Project: Privatization: The Global Scale-Back of Government Involvement in National Economies || "THE QUIET REVOLUTION": TRADE AND INVESTMENT LIBERALIZATION IN CHILE AND JAMAICA

"THE QUIET REVOLUTION": TRADE AND INVESTMENT LIBERALIZATION IN CHILE ANDJAMAICAAuthor(s): Steven G. FishbachSource: Administrative Law Review, Vol. 48, No. 4, Project: Privatization: The Global Scale-Back of Government Involvement in National Economies (FALL 1996), pp. 527-543Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/40709843 .

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527

4 'THE QUIET REVOLUTION": TRADE AND INVESTMENT

LIBERALIZATION IN CHILE AND JAMAICA

Steven G. Fishbach

I. Introduction

revolutionary political and economic changes occurring in the former Soviet Union and Eastern European countries have masked a " quiet revo-

lution" occurring in the Western Hemisphere.1 Latin American and Caribbean countries have implemented economic reforms designed to reduce state economic intervention and to encourage private sector growth via increased export production.2 Both Chile and Jamaica have instituted sweeping free-market reforms, including: (1) liberalizing import and foreign exchange systems; (2) heavily courting foreign investment; (3) privatizing state-run industries; (4) decreasing government expenditures; (5) reforming their tax and banking structures; and (6) reducing and/or eliminating wage and price controls.3

This article provides an overview of the Chilean and Jamaican governments' efforts to liberalize their international trading systems and provides an analysis and comparison of the economic impact of the reforms instituted by these governments. Section II provides an overview of the Pinochet military regime's trade liberalization reforms in Chile during the 1970s and 1980s and the economic policies of the Aylwin and Frei governments during the late 1980s and early 1990s. Section III outlines the free-market reforms instituted by the Seaga, Manley, and Patterson governments in Jamaica during the 1980s and 1990s. Section IV compares the economic successes and failures of the reforms in Chile and Jamaica.

1. Carrie B. Clark, The Enterprise for the Americas Initiative: Supporting a 'Silent Revolution' in Latin America, Business America, Sept. 23, 1991, at 6.

2. Latin America: Multinational Survey- The Quiet Revolution, REUTERS, Dec. 26, 1990, available in LEXIS, NEXIS Library, ARCNWS File.

3. Richard Bernai, Jamaica Sets the Stage for the Twenty-First Century, 1-4 (document from the Jamaican Embassy; document on file with author); see generally Sebastian Edwards & Alejandra C. Edwards, Monetarism And Liberalization: The Chilean Experiment (1987).



528 48 ADMINISTRATIVE LAW REVIEW 527

II. Trade Liberalization During the Pinochet Regime (1973-1989) A. Introduction

Augusto Pinochet successfully executed a military coup in September 1973. 4

Pinochet, upon seizing political power,5 immediately sought to remedy the ram- pant inflation and excessive deficits that resulted from previous socialist policies.6 Although the military leaders in charge of economic policy agreed with this policy, they initially had no unifying economic vision for Chile's future.7

Shortly after Pinochet assumed power, however, a group of economists known as the "Chicago Boys" ascended to prominence in shaping economic policy within the Pinochet regime.8 The Chicago Boys, most of whom had studied economics at the University of Chicago, shared a deep faith in free-market economic policies to promote economic growth and development.9 Consequently, they rejected an active role for the Pinochet regime in the Chilean economy.10

The Chicago Boys' commitment to free-market economics led to a major overhaul of the Chilean economy within the first two years of the Pinochet regime. Specifically, the Chicago Boys sought to restore the "primacy of the market" in the Chilean economy by simultaneously privatizing state-owned industries and companies and liberalizing its extremely protectionist international trading system.11

