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THE WORLD BANK

The Road to SustainedGrowth in Jamaica

A W O R L D B A N K C O U N T R Y S T U D Y

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A W O R L D B A N K C O U N T R Y S T U D Y

The Road to Sustained Growthin Jamaica

THE WORLD BANKWashington, D.C.


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Copyright 2004The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W.

Washington, D.C. 20433, U.S.A. All rights reservedManufactured in the United States of AmericaFirst printing: April 2004

printed on recycled paper

1 2 3 4 06 05 04

World Bank Country Studies are among the many reports originally prepared for internal use aspart of the continuing analysis by the Bank of the economic and related conditions of its develop-ing member countries and to facilitate its dialogues with the governments. Some of the reports arepublished in this series with the least possible delay for the use of governments, and the academic,business, nancial, and development communities. The typescript of this paper therefore has notbeen prepared in accordance with the procedures appropriate to journal printed texts, and the

World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal

documents that are not readily available.The ndings, interpretations, and conclusions expressed in this paper are entirely those of theauthor(s) and do not necessarily reect the views of the Board of Executive Directors of the WorldBank or the governments they represent. The World Bank cannot guarantee the accuracy of thedata included in this work. The boundaries, colors, denominations, and other information shownon any map in this work do not imply on the part of the World Bank any judgment of the legalstatus of any territory or the endorsement or acceptance of such boundaries.

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ISBN: 0-8213-5826-X

eISBN: 0-8213-5827-8ISSN: 0253-2123

Cover Art by Jamaican painter Milton Messam, 2003.

Library of Congress Cataloging-in-Publication Data

The road to sustained growth in Jamaica.p. cm. (A World Bank country study)

Includes bibliographical references.ISBN 0-8213-5826-X

1. JamaicaEconomic conditions. 2. JamaicaEconomic policy. I. World Bank. II.Series.

HC 154.R62 2004330.97292dc22

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iii

T ABLE OF C ONTENTS

Acknowledgments Abbreviations

EXECUTIVE SUMMARY

PART I: OVERVIEW AND POLICY OPTIONS A Conguration of Bandwagon Reforms Could Make a DifferenceThe Big Picture: Past and PresentGrowth and Poverty ReductionUnderstanding Growth in JamaicaReducing the Fiscal and Debt BurdenRevitalizing the Financial System

Improving Education OutcomesCrime and Its Impact on BusinessImproving Jamaicas International Competitiveness

PART II: MAIN REPORT1. Growth and Poverty Reduction in Jamaica

Poverty Incidence and Income Inequality Who are the Poor?Rural vs. Urban Poverty Poverty Reduction with No Growth: The Paradox of the 1990sSummary and Issues for the Future

2. Understanding Growth in JamaicaSlow Growth, High Investment, Low Employment GenerationThe Supply Side of GrowthJamaicas GDP Growth May Be UnderestimatedCapital InputsThe Labor Force and GrowthRaising Growth in Jamaica

3. Reducing the Fiscal and Debt BurdenThe Government BudgetTowards Sustainable DebtReducing and Improving Government ExpenditureRaising Revenue: Taxer and User FeesFiscal Institutions and Governance

4. Revitalizing Jamaicas Financial SystemThe Causes of Jamaicas Financial CrisisDealing with the CrisisResults of the Crisis Revolution

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The Debt Overhang and Its EffectsThe Post-Crisis Improvement in Financial Sector Regulation,Supervision, and the Solvency Issue

5. Improving Education OutcomesThe International Evidence on Private and Social Returns to EducationProgress in Education Coverage, But Quality SufferedSocial Returns to EducationInequality, Poverty, and Student AchievementOutcomes and Public Expenditure

What Has Been Done and What More Can Be Done?6. Crime and its Impact on Business in Jamaica

Governance in Jamaica: the International ContextDimension and Trends in Crime in JamaicaPatterns of Criminal Victimization of Jamaican FirmsThe Economic Costs of CrimePolicy Options

7. Improving Jamaicas International CompetitivenessEvolution of Trade in Jamaica 19982001Trade Policy ReformsHas Jamaica Reaped the Full Gains From TradeThe Decline in Competitiveness in the 1990sJamaicas Business Environment for ExportsThe Performance in TourismDecline in the Apparel Sector Reects the Decline in CompetitivenessImpending Issues in the International Trade AgendaImproving the Framework for Exports and Development

Annexes Annex A: Identifying the Determinants of Crime Annex B: Methodology for Business Victimization Survey Annex C: Case of Service Station near Montego Bay Annex D: Case of Furniture Manufacturing Firm in

Kingston Metropolitan Area Annex E: Program DESEPAZ, Desarrollo, Seguridad y Paz

(Development, Security and Peace) in Cali, Colombia Annex F: Police and Community Cooperation for Reduction of

Violence in Diadema, Sao Paulo, Brazil Annex G: Citizen Culture in Bogota (Cultura Ciudadana en a la

Alcadia de Bogota), Bogota, Colombia Annex H: Focus on Youth: the Model of the City of Boston, Massachussets, USA Annex TablesBibliography

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T ABLES

1: JamaicaSelected Economic and Social Indicators, 198020012: JamaicaMillenium Development Goals, Achievements and 2015 Target

3: JamaicaGDP Growth, Employment Growth and Investment Rates:198120014: JamaicaIndicators of Consumption (Average Annual Growth Rates)5: Primary Surplus/Decit (% of GDP) Required to Stabilize the

Stock of Public Debt6: The Annual Economic Cost of Crime, 20017: Impact of Crime on Business Practice (%)

1.1: Consumption of the Poor, 195819881.2: Poverty and Social and Economic Indicators1.3: Poverty in Rural and Urban Areas (percent of population)1.4: Movement in Average Wages and Earnings Compared to Increase in CPI1.5: Factor Income Share1.6: Jamaica CPI Annual Index and Relative Price of Food1.7: Private Remittance Inows (US$ millions)2.1: JamaicaGDP Growth, Employment Growth and Investment Rates:

198120012.2: Jamaica Estimates of Sources of Growth 19912000

2.3: Jamaica: The Rise in Currency Holdings, 199120002.4: Jamaica: Labor Force Indicators, 199120003.1: Jamaica Fiscal Operations, 1992/932002/033.2: JamaicaDomestic and External Debt, and Structure of External Debt,

1991/922001/023.3: Primary Surplus/Decit (% of GDP) Required to Stabilize the

Stock of Public Debt3.4: Jamaica Public Sector Investment Program, 2000/012003/043.5: Government Revenues/GDP, Selected Countries, 20003.6: Fiscal Risk Matrix4.1: Jamaicas Financial System, 1990, 1995, and 20014.2: JamaicaFixed Capital Formation and Growth, 198620014.3: Government Net Credit Stock/Deposits, Banks, 20005.1: Returns to Education of Male Immigrants in USA by Country of Birth5.2: Enrollment by School Type in Secondary and Tertiary Education

by Consumption Quintile (%), 20005.3: Highest Examination Passed by Population 14 Years and Over Not

Enrolled in School/Educational Institution (%), 20016.1: International Comparisons of Selected Governance Indicators, 20026.2: Victimization by Sector in which Firm is Located and Type of Crime6.3: Reporting and Reporting Outcomes (% of Total Cases)

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6.4: Distribution of Respondents by Selected Measures Taken to Protect Against Crime and Nature of Organization (%)

6.5: Annual Impact of Crime, Summary 6.6: The Annual Economic Cost of Crime, 20016.7: Impact of Crime on Business Practice (%)7.1: Export and Import Growth in Jamaica7.2: Merchandise Trade and Exchange Rates in Jamaicas Economy 7.3: Competitiveness Rankings for Jamaica and Neighboring Countries, 2001

A NNEX T ABLES A1.1: JamaicaConsumer Price Ination, 19902002 A2.1: JamaicaMain Aggregates of GDP, 19902001 A2.2: JamaicaGDP by Industrial Sectors, current J$, 19902001 A2.3: JamaicaGDP by Industrial Sectors, constant J$, 19902001 A2.4: JamaicaGDP by Industrial Sectors, % growth, 19902001 A2.5: Growth Accounting Adjusting for Human Capital, 19612000 A2.6: JamaicaDeterminants of Change in GDP Per Capita A2.7: JamaicaLabor Force and Employment by Industry Group and

Labor Status (000), Annual Average A3.1: JamaicaNon-nancial Public Sector Debt

A3.2: JamaicaExternal Public Debt Outstanding A3.3: JamaicaCentral Government Revenues and Grants,

