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Third World Debt Crises - The Jamaican Experience

Third World Debt Crises - The Jamaican Experience

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Levitt (1991) in a scathing commentary on Jamaica's debt position during the crisis surmises that,
    The huge inflow of official loans and grants in the early 1980's, which might have rebuilt the capacity of Jamaica's economy to increase production, was largely spent on public and private consumption of imported goods and services.
Thus LDC Governments have undoubtedly contributed in transforming the problem of debt into a crisis. Brown (1986) carries this debate further since he notes that in Jamaica the Government's decision between 1976 and 1980 to defend an overvalued exchange rate and to promote socialist policies swayed investor confidence and precipitated capital flight. The government then found itself having to borrow not only to finance the current account deficit but also increasing levels of net capital outflows. The Jamaican government, like other LDC governments during the crisis, is chastised for the way in which they borrowed funds. Caribbean economists point decisively to a generally unplanned or ad hoc way of acquiring debt that occasioned little or no attention to crucial areas or requirements of an efficient debt structure or policy. These crucial areas, highlighted by Kirton (1986) include, the debt maturity structure, targeted benchmarks or suitable debt servicing levels and clear strategies in terms of sourcing and using foreign exchange.

It should therefore be clear that both MDCs and LDCs should bear the responsibility of causing the Debt Crisis. LDCs however debatably could have minimized these effects if they had managed their debt more efficiently during the short period before the second oil price shock. This conclusion is especially alluded to in the work of Levitt who continuously laments Jamaica's dependence (which begun during the years of expansion 1950-1970) on imports to support production and consumption. This situation along with a reluctance to alter the economic model placed Jamaica in a highly exposed position when industrialized countries responded to the second oil price shock. Other LDC's also placed themselves in situations of high-risk exposure that made it unusually difficult for them to service their debt.

It is therefore understandable why many development economists have skewed the blame for the debt crisis towards developing economies. The seeds of the crisis were however planted and nurtured by the actions of both parties and as such the responsibility of alleviating it should be mutual. This conclusion is especially evident in the proposals made and undertaken to ease the harshly negative effects, since most of the options chosen reflected mutual cooperation by both LDCs and MDCs. Interestingly the two options of default, which penalized most developed countries severely and macroeconomic adjustments in the south, which focused on less developed countries were largely unsuccessful in achieving lower levels of debt servicing. Alvin Hilaire in an article entitled 'Economic Stabilization in the Caribbean' alludes to this fact when he states categorically that although the international monetary fund macroeconomic stabilization programs were effective in restoring public confidence in the Government's economic management capabilities in Jamaica "they were inadequate to stabilize Jamaica's balance of payments." He also notes that the economic recovery program in Guyana showed signs of success not only because of its intensive privatization and foreign investment program but also because of "considerable debt forgiveness…under the IMF and World Bank Heavily Indebted Poor Country Initiative." It is therefore clear that the most effective policies like debt rescheduling and debt refinancing were effective because of a mutual approach to addressing the situation.

Notes

(1) P Kalonga Stambuli 'Causes and Consequences of the 1982 Debt Crisis' 1998

(2) Please See Richard Bernal's 'Resolving the Debt Crisis.'

This was an entry for The 2004 Moffatt Prize in Economic Writing. See the contest rules for more information.

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