can financial liberalization come too soon? jamaica in the 1990s

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CAN FINANCIAL LIBERALIZATION COME TOO SOON? JAMAICA IN THE 1990s Author(s): James W. Dean Source: Social and Economic Studies, Vol. 47, No. 4 (DECEMBER, 1998), pp. 47-59 Published by: Sir Arthur Lewis Institute of Social and Economic Studies, University of the West Indies Stable URL: http://www.jstor.org/stable/27866184 . Accessed: 10/06/2014 19:52 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . University of the West Indies and Sir Arthur Lewis Institute of Social and Economic Studies are collaborating with JSTOR to digitize, preserve and extend access to Social and Economic Studies. http://www.jstor.org This content downloaded from 195.34.79.45 on Tue, 10 Jun 2014 19:52:13 PM All use subject to JSTOR Terms and Conditions

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Page 1: CAN FINANCIAL LIBERALIZATION COME TOO SOON? JAMAICA IN THE 1990s

CAN FINANCIAL LIBERALIZATION COME TOO SOON? JAMAICA IN THE 1990sAuthor(s): James W. DeanSource: Social and Economic Studies, Vol. 47, No. 4 (DECEMBER, 1998), pp. 47-59Published by: Sir Arthur Lewis Institute of Social and Economic Studies, University of the WestIndiesStable URL: http://www.jstor.org/stable/27866184 .

Accessed: 10/06/2014 19:52

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

University of the West Indies and Sir Arthur Lewis Institute of Social and Economic Studies are collaboratingwith JSTOR to digitize, preserve and extend access to Social and Economic Studies.

http://www.jstor.org

This content downloaded from 195.34.79.45 on Tue, 10 Jun 2014 19:52:13 PMAll use subject to JSTOR Terms and Conditions

Page 2: CAN FINANCIAL LIBERALIZATION COME TOO SOON? JAMAICA IN THE 1990s

Social and Economic Studies 47:4 (1998) ISSN: 0037-7651

CAN FINANCIAL LIBERALIZATION COME

TDD SOON?

JAMAICA IN THE 199?S*

James W. Dean

ABSTRACT

This essay argues that Jamaica's woes were triggered by premature

liberalization of her internal and extenl financial markets. It argues further

that liberalization in the long run can serve Jamaica well, but only if coupled wth a wide range of stabilization and prudential measures to avert further

crises.

The countries of the Caribbean...may gain from orienting their reforms to

wards a more competitive domestic financial sector and a more open

external financial sector. This should not mean that countries should rush

towards the liberalization of their financial sectors... a liberalization programme

should not be undertaken until a large measure of macroeconomic stability has been achieved, including careful and effective management of the money

supply and the fiscal account. This should be followed by the liberalization of

trade and the domestic financial sector and finally [emphasis added] the

liberalization of the capital account (El Hadj, 1997, p. 28).

The author acknowledges with gratitude informative interviews with Jamaican government officials and ministers, central, commercial and merchant bankers private sector economists, and academics. Without their information and insights this paper would not have been possible.

Pp 47-59

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Page 3: CAN FINANCIAL LIBERALIZATION COME TOO SOON? JAMAICA IN THE 1990s

48 SOCIAL AND ECONOMIC STUDIES

LIBERALIZATION AND ITS CONSEQUENCES

The political economy of financial liberalization in developing countries

Financial liberalization that began in the UK and the USA during the 1970s was followed by a world wide lifting of controls. Such controls typically in

cluded interest rate ceilings, restrictions on entry by both domestic and foreign financial institutions and on exit by the former, and barriers to the inward and

outward movement of capital. This was often accompanied by an overvalued

exchange rate. Liberalization usually meant a lifting of interest rate ceilings, a

relaxing of barriers blocking domestic financial institutions from establishing branches and subsidiaries abroad, allowing domestic residents to hold foreign securities and bank accounts and perhaps also to invest abroad directly, and a

loosening of restrictions on external payment of dividends, profits, capital

repatriation and disinvestment by foreign firms. As well, it often meant a

relaxing of restrictions on the inward flow of capital, such as those on entry of

foreign financial institutions, sale of securities to foreigners, borrowing abroad

by domestic banks and non-bank firms, access by foreigners to domestic equi

ties and real estate, and foreign direct investment.

