Stabilization and Structural Adjustment Programmes in Jamaica

1. Stabilization and Structural Adjustment Programmes in Jamaica

2. Objective • Discuss the rise of Neo-liberalism and the impact of structural adjustment on social policy in the Caribbean. • Note some Caribbean examples of the effects of structural adjustment

3. Definitions • In economics, the debt-to-GDP ratio is one of the indicators of the health of an economy. • It is the amount of national debt of a country as a percentage of its Gross Domestic Product (GDP). • A low debt-to-GDP ratio indicates an economy that produces a large number of goods and services and probably profits that are high enough to pay back debts.

4. Definitions • External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. • The debtors can be the government, corporations or private households. • The debt includes money owed to private commercial banks, other governments or international financial institutions such as the International Monetary Fund (IMF) and World Bank.

5. The Situation Today • Five of the world’s 13 most indebted nations (as a share of GDP) are now in the Caribbean. • Debt has accumulated because of successive years of fiscal deficits and, since the mid 1990s, borrowing by public enterprises and off-balance sheet spending, including financial sector bailouts. • With mounting interest bills, the global financial crisis caused serious problems for debt management.

6. The Situation Today • Antigua & Barbuda – 130% • Barbados – 103.9% • Jamaica – 126% • St. Kitts and Nevis – 200%

7. The Situation Today • In the Dominican Republic the impact of the crisis is severe, but governments have responded proactively, relaxing considerably monetary policy in the Dominican Republic, and pushing through fiscal adjustment and debt restructuring. • Innovative ideas about how to manage debt, include the recent experience of the debt exchange by Jamaica and debt restructuring by Antigua.

8. The Situation Today • Even before the crisis, economic growth in the region has lagged other parts of the hemisphere because of weak productivity growth―not low rates of investment―and weak integration with the so-called new global “growth poles.” • These are the large, vibrant, emerging market economies like Brazil and China with spillovers that drive growth in other countries.

9. The Situation Today • Diversification of economic partners and export markets, which some countries are already pursuing, should become a deliberate strategy going forward. • “Like most of the advanced economies, the Caribbean needs to tackle the obstacles to higher growth, and come up with new, home-grown ideas to enhance its prospects,” - Nicolás Eyzaguirre, Director of the IMF’s Western Hemisphere Department

10. The Situation Today • New sources of growth: other offshore services, for example, in the areas of health, education, and specialized financial services. • Some countries would need to improve the efficiency of key factors like information technology and energy production to make this possible. • Cost savings from scale economies, particularly in the area of integration of institutional activities like financial sector supervision and regulation.

11. The Situation Today • Three Caribbean countries have taken on IMF programmes to guide the adjustment processes, the region’s engagement with the Fund has more generally intensified through the Fund’s heightened surveillance activities and the increased technical assistance being provided, particularly through the focused work of the Caribbean Regional Technical Assistance Centre.

12. The Situation Today • Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines have all had IMF programmes

13. The Situation Today – The Bahamas • Economic activity grew by about 1½ percent of Gross Domestic Product (GDP) in 2011, up from near-zero in 2010, on improved tourism activity and ongoing investment projects, including the large US$3.5 billion private Baha Mar project. • Unemployment remained high at 16 percent, and inflation more than doubled to 3 percent, mainly due to higher world oil prices.

14. The Situation Today – The Bahamas • The fiscal deficit in FY2011/12 (July to June) is estimated to have increased to about 6 percent of GDP, up from 4½ percent in the previous fiscal year. • Despite higher exports in the wake of the gradual global recovery, the external current account deficit widened in 2011. • This is due to higher imports, which reflect a surge in foreign direct investment (FDI)-related imports and high world oil prices.

15. The Situation Today – St. Kitts & Nevis • Economic activity continued to shrink in the first semester of 2012 on account of a sharp slowdown in the construction sector which outweighed a modest recovery in tourism. • Despite this contraction, now in its fourth year, and the sluggish global environment, the authorities have continued to successfully implement their home−grown economic programme.

16. The Situation Today – St. Kitts & Nevis • The outlook is a contraction lasting through 2012, followed by a modest economic recovery in 2013, partly supported by a rebound in FDI. • Uncertain global economic conditions remain the key downside risk to growth.

17. What is Neo-liberalism? • The liberal school of economics became famous in Europe when Adam Smith published The Wealth of Nations. • He advocated the abolition of government intervention in economic matters. • No restrictions on manufacturing, no barriers to commerce, no tariffs, free trade was the best way for a nation's economy to develop.

