The world is in a deep financial recession. Some of the ripples of this mega recession are beginning to hit Jamaica. But these are only ripples. No major corporation so far has collapsed. Yet, there is an inordinate panic in the private sector of Jamaica that the country has been hit by this catastrophe. It has not - not yet.

In the absence of the full force of the collapse taking place elsewhere, it is sheer nonsense to categorise the package announced by Prime Minister Bruce Golding on December 15 as a "bail-out" of businesses and personal catastrophes.

What is bail-out like?

Jamaicans should know what a bail-out is like. There was a massive bail-out in the mid-1990s for all savers, pensioners and insurance holders with accounts in the banking system numbering 2,124,000 accounts. When the melt-down of the financial sector occurred at that time, the cost to the Government was $140 billion, a staggering amount representing 44 per cent of the GDP. This event was ignominously the third largest bail-out in world history, with Argentina 55 per cent in 1980 and Indonesia 50 per cent in 1997 being the two highest.

However, the bail-out now taking place in the United States economy has become the new leader, with an expectation to cost $8 trillion, which is an awesome 57 per cent of the American GDP.

Jamaica's GDP

Last Sunday's announcement was a tiny .001 per cent of Jamaica's GDP. It was really a well-tailored and welcome political attempt to assuage fears by presenting an across-the-board package of benefits for many interest groups who are in need, but not yet in danger of going under.

The real financial blows are yet to come as the signals are showing. The bauxite/alumina sector, earning US$1.5 billion, one of the top three foreign exchange earners of the country, is beginning to feel severe shocks with plants closing and workers being laid off in substantial numbers, while the stockpiles are full. Tourism too, the second largest foreign-exchange earner, US$2 billion, is experiencing a similar fallout. Occupancy is falling and room rates are declining correspondingly. When the full impact is felt here in respect of these two sectors, to which declining remittances, US$2.1 billion, can be added, the Jamaican economy will then face enormous problems, unless the deepening global catastrophe begins to ease, sparing us the worst of the consequences.

Situation worsens

If the grave situation worsens, or continues unabated, a real bail-out would be needed. In the Jamaican case as long as the financial sector is not impacted, the result would be closures of plants and hotels with massive loss of employment, loss of asset value and decline in economic growth. The Jamaican banking sector is not in that danger category as the linkages to the troubled financial institutions abroad are minimal, compared to the link of tourism to local hotels and export sales of bauxite and alumina to the export market. This lack of deep connection leaves the Jamaica government better off than in the financial meltdown more than a decade ago where the bail-out was far more costly.

On the other hand, if these productive sectors which earn by far the greater amount of foreign exchange are faced with the type of collapse of the recession of the 1980s, the loss of revenue and foreign exchange could cripple the ability of the public sector to provide enough foreign exchange for imports of food, oil, medication and so on.

In these circumstances it would become critical to assess what kind of bail-out would be required. Judging by the previous experiences, the impact would be awesome, much more than could be provided by government. While government salvaged the collapse of Alcoa by leasing the plant in 1984 and running it successfully. But when it had to take over failed hotels in the 1970s, it had to absorb considerable losses which continued for years.

The multi-lateral institutions Inter-American Development Bank (IDB) and World Bank together could not restore the loss of foreign exchange in a current meltdown. Contraction of the economy would be severe, involving huge personal sacrifices.

IDB assisting Jamaica

Against this background, it is good to see the IDB once again active in assisting Jamaica after a six-year break. IDB lending stopped in 2002 because Jamaica failed to fund the Jamaican dollar counterpart portion of the loans. The Government, on the other hand, wished to pursue market loans which were quicker, although more expensive. This left a huge backlog of some US$1 billion in IDB lending to bring the programme for Jamaica current. This could be quickly accessed. The present government is now reaping the full benefit of this with loans in the pipeline for five major projects to be announced in January 2009. Two of these provide financing for the private sector for cash flow requirements and export financing. These two are stimulation packages, not bail-outs.

If the recession hits the Jamaican economy hard next year there will be need to have funds available for a genuine bail-out, or risk the collapse of the major foreign exchange earning sectors, which would be a catastrophe. The Government would be wise, therefore, to leave space in the IDB programme for bail-out financing rather than stimulation of specific areas of the economy. A prudent amount for bail-out would be about 10 per cent GDP, or $90 billion.

One other aspect of this crisis needs to be clarified. Government has the option to use the crisis to restructure the economy to deal with the fiscal deficit as was done in the first half of the 1980s with great pain and political damage. If this is to be done, then the best strategy is to work towards an early general election with the expectation of a win with sufficient margin to allow for a stabilisation programme of the economy. I mention this because if the opportunity is not used when it occurs for drastic expenditure cuts to wipe out the fiscal deficit and put the economy on a stable path for recovery, then it is unlikely that there will be any possibility of the Jamaican economy being attractive enough to meet the post-crisis demands of the bond market, which it will be necessary to access in part after the recession.

Deeper trouble

This was the fundamental question that confronted Jamaica in the early 1980s when the crucial decision was made to restructure the economy which was in deeper trouble then than it is now, or is likely to be at this time.

The country cannot continue to limp along on low growth, no growth and negative growth as it has done for more than the last 18 years while its substance is drained in paying excessive debt service charges and carrying the cost of a bloated public sector leaving everything else in stagnation.

Serious thinking out of the box must be applied to deal not only with the here-and-now, but with the daunting future.

Edward Seaga is a former prime minister. He is now a distinguished fellow at the UWI and pro-chancellor of the University of Technology. Email: odf@uwimona.edu.jm