Debating the IMF bandwagon

Peter-John Gordon, Contrlbutor

Ian Boyne's article 'IMF bandwagon and JEEP', which appeared in The Sunday Gleaner of October 16, raises the issue of the appropriateness of the IMF programme. As part of the national discussion which must take place around our economic strategy in these perilous times, I join this public discussion. From the outset, I must declare I carry no brief for anyone.

Boyne set up his discourse as a zero-sum game between the IMF and Jamaica - whatever one gains, the other loses. This is a most unfortunate construct in which to discuss our options. I will stay away from the caricatures used by Boyne such as "dreaded institution", "neoliberal policies", "dogma", etc., as these terms evoke unnecessary emotions without enhancing clarity.

The first thing to note is that a country whose economy is in a healthy position does not need to enter into a borrowing relationship with the IMF. If there is no borrowing relationship between a country and the IMF, the IMF cannot 'insist' on policy adjustments within that country. The IMF is approached only when there is economic trouble.

Countries face budget constraints. These budget constraints are not necessarily binding in each year; however, over time, these constraints must hold. A country can only spend more than it earns if it borrows. Borrowing is simply moving income from the future to the present; therefore, loans must be repaid in the future. When a country borrows, it is able to spend more than it earns; when it repays, it must spend less than it earns.

Jamaica's debt burden has occurred because it has for too many years spent more than it earns. This expenditure has not been on wasteful fighter jets or aircraft carriers; it has been on education, health, security, infrastructure and all the other things that governments spend on. We have simply sought to buy more of these things than we can afford. Ignorance or deliberate attempts to manipulate the public have led to promises from political platforms to increase government spending by multiple amounts - doubling and tripling salaries, etc., usually accompanied with the nebulous statement that such expenditure will be paid for by reducing corruption and waste.

containing fiscal deficit

When the country has to make interest payments and, therefore, to reduce expenditure on things which the Government would like to spend on, such as education and health, it is not that education and health are being hurt. The interest payment is simply paying for education, health and all the other things consumed in the past. In 2008-2009, interest payments accounted for 35.8 per cent of Government expenditure. This figure rose to 44.7 per cent in 2009-2010. The Jamaica Debt Exchange, which is a euphemistic term for a default, caused this figure to fall to 33.8 per cent in 2010-2011.

If the Government could force not only a reduction in interest, but also in principal to zero, and continued to spend more than it earned, in time the country would return to the same debt situation it now is in. Containing the fiscal deficit is, therefore, important, whether the Government decides on this policy by itself or is nudged into this position by the IMF.

The fiscal balance is not the only macroeconomic variable which is of concern. The balance-of-trade position is also important. They are interconnected.

If the fiscal balance is negative, so will be the trade balance. How the fiscal balance is controlled is a matter for politics and public policy (how much the various elements of government expenditure, education, health, security, public-sector wages, etc. should be adjusted to meet the target); the need for it to be controlled is an economic imperative.

It is interesting that Boyne is suggesting that pro-cyclical, demand-compression polices are inappropriate. I don't recall him rushing to the defence of Omar Davies when he gave his infamous "run wid it" speech. Maybe if Davies had stuck to more conventional economic language, he would not have had to carry the burden of condemnation by many, including editorials, so many years later. Recall what had occurred: Jamaica had experienced a hurricane which had damaged social and economic infrastructure which required an immediate response from Government.

The issue was, should this response have been accommodated within the pre-hurricane budget, or should there have been a loosening of the budget constraint. Davies could have said, "The negative shock caused by the hurricane has forced the economy off its steady state saddle path on to a lower-growth trajectory. In order to mitigate the fall in output and employment which this will occasion, we have to employ counter-cyclical financing. However, because of the high marginal propensity to import, the efficacy of this strategy for generating additional growth is not particularly high.

"This means that additional growth will not be sufficient to facilitate higher tax collection to compensate for the fiscal stimulus, therefore, the future fiscal situation will deteriorate. We will have to deal with this situation in the further, but it is imperative that we seek to reduce the effects of the negative shock now."

Davies, in a country not known for economic literacy, tried a loose translation of the above into the vernacular: 'We will run wid it, and deal with the consequences tomorrow', which had many voices accusing him of corruption. The point is that Davies recognised the limitations of counter-cyclical policies in Jamaica, given the structure of its economy. The rest of us also need to recognise this fact. Spending large sums of money to try to stimulate demand will have little effect, since much of it will leak out through imports. Large countries with the ability to stimulate world demand can try such policies in a world recession (incidentally with little sign of success to date); small countries like Jamaica would be foolish to pursue such policies.

tax reform

Boyne lambasts the free-market approach of the policy advice by the IMF. Is he opposed to privatising public enterprises? In 2010-2011, the public-sector deficit was $90.8 billion, with 87 per cent of this arising from the Budget, while 13 per cent was from lossmaking public enterprises. Should the country continue to carry the burden of lossmaking public enterprises? What about his disapproval of the abolition of capital control? Is he recommending that we reintroduce them and employ an army of people to enforce them? Should we return to body searches at the airports to prevent people taking out foreign exchange?

Everyone is arguing for tax reform. Each person, however, has his own idea of what these reforms should be. The tax structure is distortionary with its differential tax rates for different sectors. A careful examination of many of the calls for tax reform is not a call to adjust the system; rather, they are calls to change the positions of individuals within the system - people are clamouring to become the preferred persons. Their only problem with the tax system is that they do not occupy the most favoured position.

For the economy to grow and prosper, incentives must be removed completely. Incentives are decided more on the basis of political pressure and connectedness than on any credible criterion. When one sector is given an incentive, all other sectors which are excluded are simultaneously given a disincentive. This is why all businesses should face the same tax rate.

Boyne declares: "Let's make one thing clear: Promoting fiscal recklessness, pursuing distortionary macroeconomic policies and adopting populist and redistributionist policies without a sound macroeconomic base is not what I am recommending." I obviously have failed to grasp what he is proposing; I wish he would clearly say, as the country faces some very difficult issues in addressing its economic situation.

Peter-John Gordon is a lecturer in the Department of Economics, UWI, Mona. Email feedback to columns@gleanerjm.com and pjmgordon@hotmail.com.