The Multinational Monitor

JUNE 1980 - VOLUME 1 - NUMBER 5


J A M A I C A

Internal IMF Documents Reveal Political Motives in Jamaica

Jamaica has cut off its stormy relations with the International Monetary Fund. Now, leaked IMF memos substantiate Prime Minister Manley's claim that Fund personnel have been guided primarily by political considerations in their dealings with the island government.

by Wendy Cooper

Confidential international monetary Fund (IMF) documents about Jamaica, recently leaked to the press, provide a telling indication of just how low the institution's credibility has fallen.

The Fund's technical competence, the efficacy of its programs, and its supposedly dispassionate attitude toward the politics of a borrower are all thrown into question. The fact that Jamaica is the country at issue greatly magnifies the documents' significance. Jamaican Prime Minister Michael Manley has been one of the most prominent critics of the Fund's inadequacies when it comes to dealing with the non-oil producing Third World countries, and is currently in the throes of a tense election campaign in which "with the IM F or without it?" is a crucial question.

Since 1944, when the victorious allies met at Bretton Woods, New Hampshire to fashion a new world economy in the image of the United States dollar, the IMF has been the linchpin of the international financial system. In subsequent years, it has become a convenient tool for the developed countries plus OPEC to impose deflationary adjustment on the deficit-ridden Third World. -

Its mandate to promote exchange rate stability and orderly international capital flows is frequently exercised in regards to the Third World, with the Fund effectively forcing developing countries with balance of payments deficits to restore some temporary equilibrium by lowering their levels of income and employment. The Fund's economic philosophy in the Third World is essentially based on the idea that excess demand is the principal cause of a balance of payments deficit. The structural problems of development in an individual country are scarcely ever addressed.

Remarkably, the Fund's own assessments have shown that its programs have limited success. In a recent review of 21 standby arrangements in 18 countries during the 1973-1975 period, only seven were considered successful (and those with qualifications). Although in 14 of the cases the country's balance of payments position improved, that improvement had more to do with such exogenous factors as temporary export increases and heavy inflows of short-term capital than with the standby arrangement itself.

External criticism of the fund's operations has intensified. It has been forcefully argued (most recently at the South-North conference on the international monetary system and the New International Order in Arusha, Tanzania in June) that while the Fund is not responsible for all the current economic problems of the Third World, it has outrun its usefulness in a period when a new spiral of inflation-recession-oil price hikes-debt crises is threatening. Direct recycling of the petrodollar surplus to the Third World and a genuine focus on development are being called for. o

Jamaica has been one of the most vocal of such critics, and for very good reasons. A Third World producer of primary commodities-sugar in the colonial period and bauxite since independence in 1962 - with 60 percent of its 2.2 million people under the age of 20 and no known domestic oil reserves, the island presents a classic case of the small developing country in big trouble.

Manley's program, since he came to power in 1972, has run into some predictable problems. His democratic socialism has been running against the prevailing winds. Manley overestimated his bargaining power in his "Jamaicanization" of the bauxite industry, which commenced in 1974 with the imposition of a bauxite levy on the multinational aluminum companies. The companies began to look elsewhere for their new bauxite supplies, and the general investment climate perceived by foreign firms deteriorated. The cost of such social programs as free education at all levels, a national literacy campaign, land reform and low-cost housing has proven immense in the face of a sky-rocketing bill for imported oil and the declining value of many of the country's exports.

On March 2, Manley announced national elections, citing relations with the Fund as a major issue. Three weeks later, following deliberations of the executive of the PNP, discussions with the Fund were broken off. The government decided that the conditions set for a new $180 million stand by credit were politically unacceptable. Since then, an unprecedented search for alternative sources of bilateral assistance has proceeded: The country is said to require at least $220 million this year, and the struggle to stave off default is a daily one.

These dramatic steps were the culmination of three years of increasingly acrimonious IMF-Jamaica relations. In 1977, Manley turned in desperation to the Fund for an initial two-year standby arrangement. By mid-1979, 264 million in SDRs (the unit of the Fund's special international currency) had been extended by the Fund-and Jamaica's economy was in no better shape. Indeed, as a result of the Fund's "conditionality" program, money was devalued, ceilings were placed on workers' wages, prices increased and real income dropped by 35 percent. International inflation also took its toll. In 1979, Jamaica's oil bill was $33 million more than expected, and food and raw materials costs increased $18 million above projected levels. At home, June floods cost the sugar industry $25 million.

The election campaign has been scarred by violence and verbal invective. The leader of the opposition Jamaica Labor Party, Edward Seaga, a private businessman and staunch advocate of free enterprise, has accused Manley of trying to effect a "military solution" to Jamaica's dilemma. He is intensely critical of Manley's economic policies generally, but on the Fund he is noticeably noncommittal. "The I ME," he said at a recent press conference in New York, "is one of the several options that we have been exploring."

Judging from the recently leaked IMF documents, the Fund's desirability as anybody's option is highly questionable. They show that top officials were of the opinion last November that "if Jamaica was to be considered on its own merits, "the IMF's program "is unlikely to give rise to very significant investment or economic growth over the full three-year period of massive fund support" then under consideration.

