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The fatigue of development and jobs:

Edward
Seaga

Sunday, November 11, 2018

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There were two principal programmes to deal with the gaps in the domestic and external accounts. These were the imperatives of the period.

The International Monetary Fund (IMF) and Government strategised to stabilise the domestic account, that is, reduce to a low level the huge excess of expenditure above revenue (fiscal gap), which in 1980 amounted to 17.5 per cent of GDP — one of the highest in the world. The World Bank, through a series of structural adjustment loans, would work with Government to build a stronger base of foreign exchange earnings, by enhancing the performance of specific sectors to become substantial net earners of foreign exchange.

These sectors, principally tourism and export garment manufacturing to begin with, would become two additional legs for a one-legged export stool so that the economy would no longer rest on a single leg (bauxite) which, when it wobbled the economy wobbled, and when it collapsed, the economy would collapse too. It would now become a stable three-legged stool.

The first half of the decade presented an exceptionally demanding challenge to keep the economy afloat while it was being adjusted. Over the first three years, to 1983, this was comparatively successful, but the last two years — 1984 and 1985 — were crucial tests of political will and economic stamina, which brought back some of the worst memories of the adversities of 1977 and 1978.

In an address which I gave at the Bank of Jamaica auditorium February 9, 1984, I reported on the Jamaican outcome over the first three years, 1981-83, compared with that of other countries.

“It must be remembered that in the period of which we speak, 1981 to 1983, the world experienced the most savage recession of the past 50 years. No country was spared. Jamaica was badly hurt by this recession, particularly in 1982 and 1983.

“The common feature of this recession [was] that in countries throughout the world, positive growth in economies had turned negative — investment had decreased; unemployment had increased in the USA by 50 per cent, Canada 87 per cent, the UK 30 per cent, the Federal Republic of Germany 70 per cent, France 30 per cent, and Barbados 26 per cent.

“But in Jamaica in the past three years we accomplished just the opposite. Economic growth increased, not decreased, for three consecutive years. Investment increased, not decreased, for three consecutive years; and the unemployment rate decreased, not increased. Unemployment fell in 1981 and 1983 despite the fact that over that period net migration fell drastically by half… because more Jamaicans who migrated earlier returned home and more who are at home were staying home, resulting in yet more jobs to be found.

“Against this background of performance I asked the World Bank to advise me which of the other 150-odd countries throughout the world over the years of this shattering recession, 1981-1983, had achieved increased economic growth in each of the three years, increased investment… and reduced unemployment. The data submitted by the World Bank showed that of the more than 150 countries in the world, only eight achieved those results, and Jamaica was one of them.

“The economic recovery programme, therefore, not only began to turn around the economy successfully in the right direction, but it did so to an extent equalled only by seven other countries throughout the world.

“But let us not be satisfied by this. Let us return to the [real] question.

“Have we achieved the targets we set for ourselves in 1981 for the first three years of the IMF programme?

“I dare say, no country in the world has performed over this period to the extent of the targets set in 1981 before the recession had begun to run its course. Jamaica was no exception. We, too, failed to achieve some of our targets which we set in 1981 before the recession commenced to hurt. Nonetheless, I want to examine the extent to which we did not achieve some of the levels of performance targeted.

“Notwithstanding the fact that no country succeeded in meeting all the targets, I want to compare our level of performance [for each major target set in 1981] because it tells a most revealing story which will not only provide a deeper understanding of what happened in the Jamaican economy, but will place the economic strategies being pursued in a proper perspective.

“In each case, it was found that there was a shortfall between target and performance. We must ask ourselves if the reason for the shortfalls was a wrong strategy or not; and if not, then what other factors could have been responsible?

“I [earlier] demonstrated that the strategies employed by Government effected an economic turnaround (between 1981 and '83). This was one of the targets of economic recovery. In this period the net international reserves were the only area of the economy that continued to fall. This was traced directly to the drastic fall in bauxite exports from 12 million tonnes in 1980 to 7.6 million tonnes in 1983. In turn, this dramatic reduction in bauxite exports can be linked directly to the stinging impact of the international recession.

“(But) what if bauxite production had not fallen? What if production had continued at the level of the targets set in 1981 for 12 to 13 million tonnes per annum?

“I asked the National Planning Agency to calculate the impact on the major economic indicators if bauxite production had been at the target level during 1981 to 1983, in order to determine what this would have meant to achievement of the IMF targets.

“The results showed that not one IMF test would have been failed; no devaluation would have been necessary; no intense credit restrictions. In short, the economy would have been on a smooth course of gradual recovery.

“The shortfall in achieving the level of performance set by the IMF agreement can be identified, therefore, as a result of the fall of bauxite production to almost one-half of the 1980 level. This in turn was as a result of the international recession, not the policy of the Government of Jamaica.”

Table 2

Bauxite Exports: 1980 — 1989

Bauxite and Bauxite equivalent of Alumina

Bauxite mined and processed into Alumina

Year Volume 000 tonnes

1980 11,987.3

1981 11,606.0

1982 8,334.4

1983 7,692.8

1984 8,734.9

1985 6,239.3

1986 6,963.9

1987 7,659.9

1988 7,408.4

1989 9,394.8

Total 86,322.5

Source: Jamaica Bauxite Institute

A definitive statement on the singular damage created by the global recession through the collapse of the bauxite/alumina market came from a benchmark study done by Paul Chen Young and Associates on the macro effects in the fallout in the bauxite/alumina sector on the Structural Adjustment Programme 1981-1985. The question was what would be the annual economic growth rate if bauxite production had not collapsed? The question was answered with finality:

Growth would have been

8% in 1982 as against 1%

4% in 1983 “ “ 2%

5% in 1984 “ “ -0.4%

10% in 1985 “ “ -4.7%

The difficulties of the first half of the 1980s posed an exceptional challenge. The situation worsened dramatically by 1985, with the demand for aluminium worldwide sharply deteriorating even further. The market for cars, planes, cans for containers and other items made from aluminium plunged deeper to lower levels. The consequence was a further fallout which so devastated production that the unthinkable happened — almost all the mining operations in Jamaica ceased and plants were shut down.