1996/972002/03 (% of GDP) A6.1: Crime Rate Indices for Jamaica, 19702001 A6.2: Jamaica and New York : Murder Rates for 100,000, 19702000 A6.3: Murder Rates by County and Parish, 19842001 A7.1a: Jamaicas Major Exports and Imports (US$ million) A7.1b: Jamaicas Major Exports and Imports (% of exports)

A7.2: Jamaica: Balance of Payments Summary A7.3: Foreign Direct Investment in Jamaica (US$ million), 199801

B OXES1.1: Measurement of Poverty in Jamaica2.1: Consumption Indicators3.1: A Tale of Two Privatizations3.2: The Budget Process6.1: Construction Firm in Kingston Metropolitan Area7.1: The Impact of an Appreciated Exchange Rat7.2: The Pass Through from the Exchange Rate to Prices7.3: Inadequate Infrastructure Limits Investments, Competitiveness and Growth7.4: The Decline of the La Moda Garment Company

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F IGURES1: JamaicaPoverty Head Count2: Jamaica: Poverty Head Count Actual and Regression Prediction3: Jamaica: Fiscal Revenue and Expenditures by Type, 1991/922002/034: Jamaica: Total Public Sector Debt to GDP5: Jamaica: Bank Credit to the Public and Private Sectors, 199420026: GDP Growth and Total Debt (% GDP) in 86 Countries7: School Enrollment by Age and Consumption Quintile, 20008: Lorenz Curve Distribution of Public Recurrent Expenditure by

Level of Education and by Consumption Quintile, 20009: Jamaicas International Ranking on Selected Governance Indicators,

2002/200310: As its REER Appreciated, Jamaicas Share of Exports in GDP Declined11: . . . and as its Share in World Exports Fell

1.1: Jamaica: Poverty Head Count (% of Population)1.2: Poverty (%), Annual Ination (% p.a.) and Annual GDP Growth (% p.a.)1.3: Jamaica Poverty Head Count: Actual and Regression Prediction3.1: Jamaica: Fiscal Revenue and Expenditures by Type, 1991/922002/033.2: Jamaica: Total Public Sector Debt to GDP4.1: Fiscal Cost of Banking Crisis (as Percentage of GDP)4.2: Real GDP in Selected Crisis Countries, (First Crisis Year = 100)4.3: Jamaica: Bank Credit to the Public and Private Sectors 199420024.4: GDP Growth and Total Debt (% GDP)4.5: Commercial Bank Loan Rates and Ination, End June5.1: School Quality According to Employers Appraisal5.2: School Enrollment by Age and Consumption Quintile, 20005.3: Percent Correct in Mathematics, Junior High School Certicate

Examination, 199720005.4: Percent Correct in Language, Junior High School Certicate

Examination, 199720005.5: Percentage of Eligible Cohort Taking CXC, 2001

5.6: Percentage of Total Passes of CXC Candidates, 20015.7: CXC Performance in 9 Caribbean Countries5.8: English CXC Passing Rate (%) and Class Hours in

Eight Caribbean Countries5.9: Lorenz Curve Distribution of Public Recurrent Expenditure by

Level of Education and by Consumption Quintile, 20006.1: Jamaicas International Ranking on Selected Governance Indicators,

2002/20036.2: Jamaicas Relative Performance in Law and Order, 2003 (112 Countries)

6.3: Trends in Rates of Major Crimes in Jamaica, 197020017.1: Tariff Reform in the 1990s7.2: As its REER appreciated, Jamaicas Share in World Exports Fell7.3: . . . and as its Share of Exports in GDP declined7.4: Jamaicas Regional Tourism Share Suffers as the Exchange Rate Appreciates

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A CKNOWLEDGMENTS

This Country Economic Memorandum (CEM) was prepared by a core team consisting of Sanjay Kathuria (Task Leader), Errol Graham, James Hanson and Rina H. Oberai. From the core team,the principal responsibilities for different parts of the report were: Chapters 1, 3 (Errol Graham);Chapters 2, 4 (James Hanson); Chapter 6 (Rina H. Oberai); Chapters 5, 7 and Part I (Sanjay Kathuria). In addition, Rina H. Oberai provided analytical support for the full report.

Kin Bing Wu prepared the rst draft of Chapter 5. Michael Corlett, Kevin Tomlinson, andPhaedra Chrousos provided research support. Ayesha Aparakka-Hemantha did the desktop pub-lishing, helped by Margarita Chavez-De Silva and Fernanda Brito. Homa-Zahra Fotouhi helpedto secure Dutch trust funds. The Country Director is Caroline Anstey, the Lead Economist andSector Leader is Antonella Bassani, the Sector Manager is Mauricio Carrizosa, and the SectorDirector is Ernesto May.

The report draws on the work of an interdisciplinary team from within and outside the WorldBank. Several background papers were prepared for the report. From the University of the WestIndies in Kingston, a team consisting of Alfred Francis, Anthony Harriott, Claremont Kirton, and

Godfrey Gibbison prepared a paper on crime and violence, and also conducted a business victimiza-tion survey of 400 rms across the island. Warren Beneld prepared a paper on poverty. From outsideJamaica, a team from the Netherlands Economic Institute prepared papers on trade and competitive-ness (Huib Poot), productivity (Eric Bartelsman), and National accounts (Ivo Havinga). Otherpapers prepared were on infrastructure (David Erhardt, Basil Sutherland and Winston Hay, Castalia

Advisory Group), and poverty (Carolina Sanchez-Paramo and Diana Steele, World Bank). The reportalso drew on the World Banks cross-country growth analysis done by Norman Loayza, PabloFajnzylber and Cesar Calderon.

The team beneted from interaction with Pablo Fajnzylber, Indermit Gill, Orsalia Kalantzopou-los, Ali Khadr, Daniel Lederman, Norman Loayza, Humberto Lopez, and Arvind Subramanian.Comments were received from Caroline Anstey, Antonella Bassani, Mauricio Carrizosa, Wendy Cunningham, Toby Linden, Yira Mascaro, Ernesto May, Guillermo Perry, Claudia Sepulveda,Roberto Zagha, and country counterparts from the IMF and IDB. The peer reviewers were Nancy Birdsall, Shahrokh Fardoust, and Damien King.

The World Bank is very grateful for the support of the authorities in the preparation of thisreport. The team has beneted from interaction with the Finance Minister (including in dening thescope of the work), Bank of Jamaica, the Ministry of Finance, the Planning Institute of Jamaica, theStatistical Institute of Jamaica, the Ministry of Education, Youth and Culture, the Department of Economics at the University of the West Indies, the Private Sector Organization of Jamaica, anddevelopment partners. The report was discussed with the authorities at a workshop on October 30,2003, and written comments were provided subsequently.

The World Bank is grateful for the support provided by Dutch trust funds that enabled key background papers to be prepared by the Netherlands Economic Institute.

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PAC Public Accountants CommitteePAYE Pay-as-you-earnPIOJ Planning Institute of JamaicaPNP Peoples National Party

PSIP Public Sector Investment ProgramQRs Quantitive RestrictionsREER Real Effective Exchange RateSCJ Sugar Company of JamaicaSCT Special Consumption TaxSESP Social, and Economic Support ProgramSLC Survey of Living ConditionsSME Small and Medium Size EnterprisesSP&CMP Strategic Planning & Community Mobilization ProjectSTATIN Statistical Institute of JamaicaTFP Total Factor Productivity TRN Taxpayer Registration NumberUN United NationsUNDP United Nations Development ProgramUNICEF United Nations Childrens FundUNODC United Nations Ofce on Drugs and CrimeUWI University of West Indies

VAT Value Added Tax WDI World Development Indicators WTO World Trade Organization

CURRENCY EQUIVALENTSCurrency Unit: Jamaican Dollar (J$)

US$1.0 = J$ 60.50 (as of December 1, 2003)

FISCAL YEAR April 1 to March 31

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Jamaicas economic history is a story of paradoxes and potential. It has an English-speaking anda reasonably well-educated labor force, is close to the worlds largest market, the USA, and has

an abundance of natural beauty, which has spurred tourism. Many of its social and governanceindicators are strong. School enrollment for 6- to 14-year-olds is near universal. Poverty declinedsignicantly in the 1990s, and is below the average of comparable countries.

Nonetheless, measured GDP growth has been disappointing since 1972, and was negligible overthe 1990s (although growth in the 1990s may be underestimated) despite high measured rates of investment. Agricultural and manufacturing output fell. Employment has declined since the mid-1990s owing to the large fall in formal private sector employment, and the equivalent of 80 percentof the tertiary graduates during the 1990s are estimated to have emigrated. Crime rates are very high.Government debt reached 150 percent of GDP in 2002/03, one of the highest ratios in the world.The particular conuence of changes that helped reduce poverty in the 1990s is unlikely to continuein the current decade, and may even reverse.

