Debt and Adjustment

Social and Environmental Consequences in Jamaica

Patricia Lundy

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9781138613928
• eBook ISBN:
  9780429873690
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Published in 1999, this text is based on original research carried out during 13 months fieldwork in Jamaica. The first key theme is an examination of the damage to the social environment and ecology of the island, which has resulted from IMF/World Bank prescribed structural adjustment policies. The second is the identification of a social movement in Jamaica of community environmental groups, some based in ultra-poor squatter communities. The study presents data and case studies which are characteristic of many "third world" countries, and links Jamaica's heavy external indebtedness to its deteriorating social environment and ecology.

1 Crisis, debt and adjustment

The late 1970s was a difficult time for many ‘Third World’ countries. They experienced a series of problems including high inflation, slow growth, stagnating exports, and mounting debt problems (Van Der Gagag & Barham, 1998). An economic crisis ensued in most Latin American, Asian, African and Caribbean countries. As a result, many of these countries were forced to seek the financial assistance of international institutions such as the World Bank and International Monetary Fund (IMF). The new macroeconomic policies advocated by the latter, to restore ‘Third World’ economies, are usually referred to as adjustment. As I will discuss shortly, adjustment policies aim to restore internal and external balances and increase the role of the market (Van Der Gagag & Barham, 1998). In recent years, there has been much debate about the role of the World Bank, the IMF and the structural adjustment policies (SAPs) they espouse. Within this debate, there has been an on-going assessment of weaknesses in the implementation of such programmes and controversy regarding the social and environmental costs of adjustment.

This chapter provides the necessary background information and context for understanding the economic crisis in Jamaica and the ensuing process. The chapter is divided into a number of sections. It begins with a brief overview of key structural features of the Jamaican economy. This is followed by an outline of the emergence of the current economic crisis. The chapter then goes on to examine the role of the international financial institutions and the aims and content of structural adjustment policies. Finally, a number of controversial issues surrounding structural adjustment policies are discussed.

Structures of dependency

The economic crisis which became manifest in Jamaica in the 1970s revealed a deep structural weakness which reached back into the colonial history of the country. In 1950 the economy typified the colonial model of dependent underdevelopment. It was an open, import-dependent, monocrop economy ; 90 per cent of its foreign exchange was earned from one crop, sugar (Le Franc, 1994). Today Jamaica is a small, open, dependent, capitalist economy. Jamaica’s economic structures which are outlined below are characteristic of many formerly colonized nations in the ‘Third World’.

Firstly, there has been very highly specialized production of a narrow range of primary products, mainly for export, with sales limited to a few markets. While the economy has diversified somewhat over the years, it is still basically dependent on exports of only three goods and services -bauxite, export agriculture (mainly sugar and bananas) and tourism - for the majority of its export earnings. All of which are based on the exploitation of natural resources which, as I will discuss in Chapter Four, has intensified over the past decade or so.

The country’s export industries are directly linked with, and dependent on. the advanced capitalist countries through the use of imported management, technology and raw materials. Jamaica has historically been dependent on a limited number of trading partners. In the past few decades, trade has been concentrated particularly on the US, British and Canadian markets. Jamaica, like a number of other Caribbean countries, relies on preferential market access for two of its major commodities - sugar and bananas. However, there is concern that there may be a threat to preferential agricultural markets within the European Union as a result of deliberations at the Uruguay Round of Gatt Agreement in 1994 and the World Trade Organization in 1996, and other trade agreements (Economic and Social Survey, 1996).

Secondly, the prices for Jamaica’s export products have been unstable and this has led to general economic instability and mitigated against long term economic planning. When countries have little or no control over the prices of what they buy and sell, such openness makes them especially vulnerable to sudden losses of income when the world market prices of their exported commodities drop. In addition, decisions by the trading partners of small, open economies to decrease their purchases of particular commodities can have a devastating impact on the exporting countries. The extreme vulnerability of Jamaica’s economy is exacerbated by the fact that, while some attempts have been made to expand into non-traditional areas, it remains relatively undiversified. Under such circumstances, Jamaica and other Caribbean countries cannot easily increase their earnings by shifting to the production of different exports for which world demand is greater or prices higher. Jamaica’s experience in the mid-1970s and 1980s, when commodity prices plummeted, confirms the perils of commodity-concentration for some underdeveloped countries.

Thirdly, the country’s economy has been characterized by a heavy dependence on imports and on foreign capital inflows. In fact, the island is among the top twenty per cent of the world’s most trade-dependent economies. It imports ten times more food per capita than the average ‘Third World’ country (Duncan, 1987, p.192). In 1985, Jamaica exported 58 per cent of its gross domestic product and imported goods costing the equivalent of 67.8 per cent of its GDP (McAfee, 1991, p.15). This illustrates the fact that a very large percentage of what Jamaica produces is exported rather than used locally, while a high proportion of what the society consumes is imported from abroad. Levitt (1991) explains that it is important to understand that food dependence is a long-standing structural feature of a plantation economy. In Jamaica, the best land was given over to sugar cultivation, while basic cereal staples of flour, com meal and rice were, and continue to be. imported. In Chapter Four I will examine exportcentred policies, which are given high priority under structural adjustment, and how such policies may create disincentives for Jamaican food selfreliance. Farmers can get Government loans more easily for growing export crops, for example, than for producing traditional staple foods. Increasingly, land and resources are being allocated for the production of export crops with considerable implications for the environment and rural population.