Total production in 1985 and 1986 were a bit more than half the production level of 1980, in each year. (See Table 2). These were the low points of the decade.

Dr Carlton Davis, executive director of the Jamaica Bauxite Institute, reported on the collapse that was taking place, in his book the Jamaica Bauxite and Alumina Industry.

“Between December 1984 and September 1985 the following were experienced:

Reynolds (mines) closed their bauxite operations in December 1984 after 32 years of continuous operations, thereby putting some 2.5 million tonnes of bauxite out of production.

Alcoa unilaterally closed the 500,000-tonnes-per-annum alumina plant in February 1985.

Alpart closed their alumina plant, then operating at 600,000 tonnes per annum, although it had a nominal capacity of 1,150,000 tonnes.

These closures resulted from:

(a) the international market situation for alumina, especially, and aluminium;

(b) the price of oil; and

(c) the level of the Jamaica levy vis--vis others.”

In the critical year of 1985 the industry was at a point of collapse, producing only a paltry 2.9 million tonnes of bauxite. The US General Service Administration (GSA) purchased 3.6 million tonnes of Jamaican bauxite for the US strategic stockpile, increasing local production to 6.5 million tonnes for the year. Although this amount was the lowest production for the decade, it was sufficient for the industry and the economy to barely survive. Without this goodwill purchase at that time by the USA, at the request of Prime Minister Edward Seaga, the industry and economy would have been doomed.

The economy could no longer produce the results to achieve the targets of the IMF programme. Failure to achieve the set targets would lead to applications to the IMF for waivers. These would be granted on the basis of replacement by new Stand-By Arrangements, with new targets which were sometimes even more difficult. The process was disruptive to the operation of the economy. Delays in approval triggered rumours that the new Stand-By Arrangements would not be granted. These rumours, along with de facto shortages of foreign exchange, fuelled the black market. The Jamaican dollar depreciated from J$0.56 cents to J$0.20 cents to US$1.00 over the 1981 to 1985 period, heightening the price of food and other commodities critical to the lives of the poor, as well as increasing the cost of raw materials for production.

The fiscal gap of $453 million was the balance after all other usual adjustments were made. This included severe expenditure cuts which, over a two-year period, accounted for a 20 per cent reduction in staff by 27,300 posts from the full complement of 134,000 public sector-paid employees.

This was the most painful adjustment required by the IMF, but if it was not agreed the IMF deal would collapse as was the case with the Government of Michael Manley. The adjustment would leave the country helpless. The adjustment, however, would wipe out most of the financial deficit facing the country and leave it free to grow. This turning point gave the country the chance that it needed to recover.

The recovery process moved rapidly thereafter, particularly with the agreement which the Government secured from the IMF eventually to peg the exchange rate at J$5.50 to US$1.00. This was the trigger point for which the Government was awaiting. In 1986 growth appeared — the resurgence of tourism and the very substantial growth of garment manufacturing responded.

The way was now open finally for recovery, but Hurricane Gilbert arrived to change that path. It was the worst hurricane disaster of the century. It wreaked havoc on the country, smashing thousands of homes, particularly of the poor; commerce could not function for industry and tourism electricity was scarce; agriculture was at a halt; telephone communication was impossible. From the outside it seemed that this was insurmountable.

But the people of Jamaica who responded to leadership, were, with the great assistance of friendly countries, ready to start the recovery which was now unmistakenly underway. In three months there were no more streets with fallen electric and telephone poles, no garbage on the streets, shops and industries reopened, hotels could get back to their feet, and farmers dug their way back to production.

But in early 1989 another general election changed the Government and the tragedy of dysfunction resumed — the rate of exchange was no longer fixed; it could float again and it moved rapidly. The financial system faced a serious collapse in a short time until only four of 44 financial institutions were left standing. The programme faced a new meltdown. This was another appearance of the development fatigue which Jamaica had faced so often.

But the result of the analysis of the three models of economic development was that two failed — the incentive capitalist systems, and the socialist model with no reduction and a pegged exchange rate to protect the poor from high prices.

This chronology of national policies does not include those on a minor scale dealing with good and bad policies. Those which are outlined here are national policies which are broad and have wide impact, sometimes for a long period.

The fifties and sixties used mainstream economic policies which proved to be helpful in providing job creation on a satisfactory scale but, despite an improved movement of labour force statistics, made an inadequate impression.

The seventies speaks for itself. The alien model of socialism which was introduced by the Government of the 1970s was rejected by the Jamaican people as incompatible with Jamaican culture. It devastated the economy, politicised the system of government, eliminated production incentives and created hateful rivalries which reached levels of crimes that still exist today. It provided the worst level of job creation ever.

The eighties endured the worst test of ability to bear intensive crisis — created by the second-worst deficit in the world — and unbearable hardships. Thirdly, the worst hurricane in this century created damage to the entire country. The decade bore all these crises and ended up with a “revived system of acceptable policies” and better human relations. These positives made the 1980s the most acceptable model of development, although not perfect.

The search still continues, however, to find the way to bring the underclass into a prosperous life so that they, too, can become first class citizens.

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