The IMF and Jamaica: On Poverty and Inequality

This is a case study about the impact of the International Monetary Fund on Jamaica in the late 1970s and early 1990s. This can ­­be assessed through several different perspectives. This article will espouse to a combination of a political and socioeconomic approaches to determine the Funds’ role in the issues of poverty and inequality for Jamaicans between 1977 and 1992. It will be argued that the IMF acerbated poverty and inequality in Jamaica by increasing the cost of living and reducing government expenditures in the public sector.

In order to achieve this goal, there will be an analysis of the most important factors that contributed towards the deterioration of the Jamaican economy prior to the IMF’s intervention in Section I. It will illustrate international and domestic events that had an influence on the wellbeing[i] of Jamaicans. Then there will be an analysis of the actual intervention of IMF in Section II which will start off with the negotiations between Jamaica and the Funds, the assessments made by the Funds followed by the content of program and how it deteriorated Jamaicans’ socioeconomic structure.

Within these major arguments, we will observe the role of the conflicting policies in creating tension between the United States and Jamaica prior to the first Stand-By agreement and later on between the IMF and Jamaica. In addition to this, internal contradictions and significant flaws in both institutions that caused friction in their partnership will be brought under the limelight. Furthermore, we will take note of the IMF’s dominating asymmetrical relationship with the host country that made co-operation, mediation and compromise all the more difficult. In the end, IMF’s adoption of a radical monetarist approach in their attempt to uplift the Jamaican economy will be elaborated. Resultant to which the working class and the poor carried the burden of less than favourable decisions being made by both parties. Their social benefits soared and plummeted within a short time frame as they adjusted to the realities of their country’s economic challenges. The timeframe of 1977 to 1992 follows Michael Manley’s first and second term in office for a certain level of constancy in the Jamaican policies.

This research does not seek to determine weather or not the IMF did contribute to an economic growth in Jamaica. Instead, it seeks to understand how the Funds influenced inequality and poverty through structural adjustment policies. At any rate, the IMF claims that economic growth is not its goal and that it does not have an impact on that (Vreeland, 2003, p. 109, 158). However there are facts that point otherwise; will take a brief moment to explain those in the course of this paper. The policies of the Jamaican government that would have a significant impact on the socio-economic state of its citizens prior to its involvement with the IMF, will be discussed as well. Finally, it should also be noted that it is not feasible to fully isolate the link between the structural adjustment policies and the changes in inequality and poverty, especially with the limited statistical data during this time frame. Hence explanation of other factors should also allow readers to come to their own conclusions while evaluating the merits and weaknesses of this paper.

 

 

PART I

 

Background to Jamaica’s Economic Demise Prior to The IMF Intervention

Before explaining how the IMF changed Jamaica, it is first important to understand how Jamaica was put in a situation where it needed the IMF’s financial assistance. It is apparent how badly the Jamaican economy had suffered in the decade of 1970. GDP decreased by 26 percent between 1973 and 1980 and the fiscal deficit skyrocketed from J$95 million in 1973/74 to J$515 million in 1978/79. Such dire numbers are indicative of things going horribly wrong not only from the inside but also from the outside intervention. Here there are three major factors that have been identified as drastically changing the nature of the political, economic and social situation in Jamaica. Firstly the international oil economic crisis that affected most developing countries. Secondly the domestic influences including internal policies. Thirdly the external factors, specifically, the American destabilisation campaign.

 

Oil Crises and International Economic Downturn

A decade after Jamaica gained independence from Great Britain and a year after Michael Manley was elected as Prime Minister, Jamaica was hit by the oil crisis of 1973. According to Lal (1979), prior to the oil crisis, Jamaica had an extremely open economy with most of its commodities being fully traded (p.535). In fact, its share of imports in GDP was between 40 and 45 per cent during the 1970s (Lal, 1979, p.535). This made it more vulnerable to the global changes when the cost of virtually all goods increased exponentially during the oil crisis.

Internationally, the oil crisis clearly contributed to a decline in trade, an increase in foreign real interest rate and a gradual decrease in the economic growth with an increase in unemployment and inflation in the industrialised countries (Looney, 1987, p.42). From 1974-1992 the non-oil exporting, least developed countries, experienced a 15% decrease in trade (Killick, 1984, p.2). Jamaica’s experience included, but not limited to, balance of payments destabilisation, overall slow down of the bauxite industry and a decline in the tourism industry due to the economic situation in the United States (Lal, 1979, p.535). This led to many states questioning their dependency and vulnerability in the integrated global economy, including Jamaica. For many, the crisis meant fundamental economic changes were needed. Some turned to socialism. As we will see below, an inward protectionist economic approach was taken by the leading party in order to reduce Jamaica’s dependence to the industrialized countries – particularly, the United States (Lal, 1979, p.535).

The second oil shock was from 1979 to 1980, after Jamaica became involved with the IMF. The oil crisis intensified certain social problems in developing countries such as poverty and crime. Additionally, it contributed to a partial collapse of social and physical infrastructure (Betz, 1990, p.165). Figures in the World Development Report of 1988 also indicate that the most heavily indebt countries suffered from lower real wages and higher unemployment than in 1982 (Betz, 1990, p.165; World Bank, 1988, p.60). So there were some common challenges for developing countries in that historical period. The IMF later became an important player since they negotiated 114 new Stand-By agreements between 1976 and 1982, 108 of which were with developing countries (Killick, 1984, p.3).

  

Domestic influences

Two elements interact here, firstly the political platform of the People’s National Party (PNP); secondly the vast nationalisation policies. The former is philosophical and theoretical in nature as its effects cannot be directly quantified. Some believe it led to an alliance that strengthened the Jamaican economy and all the while also contributing to its demise indirectly. The Nationalisation policies are pragmatic in nature since they reflect not only the political economy agenda, but also other elements that stem from a long history of colonial control.

 

Conflicting Policies

Michael Manley became the 5th Prime Minister of Jamaica in 1972. It is well known in Caribbean history that Manly first started his career with a democratic socialist agenda like many leaders in the developing world during the 1970s. His policies included giving land to the farmers, providing free education for children and ensuring more employment for the women.

