The Guardian Unlimited, July 22, 2011
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As the eurozone authorities move closer to accepting the inevitable Greek debt default/restructuring, there are some who have pointed to the Jamaican debt restructuring of last year as a model. It’s hard to imagine a worse disaster for Greece. It is worth a closer look at what has been done to Jamaica, not only as a warning to Greece, but to shed some light on the damage that can be done when “the international community” is willing to sacrifice a country for the sake of creditors’ interests.
Jamaica – a middle-income developing country of 2.8 million people -- has one of the worst debt burdens in the world, with a gross public debt of 123 percent of GDP. At first glance this looks better than Greece (166 percent of GDP) but the more important number is the interest burden of the debt: for Jamaica it has averaged 13 percent of GDP over the last five years. This is twice the burden of Greece (6.7 percent of GDP), which is in turn the highest in the eurozone. (It is worth keeping in mind that the burden of the debt can vary widely depending on interest rates, and on how much is borrowed from the country’s central bank – Japan has a gross public debt of 220 percent of GDP but pays only about 2 percent of GDP in annual net interest, so it doesn’t have a public debt problem.)
Not surprisingly, a country that is paying so much interest on its debt does not have much room in its budget for other things. For the 2009/2010 fiscal year, Jamaica’s interest payments on the public debt were 45 percent of its government spending. This crowding out of public investment and social spending has hurt Jamaica’s progress toward the Millennium Development Goals. Jamaica’s coverage rates for detection and treatment of tuberculosis declined from 79 percent in 1997 to 43 percent in 2006, the worst decline of 77 countries for which data was available. The net enrollment ratio in primary school declined from 97 percent in 1991 to 87 percent in 2006/2007.
Jamaica’s long-term development failure is striking and has a lot to do with its debt burden. For the 20 years from 1988-2008, real income per person grew by just 14 percent, which is incredibly dismal. Then the country was hit by the U.S. and global recession at the end of 2008, losing export revenue, remittances, and other sources of aggregate demand. The government turned to the International Monetary Fund, which had already had a terrible track record in the country with almost continuous programs from 1973-1996. Unfortunately the 2010 IMF program called for policies that would be expected to worsen the recession, including a reduction of the fiscal deficit, as well as real decreases in spending on health, education, and childhood development.
In February of last year the Jamaican government reached agreement with creditors on the Jamaica Debt Exchange, which restructured Jamaica’s debt with the support of the IMF. The restructuring extended the average maturity of the debt and lowered interest rates enough to reduce the government’s interest burden by about 3 percent of GDP annually over the next three years. This would be quite substantial if Jamaica had a debt burden the size of Greece or Ireland, but unfortunately it still leaves the country with unbearable interest payments. There was no reduction in the principal, and Jamaica will have to refinance some 46 percent of its debt within the next one to five years – which could prove disastrous if there are unfavorable market conditions.
Jamaica’s debt burden is outrageous, and needs to be drastically reduced. It is difficult to imagine the country making much progress in economic development while so much of its resources go to interest payments.
While the situation of every over-indebted country is different – in terms of the burden and structure of the debt, to whom it is owed to (international or domestic creditors, official creditors such as the IMF or World Bank, and other specifics) -- the most important issue is the same: How much should a country sacrifice in order to keep paying off its debt? Unfortunately the people making these decisions – the European authorities, the IMF, the Paris Club and allied institutions – look at this issue from the point of view of the creditors. But a responsible government will make its decisions on the basis of the needs of its people – for employment, economic growth, and better living standards. It is this conflict of interest that underlies the debt crises we are looking at in most over-indebted countries.