FT Alphaville has previously argued that Jamaica is one of the most interesting economic stories of the past decade. We’re glad to see that a few big-name economists agree.
Brookings published a paper on Thursday titled Sustained Debt Reduction: The Jamaica Exception, authored by the IMF’s Serkan Arslanalp, Berkeley’s Barry Eichengreen and Stanford’s Peter Henry. It’s absolutely fascinating.
Our mainFT colleague Soumaya Keynes is planning to columnise on the theme later this week, but given our above-average interest in Jamaica we wanted write a quick(ish) post on the paper. Here’s the basic gist, with FTAV’s emphasis below:
Sharp, sustained reductions in public debt are exceptional, especially recently. We know this because public-debt-to-GDP ratios have been trending up in advanced countries, emerging markets, and developing countries alike. Governments have borrowed in response to financial crises, pandemics, wars and other emergencies, resulting in higher debt ratios. But only in rare instances have they succeeded in bringing those higher debt ratios back down once the emergency passed.
. . . Against this gloomy backdrop, it is uplifting to consider cases where countries have succeeded in significantly reducing their debt ratios. In addition to their morale-building effect, such cases may help to illuminate the economic and political conditions that facilitate debt consolidation. Jamaica is such a case.
The government reduced its debt from 144 percent of GDP at the end of 2012 to 72 percent in 2023.3 Jamaica cut its debt ratio in half despite averaging annual real growth of only ¾ percent over the period. It did so despite vulnerability to hurricanes, floods, droughts, earthquakes, storm surges and landslides: Jamaica is ranked as the third most disaster-prone country in the world according to the Global Facility for Disaster Reduction and Recovery. It did so despite a COVID-19 pandemic that disrupted tourism and mandated exceptional increases in public spending. Yet, despite this exogenously prompted deviation from plan, the IMF’s baseline projection, in its 2023 Article IV report, forecasts a further fall in debt/GDP to less than 60 percent over the next four years.
The paper explores why Jamaica — which has spent most of its time as an independent country in some kind of IMF programme — seemingly turned into a Caribbean Germany sometime around 2013.
As the highlighted bit above indicates, it was largely because of Herculean fiscal efforts, rather than growing the economy — historically the main way countries have managed such dramatic debt reductions. Because of its debts Jamaica has run pretty chunky primary (pre-interest payments) budget surpluses. But crucially it this time it stayed the course, and kept them roughly an eye-popping 7 per cent level for much of the past decade.
And yes, economic growth has remained disappointing, but this hasn’t really been a classic case of sudden draconian austerity strangling the country’s economic vim. It’s important to remember that Jamaica has economically struggled for generations. At one point real GDP contracted for 13 straight years, as Henry noted in the subsequent Brookings discussion on Thursday. At least now it is still mostly growing.
Most importantly, both poverty rates and unemployment have fallen sharply over the past decade, despite the cross-party fiscal rectitude.
So why was Jamaica able to keep running such high primary budget surpluses across two different administrations? Arslanalp, Eichengreen and Henry argue it mainly boils down to two interlocking factors:
Firstly, the adoption of strong but flexible fiscal rules:
The Fiscal Responsibility Framework introduced in 2010 required the Minister of Finance to take measures to reduce, by the end of fiscal year 2016, the fiscal balance to nil, the debt/GDP ratio to 100 percent, and public-sector wages as a share of GDP to 9 percent. The framework was augmented in 2014 to require the minister, by the end of fiscal year 2018, to specify a multi-year fiscal trajectory to bring the debt/GDP ratio down to 60 percent by 2026. The framework included an escape clause to be invoked in the event of large shocks. This prevented the rule from being so rigid, in a volatile macroeconomic environment, as to lack credibility. At the same time, it included clear criteria and independent oversight to prevent opportunistic use.
Secondly, by building on decades of efforts on consensus-building aimed at limiting political violence to forge a broad national consensus on the course ahead:
In 2013, a series of ongoing discussions in the National Partnership Council, a social dialogue collaboration involving the government, parliamentary opposition, and social partners, culminated in the Partnership for Jamaica Agreement on consensus policies in four areas, first of which was fiscal reform and consolidation. The Partnership for Jamaica Agreement fostered a common belief that the burden of fiscal adjustment would be widely and fairly shared. It supported the creation and ensured broad national acceptance of the Economic Programme Oversight Committee (EPOC) to monitor and publicly report on fiscal policies and outcomes, and to provide independent verification that all parties kept to the terms of their agreement.
. . . A sustained lower level of polarization made for policy continuity and continued debt reduction when a different political party took power in 2016. For the first time in decades, a new government did not reverse the policies of its predecessor. By creating a sense of fair burden sharing, Jamaica’s organized process of consultation thus sustained public support for the operation of the country’s fiscal rules, culminating in March 2023 with the establishment of a permanent, independent Fiscal Commission.
Alphaville explored the subject in depth across two big posts back in 2020, the first looking at how Jamaica found itself on the cusp of a political-financial-economic abyss in 2012, and the second looking at how it tiptoed back from it.
From FTAV’s past conversations with Jamaicans across the political and socio-economic spectrum we’d guess that the main explanation for Jamaica’s debt turnaround was the ephemeral concept of “ownership”.
Basically, this was seen as something Jamaicans themselves had to do to finally rid themselves of a massive overhang of debt that had built up and blighted development over many decades, rather than something that was purely imposed by the IMF and its DC sidekicks.
Nothing sums up the difference more than these two photos. The first is an infamous snap of Indonesia’s Suharto signing an IMF programme under the stern gaze of the Fund’s then-managing director Michel Camdessus, and the second Jamaican prime minister Andrew Holness together with then-IMF mission chief Uma Ramakrishnan.
So can Jamaica’s example be replicated elsewhere, as both Christine Lagarde and her successor as IMF managing director Kristalina Georgieva have hopefully suggested?
Perhaps the first component, but not the second one, the paper suggests.
The lessons from Jamaica’s experience with fiscal rules, we suggest, generalize to other countries. Jamaican officials adopted simple numerical targets for the debt-to-GDP ratio, with dates attached. The finance minister was tasked with formulating a multi-year budget detailing how the debt ratio would get from here to there. Parliament strengthened the governance of state-owned enterprises and public bodies to avoid cost overruns. The fiscal rules included a state-of-the-art escape clause that balanced flexibility with credibility. And an auditor general whose independence was constitutionally guaranteed provided outside verification of the government’s claims. These lessons can be adopted elsewhere.
The other element of the recipe, encompassing partnership agreements, is more difficult to replicate. EPOC and the Partnership for Jamaica Agreement that launched and kept Jamaica on the path of debt reduction were products of a distinctive national learning process that began a third of a century earlier with the Electoral Advisory Commission, whose structures and processes were transferred to other domains, including, eventually, the budgetary. The decision to start down this road reflected the country’s history of race and class division and political violence, away from which leaders and society turned at the end of the 1970s when the country reached the political brink. Other heavily-indebted countries have different political histories. They do not all face the same dire political circumstances. Nor is there any guarantee that their leaders and publics will respond in the same way.
Unfortunately, the first doesn’t realistically work without the second. And as long as Jamaica’s economy remain sluggish this will be a turnaround story with asterisks. Nor does this obviously mean that other debt-addled countries should always go for unthinking, proscriptive, hardcore austerity.
Still, it’s a rare positive story. As professor Henry previously told FTAV: “It shows that countries actually have agency. If Jamaica can do this, my goodness, everyone can.”
Source: Economy - ft.com