Seeking regional support, Jamaica’s relationship with Cuba grew quickly. Fidel Castro ensured Cubans would assist in the construction of new schools that could sustain the free education policy that had been implemented in Jamaica. Although it was clear that tensions had risen between the United States and Cuba during the Cold War, Manley made sure the United States understood that Jamaica would not break the alliance with Cuba. He also made it certain that other countries knew where Jamaica stood in world politics. He confirmed his stance at the Non-Aligned Conference in Algiers, even before being elected in 1970, by stating the following:

We suggest that the capacity for action depends upon the construction of a methodology appropriate to each situation and its needs. We are not certain that the Movement is giving enough attention to the search for methods. The danger which can threaten everything that is promised by the Non-Aligned Movement, is that it should lose its credibility by the over-articulation of its promise, while under-delivering in its purpose (Hearne, 1976, pp.202-203 in Keith & Keith, 1992, p.15).

Manley’s administration increased public expenditure to an extent that it exceeded Jamaica’s fiscal capacity in spite of the assistance of Cuba (Sharpley, 1984, p.125-6). Revenues from its bauxite industry and other high yielding industries such as the sugar industry and the newly nationalised energy sector were not used for investment activities. Instead they were used to support greater social services, increased employment, and further public ownership and control of production (Sharpley, 1984, p.125). In the end, these policies contributed to the destabilisation of the Jamaican economy.

 

Nationalisation

During the 1970’s the nationalisation of telecommunication, transportation, electricity and mining companies were undertaken. They were mostly foreign-owned (Bakan, 2007). While this process started at the end of Hugh Shearer’s[ii] term, it intensified during Michael Manley’s first term in office.

The first sector to be nationalised was the Jamaica Public Service Company, which provided electricity to the whole country (JPS, 2013; Phillips, 2007). This happened in 1970 (JPS, 2013), two years before PM Shearer stepped down. A few years after Manley’s election, the government also gained ownership of the public transportation in Kingston and effectively controlled the Jamaica Omnibus Services in 1974 (Button and Hensher, 2001, p.273; Phillips, 2007). By the end of 1975, the government made a bold decision to nationalise the telecommunication sector (Keith & Keith, 1992, p.13). This was done through the Capital Development Fund, which allowed the government to control both the Jamaican Public Service Company and the Jamaica Telephone Company (Keith & Keith, 1992, p.13; Phillips, 2007).

Eventually the nationalism drive gave rise to the government acquiring 51% of the most important sector that was bauxite industry (Phillips, 2007). This last nationalisation merits a closer look due to its great significance and its contribution towards Jamaica’s declining relationship with the United States.

Since the 1950’s, Jamaica has been well known for its natural resources – especially bauxite. In fact the extraction and exportation of bauxite and alumina was so significant in the country that when the International Bauxite Association was established in 1974, the decision was made to have its headquarters in Jamaica (Keith & Keith, 1992, p.11). In line with its nationalisation policies, the government purchased 51% of the industry for developmental purposes (Keith & Keith, 1992, p.12). The nationalisation of this industry seemed like a smart move when it became known that one tone of Guyanese bauxite, sold between BWI$14 and BWI$28, could be resold at BWI$350 at a semi-fabricated aluminum state (Jefferson and Girvan, 1971, p.220 in Keith & Keith, 1992, p.8).

Therefore, the intention behind the nationalisation was to help build a stronger economy by creating new processing jobs that were at that point in time still in Canada and the United States. This could also keep capital from natural resource extraction within the country.

To stress just how important this industry was for the Jamaican economy, both the industrial and the agricultural sector’s success depended on the bauxite industry (Keith & Keith, 1992, p.12). Hence, it was believed that gaining control of it would help them gain control over other industries too. The revenue would have been used to help finance the transformation of the agricultural industry moving it away from subsistence agriculture to more lucrative mass production farming such as sugar cooperatives and collective farming (Keith & Keith, 1992,p.11,12). Unfortunately, the nationalisation of this industry and the bauxite levy had a direct impact on the balance of payments, also on the relative prices of local and traded products (Sharpley, 1984, p.123).

In the end, the nationalisation of the economy, along with some of the other policies that were implemented during this period, were done to create self-reliance and mass mobilisation. Dr. Phillips, a professor at the University of West Indies in Mona Jamaica, explains this: [Manley’s] analysis was structured by an assessment of the realities of post-colonial Jamaican society, disfigured by the effects of slavery and colonialism, and in need of radical restructuring (Phillips, 2007). Notwithstanding, it was less in line with the realities of the poor domestic economic performance and continuously changing external economic conditions (Brown, 1981, p.1).

 

United States Destabilisation

United States was opposed to Jamaica’s advocacy of social democracy, her new nationalisation campaign and the new alliance with Cuba and the Soviet Union. The alliance was the greatest concern for the United States. Jamaica, along with a few other Caribbean nations (Morales, 1994, footnote 17, p.97), supported Cuba’s stance on the MPLA regime in Angola that Secretary of State Henry Kissinger was promptly sent to the island at the request of President Nixon. His mission: command Manley to condemn Fidel Castro’s deployment of troops into Angola to support the anti-apartheid movement (Blum, 2004, p.264). When Manley refused to concede, the United-States cut its financial aid for the country by 87% ($30 million to $4 million) (Beckford, 2001).

According to investigative reporters Ernest Volkman and John Cummings, there was a destabilization program carried out by the CIA (Blum, 2004, p.264). As stated by several American intelligence sources, the mission included several different measures. There were covert shipments of arms and other equipment to opposition forces (Blum, 2004, p.264). This intensified the use of violence in politics that already existed in the country. They were also involved in politics by covertly financing the opposition party, by infiltrating the armed forces and the security service to turn them against the government and finally by creating anti-government organisations with the mobilization of the middle class (Blum, 2004, p.265-6).

