Apr 09, 2015
The international media isn't paying much attention to President Barack Obama's trip to Jamaica this week, but maybe they should. The country has become a terrible example of what can happen when creditors -- led by the International Monetary Fund -- are able to impose harsh austerity on a small nation in an attempt to collect on an uncollectable debt. Because the U.S. Treasury Department decides what the IMF does in the Western Hemisphere, President Obama himself can claim responsibility for this crushing economic failure.
The Caribbean island nation has had declining living standards for the past 20 years. Per capita GDP has fallen by an average of 0.3 percent annually, making Jamaica the worst-performing economy in the hemisphere over that time frame. And this measures only average living standards. It is much worse at the bottom, with poverty more than doubling since 2007 and unemployment surpassing 14 percent - higher than its peak from the 2009 world recession. (More detail can be found here.)
But where Washington bears the most responsibility are the country's dim future prospects. It is currently under an IMF agreement that requires the government to run annual primary budget surpluses - revenue minus spending, excluding interest payments - of 7.5 percent. This is the worst such burden in the world. For comparison, Greece was projected to run a primary budget surplus of 3.0 percent this year and about 4.5 percent thereafter. This goal is so unsustainable that it is causing a political crisis as well as a widespread belief that it can't possibly happen.
How can something so much worse be done to Jamaica? Besides the obvious fact that Jamaica is much poorer and also black, it mostly boils down to the creditors cartel, headed by the IMF, that is calling the shots. This used to be the situation faced by most of the Western Hemisphere south of the U.S., but in the past 15 years the vast majority of the region has gotten loose from the IMF and Washington's grip, winning Latin America's "second independence." Jamaica is an extreme example of what happens to those who were not fortunate enough to get away.
The fiscal austerity that this cartel has imposed would be enough to throw even the U.S. economy into recession, with budget tightening of 5 percent of GDP between 2012 and 2015. Even at the IMF executive board - which must approve the four-year agreement that the country is operating under - about 25 percent of the directors were worried that excessive austerity could threaten Jamaica's "fragile recovery and social cohesion."
By any measure of the country's debt burden, it is unsustainable. The government is currently paying more than 8 percent of GDP in interest - about twice the level of the most indebted countries in Europe, and one of the worst interest burdens in the world. There have been two debt restructurings in the past three years, led by the IMF. These reduced the interest burden from even more astronomical levels, but left it unsustainably high. And they didn't touch the principal - hence the ridiculously high primary budget surplus that is being imposed in order to pay down the debt over the long term, especially with so little economic growth. (This is similar to the problem that Greece faces, only much worse.)
Moreover, the debt restructurings of 2010 and 2013 didn't touch the foreign institutions that hold a little less than half of the external debt. These official creditors are mainly the IMF, World Bank, and Inter-American Development Bank (IDB). Although the interest rates on this debt are much lower than on the privately held debt, it is still a sizable debt burden, and the IMF is currently pulling out more money from Jamaica than it is lending.
Here is where President Obama could make a big difference if he wanted to allow Jamaica to have a chance at growth. In 2007 the IDB canceled billions of dollars of debt from five countries in the hemisphere: Bolivia, Haiti, Honduras, Guyana and Nicaragua. The U.S. could help to arrange something similar for Jamaica (and other highly indebted Caribbean countries such as Grenada) with not only the IDB, but the other official creditors as well.
Most immediately and much more easily, President Obama could direct the U.S. Treasury Department -- and therefore the IMF -- to put an end to the self-defeating austerity in Jamaica, and allow the economy and employment there to grow.
Ironically, it is the massive amounts of aid from Venezuela, as well as investment from China, that has enabled the Washington-based creditors cartel to squeeze Jamaica like this. According to the IMF, Venezuela has provided Jamaica aid averaging about 2.5 percent of Jamaica's GDP over the past three years through its Petrocaribe program. This is massive. For comparison, it is much more, relative to the economy, than U.S. federal spending on Medicaid. But to Jamaica's great misfortune, under current arrangements this aid is used to pay off creditors rather than invest in the country's future.
A change of policy from President Obama is unlikely without some pressure from Jamaica. No government wants to default on its debt, but Kingston must show its willingness to say no to the IMF creditors cartel and the future of endless economic decline it offers.
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