B. Pinochet's Trade Liberalization Policies

Numerous complex, protectionist structures had been imposed as a result of import substitution policies enacted during the 1930s and 1940s.12 By 1973, Chile's nominal average tariff rate exceeded 100 percent, with some imported products facing tariff rates of over 700 percent.13 In addition, an array of non- tariff barriers protected Chilean industries, including quotas, a multiple-tiered exchange rate system, deposits worth ten times the value of the imported good, and complex import licensing requirements.14 Pinochet sought to dismantle these

4. Enrique R. Carrasco, Chile, Its Foreign Commercial Bank Creditors, and Its Vulnerable Groups: An Assessment of the Cooperative Case-by-Case Approach to the Debt Crisis, 24 L. & Pol. Int'l Bus. 273, 297 Í1993V

5. Pinochet transformed Chile from a democracy to an authoritarian regime by passing laws which dismantled the leftist political parties that comprised the Allende coalition and by declaring that all political parties were in "recess." Id. at 297-98.

6. Juan G. Valdes, Pinochet's Economists 19-20 (1995); see James Petras & Fernando I. Leiva, Democracy And Poverty In Chile 23 (1994).

7. Petras & Leiva, id. at 23; see Valdes, id. at 20. 8. See Valdes. subra note 6. at 20. 9. Id. at 2.

10. Id. 11. Sebastian Edwards & Alejandra C. Edwards, Monetarisn and Liberalization: The

Chilean Experiment 109 (1987); Petras & Leiva, supra note 6, at 23. 12. Edwards & Edwards, supra note 1 1 , at 3; Andrea Butelmann & Alicia Frohmann, U.S. -Chile

Free Trade, in The Premise And The Promise: Free Trade in the Americas 180 (Sylvia Saborio ed., 1992).

13. Edwards & Edwards, supra note 11, at 111. 14. Butelmann & Frohmann, supra note 12, at 179, 180.



FALL 1996 Trade: Chile and Jamaica 529

protectionist structures and to open Chile's economy to imported goods.15 This liberalization would "result in a reallocation of resources toward those sectors [in] which Chile had a comparative advantage, increased efficiency, rising exports, higher employment over the longer run, faster growth and an improved income distribution. ' ' 16

The Pinochet regime first cut the maximum tariff rate from 700 percent to 220 percent, and slashed most tariffs by 10 percent in early 1974.17 These reductions had little effect on exposing Chilean products to foreign competition because the tariff levels remained extremely high.18 The government subsequently reduced tariffs again and announced that by 1978 tariff levels would not exceed 35 percent.19 All imported goods by the middle of 1979 had a uniform tariff rate of 10 percent, with the exception of automobiles.20

The Pinochet regime also consolidated the confusing 15-tiered exchange rate system into a three-tiered rate system, and eventually introduced a fixed single exchange rate tied to the dollar in 1975.21 The government also removed all quantitative restrictions by 1976.22

These trade liberalization measures, coupled with the government's privatization strategies, substantially increased the competitiveness of Chilean exports and helped to spawn the growth of nontraditional (non-copper) exports such as fish, fruit, and timber.23 The relative prices of nontraditional products decreased and exports of these products increased substantially.24 In addition, although certain inefficient companies in the manufacturing sectors closed as a result of increased foreign competition, certain manufacturing industries such as beverages, paper products, and tobacco increased production as a result of increased labor productivity and efficiency.25 Chilean consumers also reaped the benefit of the influx of cheaper imported goods such as televisions and automobiles that only wealthy Chileans could afford prior to the tariff reductions.26 Real GDP grew dramatically from a negative 13 percent in 1975 to approximately 7 percent a year from 1977 to 1981. 27 In addition, the Pinochet regime imposed successful anti-inflationary policies such as increased taxes, increased interest rates, decreased government spending, and exchange rate manipulation to reduce inflation from 600 percent in 1973 to approximately 10 percent in 1981. 28

15. Edwards & Edwards, supra note 11, at 111. 16. Id. at 110 (citation omitted). 17. Id. at 111. 18. Id. 19. Id. 20. Id. at 113. 21. Id. at 50 n.2. The exchange rate, however, was periodically adjusted to account for inflation

and hence was called a "crawling- peg" system. 22. Id. at 113. 23. Id. at 117, 122-23. 24. Id. at 122-25. 25. Id. at 118-19. 26. Id. at 131. 27. Id. at 2. 28. Id. at 31-33.




