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Caribbean Islands Role of Government
The government's first attempts to intervene in the economy
occurred during early self-government in the form of national,
macroeconomic planning that stated only the broadest of economic
objectives. The first such government plan was the "Ten-Year Plan
of Development," issued in 1947 and revised in 1951.
Industrialization, however, was eventually spurred on more by
industrial incentive legislation than by macroeconomic planning.
Legislation during the first two decades after World War II
changed the pace of industrialization and the structure of the
economy. Generous fiscal incentives--such as tax holidays,
accelerated depreciation rates, duty-free importation of raw
materials, tariff protection, and subsidized factory space--served
to emphasize industry and services over agriculture, particularly
manufacturing, mining, and tourism. The manufacturing sector grew
as a result of important government acts, such as the Pioneer
Industries Law of 1949, the Industrial Incentives Law of 1956, and
the Export Industries Law of 1956. Investment in the bauxite and
alumina sector was encouraged by the Bauxite and Alumina Act of
1950. The Hotel Aid Law of 1944 provided a similar catalyst to
investment in the tourism sector.
During the first decade of independence, government policies
generally continued the efforts of the 1950s to lure investment in
mining, manufacturing, tourism and, by the 1960s, in banking and
insurance. A large number of foreign corporations, mostly from the
United States, were established in Jamaica as a result of the
"industrialization by invitation" strategy that was based on the
Puerto Rican growth model of development.
Government involvement in the economy increased significantly
from 1972 to 1980, establishing one of the largest public sectors
in the Caribbean. In 1974 Prime Minister Michael Manley declared
his government socialist and announced its intention of controlling
the "commanding heights of the economy." Although the economy was
nominally socialist, its production patterns during the 1970s were
actually mixed. Private enterprise dominated in nearly every sector
and the "right to private property" was maintained.
Internationally, the government led the call for a New
International Economic Order in the world's economic system.
Manley's first term as prime minister (1972-76) was much more
populist and nationalist in orientation than his second term.
Manley advocated a "third path" development strategy that viewed
Jamaica as a nonaligned, independent member of the Third World.
This approach rejected both the Puerto Rican and Cuban models of
development and sought to reverse democratically the inequitable
distribution of wealth in Jamaica. Policies included the creation
of rural health schemes, food subsidies, literacy campaigns, free
secondary and higher education, a national minimum wage, equal pay
for women, sugar cooperatives, and rent and price controls.
Between 1972 and 1976, the Manley government carried out a
small agrarian reform program, Project Land Lease, that sought to
alleviate high unemployment by introducing job creation schemes and
redistributing concentrated land holdings. The reform process
included the creation of agricultural cooperatives, including the
formation of a Sugar Workers Cooperative Council, an important
actor in the country's political economy. Seeking to reduce
dependency on foreign investment, the government also nationalized
with compensation all of the foreign-owned utility companies
(electricity, telephone, and public transportation companies). The
government also purchased sugar factories and the foreign-owned
Barclays Bank. The new role of government in the economy was
financed through deficit spending and a greatly increased levy on
bauxite production; the latter move quickly brought the Manley
government into conflict with the American and Canadian aluminum
companies.
The bauxite conflict involved Jamaica's abrogation of its
agreements with international aluminum companies in 1974. The
dispute resulted from Jamaica's decision to impose a new 7.5-
percent bauxite levy in order to gain greater national benefits
from the industry and offset the increased cost of imported oil.
This measure had the broad, and perhaps overwhelming, support of
nearly all sectors of Jamaican society. From January 1974 to March
1975, the bauxite levy provided close to J$ 200 million, increasing
bauxite revenues sevenfold in the first fiscal year of the tax (see table __, Selected Movements in the Jamaican Exchange Rate,
Appendix A). The new bauxite levy was the most important and
dramatic example of expanded government involvement in the economy.
The Manley government also began negotiating with the aluminum
companies over acquisition of a significant equity position in
their Jamaican operations (albeit a smaller share than that sought
in bauxite production). Between 1974 and 1978, Jamaica and the
international companies concluded agreements that gave Jamaica a
51-percent stake in both Kaiser and Reynolds' local operations, a
6-percent share of Alcoa's, and 7 percent of Alcan's. Revere
Aluminum and the government could not agree on a price, resulting
in Revere's withdrawal from Jamaica. The government also purchased
much agricultural land surrounding the bauxite mines. Throughout
the proceedings, the government was able to acquire the companies'
landholdings at book value.
An important element of Jamaica's bauxite policy during the
1970s was the formation of the eleven-member International Bauxite
Association (IBA). Modelled on the Organization of Petroleum
Exporting Countries (OPEC), by 1976 the IBA controlled about 70
percent of world bauxite production and 90 percent of world bauxite
trade from its Kingston headquarters. The greater availability of
bauxite compared with oil, however, and the reluctance of other key
members of the IBA to impose taxes equivalent to those of Jamaica
reduced the IBA's effectiveness.
