What have been the results from Jamaican fiscal policy?

by on May 7, 2013 at 4:25 am in Current Affairs, Economics | Permalink

Here is the update:

Over 40 years, Jamaica has been “rescued” on countless occasions. In the 1980s, the island became almost a byword for “structural adjustment”. Jamaica is one of the most indebted countries, spends twice as much on debt repayments as it does on education and health combined, and looks set to miss several millennium development goals (pdf). After four decades of austerity, the country has a few lessons for the likes of Greece, Portugal and Ireland.

The IMF has announced a $1bn (£650m) loan to “help” Jamaica meet huge debt payments due in coming years. As usual, the loan is to be accompanied by four years of austerity – precise details still pending, though a pay freeze, amounting to a 20% real-terms cut in wages, has been agreed.

This austerity will be applied to an economy that has effectively not grown since 1990. Huge debt has been a constant burden, with foreign debt payments of more than 20% of government revenue every year. When the financial crisis hit, the island was pushed into full-scale recession, before being pounded by Hurricane Sandy last year.

It seems nothing good is pending, economic growth is negative, and the debt to gdp ratio is 143%.  I take it we can agree this is one case where stimulating nominal demand will not bring much in the way of dividends?  Do we agree?  Last year the inflation rate was over ten percent and the (nominal) exchange rate hit new lows.  Do note the country ran a primary surplus last year and is attempting to move toward a balanced budget, so does anyone wish to pin this mess on fiscal austerity?  Or is their austerity and its observed failings a symptom of other policies which went badly wrong?

The measured government budget deficit is about 6.1% of gdp, but I suspect if you start the calculation in 1990, in “cyclically adjusted terms” Jamaica will appear to be running a huge surplus and a very tight fiscal policy.  After all, I do see unemployment estimates in the range of 13 to 14 percent.  Isn’t that a classic sign of deficient aggregate demand?

I do wonder if we can agree on this case.  And if we agree on this case, which more general lessons might we draw about the difficulty of inference from data…?

Addendum: This is a post about Jamaica and also about macroeconomic inference.  If you are tempted to write a post in response, criticizing me on the grounds that I am postulating a historical equivalence between the United States and Jamaica, or if you try to cover your tracks with semantics, by suggesting that I am “implying” such an equivalence, or implying some other mistake, or if you are committing any number of other fallacies or equivocations in response to this post, put on the dunce cap and go to the back of the class.  Please consider this a general warning to be attached to everything written by me on this site.

Extra: Ashok Rao offers good commentary on Jamaica (and India).

Max May 7, 2013 at 4:44 am

Jamaican debt is denominated in US dollars, not their own currency. This seems a critical point, and I’m confused at to why is does not feature strongly in your analysis.

Jeff May 7, 2013 at 7:21 am

I could be mistaken but I think one point he is trying to make is that there’s always some complicating factor, it just isn’t sufficient to rely on a single model (AD or anything else) and on that model alone with respect to any country. Models can be useful ways to think about facts, but they do not define facts. Or to put it another way, models are not Truth.

Gene May 7, 2013 at 7:34 am

Not *some* confounding factor, THE confounding factor.

Tyler Cowen May 7, 2013 at 7:56 am

Jeff puts it very well here, thanks. It is a point about observational equivalence, not a claim that Jamaica has a similar structure to…[fill in the blank], even if you might see some analogies.

Ashok Rao May 7, 2013 at 8:11 am

But the important factor in using one model or the other are the implications beyond an immediate set of statistics. In other words, certain models taken to their logical conclusion within a set of empirics might yield absurd results. This is good reason to believe that even if within the bounds of observable data the model holds, it’s not smart to make policy thereof.

For example, it is really difficult to square Jamaican inflation with a nominal demand shock (“suggested” by unemployment) with an upward sloping supply curve. Of course, AS could have severely shifted to the left over the same time period, but that far outweighs demand side problems.

Econometric evidence through the 2000s suggests that Jamaica was never too far above or below NAIRU (which has its own problems, but serves as good a frame of reference as any other). There does seem to be an inflation-unemployment tradeoff. This is explained by the inadequate sectoral rebalancing after liberalization (see agriculture and credit market data).

