A little under one month ago, the Caribbean Policy Research Institute (CAPRI) held a joint seminar with the world- renowned Stanford Graduate School of Business. As the not-so-new Golding administration enters the second half of its term, and just in front of the third in a series of ever more difficult budgets, it seems an appropriate time to address the failure of Jamaica to achieve faster economic growth, without which the relief provided by the Jamaica Debt Exchange will be only a very temporary respite.

CAPRI had assembled an extremely high-powered panel to discuss the Brookings Institute paper by leading Jamaican academic Peter Blair Henry, now Dean of the Stern Business School, and his former Stanford colleague Conrad Miller.

Entitled “Institutions verses Policies : A Tale of Two Islands”, the paper notes that both Barbados and Jamaica inherited the two institutional characteristics that the literature on growth identifies as critical to long run prosperity “strong constitutional protection of private property and English common law”. However, despite a similar small-island economic base, they experienced “starkly different growth trajectories in the aftermath of independence. From 1960 to 2002, Barbados’ gross domestic product, per capita grew roughly three times as fast as Jamaica’s. Consequently, the income gap between Barbados and Jamaica is now almost five times larger than at the time of independence.”

Since their property rights and legal systems are virtually identical, recent theories of development cannot explain the divergence between Barbados and Jamaica. The paper posits that differences in macroeconomic policy choices, not differences in institutions, must therefore account for the differing growth experiences of these two Caribbean nations.

The paper highlights the sharp decline in the standard of living for Jamaicans after 1972. Both countries were impacted by the first oil shock in 1973, but, as Henry and Miller point out, “While Jamaica’s economy contracted at a rate of 2.3 per cent per year from 1972 to 1987, Barbados, whose economy has a similar structure and was subject to the same external shocks, grew by 1.2 per cent per year.”

The authors argue that “countries have no control over their geographic location, colonial heritage or legal origin, but they do have agency over the policies that they implement. Of particular importance for small, open economies (that is, most countries in the world), is the response of policy to macroeconomic shocks such as a fall in the terms of trade. Pedestrian as it may seem to say, changes in policy, even those that do not have a permanent effect on growth rates of GDP per capita, can have a significant impact on a country’s standard of living within a single generation.”

The panel discussion that followed Blair Henry’s presentation of his paper, entitled “Institutions and policy outcomes — what do we know?”, included presentations by financial secretary Dr Wesley Hughes, Capri’s Dr Damien King, University of Michigan dean Susan Collins, and Stanford University’s Eddie Lazear, former chief economic adviser to George Bush.

Dr Collins, who has a Jamaican background, argued that the puzzle that needed to be answered was “Why do poor economic polices persist given good (political institutions?”, presumably referring to our initial constitutional endowment. She argued that our growth outcome was a complex interplay of initial conditions (institutional endowment, geography), policy choices (macro, business climate), luck (external and internal shocks) and leadership. She noted Jamaica’s particularly poor showing in the 2008 World Bank governance indicators in the category rule of law, well below the Caribbean average, and even further below that of Barbados, and theorised that we would have started at a roughly equal level post independence. She argued the particular importance of increasing total factor productivity, which goes beyond simply adding capital or workers to incorporate the intangibles of knowledge and technology in growth performance.

Lazear argued that good rhetoric often makes bad policy, citing as an American example President Obama’s commitment as a candidate to renegotiate NAFTA, whilst his economic adviser Austan Goolsbee effectively told the Canadians he wasn’t serious. He also theorised that the reason China is now doing so well is that the experience of the cultural revolution was so bad that the Chinese had been willing to form a coalition for change.

Using the further example of Italy, he drew attention to the difference between de jure and de facto institutions. Quite different growth outcomes prevail between Northern and Southern Italy, depending on “how close one gets to the Swiss border”, despite both parts of Italy having supposedly the same institutions. In short, he says, “culture really matters”.

In his presentation, Dr King noted the inherent tension between determining the importance of policy and institutions, in that “institutions persist” and are often legacies of “two to three hundred years ago”.

He argued that just looking at the endowment of the political systems was not convincing, as both the Philippines and the US had a similar Presidential style political system, but had a ten fold difference in national income.

Looking at the question as to why fiscal policy went so awry in the 1970s, King argues we need to explain why despite a successful exchange rate peg, low fiscal deficits, and twenty years of average growth of six per cent per annum, the Jamaican population were much more susceptible to the argument “better must come” — an argument that fell flat in Barbados.

King argued a promising line of thought was that Jamaica had been set up as a “colony of exploitation”, with a high degree of absentee land ownership and the resultant inequality, whilst Barbados had a much greater degree of European settlement, and therefore more participation in governing structures from the very beginning. This difference may account for why Jamaica has run fiscal deficits every year except for six since independence, whilst in Barbados budgets have been much more balanced.

Supporting this view, Dr Hughes observed that in 1992, Barbados negotiated wage cuts to avoid a devaluation, something that “he can’t believe Jamaica could have pulled off at any time in its history”.