However, the two most relevant tasks on their agenda for this paper were the extensive labour unrest and the economic destabilization missions. The first sparked widespread strikes in several important industries and was facilitated by the Free Labor Development, the CIA’s principal labor organization in Latin America (Blum, 2004, p 15). The second was mostly in response to the bauxite levy that was implemented after the nationalisation of the bauxite industry. The CIA even managed to slowdown the bauxite production leading to the closure of an important mining company in August 1975. This was a big hit on the Jamaican economy.

While this might seem like an unnecessary digression, it does help demonstrate that Jamaica’s hardship is the product of both endogenous and exogenous actors acting within the state. The CIA was not directly tied to the IMF but its actions contributed to the economic situation prior to the IMF’s involvement in the country. It did not take long before the economic growth in Jamaica declined. For eight years, there was a negative growth, high inflation and staggering unemployment. Not to mention, there was a significant migration of capital with the emigration of the middle class to industrialised countries especially in the United States. Granted, the latter was the result of both the American destabilisation and the Jamaican nationalisation campaigns that was unfriendly for Jamaican entrepreneurs.

Although the socialist policies had clearly contributed to the balance of payments as well, the Manley administration tactfully decided to focus on the United States’ contribution to the downfall of the Jamaican economy. His stubbornness cost him the 1980 election that was won by Edward Seaga who ran on a platform of denationalization and deregulation of the economy (US Library of Congress, 2013). In any case, during his first six years in office, Seaga achieved mixed results. He succeeded in privatizing small parts of the agricultural and tourist industries but there was actually an increase in the role of the government in the key sectors of oil refining and bauxite production after several large firms closed their business in the country (US Library of Congress, 2013). With the new American President Ronald Reagan coming into office, whose administration was rhetorically confrontational against Cold War foes. With the defeat of Manley’s party, the USA saw an opportunity to make a symbolic success of Edward Seaga’s more pro-western government. Resultantly, American bilateral and Washington multi-lateral concessionary loan facilities were opened up for Jamaica on a larger scale. The ruling party of Jamica took full advantage of this opportunity and the USA gave over 200 million dollars during Seaga’s term. The economy showed signs of slight recuperation and attracted the private sector both local and abroad. By the time Manley won his second term in office in 1989, he had finally decided to tone down his socialist policies. This time, he was ready to start negotiating with the IMF and World Bank.

 

 

Conclusion

Here we have gone through a brief historical account that could help explain why Jamaica’s economy suffered to a seemingly irreversible point that forced to it lending from the IMF and the World Bank. Several points have been brought forward. First, there was the oil crisis and the international economic downturn; second there were conflicting domestic policies and nationalisation campaigns; third there was the destabilisation carry out by the United States. Each section has demonstrated changes in the economic soundness in the state. Now that we have a snapshot of Jamaica prior to the intervention we can integrate the IMF into the analysis and attempt to determine the impact of its intervention.

 

PART II

 

IMF Negotiations And Its Impact

It must be understood that the Jamaican government had exhausted all their options in terms of being financed. They had approached several different private financial institutions and countries, by seeking credit from countries such as, Trinidad and Tobago, Eastern European countries, Cuba and Venezuela (Sharpley, 1984, p.139).

After failing to increase official inflows, the government finally came to terms with the IMF and signed a two-year stand-by facility in July-August 1977 (Brown, 1981, p.38). This agreement was far more lenient than the second. For instance, the negotiations for the $79.6 million USD loan allowed the Jamaican government to maintain key policies and including subsidies, price control, dual exchange rate, along with social welfare employment programs to name a few (Brown, 1981, p.38). By December, the agreement had already been terminated due to the government’s failure to reach the domestic credit expansion target (Brown, 1981, p.38).

In January 1978, once again the IMF was invited to Jamaica to negotiate an Extended Fund Facility (EFF) for a period of three-year in the amount of 240 million US Dollars. For Jamaica to qualify for the EFF, they had to devalue its two-tiered currency by 5.2 percent in special rate and by 13.6 percent in basic rate. Under the terms of a rigid May 1978 agreement, the Jamaican government had to instil a crawling peg system by regularly devaluing the currency over the course of next year. It also imposed additional taxes on consumer goods, lifted price controls, reduced government expenditures, set a ceiling on wage increases, further increased charges for government services, activities of several state-owned corporations were limited as well. As a result of IMF program, political and social tensions aggravated. Jamaica generally adhered to the terms of agreement, which caused the inflation to soar, depletion of foreign reserves, real wages plummeted and the trade deficit rose. This decline in the standard of living increased unrest, opposition protests and violence.

As Jamaica had complied with the policies dictated by the IMF, the Funds agreed to raise its loaned amount in June 1979 up to US$428 million. It was in the purview of the severe floods and damages it caused. It was also aimed at reducing the effect of increased price of oil, which had skyrocketed again during 1979. In spite of the new transaction, IMF-Jamaican relations soured in late 1979 as the economy continued to perform poorly even though the island followed the Fund’s basic guidelines. Although it lasted longer than its predecessor, this agreement was terminated within two years in 1980 (Brown, 1981, p.40). During these two contracts there were two interruptions due to fundamental disagreements (Looney, 1987, p.47). Manley himself stated in the South-North Conference that:

IMF prescriptions are designed by and for developed capitalist economies and are inappropriate for developing economies of any kind; the severe suffering imposed on a developing society through IMF conditionality is endured without any real prospect of a favourable economic outcome and without an adequate foundation of social-welfare provisions to mitigate the hardships experienced by the people; the notion that with IMF approval international commercial banking institutions will supplement the funds made available by the IMF is a fallacy; the punitive withholding of tranches of foreign exchange as a consequence of the failure to meet periodic IMF tests condemns the defaulting country to a worsening of the foreign-exchange situation which the IMF involvement itself is aimed at improving (Jamaican Gleaner, 5 July 1980).

To no surprise, from the beginning of the negotiation process of the first Stand-By agreement, there was an important point of disagreement between the Jamaican government and the Funds with regard to the prescribed devaluation policies due to the nature of their economy. The Jamaican government made the argument that devaluation would provide little stimulation to the demand of exports, as bananas and sugar were sold under fairly inflexible negotiated agreements, but that it would reduce the foreign exchange equivalent required to cover the local costs of bauxite alumina companies (Sharpley, 1984, p.140).