Fourthly, there has been a predominance of foreign decision-making in the country’s economic activity. This has resulted from the historical experience of foreign ownership and control over the important sectors of the economy. The country’s dependence on financial assistance from individual countries and, more recently, dependence on multilateral organizations such as the International Monetary Fund (IMF) and World Bank can be seen as a continuation of this feature. Foreign financial assistance has historically been characterized by agreements which require the widespread use of donor country personnel, materials and equipment. Historically much of the locally-generated surpluses have been transferred abroad by foreign-owned enterprises and, as such, very little has been available for reinvestment locally. Such structural features have meant that Jamaica has, historically, had a disadvantaged position in international relations. The above points are expanded upon in the following sections. However, before continuing further, it is useful to briefly examine the origins of the Jamaican debt crisis.

Origins of the debt crisis

The origins of the economic problems faced by Jamaica in the 1980s and 1990s can be traced to historical circumstances, as discussed earlier. However, in order to understand the economic crisis which manifested itself in the 1970s. it is important to focus on events which occurred during that decade. The Jamaican economy experienced rapid economic growth during the post-war years which led to transformations in the nation’s economic and social structure. Rates of growth averaged, per annum, 7.5 per cent from the 1950s to Independence in 1962, 5.1 per cent between 1962-68 and 6.1 per cent from 1968-73 (Levitt, 1991, p.11). The decades of the 1950s and 1960s saw the emergence of mining, tourism and manufacturing as leading sectors of the economy. Both the mining and tourism sectors have been described as enclaves, with very few’ linkages with the rest of the economy, and which created a small and exclusive high wage sector. Both are highly dependent on and cater to foreign markets and consumers (Le Franc, 1994, p.4). One of the most important features of the economy at this time was its dependence on foreign investment, particularly in the bauxite-alumina industry.

The development of the bauxite industry was the single most important factor in the country’s economic growth. This sector was supplemented by growth in construction and manufacturing, tourism and an expanding public sector. Agriculture was relatively stagnant during these years. However, as Duncan (1987, p.196) points out, underneath what appeared to be major economic accomplishments, as reflected in the aggregate indicators, there was high unemployment (despite increasing emigration), an increasingly skewed distribution of income, a rise in industrial unrest and an increase in both absolute and relative poverty.

In the post-war period, policies geared towards attracting foreign investment as part of the ‘industrialization by invitation’ strategy were implemented. This resulted in increased penetration by transnational corporations from the US and Canada in the major productive sectors, and there w ere large inflows of foreign capital, especially for investment in the bauxite-alumina sectors. In these early years, foreign investors had 100 per cent control over the bauxite industry (Edie, 1991, p.21).

By 1970, Jamaica had become the world’s leading exporter of bauxite (mostly in crude form, but also processed as alumina). As Boyd (1988, p.129) points out. the bauxite-alumina industry accounted for more than 50 per cent of merchandise export earnings before the end of the 1960s, and by 1980 it accounted for 78 per cent of the total value of goods exported. There were also some positive, though limited, spin-offs for the rest of the economy. However, while there was an increase in Government revenues from the growth of this industry, as Girvan (1971) has noted, these were insubstantial in comparison to the profits made by company stockholders overseas. Girvan has stated unequivocally that multinational corporate capital promoted economic underdevelopment in Jamaica. He has argued that the terms on which the transnational companies entered Jamaica were inconsistent with the national interest.

The Peoples National Party (PNP) came to power under Manley in 1972, with an agenda of democratic socialist reformism, including policies aimed at the redistribution of wealth in Jamaica and the diversion of some of the profits from the bauxite industry to the national interest. During the 1970s, Manley’s government implemented a number of social reforms, including increased expenditure on health and education services. To finance these reforms (particularly in the wake of the 1973 oil price rise) and in an attempt to gain more control over bauxite exports, in 1974 the Manley Government imposed a production levy on the industry, which increased the tax revenue from bauxite from J$25 million to J$200 million in one year (Boyd, 1988, p.129).

The PNP Government also set out to acquire majority ownership in the bauxite-alumina industry. In 1975, a Government holding company was formed and took control of a 51 per cent equity position in Kaiser and Reynolds - the bauxite mining companies - and a minority position in Alcoa and Alcan - the alumina producing companies - and engaged in trading on its own account (World Bank, 1989, p.viii). The Government promoted the establishment of an international association of bauxite producers in 1974, with the objective of co-ordinating members’ policies towards the multinational mining companies. At the same time, Manley’s Government nationalized a number of other enterprises in the country, including foreign-owned hotels and sugar estates.