Many commentators and economists described the trade liberalization, privatization, and anti-inflationary measures as the "Chilean miracle."29

C. Chile's Debt Crisis

The miracle, however, collapsed in the early 1980s as a result of a myriad of complex economic variables. The Chilean government also sought to deregu- late the banking industry while it was liberalizing its trading system. In June 1979, it eliminated restrictions on the banks' allowable maximum ratio of foreign liabilities to equity and such liabilities became subject only to the banks' maximum debt/equity ratio, thereby allowing banks to procure increased foreign lending.30 Floating rate loans from foreign banks financed much of Chile's economic boom in the late 1970s and early 1980s.31 Chilean banks increased their foreign liabilities by only $500 million between 1975 and 1978, but dramatically increased their foreign liabilities by six billion dollars between 1979 and 1981. 32

During the next two years, copper prices declined and world interest rates increased as the world economy entered into a recession.33 In addition, the government imposed a fixed exchange rate in 1979.34 In the face of the world recession, the Chilean peso subsequently became overvalued and the government imposed a significant devaluation in June 1982.35 The devaluation and increased interest rates exacerbated Chile's debt crisis because they increased Chilean debtors' obligations.36

The increased debt load had a devastating impact on the Chilean economy, which suffered a major recession. GDP contracted by 15 percent, real wages decreased, unemployment increased to nearly 30 percent, and investment and consumption declined significantly.37

D. Chile's Response to the Debt Crisis

Many other Latin American countries, such as Brazil and Mexico, also experienced major debt problems in the early 1980s, known as the "lost decade" in Latin America.38 Although Chile maintained a significantly smaller debt load in absolute terms compared to other Latin American countries, Chile had the highest ratio of debt to GDP in Latin America - 130 percent.39 Although the Chilean government initially believed that the market would automatically rec- tify the problem, it subsequently intervened in the exchange market to help solve the debt problem.40 This measure did not prove adequate and the Chilean

29. Id. at 2. 30. Id. at 56. 31. Carrasco, supra note 4, at 315. 32. Id. at 315-16. 33. Id. at 318. 34. Id. at 317. 35. Id. at 318. 36. See id. at 318. 37. Id. at 319. 38. Id. at 273. 39. Id. at 319-20. 40. Id. at 355.




government turned to the International Monetary Fund (IMF) for assistance.41 In exchange for loans from the IMF, the Pinochet regime agreed to continue

its drive toward a free-market economy by implementing stringent economic adjustment policies, including a conservative monetary and fiscal approach, depreciation of the peso, and continued emphasis on exports to drive growth.42 The IMF revised the agreements to allow Chile to pursue a short-term fiscal deficit in order to stimulate economic growth because Chile experienced negative growth in 1983.43 The government initiated temporary tariff hikes to finance the expansionary policy that were subsequently phased out during the second half of the 1980s.44 Chile subsequently entered into another agreement with the IMF in 1985 calling for a reinstatement of strict economic adjustment measures.45 The fiscal discipline imposed by the IMF agreements enabled the Chil- ean economy to recover and stabilize the amount of its external debt.

E. The Economic, Social, and Environmental Impact of Pinochet's Reforms

During the remaining years of the 1980s, Chile experienced steady economic growth of approximately 5 percent a year, increased employment, balance-of- trade surpluses, and moderate rates of inflation. In addition, Chile's export- oriented economy became much more diversified and less reliant on copper exports. Copper exports had constituted approximately 80 percent of total exports when Pinochet gained power; by the end of the 1980s, copper exports constituted approximately 40 to 45 percent of total exports. This diversification has enabled the Chilean economy to be more reliant in the face of external shocks to the world markets.46 In addition, diversification has enabled Chile to sustain solid economic growth rates in the late 1980s and early 1990s when many countries suffered economically as a result of the world recession. The economic benefits of Pinochet's reforms, however, have come at the high cost of political repression, increased economic and social inequalities, and severe environmental degradation.

