Americans concerned about the impact of public debt on the global recovery have focused — with good reason — on Greece. Closer to home, however, the tourism mecca of Jamaica illustrates the catastrophic effects of borrowing way too much, and the painful choices that follow. This saga, less familiar than Greece's, is a lesson for lawmakers in the U.S. and elsewhere.
The Caribbean nation actually is in worse financial shape than Greece: Jamaica has more debt in relation to the size of its economy than any other country. It pays more in interest than any other country. It has tried to restructure its loans to stretch them out over more years, at lower interest rates, with no success. Such a move would be risky for its already nervous lenders. So Jamaica is trying to wangle a bailout from a skeptical International Monetary Fund. Another deadline for a potential deal just came and went last week, though negotiations continue.
Jamaica is caught in a debt trap. More than half of its government spending goes to service its loans. The country can spend barely 20 percent of its budget for desperately needed health and education programs. Its infrastructure is faltering. It lacks resources to fight crime. It has little margin to recover from natural disasters such as Hurricane Sandy.
To set itself straight, Jamaica needs a restructuring, and a bailout with significant debt relief. No way can a small economy that has limped along with growth at less than half the global average for two decades pay back the fortune that it owes. But as with Greece, as with America, as with the state of Illinois, government leaders have balked at imposing the inevitable hardships. Saying no to favored constituents is no easier in Kingston than in Springfield.
The potential alternative is worse: Defaulting on its debt would ruin Jamaica's prospects for many years to come: It would undermine the island's critically important trade relations with the U.S. It would discourage badly needed foreign investment in its tourism, agriculture and mining sectors. The only thing worse than doing what Jamaica must do to live within its means would be not doing it.
That hard fact is being faced to some degree by debtor nations around the world. Jamaica is an extreme example of the fate that could befall Spain, Italy, Japan or, yes, the U.S., if debt keeps piling up. The analogy only goes so far since those much-larger economies have better resources to manage their finances. Jamaica has few options, apart from beseeching the IMF.
The American "fiscal cliff" deal was good news for Jamaica, which could not afford another U.S. recession. The island's financial stewards have taken some practical steps to depreciate the local currency and curb inflation. The broader solution, however, is as obvious and necessary in Jamaica as it is in Greece and other countries mired in debt: Reform taxes, curb pension costs, cut public payrolls.
In Jamaica, that austerity-based formula has, unfairly, gotten a bad name. Critics of trade liberalization, privatization and deregulation point to Jamaica as Exhibit A of First World policies gone awry. IMF-imposed fixes more than a decade ago — after public debt had ballooned in the 1990s — made conditions worse, the critics say.
What really happened, however, is that IMF fixes gave Jamaica a temporary lifeline, but government never stopped borrowing and spending. The lesson of Jamaica is not that access to credit is bad. It's that irresponsible stewardship is bad.
We're cautiously optimistic that Jamaica's current leaders will do better: Finance Minister Peter Phillips says his government must do whatever is necessary to reduce its out-of-control debt. Job One: Jamaica must make enough painful progress to win the confidence of the IMF, and of private lenders.
While the rest of us wait to see whether the island nation escapes its debt trap, we'll see whether other countries learn the lesson of Jamaica: Stop digging such deep, deep holes in the beach.
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