In Part One, published on November 30, 2014, I reviewed Jamaica’s post-independent debt experiences. Another important facet of macroeconomic stability is inflation rates, as measured by the consumer price index. The Jamaican economy has suffered adversely from the effects of exogenous price shocks at particular points throughout its history, which exposed its lack of resilience in very significant ways. It was shown earlier in the study for example that one of the major causes of the collapse of the economy in the 1970s was the acute shortage of foreign currency which the Government faced as a result of two major oil price shocks. It will also be shown here that one of the main reasons for the high interest rate regime which dominated the 1990s and post-2000 period was the persistent upward pressure on domestic inflation which was posed in that period in the height of the economic liberalisation.

The evidence suggests the existence of a particularly strong relationship between inflation and economic performance as well as income poverty. Inflation in the economy was at its lowest in the period 1960-1972, which was also the period of time when the economy grew the fastest and per capita incomes reached its highest. Prices were very stable between 1960 and 1972 as the rate of inflation averaged a manageable 5.2 per cent in that period. The rate, however, jumped to 18 per cent in 1973 and 27 per cent in 1974, which was partly a reflection of the major oil price shock in the world economy. Prior to this, though, the evidence suggests that there was an upward pressure on the prices of some essential commodities and inputs such as wheat and capital inputs in the world economy, which saw inflation reaching 14 per cent in 1970. In 1978, inflation rose to 35 per cent and averaged 30.4 per cent from 1978-1980, by which time the central bank’s foreign currency reserves had been depleted, and it had little choice but to turn to the multilaterals for critical balance of payments support. A recovery in the global economy and increased aid flows in the 1980s saw an easing of the foreign exchange crunch and of commodity supplies, thus catalysing a reduction in inflation rate in the early 1980s before another round of comparatively milder increase in OPEC oil prices brought the inflation rate back over 20 per cent between 1984 and 1985, in which years the average inflation rate stood at 27 per cent. Aside from oil price increases, there was also a forced devaluation of the currency by 84 per cent in 1983 under the prescriptions of the multilaterals. Although this move made exports more attractive, it also made imports far more expensive, thus triggering inflation in a largely import dependent nation. Relative stability then prevailed in the economy leading up to 1990 when the new government shelved its socialist orientations of the 1970s and embarked on right wing neo-liberal economics. This was particularly manifested by way of its continued financial liberalisation, as well as a heightened economic liberalisation programme.

The post-1990 free market push saw an abandonment of many quantitative restrictions which dominated the previous two decades, including a removal of direct controls such as those on credit and foreign exchange as well as protective tariffs and quotas which profoundly increased the quantity of money in circulation thus contributing to major upward pressure on the inflation rate. Additionally, it precipitated marked currency depreciation within bands, and thus increased the cost of imports and with it imported inflation. Of note, also, is that the economy also started to experience an unanticipated bolstering of remittance inflows in the early 1990s, resulting from the marked levels of migration to Europe and North America, which took place during the economic malaise of the 1970s and 1980s. Taken together, these factors, therefore, resulted in increased demand for consumer goods, thus driving up inflation in an era which was also characterised by an increased affinity for and purchase of foreign consumer goods by the upper echelons of the society. Not surprisingly, therefore, Jamaica experienced its highest inflation rate in the early 1990s reaching 51 per cent in 1991, 77 per cent in 1993, and averaging a significant 36 per cent from 1991-1996. Despite continued inflationary pressures, the Government was able to successfully bring down inflation rate to single digits in the late 1990s, which saw an average of close to eight per cent for the period 1996-2002. This was, however, aided by a high interest rate regime which the central bank started to institute as a response to the monetary pressures brought on by the high. The collapse of the financial sector in the mid-1990s, the resultant government bailout and the various exercises undertaken by the Government to mop up liquidity also created downward pressure on prices. Of note is the severe financial repression which manifested by way of the vast differentials between interest rate and inflation rate which emerged by the late 1990s which saw average lending rates in excess of 30 per cent, while inflation was averaging single digits. This differential represented a clear case of macroeconomic instability in the Jamaican economy. Inflation has thus both directly and indirect imposed negative, restraining effects on the Jamaican economy and draws sharply into question the wisdom of the extent of the fairly comprehensive market capitalism exercise which took root in the early 1990s. High interest rates and inflationary pressures are seen to be strongly associated and, in turn, functioned as an impediment to and disincentive for overall productivity in the economy, suggesting that there is a clear case that high inflation has been part of the country’s struggles with poverty.

Inflation, which is manifestly a symptom of macroeconomic instability, has aided in creating social isolation, which has increased notably and in limiting the involvement of government in the economy. Indeed, it appears that macroeconomic instability as demonstrated by the country’s mostly high inflation rates, high interest rates, and large debt burdens have been critical in accounting for the country’s generally slow economic and social progress. Notably, the country’s greatest prosperity throughout its post-independence history came in the mid to late 1960s and early 1970s when inflation was at its lowest levels. The periods of highest inflation in the late 1970s, generally in 1980s, and first half of the 1990s have coincided with comparatively higher levels of social hardships than the others period and spans the origin of Jamaica’s rise as a major narcotics transshipment point as well as its rank as one of the top 10 murder capitals of the world. In terms of a comparison with per capita incomes, the evidence suggest that per capita incomes were also at their highest during periods when inflation was low and stable for example in the mid- to late-1960s and the late 1990s and post-2000 periods.

Taken together, there is a clear suggestion that, over the course of the time series, macroeconomic instability has impacted adversely on the incidence of poverty and development potential of the Jamaican state. The economy has been more prosperous during periods of macroeconomic stability while poverty has increased under converse conditions.

Denarto Dennis is a lecturer in the Department of Economics at the University of the West Indies, Mona.