Jamaica is doing OK

Could it do better than OK?

I’m writing a series of economic development posts, each one highlighting a specific country or pair of countries. Previous installments included Bangladesh, Pakistan, Cuba, and the Dominican Republic vs. Haiti. Today, by popular request, I’m going to talk about Jamaica.

Jamaica is classified as a middle-income country by the World Bank. In terms of GDP per capita (PPP), it’s at about $10,000, putting it somewhere in the same neighborhood as Vietnam, Tunisia, or Jordan. That’s rich enough for Jamaicans not to starve, and for most to have generally decent living situations, but not enough to eliminate extreme poverty or create the kind of broad middle class we’d recognize as such in a developed country. So we’ll talk a bit about what, if anything, Jamaica could do to improve its situation. But first, I think the real story here comes from looking at Jamaica’s performance over time. Here’s Jamaica’s income level compared to a couple nearby Caribbean countries (only going up to 2019, to take out the negative effect of Covid):

Jamaica’s growth has been pretty close to zero since 1990 — an era when lots of developing countries hit high growth rates. In this, it’s similar to Barbados and Haiti, although Jamaica’s income level is about halfway between those other two countries. Of the four, only the D.R. has shown the rapid upward trajectory of successful industrialization.

It’s an interesting question of why Jamaica and Barbados, which had similar income levels until the late 60s, ended up diverging so much. Economists Peter Blair Henry and Conrad Miller have a paper that tries to explain this. The divergence, they argue, was not due to any deep difference in institutions — both countries essentially use the same British-derived governance model and property rights regimes — but to different macroeconomic policy choices. Henry and Miller claim that Jamaica’s socialist policies in the early 70s — nationalization of industry, import barriers, subsidies for basic goods, high deficits, and so on — did long-term damage, while Barbados’ relatively neoliberal policies avoided hurting its economy much during those troubled years.

This, if true, would be a pretty direct rebuke to the ideas of people like Ha-Joon Chang, who argue that nationalization, import barriers, and tolerance of rapid inflation are a more effective growth strategy than the traditional “neoliberal” orthodoxy of privatization, free trade, sound money, and balanced budgets. And interestingly, Jamaica’s more leftist turn in the 70s didn’t result in enduringly lower inequality than Barbados — the two countries’ Gini coefficients are almost equal, both in the mid-40s.

So that’s one story. But I think the more important question here has to be why Jamaica hasn’t seen a takeoff in growth, the way the Dominican Republic. has. Remember, a growth takeoff — rather than simply stagnation at a higher level — is the ultimately goal of “development state” policies like those recommended by Ha-Joon Chang.

There are a number of theories as to what causes a country to go from agriculture, mining, tourism, and other relatively simple activities to more complex activities like manufacturing and high-value services. It might be that each country just has to wait its turn in line, waiting for the so-called “flying geese” of global capital to decide that this is the next place to produce shoes and clothes and toys. Under this theory, countries can at best hope to cut in line by having slightly better education and infrastructure than the next country over. (In fact, this is the implication of economic geography theory, one of my favorite economic theories.)

But if we assume there is something countries can do to jump-start industrialization, then the best candidate for what they can do is the “development state”. My favorite formulation of this is in the book How Asia Works, which — though it doesn’t get everything quite right — is the simplest and most reasonable guide to the basic idea. The author, Joe Studwell, distills the experiences of successful East Asian industrializers into three basic steps:

1. Land reform, to employ the rural population and raise farm output while freeing up landlords to start manufacturing companies

2. “Export discipline”, meaning a country promotes exports in manufacturing industries as a tool to absorb foreign technologies, learn how to climb the value chain, and generate foreign exchange

3. Financial repression, meaning that the finance sector is forced to fund manufacturing and exports rather than putting all its money in stuff like real estate or Bitcoin or whatever.

On land reform, Jamaica fails badly; concentrated land ownership and widespread tenant farming is a big reason for its continued high inequality. The Jamaican Left keeps proposing land reform, and it keeps not getting done. This is probably depriving Jamaican manufacturing of talent; a number of the country’s richest and most well-educated people are engaged in relatively unproductive landlording instead of starting the next Hyundai or Samsung.

How about export discipline? Here, Jamaica faces a more formidable enemy than political gridlock — its own abundance of natural resources. Jamaica has huge reserves of bauxite, which is used to make aluminum. This accounts for an enormous percentage of its exports:

This poses a couple of challenges to industrialization. First, exporting aluminum-related minerals makes Jamaica’s currency more expensive (since it means other countries have to buy a lot of Jamaican dollars in order to buy the minerals). That makes Jamaican exports less competitive. This is known as “Dutch disease”. Henry and Miller discuss how Dutch disease hurt Jamaican agriculture in the 70s, causing high unemployment even as exports surged.