Sustained growth will be fundamental to further declines in poverty and Jamaicas realizing itspotential. This paper offers policy options for increasing growth in a sustainable way. In doing this,it attempts to explain the paradoxes of low growth in GDP and employment despite high invest-ment and strong poverty reduction. Achieving sustained growth will involve dealing with thegrowing debt burden on a very urgent basis, ensuring a sustainable scal situation, and improvinginternational competitiveness. Competitiveness is beginning to improve with the recent deprecia-tion of the exchange rate but will also depend on limiting increases in public and private sector real

wages, and on improvements in infrastructure. Efforts will also be needed to reduce crime, which isa major cost to business and a major deterrent to the quality of life in Jamaica. Education quality needs to be improved and the subsidy to tertiary education reduced in order to stem its drain on

the treasury and improve equality.Jamaicas poor growth performance has a number of well-known explanations, but they need tobe supplemented for the latter half of the 1990s by the loss of competitiveness. The negligible (mea-

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sured) GDP growth in the 1990s is usually attributed to two factors: an adverse external climate andthe nancial crisis that arose from bank privatization to poorly capitalized investors, and nancial lib-eralization unaccompanied by appropriate regulatory strengthening. These two factors offset the lib-eralization in the real economy at the beginning of the decade. In addition, the second part of the

decade was characterized by an appreciating real exchange rate induced by the approach to mone-tary policy, rising real wages, rising costs associated with rising crime, and an increasing burden of government consumption, all of which reduced international competitiveness to the point wherethe output of agriculture and manufacturing declined, and tourism lost some of its share of theCaribbean market.

The poverty headcount was halved between 1992 and 1998 despite negligible measured GDPgrowth, which can be largely explained by a conjunction of several factors particular to the period.First, GDP growth could be underestimated by 12 percentage points per annum in the second half of the 1990s, judging from the growth in consumption of power and meat and sh, as well as therapid growth of currency usage. The underestimate may reect the difculty of estimating GDP inan increasingly service-dominated economy, particularly one that is highly open, and where theinformal sector is large. Second, ination, which hurts the poor disproportionately, fell sharply.Third, the relative price of food declined, owing largely to trade liberalization and the appreciationin the real exchange rate, which reduced a major element of cost in the budget of the poor. Otherfactors in the decline in poverty may have been the rise in real wages and remittances, though theirrole is less clear. However, ination is already low and the real exchange rate has begun to depreci-ate, not appreciate as in the past. Hence two important poverty-reducing factors are unlikely to con-tinue to operate in the future, which means that further reduction of poverty is likely to depend onachievement of sustained growth.

The apparent paradox of low measured growth and high measured investment rates can beexplained by the underutilization of much of the capital created in the early 1990s, the investment

to protect against crime, and the concentration of investment in a few, rapidly growing sectors thatmay have some tax distortions and whose contribution to GDP is hard to measure. Of course, cor-recting for possible underestimation of the level and growth of GDP would reduce this apparentparadox.

Whatever growth has occurred has not created much employment, largely because of the lossof competitiveness in the 1990s that hurt tradable goods production and thereby formal privatesector employment. Employment rose less than 0.3 percent per year from 19912001. Between19962001, only public sector employment rose, while informal sector employment was stable;both rose as a share of total employment. Despite weak employment and productivity growth, real

wages rose, suggesting an imperfectly functioning labor market. Poor employment prospects,along with high crime, have encouraged high rates of migration, and the equivalent of 80 percentof tertiary graduates in the 1990s are estimated to have migrated.

Moreover, scal and debt dynamics have worsened signicantly owing to the resolution of thenancial crisis and a rising Government wage bill. Debt is now about 150 percent of GDP and theGovernment interest bill is about 16 percent of GDP. Simply stabilizing the debt at current ratios willrequire extremely high primary surpluses, exceeding 10 percent of GDP. This has inevitably led toinvestor concerns, indicated by increased spreads on Jamaicas international bonds over the last year,sharply increased domestic interest rates and pressure on the exchange rate. Increasing condence willrequire not just a stable but a declining debt to GDP ratio, which means that tackling the debt burden

will need to be the top current priority of the Government. If the primary surplus were to fall to, say,67 percent of GDP, the ratio of debt to GDP would rise, since a 67 percent primary surplus would

stabilize the debt to GDP ratio only if debt were lower by some 50 percentage points of GDP.The question, then, is how can Jamaica restore self-sustaining and job-creating growth? Thereport argues that this requires improving international competitiveness and productivity, while alsotackling short-term exigencies. The policy options are grouped into three categoriesthose neces-sary to limit the risk of a crisis and its effect, with a likely immediate impact; those likely to have an

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THE ROAD TO SUSTAINED GR OW TH I N JAMAICA 3

impact in the short-term; and those likely to have an impact in the medium- and long-term, but on which action is nonetheless needed now. This categorization is based on the time period of likely impact. The report suggests that a bandwagon approach to reforms may be needed, with policy actions needed on several important fronts in order to improve prospects for sustained growth,

including measures that help avoid crises, since crises hurt the poor and damage growth prospects.Such an approach could involve the following actions:Crisis-proong actions: Given the current macroeconomic situation, crisis-avoidance measures

are necessary. Being vulnerable to a crisis also affects condence and hence growth, as has occurredin Jamaica. Crisis-proong would also mean being ready to offer relief to the poor in case a crisisdoes take place, because it is the poor who will suffer most if a crisis should occur. Actions alongthese lines could include: generating large primary surpluses by implementing revenue generationmeasures and expenditure reduction measures quickly; continuing to strengthen social safety nets;and maintaining and improving transparency and speed of communication of economic news tothe public.

Actions with short-term impact: These could include:I ensuring that the recent gains (since 2002) achieved via real exchange rate depreciation are

preserved;I reducing signicantly the growth of the public sector wage bill and avoiding policies that

will push up the wage rate in US dollars;I continuing to search for cost-cutting measures in the public sector, for example by expedit-

ing the preparation and implementation of the report of the Task Force on expendituremanagement;

I privatizing the remaining public entities and selling Government shares in private entitiesexpeditiously;

I accounting for and reducing substantially the contingent liabilities taken on by Govern-

ment, which have often resulted in an increase in national debt;I equalizing the effective tax rates across different sectors and extending the tax base throughpresumptive taxation;

I eliminating the stamp duties that are levied on selected imports, which will limit the priceincreases (especially of food) that accompany depreciation; and increasing cost sharing intertiary education.

Actions with medium/long-term impact: Such actions would be critical for improving sustain-able growth prospects over time, and could include:

I tackling crime with all-out and systematic efforts (through improving information on crimeand its incidence, improving clear-up rates for violent crimes, and applying targetedinterventions);

I putting more effort and resources in schools where low income students study, gradually reducing wage compression in teacher salaries, and increasing reliance on private schoolsthat strive for quality improvement;

I reducing the cost and providing better coverage of water and sewerage services, improvingroads, especially rural roads, and improving the reliability of power supply, and ensuringthat all these are fully nanced by user charges, i.e., by levying and increasing tolls and userfees on existing and upcoming infrastructure facilities;

I increasing transparency in accounting for contingent liabilities and thereby limiting theirgrowth;

I and improving lending to the private sector, especially small borrowers, by accelerating thestarting up of credit registries.

Finally, given that policy choices are likely to be difcult, an approach based on social dialogueand consensus-building is essential to creating ownership for future reforms by all stakeholders,and for maintaining and improving social peace.


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POLICY MATRIX*** Policies necessary for crisis-proong (reducing vulnerability), immediate impact** Policies with short-term impact* Policies with medium and long-term impact

(Note: the above categorization indicates the time period of likely impact. Policy action is neededon all fronts in order to improve sustained growth prospects.)


Key Constraints Policy Options1. The debt crisis and scal deteriorationDebt/GDP has risen from 79 percent in 1996/97 toabout 150 percent in 2002/03, and domestic debtfrom 35 percent to 90 percent. The rise reects thelarge costs of the nancial crisis but also deteriora-

tion in other parts of the scal accounts.High debt constrains growth by crowding out privateinvestment as well as productive expenditure in thegovernment budget, and also raises concerns aboutmacroeconomic stability.Fiscal deterioration: The central Government pri-mary surplus of 10.5 percent of GDP in 1995/96 hasfallen to 7.7 percent in 2002/03, while the scal bal-ance deteriorated from a surplus of 1.8 percent of GDP to a decit of 8 percent.Interest costs have risen from 8.7 percent to15.7 percent of GDP; the wage bill has increasedfrom 7.7 percent to 13 percent of GDP; other non-interest, non-capital expenditure from 4.7 percentto 6.9 percent of GDP.Capital expenditures have fallen from 5.4 percentto 2 percent and businessmen complain aboutinfrastructure bottlenecks.Explicit and implicit contingent liabilities are growing,created by government on its own behalf or onbehalf of other public sector entities or even entitiesthat have been privatized.Revenues are already high, at 29.6 percent of GDP in2002/03 (tax revenues 26.4 percent of GDP). Tax rev-enues will need to increase further in order to makethe scal and debt situation more sustainable. Thiscould be achieved if the informal sector could be bet-ter taxed and tax rates across sectors rationalized.