After Pinochet lost power in 1989, when he was defeated by Patrício Aylwin in the Chilean elections, reports of political atrocities and human rights violations during the Pinochet years emerged.47 The Pinochet regime "espoused a particu- larly brutal form of economic darwinism."48 Pinochet killed, imprisoned, and exiled many economic and political opponents.49 A 1991 report estimated that

41. Id. at 356. 42. Id. 43. Id at 356, n.432. 44. Id at 356. 45. Id. 46. See id at 374. 47. Malcolm Coad, The Healing Path Through Purgatory Fire; Under President Aylwin, the country has

found a model way of making reparation for the abuses of the Pinochet years, Malcom Coad in Santiago writes, Guardian, (London) Feb. 6, 1993, at 11.

48. Duncan Green, Chile: The First Latin American Tiger, NACLA Report On The Americas, July/Aug. 1994, at 12, 13.

49. Atrocities and Repentance in Chile, N.Y. Times, Feb. 23, 1991, at A24.




Pinochet killed over 2,000 persons during his reign.50 Pinochet cannot be pun- ished for these human rights violations because he still retains power of the military in Chile under the constitution he established in 1980.51

Despite the positive economic trends resulting from Pinochet's trade liberalizing reforms, the reforms exacerbated the already present problem of unequal income distribution. Forty-five percent of families lived in poverty by 1985, whereas only 17 percent of families lived below the poverty line in 1970.52 In addition, by 1988, the top fifth of the Chilean population earned 81 percent of the country's total income.53 Thus, the poor and lower- income Chileans bore the brunt of Pinochet's economic reforms.

Pinochet's export-oriented model of growth also took a heavy toll on Chile's natural environment. The Pinochet government placed environmental protec- tion very low on its policy agenda because it feared such a policy would stunt economic development.54 Many of the fruit farms have used excessive pesticides causing numerous birth defects in farm workers' children.55 In addition, many of the Chilean waters have been overfished, and much of the land has been deforested.56

F. The Aylwin and Frei Administrations' Reform Efforts

Despite the political, economic, social, and environmental impact of Pi- nochet's export-oriented strategy, the subsequent Aylwin and Frei administrations have pursued similar economic policies. These administrations have continued to rely on exports as the main engine of economic development.57 The Chilean economy has continued to grow at solid rates under the Aylwin and Frei governments: 10.4 percent in 1992 and 5.7 percent in 1993.58 Foreign investment also has increased substantially as democracy has returned to Chile. Although this trend has lifted many of the poor out of poverty, the vast disparities of wealth still plague Chilean society. Both the Aylwin and Frei administrations, however, have sought to spend more resources on eradicating these disparities than the Pinochet regime. Housing, health, and education spending all increased substantially in 1992.59 The current Frei administration has vowed to eradicate poverty by the end of this century.60 Both administrations' efforts to address

50. Jeb Blount, Chile: The Experiment Pays Off; Santiago Boom Returns as Democracy Advances, Hous. Chron., Dec. 20, 1992, at A26.

51. Gustavo Gonzalez, Chile: 1990 Year of Complex Return to Democracy, Inter Press Service, Dec. 21, 1990, available in LEXIS, NEXIS Library, ARCNWS File.

52. Carrasco, supra note 4, at 360 n. 459. 53. Pinochet's Miracle Has Ups and Downs; Claim of 'Near-Developed' Status As Yet Unjustified, Latin

American Regional Reports, Oct. 13, 1988, at 6, available in LEXIS, NEXIS Library, ARCNWS File.