According to the IMF, if there were devaluation, the urban poor would suffer; if there were no devaluation, the rural poor would suffer most (Sharpley, 1984, p.140). For political reasons, the Jamaican government decided to shift the burden on the rural poor, even though the Funds had advised them of the optimal economic option of allowing the urban poor to carry the burden (Sharpley, 1984, p.140). The thought process behind the Funds’ point of view stemmed from the belief that the rural poor would be able to benefit for higher wages in the agricultural exports, which could potentially increase reliance on local production of food (Sharpley, 1984, p.140). This is mostly speculation that poor urban Jamaicans would had suffered less had their government been able to prevent the devaluation policies from being applied, but it happened to be a non-negotiable tenant of the Stand-By agreement (Sharpley, 1984, p.40). It does show, to a certain extent, the good intentions of the IMF.

 

The Assessments

In order to better understand the Funds’ socioeconomic impact in the country, it is essential to understand how it assessed the situation in Jamaica and what factors it focused on. The political economy agenda bias illustrates their real focus and lack of interest in the country’s socioeconomic goals and ambitions. Furthermore, they fail to integrate policies that would help alleviate the impact of external factors since there prescription was based on the assumption that the economic failure was due almost exclusively to endogenous factors.

 

Biased political economy agenda

The first issue to address is in regard to the IMF’s biased political economy agenda because it espouses to market-oriented solutions that uses price mechanism to allocate resources (B. J., 1980, p.1983). A strict supply and demand approach to Jamaica’s economy can cause several different challenges. Again, this country’s economy is very open. Hence, fluctuations in the global market can have a significant impact the economic health of the country.

Another important influence comes from monetarism, an economic theory developed by Milton Friedman and Edmund Phelps. It considers inflation as being primarily a monetary problem created by excessive central bank money (Gilpin, 2000, p.83). This is supplemented with the idea that employment rates adjust themselves naturally with the market while remaining an upper limit on economic activity (Gilpin, 2000, p.83). When the governments attempt to force this rate to decrease, it will inevitably create to higher inflation (Gilpin, 2000, p.83). Though this is an oversimplification of this theory, it is enough to understand the thought process behind the prescribed structural adjustment policies during this period of time. It also helps in understanding the strong opposition to government intervention in the economy – even in social projects that could potentially reduce poverty and inequality.

In fact, these doctrines go directly against the policies that many post-colonial countries were working so hard to protect (B. J., 1980, p.1984). Many of Jamaica’s leaders were greatly inspired by certain tenants of the dependency theory. These individuals believed that even though Jamaica gained its independence from Great Britain in 1962, it was still a part of an international system in which it was economically at the mercy of other industrialised states. This was clearly vocalised by Manley when he became the leader of the People’s National Party (PNP) in 1968. Not only did Manley express his discontentment with the system altogether, but he also underlined the unjust advantage that is given to foreign investors through the form of tax cuts. He explained this in the Foreign Affairs Quarterly (Manley, 1970, p. 105):

Jamaica has fallen into the same trap as many other developing countries by thinking that the indiscriminate granting of tax incentives to foreign capital – regardless of the contribution which the particular capital can make to development, or of the posture of that capital in the society – will necessarily contribute to progress (Keith & Keith, 1992, p.7).

These two different doctrines are on opposite ends of the spectrum in terms of how they prioritise the socioeconomic wellbeing of Jamaicans. On the one had, there is the Manley administration that is concerned with self-empowerment and self-sufficiency. It attempted to implement policies that would increase equality and alleviate poverty amongst the most marginalised[iii]. On the other hand, there is the IMF that seemed primarily concerned with achieving a balance of payment, which according to them will lead to economic prosperity. This will then help a country increase their GDP on their own, eventually, which can then be redistributed and alleviate poverty. However, we will see that their policies in Jamaica produced conflicting results.

 

Patronising The Host Country

In addition to the political economy agenda bias of the IMF, there also seems to be a general assumption that the countries seeking credit are at fault. In other words, they assume that the problem is not the international economic situation; it is the internal economic policies, leadership or fiscal management of lending countries that put them in the situation. There is a certain balance between internal and external factors that influence developing economies, actually all economies.

It has been demonstrated by scholars, such as Girvan, Bernal and Hughes (1980), that the fund took an approach that implied Jamaica’s situation was primarily and almost exclusively due to internal mismanagement (Looney, 1987, p.50). This approach was taken in spite of the fact that many other factors especially, external factors, were at play – as demonstrated above.

Other scholars, like Dell, agree with the IMF’s assessments which focus more on the internal factors that contributed to the balance of payment stabilisation issues during this period as being mostly internal[iv] (Looney, 1987, p.49). Though, this analysis might bear some truth, focusing on this alone can lead to distortion of the actual situation and lead to failure. Subsequently, it can contribute to increasing the balance of payments destabilisation. At any rate, the debate on whether or not external factors carried a heavier weight on the Jamaican economy is very relevant but extremely difficult to determine. Seeing that both exogenous and endogenous factors played important roles, the IMF should have taken note of this in their pre-loan assessment and apply policies that would reflect this. Regrettably, this was not the approach taken.

Moreover, they should have noted that during this period, and even today, most Caribbean countries’ economies are open. Hence, the stability of their economy depends greatly on the stability of the global economy and at the very least, their greatest trading partners such as the United States. But here their analysis for the stand-by agreement in July 1977 included the net foreign assets of the central bank, the net banking system credit to the public sector and outstanding arrears and the limits to the new external medium and long term borrowing (Looney, 1987, p.51).

It is to no surprise that this agreement terminated in December 1977, as it did not properly address the source of the problem and it created other challenges for the country. For instance, the Funds have been vehemently accused for the constrained time frame that it grants recipient states. Achieving a balance of payments is an arduous and time-consuming process for a country like Jamaica during the 1970s. In retrospect, we see that it can take a long period of time before achieving this goal seeing that it still has not been met. Yet the first Stand-By facility of J$468 had a two year timeframe (Brown, 1981, p.1).

