Editorial

The benefits of bipartisan consensus on economic policy

Sunday, October 07, 2018

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When the two main political parties in a country have very different approaches to economic policy the result is often disastrous.

The United Kingdom's steady post-empire decline from being the dominant global power is not unrelated to economic policy differences between the Conservative Party and the British Labour Party. Two examples suffice, namely, the privatisation-nationalisation of the coal industry and membership in or withdrawal from the European Union.

In Jamaica, there were costly differences between the state-led Democratic Socialism of the 1970s of the People's National Party (PNP) and the unregulated free market of the Jamaica Labour Party (JLP) of the 1980s. There were diametrically opposed differences over regulation/deregulation, State ownership/foreign ownership and the International Monetary Fund (IMF) versus the non-IMF path.

One common economic practice which has had disastrous consequences and for which the Jamaican people are still paying, has been persistent and excessive government borrowing. Both the PNP and JLP are guilty.

It is based on the assumption that increased government expenditure financed by borrowing rather than taxation can stimulate economic growth stymied by adverse external events. It does not work in a highly open economy. It produces escalating debt, increased imports, and no economic growth.

It started immediately after Independence in 1962 when the debt/gross domestic product (GDP) ratio was single digit. Then the Government thought it could compensate for the first oil crisis which tripled the oil import bill in a single year in the early 1970s.

In the 1980s, the external debt of Jamaica was doubled. And so on until Jamaica had one of the highest debt/GDP ratio in the world. Whereas empirically based economic wisdom states that the debt cannot be paid off if the debt/GDP ratio is over 60 per cent, Jamaica's was over 120 per cent.

Arithmetic and common sense dictated that the debt had to be restructured (a pre-condition of the IMF deal) and reduced to bring down the debt/GDP ratio and the budget deficit.

This extremely difficulty and politically courageous process start under Mr Audley Shaw and was continued by Dr Peter Phillips, and again under Mr Shaw. Now it is Dr Nigel Clarke's turn at the wicket. He needs to stick tenaciously to the programme.

The continuity of economic policy is necessary over long periods to tackle problems of the dimension of the high debt/GDP ratio. That is a lesson for Barbados where the public debt is the equivalent of 170 per cent of GDP.

Continuity of economic policy is an integral aspect of economic stabilisation. Fiscal consolidation has been made possible in large measure by bipartisan consensus and political courage. Jamaica owes a debt of gratitude to Mr Shaw and Dr Phillips.

There is still a long way to go to get to the pragmatic benchmark of a debt/GDP ratio of 60 per cent. This is the challenge for Dr Clarke. But he enjoys the benefits of bipartisan political consensus, the plaudits of international rating agencies, the strictures of the IMF programme, and the absence of external shocks.

If and when (think positive) the debt/GDP ratio gets below 60 per cent, policies must be put in place to ensure that future governments of Jamaica do not relapse into a self-inflicted debt crisis.

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