54. Green, supra note 48, at 12, 15. 55. Id. 56. Id. 57. See id. 58. Id. 59. Gustavo Gonzalez, Chile: The Dark Side of a 'Miracle', Inter Press Service, Nov. 27, 1992,

available in LEXIS, NEXIS Library, ARCNWS File. 60. Green, supra note 48, at 14.




the poverty issue, however, have been limited by political reality. Pinochet

during his regime enacted laws which fixed military budgets at extremely high levels, making it difficult to shift resources to address social and economic inequalities.61 In addition, it is unlikely that the conservative factions in the Chilean

Congress will agree to reform the military budget laws.62 Thus, the export- oriented model initiated by Pinochet continues to exist in similar form, albeit under a democratic system of government.

III. Jamaica: Free-Market Reforms

A. Introduction

Deteriorating economic conditions in Jamaica in the late 1970s led to social violence during the 1980 elections, when Edward Seaga and the Jamaica Labor

Party QLP) were propelled to power.63 The Seaga government inherited many daunting economic problems from the Manley government, including a high unemployment rate, a mounting government debt, and severed diplomatic rela-

tionships with the United States and the international banking community. Like the Pinochet regime in Chile, the Seaga government sought to shift the Jamaican economy away from activist state economic policies toward more open, free- market policies.64 Seaga envisioned Jamaica as a Caribbean Singapore, an ex-

port-oriented economy based on cheap labor with the private sector as the main vehicle for economic growth and development.65 The Seaga government, in an

agreement with the World Bank, implemented an economic plan known as " structural adjustment" in an effort to realize this free-market vision.66 The

plan resembled the free-market reforms instituted by the Pinochet regime, and the goals of the plan were to court foreign investment, to privatize state-owned industries, to liberalize Jamaica's international trading system, and to promote an export-oriented economy.67

B. Seaga's Investment Strategies

When Seaga became prime minister in 1980, numerous laws already offered incentives to foreign investors to produce exports. The Jamaican government had passed the Export Industry (Encouragement) Act in the 1950s.68 This act

provided various incentives to companies that exclusively exported their products

61. Gonzalez, supra note 59. 62. Id. 63. During the election campaign, nearly 800 people were killed. Seaga and the JLP took 58%

of the popular vote. Michael Massing, The Jamaica Experiment, 252 Atlantic Monthly 37, 42 (Sept. 1983).

64. Carl Stone, Class, State, and Democracy in Jamaica 158, 167 (1986); Robert E. Loo- ney, The Jamaican Economy in the 1980s: Economic Decline and Structural Adjustment 196 (1987).

65. Massing, supra note 63, at 44. 66. Id. at 42. 67. Id. ; Looney, subra note 64, at 196. 68. Price Waterhouse, Doing Business in Jamaica 28 (1993).




outside of Jamaica and the Caribbean, including tax holidays and duty-free importation of raw materials and intermediate products.69 Since the passage of the Export Industry Act, Jamaica has implemented other investment incentives, including the Jamaica Export Free Zones Act.70 The Jamaica Export Free Zones Act, enacted during the Manley regime, established two free trade zones in Kingston and Montego Bay.71 Foreign investors operating in the free trade zones receive 100 percent tax exemptions on profits, duty-free importation of raw materials, capital, and consumer goods, and unlimited repatriation of profits.72

Despite the existence of these various incentives, foreign investment became increasingly scarce when Seaga came to power in 1980. Both internal and external forces deterred investment in Jamaica during the 1970s. Manley' s activist economic policies and staunch anticapitalist rhetoric and rising interest rates all served to deter foreign investment in Jamaica.73 In fact, net investment in Ja- maica turned negative by the end of Manley 's regime.74