The response of the bauxite companies to this direct Government intervention in the sector was to cut back production and curtail investment in Jamaica. They filed suit with the World Bank’s International Centre for the Settlement of Investment Disputes, contesting the legality of the production levy, and, at the same time, they began to transfer bauxite and alumina production from Jamaica to other countries (Edie, 1991, p.95). Despite proportionally increased income from the levy, the reduction in production hit the revenues which the Government anticipated. The weakness of a single national economy was demonstrated by the ability of the transnational mining companies to transfer their activities to other countries in response to such measures.

The Jamaican bauxite policy reveals the dilemma which faces governments of underdeveloped counties. Attempts at increasing state control over TNC operations can result in negative and retaliatory measures from the companies concerned. It was not until 1989, that new bauxite levy agreements were reached with two of the three major transnationals operating on the island. They have agreed to operate their plants at full capacity in exchange for a 50 per cent reduction in the levy to 3 per cent of the average realized price of aluminum ingot (The Economist Intelligence Unit, 1989-90, p.12).

However, when foreign investment stopped and production slowed down, given the export concentration of the economy, the cut-backs in bauxite and alumina production significantly affected exports. Moreover, at this time there was a recession in the industry worldwide. The combination of factors meant that Jamaica’s share in the world bauxite production declined. While it had been as high as 23.2 per cent of global production in 1965, following the recession and the industry’s reaction to the PNP Government’s intervention, it had fallen to 13 per cent in 1979 (World Bank, 1989, p.viii). At the same time, the Jamaican economy was affected by a number of other adverse developments in the world economy. The most important was the massive increase in oil prices, which trebled between 1973 and 1974. In addition, as a result of the world economic recession, the country’s terms of trade - which compares changes in the prices of exports with those of imports - worsened during this period.

Growth slowed and the economy went into recession in the 1970s, as can be seen from the figures for GDP percentage growth rates in Table 1.1. The balance of payments showed a surplus of J$6.9m in 1970, but by 1972 this was a deficit of J$40.6m, which increased further to J$213m in 1976 (Bernal, in Davies, 1988, p.94). In 1976, the Government’s net international reserves became exhausted, with the overwhelming majority of continued Government borrowing aimed at budgetary financing and balance of payments support (Girvan. in Davies, 1988, p.54).

Table 1.1 Percentage growth of GDP, 1970-1978

The tempting international loan climate had led the Government during these years to borrow to tide over its difficulties. At first this was done in order to maintain its programme of nationalization of key industries and its social welfare measures, but later it became necessary to meet the fundamental problems of the balance of payments deficit (Cumper, 1983, p.9). Jamaica’s foreign debt rose dramatically from US$124 million in 1970 to US$489 million in 1976 (World Bank, 1989, p.viii).

Table 1.2 indicates the sizable growth of Jamaica’s debt from 1970 to 1975. The bulk of Jamaican borrowing at this time was still from commercial institutions. However, serious balance of payments problems forced the Government in 1977 to seek external financing from the IMF. Commercial banks suspended further lending pending an IMF designed programme of balance of payments adjustment (Bernal, in Davies ed., 1988, p.96).

Table 1.2 Direct government debt by type of loan (US$ million)

The period of decline over ‘the Manley years’ (1972-80), has been analyzed by a number of scholars. There is little dispute among them over the existence or severity of the decline, but rather over whether or not external forces were more or less responsible for the decline than internal factors. Manley’s Government has been criticized by Levitt (1991, p.14) for failing to use the windfall gain from the bauxite levy to increase real investment in productive capacity. Manely has been criticized for the increase in Government expenditure which was far in excess of the growth of revenues, resulting in fiscal deficits of the order of 15 per cent of GDP. Levitt (1991) suggests that socialist redistributive measures and costly reforms implemented were appropriate in the years of high growth but fatally hazardous when the traditional engines of growth began to fail and the external environment became turbulent and hostile.

Boyd (1988, p.130) is of the opinion that the Manley Government pursued its objectives without recognizing the importance of the constraints imposed by declining investment and output and persistent balance of payments disequilibria on the small, open economy. In a similar vein to Levitt, he argues that Manley did not take due regard of the internal and external constraints within which the economy had to perform. This, he says, contributed to the economic crisis which manifested itself in the mid 1970s.

As Edie (1991) rightly points o...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Table of Contents
• List of Tables
• Acknowledgement
• Preface
• 1 Crisis, debt and adjustment
• 2 Social consequences of structural adjustment
• 3 Alternative methodology in the study of adjustment
• 4 Does adjustment harm the environment?
• 5 Social action, the environment and adjustment
• 6 Summary and conclusions
• Bibliography