More here: http://bit.ly/YClTbd

Boonton May 7, 2013 at 8:23 am

That seems a straw man argument Jeff. No one advocates relying on a single model (no not even the fiendish Paul Krugman!) and very few argue that developing economies are suffering primarily from Keynesian recessions. What I think is important to note here is that while an AD centered model doesn’t get you far in coming up with solutions to make Jamacia better, nothing observed so far about Jamacia tells us there’s anything wrong with the AD model.

dan1111 May 7, 2013 at 9:01 am

What happens a lot, though, is that people use country X as a test case to prove or disprove a model–even though confounding factors may make it useless as a test case (at least with a sample size of one).

This is the kind of question for which you need thousands of independent test cases to say anything useful, but there are only a few hundred countries total, and their policies and outcomes are extremely interrelated.

Michael May 7, 2013 at 9:15 am

Agreed. There are countless examples of people using a single country (N=1) to make some specific point. Pre-crisis, Ireland was the Celtic Tiger that was meant to prove something or another about corporate tax rates. Latvia was mentioned disproportionately often over the last few years. Any discussing about any country’s debt ends up becoming, “the next Greece,” and to a lesser extent, Hong Kong, Singapore, etc. are brought up to make certain points about “economic freedom,” and what not.

There’s too much “let’s generalize based on one small country!”

derek May 7, 2013 at 9:41 am

Isn’t that meaningless? Jamaica couldn’t borrow in their own currency because no one, probably including their own people, would consider it worth anything. It isn’t themselves that would accept the borrowed money as payment, it is someone elsewhere. January they exported 153 million, imported 553 million.

Alexei Sadeski May 7, 2013 at 10:56 am

Correct.

Tyler Cowen May 7, 2013 at 5:32 am

Analogous to eurozone, exactly.

Ashok Rao May 7, 2013 at 6:06 am

I’m thinking Italy, more than anything else. EZ as a whole has different dynamics (as in Jamaica doesn’t have its Benelux).

Max May 7, 2013 at 6:10 am

No, analagous to individual countries in the eurozone – the distinction is important.

dan1111 May 7, 2013 at 6:33 am

Are you postulating a historical equivalence between MR commenters and dunces? Or at least implying the same?

anon May 7, 2013 at 6:50 am

I don’t think he’s talking to us … we’re not cool enough for grade school-taunting :)

Boonton May 7, 2013 at 6:34 am

It seems nothing good is pending, economic growth is negative, and the debt to gdp ratio is 143%. I take it we can agree this is one case where stimulating nominal demand will not bring much in the way of dividends?

It probably is difficult to stimulate demand in an economy that is very small and highly reliant trade, esp. imports. It’s very easy for demand to leak out into simply buying goods overseas.

A few other macro items to note:

1. Is it suffereing a recession of unemployed resources or not?

2. Does it borrow in its own currency or foreign currencies (US dollars or Euros)?

#1 isn’t clear to me, http://www.tradingeconomics.com/jamaica/inflation-cpi seems to indicate a pickup in inflation indicating an overheating economy. Stimulus wouldn’t do much in that case and if unemployment is high it’s likely due to structural problems.

http://www.tradingeconomics.com/jamaica/unemployment-rate seems to say the unemployment rate is a bit higher than ‘normal’ but it also seems to vary quite a bit and isn’t consistently reported.

#2 turns a country into what a state is in the US. Stimulus then amounts to asking private companies or individuals to try to stimulate the economy.

3. The fact that it’s chronically getting ‘bailed out’ indicates that to me you have less of a Keynesian problem and more of a Donald Trump problem, or actually not a problem. In the 90′s Trump would periodically threaten his creditors with bankruptcy to force them to renegotiate his debt to better terms with him. If that’s the case Jamacia may be less in a crises and simply just the way it does business.

prior_approval May 7, 2013 at 6:58 am

‘or implying some other mistake’

Look upon my infallibility, ye foolish, and despair!

Aaron May 7, 2013 at 10:57 am

“Implying,” not “making.”

prior_approval May 7, 2013 at 2:35 pm

Interesting distinction – the full text between the commas is ‘or implying some other mistake,’ which certainly suggests that anyone ‘implying’ a mistake will not be tolerated. Note that my comment is not directed towards making a mistake, nor implying any mistake in any particular case.

It is directed to the idea that a mistake cannot be implied, along with a number of other things which deserve a dunce cap, leading to this conclusion – ‘Please consider this a general warning to be attached to everything written by me on this site.’

In other words, the gloves have come off when it comes to anyone pointing out anything which Prof. Cowen does not want pointed out, and this includes the implication of a mistake. And like the poetic reference, I’m sure this belief that any implied mistake is unacceptable stands on two vast legs of stone.

