framework of IMF-type policy choices.
How to break out of this impasse? By tackling the debt
and other problems much more radically, as we
have suggested, rather than turning to the IMF.
69
The social challenge (Girvan)
Deep divisions exist in our society but a minimum degree of
social consensus is required. Equity and social justice are
needed for economic growth.
Local (and foreign) capital needs to accept a social minimum
wage for all as the condition of social stability and
improved labour productivity (including decent and
adequate housing, public transport, education, and health
care, as well as a living wage).
This may emerge out of a shared realisation that we are
presently locked in a vicious cycle of economic stagnation
and social disintegration from which it is in the interest of
everyone to escape, at least those who see Jamaica as the
locus of their long-term commitment.
70
NOW IS NOT THE TIME TO DO NOTHING
Now is certainly not the time to do nothing, just as so many
decided was the case in 1938. Since December, we have
known the initial demands of the IMF which include higher
taxes, cuts in jobs and services, a public sector pay freeze,
more divestment, the debt exchange and yet ever more
debt... the list goes on and on.
Further details came out with the IMF agreement in January
revealing the extent of the burden that is being demanded to
satisfy the appetite of financial investors / capital. The IMF
conditions will no doubt become more demanding at every
passing quarter. And yet no measures to address the lack of
growth in the economy - in fact just the opposite.
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NOW IS NOT THE TIME TO DO NOTHING
The IMF package is deflationary, pushing back any chance of
growth as spending is reduced by a shrinking workforce and
a timid government . We are being asked to take a cut in our
already dismal living standard for a medicine that cannot
work. The IMF package, the coming budget and the four
budgets from last year on which the IMF loan depended,
mean just one thing – more hardship for those who can
least afford it.
We are being told that we must pay for the greed of others, and
a system that has failed. Why should those who have not
caused the problems being asked to pay, and pay for a
‘solution’ that cannot work?
72
NOW IS NOT THE TIME TO DO NOTHING
The coming budget debate opens on Thursday 8 April,
so now is certainly not the time to do nothing. In
December, the Prime Minister withdrew some proposed
taxes because he said he 'heard the cry of the people'. In
1938, the people's cry was also heard, leading to the
legalisation of trade unions, a national minimum wage, the
vote for even the poor and unemployed, and eventually to a
constitution and self-government / independence.
If we are not to continue down this IMF road, leading to ever
more hardship, we need to take some action, and take it
soon.
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2009-10 Budget Measures (1)
74
2009-10 Budget Measures (2)
75
GREECE
Greek Austerity Measures Spark Rising Protests
(early March 2010)
Last week, the Greek government announced a series
of painful austerity measures aimed at tackling a
budget crisis so serious, it once seemed like the
entire country could go bankrupt.
Greece ground to a halt as workers went on a 24-hour
nationwide strike and tens of thousands of people
took to the streets to protest civil-service pay cuts
and higher taxes in the biggest and angriest
demonstrations so far against the austerity
measures
76
ICELAND
Iceland financial crisis: Voters reject debt
repayment plan (6 March 2010)
In a nationwide referendum more than 90 percent
of voters have resoundingly rejected a $5.3
billion plan to pay off Britain and the
Netherlands for debts spawned by the Iceland
financial crisis.
77
Budget Debate Dates
Thursday
25 March
Finance Minister, Audley Shaw will table the
2010-2011 Budget
30 March to
1 April
The Standing Finance Committee of the House will
meet to consider the estimates
Thursday
8 April
The Finance Minister, Audley Shaw will open
the 2010-2011 Budget Debate (date to be
confirmed)
Tuesday
13 April
Opposition Spokesman on Finance, Dr Omar Davies
Thursday
15 April
Opposition Leader, Portia Simpson Miller
Tuesday
Prime Minister, Bruce Golding
20 April
Wednesday
21 April
The Finance Minister, Audley Shaw will close
the debate.
Thanks for your attention
On behalf of the
Campaign for Social &
Economic Justice (Jamaica)
www.csej-jamaica.org
Paul Ward
[email protected]
79