2. Pervasive and high crime and violence Jamaica has very high rates of violent crime, includingthe third highest homicide rate in the world.Crime imposes major costs on society and business,which limit growth (see below).The empirical foundation for action on crime is weak.

Increase primary surplus, control wage billand contingent liabilities, and increase govern-ment investment*** Increase the primary surplus, the key policyinstrument. Primary surpluses of over 10 percent

of GDP are needed just to maintain the current,high debt to GDP ratio of about 150 percent.** Limit growth of wage bill, reduce governmentemployment and non-interest, non-capital expendi-ture including contingent liabilities (see below).** Privatize remaining public entities and sell Govern-ment shares in private companies.* Increase expenditure on infrastructure to crowd-in overall private investment; nance it with usercharges.** Account for and reduce contingent liabilities takenon by Government.* Limit growth of contingent liabilities by increasingtransparencyclassify full range of direct and contin-gent liabilities, as well as the associated risk, includingcontingent liabilities from riots, natural disasters andfrom public sector and quasi-public sector entities.** Expedite preparation and implementation of report of Task Force on expenditure management.

Extend tax base, rationalize taxes and reducetertiary education subsidy** Reduce the disparity in tax rates across sectors.** Extend the tax base to include more of the infor-mal sector by a system of presumptive taxes basedon consumption indicators.* Levy and increase tolls on upcoming and existinginfrastructure facilities.** Reduce subsidy on tertiary education (see 3.)* Build social consensus and buy-in for difcult,but necessary, economic policy choices.Identify and measure crime better* Strengthen official data collection on crime, andconduct frequent victimization surveys. Thesewould be an input for policy-making, improvingpolicing methods, public debate and betteraccountability.


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Crime costs society at least 4 percent of GDP explic-itly, including lost production, health expenses, andpublic and private spending. In addition, exportingrms security costs can be as high as 5 percent of sales, small rms losses due to extortion, fraud, rob-bery and arson can be 9 percent of revenue, with anaverage of 36 percent for rms in manufacturingand distribution.Crime reduces the efciency of capital use by limitingmulti-shift operations, and of schooling because of closures. It results in major implicit social costs.The costs of crime limit growth. Some 1020 percentof rms in the business survey suggested that theymay close down in the next three years because of crime.Young males are the most likely victims as well as per-

petrators of violent crime. Amongst those arrested formajor crimes, 53 percent, predominantly male, werefrom the 1625 age group. About 32 percent of the1516 year olds in the poorest quintile were notenrolled in school in 2001, and even if enrolled, somedo not have a positive school experience. This breedsfrustration and unemployment, leads to a cycle of anti-social behavior, and reduces the contribution of apotentially productive segment.3. Poor education outcomesEducation expanded remarkably, real Governmentexpenditure doubled in the last ten years. By 1989,enrollment was universal for 614 year olds. Butexpansion came at the cost of quality. About3040 percent of grade 6 leavers are functionallyilliterate. Only 30 percent pass the Caribbean CXCmathematics examination in grade 11. Jamaican-educated workers receive amongst the lowestreturns in the US labor market. Poor education out-comes limit general productivity gains and growth measured TFP growth in Jamaica has been negativein the 1990s.The quality of schools is very unevenTraditionalHigh School students score much higher than Com-prehensive and Primary and Junior High students ingrade 9 examinations, have better facilities and teach-ers, and much higher participation and scores in theCXC examinations than former Comprehensiveschools.

Improve enforcement, increase social capital,and target high crime areas* Upgrade investigative capacity of police to improveclear-up rates for violent crime, which would detersuch crime.* Form effective partnerships between police, busi-ness and local communities, by setting common goalsand sharing information.* Build social capital such as greater trust and lowertolerance to crime and violence, especially throughinterventions in the home, school and the workplace.* Target high crime urban areas, especially theKingston Metropolitan Area, to reduce the impact of crime on the business community.

Enhance quality of school experience

* Improve the overall quality of the school experi-ence, especially for poor students (see below).* Enhance school programs to include teaching of social and conict resolution skills to students (seebelow).

Increase focus on early learning* Increase focus on early learningthrough teachertraining, setting service standards, providing educa-tional material and toysto improve overall educa-tion outcomes, making later education less costly andmore effective.* Raise functional literacy target to 100 percent ingrade 6 instead of the current goal of 80 percent,because functionally illiterate are likely to becomepart of the youth at risksee below.

Improve incentives and facilities for below-average schools, and make school resultspublic* Allocate funds to schools based on enrollments,not teacher positions approved, thus allowing moreexibility in the use of funding.* Give special grants to schools with large needs, forexample, those with a large proportion of studentsreading below grade.* Provide free foundation books to students in All-Age and Primary & Junior High Schools.* Create incentives for more qualied and educatedteachers to teach in schools other than the Tradi-tional High Schools.

* Gradually reduce wage compression in teachersalaries.* Make school results public so that parents andcommunity can monitor progress.


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Poor students get tracked into lower quality schools,have higher absenteeism, face a more difcult homeenvironment, see lower enrollment after age 14(owing to lack of seats in schools) and higherdropouts, and end up far less educated. All this cre-ates a vicious cycle of youth at risk, especially males,and unemployment and poverty. Tackling these prob-lems would involve a coordinated approach thatwould address issues of school quality of below-average schools (see above), increase school spaceafter grade 9, and pay special attention to thosefalling behind and reading below grade level.

4. Inadequate credit access for private sector Jamaica quickly resolved its massive nancial crisis,and strengthened nancial regulation and supervisionbut at great cost. Jamaican Government debt is nowabout 45 percent of bank deposits, about twice theshare of private credit. With high and relatively risk-free returns on government debt, banks havebecome more reluctant to lend to private rms,especially small rms and start-ups, which constrainsa potentially vibrant source of GDP and exportgrowth. In fact, with the current returns on govern-ment debt, even some current and potential entre-preneurs may become rentiers.

5. Appreciation of the exchange rate andother factors reducing competitiveness in the1990s

Jamaicas competitiveness has declined signicantly inthe 1990s, reected in declining shares of exports inworld trade and in Jamaicas GDP and stagnation in

export earnings. This adverse performance is closelylinked with the appreciation of the CPI-based REERover 199298, and an even greater appreciation inthe wage-based REER. Besides creating incentives forproduction of more non-tradables, the appreciatedexchange rate also reduces growth, because it is theexport and import-competing sectors which usuallysee the most rapid productivity increases.

Survey results show that exports have been hurt byhigh wage increases in the 1990s, exchange rateappreciation, high and rising crime, difculties inaccessing inputs, and high cost of utilities, adding up

to an increasingly high-cost economy. The most suc-cessful exports are based on exploitation of naturalresources, especially tourism and bauxite, but eventourism has been hurt by the above constraints, and

Utilize private schools more intensively andincrease parental involvement* Buy places in private schools that target andachieve quality improvement, rather than constructnew schools, to address problem of insufcientschool space after grade 9.* Pay private schools to provide compensatory,results-based education to repeaters.* Increase parental involvement through publicitycampaigns to inform parents about their role in childlearning, such as discouraging absenteeism, providingmoney for book rental, and creating a more con-ducive home environment.

Start credit registries and improve collateralprocedures** Reduce the demand for resources by government,which means increasing the primary surplusseeabove. This will increase availability of credit for theprivate sector, gradually reduce interest rates, andalso improve the incentives for entrepreneurialrather than rentier behavior.* Accelerate the startup of credit registries toimprove lending quality and quantity. Registries allownancial intermediaries to lend to borrowers morelikely to repay and give borrowers an incentive torepay to maintain a good credit record. Credit reg-istries can increase access by including small borrow-ers and records of loan repayments as well as

defaults.* Improve collateral procedures, perhaps by creatingdebt tribunals separate from the court system, asother countries have done. Lenders and businessmenhave complained about the courts handling of com-mercial cases.Maintain credible macro policies and continueto encourage exchange rate exibility*** Maintain credible macro policies. Because theexchange rate depends so much on market senti-ment, credible macro policies, especially reducing thedebt overhang and maintaining a high primary surplus

will be crucial to prevent an excessive correction inthe exchange rate, which could spark high inationand increase poverty incidence.** Ensure that policies do not offset the gains in com-petitiveness achieved via real exchange rate deprecia-tion since 2002, which would also require that publicand private sector wages do not increase in US dollarterms.Improve enabling environment for exports* Encourage employers and trade unions to concludeproductivity-based wage agreements to preventfuture erosion in competitiveness.

