Peter Henry, dean of the NYU-Stern School of Business, joined a small group of Wagner faculty and doctoral students on April 4 to present and discuss his research on how macroeconomic policy has affected the economic trajectories of Jamaica and Barbados since the former British colonies achieved their independence in the 1960s.
Although the two countries began this period with similar economies and political institutions, by the beginning of the 21st century the gap between their levels of wealth was stark. Today, per capita GDP in Barbados exceeds that of Jamaica by an amount larger than Jamaica’s entire inflation-adjusted growth since independence. While the economy of Barbados has grown steadily since 1960, Jamaica’s growth was undercut by a lost decade-and-a-half during which its economy contracted.
Henry, an economist, argued that this discrepancy can be explained by policy decisions, not institutional performance. In short, the government of Barbados implemented policies that were more favorable to business. In the 1970s, Michael Manley’s government in Kingston implemented a platform of “democratic socialism,” establishing import substitution tariffs, taxing its key mineral export, bauxite, nationalizing foreign firms, and increasing government spending. Barbados on the other hand kept inflation under control through tight fiscal policy and courted foreign investment through an “outward-looking growth strategy,” he said.
We’ve heard this story before. It is the classic neoliberal development narrative. However, Henry argued that perhaps the most important policy decision made by the Barbadian government was actually to resist the IMF’s recommendations to devalue its currency (pegged to the dollar in 1975) as inflationary pressure rose in the 1980s. Instead, the government deftly managed a complex set of negotiations with employers, unions, and workers that culminated in 1993 with a tripartite protocol on wages. Rather than unilaterally devaluing the Barbados dollar, these parties agreed to a wage cut. The Barbadian economy grew by 2.7% from 1993 to 2000.
As NYU Wagner Dean Ellen Schall put it, “Another way to tell this story is that success was dependent on a workforce made up of a high percentage of union members so that union members can represent a large group of people,” and actually consent to this major macroeconomic policy change through negotiation. Dean Henry agreed, but emphasized the role of discipline. The discipline of the unions to get workers to agree to a painful wage cut was matched by the government’s discipline in pursuing its own approach to growth, he noted. This meant avoiding Manley’s short-term profligacy in the 1970s, but also defying the Washington Consensus on the currency issue. “Discipline means different things at different times. It’s vigilant temperance, sticking with tactics aligned to your overall strategy,” he said.
This belief in moderation as a north star for macroeconomic policy was the take-away point Henry offered at the end of the seminar, in response to a question about how to apply the lessons from these two small islands to the modern economic challenges faced today by Europe, in particular the Eurozone crisis.
“You’ve got to find some middle road, what I call ‘discipline,’ between stimulus forever and austerity today. Navigate between Joe Stiglitz and Anne Kruger,” he said. That’s reasonable and sounds simple enough, but then again, the politics of an island 166 square miles in area are undoubtedly far less complex than those of a 27-state confederation with a GDP approaching $16 trillion.