As the first ship sails through the newly expanded Panama Canal in April 2016, marking the end of the first phase of its multi-billion dollar expansion, it capped off years of China-esque growth. This is in contrast to Jamaica’s sluggish economic growth with numerous bailouts by the International Monetary Fund (IMF) and has moved a step backwards in trying to achieve its millennium goals. This is a tale of two extremes regarding debt repayment which might provide some lessons to the Troika on how debt repayment should be structured in Europe as not to fall into a vicious Jamaican cycle.
The Story of Panama
The turning point in Panama’s economy can be stemmed from the US invasion of Panama removing the dictator General Manuel Noriega, which under his leadership increased Panama’s debt to large levels, owing over $60 million to the IMF. So how did Panama managed to turn its economy around while still achieving decreasing debt to GDP ratio? It was hugely due to the referendum result in 2006 where its citizens approved the expansion of the Panama Canal. Foreign investment flooded in, initiating a period of high economic growth that was not seen outside of China.
At the same time having a dollarised economy means that the nation enjoyed a long period of low-interest rates on its debt. Therefore, Panama managed to improve its debt to GDP ratio by inflating away its debt through high economic growth which due mainly to significant government incentives in attracting foreign direct investments either through the Panama Canal Expansion Project or the Colón Free Trade Zone, ‘The First Free Trade Zone of the Western Hemisphere’.
The benefit of having strong economic growth coupled with low real interest rates have enabled the government to expand its funding into the public sector in recent years through the Panama Metro Line and energy generation projects to name a few to improve the welfare of its people. Its success in doing just that can be seen in its ability to lower its poverty rate at a much faster rate as its Latin America counterparts. According to the World Banks Poverty headcount ratio at $1.90 a day (% of the population), Panama figures have fallen from 11% in 2006 to 2.9% in 2014, much lower than the average for Latin America of 5.6% (2012).
One of the potential short-run problems for Panama is that multinational companies still find it challenging to win contracts against entrenched players from Spanish and Brazilian firms which might discourage foreign direct investment. Moreover, as the interest rate is pegged to the dollar rate, the constant prospect of a further increase in Federal Reserve rate might push up the interest rate on national debt. However, this effect is less prominent than during the Latin America debt crisis as now the country has less debt, steady economic growth and a sound financial institution.
The Story of Jamaica
Jamaica had also suffered from mounting debts during the 1980s. After a disastrous experiment with socialism, debt levels has soared to record levels and forcing the government to sought IMF’s funding. International creditor-imposed IMF austerity measures resulting in high-interest rates, around 25%, forcing deep cuts in government spending. Jamaica’s decades of strict adherence to the refinancing program is said to have damaged the economic foundation and its future. On the economic front, the inability to spend and help transition the economy post the closing the large alumina producers which employed a large percentage of the population created huge structural unemployment. The lack of a stable social institution and infrastructure investments has eroded foreign investor confidence, sorely needed in a time where expansionary fiscal policy is limited and growth is sluggish.
Spending cuts resulted in Jamaica being one of the only few countries to be moving backwards in its millennium development goal targets. In the 1990s, there were 97% of children who completed primary school but in 2013 only 73% do. For health care, back in the 1990s, there were 59 maternal deaths for every 100,000 childbirths, but now the figure is now around 110, which was another step backwards. In 2009, $4.4 billion were siphoned out of the National Housing Loans Scheme, a legacy of President Manley to help pay off the debts. The largest effect will be the youth unemployment, hovering around 25%, creating a generation of youth dependent of welfare handout, crime and lack of future employability.
“I trained for the world that does not exist.”
A quote by the generation of young Spaniards left behind accurately summed up the plight of youth unemployment currently plaguing Jamaica. Young Jamaicans are left unemployed due the lack of job creation from both public and private sectors. This will further dampen the growth potential of Jamaica once the economy emerged from its debt refinancing program as the youth generation has been damaged by years of unemployment, poor health services, lack of education and skills, all are a disincentive for potential investors.
The bright light in Jamaica is that reform programs are starting to bear fruit. Institutional reforms have pushed Jamaica up the ranking of the 2015 Doing Business rank and recent strong push by the government to be a player in the global logistics network, joining the class of Singapore, Dubai and Rotterdam to become part of the global value chain might boost foreign direct investment and job creation figures. However, would all of this be sufficient to reverse the negative effect of a generation impacted by the highly controversial austerity measures put in place by it international creditors or is it too late?
What was Different in the Two Stories?
Panama’s debt repayment has been less painful as it enjoyed low-interest rates as they were operating in a dollarised economy while at the same time growing at China-like rates. It focused on attracting investment to boost growth level to inflate away its debt to GDP ratio. While on the other hand, Jamaica suffered high-interest rates both from international creditors and local banks while at the same time due to severe government spending cut which dampened the economy and massive fall in GDP.
The Gleaner, Jamaica’s biggest newspaper sums it all up on how far Jamaica has gone backwards. It’s headlined after a poll in 2007 reads ‘Give us the Queen’ underlying the willingness of its people to rejoin under the British rule. Political mismanagement of debt along with liberal institutional policies of harsh austerity has destroyed Jamaica economic foundation to the brink where its people prefer their once colonial oppressors. Greece is currently on the same path if creditors fail to understand that further austerity measures can destroy the fundamentals of the nation creating a loss generation. Therefore is a reduction of interest rates on its debt or even the incentivizing Europeans to invest in Greece be a short cut out of the current debt malaise as Panama has shown us.