* Improve quality of infrastructure and extend cover-age, especially for water and roads, by levying andincreasing tolls and user fees.


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the once successful apparel sector is in the doldrums.High wage costs are especially constraining. Besidesthe direct effect of high wages on private sectorcosts, the high share of wage costs in the govern-ment budget leads to higher decits and morecrowding out of private borrowing and of productivegovernment expenditure (see above). Also, theimposition of additional stamp duties has generatedupward pressure on prices for the average Jamaicanconsumer.

* Improve access to imported inputs by makingcustoms procedures more efcient.** Eliminate the stamp duties that are levied onselected imports, especially food, which will reducethe price increases that accompany depreciation, andso reduce the potential impact of food priceincreases on the poor.


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P ART I

O VERVIEW ANDP OLICY O PTIONS

This review of Jamaicas poverty and economy by the World Bank comes after a long hiatus. Itfollows up on the commitment made in the Country Assistance Strategy of November 2000,

and is a major milestone in the World Banks deeper engagement with Jamaica. It is comple-mented by a Bank study on Youth Development in the Caribbean, rst presented at the CGCEDmeeting in June 2002. It will be followed up by a Public Expenditure Review. Also, Jamaica is a key component of an ongoing report on tertiary education in the Caribbean, as well as of a proposedanalysis of the likely impact on Caribbean countries of trade negotiations in the context of the Dohadevelopment agenda, the FTAA and the Cotonou agreement with the EU.

In the 1990s, poverty in Jamaica was reduced despite negligible growth in measured GrossDomestic Product (GDP) and a major nancial crisis, owing to a conjunction of several factors.However, these factors are unlikely to continue to operate (see section III) and, moreover, thereis the additional drag on poverty reduction imposed by the current scal crisis. Future sustainedreduction in poverty is therefore likely to depend on sustained growth in the Jamaican economy as

well as the implementation of policies to ensure that the poor are empowered to take advantages of the opportunities that arise from increased growth.

Accordingly, the report focuses on reducing impediments to sustained growth, paying particu-lar attention to policies that will continue to reduce poverty. It is divided as follows: an ExecutiveSummary and Policy Matrix; Part I, which provides a fuller Overview and Policy Options; and PartII, which comprises the Main Report and provides the analytical backing and details behind theconclusions and policy options.

Part I of the report is organized as follows. The rst section highlights the most important pol-icy issues that bear consideration. The second section discusses some of the major successes in the1990s, as well as the areas where Jamaica fell behind. The third section analyzes the reasons for the

trends in poverty, and points to the need for growth in order to reduce poverty in the future. Thefourth section provides a discussion of growth and productivity, and shows that growth is probably underestimated, but is nevertheless very low. The fth section analyzes the grave scal challenge that

9


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confronts Jamaica, including issues of debt sustainability, crowding out and the decline in publicinvestment. The sixth section discusses the nancial sector crisis and its costs, while pointing to theimprovement in governance of the nancial sector and the functioning of the nancial institutions.The seventh section explores the education sector, trends in enrollment and outcomes, and the rea-

sons for less than satisfactory outcomes. The eighth section, on crime and its impact on business,starts by providing a comparative picture on Jamaicas governance indicators, analyzes trends incrime and estimates the economic costs of crime, and discusses rms coping strategies on the basisof a business victimization survey. The ninth section discusses trends in competitiveness includingthe exchange rate and the export environment for rms, and provides case studies of tourism andapparels. Each of the sections also provides policy options.

Part II of the report, which provides the analytical backbone for this study, follows an organi-zation similar to Part I, and consists of seven chapters.

A Conguration of Bandwagon Reforms Could Make a Difference What can be done? This report concludes that there is no magic wand to kick-start sustained growthin Jamaica. Raising growth in a sustainable way is likely to be a slow process. This owes to the twintyrannies of the very large debt overhang and the high level of violent crime, both of which areamongst the highest in the world. These are key underlying reasons for Jamaica being a high costeconomy, and for its lack of competitiveness and growth, and have encouraged the departure of human capital (whose development is heavily subsidized by Government) from Jamaica.

With concerted action on several frontsa bandwagon approachit is possible tomake a difference. Simultaneous, coherent and mutually reinforcing action on several fronts canserve not only to increase growth that is self-sustaining and job-creating, but also to improve per-ceptions, so vital to both domestic and foreign investment. This requires improving internationalcompetitiveness and productivity, but of course short-term exigencies need to be tackled. Some

of the most important ingredients in a bandwagon approach to reform are outlined below.Crisis-proong actions. Given the current macroeconomic situation, crisis-proong (borrow-ing from Williamson 2003), which will help reduce the risk of a crisis, is a top priority, especially since it is the poor who will suffer most during a crisis. Moreover, being vulnerable to a crisis alsoaffects condence and hence growth, as has occurred in Jamaica. Also, in case a crisis does occur,its impact on the poor could be mitigated by pre-crisis strengthening of safety net schemes, which

would enable the Government to offer quick and well-targeted relief to the poor. Such policiescould include:

I Generating large primary surpluses by implementing revenue generation measures quickly and cutting expenditures where possible.

I Continuing to strengthen social safety nets, an area where Jamaica has been devoting muchattention.

I Maintaining and improving transparency and speed of communication of economic news tothe public.

Actions with short-term impact. These could include:

I Ensuring that policies do not offset the recent gains in competitiveness achieved via realexchange rate depreciation since 2002.

I Reducing the growth of wage costs in the public sector by reducing public employment andlimiting wage growth, and avoiding policies that increase wages in US dollars.

I Continuing to search for cost-cutting measures in the public sector, for example by expedit-ing the preparation and implementation of the report of the Task Force on expendituremanagement.

I Privatizing the remaining public entities and selling Government shares in private entitiesexpeditiously.



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I Accounting for and reducing substantially the contingent liabilities taken on by Government, which have often resulted in an increase in national debt.

I Equalizing the effective tax rates across different sectors and extending the tax base throughpresumptive taxation.

I Eliminating the stamp duties that are levied on selected imports, which will limit the priceincreases (especially of food) that accompany depreciation.I Increasing cost sharing in tertiary education, and moving the student loan scheme in tertiary

education away from reliance on public resources to the private sector.

Actions with medium/long-term impact. These actions are necessary since they would be criticalfor enhancing sustainable growth prospects over time, and could include:

I Tackling crime with all-out and systematic efforts, including better information on crimeand its incidence, improving clear-up rates for violent crimes, and applying targetedinterventions.

IPutting more effort and resources in schools where low income students study, gradually reducing wage compression in teacher salaries, and increasing reliance on private schools,in order to improve the quality and skills of the labor force.

I Reducing the cost and providing better coverage of water and sewerage services, improvingroads, especially rural roads, and improving the reliability of power supply, and ensuringthat all these are fully nanced by user charges, that is, by levying and increasing tolls anduser fees on existing and upcoming infrastructure facilities.

I Increasing transparency in accounting for contingent liabilities and thereby limiting their growth.I Improving lending to the private sector, especially small borrowers, by accelerating the

start-up of credit registries and improving collateral procedures.

The difcult policy measures highlighted above require social consensus. An approach basedon social dialogue and consensus-building is essential to creating ownership for future reforms by all stakeholders, and for maintaining and improving social peace. Countries such as Ireland formu-lated a tripartite social pact in 1987 between unions, employers and government (later widened toinclude voluntary and community organizations, representatives of the unemployed and womensgroups) to help evolve a national consensus to support large macroeconomic adjustments, includ-ing the scal crisis of the 1980s (McCarthy 2001). In Mauritius, an economy similar to Jamaica inmany respects such as size, and dependence on tourism and sugar, social and political consensus

was achieved despite inequality and diversity in ethnic composition, and helped in the evolution of strong domestic institutions that played a key role in Mauritius strong economic performance overthe last three decades (Subramanian and Roy 2002).

