Wednesday, May 18, 2011

How the IMF's involvement in Jamaica stunted Jamaica's development

In the early 1970s, the socialist-leaning government led by Michael Manley promised reforms that would end the historical inequalities left behind from Jamaica's days as a colony of the United Kingdom. However covering the costs of these reforms, and dealing with issues such as massive increases in international oil prices, quickly saw Jamaica in financial trouble and in need of assistance. Unable to meet the day-to-day costs of running the country, let alone debt repayments, they had no option but to turn to the International Monetary Fund. Although not responsible for the initial causes, the conditionalities that accompanied IMF assistance were responsible for the continuation and entrenchment of Jamaica's weak development performance since the 1970s.

In the early 1970s, a decade after its independence from the United Kingdom, Jamaica was a small post-colonial nation largely dependent on its agricultural and mineral sectors, and an emerging tourism industry. Although state-promoted industrialisation, economic diversification and foreign investment had seen Jamaica's economy grow since independence, historical social inequalities still existed. The socialist-leaning Manley-led government that came to power in 1972 promised a path of social reform that would address these inequalities and lead to a better way of life for working-class Jamaicans. However, increased welfare services saw a massive increase in state expenditure that had to be covered. The spike in OPEC oil prices of the mid-1970s also pushed up the price of oil and food imports on which Jamaica relied heavily. Fortunately the global financial institutions were flush oil with revenue, and large loans were easy to get. By the late 1970s the price of oil had fully impacted on industrialised nations, pushing interest rates up and causing a slump in the demand for raw materials such as the bauxite that was a main pillar of the Jamaican export industry. Jamaica was now burdened with high-interest loans and contracting revenue with which to meet repayments.3

In an effort to deal with its ailing economy and debt the government took measures to curb imports and raise foreign currency. High tariffs and restrictions on luxury and 'non-basic' goods were imposed. Production levies were introduced into the mineral sector, especially on the multinational mining companies. This new assertiveness from the State scared foreign investors into disinvestment and capital flight from local investors.4

The Jamaican government was in deep trouble financially and facing social unrest. By the end of the 1970s it had no choice but to turn to the IMF for help.5 By the time the IMF began its association with Jamaica, the country was already deep in debt, had scared off foreign investment and was suffering from a currency crisis, and was politically committed to social welfare reforms it could not pay for. Jamaica had dug itself a massive hole in terms of development progress and performance. However far from assisting Jamaica to recover from this situation, the IMF – in exchange for much-needed funds to tide the government over – would impose programmes of conditionality that would only work to entrench, and in some cases exacerbate, Jamaica's fragile situation.

In July 1944, representatives from 45 countries met in the town of Bretton Woods, New Hampshire in the United States. They believed a framework for international economic cooperation would need to be established at the end of the war to avoid a repeat of such conditions at the Great Depression of the 1930s. It is from this meeting that the Bretton-Woods Institutions, which include the International Monetary Fund and the World Bank, were formed.6 The initial concept behind the IMF was the Keynesian assumption that market failure will occur at some point in some countries, and when it did the IMF would be able to bolster that country's institutions to provide employment, fund tax cuts and the like until it was able to get back on its feet again. Global collective action around this was seen as important as one country's economic actions spill over into others, and if an ailing country could be temporarily supported, then it would allow the global market to continue to run smoothly – thus avoiding another event like the Great Depression.7

However the 1980s saw the rise of a new neo-liberal free market economic paradigm. Championed by Ronald Reagan and Margaret Thatcher, the paradigm soon made its way into the IMF hierarchy and became its new mantra for the developing world.8 Stiglitz argues that this new influx of “market fundamentalists” discarded Keynes' belief that public institutions should shield the public from inevitable market failures, and instead pushed a faith that markets were near-infallible and that public institutions were the hazard.9 He also believes that a 'revolving door' between the financial community and the IMF saw the blurring of interests between the two.10 He argues that at that time, albeit unofficially and probably unintentionally, the IMF began to work like a debt collector for G-7 lenders. Their policies became focused on debt repayment rather than other options such as stalling repayments or bankruptcy options – options that were better off in the long run for the developing countries and for global stability, but would mean that creditors remained unpaid. “Looking at the IMF policies in this way, its emphasis on getting foreign creditors repaid rather than helping domestic businesses remain open becomes more understandable.”11