As a consequence, their corrective policies had disastrous effects. In addition to being patronizing and fully exploiting their asymmetrical power relationship, we will also see below how the IMF deflects responsibility and obstinately re-applies the same failing policies repetitively without taking responsibility for the failure. In the midst of all of this, there is also the realisation that the IMF’s assessment failed to take into consideration the social factors that would have an influence on poverty and inequality for Jamaicans.

As we can see above, poverty reduction is not the mandate of the IMF nor is it one of its goals, but as Sidney Dell (1991) points out, the primary objectives in Article I(ii) also includes the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy (p.17). Even if poverty reduction is not its goal, if the IMF was contributing to unemployment it is not only contributing to an increase in poverty, but it is also failing to meet one of its primary objectives. Below, we will see how some of the main components of conditionality’s influence the socioeconomic wellbeing of Jamaica.

 

The Contents of the Program

The Funds happen to have a very rigid assistance plan with the same key components being reapplied to most of their borrowing countries during the 1970s and through the 1990s. Naturally, they have been criticised time and again for the same reasons. A few of those classic objections will be explored in relation to the socioeconomic wellbeing of Jamaicans. These are the arguments: the devaluation of the currency, the curtailment of the government expenditure and the trade liberalisation.

 

Devaluation

The core policy prescription in IMF loan programs is devaluation. This comes from the logic that the best way in which a country can increase its exports and decrease its imports is by making foreign currency more expensive to increase trade. Many countries have noticed that this might not be the optimal solution, as it might not result in curtailment of imports or expansions of exports because of demand or supply elasticises (J. B., 1980, p.1984).

There is actually a very heated debate on the consequences of devaluation, particularly with regards to its ability to increase inflation. It has been demonstrated by Krugman and Taylor (1978) that countries with a trade deficit will have a negative aggregate demand if devaluation policies are implemented (Acar, 2000, p.64). The authors Caves, Frankel and Jones (1996), Cooper (1971), Edwards (1986) and Krugman and Taylor (1978) contended that devaluation can have a reverse impact on developing countries because it can create negative effects on aggregate demand which can contributed to unemployment and a reduction in output (Acar, 2000, p.64).

Devaluation can also have an impact on income distribution. According to Krugman and Taylor (1978), it can decrease the workers-shares and increase the earnings of profit earners since wages are the same or even decreased and prices have increased (Acar, 2000, p.65). Oxfam (1991) noted that by the late 1980s, the World Bank Figures illustrated an adverse trend where the consumption of richest ten per cent of Jamaicans was 17 times greater than that of the poorest 10 per cent (p.5).

Most scholars agree that devaluation can be useful, but the irritating aspect of this centerpiece policy of the IMF is the way in which it is applied successively irrespective of negative results (J. B., 1980, p.1984). To clarify, when devaluation is met with failure, the remedy is disappointingly more devaluation.

To no avail, the IMF devalued the JMD by 49 per cent in successive phases within a two-year timeframe starting in May 1977 and ending in May 1979. Neither the balance of payment problems nor the staggering inflation were corrected (J. B., 1980, p.1984). To be fair, these policies did seem to contribute to a slight change in the inflation levels by 1989 at which point it was around 30% (Killick, 1995, p.100) as opposed to 35% in 1978 (Stone, 1986, p.165). In addition to this, there were no substantial changes in the balance of payment indicators that continued to fluctuate in 1989 (Killick, 1995, p.100). Unfortunately, those who suffer the most were the poor.

This line of thought resembles that of Mussa and Savastano (1999) who describe the IMF programs as often being characterized as unnecessarily damaging to growth, harmful to the poor, unduly inflexible and unresponsive to the differing needs and circumstances of member countries and based on a ridged application of outmoded and discredited economic principles (p.80). Jamaica is similar to most other Caribbean countries with respects to its heavy dependency on imported foods and other essential commodities like fuel. While devaluation, in theory, helps the poor by reducing the price of certain essential imported goods like cereal and energy (Grellet, 1994, p.169), the overall impact in this situation was quite different in practice. By continuously devaluating the JMD, the IMF indirectly had a two-fold impact on the country. On the one part, it increased the cost of living for Jamaicans. On the other part, it increased the country’s external debt. As the host country’s currency is devalued, the cost of foreign currency increases which means they need more local funds to repay the debt (Acar, 2000, p.66). Through an interview with Black (2001), Dr. Michael Witter, professor of economics at the University of the West Indies in Jamaica, contextualise the impact of these policy for locals as such:

Since our society is so heavily dependent on imported food, imported fuel, important books to go to school, important medicine, when we devalue the cost of those things we import go up to the citizens. As a result, the economy today is much more under the control of foreigners; not necessarily through direct ownership but through the mechanism of debt. Nowadays, we owe $7 billion so the debt is rising, and all the time the debt is rising, our capacity to export to produce is getting less (Black, 2001).

Moreover, as it has been explained by Brown (1981) in reference of the Jamaican case, deflationary policies can be associated with a fall in investments. It is therefore possible that a fall in incomes and employment can result without external balance being achieved (Brown, 1981, p.2). This is precisely what happened in Jamaica during the 1980s when deflationary policies were being implemented but there was little to no progress in terms of stabilising the balance of payment. Yet cuts were still being made to the minimum wage as the cost of basic commodities increased. In the early 1980s Jamaica had to face severe foreign exchange crisis, accelerating inflation, political and social tensions and falling output of its chief industries. Between the end of 1987 and May 1988, the devaluation of Jamaican dollar had reached a staggering 95%. In addition, the external debt had accrued up throughout the 1980s reaching up to US$4.5 billion in 1989, or equivalent to 125% of GDP (Fontaine, 2001, p.7). In fact, throughout the years there has been a steady growth of domestic and public debt (see Figures 1 and 2). By decomposing the debt King and Richards (2008) discovered that by 2003 about the third of the debt owing was from interest (p. 8). Other factors include the country’s need to borrow in order to service the debt along with a “debt absorption from outside of central government” (see Figure 3) (King and Richards, 2008, p.8).