Though I do think a certain segment of the economics/policy advice spectrum has become very, very touchy recently, in part due to the proper functioning of scientific inquiry in a discipline which adores the thought that it too is a science. And how those accustomed to writing the narrative were disturbed when facts demonstrated just how silly that narrative was.

Claudia May 7, 2013 at 7:02 am

Isn’t Jamaica a classic example (by no means unique) behind the idea that high debt loads can become problematic for countries: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_3HK5k8CCffR7iV7 Particularly, when financial markets interpret the debt as a sign of mismanagement or instability. At least, according to this survey of economists this is not controversial, though deciding which countries fall in (or are close to) this category is not easy.

Boonton May 7, 2013 at 7:12 am

Is it a problem for Jamacia? Evidence? From what I’m able to see Jamacia’s gov’t spending as a % of GDP has been oscillating between 25-30%, which is actually a bit less than the US (add Federal, State and local gov’t spending together).

Claudia May 7, 2013 at 8:26 am

Read the quoted text again … I see a lot of problems. One example, debt service in excess of education and health spending.

Boonton May 7, 2013 at 8:39 am

http://www.indexmundi.com/facts/jamaica/public-spending-on-education

Curiously Jamacia’s spending on education as a % of GDP has been remarkably constant at around 5% despite the increase in gov’t spending on debt service. This would seem to seem to indicate Jamacia is spending roughly what it wants to on education. While there’s been some dip in the % who finish primary school in recent years, the completition rate seems rather steady

http://www.indexmundi.com/facts/indicators/SE.PRM.CMPT.ZS/compare#country=jm

Claudia May 7, 2013 at 8:47 am

You may have just given me the best example of the fallacy of revealed preferences ever … hey when did the high debt levels start? Also debt, a stock, is a summation of many decisions, shocks, and constraints. I personally think its role as a proxy for other stuff is as important as its direct role in current decision making.

Boonton May 7, 2013 at 9:18 am

Not sure when the ‘high debt level’ started but the education data goes back to the mid-70′s. You said the article claims education spending is being held back by debt servicing. If that was the case why is spending so consistent?

Don’t get me wrong, if tomorrow the Federal Reserve printed a few billion dollars and wiped out the country’s debt, I’m sure they would spend more on education. Most people’s lifestyle would go up if a rich friend suddenly paid off their debts. But the question is does the country’s debt causing a real ‘crises’ for it or is the crises for other people….such as those who are holding the other end of the IOUs?

Boonton May 7, 2013 at 8:31 am

Let me just clarrify, is Jamaica’s high debt load a problem for the country or is it a problem for the banks and funds that loaned the money to Jamacia?

It seems to me that this is only somewhat analgous to the EU where the countries on the outskirts have a huge interest in remaining in the good graces of the EU’s inner core. Since there is no South American/Carriban Monetary Union it seems the terms of barter here are somewhat reversed. Countries are able to borrow at good rates until they start to exhaust their credit. When creditors try to raise rates, they threaten default which beings everyone to the table to ‘restructure’ the debt with the help of the IMF.

So perhaps the model to view this is not so much high debt loads being a problem but a variation on a tourist trap. Instead of suckering couples in to spend too much money on trinkets and getting drunk at overpriced resorts, we have ‘hedge fund tourist traps’ built on the premise that this time is different and ‘hot money’ can find superior returns in the less tame debt markets of the world.

zbicyclist May 7, 2013 at 9:36 am

But these aren’t Kiva loans funded by naive, well-meaning westerners who don’t really care if they get their $25 back [disclosure: I've made hundreds of these]. Aren’t these loans made by people who should know better?

Boonton May 7, 2013 at 10:06 am

How burned are the investors really getting? Maybe you have some loans with interest rates higher than you’d get in other, ‘safer’ markets. The ‘crises’ only come along every few years or so. There’s a better than even chance your fund may be able to buy the bonds, earn the interest for a while, then sell them later on and be out before the crises hits. Even during the crises, though, the result isn’t diaster. The loan gets ‘restructred’ at a lower interest rate over a longer term. Maybe you take some loss but the bond you’re holding still probably pays more than an ultra-safe US Treasury bond.

That plus if anything has been proven over the years its certainly NOT that hedge funds and other managed funds don’t loose money all the time and whenever one fund goes out of business there’s always room for another hot one to come along and repeat the same mistakes.