"We are also agreed," E. Walter Robichek, director of the Western Hemisphere department and C. David Finch, director of the exchange and trade relations department, told the Fund's managing director in a memo dated November 14, "that on present indications the program would need to be supported by a further 100 million SDR of balance of payment support if the remaining arrears are to be eliminated. "They estimated that this level of assistance would involve the staggering amounts of over SDR 400 million, or about 10 percent of GDP per annum for the last two years of the program "and would undoubtedly need to be continued at a substantial level for the following several years."

In fact, the managing director was told that "the program outlined would not deserve your support"-if it were not for one very significant factor. There was clearly no doubt in the officials' minds that "Jamaica cannot be considered on its own merits."

The reasons given show just how conscious Fund bureaucrats have become of the pressures being brought to bear on the IMF as an institution. "Until the fund is lending on a substantial scale from the supplementary facility to other members, the cessation of lending to Jamaica would be taken as a signal to developing countries that the Fund is not prepared to adapt its standards to fit their needs," they state.

The Fund's current supplementary facility strategy vis-a-vis the Third World-same remedy, just more of it-is dearly laid out. "It is equally evident," Robichek and Finch point out, "that the collapse of the effort would seriously set back attempts to show that a greatly increased scale of Fund lending is an essential part of organized efforts to cope with the emerging problems of adjustment related to energy price increases." There is no apparent interest here in structural development issues. Nor is there indeed in the subsequent confident prediction: "It is also to be stressed that countries do eventually recover from payments problems and predictions of continuing inability to cope are not valid."

Asked in a telephone interview if the Fund is in fact equipped to deal adequately with balance, of payments problems of non-oil producing Third World countries, Robichek merely said: "It isn't the role of the Fund to compensate countries for all the misfortunes that befall them."

The issue of the Fund's technical reputation, however, was the source of some disagreements between Robichek and Finch. Finch stresses that "our role in negotiating and in guiding the action of other providers of capital is critically dependent on maintaining our technical reputation." That reputation, he told the managing director, would be seriously undermined if the program were continued "in light of the widening departures from the original objectives."

Nevertheless, Robichek's greater optimism and Jamaica's crucial importance as a test case won the day.

As far as the specifics of the Jamaican case are concerned, the document admits that "severe flooding, sluggish mining exports, and sharp increases in fuel prices and foreign interest rates-mostly unforeseen and outside the control of the authorities," greatly worsened the country's 1979 balance of payments prospects.

The inflation rate, it is similarly conceded, was affected by factors outside government control. While the original estimates had been for a rate of 12 to 13 percent by December 1979, the documents note that rises in the price of fuel, imported grains and local foodstuffs (due to weather-related shortages) were contributing to the persistence of a rate of 18-19 percent.

Significantly, after Jamaica had broken with the Fund, =1 M f- officials took a harsher view of where the blame lay for Jamaica's troubles. In an April 18 document that is effectively a post-mortem on what went wrong, greater stress is laid on "major shortcomings of fiscal management" by the Jamaican government.

What is perhaps the most troubling aspect of the documents is what they reveal about the extent to which the Fund attempted to involve itself in the internal politics of Jamaica. Fund personnel apparently lobbied hard with extra-governmental groups in an attempt to win support for a new IMF program. According to the April appraisal, Fund staff tried "to extend the network of consultations outside the government to cover business groups, the labor movement and, more broadly, the intellectual community; in effect, an attempt was made to develop mechanisms for collaboration among the various economic groups in the achievement of the program's objectives-the social contract."

And when relations between Jamaica and the Fund really started to crack up towards the end of last year, 1 M F officials identify as the final straw the fact that "the balance of power within the ruling party shifted decisively in favor of those who opposed the basic tenets of the program, viz., reliance on the market mechanisms and on the private sector to effect the recovery."

The Fund's concern with Jamaica's politics did not stop with domestic issues. According to the November document, members of an IMF mission to the island were instructed to "stress the unfavorable impact on local and foreign investment, capital flows and migration of skills, of the deeply entrenched suspicion that the government is not seriously committed to its economic program, judging from perceived inconsistencies between its foreign policy and domestic political stances on the one hand and the dictates of the program on the other."

Asked if such statements might not constitute an attempt to influence the country's foreign policy, Robichek responded that "Manley's foreign policy announcements have proven to be very counter-productive not abroad, but inside Jamaica." He conceded that Manley's speech to the non-aligned nations conference in Havana last fall, in which he severely criticized U.S. policy in the Caribbean, exemplified such "announcements." But Robichek insisted that it was the response of private investors inside Jamaica that concerned the Fund, not that of the U.S. State Department.

Evidently, such a distinction is far from clearcut. And the view in some pro-Manley quarters that the Fund has been part of what is in fact an attempt to "destabilize" Manley's leftist government may gain currency.

But what is clearly inescapable is that the Fund's usefulness, not simply to the Third World but, by implication, to the overall health of the international economy, is in serious question: and the IMF knows it.


Wendy Cooper reports for the Journal of Commerce on international trade and investment issues.


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