The Big PicturePast and Present Jamaica has not lived up to its early promise. Jamaica has many advantagesproximity to the worlds largest market, an English-speaking work force, fairly good initial endowments, and wide-spread education. Spurred by the development of bauxite mining and tourism, it enjoyed rapidGDP growth of 6.3 percent annually between 195272. However, the period since then has beenquite difcultper capita income has been stagnant for the last three decades, and major macro-economic problems have periodically occurred, including high ination, large debt accumulation,and, most recently in 1995, a nancial crisis. Many of these problems arose from various combina-tions of economic nationalism, two oil price shocks, declining export prices, and political unrest.

To address many of these problems, Jamaica implemented a series of broad-based reforms, espe-cially since the late 1980s. Jamaica achieved some major successes in the 1990s, particularly in reducing poverty and

ination (Tables 1 and 2), and cleaning up quickly, albeit expensively, the huge nancial crisis.In spite of low measured growth, poverty incidence was halved between 19922001. Ination has

THE ROAD TO SUSTAINED GR OWT H I N JAMAICA 11


26/225


T A B L E 1 : J A M A I C A

S E L E C T E D E C O N O M I C A N D S O C I A L I N D I C A T O R S , 1

9 8 0 2 0 0 2

A v g .

1 9 8 0

1 9 9 0

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

1 9 9 5 2

0 0 2

P o v e r t y a n

d S o c i a l

P o p u l a t i o n ( m i l l i o n )

2 . 1 3

2 . 4 1

2 . 4 9

2 . 5 2

2 . 5 4

2 . 5 6

2 . 5 6

2 . 6 3

2 . 6 0

2 . 6 3

2 . 6

L a b o r F o r c e ( t h o u s a n d )

6 9 9

1 0 5 9

1 1 5 0

1 1 4 3

1 1 3 4

1 1 2 9

1 1 1 9

1 1 0 5

1 1 0 5

1 1 2 5

1 1 2 6

. 1

( 1 9 8 1 )

P o v e r t y ( h e a d c o u n t i n d e x )

2 8 . 4

2 7 . 5

2 6 . 1

1 9 . 9

1 5 . 9

1 6 . 9

1 8 . 7

1 6 . 8

2 0

. 3

L i f e E x p e c t a n c y ( y e a r s )

7 0 . 7

7 3 . 2

7 4 . 4

7 4 . 8

7 5 . 3

7 5 . 5

7 5 . 7

7 5

. 1

I n f a n t M o r t a l i t y

2 7 . 0

2 4 . 5

( p i e r 1 , 0 0 0 l i v e b i r t h s )

G r o s s S c h o o l E n r o l l m e n t

( % o f s c h o o l - a g e p o p u l a t i o n )

P r i m a r y

1 0 3 . 1

1 0 1 . 3

1 0 1 . 5

9 9 . 6

9 5 . 3

9 8 . 7

9 9 . 6

9 8

. 9

S e c o n d a r y

6 6 . 7

6 5 . 3

6 5 . 7

6 6 . 1

8 4 . 2

8 3 . 6

8 3 . 3

7 6

. 6

U n e m p l o y m e n t

2 7 . 3

1 5 . 7

1 6 . 2

1 6 . 0

1 6 . 5

1 5 . 5

1 5 . 7

1 5 . 5

1 5 . 0

1 5 . 1

1 5

. 7

( % o f t o t a l l a b o r f o r c e )

G D P a n

d P r i c e s

G r o s s D o m e s t i c P r o d u c t

U S $ b i l l i o n , c u r r e n t p r i c e s

2 . 7

4 . 6

6 . 6

6 . 5

7 . 4

7 . 7

7 . 7

7 . 9

8 . 1

8 . 4

7 . 5

J a m a i c a n $ b i l l i o n ,

4 . 8

3 3 . 0

2 3 0 . 2

2 4 1 . 5

2 6 2 . 9

2 8 2 . 2

3 0 0 . 9

3 3 8 . 7

3 7 2 . 2

4 0 7 . 7

3 0 4

. 5

c u r r e n t p r i c e s

p e r c a p i t a U S $ ,

1 2 6 6

1 9 0 7

2 6 3 1

2 5 8 2

2 9 2 3

3 0 1 6

3 0 1 0

3 0 1 6

3 1 1 2

3 2 0 3

2 9 3 7

c u r r e n t p r i c e s

p e r c a p i t a , c o n s t a n t J $

6 4 6 0

7 9 9 6

8 1 1 1

7 9 3 8

7 7 2 5

7 6 2 9

7 5 4 2

7 5 4 8

7 6 4 2

7 6 8 8

7 7 2 8

( 1 9 8 6 b a s e y e a r )

( 1 9 8 6 )

G D P g r o w

t h , a n n u a l

5 . 7

5 . 5

0 . 5

1 . 3

2 . 0

0 . 5

0 . 4

0 . 7

1 . 7

1 . 0

0 . 0

% c h a n g e , c o n s t a n t J $

G r o s s D o m e s t i c

1 5 . 9

2 5 . 9

2 9 . 3

2 9 . 7

2 9 . 8

2 6 . 7

2 5 . 1

2 7 . 6

3 1 . 0

3 4 . 3

2 9

. 2

I n v e s t m e n t ( % o f G D P )

G r o s s N a t i o n a l S a v i n g s

1 0 . 8

1 6 . 0

2 3 . 3

2 4 . 9

2 3 . 2

2 0 . 6

2 0 . 0

2 1 . 1

2 1 . 9

1 7 . 5

2 1

. 6

( % o f G D P )

C o n s u m e r P r i c e s ,

2 7 . 3

2 1 . 9

1 9 . 9

2 6 . 4

9 . 7

8 . 6

6 . 0

8 . 2

7 . 0

7 . 1

1 1

. 6

a n n u a l c h a n g e ( % )

E x c h a n g e R a t e , J

$ p e r U S $

1 . 7 8

7 . 1 8

3 5 . 1

4

3 7 . 1

2

3 5 . 4

0

3 6 . 5

5

3 9 . 0

4

4 2 . 7

0

4 6 . 0

0

4 8 . 4

4 0

. 0

( p e r i o d a v e r a g e )

R e a l E f f e c t i v e E x c h a n g e R a t e

1 5 1 . 5

1 0 0

9 2 . 4

1 0 9 . 9

1 2 6 . 9

1 3 4 . 2

1 3 3 . 0

1 3 0 . 6

1 3 1 . 8

1 3 1 . 0

1 2 3

. 7

I n t e r e s t R a t e ( t r e a s u r y b i l l

9 . 9 7

2 6 . 2

1

2 7 . 7

3 8 . 0

2 1 . 1

2 5 . 7

2 0 . 8

1 8 . 2

1 6 . 7

1 5 . 5

2 3

. 0

r a t e , % p e r a n n u m , e o p )


27/225


S t r u c

t u r e o

f t h e

E c o n o m y

( % o

f G D P )

A g r i c u l t u r e

8 . 2

7 . 1

9 . 0

8 . 4

8 . 0

7 . 8

7 . 3

6 . 7

6 . 6

6 . 0

7 . 5

I n d u s t r y

3 8 . 3

4 0 . 5

3 6 . 9

3 4 . 3

3 3 . 1

3 1 . 3

3 1 . 4

3 1 . 5

3 1 . 7

3 1 . 4

3 2

. 7

M a n u f a c t u r i n g

1 6 . 6

1 8 . 6

1 6 . 1

1 5 . 5

1 4 . 9

1 4 . 0

1 4 . 0

1 3 . 7

1 3 . 8

1 3 . 5

1 4

. 4

S e r v i c e s

5 3 . 5

5 2 . 4

5 4 . 1

5 7 . 4

5 8 . 9

6 0 . 9

6 1 . 3

6 1 . 8

6 1 . 8

6 2 . 7

5 9

. 9

P u

b l i c S e c

t o r

( % o

f G D P )

( s c a l y e a r

A p r i

l M a r c h

)

1 9 9 0 / 9 1

1 9 9 5 / 9 6

1 9 9 6 / 9 7

1 9 9 7 / 9 8

1 9 9 8 / 9 9

1 9 9 9 / 0 0

2 0 0 0 / 0 1

2 0 0 1 / 0 2

2 0 0 2 / 0 3

R e v e n u e a n d

G r a n t s

2 5 . 9

2 8 . 3

2 6 . 4

2 5 . 4

2 6 . 6

2 9 . 8

3 0

2 7 . 6

2 9 . 6

2 8

. 0

( c e n t r a l g o v e r n m e n t )