If I was in charge of a small countries economy and had to come up with a rational secret, multi-decade long strategy, milking the foreign investment markets every few years doesn’t seem so crazy. It’s not clear to me that it would be a worse strategy than trying to become a miniture Carribian version of Germany!

derek May 7, 2013 at 9:54 am

Look at the trade numbers. If they didn’t pay, the lenders would have to swallow a loss, yes. But the Jamaicans would suffer far more. They are dependent on the borrowed money.

Looking at the numbers and considering that it is still ticking along, I would suggest that there is another economy happening that isn’t showing up except on the consumption side.

Squarely Rooted May 7, 2013 at 7:41 am

It is also worth pondering whether certain structural factors in play limit total potential Jamaican output.

For example – Jamaica’s murder rate is among the very highest in the world and an order of magnitude larger than any nation in the OECD.

These kinds of things bound maximum output, especially in a nation with the population of Kansas and smaller than Connecticut.

Mark Thorson May 7, 2013 at 10:22 am

Not to mention their strict gun control — more strict than nearly anywhere else — during which time the murder rate skyrocketed.

Stud May 7, 2013 at 7:58 am

Wow Tyler, you are such a whiny child. Get over yourself. We criticize your posts when they suck, which has all too often been the case on this site lately.

Benny Lava May 7, 2013 at 8:49 am

I wonder what Scott Sumner would say…

http://www.boj.org.jm/

Chimping the BoJ website isn’t too useful on a phone. Any ideas?

Euripides May 7, 2013 at 8:57 am

Jamaica also had a financial crisis in the mid 1990s that the government had to bail out, so debt increased a bunch as a result.
I think it’s a great post and fascinating to think about. There is a certain tone of crankiness coming from the post, but I may be due to lack of sleep since it was poted at 4:30 in the morning (If you are in the US that is).

Joseph Gagnon May 7, 2013 at 9:03 am

I do not understand what point you are trying to make. Bad fiscal policy and bad monetary policy lead to bad results. I have no idea what the natural rate of unemployment is in Jamaica. Measured unemployment is very high for long periods of time in lots of countries and I see no reason to doubt that the natural rate can be very high. What is your point?

Boonton May 7, 2013 at 11:15 am

Just hitting wikipedia, Jamaica’s economy is 50% tourism based. That alone, I would suspect, would cause it’s natural rate of unemployment to be much higher than a larger, more diversified country.

From a Keynesian perspective it would also limit the effectiveness of stimulus. If you try to stimulate domestic demand, there’s not much for them to spend money on since they are already in Jamaica and not likely to use many of the tourism services! But then that also leads one to question of how such an economy could have a Keynesian recession to begin with? Since most of the demand is coming from outside the economy, the country itself is not really subject to the type of ‘balance sheet recession’ Keynes was talking about.

Hazel Meade May 7, 2013 at 10:17 am

I’m curious as to whether Jamaica is continuing to borrow money, and if not, how long it has essentially been revenue positive and how much it has paid in interest relativeto the original loans.

I also question the wisdom of lending them MORE money to “help” them make dept payments. I’m skeptical of debt forgiveness if it leads to more irresponsible borrowing, but if Jamaica would otherwise be running a budget surplus (and would have been running a surplus for years, absent interest payments) then it makes more sense than driving them more into debt by lending them more money.

Boonton May 7, 2013 at 11:29 am

One of the graphs on Ashok Rao link is interesting in that it shows the country experiencing higher inflation and lower unemployment in the last few years. That would be a classic sign of an ‘overheating’ economy for which demand policies are not sufficient.

HOWEVER, I wonder what inflation measures mean in an economy that’s 50% tourism? Are we capturing actual inflation or simply price increases on foreign tourists?

Donald Pretari May 8, 2013 at 12:43 am

When I think Jamaica, I think enormous Underground Economy. How does that figure in?

The Angry Philosopher May 8, 2013 at 6:26 am

Good lord Tyler, I used to think you were a reasonable guy (okay, as I recall you thought Mitt “47% of Americans are garbage, and also I will definitely bomb Iran” Romney would’ve been decent as President; maybe I should’ve seen this coming a little earlier), but this is just unbelievably silly.

First of all, the addendum: how long have you been insecure enough to write this sort of pre-emptive strike of high-pitched whining? Can you not take criticism or something? Especially the part about “… committing any number of other fallacies or equivocations in response to this post”. Gosh, you know, I was going to write a comment full of fallacies of which I am totally aware, but now I see you don’t like fallacies so I guess I won’t post it after all (*obvious sarcasm alert*). And if you don’t want anyone to write a response treating you as “implying some other mistake”, well, the first step would be to not imply that mistake in the first place. Adding a meaningless “warning” treating readers as some sort of unruly fifth-grade class simply makes it worse. Yeesh.

