New Rules

Gerard Johnson

The Caribbean offers a fascinating case study of the benefits and costs of independence. Islands that remained colonies sit side by side with those that opted for independence, or had it thrust upon them.  Islands like Turks & Caicos boast stronger stability, infrastructure and living standards, all guaranteed by the unsevered navel strings connecting them to the colonial mother.

In the 1960s, we, the independent nations of the Caribbean, enjoyed an immediate boom as expansionist policies powered them forward. We were also beneficiaries of the Cold War politics. However, growth soon faltered and almost all faced the eventual consequences of fat public bureaucracies and generous social handouts. There were significant internal political struggles, however, in almost all cases, the economic wakeup call came from shocks hitting us from outside. 

We welcomed the same confused promises that populist leaders used to gain power around the world. They told us what we wanted to hear and handed out the goodies we wanted. Independence from the white colonial masters meant we could finally spend money on ourselves instead of sending it off to London at the end of each year. Free, universal education was an essential reform and the new roads and ports were vital. The bugbear was that fiscal revenue couldn’t keep up. We were told not to worry since the money being borrowed to pay for all the infrastructure and expanded social services would generate its own revenue. Of course, this didn’t happen. We were not very good at making sure we only borrowed money for stuff that would actually generate enough revenue soon enough to service the debt. 

Importantly, however, even if we had invested in the right things at the right time, we were probably doomed anyway by our tiny size, where we are and what we export.

We are small, isolated, exposed democracies that would starve to death if the ships bringing food, clothing and energy were to stop coming. Sudden changes in world prices cause market fluctuations in large countries. However, in the micro states of the Caribbean, the same changes bring disaster. Oil is the most obvious example. Since the first OPEC-inspired price hikes of the 1970s we have seen successive price shocks drain our foreign exchange reserves and explode our prices. Since most Caribbean countries have fixed exchange rates, each shock meant we had no choice but to compress wages and public expenditure. For the few with floating rates the adjustment took the form of unrelenting devaluations, high inflation and high interest rates. The negative impact on growth is obvious.

Our economies are too small to drive our own growth, so we have to sell our products on international markets to move forward. We all grew up hearing successive leaders call for new and better exports to replace the old worn out ones. Sugar and bananas had to give way to manufactured exports and tourism. The transition has been long and bumpy. In many senses it has never really happened. We are still searching for the economic activity that earns enough foreign exchange to pay for our insatiable appetite for imports—and that creates good jobs. Good jobs are those that require sufficient productivity to pay decent wages and that offer the chance to climb a career ladder. Perhaps the high-tech revolution offers some hope for micro markets whose population speaks English and believes in the rule of law. Mainly foreigners have this sort of technology and market access. Are we ready to embrace them?

Our productivity has been flat for decades. Places like Japan increase production by steadily reducing how much inputs they need. We increase our output by using more inputs. An unheralded threat has arrived for several Caribbean countries. Populations have started to fall and that means that the size of the workforce is dropping while the number of retired people is rising. The scope for increasing output by putting more people to work is over. If our productivity continues to be flat, then as our workforce gets smaller we will inevitably get poorer. The current economic model is defunct and we need to switch to higher productivity activities, and hurry up about it! 

We now understand why our colonial mother was so willing to let us go. Each year we anxiously add up the foreign exchange we sent abroad to pay for our energy, food and transport; and we compare it with the meagre FX we’ve been able to bring home from tourism, mining, financial services and now BPO. And, each year we come up short. The only way to find the missing FX to pay for our high imports is to pray that our diaspora keeps sending money transfers and to find new ways to encourage foreigners to keep bringing in FX to invest in projects.

There is another exogenous risk we face: international squabbles. Policy struggles between major powers have interrupted aluminium markets and have thrown our economies into a tailspin. The confrontation between tax dodgers in developed countries and their governments has compromised our financial services sectors. The conflict between terrorists and western countries has triggered blocks on cash transactions and threatened our access to international banking services for legitimate cross-border business. God forbid that terrorists bring their war against the West to our shores. 