The spread of liberalization to developing countries was sporadic and

often serendipitous. Small island economies were frequently induced to open

up their external and financial sectors by the twin carrots of membership in

free trade agreements and potential for offshore banking (Dean, 1993; Dean

and Felmingham, 1997). Others were prodded or even panicked into liberal

ization by balance of payments crises (Haggard and Maxfield, 1996). Jamaica falls into the latter category.

On the surface, the rapid and early deregulation undergone by certain

developing countries is puzzling, as it proceeded further than most developed countries at the time, and in retrospect was premature. For example Argen

tina, Chile and Uruguay all liberalized during the late 1970s, and later suffered

dire consequences (Edwards, 1984; Edwards, 1987; Edwards and Wijinbergen,

1986; Corbo and de Melo, 1985). More recently, in late 1994 and early 1995, Mexico's liberalization seemed to some to be premature. Although the lessons

for sequencing economic de-control are by now well documented (for example,

McKinnon, 1991; Sachs, Tornell and Velasco, 1996), both Mexico and Jamaica

appear to illustrate that these lessons are subject to pressure from the forces of

realpolitik.

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Can Financial Liberalization Come Too Soon? 49

Of course realpolitik often operates in opposing directions. Freeing up capital flows stands to harm private sector lenders and dealers in black market

foreign exchange whose rents would be eroded by foreign competition (Grosse, 1994). Governments often have even more to lose, benefiting as they do under

capital controls from the ability to run fiscal deficits financed by monetary creation without discipline from international lenders. Governments also stand

to lose powers of patronage toward sectors of the economy that they may, for

good reasons or bad, care to favour.

On the other hand as liberalization in the developed world proceeds, with the consequent increase in global economic integration, the balance of

realpolitik begins to shift. The opportunity cost of controls on the private sector increases, as do opportunities for evading such controls. Increased ex

ternal trade leads to greater incentives and occasions for under- and over

invoicing. Banks in their turn see opportunities for tapping international sources

of savings, and are tempted to open branches or subsidiaries abroad, particu

larly in New York and in the London Eurocurrency market. Governments find such operations increasingly difficult to monitor, difficulties that are exacer

bated by enhanced communications and travel possibilities. Indeed cheap air travel alone has made the enforcement of capital controls on individuals al

most impossible. Finally, foreign firms and financial institutions see opportu nities for profit in markets that are as yet relatively closed, and begin to lobby for looser controls on entry.

Although these trends might ultimately lead to liberalization in and of

themselves, their force has typically been strengthened by a balance of pay ments crisis. This might seem paradoxical, since a crisis should surely prompt government to tighten capital controls rather than loosen them. Yet between

1985 and 1990, when much of the developing world was mired in sovereign debt crisis, developing countries consistently and increasingly liberalized their

capital accounts: the number of liberalizing measures increased from twenty two in 1985 to a peak of sixty-two in 1988 before falling off to forty-nine in 1990 (Dean, 1992; IMF, 1992; Bowe and Dean, 1997). To be sure, in some cases (for example in Argentina, Mexico and Venezuela) the initial response to

the debt crisis in 1982-83 was to tighten controls against capital flight, but these responses were soon reversed. Prompted by this evidence, Haggard and

Maxfield (1996) undertook to examine the history of capital account policy in

four countries: Chile, Indonesia, Mexico and South Korea. They found that between 1970 and 1988, these countries revised their financial policies signifi cantly in eleven instances, of which eight involved loosening rather than tight

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50 SOCIAL AND ECONOMIC STUDIES

ening. Of these eight episodes, all except one originated in a balance of pay ments crisis.

By "balance of payments crisis" is meant, loosely, a sharp reduction in a

country's stock of international reserves that is not readily reversible by bor

rowing from abroad. Such a crisis might be precipitated by unsustainable do mestic monetary, fiscal or exchange rate policies, or by external developments

such as a sharp increase in international interest rates, a drop in demand for

exports, or a deterioration in the terms of trade. The crisis typically takes

shape as a speculative attack on the exchange rate, rapid capital flight, and withdrawal of voluntary private lending from abroad (Krugman, 1979).

Why should a balance of payments crisis prompt loosening, rather than

tightening, of capital controls? The answer is that the political position of those interests that favour liberalization is suddenly strengthened. Such inter ests include holders of foreign exchange, exporters, foreign creditors and in

vestors, foreign financial intermediaries, and the international financial insti tutions (IFIs): in short, the owners, earners and potential lenders of foreign exchange. Only if the capital account is liberalized will foreign exchange hold ers desist from (illegal) capital flight, exporters desist from false invoicing, and

potential creditors be prepared to resume lending.