18. What is Neo-liberalism? • Such ideas were "liberal" in the sense of no controls. • This application of individualism encouraged "free" enterprise," "free" competition - which came to mean, free for capitalists to make huge profits. • Economic liberalism prevailed through the 1800s and early 1900s.

19. What is Neo-liberalism? • The Great Depression of the 1930s - John Maynard Keynes - theory that challenged liberalism as the best policy for capitalists. • Full employment is necessary for capitalism to grow and it can be achieved only if governments and central banks intervene to increase employment. • Used by Barack Obama – stimulus package.

20. What is Neo-liberalism? • Neo-liberalism" is a set of economic policies that have become widespread during the last 25 years or so with global decline in profitability for capitalist enterprise.

21. Characteristics of Neo-liberalism? • THE RULE OF THE MARKET: Liberating "free" enterprise or private enterprise from any bonds imposed by the government (the state). • Greater openness to international trade and investment, as in NAFTA. • Reduce wages by de-unionizing workers and eliminating workers' rights. • No more price controls. - total freedom of movement for capital, goods and services.

22. Characteristics of Neo-liberalism? • The argument is that an unregulated market is the best way to increase economic growth, which will ultimately benefit everyone.

23. Characteristics of Neo-liberalism? • CUTTING PUBLIC EXPENDITURE FOR SOCIAL SERVICES like education and health care. • Reducing the safety-net for the poor, cutting maintenance expenditure of roads, bridges, water supply - again in the name of reducing the government's role.

24. Characteristics of Neo-liberalism? • DEREGULATION: Reduce government regulation of everything that could diminsh profits, including protecting the environment. • PRIVATIZATION. Sell state-owned enterprises, goods and services to private investors. • This includes banks, key industries, railroads, toll highways, electricity, schools, hospitals and even fresh water.

25. Characteristics of Neo-liberalism? • Although usually done in the name of greater efficiency, which is often needed, privatization has mainly had the effect of concentrating wealth even more in a few hands and making the public pay even more for its needs.

26. Characteristics of Neo-liberalism? • ELIMINATING THE CONCEPT OF "THE PUBLIC GOOD" or "COMMUNITY" and replacing it with "individual responsibility." • The poorest people in a society must find solutions to their lack of health care, education and social security. • Remember the re-emergence of welfare pluralism.

27. 1980s Neo-liberalism, Debt Crisis and structural adjustment Rise of Neo-Liberalism Doctrine • Margaret Thatcher in UK • Ronald Reagan in US - "supply-side" and "trickle-down" economics • Washington Consensus (IMF, WB, US) • Reducing state involvement in economy • “Free” markets – market should allocate resources with limited govt. regulation • “Free” trade, limited protectionist measures • Increased privatisation of social sector • Residualising welfare – temporary safety net, providing for the very poor.

28. 1980s IMF Stabilization Programmes • Devaluation -to increase exports by making them cheaper and reduce imports by making them more expensive. Generally, not successful as • Demand for most commodities- price inelastic, also recession in North reduced demand for exports • First World technological substitutes for primary commodities also reduced intl. demand, e.g High fructose corn syrups (HFCS) substitute for sugar, soy oil for tropical oils • Devaluation did not reduce imports significantly as Jamaica is very import dependent. Devaluation increased domestic inflation.

29. 1980s IMF Stabilization Programmes • Reduce Fiscal Deficit - What is fiscal deficit? • The difference between total revenue and total expenditure of the government is termed as fiscal deficit. • It is an indication of the total borrowings needed by the government. • While calculating the total revenue, borrowings are not included.

30. 1980s IMF Stabilization Programmes • Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. • Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. • A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

31. 1980s IMF Stabilization Programmes • Reductions in size of Fiscal Deficit via • reduction in state borrowing • Reducing size of civil service (govt workers redundancies), • Wage guidelines/ freezes/wage cuts • Reduction in public spending on social programmes, • Removal of price controls on basic food items/ food subsidies. • Increasing fees for state services

32. What is Structural Adjustment? • Structural adjustment can be defined as the varied policy action (whether home growth or externally driven) that attempts to alter the nature, structure and functioning of economies.

33. Structural Adjustment – T&T • The early post independent Caribbean societies, leaders set about restructuring their societies and sought to raise the mass of their population from poverty through a combination of broad-based social policy (i.e. aggressive social spending) and economic measures aimed at modernising their economies via the route of import substitution industrialisation (i.e. altering the economic base).

34. T&T Structural Adjustment? • These broad-based social policies reaped significant successes as captured in improvements in a number of social indicators. • The model of development being pursued proved unsustainable for a number of reasons, both internal and external to the countries.