The second problem posed by resource abundance is high wages. Yes, we all think high wages are good, but if you’re trying to get in on the cutthroat game of global manufacturing exports, you need to start at the bottom, with simple low-value activities like making clothes and toys and light electronics assembly. This is how Bangladesh and Vietnam — and, indeed, the Dominican Republic — kicked off their own exponential growth. But with a per capita GDP of around $10,000 in 1990, Jamaica was much richer than Vietnam or Bangladesh or the D.R. In fact, it’s still richer than the first two:

Because it had so much bauxite (and, possibly, so much tourism), Jamaican wages were necessarily uncompetitive when they needed to be competitive.

In fact, Jamaica did make a big push for export-oriented industrialization, starting with exactly the kinds of labor-intensive light manufacturing industries that have worked well for the successful industrializers. Established in the 1970s and 1980s, the Jamaican Free Zones were similar to China’s Special Economic Zones — they provided tax exemptions for businesses, facilitated foreign investment, and favored export-oriented industries like textiles.

But the Free Zones never took off. Even with all the tax breaks, Jamaican manufacturing was just never competitive. In an economy that’s used to middle-income living standards, the low wages and brutal conditions necessary to be competitive in labor-intensive manufacturing just didn’t provide people with what they considered to be decent work.

According to the theories of folks like Chang and Studwell, this short-circuited Jamaica’s industrialization. Whereas Bangladeshi and Vietnamese workers would endure harsh conditions for a while but eventually get better lives as companies learned how to do more complex manufacturing, Jamaica’s high starting wages short-circuited that process. If industrialization is a process of learning to walk before you learn to run, then according to this theory, Jamaica was born with a fancy aluminum wheelchair.

And in fact, this might be the brutal, unfortunate truth for developing countries — those that are endowed with plentiful natural resources might simply be destined to start out ahead but eventually fall behind.

But to conclude that would be overly pessimistic. The fact is, we don’t really know how economic development happens, and to put too much faith in the Chang/Studwell story would be unwise. After all, the Dominican Republic is pulling off a successful manufacturing-based industrialization, and yet its top export is still gold. So having resource endowments doesn’t ensure stagnation; Jamaica still has a chance.

Also, with the rise of highly complex service industries, there’s always the chance that Jamaica may in some sense be able to “leapfrog” to higher-value activities. Jamaica is trying to do this with the Jamaica Logistics Hub, which envisions the island becoming a waystation for trade throughout the Caribbean and Latin America. This can be a good strategy for a small country — is has worked well for countries like Dubai and Singapore, each of which is actually more populous than Jamaica.

Becoming a logistics hub will involve a lot of new infrastructure — in fact, China is helping Jamaica build out its facilities. Ports, roads, and various processing facilities are all being built. According to some sources, the country is now investing about a quarter of its GDP, almost as good as Vietnam, up from about a fifth of GDP five years ago. That’s a good sign. And the JLH initiative will also involve the creation of new special economic zones, which will include their own factories — many of which are focused on doing processing for imports and exports, a low-value activity that might be able to function as the spark of a new manufacturing-based industrialization.

Let’s hope it happens. Growth hasn’t picked up yet, but it’s still very early days, and Covid is a big confounding factor. But the global supply chain crunch shows just how crucial logistics will be in the upcoming economic age.

And there’s one big reason to be optimistic about Jamaica: The enduring strength of its institutions. In an age of advancing autocracy, Jamaica remains resolutely democratic, scoring higher than the U.S. on some international measures. It’s an island (heh) of political stability in the region.

This is all the more impressive when you consider that Jamaica is still primarily a natural resource exporter. Many resource exporters suffer not just Dutch Disease and uncompetitive wages, but also political dysfunction — elites attempt to monopolize the flow of resource rents, and the struggle for power makes it very difficult for a country to provide quality infrastructure, education, property rights, and so on. This is known as the Resource Curse.

Somehow, Jamaica has avoided this curse — it may not be a rich country, it may still be highly unequal, and it may make the occasional macroeconomic policy mistake, but it has avoided becoming a kleptocratic basket case like many resource exporters. And that makes Jamaica a well-managed country.

So we have to hope that this good management will prevail in the end. Jamaica is doing OK, but it deserves to be a rich country. It just has to keep experimenting until it finds a model that will get it there.

Update: Rasheed Griffith argues that Jamaica’s economic performance has been negatively affected by a history of violence that Barbados lacks. He also points to long-standing differences in literacy rates between the two countries, as well as more continuity of legislative institutions in Barbados.

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