Why Jamaica liberalized

Jamaica's rapid removal of capital controls in 1990 can be put in the context

just described. Throughout the late 1980s, Jamaica underwent a series of bal ance of payments "mini-crises." She was repeatedly bailed out by the IFIs, in

particular the IMF, which in turn pressured for liberalization. That this oc

curred fitfully at best can in part be explained by the continuing gratitude of

developed country lenders, particularly the USA, for Jamaica's fortitude under

the Seaga government in face of the socialist example set next door by Cuba. In

short, generosity from USAID and other bilateral lenders helped relieve heat

from the IMF: one measure of this is that the exchange rate actually appreci ated between 1987 and 1989. But in 1989, with the collapse of Soviet aid to

Cuba, bilateral G-7 loans and grants to Jamaica began to dry up. Jamaica was

sufficiently starved for foreign exchange that she submitted to pressure from

the Inter-American Development Bank (IDB) to dismantle capital and foreign

exchange controls, in return for a fast-disbursing trade and finance loan.

Thus at least one interest group, the IDB, became sufficiently critical to

Jamaica's short-term financial health that it succeeded in pressuring her to

remove capital controls, precipitously and in haste. It should be added that by

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Can Financial Liberalization Come Too Soon? 51

1990, a second and crucially important interest group, the Central Bank of

Jamaica (BOJ), also stood to gain from the rapid removal of capital controls.

Under capital controls, the BOJ had established the practice of borrowing US

dollars and other foreign currency abroad, buying Jamaican dollars domesti

cally at the current exchange rate, lending these to Jamaican importers and

others as suppliers* credits, and finally collecting repayment from these suppli ers in Jamaican dollars after 30-90 days. Once the exchange rate began to

depreciate rapidly, this practice left the BOJ with massive losses, since its for

eign currency borrowing on behalf of private sector suppliers translated into

greatly increased Jamaican dollar costs once the loans came due. Just as the

BOJ had profited from this practice when the Jamaican dollar was rising, it was

losing from it once it began to fall. The BOJ therefore was happy to cooperate with exchange rate liberalization, which would force the private sector to bear

its own losses on foreign exchange obligations.

Why Jamaican liberalization was premature

Wisdom with hindsight may be suspect. Nevertheless extensive and world

wide experience with liberalization over the last two decades has taught us a

number of lessons. Central to these are three preconditions. Firstly, trouble

free liberalization must be preceded by macroeconomic balance and stability.

Secondly, it must be preceded either by an exchange rate that is close to its

long-run equilibrium, official foreign exchange coffers that are full, or, prefer

ably, both. Thirdly, it must be preceded by well-capitalized and well-supervised financial institutions, as well as well-understood regulations governing the emer

gence of new institutions and new financial practices. None of these precondi tions held in Jamaica in 1990.

By 1990, Jamaica was running loose fiscal policy as well as loose mon

etary policy, a combination that was surely unbalanced. Moreover the overall

macroeconomy was verging on instability, in the dual sense that the fiscal

deficit was close to a Ponzi scheme, and monetary creation was beginning to

accelerate the rate of inflation. The fiscal deficit had risen to record heights and was rising further and faster, in small part due to bailout efforts stemming from the 1988 hurricane, but more fundamentally because external indebted

ness had been transformed into internal indebtedness.

This is a pattern common to many developing countries that incurred

foreign debt during the 1970s and early 1980s which then became unservice

able. Typically, central banks in such countries gradually assumed responsibil

ity for outstanding private sector debt in return for payments in local currency

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52 SOCIAL AND ECONOMIC STUDIES

or in local-currency denominated bonds. Thus the central bank of Brazil, for

example, would take over the foreign debt of a Brazilian firm in return for

payment in cruzeiros or cruzeiro-dominated securities. The rationale was that

the country's foreign debt became solely a public sector or "sovereign" obliga

tion, therefore permitting the government to negotiate from strength with its

creditors. A related consideration was that private sector generators of foreign

exchange might find it in their interest to pay foreign creditors more fully than

the government deemed to be in the national interest. The assumption of debt

obligations by the central bank was therefore made much easier if it was accom

panied by foreign exchange controls.