Seaga sought to distance Jamaica politically and economically from Manley' s socialist policies as a first step in creating a more favorable investment climate in Jamaica and in improving Jamaica's financial reputation throughout the world markets.75 The JLP immediately severed diplomatic ties with Cuba and publicly opposed the Sandinista regime in Nicaragua and the Bishop regime in Grenada.76 The Jamaican government also consistently pronounced its commitment to free-market reforms. Its repudiation of socialism and communism as well as its proposed commitment to free-market reforms enabled Jamaica to establish stronger economic and political ties with Puerto Rico, Venezuela, Mexico, and, most importantly, the United States.77

Seaga' s foreign and economic policies impressed President Reagan, and Seaga became the first head of state to visit Reagan during his presidency.78 Seaga' s trip resulted in the formation of the United States Economic Committee headed by David Rockefeller, president of Chase Manhattan Bank.79 The Committee, composed of U.S. businessmen, sought to promote private U.S. investment in Jamaica.80 Seaga frequently met with corporate executives throughout the United States.81 In addition, the JLP

* 'dispatched trade missions to California

and Asia, conducted investment seminars abroad, and bought special advertising

69. Id. 70. Id. at 27-29. 71. Id. at 32. 72. Price Waterhouse, supra note 68, at 29-32. 73. Looney, supra note 64, at 183-84. 74. Id. 75. Carlene J. Edie, Democracy by Default: Dependency and Clientelism in Jamaica 119

(1991). 76. Id. at 116. 77. Id. 78. Massing, supra note 63, at 38. 79. Evelyne H. Stephens & John D. Stephens, Democratic Socialism in Jamaica: The

Political Movement and Social Transformation in Dependent Capitalism 253 (1986). 80. Id. 81. Massing, supra note 63, at 44.




sections in prestigious American publications."82 The JLP also established Ja- maica National Investment Promotion, Ltd., an agency designed to facilitate foreign investment in Jamaica.83 The JLP and Seaga received over 400 proposals from foreign investors as a result of their investment recruitment campaign.

Like the PNP, the JLP relied heavily upon foreign aid and borrowing to stabilize the economy and promote growth. Seaga' s economic makeover of the Jamaican economy enabled Jamaica to receive substantial amounts of aid from the United States, IMF, World Bank, and various international commercial banks.84 Jamaica, in 1980, received only $12.7 million in aid from the United States, but in 1981 Jamaica received $158.4 million.85

Seaga' s active recruitment of investment and aid provided the initial impetus for the implementation of the Caribbean Basin Initiative (CBI). During his visit with President Reagan, Seaga suggested that the United States create a Marshall Plan for the Caribbean to stimulate economic development and growth in the region.86 President Reagan responded by introducing the CBI in February 1982 with Jamaica as the centerpiece of its economic and foreign policy strategy.87 Thus, during his first year as prime minister, Seaga successfully courted foreign investment and aid by skillfully "maneuver [ing] the geopolitical Cold War set- ting to extract the most from . . . the United States."88

C. Trade Liberalization

Seaga also sought to liberalize the restrictive import substitution policies imposed under Manley to improve the competitiveness of Jamaican exports. An import substitution policy seeks to reduce economic dependence upon foreign imports.89 A country imposes tariffs and/or quotas to discourage the importation of foreign goods and to enable the local industry to develop the same or similar products.90 The domestic producers eventually will produce sufficient levels of the goods, thereby decreasing foreign dependence.91

Beginning in the early 1970s, Manley strengthened an import substitution policy that was originally enacted in the 1960s.92 As the Jamaican economy became increasingly dependent upon foreign imports, the Manley government imposed annual quotas on many consumer goods, raw materials, and capital goods in an effort to preserve depleting foreign exchange reserves.93 Importers

82. Id. 83. Id. 84. Edie, subra note 75, at 119. 85. Id. at 118. 86. Massing, subra note 63, at 38. 87. William P. Corbett, Jr., A Wasted Opportunity: Shortcomings of the Caribbean Basin Initiative

Approach to Development in the West Indies and Central America, 23 Law & Pol'y Int'l Bus. 955-56 (1992).