I believe that in these two criticisms lie the crux of why Jamaica's weak development performance was entrenched and exacerbated through its dealings with the IMF. I will look at situations in Jamaica generated by IMF requirements and policies, how they demonstrate these two criticisms of the IMF, and how they have been detrimental to Jamaica's development.

An important criticism of the IMF's policy implementation requirements is that they push for too much liberalisation too soon. Liberalisation before adequate regulations and monitoring systems are put in place, before social adjustments or retraining can occur, before new practices can be learnt, can lead to disastrous consequences for developing countries.12 Trade liberalisation in Jamaica is a good example of this. In the period following its independence, Jamaica diversified and industrialised its manufacturing sector, however the majority of its markets – with the notable exceptions of minerals, bananas and an emerging tourism sector – remained domestic. Agriculture for the domestic market still played a large role in the economy. Its main export products were few, and dependent on a limited number of markets, namely the United Kingdom and the US, and the banana industry received preferential treatment from Jamaica's old colonial masters the United Kingdom.13 Tariffs and restrictions on the importation of some goods provided subsidies for important agricultural imports that the local sector couldn't provide.14 By the early 1990s, most of these protectionist measures had been removed as a requirement to receive IMF assistance.15 In some instances, this was a good thing. The importation of cheap second-hand cars from Japan allowed a new taxi industry to flourish.16 However in many instances the Jamaican market was flooded with cheap, often second-rate, products that the local market could simply not compete with. The agricultural sector was hit particularly hard. For example, local businesses selling high-grade chicken to the local market were put out of business after cheap 'dark meat' parts of chicken flooded the market from the US.17 The dairy industry was also hit hard, with farmers having to dump fresh milk into the gutters because milk powder from overseas was inundating the market at a lower cost.18 Ironically the US and other industrialised countries such as members of the EU maintain tariffs and restrictions on foreign imports, and subsidies such as in the agricultural sector, which leads to issues such as overproduction and the subsequent market flooding of developing countries.19 The developing countries, reliant on assistance from the IMF, must adopt liberalisation or perish – but trade liberalisation is only beneficial if you have a well developed export sector, and Jamaica did not. It is likely that even if it did, it would still have encountered barriers when exporting to countries such as the US. Although a greater variety of goods were available, and at a cheaper price, to the Jamaican people this was offset by the collapse of local industries and businesses, and subsequent unemployment.20 The collapse of the agricultural industry saw rapid urbanisation as people came to the cities in search of work.21 Although non-traditional crops such as coffee and condiments showed promise for the export market, this required long-term investment, education and nurturing that often wasn't available.22 However, the 'market fundamentalism' predominant at the IMF did not see these effects as consequences of trade liberalisation – instead of admitting error, the IMF, in Jamaica and other developing countries, only pushed these policies further.23

One sector in which Jamaica did develop comparative advantage was the apparel manufacturing sector. In an effort to induce foreign direct investment into the country, and at the behest of the IMF, Jamaica liberalised its financial sector. This allowed it to establish 'free trade zones' – zones in which usual import/export taxation, labour and union laws do not apply – and open them up for foreign business interests. This was mostly in the form of CMT (cut make trim) firms where workers assemble garments from imported pre-cut fabrics. In accordance with IMF guidelines, wages are kept low to help maintain 'comparative advantage'. Jamaica's proximity to the US, which was the market, also gave Jamaica advantage.24 However, 'free trade zones' encouraged by the IMF are autonomous zones, with little connection to the local economy, except for providing cheap land and low-paid labour. For example the CMT zones imported all the fabric, pre-cut, directly into the autonomous zones. The only value added to the garments in Jamaica was that of labour when the garments were assembled. Low-skill labour, as was used in the CMT firms, is not something that needs investment, there is no need for education or training. There few reasons for such companies to stay in one place in the long term, let alone invest in that area. Surely enough, in the mid-1990s, the North American Free Trade Agreement (NAFTA) was signed and low wage competition in Central America emerged that Jamaica couldn't compete with. The CMT firms packed up and left en masse – between 1996 and 2000, 47 companies closed or relocated their operations leaving their workers with nothing.25 This provides another example of how IMF policy pushes for risky short-term solutions to enable developing countries to cover debt repayments at the expense of less lucrative long-term investment that will provide stability and growth of communities and economies.

