Jamaica - Role of Government in the Economy

Jamaica - Role of Government in the Economy

The government's first attempts to intervene in the economy occurred during early self-government in the form of national, macroeconomic planning that stated only the broadest of economic objectives. The first such government plan was the "Ten-Year Plan of Development," issued in 1947 and revised in 1951. Industrialization, however, was eventually spurred on more by industrial incentive legislation than by macroeconomic planning.

Legislation during the first two decades after World War II changed the pace of industrialization and the structure of the economy. Generous fiscal incentives--such as tax holidays, accelerated depreciation rates, duty-free importation of raw materials, tariff protection, and subsidized factory space--served to emphasize industry and services over agriculture, particularly manufacturing, mining, and tourism. The manufacturing sector grew as a result of important government acts, such as the Pioneer Industries Law of 1949, the Industrial Incentives Law of 1956, and the Export Industries Law of 1956. Investment in the bauxite and alumina sector was encouraged by the Bauxite and Alumina Act of 1950. The Hotel Aid Law of 1944 provided a similar catalyst to investment in the tourism sector.

During the first decade of independence, government policies generally continued the efforts of the 1950s to lure investment in mining, manufacturing, tourism and, by the 1960s, in banking and insurance. A large number of foreign corporations, mostly from the United States, were established in Jamaica as a result of the "industrialization by invitation" strategy that was based on the Puerto Rican growth model of development.

Government involvement in the economy increased significantly from 1972 to 1980, establishing one of the largest public sectors in the Caribbean. In 1974 Prime Minister Michael Manley declared his government socialist and announced its intention of controlling the "commanding heights of the economy." Although the economy was nominally socialist, its production patterns during the 1970s were actually mixed. Private enterprise dominated in nearly every sector and the "right to private property" was maintained. Internationally, the government led the call for a New International Economic Order in the world's economic system.

Manley's first term as prime minister (1972-76) was much more populist and nationalist in orientation than his second term. Manley advocated a "third path" development strategy that viewed Jamaica as a nonaligned, independent member of the Third World. This approach rejected both the Puerto Rican and Cuban models of development and sought to reverse democratically the inequitable distribution of wealth in Jamaica. Policies included the creation of rural health schemes, food subsidies, literacy campaigns, free secondary and higher education, a national minimum wage, equal pay for women, sugar cooperatives, and rent and price controls.

Between 1972 and 1976, the Manley government carried out a small agrarian reform program, Project Land Lease, that sought to alleviate high unemployment by introducing job creation schemes and redistributing concentrated land holdings. The reform process included the creation of agricultural cooperatives, including the formation of a Sugar Workers Cooperative Council, an important actor in the country's political economy. Seeking to reduce dependency on foreign investment, the government also nationalized with compensation all of the foreign-owned utility companies (electricity, telephone, and public transportation companies). The government also purchased sugar factories and the foreign-owned Barclays Bank. The new role of government in the economy was financed through deficit spending and a greatly increased levy on bauxite production; the latter move quickly brought the Manley government into conflict with the American and Canadian aluminum companies.

The bauxite conflict involved Jamaica's abrogation of its agreements with international aluminum companies in 1974. The dispute resulted from Jamaica's decision to impose a new 7.5- percent bauxite levy in order to gain greater national benefits from the industry and offset the increased cost of imported oil. This measure had the broad, and perhaps overwhelming, support of nearly all sectors of Jamaican society. From January 1974 to March 1975, the bauxite levy provided close to J$ 200 million, increasing bauxite revenues sevenfold in the first fiscal year of the tax (see table __, Selected Movements in the Jamaican Exchange Rate, Appendix A). The new bauxite levy was the most important and dramatic example of expanded government involvement in the economy.

The Manley government also began negotiating with the aluminum companies over acquisition of a significant equity position in their Jamaican operations (albeit a smaller share than that sought in bauxite production). Between 1974 and 1978, Jamaica and the international companies concluded agreements that gave Jamaica a 51-percent stake in both Kaiser and Reynolds' local operations, a 6-percent share of Alcoa's, and 7 percent of Alcan's. Revere Aluminum and the government could not agree on a price, resulting in Revere's withdrawal from Jamaica. The government also purchased much agricultural land surrounding the bauxite mines. Throughout the proceedings, the government was able to acquire the companies' landholdings at book value.

An important element of Jamaica's bauxite policy during the 1970s was the formation of the eleven-member International Bauxite Association (IBA). Modelled on the Organization of Petroleum Exporting Countries (OPEC), by 1976 the IBA controlled about 70 percent of world bauxite production and 90 percent of world bauxite trade from its Kingston headquarters. The greater availability of bauxite compared with oil, however, and the reluctance of other key members of the IBA to impose taxes equivalent to those of Jamaica reduced the IBA's effectiveness.