In the context of considerable domestic inflation and currency-deprecia

tion, the long-run consequence of governments' assuming of foreign currency

liabilities has been that they have been left holding greatly depreciated claims in local currency as assets. (The BOJ practice of borrowing foreign exchange on behalf of importers was a short-term example of this.) Except to the extent

that the consequent gap between assets and liabilities is met by taxation, it has to be met by issuing domestic government debt. Moreover, governments or

their central banks typically finance repayment and retirement of their foreign debt by further increasing their domestic debt. As a result, the excessive exter

nal debt that burdened so many developing countries in the 1980s has typi

cally been replaced by excessive internal debt in the 1990s. Jamaica, with mas

sive outstanding government debt, debt service payments and fiscal deficits, is a prime example.

Monetary policy in Jamaica has long been captive to fiscal policy, an

inevitable by-product of the country's British legacy of a weak central bank

subordinate to the financing requirements of the Department of Finance. Al

though the reasons for excessive monetary creation were varied, a core cause

was the BOJ's penchant for purchasing government debt and issuing deposits to the government in return: these latter then became part of the monetary

base. Thus as the fiscal deficit expanded, so too did the money supply. A

secondary cause was the inflow of capital from abroad, first as generous bilat

eral and multilateral lending to the Seaga government, and then as insurance

and other resource transfers from abroad after the hurricane of 1988. These

capital inflows typically were not sterilized; rather they added to the monetary base. The inflation rate jumped from 8.5% in 1988 to 17.2% in 1989, and the

Jamaican dollar began to depreciate sharply. Partly also as a result of capital

inflows, the exchange rate had appreciated from 1987 to 1989. By 1990, de

spite nominal depreciation, it was still overvalued in real terms.

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Can Financial Liberalization Come Too Soon? 53

Finally, Jamaica's banks, credit unions, and insurance companies were

under-capitalized, under-supervised, and under-regulated. In fact the oversights were legion, far too extensive to be documented here. For example, regulations

governing entry and capitalization by merchant banks and by credit unions were casual in the extreme. In the case of credit unions, they dated back to the 19th century. Regulations governing cross-lending between banks and mer

chant banks were also excessively lax or not enforced, partly because directors

could not be held liable for bad debts. Moreover government had extremely limited powers to assume control of a financial institution whose management

was clearly incompetent or corrupt. Deposit insurance did not exist. In the

context of macroeconomic instability and an overvalued exchange rate, Jamaica's

financial institutions were ripe for a roller-coaster ride from quick profits to

insolvency.

When deregulation of interest rates and capital controls came in 1990, the initial consequence was sharp depreciation of the Jamaican dollar. This

then fuelled inflation and led to further depreciation. The Bank of Jamaica was forced to respond with sharp increases in interest rates in order to attract

short-term capital from abroad and in order to arrest spiralling inflation, which

by 1991 had reached 80.2%. In order to fund its rapidly expanding deficit, the

Bank of Jamaica issued ever-increasing quantities of treasury bills, which drove rates up further, as high as 50% by mid-1992.

Commercial banks were (and still are) burdened with a 25% primary (cash) reserve requirement as well as a secondary requirement to hold 22-28%

of their assets as treasury bills. The latter became an extremely lucrative source

of income as t-bill rates climbed above 40% per annum. One consequence was

that, "comforted" by this income, some of the banks became overly casual about

the rest of their portfolio, extending uncollateralized loans and failing to pur sue arrears. As these arrears became public knowledge, a later consequence

was a "flight to quality" by depositors, who moved their money to the larger

indigenous banks as well as the three foreign banks. Two of the latter enjoy well established rural branch networks and stable, low-cost deposit bases, and

became "money-machines" at the same time as many of the indigenous banks

suffered from disintermediation. The woes of the indigenous banks were some

times shielded from scrutiny by the BOJ and Ministry of Finance because of

their ability to shift non-performing assets to merchant banks or building soci

eties with which they were allied. Finally, when monetary contraction had

became the order of the day, classic "moral hazard" and "adverse selection" set

in: banks dependent on interest-sensitive deposits, handicapped by the 25%

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54 SOCIAL AND ECONOMIC STUDIES

cash reserve requirement, under-capitalized and over-assured by the BOJ's fre

quent "loans-of-last-resort," began to extend loans at extraordinary interest

rates to borrowers of dubious quality.

By early 1997, after the failures in 1994 and 1996 of a small merchant

bank and a medium-sized commercial bank, and with the country's insurance

companies in liquidity crisis, the government had established a sort of resolu

tion trust called the Financial Sector Adjustment Company (F1NSAC), and

had committed itself to a J$6.3 billion aid package for the financial industry. In

addition, the Minister of Finance drew up a comprehensive "fast-track" bill for

re-regulating financial institutions.