 

Curtailment of Public Expenditures

The curtailment of government expenditures is important to regaining a balance of payments and it can be achieved in several different ways. Nonetheless, the IMF seems to prefer encouraging a cut of public investments in particular (Vreeland, 2003, p.154-155). As a result, this sector can shrink and can also be shifted to the private sector. Thus providing less services and more expensive services to the nation. For those who can afford it, this has little to no impact, whereas for the middle income to low income Jamaicans, this can have a significant impact on their access to the very same public services that the Manley Administration was attempting to improve – education, health, public transport and telecommunications.

The curtailment of public expenses can have several significant impacts on a society. It has been demonstrated by Grellet (1994) that the urban poor’s quality of life rely more heavenly on the public sector than nominal spending which the structural adjustment policies concentrate on (p. 168). With regards to food, cuts in government subvention, as a general rule, will have a direct impact on the most impoverished groups (Grellet, 1994, p.169). While cuts in areas such as education can have a long-term impact on economic growth (Grellet, 1994, p.167).

An Oxfam report in 1991 also illustrates how social services related to health, education and housing deteriorated during the 1980s in Jamaica. Oxfam used an interesting methodology for this report by using interviews with Jamaicans to help bring forward the most pressing issues. It then contrasted its findings with statistical data. In fact, the two combined validates the basic argument that the IMF increased issues related to poverty and inequality by reducing government expenditures in the public sector. Some of the most telling statistics includes the following:

– In 1989 over 30 per cent of children attending public health clinics were diagnosed as malnourished.

– In 1971 there was one doctor for every 2,700 people in Jamaica; in 1991 there was one doctor per 5,200 Jamaicans.

– In 1989 it cost on average J$1,119 to send a child to primary school, 60 per cent of this sum going towards lunch and 25 per cent towards fees; at the same time, the statutory minimum weekly wage stood at less than J$100 (Oxfam 1991, p5).

It is interesting to see that the same areas the government was pressured to make cuts since 1977 had a direct impact on people’s access to education, health care and even food. The last data on the minimum wage is also very pertinent for determining the ability for people to pay for these services and others. If the cost in basic commodities was increasing and the access in social services was decreasing, then there would be a need for higher incomes. Or at the very least, salaries should be pegged to the inflation rate.

 

Curtailment of Minimum Wage

Another specific area in which the government was forced to make cuts was with the minimum wage. An important component to Manley administration’s political economy agenda was to increase the standard of living for Jamaicans with employment expansion and income redistribution (Brown, 1981, p.4). The goals were well defined as raising the level of money and real income at the lower end of the scale; expanding incomes and employment in agriculture; and expanding short-term employment (Brown, 1981, p.4). However the means of achieving these goals were not as well defined and it was not established in a sustainable way.

In fact, they had two main instruments, wage policies and public ownership, that were both utilised through the shift of private assets to the public sector. One problem was that this system did not generate any new assets (Brown, 1981, p.5). This is one instance in which there was a lack of resources, leadership and management on the Jamaican government’s part. Nevertheless, the intention was there. It is difficult to determine how long it would have taken for these goals to eventually be met without the assistance of the IMF. Nevertheless, the IMF definitely steered these policies in a different direction. David Coore, the Deputy Prime Minister and Minister of Finance (1977) summarised the aim of the Fund’s income policy as being drafted to ensure that money incomes do not race ahead of real production in such a way as to result in an inflationary spiral that will not only cause severe hardship on those least able to bear it. (p.2). This statement reflects the IMF’s monetary perspective instead of the Jamaican social democratic perspective. Moreover, it overlooked the fact the devaluation policies were at the root cause of the inflation and it also overlooked the socioeconomic impact it would have on Jamaicans. Accordingly, the results were mix.

Because devaluation increases the price of traded goods, it would be normal for workers to demand a higher income to maintain a reasonable purchasing power (Acar, 2000, 68). This was not the case. Yet Jamaicans saw both there incomes being reduce and the price of basic commodities such as soap and rice increase. So as the inflation increased, purchasing power decreased. Simultaneously, the Funds attempted to decrease workers ability to protect their interests and demand better working conditions and benefits when needed.

Therefore, it attacked the core of the matter by directly influencing union labours. The undermining of labour unions is a recurring complaint in the analysis of the Funds’ role in developing countries (International Trade Union Confederation, 2013). Jamaica most certainly is not an exception to this. Even the CIA had played a clandestine role in disrupting the labour unions through their infiltration, which led to a host of unusual strikes, conveniently, in the key public sectors. The reasoning behind the Funds’ doctrinal divergences with union labours is quite simple since unions are often perceived as an obstacle to capitalist ambition of continuous increases in profit. The problem that we encounter here really is the Funds’ supposed interest in international economic development but it’s incapacity or unwillingness to include social factors such as the consequences of restricting labour unions.

In this case, labour unions in Jamaica, as in many other developing countries during the 1970s, played a crucial role in reducing the impact of inflation on the working class. After the oil crisis, Jamaican unions were capable of maximizing their collective bargaining power to increase wages (Stone, 1986, p.108). This helped increase their purchasing power at a time when the cost of living had drastically increased (Stone, 1986, p.108). Except, progress was reversed as the IMF became active in the country. It created a combination of issues spanning from the restrictive loan repayment timeframe, the large payment requirements, the anti-labour policies, the cut in wages, to the continuous devaluation of the Jamaican dollar which all contributed to a decreased purchasing power.

The Funds achieved this by requesting the government to make amendments to labour laws that would make it easier for employers to fire staff, to adjust their pension programs by cutting retire workers benefits, to privatise government financial and energy sectors, and to cut government salaries (Lloyd and Weissman, 2001). In an extensive research carried out by the Multinational Monitor (2001), 26 countries with IMF loans were studied and showed the classical examples of what the Funds calls the promotion of labor flexibility . Some countries like Uruguay experienced a government decentralisation of labor agreements; other such as Argentina saw legal changes to reduce social security, while others like Nicaragua had changes that created greater flexibility in contracting of labor (Multinational Monitor, 2001). Similarly, the pressure has been on the trade unions since the beginning of the Jamaican-IMF relationship. The major argument throughout the years was that the unions wanted their salaries to be pegged to inflation whereas the Funds wanted it to be pegged to the GDP (Hamilton, 2012). The former is a mechanism that would allow Jamaicans to maintain reasonable purchasing power in spite of inflation.