Although extremely popular among most social classes in Jamaica, Manley's bauxite levy produced mixed results. In the short run, the policy provided significant revenues for the government's social programs and generated scarce foreign exchange for Jamaica's businessmen; it alienated the foreign companies, however, and encouraged them to develop new resources in Brazil, Australia, and Guinea during the 1970s and 1980s. A long-term decline in new investment in Jamaican bauxite caused a fall in the country's share of world output.

Manley's second term (1976-80) was characterized by protracted attempts to come to terms with the IMF for economic support. As the economy gradually deteriorated and international reserves had dwindled during Manley's first term, the government had been forced to approach the IMF for assistance with balance-of-payments support. Strapped with an ailing economy, the Jamaican government agreed to an IMF stabilization program a few months before the 1976 election. The IMF agreed to make a loan to Jamaica if the government undertook a large currency devaluation, instituted a wage freeze, and made a greater effort to balance the budget. After the election, however, Manley rejected the IMF recommendations, citing the harsh measures demanded by the Fund in return for balance-of-payments support and arguing that the IMF conditionalities constituted interference in the internal affairs of the country.

The government then produced an austerity plan, the Emergency Production Plan of 1977, that emphasized self-reliance and agricultural development. The plan included provisions for establishing a two-tier exchange system and devaluing the Jamaican dollar. Although the plan did not conform to IMF demands, it laid the groundwork for an eventual reconciliation between Manley and the IMF. In May 1977, IMF negotiators arrived in Jamaica to arrange a two-year Standby Agreement that was to provide Jamaica with a much needed US$75 million. The IMF suspended the Standby Agreement in December, however, because Jamaica had failed to meet one of the targets monitored by the IMF on a quarterly basis.

In January 1978, the IMF was once again invited to Jamaica to negotiate a three-year Extended Fund Facility (EFF) in the amount of US$240 million. In order to qualify for the EFF, Jamaica devalued its two-tiered currency by 13.6 percent (basic rate) and by 5.2 percent (special rate). Under the terms of a rigid May 1978 agreement, the government reunified and devalued its currency, agreed to place the currency on a crawling-peg system of regular devaluations during the next year, imposed new taxes on consumer goods, reduced government expenditures, increased charges for government services, lifted price controls, guaranteed profits for private firms, set a ceiling on wage increases, and limited the activities of several state-owned corporations.

The IMF program resulted in exacerbated political and social tensions. Although Jamaica generally followed the terms of the agreement, inflation soared, real wages fell, foreign reserves collapsed, and the trade deficit rose, all of which were expected as part of the short-term adjustment to stabilization policies. The decline in living standards caused by the agreement increased unrest, violence, and opposition protests.

Because Jamaica had complied with its policies, the IMF increased its lending to Jamaica in June 1979. The new limits for the EFF were set at US$428 million to cover the costs of severe floods and the increased price of oil, which skyrocketed again during 1979. Despite the new funding, IMF-Jamaican relations soured in late 1979 as the economy continued to perform poorly even though the island followed the Fund's basic guidelines. Jamaica continued to negotiate with the IMF until March 1980, when Manley broke off negotiations and outlined a new, non-IMF path to economic recovery. In the subsequent election of October 1980, the PNP carried only 41 percent of the vote, an apparent repudiation of Manley's policies of initially seeking IMF support and later imposing severe austerity measures on the population.

Seaga's October 1980 election marked the beginning of the second major shift in economic policy since independence. Seaga's JLP was quick to put virtually all of the blame on Manley for the steep economic decline of the previous decade. The Seaga government, a close ally of the newly elected administration of United States president Ronald Reagan, also favored a supply-side approach to economic management. Provided with unprecedented external financing from multilateral and bilateral lending agencies, the Seaga government embarked on a structural adjustment program under the specific guidelines of the IMF and the World Bank.

The Seaga government changed the general outlook of the Jamaican government by the structural adjustment of the economy, stressing private-sector initiative and market mechanisms. Determined to reverse the export bias of the manufacturing industry, the government refocused exports on "third country markets" (other than the domestic or Caricom markets), particularly the United States, using foreign exchange export incentives to increase trade. This strategy coincided with the duty-free importation of goods destined to the United States market covered under the Caribbean Basin Initiative (CBI--see Appendix D).