E x p e n d i t u r e s

2 3 . 7

2 6 . 5

3 2 . 6

3 3 . 0

3 3 . 5

3 4

3 1

3 3 . 3

3 7 . 6

3 2

. 7


I n t e r e s t p a y m e n t s

7 . 9

8 . 7

1 1 . 4

9 . 4

1 2 . 4

1 3 . 8

1 2 . 8

1 3 . 7

1 5 . 7

1 2

. 2


P r i m a r y B a l a n c e

1 0 . 0

1 0 . 5

5 . 2

1 . 8

5 . 5

9 . 6

1 1 . 8

8 . 0

7 . 7

7 . 5


A d j u s t e d C e n t r a l

2 . 2

1 . 8

6 . 3

8 . 7

1 2 . 3

8 . 3

5 . 5

5 . 7

8 . 0

6

. 6

G o v e r n m e n t B a l a n c e 1

P u b l i c S e c t o r B a l a n c e

1 . 6

2 . 0

5 . 3

9 . 2

1 0 . 9

7 . 2

5 . 6

6 . 8

9 . 3

6

. 5

T o t a l D e b t

1 3 8 . 3

8 5 . 9

7 9 . 1

1 0 2 . 3

1 1 5 . 7

1 3 2 . 7

1 3 1 . 9

1 3 0 . 6

1 4 8 . 5

1 1 5

. 8

D o m e s t i c

3 8 . 1

2 6 . 4

3 5 . 4

5 9 . 3

7 3 . 1

9 0 . 0

8 3 . 6

7 8 . 2

8 9 . 8

6 7

. 0

E x t e r n a l

1 0 0 . 2

5 9 . 5

4 3 . 7

4 3

4 2 . 6

4 2 . 8

4 8 . 3

5 4 . 2

5 8 . 8

4 9

. 1

E x t e r n a l S e c

t o r

E x p o r t s o f G o o d s a n d

1 4 2 1 . 6

2 3 2 5

3 5 4 1

3 4 6 5

3 5 4 7

3 5 4 0

3 6 4 3

3 7 8 2

3 5 7 3

3 2 2 9

3 5 4 0

N o n - f a c t o r S e r v i c e s

( U S $ m n )

I m p o r t s o f G o o d s a n d

1 6 7 8 . 3

2 9 2 8

4 2 4 6

4 2 3 1

4 5 0 4

4 5 0 2

4 5 0 7

4 9 8 9

5 2 4 8

4 8 2 9

4 6 3 2

N o n - f a c t o r S e r v i c e s

( U S $ m n )

E x t e r n a l c u r r e n t a c c o u n t

5 . 1

6 . 8

1 . 7

2 . 2

4 . 6

4 . 4

2 . 9

5 . 0

1 0 . 1

1 3 . 3

5

. 5

b a l a n c e ( % o f G D P )

N e t I n t e r n a t i o n a l

4 4 2 . 8

3 9 7 . 3

4 2 8 . 2

6 9 2 . 6

5 4 1 . 0

5 8 2 . 0

4 5 0 . 2

9 6 9 . 5

1 8 4 0 . 7

1 5 9 7 . 0

8 8 7

. 7

R e s e r v e s , U

S $ m i l l i o n

( 1 9 8 2 )

G r o s s R e s e r v e s ,

1 0 5 . 0

1 6 8 . 2

6 8 1 . 3

8 8 0 . 0

6 8 2 . 1

7 0 9 . 5

5 5 4 . 5

1 0 5 3 . 7

1 9 0 0 . 9

1 6 4 5 . 4

1 0 1 3

. 4

U S $ m i l l i o n

1 . I n c l u d e s F I N S A C i n t e r e s t p a y m e n t s o n a f u l l y e a r b a s i s .

S o u r c e :

I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s , I M F ; I M F ; W o r l d D e v e l o p m e n t I n d i c a t o r s , W o r l d B a n k ; E c o n o m i c a n d S o c i a l S u r v e y , P

I O J .


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M I L L E N N I U M D E V E L O P M E N T G O A L S , A C H I E V E M E N T S A N D 2 0 1 5 T A R G E T

M i l l e n n

i u m D

e v e l o p m e n

t

G o a l

( M D G

)

I n d i c a t o r s

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 1

M D G T a r g e

t 2 0 1 5

S t a t u s *

E r a d i c a t e E x t r e m e

P o v e r t y h e a d c o u n t , n a t i o n a l

2 8 . 4

2 7 . 5

1 8 . 7

1 6 . 8

H a l f o f 1 9 9 0 l e v e l

O n t r a c k

P o v e r t y a n d H u n g e r

( % o f p o p u l a t i o n )

A c h i e v e U n i v e r s a l P r i m a r y

S c h o o l e n r o l l m e n t ,

9 6 . 2

9 4 . 2

9 5 . 7

9 6 . 8

9 5 . 4

9 2 . 8

1 0 0 . 0 0 A c h i e v e d

E d u c a t i o n

p r i m a r y ( % n e t )

P r o m o t e G e n d e r E q u a l i t y

R a t i o o f g i r l s t o b o y s i n

9 9 . 4

9 7 . 2

1 0 0 . 0

1 0 1 . 0

9 8 . 0

E l i m i n a t e g e n d e r

A c h i e v e d

a n d E m p o w e r W o m e n

p r i m a r y a n d s e c o n d a r y

d i s p a r i t y i n

e d u c a t i o n ( % )

e d u c a t i o n

R a t i o o f y o u n g l i t e r a t e

1 1 1 . 0

1 1 0 . 2

1 0 9 . 3

1 0 8 . 3

1 0 7 . 4

1 0 7 . 3

f e m a l e s t o m a l e s

( % a g e s 1 5 2 4 )

R e d u c e C h i l d M o r t a l i t y

M o r t a l i t y r a t e , u n d e r - 5

3 4 . 0

2 7 . 0

2 0 . 0

2 0 . 0

2 0 . 0

2 0 . 0

6 . 7 ( r e d u c e b y

F a r b e h i n d

( p e r 1 , 0 0 0 l i v e b i r t h s )

2 / 3 f r o m 1 9 9 0 )

M o r t a l i t y r a t e , i n f a n t

2 8 . 0

2 2 . 5

2 7 . 0

2 4 . 5

2 4 . 5

2 4 . 5

( p e r 1 , 0 0 0 l i v e b i r t h s )

I m p r o v e M a t e r n a l H e a l t h

M a t e r n a l m o r t a l i t y r a t i o

1 2 0

1 0 6 . 2

1 0 6 . 2

3 0 ( r e d u c e b y

F a r b e h i n d

( m o d e l e d e s t i m a t e ,

2 / 3 f r o m 1 9 9 0 )

p e r 1 0 0 , 0 0 0

l i v e b i r t h s )

C o m b a t H I V / A I D S ,

P r e v a l e n c e o f H I V , f e m a l e

0 . 4 0

0 . 9

H a l t s p r e a d

L a g g i n g

M a l a r i a a n d O t h e r D i s e a s e s

( % a g e s 1 5 2 4 )

( 1 9 9 9 )

I n c i d e n c e o f t u b e r c u l o s i s

7 . 5

5 . 6

4 . 6

4 . 9

4 . 9

4 . 7

( p e r 1 0 0 , 0 0 0 p e o p l e )

E n s u r e E n v i r o n m e n t a l

I m p r o v e d w a t e r s o u r c e

9 3 . 0

9 2 . 0

9 6 . 5

( h a l f o f 1 9 9 0

O n t r a c k

S u s t a i n a b i l i t y

( % o f p o p u l a t i o n

p r o p o r t i o n w i t h o u t

w i t h a c c e s s )

a c c e s s )

* U s i n g U N D P g u i d e l i n e s f o r a s s e s s m e n t o f p r o g r e s s t o w a r d e a c h g o a l . S e e H u m a n D e v e l o p m e n t R e p o r t , U N D P 2 0 0 2 .

S o u r c e :

W o r l d

B a n k ; E c o n o m i c a n d S o c i a l S u r v e y , v a r i o u s i s s u e s , P I O J ; P I O J


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been reduced to single digits since 1997, an unprecedented post-Independence record. The nancialsector was cleaned up quickly, although the cost of the nancial crisis was one of the largest in the

world in terms of GDP. In addition, international reserves reached new highs with major increases in2000 and 2001. The tax effort has been consistently strong, varying mostly between 2527 percent

of GDP, which is among the higher rates in the developing world. Fiscal management benets froma relatively strong legal and institutional framework. Enrollment in school in the 1990s continued toexpand in early childhood, senior secondary and tertiary education, following near universal primary enrollment of all children between 6 and 14 by 1989. Finally, and importantly, Jamaica comes out

well in cross-country comparisons of democratic traditions and institutions, voice, governmentstability, quality of the bureaucracy, and the regulatory framework.