35. T&T Structural Adjustment? • Since the late 1970s, the paradigm of adjustment as advanced by the International Financial Institutions (IFIs) has come to dominate policy discourse and policy action, and structural adjustment has come to be associated with the policy recommendations emanating from the IFIs (adjustment a la IMF/World Bank) and more recently the World Trade Organisation.

36. T&T Structural Adjustment? • This heralded a fundamental shift in policy focus, in the priority accorded economic issues as against social/human development issues and in the approaches to addressing these. • Growing inequality of incomes was found for Trinidad and Tobago under structural adjustment (1986 – 1993).

37. T&T Structural Adjustment? • Government's approach to reigning in its expenditure, attempted to minimise the social impact. • Mass public sector retrenchment was avoided and employment was reduced through the introduction of voluntary separation employment packages (VSEP) and by natural attrition; the wage bill was lowered by a freeze on salaries and actual salary cuts.

38. T&T Structural Adjustment? • Nevertheless, many workers suffered a decline in real incomes through decreases in nominal income and rises in prices and many fell below the poverty line. • Domestic prices, especially food prices, escalated under adjustment. • Employment in the agricultural sector and the informal sector expanded. • Spending on the social sector declined and this adversely affected their operations.

39. T&T Structural Adjustment? • Government workers, service workers and others employed in labour intensive activities in the manufacturing sector were most severely hit by the decline in income. • Real minimum wages in these activities dropped and the labour share of GDP diminished considerably. • The share of GDP going to profits also rose.

40. T&T Structural Adjustment? • Poverty rose over the period of adjustment. • The incidence of poverty was found to be greater among the urban poor and particularly high for government workers. • Rural workers who had access to garden plots or were less dependent on wage income fared better.

41. T&T Structural Adjustment? • There was an expansion of job opportunities for women in the public and private sector. • Social programmes up to 1993 were ad hoc and not focussed on providing immediate relief to the dislocated persons.

42. 1980s World Bank Structural Adjustment Programmes • World Bank Structural Adjustment Programmes • Trade Liberalisation - opening up economy, lowering tariffs, duties. Removal of import controls/import quotas to “remove trade distortions/increase competitiveness” • Privatisation • Tax reform – from progressive to flat rate (more regressive)

43. Neo-liberalism, Stabilization and Structural Adjustment • Mexico - wages declined 40 to 50% in the first year of NAFTA (1994) while the cost of living rose by 80%. • Over 20,000 small and medium businesses failed and more than 1,000 state-owned enterprises have been privatized in Mexico.

44. Neo-liberalism, Stabilization and Structural Adjustment – The Caribbean • Loss of preferential trading arrangements for key producing sectors, as the new rules of engagement for international trade take hold.

45. 1980s Neo-liberalism, Stabilization and Structural Adjustment • Financial Sector Liberalisation • Foreign Currency Market Liberalisation • Jamaica received loans from IMF/WB and other MLs throughout 1980s. These agencies had cross-conditionalities. • Between 1981 and 1989, Jamaica’s debt almost doubled, net transfers to official creditors (multi and bilateral creditors) became negative after 1985 (Anderson and Witter, 1994)

46. 1980s Neo-liberalism, Stabilization and Structural Adjustment • Net transfers on external debt are net flows minus interest payments during the year; negative transfers show net transfers made by the borrower to the creditor during the year. • Net resource transfers from poor to rich countries remain high despite a decline resulting from the global contraction of output and employment.

47. 1980s Neo-liberalism, Stabilization and Structural Adjustment • Developing countries as a group are expected to have continued to provide net financial resources to developed countries in 2009 at a level of $568 billion. • While still substantial, this amount is notably lower than the all-time high of $891 billion reached in 2008.

48. 1980s Neo-liberalism, Stabilization and Structural Adjustment • User fees introduced in health and education in 1990s • Wage earners and the poor suffered the brunt of adjustment, while a thriving merchant class emerged. • Increased income inequality in Jamaica. (Anderson and Witter, 1994)

49. 1980s Neo-liberalism, Stabilization and Structural Adjustment • Labour market shifts - Public sector jobs replaced by jobs in the secondary sector (garment export processing zones (EPZs), tourism, retail) and informal sector self-employment (Both low skill, low wage, few/no benefits or protections) • Cutbacks in education budget between 1977-87 was 30% in real terms, school infrastructure deteriorated (Anderson and Witter, 1994)

50. 1980s Neo-liberalism, Stabilization and Structural Adjustment • Student attendance rates declined, also performance in CSEC. Pass rate for English fell from 43% in 1986 to 25% in 1993, (Handa and King, 1997). • Reduction in healthcare personnel due to migration, budget cuts, stock of reg. nurses fell by half, number of community health aides reduced by more than 50%