So far, the Latin American and Caribbean countries have weathered the global financial crisis and resulting economic storm without suffering the financial panics and debt crises that afflicted the region in the 1980s. Most countries were much better prepared in terms of their economic policy response, financial system and key macro-economic fundamentals. T

he political environment has also been far more stable in Central and South America than at any other point in the last half century, notwithstanding the problems in Guatemala and violence from narco-terrorists in Mexico.

In short, when the global crisis erupted, the region was not plagued by the usual massive balance of payments and fiscal deficits, debt overhang, dwindling foreign reserves and runaway inflation, or by political instability. Generally, regional countries have, therefore, had more room to manoeuvre, enabling them to use interest rate cuts and increased public spending to ease the impact of the downturn on production and employment.

Several Caribbean countries are, however, grappling with balance-of-payments deficits, high debt levels and fiscal deficits that are rising as exports, tourism earnings, remittances, investment activity and overall output contract. According to the Economic Commission for Latin America and the Caribbean (ECLAC) in its 2008-2009 survey of the region, "These countries have limited room to implement policies that could moderate the production and employment effects of the crisis." Unfortunately, Jamaica is among this group.

In the short term, financial support from the International Monetary Fund (IMF) and other international lending agencies will be required to stabilise these economies, and a growing list of countries have already concluded borrowing arrangements, or have secured resources under the fund's exogenous shocks facility - Dominican Republic, Antigua and Barbuda, Grenada and St Lucia. Borrowing arrangements, by necessity, are conditioned by commitments to correct fiscal and external deficits within specified time frames and to implement policies to stimulate economic growth in the medium term. Jamaica is in the process of finalising such a programme.

Fiscal deficits

In Jamaica's case, the high and rising fiscal deficit, the size of the debt, and the level of debt-servicing costs are particularly acute. Structuring an adjustment programme is, therefore, more challenging, and its implementation is likely to be more painful having regard to the protracted imbalance in the country's fiscal operations. The fact is that, except for two years in the earlier half of the 1990s, Jamaica has run fiscal deficits continuously for over two decades and for most years in the past five decades.

After the brief interruption in the 1990s, fiscal deficits returned, driven initially by the huge costs of the currency stabilisation and inflation-control measures that were implemented after the premature liberalisation of foreign-exchange controls. Subsequently, added pressure came from huge public sector wage increases, in some instances as high as one and a half times the inflation rate. Then the costs of the controversial financial-sector interventions, that skyrocketed after 1995, and the continuing large wage increases pushed up both the fiscal deficit and the national debt in the latter part of the 1990s and early 2000s.

Thereafter, the deficit was brought down to the three to four per cent range by compressing budgetary allocations for capital works and curtailing wage settlements for public-sector workers (including a voluntary wage freeze in 2004). But even as the deficit was coming down, pressure was mounting from the large losses of the Sugar Company of Jamaica, the Jamaica Urban Transit Company, Air Jamaica (including when it was under majority private ownership), National Water Commission and public-sector entities. The losses of these entities and those of the government's bauxite holdings (which have been hurt by the recession) have now become a key driver of the deficit. There have been, too, the ongoing fiscal costs of the monetary policy interventions used to stabilise the foreign-exchange market, which have been a source of heightened controversy recently.

Core activities

With the deepening economic crisis and worsening debt situation or debt dynamics as it is euphemistically referred to by the IMF, strong action is required on the fiscal side of our problems. Obviously, restructuring of the public sector through divestment of non-core and loss-making entities is essential, as Prime Minister Golding has said and others before have enunciated. Decisions about what constitutes core activities must be the first step.

While divestment of non-core, commercial entities is essential, the rationalisation of overlapping entities, streamlining of central government functions, and the broadening of the range of services paid for by user fees is critical to reducing the structural deficit in public-sector finances. Where necessary, the management of some of these services should be privatised, as has been done with the Sangster International Airport. An example of other services that can be handled in this way is motor-vehicle inspection. In this case, gains are possible in efficiency and revenues as well as in crime-fighting and general public order.

Since the 1980s, reform measures have been carried out in the public sector and there have been substantial improvements under, first, the Administrative Reform Programme, and then the Public Sector Modernisation Programme. Studies by KPMG and other consulting groups have been prepared that have diagnosed the structural, policy and other weaknesses of the public sector and provide prescriptions for further reforms. The Public Sector MOU also sets out understandings between the Government and the unions about the handling of the reform process. Starting with these tools and compelled by the dire need to act because there are no longer any soft options, we must renew and accelerate the process of overhauling the public bureaucracy.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.