Although extremely popular among most social classes in
Jamaica, Manley's bauxite levy produced mixed results. In the short
run, the policy provided significant revenues for the government's
social programs and generated scarce foreign exchange for Jamaica's
businessmen; it alienated the foreign companies, however, and
encouraged them to develop new resources in Brazil, Australia, and
Guinea during the 1970s and 1980s. A long-term decline in new
investment in Jamaican bauxite caused a fall in the country's share
of world output.
Manley's second term (1976-80) was characterized by protracted
attempts to come to terms with the IMF for economic support. As the
economy gradually deteriorated and international reserves had
dwindled during Manley's first term, the government had been forced
to approach the IMF for assistance with balance-of-payments
support. Strapped with an ailing economy, the Jamaican government
agreed to an IMF stabilization program a few months before the 1976
election. The IMF agreed to make a loan to Jamaica if the
government undertook a large currency devaluation, instituted a
wage freeze, and made a greater effort to balance the budget. After
the election, however, Manley rejected the IMF recommendations,
citing the harsh measures demanded by the Fund in return for
balance-of-payments support and arguing that the IMF
conditionalities constituted interference in the internal affairs
of the country.
The government then produced an austerity plan, the Emergency
Production Plan of 1977, that emphasized self-reliance and
agricultural development. The plan included provisions for
establishing a two-tier exchange system and devaluing the Jamaican
dollar. Although the plan did not conform to IMF demands, it laid
the groundwork for an eventual reconciliation between Manley and
the IMF. In May 1977, IMF negotiators arrived in Jamaica to arrange
a two-year Standby Agreement that was to provide Jamaica with a
much needed US$75 million. The IMF suspended the Standby Agreement
in December, however, because Jamaica had failed to meet one of the
targets monitored by the IMF on a quarterly basis.
In January 1978, the IMF was once again invited to Jamaica to
negotiate a three-year Extended Fund Facility (EFF) in the amount
of US$240 million. In order to qualify for the EFF, Jamaica
devalued its two-tiered currency by 13.6 percent (basic rate) and
by 5.2 percent (special rate). Under the terms of a rigid May 1978
agreement, the government reunified and devalued its currency,
agreed to place the currency on a crawling-peg system of regular
devaluations during the next year, imposed new taxes on consumer
goods, reduced government expenditures, increased charges for
government services, lifted price controls, guaranteed profits for
private firms, set a ceiling on wage increases, and limited the
activities of several state-owned corporations.
The IMF program resulted in exacerbated political and social
tensions. Although Jamaica generally followed the terms of the
agreement, inflation soared, real wages fell, foreign reserves
collapsed, and the trade deficit rose, all of which were expected
as part of the short-term adjustment to stabilization policies. The
decline in living standards caused by the agreement increased
unrest, violence, and opposition protests.
Because Jamaica had complied with its policies, the IMF
increased its lending to Jamaica in June 1979. The new limits for
the EFF were set at US$428 million to cover the costs of severe
floods and the increased price of oil, which skyrocketed again
during 1979. Despite the new funding, IMF-Jamaican relations soured
in late 1979 as the economy continued to perform poorly even though
the island followed the Fund's basic guidelines. Jamaica continued
to negotiate with the IMF until March 1980, when Manley broke off
negotiations and outlined a new, non-IMF path to economic recovery.
In the subsequent election of October 1980, the PNP carried only 41
percent of the vote, an apparent repudiation of Manley's policies
of initially seeking IMF support and later imposing severe
austerity measures on the population.
Seaga's October 1980 election marked the beginning of the
second major shift in economic policy since independence. Seaga's
JLP was quick to put virtually all of the blame on Manley for the
steep economic decline of the previous decade. The Seaga
government, a close ally of the newly elected administration of
United States president Ronald Reagan, also favored a supply-side
approach to economic management. Provided with unprecedented
external financing from multilateral and bilateral lending
agencies, the Seaga government embarked on a structural adjustment
program under the specific guidelines of the IMF and the World
Bank.
The Seaga government changed the general outlook of the
Jamaican government by the structural adjustment of the economy,
stressing private-sector initiative and market mechanisms.
Determined to reverse the export bias of the manufacturing
industry, the government refocused exports on "third country
markets" (other than the domestic or Caricom markets), particularly
the United States, using foreign exchange export incentives to
increase trade. This strategy coincided with the duty-free
importation of goods destined to the United States market covered
under the Caribbean Basin Initiative (CBI--see Appendix D).