Basing its policies on comparative advantage studies, in the early 1980s the government announced seven priority subsectors where investment and production would be emphasized and foreign exchange would be focused: garments and sewn products, footwear and leather products, construction materials, food and agro-industry, automotive products, furniture, electronics, and electrical products. Primary emphasis was placed on light or value-added manufacturing that utilized Jamaica's comparative advantage of cheap labor through production-sharing with American or Asian companies. The new industrial push also entailed a variety of physical infrastructure improvements and projects. For example, the government used World Bank loans to build factory space in Export Free Zones in Kingston, Montego Bay, and later in Spanish Town, where the bulk of the new export-oriented industries operated. New garment and apparel factories were generally referred to as 807 program factories, (see Glossary), named after the corresponding United States Tariff Schedule number that allowed these exports preferential access. Light manufacturing factories were the busiest, and garments and other sewn products in particular enjoyed the most rapid growth of all priority subsectors.

Structural adjustment policies were also aimed at reducing state ownership in directly productive enterprises, such as hotels, which were divested. Although the JLP government sought similar policies of divestment in oil refining and bauxite mining, the abrupt decisions of large foreign companies to leave Jamaica limited Seaga's flexibility. For example, when the Exxon Corporation decided to sell its Jamaican refinery, the Seaga government felt obliged to buy it so the country could refine oil locally and continue a small reexport program. A similar situation arose in the early to mid-1980s, when most of the major bauxite companies on the island decided to close operations or leave Jamaica, despite the government's pro-foreign investment stance. In the case of the closing and sale of the Alpart plant in Clarendon, the government once again bought the enterprise in order to maintain a necessary level of production and exports. In 1987 a new round of divestment of state enterprises was announced, including the National Commercial Bank and branches of the national media. The government decided to retain ownership in utilities, however.

Beyond the outright buying and selling of private enterprises, the structural adjustment also entailed promoting investment, finding new markets for nontraditional products, and improving financing for exporters. The attempt to achieve these economic goals led to important organizational changes in government agencies, most notably the establishment of the Jamaican National Investment Promotion Limited (JNIP). The JNIP's task was to lure more foreign investment to Jamaica while promoting the island's newly developed exports through offices in the Caribbean, North America, Europe, and Asia. The high-profile offices were established to act as a one-stop shop for foreign investors, who were often dismayed by Jamaican bureaucracy. Although the JNIP was able to solicit new investment during the 1980s, these gains could not replace the aggregate investment losses represented by the departure of major oil and mining companies.

The government also sought to improve available financing for exporters. In 1981 the government established the Export Development Fund to troubleshoot export problems and strengthen the budget and promotional role of the Jamaica National Export Corporation. In 1986 the government disbanded the Jamaica Export Credit Insurance Company and replaced it by the more sophisticated Jamaican Export-Import Bank, which was expected to give more effective support to exporters.

Privatization was the government's focus in agriculture as well. Several large foreign companies were invited to the island to manage previously government-run activities, especially in the sugar industry. In addition, a special, high-profile government agency, Agro-21, established as part of the prime minister's office, was created to develop new agricultural products and to modernize farming methods. Like the JNIP, Agro-21 had mixed success; some subsectors such as floral exports and inland fisheries flourished, whereas Agro-21's largest endeavor, the Spring Plains Project had not, as of 1987, proved successful.

The Seaga government also pursued more orthodox fiscal and monetary policies in attempts to retain access to external financing under structural adjustment lending. On the fiscal side, the government attempted to reduce budget deficits primarily through public sector lay-offs and divestment of enterprises, and secondarily through ad hoc sales taxes and a comprehensive tax reform. Further policies included the elimination of food subsidies and other price controls, increased public school fees and a reestablishment of university tuition, and a gradual reduction in quantitative restrictions on imports. Monetary policy was characterized by a tight control of the money supply. Although emphasis was placed on savings to stir investment, local investment was hindered by relatively high interest rates. Despite orthodox policies, deficits remained relatively large until 1986, when national accounts began to improve.

The Seaga government's structural adjustment and economic reform measures were only partially successful by the end of 1986. On the positive side, the virtual completion of the structural adjustment process had increased confidence in the economy. Decreased oil prices and some improvement in the bauxite sector spurred the economy to grow once again in 1986. At the same time, however, it was evident that there would be no easy recovery from the deep recession of the early 1980s. In the late 1980s, debt, unemployment, and unequal distribution of wealth continued to be major economic problems facing Jamaica. As had happened with Manley's policies, Seaga's economic policies were offset by adverse trends in the international economy, especially commodity prices. Seaga also discovered that the opposition political forces and the country's economic legacy represented major constraints on establishing those policies. Neither Manley nor Seaga succeeded in transforming the economic structures of Jamaica to the extent proposed in their rhetoric. Finally, Seaga, too, came into some conflict with the IMF over both the pace and the nature of economic conditionalities as the political tide turned against the JLP in 1986. Although most pressures abated after a January 1987 IMF agreement, the JLP softened its strict orthodoxy of the early 1980s and focused economic policies on the electoral challenge ahead.

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