Another interesting finding is the IMFs impact on labour shares[v] in the countries that participated in the IMF programs versus those that did not participate and those that are no longer involved with the IMF. The results, produced by Professor Vreeland (2003), demonstrate that labor share is lower for countries that participate in Funds’ programs. Labour share is best off in countries that have never participated in an IMF program, and worst off in countries currently participating in an IMF program. Labour does slightly better when the country leaves the IMF program, but it does not appear to rebound immediately [vi] (Vreeland, 2003, p.141). It is striking and extremely relevant to this research as it makes a very strong correlation between the IMF’s involvement within developing countries, in this case Jamaica, and its impact on worker’s compensation for the income they help generate – which subsequently has an impact on their economic wellbeing.

 

Trade Liberalisation

It is well known that IMF’s conditions forced the Jamaican government to remove trade barriers. The country, especially under Manley’s administration, had a protected economy. Just like it was revealed earlier, land was given to the population of Jamaica to help empower them. This was an ethically questionable move. But his administration ensured that small farmers, regardless of whether or not they were black, were protected by certain trade barriers (Black, 2001). The trade liberalisation along with the devaluation of the JMD contributed to the annihilation of the local economy.

Some would make the argument that the free market and its infamous invisible hand will allow competing companies to produce the most cost effective products to be on the winning sides. However what does this mean for smaller nations that are not able to compete with the rest of the world due to factors that are beyond their control, such as the size, location and colonial past of their country that put them several steps behind other countries? The intent here is not to make broad generalisations that deflect responsibility from the Jamaican government. But it is important to keep such factors in mind.

Trade liberalisation in conjunction with devaluation policies can be quite damaging for an economy. This is because devaluation has the affect of restricting imports due to higher prices and trade liberalisation removes import controls. Together they made Jamaicans more vulnerable to the international fluctuating prices of commodities (Acar, 2000, p.60). This also made it more difficult for Jamaicans to compete with foreign companies that are able to decrease the cost of production with more efficient technology thus jeopardizing the local economy. In Jamaica, this happened mostly in the agricultural sector. In that particular case, Jamaican farmers needed to import seeds and other commodities necessary for the growth of their crops while more industrialised countries have easier access to the same commodities (Black, 2001).

In a research on the impact of structural adjustment on income distribution and poverty in Jamaica, Handa and King (1996) were able to identify a trend between 1989 and 1993 (p.11). Although this is only a fragment of the timeframe set for this paper, it should be noted that income distribution inequality actually increased when there were accelerated policy reforms in the financial and trade sector (Handa and King, 1996, p.11). They have also been able to establish that the overall income distribution went downhill during the first wave of structural adjustment policies in the early 1980s and the living conditions also decreased (Handa and King, 1996, p.12). On a positive note, they also have evidence that seems to support the hypothesis that inequality gradually decreased from 1989 to 1993 and that these examples above are dips in the charts related to the intensity of the Funds policies. To come to this conclusion they also needed to take other factors into consideration, notably ­­­­the access to electricity and immunization (Handa and King, 1996, p.12, 13).

With regards to trade liberalisation in general, there is a double standard between the north and the south that is quite disconcerting. It has been acknowledged by many scholars that the free market is not free per se. While the industrialised countries make the rules of the game by limiting developing countries’ authority to interfere in the market, they themselves cheat the system through the subsidies of their own produces. There is indeed a double standard in which developing countries are being induced to rely on the market for more products while industrialised countries are removing the market forces for more products (Dell, 1991, p.33). As Dell (1991) puts it, if free market conditions were the key to developm­­ent, there would be no dichotomy between developed and underdeveloped economies since government intervention in the latter economies is a relatively recent phenomenon, following accession to economic independence (p.33). Moreover, there are several well-documented cases in which those subsidized goods are exported to developing countries and are sold at a price at which the locals cannot compete with[vii].

 

Conclusion

When analysing the situation in Jamaica, it becomes clear that the approach taken by the IMF is inadequate. All in all, the general criticisms that have been made against the IMF included their lack of sensitivity to the individual situation of borrowing countries, their monetarist doctrine, the I political economy agenda bias against socialism, their promotion of the free market, their perpetuation of dependency, their short timeframe for stabilisation of balance of payments, and of course their imposition of onerous conditions (Looney, 1987, p.48). These are all arguments that have been brought forward in the pages above. It is more important to take away the impact that the IMF had on the wellbeing of Jamaicans with regards to poverty and inequality.

The initial challenge was the Funds’ doctrine that immediately went against that of the Jamaican government at the time. One trusted the market as solution to the balance of payment problems while the other was weary of the market and sought to protect its economy to empower Jamaicans. The approach of the Funds in the assessment failed to take into consideration the socioeconomic impact of the policies and even failed to integrate policies that would negate the effects of external factors like the state of the international economy. The devaluation policies had some of the worst effects by increasing inflation, the external debt and the cost of living. This vicious circle of constant devaluation to reduce inflation prolonged the situation. The curtailment of the government public expenditures reduced the access to certain social services making the services less affordable and increasing malnutrition. The curbing of the minimum wages decreased the purchasing power, decreased workers’ collective bargaining and the labour shares. Finally the trade liberalization increased the gap between the rich and the poor and destroyed parts of the local agricultural economy.

The aim of this paper was to present an unbiased analysis of the IMF intervention and the aftermath of the country’s economy. This case study is to serve as a typical example of how the IMF, which on the surface wanted to rescue a failing economy, actually and eventually, manages to further deteriorate the living conditions of the masses of the country. The main reason why IMF ends up damaging the economy is its policies. From 1944 to date, the IMF has been the same economic model that is flawed as they propose the same one-solution-for-every-one. They aim at short-term economic recovery by squeezing the life out of the currency of a nation, by curtailing government spending by reducing subsidies and wages (already discussed above) and steep recovery plan. These measures result in the working class suffering the most and business class not investing fully.