Millenium Development Goals (MDGs). Jamaica is likely to meet many of these goals(Table 2), including those on poverty and under 5 malnutrition, universal primary education, andaccess to safe drinking water, though it is unlikely to meet the targets on child and maternal mortality (even thought the proportion of births attended by skilled health personnel remains high at 95 percent). Also, HIV/AIDS has been spreading, with the youth being particularly vulnerable. On educa-tion, while net primary enrollment is very high, the key issue relates to inadequate quality of the edu-cation system. Also, while gross completion rates in primary education are high (95 percent in 2000),only 68 percent of those who enrolled completed secondary education (World Bank 2002d).

Unfortunately, the 1990s also left a legacy of debt, crime, and very low growth. The nan-cial crisis increased the public debt sharply, particularly domestic debt. The debt to GDP ratio wasreduced from 138.3 percent in 1990/91 to the still high level of 79 percent in 1996/97 but it roseagain after the nancial crisis and rising scal decits to reach about 150 percent in 2002/03. Thisdebt and its servicing crowds out private borrowing and public capital formation. The crime rate rosein the 1990s (Jamaica has the third highest rate of violent crime in the world), after being quitesteady in the 1980s, exacting a major cost on the economy, equivalent to a minimum of 4 percent of GDP every year. Partly owing to these factors, GDP declined each year from 1996 to 1999. The1990s also saw a loss in Jamaicas competitiveness, with a decline in market share and total factor pro-ductivity, as well as an appreciation of the real exchange rate that hurt tradable goods production.Finally, even as education expanded, outcomes continued to be poor, particularly for the underprivi-leged. And, the lack of opportunities along with crime, contributed to migration equivalent to nearly 80 percent of the well-educated and highly subsidized tertiary graduates.

Growth and Poverty ReductionPoverty in Jamaica declined substantially in the latter half of the 1990s, paradoxically despitea small decline in measured GDP and a major nancial crisis. Poverty declined from an esti-mated 27.5 percent of the population in 1995 to about 17 percent in 1999 (Figure 1). Consistent


Poverty = -1.65time + 36.66R2 = 0.6222

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

Trendline50

40

30

20

10

0

FIGURE 1: JAMAICA POVERTY HEAD COUNT(% of population)

Source: Survey of Living Conditions, PIOJ-STATIN, for poverty data.


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with the general decline in poverty, vulnerability to poverty appears also to be somewhat less in2000 than in 1993.

The decline in poverty is likely due to a conuence of factors particular to the period. First,output probably grew somewhat faster than measured GDP (see Chapter 2). The informal sector and

the underground economy have continued to provide employment, which may be one of the factorsin the underestimate of GDP as well as the decline in poverty. Second, ination, a tax that particu-larly hurts the poor, has fallen. Ination hurts the poor because more of their assets are in currency,

which depreciates with ination, and because ination generates larger relative price movements, to which the poor are vulnerable. Third, the relative price of food has fallen, reecting lower prices of primary products worldwide and the real appreciation of the exchange rate, as well as reduced tradeprotection. Food, of course, accounts for a major portion of the budgets of the poor. In addition,rising real wages (partly because of backward indexed wage contracts, and partly because of strongunion pressure) and remittances may have helped reduce poverty. However, rising real wages alsocontributed to the decline in private employment and may have mainly beneted the already better-off workers. Remittances from overseas have grown sharply in dollar terms, but have not increasedmuch as a proportion of GDP, and in fact declined by 2 percentage points of GDP between 1995and 1998. Their effect on poverty seems to be one of maintaining incomes and keeping people out of poverty, rather than raising people out of poverty.

For the period 19892001, a strong statistical relationship exists between poverty and realGDP, ination, and the relative price of food. This relationship explains relatively well not only the sharp rise in poverty in 1991 but also the observed fall in poverty over the latter half of the 1990s,as can be seen in the low residuals in Figure 2 (see footnote 10 in Chapter 1 for full details). Accord-ing to that relationship, the elasticity of the poverty head count with respect to GDP (percent changein the headcount divided by the percent change in GDP) is 2.8, a relatively large gure by interna-tional standards. This elasticity implies a ten-percent increase in real GDP would reduce the head

count by the relatively larger gure of 28 percentfrom the 17 percent currently to 12 percent. A ten-percentage point fall in ination would reduce the poverty head count by 3 percentage points(from 17 percent to 14 percent) and a ten-percentage point reduction in the relative price of food

would reduce the poverty head count by almost 4 percentage points (from 17 percent to 13 percent).


05

101520253035404550

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

% o

f p o p u

l a t i o n

Actual Regression Prediction

FIGURE 2: JAMAICA: POVERTY HEAD COUNT ACTUAL AND REGRESSIONPREDICTION

Note: The predicted equation is based on the following regression (see Chapter 1): Poverty Head Count = 48.1 0.0036** Real GDP + 0.30** Ination + 37.8* Rel Price of FoodSource: Survey of Living Conditions, PIOJ-STATIN, for poverty data, and STATIN for other data.


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Of course, these estimates reect both any underestimate of GDP growth and the other forces that were at work during the decade and their correlation with these 3 variables.

Unfortunately, it is unlikely that the macroeconomic factors that contributed to therecent poverty reduction and offset the impact of slow growth on GDP will continue to

operate in the next few years. Indeed the slowing impact of these factors may explain why theincidence of poverty has leveled off since 1999. Further gains from falling ination and lower rela-tive food prices are unlikelyination has leveled off and the real exchange rate has begun todepreciate. Only further reductions in protection of agriculture, such as cuts in stamp duties, arelikely to limit rises in relative prices of food. Growth of the informal sector has helped maintainemployment and contributed to unmeasured GDP growth, but it is unlikely to grow rapidly with-out faster growth in measured GDP. Whatever the impact of rising real wages has been, it isunlikely that employers will be able to continue to give wage increases in excess of ination andproductivity, given the openness of the economy and associated competitive pressures. Pressuresfor wage increases not justied by higher productivity are likely to continue to reduce employmentand to slow growth, especially since the need for scal stringency will reduce the public sectorsdemand for labor. Remittances may play a greater role in poverty reduction in the future, assumingremittances continue to grow in dollar terms and the real exchange rate depreciates. Finally, itshould be noted that in all countries, poverty becomes harder to reduce as the proportion of peo-ple in poverty decline. A closely related point, as suggested by international experience, is that theelasticity of poverty with respect to GDP declines as the level of GDP rises.

Future sustained reduction in poverty is therefore likely to depend on sustained growth inthe Jamaican economy as well as the implementation of policies to ensure that the poor are empow-ered to take advantages of the opportunities that arise from increased growth. A recent World Bank study, based on cross-country regressions, suggests that on average the income of the poor risesone-for-one with overall growth (Dollar and Kraay, 2001a).

It will also be important to ensure that Jamaicas growth is pro-poor that growth raisesthe income of the poor at least as much as average income growth, if not more. The poor face anumber of problems in beneting from growth alone. This is illustrated by the aforementioned

World Bank study, which implied that in half the countries, income of the poor rose less rapidly than overall growth. As in most countries, Jamaicas poor are more likely to be members of largerhouseholds, be in female-headed households, have less education, and be employed in the ruralsectoragriculture or shing. In Jamaica, poverty also appears to be strongly correlated with socialfactors including: teenage pregnancy; single parenting; drug abuse; domestic violence; and childabuse and delinquency, though these associations are often the result of poverty, rather than itscause. As the cross-country evidence demonstrates, policies that promote growth in demand forlabor, and access to education, health and social services can help to reduce poverty, reduce the

vulnerability of the poor and allow the poor to take advantage of opportunities that are generated when the economy grows. Policies that address structural rigidities in factor markets will also beimportant to ensure that Jamaicas growth is broad-based.

Rural poverty is also an issue that should be addressed. The incidence of poverty in therural areas, at 24.1 percent, is more than three times higher than that in Kingston. However, thelow correlation between the fortunes of agriculture and the level of rural poverty suggests that ruralpoverty issues are much broader than agriculture alone and the non-farm productive sector may require attention. There is therefore need for a comprehensive rural strategy that embraces themultidimensional nature of rural development.

Understanding Growth in JamaicaGrowth in GDP and employment was low in the 1990s while, paradoxically, investment washigh. Average measured GDP growth actually was negative over the period 19962001 (Table 3). A loss of external competitiveness led to a fall in agricultural and manufacturing output, and also led tothe exit from Jamaica of some textile (a major source of female employment) and tire manufacturing



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G D P G R O W T H , E

M P L O Y M E N T G R O W T H A N D I N V E S T M E N T R A T E S : 1 9 8 1 2 0

0 1

A v e r a g e

1 9 8 1 1

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