88. Edie, supra note 75, at 116. 89. Kempe R. Hope, Economic Development in the Caribbean 88-90 (1986). 90. Id. at 91. 91. Id. at 89. 92. Massing, subra note 63, at 41. 93. Hope, supra note 89, at 91.




of a particular product had to obtain a license from the government to import a product which rationed the foreign exchange in accordance with the quotas for that particular product.94 Corruption, delay, and bureaucracy plagued the licensing system.95

The Manley government also attempted to restrict the movement of the Jamai- can dollar. From 1972 until 1977, the Jamaican government pegged the Jamai- can-dollar- to-U.S. -dollar ratio at lil.lO.96 Although the Jamaican dollar was overvalued, the Jamaican government refused to devalue its currency in order to avoid putting pressure on the cost of living in Jamaica.97 Nevertheless, a black market exchange system developed as a result of the highly overvalued Jamaican dollar.98

Manley 's import licensing system and fixed exchange rate policy had an adverse effect upon the competitiveness of Jamaican exports. First, exporters often relied upon foreign raw materials and inputs in their production processes. The scarcity of foreign exchange under such a system restricted access to vital imports, thereby discouraging export production. Second, the overvalued currency increased the expense of Jamaican exports in the world market, making them less competitive.

Seaga, in accordance with the World Bank and IMF agreements, sought to liberalize the foreign exchange system and the import quota system to reduce the bias against exporters.99 Seaga exempted exporters from the import licensing system that rationed foreign exchange.100 Exporters had unlimited access to foreign exchange to purchase raw materials, spare parts, and capital goods.101

Seaga also created in effect a dual exchange rate system.102 Seaga kept intact the official overvalued exchange rate.103 Importers of basic goods such as flour, rice, and baby food could purchase foreign exchange from the Bank of Jamaica at the favorable government rate.104 Seaga, however, allowed the market to ration foreign exchange among importers of non-essential goods.105 Commercial banks could offer foreign exchange to importers at a prevailing market rate, which was a less favorable rate.106 Such a system legalized the black market exchange system and devalued the Jamaican dollar, thereby strengthening export competitiveness.107

In addition, the government simplified the rationing system. Importers no

94. Massing, supra note 63, at 42-44. 95. Id. 96. Looney, supra note 64 at 18. 97. Id. at 20. 98. Massing, supra note 63. 99. See Looney, supra note 64, at 204-05.

100. Jamaica Reforms Import Licensing, Exchange Controls, 6 Bus. Am. 32 (Jan. 24, 1983). 101. Id. 102. Looney, supra note 64, at 204-05. 103. Jamaica Reforms Import Licensing Exchange Controls, supra note 100, at 32. 104. Id. 105. Id. 106. Id. 107. Looney, supra note 64, at 204-05.




longer had to apply for a license for every import request.108 Rather, the importers received an annual quota of foreign exchange; they merely had to stay under their quotas.109

Shortly after the introduction of the dual exchange rate, the rates were merged and the government devalued the currency even further.110 The government subsequently held public auctions and the currency once again declined.111 In 1983, the rate equalled J$1.78-US$ I.112 The currency then declined to JJ6.40- US$1 in October 1985. 113

The Seaga government also attempted to remove import quotas to expose domestic companies and producers to greater competition.114 Over 350 quantitative restrictions had been imposed by the early 1980s.115 Seaga removed the quotas from 64 items in February 1982, and removed another 60 items in February 1983.