Throughout the history, the countries that resorted to IMF programs, failed to show significant long-term recovery, especially if the country continued to receive loans over an extended period of time. Argentina is another example of the same mantra. They approached the IMF for financial assistance, the economy showed some signs of immediate recovery but the same solution for everyone methodology of IMF failed once more when in 2002 Argentina defaulted on its debt resultantly they stopped the conversion of US dollar and Peso Argentino. Greece is another example of contemporary era, which does not even fall into the developing nations, located in the heart of Euro trade zone. The IMF created another economic mess. As per the report in online version of The Wall Street Journal, June 5, 2013 the IMF accepted its mistake in the contribution to worsening the economic problems of Greece. IMF then goes on and blames the major banks of Greece for its economic failings.

Today, Jamaica is one of the most indebt countries. It fails to see improvement in either the millennium goals or economic growth as it contributes over 20% of its income towards debt repayment (Dearden, 2013). The Funds (2011) reported that in 2010 the poverty rates in Jamaica were at 43.1 and unemployment was at 11.5 in their Regional Economic Outlook, Western Hemisphere: Shifting Winds, New Policy Challenges (p.71). But on a more positive note, more recent data from the UNDP seems to suggest that the health and income IHDI have been improving since the 1990s[viii]. However, after all those years of being involved with the IMF, inflation is still high. Granted not as high as the immediate aftermath of the oil crisis and worst of all, there are still balance of payment issues. Furthermore, Vreeland (2003) also confirms the assertion that everybody is not hurt in the same way in the short run with the IMF policies. It turns out those who are in the worst off economically are affected more negatively because “the total growth slows as their share in income decreases” (loc 345).

The place of the IMF in the international system has slightly changed throughout the years. Its primary role at its inception was for an emergency purpose by assisting countries in dire economic situations brining their economy back to par. While its need increased after the 1973 oil crisis and the Asian Crisis in the 1990s (Bennathan, 2008, p.74). As the developing countries’ economy grew, and more particularly as their reserves grew from a recommended amount of 3-6 months, and to 12 months for some, there was a decreasing need for its services (Bennathan, 2008, p.75). Which consequently means that the Funds have less new loan agreements. Although it seems like the current economic situation in Europe will change that. Part of the reason why so many countries are accumulating too much reserves at the detriment of its economy (Bennathan, 2008, p.75), to a certain extent, lays in their lack of trust in the IMF which is a reflection of their weariness in the IMF’s conditionality and their consequences.

 

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Annex

 

Figure 1

Growth and Composition of Domestic Debt, 1990 – 2005

growth and composition of domestic growth-Jamaica resarch.png

Source: Bank of Jamaica in King, Damien and Latoya Richards. (2008) “Jamaica’s Debt: Exploring Causes and Strategies”. Caribbean Policy Research Institute. Retrieved March 1, 2014 from: http://commonsenseja.files.wordpress.com/2013/01/jamaica-debt-report.pdf.

 

Figure 2

Total Public Debt: Ratio to GDP 1995 – 2006

 

figure-2-total-public-debt-ratio-to-gdp-1995-2006-jamaica-resarch

Source: King, Damien and Latoya Richards. (2008) “Jamaica’s Debt: Exploring Causes and Strategies”. Caribbean Policy Research Institute. Retrieved March 1, 2014 from: http://commonsenseja.files.wordpress.com/2013/01/jamaica-debt-report.pdf.

 

Figure 3

Decomposing the Growth of the Debt, 1997 – 2003

 Figure 3-total public debt ratio-Jamaica Research.png

Source: King, Damien and Latoya Richards. (2008) “Jamaica’s Debt: Exploring Causes and Strategies”. Caribbean Policy Research Institute. Retrieved March 1, 2014 from: http://commonsenseja.files.wordpress.com/2013/01/jamaica-debt-report.pdf.

 

Endnotes

 

[i] Please note that the term wellbeing will be used loosely throughout the essay to substitute the repetition of poverty and inequality.

[ii] Hugh Shearer was the leader of the Jamaican Labour Party and the Prime Minister from 1967 to 1972. He was Michael Manley’s predecessor.

[iii] At the time, the most marginalised Jamaicans happened to be black people. Through his methods were questionable, the Manley administration attempted to change this with policies such as the redistribution of land.

[iv] To be more specific, this includes excessive demand, excessive monetary expansion, overhauled exchange rate and excessive wage charges (Looney, 1987, p.49).

[v] Labour share is defined as such by Vreeland (2003, p167): “Total nominal earning of employees divided by value added in current prices, to show labor’s share in income generated in the manufacturing sector. Source: World Development Indicators on CD-Rom (1995), where it appears as UM VAD WAGE ZS.

[vi] Sample includes 135 sample countries in Africa, North America, South America, Asia, Europe, and Oceania and the Pacifica Islands, with 4,126 observation-sample from 1951-1990 (Vreeland, 2003, p.169)

[vii] One of the most famous case of that demonstrates the damaging effect of lower tariffs and importing cheap goods in a developing country is that between the US and Haiti. In his own words during an interview with Democracy Now, former President Bill Clinton states the following: “Since 1981, the United States has followed a policy, until the last year or so when we started rethinking it, that we rich countries that produce a lot of food should sell it to poor countries and relieve them of the burden of producing their own food, so, thank goodness, they can leap directly into the industrial era. It has not worked. It may have been good for some of my farmers in Arkansas, but it has not worked. It was a mistake. It was a mistake that I was a party to. I am not pointing the finger at anybody. I did that. I have to live every day with the consequences of the lost capacity to produce a rice crop in Haiti to feed those people, because of what I did. Nobody else.” (Democracy Now, 1 April 2010).

[viii] Data was retrieved August 28, 2013 from 1980 to 2010 for comparison from the UNDP’ International Human Development Indicator website: http://hdrstats.undp.org/en/tables/

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