And you do imply a mistake, that’s the thing. It’s in the tone of the writing, so you have a small measure of plausible deniability, but I’m going to go out on a limb and say that the repeated question

“I take it we can agree this is one case where stimulating nominal demand will not bring much in the way of dividends? Do we agree? Last year the inflation rate was over ten percent and the (nominal) exchange rate hit new lows. Do note the country ran a primary surplus last year and is attempting to move toward a balanced budget, so does anyone wish to pin this mess on fiscal austerity? Or is their austerity and its observed failings a symptom of other policies which went badly wrong?”

implies that you believe someone would want to claim that Jamaica is stuck in a rut due to austerity. So who is it (*cough Krugman cough*?), and where do they claim anything like “Jamaica (or similar economies) are having trouble due to austerity and need demand stimulus”? As far as I can see, nobody is claiming anything like that.

As for your question about observational equivalence, the obvious answer is to see how related two observations are. Jamaica is very different from the economies that you imply (yes you do, there’s no use denying it; your little temper tantrum of an addendum only serves to highlight it) a comparison to (‘observational equivalence’, which you say is the real point of your post, requires just such a comparison). The key is to then look at your models and say, “how do these observations differ, and what do these differences imply in my models?” (I’m sort of finding it strange that a professor of economics should ask for such things explained to him). Some very key points about Jamaica: internal demand doesn’t particularly drive its economy; in fact, it’s top sources of income are tourism (which provides a quarter of the jobs available) and remittances. Is it any wonder that stimulating internal demand isn’t going to make much difference in Jamaica? So what does this mean for applying certain models to economies which are nothing like Jamaica’s? Well, nothing, obviously. You can use the same models on Jamaica and similar economies, but you have to adjust the parameters, such as where the country gets its income from, the fact that its high debt is denominated in a currency it has no control over, etc., and (surprise!) you get different answers, even if some of the facts look similar. It’s like pointing out that a jet plane won’t fly underwater, and then asking what the implications for “observational equivalence” for fluid dynamics are.

PS. I wasn’t sure about the Romney thing, so I tracked the quote down. From a post on Nov. 7, 2012 titled ‘From Scott Sumner’: “Like Gideon Rachmann, I still think Romney would have been fine as a President”. A president who thinks that 47% of Americans are unproductive trash (based on a totally misleading statistic) and who basically said he would definitely bomb Iran.

PPS. Also, the argumentation ‘tactic’ of saying “Do we agree? huh? Well DO WE? Anybody want to disagree? HUH?” is juvenile.

Marghretta McBean May 9, 2013 at 11:27 pm

It would behoove you to discuss WHY Jamaica is in so much debt. To quote from a synopsis of “Life and Debt” a documentary made in 1990: “Former Prime Minister Michael Manley was elected on a non-IMF platform in 1976 [Also recall many American politicians considered him a subversive because of his stance - Jamaican economic independence]. He was forced to sign Jamaica’s first loan agreement with the IMF in 1977 due to lack of viable alternatives– a global pattern common throughout the Third World. At present Jamaica owes over $4.5 billion to the IMF, the World Bank and the Inter-American Development Bank (IADB) among other international lending agencies yet the meaningful development that these loans have “promised” has yet to manifest. In actuality the amount of foreign exchange that must be generated to meet interest payments and the structural adjustment policies which have been imposed with the loans have had a negative impact on the lives of the vast majority. The country is paying out increasingly more than it receives in total financial resources, and if benchmark conditionalities are not met, the structural adjustment program is made more stringent with each renegotiation.

To improve balance of payments, devaluation (which raises the cost of foreign exchange), high interest rates (which raise the cost of credit), and wage guidelines (which effectively reduce the price of local labor) are prescribed. The IMF assumes that the combination of increased interest rates and cutbacks in government spending will shift resources from domestic consumption to private investment. It is further assumed that keeping the price of labor down will be an incentive for increasing employment and production. Increased unemployment, sweeping corruption, higher illiteracy, increased violence, prohibitive food costs, dilapidated hospitals, increased disparity between rich and poor characterize only part of the present day economic crisis.”

Jamaica was self-sufficent for centuries: it had enough milk and other foodstuffs to support its population and export to other places. It was forced to import American milk (destroying the local dairy industry), American wheat (which most people wasted – rice was more popular), American corn (also not a Jamaican food) to support American farmers. This is only a partial list.

History (and economics) is written by the winning side.

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