An increasingly dangerous feature of our tiny countries is their extreme vulnerability to natural disasters. Last year, Hurricane Maria reminded everyone of the fate we dodge each year. Little Dominica suffered massive devastation that was estimated at over 200% of GDP! The cost of rebuilding all our infrastructure to withstand massive storms is astronomical and our governments are broke. One monster storm can wipe out decades of investment; and yet, we are not aggressive in enforcing building codes, creating contingency funds and transferring risk. The current anguish in the Eastern Caribbean over a medical school moving from a highly exposed country to a safer one sends a frightening message to our exposed micro states.  Our very survival depends on enlightened leadership to give us a fighting chance against this inevitable goliath.

In conclusion: the future of our tiny, island countries is unclear. The risks are evident but our ability to manage them is not. Poor leadership has caused us to lose several decades of near zero growth and no improvement in productivity. There is little we can do to insulate ourselves from the fallout from international political squabbles and economic shocks. Climate change promises stronger and more frequent disasters, while our traditional ways of dealing with it is ineffective. We are desperate for enlightened leadership. The recent experiences of Jamaica and Barbados tell a useful tale. 

Jamaica’s leaders took it to the brink of disaster. Humbled by desperation, they accepted the IMF’s most draconian economic stabilization programme in current world history. Five years later, they have managed to drag public debt down from about 150% of GDP to below 100% but they still have a long way to go. Their bonds remain at junk status and public spending will have to remain under wraps for at least eight more years. The price paid by the incumbent political party was that it lost the next elections by a nose. This is the price of having chosen democracy over totalitarianism. The party that took over the reins of government in 2016, gratefully, has continued the austerity programme, but they realise that their political survival demands growth. No democratic administration can tell its people they have to suck salt for a generation and expect to be re-elected. The tricky question is how to invest in growth while clawing your way back to solvency. Jamaicans have yet to find a solution, but they seem to have learnt from the past mistakes of investing in things that will not generate enough growth to justify the investment; closing one eye to endemic corruption; and eschewing foreign investment that dwarfs local elites.

Barbados’ leaders chose the opposite path to the famous 1993 policies of Prime Minister Sandiford that managed a massive, exogenous oil shock by compressing wages and spending. Twenty years after Sandiford’s heroic stand, Jamaica followed his lead and decided to face the consequences of poor economic management. Jamaica chose to stop the crazy public deficits, but at the same moment Barbados opted to expand public expenditure and increase its debt. The eventual upshot was a wipe out in the general elections. The public did not reward them for using borrowed money to keep on spending. Now Barbados is facing the arduous task of climbing slowly out of the hole it deliberately dug for itself. As it does so, it will have to keep one eye on the looming risks from abroad. And it will have to remember the lesson from Jamaica: even bankrupt people need hope.

The independent Caribbean is growing up. Some wish we’d found a way to remain linked to the colonial mother. Others prefer the bumpy road of our political independence. The physical infrastructure may not be as good as it would probably have been, but perhaps there is an increasing sense of pride in our growing ability to go it alone. We are not yet economically independent, but we now understand that it is a necessary part of being politically independent.  

Our economic management is getting better. We have been around long enough to feel the consequences of poor leadership and we are starting to recognize what good leadership looks like.  That is not to say that we are out of the woods. The Barbadians ousted the party that led them into a debt trap, but the Jamaicans dumped the party that bit the bullet. In any case, the new leaders need to look beyond balancing the books. We need hope and direction. It is a cold, hard world but we have no choice but to carve out our place it in. If we get it wrong, then we may be facing more lost decades. If we get it right, then we could give the next generation something real to celebrate on Independence Day. In any case, the only way for us is forward since our colonial mother has made it very clear that she has absolutely no desire for us to return “home”, in fact, she doesn’t even want us to visit.


Image credit: Erin McLeod. Plane window.

Gerard Johnson has extensive experience in economic development throughout Latin American and the Caribbean. He successfully navigated the complex space occupied by multilateral development finance institutions; bringing record levels of finance and brokering reforms that changed the economic and social landscape. In the course of his career he has been a senior policy advisor to the Minister of Finance and the Public Service in Jamaica; Regional Advisor to SEAF, a private equity fund that boosts growth for selected companies;  General Manager at Inter-American Development Bank: managed the bank’s Caribbean program – the largest development program for lending to sovereign states in the region and as Country Representative led the IDB’s programs in Haiti, Guatemala, and Jamaica.

 

 

 

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