JAMAICA | Economists hails Jamaica’s debt reduction as an exercise in fiscal responsibility and partnership

JAMAICA | Economists hails Jamaica’s debt reduction as an exercise in fiscal responsibility and partnership

WASHINGTON DC | March 30, 2024 - The creation of the National Partnership Council,  the Economic Programme Oversight Committee (EPOC); the  adherence to the  Fiscal Responsibility Framework introduced in 2010 as well as the continuation of the policy by the JLP in 2016 have been instrumental in Jamaica reducing its debt to GDP ratio in a remarkably sustained manner.

This is the view expressed by Jamaican economist at Stanford University, professor Peter Blair Henry In a paper entitled “Sustained Debt Reduction: The Jamaica Exception,”  along with authors Serkan Arslanalp and  Barry Eichengreen.

They were delivering their paper on Thursday at the Brookings Institute in Washington DC, where they noted that sharp, sustained reductions in public debt are exceptional, “because public-debt-to-GDP ratios have been trending up in advanced countries, emerging markets, and developing countries alike.”

The Economist hailed Jamaica as being exceptional in its ability to reduce its public-debt-to-GDP ratio despite financial crises, pandemics, and other emergencies as a result of  adopted fiscal rules that highlighted the debt problem,encouraged formulation of a medium-term plan, and limited fiscal slippage.

“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,” the authors pointed out.

“In the case of Jamaica the government reduced its debt from 144 percent of GDP at the end of 2012 to 72 percent in 2023. 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 which was delivered in Washington DC last week, highlighted the fact that 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.

In order to achieve this the paper pointed to the consensus building exercise entered into by the government of the day. “

“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 paper noted.

“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.”

EPOC and the Partnership for Jamaica Agreement solidified the sharp decline in conventional measures of political polarization that began four years earlier, coincident with the creation of the National Partnership Council.

They highlighted that “a sustained lower level of polarization made for policy continuity and continued debt reduction when a different political party took power in 2016, as 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,” the economists declared.

“Jamaica managed its financial system well in this period. It adeptly managed the term structure of the debt, by way of  a well-designed fiscal rule, and a partnership agreement creating confidence that the burden of adjustment would be widely and fairly shared.

These they pointed out were key elements to the solution as neither element would have worked to achieve sustained debt reduction in the absence of the other. Both were needed the authors declared.

An important question is whether the lessons from Jamaica generalize. In Section 5 we discuss two other countries that achieved significant debt reduction by adopting fiscal rules and consensus-building arrangements: Ireland in the late 1980s and Barbados for a decade starting in the early 1990s.

These cases differ in their particulars. But they have in common that Ireland and Barbados – like Jamaica – are small, open economies.

These economies are highly structured, in that trade unions and employers associations are cohesive and powerful. 

In both cases, the agreements reached and institutions created to initiate and maintain the momentum of debt reduction leveraged earlier historical experience with institution-based consensus building.

The similarities of these cases are consistent with the literature suggesting that democratic corporatism, a process of policy formulation involving extensive consultation and consensus building, is easiest where interest groups are well organized and the number of agents is limited.

They are consistent with the view that such arrangements are imperative in small, open economies especially exposed to exogenous shocks. And they are consistent with the view that so-called neocorporatist arrangements, when and where they emerge, build on earlier historical experience.

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