Socialist policies curbed Jamaica’s economic growth
Many economists believe that legal and institutional arrangements are the decisive factor influencing economic development. In this view, nations with secure property rights and contract laws enforced by a judiciary free of government interference will benefit from substantial private investment and experience long-term economic growth and prosperity.
A new paper by Peter Blair Henry and Conrad Miller of Stanford University presents evidence that legal institutions are not the only factor influencing long-run economic growth. Government economic policy choices also play a crucial role.
Barbados and Jamaica both gained independence from Great Britain in the early 1960s and have many cultural and social similarities. Most importantly, both inherited parliamentary democracy and British common law institutions, including well-defined and enforced property rights regimes. Yet, the two Caribbean island economies saw very different growth patterns during the subsequent decades. Between 1960 and 2002, GDP per capita grew three times faster in Barbados than in Jamaica.
Henry and Miller argue that socialist economic policies adopted in Jamaica beginning in 1972 account for the difference.
In 1972 the People’s National Party (PNP) rose to power [in Jamaica] with the promise of “democratic socialism,” which translated as extensive state-intervention in the economy. The PNP nationalized companies, erected import barriers in the form of higher tariffs and outright bans, and imposed strict exchange controls. Social justice meant income redistribution through job-creation programs, housing development plans, and subsidies on basic food items.
Government spending subsequently rose in Jamaica from 23 percent of GDP in 1972 to 45 percent of GDP in 1978. Revenue did not keep pace with the rise in expenditure. From 1962 through 1972 Jamaica’s average fiscal deficit was 2.3 percent of GDP, but from 1973 to 1980 the average fiscal deficit was 15.5 percent of GDP. Much of the deficit was financed through direct borrowing from the Bank of Jamaica. Predictably, inflation also rose. From 1962 to 1972 the average rate of inflation was 4.4 percent per year. By 1980 inflation was 27 percent per year and investment had collapsed to 14 percent of GDP, down from 26 percent in 1972.
Barbados refrained from excessive government intervention in the economy.
Barbados, on the other hand, avoided nationalization, kept state ownership to a minimum, and adopted an outward looking growth strategy while keeping government spending under control.
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The experience of these two Caribbean nations holds lessons for governments, both large and small, grappling with the current global crisis, says Henry, the Konosuke Matsushita Professor of International Economics at the Stanford Graduate School of Business. “While there is a legitimate and helpful interim role for governments to play in restoring the financial sector back to health,” he says, “extensive and ongoing government intervention in markets—along with the protectionist sentiment that it is likely to arouse—has the potential to cause many more problems than it solves.”
Sounds like something President Obama and his economic advisors should pay attention to.
The article has been published in the May issue of the American Economic Review. A working paper version is available from the National Bureau of Economic Research for US$5 via this page.