WHITHER NOW?

Fiscal restraint

The government's most immediate challenge is to reduce its fiscal deficit. Unless it can do this, pressures to print money will prove irresistible, and the painful sequence of double-digit inflation followed by double-digit interest rates will recur. The Ministry of Finance finds itself in the unenviable position of antici

pating that upwards of 80% of its anticipated revenues for 1997-98 will be

absorbed by debt service. Meanwhile, certain public expenditure programmes,

notably education, have been squeezed to a point that severely undermines the

country's future.

Fiscal restraint can be achieved by increasing revenue, by reducing debt

service payments, or by reducing current and capital expenditure. There would seem to be considerable scope in Jamaica for broadening the tax base without

increasing tax rates. Part of this could involve better collection and enforce

ment, and closing loopholes. Part of it should also involve an overhaul of the

external tariff and duty system. Duties on price-inelastic and income-elastic

imports ? luxuries like high-priced automobiles ? should be raised or at least

enforced, whereas those on price-elastic and income-inelastic imports ? neces

sities like cooking oil ? should be lowered or eliminated. Such reforms would

also improve the distribution of after-tax incomes.

Debt service payments can only be reduced in the long run by using fiscal surpluses to retire outstanding debt. This ought to be one of government/s

top priorities, though it is difficult to implement in an election year since the

costs are immediate and the payoff is long-run. In addition the debt might be

restructured toward the long end; long-term zero coupon bonds would be ideal

but it is not clear that they would be saleable.

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Can Financial Liberalization Come Too Soon? 55

The potential for reducing current and capital expenditure is beyond this essay's scope, except to remark once again that whereas expenditure on

physical capital has been badly neglected, top priority ought to be given to human capital For example low-cost and highly effective motivational and educational programmes such as the Special Training and Empowerment Programme (STEP), which is targeted at high school dropouts, surely must

yield real returns in terms of productivity and crime reduction that exceed those of most private sector projects, not to mention most government expen

diture. Finally, there is potential for one-shot injections of revenue from

privatization. Alternatively, government corporations such as the Jamaica Pub

lic Service Company might be restructured with an eye to increasing efficiency.

Exchange rate options and coping with capital flows

In principle the ideal options for a country like Jamaica, which has lost credibil

ity in the eyes of external investors, is to commit itself to an exchange rate

regime that is purely market-driven and permits no role for government inter vention. Two polar regimes unambiguously tie government's hands: a currency

board, and a purely flexible rate. The arguments in favour of each are well known. They have in common the advantage of what might be termed "auto

maticity": that is, independence from the interfering hand of government or the central bank. A further advantage of a currency board is that, in contrast to a flexible-rate regime, it ties the country's inflation rate to an external an

chor: in Jamaica's case the obvious candidate would be the US dollar. A step beyond a currency board would be explicit replacement of the Jamaican dollar with the US dollar, as in Panama. Such a visible regime would undoubtedly be

perceived (wrongly) by the public at large as a disgraceful surrender of national

sovereignty. Nevertheless dollarization is apparently being advocated by an

important lobby group, the Private Sector Organization of Jamaica. The current Ministry of Finance is opposed to a currency board, per

haps because the short-run consequences of surrendering control over shocks

to money demand or money supply are formidable to contemplate. For ex

ample, a currency board regime would force contraction of the money supply in the face of a capital outflow or withdrawal of capital inflows, with a conse

quent hike in interest rates. Facing a massive bailout of the financial sector as

a result of recent interest rate spikes and having just now got interest rates

barely under control, the Ministry is understandably loath to risk another

episode. Although it was commonly alleged after the Mexican crisis of 1994 95 that the Bank of Mexico could have forestalled devaluation by refraining

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56 SOCIAL AND ECONOMIC STUDIES

from sterilizing capital outflows and allowing interest rates to rise, the Gover nor of the BOM retorted forcefully in the Wall Street Journal that this was not

an option because it would have triggered a banking crisis. Indeed Argentina,

which has a currency board, was hard put to avert bank failures in the after

math of the "tequila effect" that followed Mexico's troubles.