Basing its policies on comparative advantage studies, in the
early 1980s the government announced seven priority subsectors
where investment and production would be emphasized and foreign
exchange would be focused: garments and sewn products, footwear and
leather products, construction materials, food and agro-industry,
automotive products, furniture, electronics, and electrical
products. Primary emphasis was placed on light or value-added
manufacturing that utilized Jamaica's comparative advantage of
cheap labor through production-sharing with American or Asian
companies. The new industrial push also entailed a variety of
physical infrastructure improvements and projects. For example, the
government used World Bank loans to build factory space in Export
Free Zones in Kingston, Montego Bay, and later in Spanish Town,
where the bulk of the new export-oriented industries operated. New
garment and apparel factories were generally referred to as 807
program factories, (see Glossary), named after the corresponding
United States Tariff Schedule number that allowed these exports
preferential access. Light manufacturing factories were the
busiest, and garments and other sewn products in particular enjoyed
the most rapid growth of all priority subsectors.
Structural adjustment policies were also aimed at reducing
state ownership in directly productive enterprises, such as hotels,
which were divested. Although the JLP government sought similar
policies of divestment in oil refining and bauxite mining, the
abrupt decisions of large foreign companies to leave Jamaica
limited Seaga's flexibility. For example, when the Exxon
Corporation decided to sell its Jamaican refinery, the Seaga
government felt obliged to buy it so the country could refine oil
locally and continue a small reexport program. A similar situation
arose in the early to mid-1980s, when most of the major bauxite
companies on the island decided to close operations or leave
Jamaica, despite the government's pro-foreign investment stance. In
the case of the closing and sale of the Alpart plant in Clarendon,
the government once again bought the enterprise in order to
maintain a necessary level of production and exports. In 1987 a new
round of divestment of state enterprises was announced, including
the National Commercial Bank and branches of the national media.
The government decided to retain ownership in utilities, however.
Beyond the outright buying and selling of private enterprises,
the structural adjustment also entailed promoting investment,
finding new markets for nontraditional products, and improving
financing for exporters. The attempt to achieve these economic
goals led to important organizational changes in government
agencies, most notably the establishment of the Jamaican National
Investment Promotion Limited (JNIP). The JNIP's task was to lure
more foreign investment to Jamaica while promoting the island's
newly developed exports through offices in the Caribbean, North
America, Europe, and Asia. The high-profile offices were
established to act as a one-stop shop for foreign investors, who
were often dismayed by Jamaican bureaucracy. Although the JNIP was
able to solicit new investment during the 1980s, these gains could
not replace the aggregate investment losses represented by the
departure of major oil and mining companies.
The government also sought to improve available financing for
exporters. In 1981 the government established the Export
Development Fund to troubleshoot export problems and strengthen the
budget and promotional role of the Jamaica National Export
Corporation. In 1986 the government disbanded the Jamaica Export
Credit Insurance Company and replaced it by the more sophisticated
Jamaican Export-Import Bank, which was expected to give more
effective support to exporters.
Privatization was the government's focus in agriculture as
well. Several large foreign companies were invited to the island to
manage previously government-run activities, especially in the
sugar industry. In addition, a special, high-profile government
agency, Agro-21, established as part of the prime minister's
office, was created to develop new agricultural products and to
modernize farming methods. Like the JNIP, Agro-21 had mixed
success; some subsectors such as floral exports and inland
fisheries flourished, whereas Agro-21's largest endeavor, the
Spring Plains Project had not, as of 1987, proved successful.
The Seaga government also pursued more orthodox fiscal and
monetary policies in attempts to retain access to external
financing under structural adjustment lending. On the fiscal side,
the government attempted to reduce budget deficits primarily
through public sector lay-offs and divestment of enterprises, and
secondarily through ad hoc sales taxes and a comprehensive tax
reform. Further policies included the elimination of food subsidies
and other price controls, increased public school fees and a
reestablishment of university tuition, and a gradual reduction in
quantitative restrictions on imports. Monetary policy was
characterized by a tight control of the money supply. Although
emphasis was placed on savings to stir investment, local investment
was hindered by relatively high interest rates. Despite orthodox
policies, deficits remained relatively large until 1986, when
national accounts began to improve.
The Seaga government's structural adjustment and economic
reform measures were only partially successful by the end of 1986.
On the positive side, the virtual completion of the structural
adjustment process had increased confidence in the economy.
Decreased oil prices and some improvement in the bauxite sector
spurred the economy to grow once again in 1986. At the same time,
however, it was evident that there would be no easy recovery from
the deep recession of the early 1980s. In the late 1980s, debt,
unemployment, and unequal distribution of wealth continued to be
major economic problems facing Jamaica. As had happened with
Manley's policies, Seaga's economic policies were offset by adverse
trends in the international economy, especially commodity prices.
Seaga also discovered that the opposition political forces and the
country's economic legacy represented major constraints on
establishing those policies. Neither Manley nor Seaga succeeded in
transforming the economic structures of Jamaica to the extent
proposed in their rhetoric. Finally, Seaga, too, came into some
conflict with the IMF over both the pace and the nature of economic
conditionalities as the political tide turned against the JLP in
1986. Although most pressures abated after a January 1987 IMF
agreement, the JLP softened its strict orthodoxy of the early 1980s
and focused economic policies on the electoral challenge ahead.
Data as of November 1987
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