Granted that the world has changed a lot since the Bretton-Woods Institutions were first formed in 1944, I do not believe that the spirit behind the IMF – to assist countries regain long-term stability in times of fiscal hardship – should have. However the dominance of the neo-liberal free market ideology and the 'revolving door' between the private financial sector and the public institution of the IMF has seen the IMF lose sight of this. It is able to push its fundamentalist free market ideologies onto developing countries that are in no position to say no. In Jamaica this devastated the local agricultural sector, flooded Jamaica with second-rate goods, and left already-struggling people unemployed and with no immediate job prospects. The IMF's tendency to push for debt repayment over long-term stability has seen projects such as the 'free trade zones' set up in Jamaica. They only encourage and entrench weak development performance as they provide no opportunities for workers to upskill, the wages are very low, there is no investment in the wider community, and there is no incentive for long-term investment. Indeed, in Jamaica the firms left as quickly as they arrived once cheaper labour became available elsewhere. Although Jamaica was in a bad economic situation of its own doing already, I believe that Jamaica's weak development performance since the 1970s was exacerbated and entrenched by its involvement with the IMF.

1Witter, M 'Trade liberalization: The Jamaican Experience' (Unpublished, 2005), p186
2Witter, M 'Trade liberalization: The Jamaican Experience', p191
3Broad, R and J Cavanagh, Development Redefined: How the Market Met Its Match (Colorado, USA: Paradigm Publishers, 2009), pxii; Witter, M 'Trade liberalization: The Jamaican Experience', p191
4Witter, M 'Trade liberalization: The Jamaican Experience', p191
5Witter, M 'Trade liberalization: The Jamaican Experience', p191
6International Monetary Fund, 'About the IMF: History: Cooperation and reconstruction (1944–71)', (accessed 9/4/2011)
7Stiglitz, Joseph E, Globalization and its Discontents (New York: W.W. Norton & Company, Inc., 2002), p196
8Broad, R and J Cavanagh, Development Redefined: How the Market Met Its Match, pxii; Stiglitz, Joseph E, Globalization and its Discontent, p13
9Stiglitz, Joseph E, Globalization and its Discontents, p196
10Ibid, p207
11Ibid, p208
12Fukuyama, Francis, 'The Imperative of State Building', Journal of Democracy 15/2, p20; Kirkpatrick, C and D Tennant, 'Responding to Financial Crisis: Better Off Without the IMF? The Case of Jamaica' in Finance and Development Research Programme Working Paper Series (University of Manchester: Institute for Development Policy and Management, 2002) Paper #38, p7; Stiglitz, Joseph E, Globalization and its Discontents, p212
13Witter, M 'Trade liberalization: The Jamaican Experience', p186, 188
14Ibid, p193
15Ibid, pp192-195
16Ibid, p199
17Black, Stephanie, Life and Debt: A Film (Tough Gong Pictures, 2001)
20Witter, M 'Trade liberalization: The Jamaican Experience', p206
21Federal Research Division of the Library of Congress, 'Jamaica – Economy', (accessed 10/4/2011)
22Witter, M 'Trade liberalization: The Jamaican Experience', p203
23Stiglitz, Joseph E, Globalization and its Discontents, p213
24Witter, M 'Trade liberalization: The Jamaican Experience', p195
25Witter, M 'Trade liberalization: The Jamaican Experience', pp195-196; Black, Stephanie, Life and Debt: A Film