This leaves a fully flexible rate. Although flexibility runs the danger of

fuelling inflation, by the same token it provides a highly visible and potentially

embarrassing signal to the outside world of the extent to which a country is in

fact controlling inflation. In addition it provides a shield from the interest rate

or money supply shocks that volatile capital flows can impose on an open,

developing economy (Dean, 1996). For example the Mexico episode reinforced

calls in some quarters for a "Tobin tax" to deter speculative capital inflows and

outflows. A counter-argument is that speculative flows are deterred by volatile

exchange rates. Thus if central banks would cease and desist from all interven

tion in the foreign exchange market, including their customary short-run pur chases and sales to smooth fluctuations around the perceived "fundamental"

rate, they would find that their dilemmas about sterilizing speculative flows

would disappear because the speculators would stay at home.

Hedging against shocks to the external accounts

Whether Jamaica retains her present managed exchange rate regime or moves

toward less intervention, she could benefit from greater employment of mod

ern risk management techniques. These involve financial arrangements to pro

duce gains (or losses) that offset, at least in part, losses or gains resulting from

price, exchange rate, or interest rate volatility. Such arrangements take three

generic forms: futures, options and swaps. For example a futures or options

contract on the price of bauxite/alumina could be engineered to produce prof its if the price of bauxite/alumina fell, offsetting losses in export revenues.

Another arrangement, used for example by Mexico in the early 1990s, when

oil prices were volatile, is to issue bonds to external lenders with coupon or

even principal payments contingent on export (oil) prices, or even on export

revenue.

Although the exchange rate, interest rate, or commodity price risk on

any accounts payable or receivable can be hedged in principle via futures or

options, developing countries are replete with missing markets (for example there are no traded futures and options on the Jamaican dollar). Nevertheless

innovative techniques have been devised in recent years to bridge such missing

markets.

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Can Financial Liberalization Come Too Soon? 57

External (or internal) government debt contracted at a floating rate of interest could in principle be swapped with a counter-party for payments at a

fixed rate. Similarly, external debt denominated in pounds sterling might be

swapped for external debt denominated in dollars; this might be desirable if most of the country's export revenue is dollar-denominated (Mehran, 1986).

Techniques for debt management have now evolved to the point that computer

programmes design optimally-hedged portfolios of external debt (Claessens,

1991).

Optimal government intervention

We conclude with brief remarks on the extent to which a government in a

developing economy such as Jamaica's should intervene to do such things as

create missing financial markets, allocate credit, or promote saving and invest

ment. It is commonly argued that the Southeast Asian "miracle" economies

achieved their rapid growth in no small part from such intervention, much of

which runs counter to the conventional "Washington consensus" that empha

sizes laissez faire.

Firstly, it should be emphasized that the Asian economies, almost with

out exception, achieved their miracles in the context of low inflation and low

budget deficits, if not surpluses. That is, macroeconomic stability, a centrepiece of the Washington consensus, was also their sine qua non. Secondly, the Asian

economies typically liberalized financially only in the context of realistic ex

change rates and (fairly) well supervised financial sectors.

Nevertheless profound differences in philosophy prevailed and continue

to prevail between Asian economics and the Washington consensus. Several of

these are explored in Stiglitz (1996) and Stiglitz and Uy (1996). For example, because East Asian governments have typically not run deficits, they have

lacked markets for government securities and without that benchmark have

been slow to develop corporate bond markets. Recently, governments in Hong

Kong, Malaysia, Singapore, Korea and Taiwan have intervened to foster their

bond markets.

A question for Jamaica is whether and how the government should at

tempt to foster direct financial markets alongside her financial intermediaries.

Jamaica like most developing countries is disproportionately dependent on

banks for mobilizing credit, relative to more developed economies. A related

question is whether Jamaica should foster long-term credit allocation via devel

opment banks. In many Caribbean and Latin American countries these be

came sinkholes for government subsidies. Yet as Stiglitz and Uy (1996) point

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58 SOCIAL AND ECONOMIC STUDIES

out, in East Asia they succeeded. One lesson may be that development banks should be capitalized, owned and operated independently of government, with the latter's role limited to providing the legislative preconditions for their emer

gence.

REFERENCES

Ciaessens, Stijn (1991) "How Can Developing Countries Hedge Their Bets?" Finance

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Corbo, Vittorio and Jaime de Melo (1985) "Liberalization with Stabilization in the southern Cone of Latin America: Overview and Summary" World Development,

Vol. 13, pp. 836-866.

Dean, James W. (1992) "The Debt Confessional" World Competition, Vol. 15, March.

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