The evidence shows that Jamaica’s economic performance in the 1990s, a period during which tight monetary policy with high interest rates prevailed, could be described as a failure with none of the key economic targets, other than the increase in net international reserves, being met.

The economy experienced only minimal growth during the period 1991 to 1999, with GDP remaining at about J$17 billion, exports falling from 29 percent of GDP to 18 percent, public-sector surplus moving from 2.2 percent of GDP to minus 5 percent, unemployment rate remaining constant at 15 percent (but with suspected high underemployment), and a prolonged period of high interest rates, with the weighted average lending rate of commercial banks at around 40 percent.

. Foreign exchange flows contributed heavily to money creation, which grew at an annual average of about 40 percent between 1991 and 1995 – the period leading up to the collapse of the domestic financial sector. Primarily because of the sharp increases in money supply (M2), the rate of inflation could not be contained and averaged 37 percent annually.

The rate of inflation could have been even higher were it not for the high level of liquid reserves imposed by the Bank of Jamaica, which was a high 52 percent for commercial banks, of which 25 percent was in non-interest-bearing cash accounts.

Given the situation of money creation and the accompanying high interest rates and the prevailing low level of capitalization in the business sector, where financing was primarily from overdraft facilities, the ultimate result was massive loan losses contributing to insolvency of the banking system.

In addition, corporate entities and persons with cash became more risk-averse and, rather than making long-term investments, moved funds to government paper and short-term investments (especially the commercial paper market), to take advantage of high interest rates in liquid instruments.

While Prime Minister Patterson’s policies could be described as reformist, especially when compared with the experience of the 1970s, the things that went wrong were misguided financial policies based on the fixation of continued buildup of the net international reserves and maintenance of the exchange rate, almost at any cost.

The consequence was a sustained period of high interest rates, business failures in all the domestic market-oriented sectors, a worsening of the current account balances, public-sector deficits, high interest rates, high inflation, and a decline in the production of goods and services.

The main beneficiaries from such policies are cash-rich companies and financial institutions that are heavily invested in government paper. As a result, those policies have led to a redistribution of income from those who can least afford it to the wealthy.

The manufacturing sector lost one-third of its contribution to gross domestic product, falling from 21.2 percent in 1990 to 15.7 percent in 1999, while most of the growth that took place was in financial institutions as their share of GDP rose from 9.2 percent to 13.4 percent over the same period.

So the dynamism of that sector, developed by Jamaican entrepreneurs, was one of driving forces that contributed significantly to the national economy. At the same time, the balance of goods and services account deteriorated by some 150 percent between 1991 and 1999, moving from minus US$256 million to minus US$634 million.

Net international reserves would have been wiped out had it not been for the high flows of private transfers that rose from US$253 million to US$612 million over the same period (and is now in excess of US$1 billion) and short-term capital inflows to take advantage of the high interest rates with virtually no devaluation risk, given the zealous commitment to protecting the exchange rate. It was a sure-win situation for short-term investors and speculators.

As to whether liberalization of the foreign exchange market has been successful, the 1990s experience would suggest there was no capital flight and that short-term inflows took advantage of high interest rates.

The price paid for attracting such funds was a period of sustained high domestic interest rates with a substantial premium over rates overseas.

While these flows allowed the authorities to buy foreign exchange and to increase the net international reserves, the foreign exchange inflows were not channeled into productive enterprises, thus voiding the real benefits of liberalisation.