116 By the mid-1980s most quantitative restrictions had been

removed. After the majority of these restrictions had been removed, the Seaga government, in conjunction with the January 1987 IMF agreement, introduced the Tariff Reform Program in 1987. 117 This program attempted to simplify customs procedures and to strengthen manufacturing and export competitiveness by phasing out tariffs over a four year period.118 The program mandated maximum tariff rates of 30 percent for consumer goods, 20 percent for capital goods, 10 percent for intermediate goods, and 5 percent for utilities by 199 1.119

D. Economic Impact of Seaga 's Free-Market Reforms

Initially, Seaga' s free-market reforms appeared to have an extremely benefi- cial effect on the Jamaican economy. The Jamaican economy grew 1.8 percent in 1981 in contrast to a 5.4 percent decline in 1980. 12° Inflation decreased substantially to only 5 percent in 1981, and unemployment declined moder- ately.121 Seaga's investment recruiting campaign also resulted in many proposals.122 Finally, the construction and tourism sectors showed strong signs of economic recovery.123

Despite these impressive short-term economic statistics, the reforms failed to have a major impact in improving the competitiveness of Jamaica's exports

108. Jamaica Reforms Import Licensing Exchange Controls, supra note 100, at 32. 109. Id. 110. Economist Intelligence Unit, Country Profile, Jamaica, 20 (1987). 111. Id. 112. Looney, supra note 64, at 219. 113. Economist Intelligence Unit, supra note 110, at 20. 114. See Looney, supra note 64, at 209. 115. Id. 116. Id. 117. Economist Intelligence Unit, Country Profile, Jamaica 22 (1989-90). 118. Id. 119. Id. 120. Massing, supra note 63, at 42. 121. Id. 122. Id. 123. Id.




and in shifting Jamaica to an export-oriented economy. Jamaica's economy experienced only marginal economic growth during the first half of the 1980s.124 Bauxite production consistently decreased during the first half of the 1980s as a result of low world demand for the product.125 Sugar production remained

stagnant during the first half of the 1980s.126 In addition, the CBI, which provided Jamaican and other countries duty-free

status for many of their exports to the United States, had only a minimal effect on stimulating Jamaican exports during the 1980s. First, prior to the CBI, 87 percent of exports from the designated countries already received duty-free status under the Generalized System of Preferences or because the exports did not

compete with U.S. products.127 Second, of the remaining 13 percent of exports, the CBI specifically excluded critical exports such as textiles and sugar from

duty-free status.128 Congress also excluded such products from duty-free status because of strong protectionist lobbying efforts of U.S. textile manufacturers and sugar producers.129 Thus, two of Jamaica's strongest export sectors failed to reap the benefits of the CBI.

Despite major support from the U.S. government, Seaga's active courting of investment resulted in very few concrete investment projects in Jamaica. High interest rates in the United States and the continued perception of social and political instability deterred potential investors away from Jamaica.130 Fi-

nally, Seaga's liberalization of the import and foreign exchange system also had a minimal effect in attracting foreign investment and strengthening Jamaica's export capacity. As one commentator noted,

In effect the removal of some elements of restriction and the simplification of the system of licensing have not had a noticeable effect on the bias toward import substitution. The bias is maintained by the complex system of incentives to production for the domestic market and the continuing need to ration the use of foreign exchange. . . . The switch of an import dependent manufacturing sector to an export promotion strategy is not possible under conditions of foreign exchange scarcity.131

By 1982, "the marketplace began to lose some of its magic."132 The JLP, IMF, and World Bank all realized that the reforms would cause short term pain. The IMF agreement of 1981, however, was based on optimistic assump- tions forecasting modest growth in Jamaica's major export sectors.133 This

growth, however, never materialized as bauxite, alumina, sugar, and banana

124. Omar Davies, An Analysis of the Management of the Jamaican Economy: 1972-1985, 35 Social and Economic Studies 73, 100 (1 986).

125. Id. at 93. 126. Id. 127. Corbettjr., supra note 87, at 955, 960-61. 128. Id. 129. See generally id. at 95. 130. Stephens & Stephens, supra note 79, at 258-59. 131. Looney, supra note 64, at 210 (quoting Adlith Brown, Issues of Adjustment and Liberalization

in Jamaica: Some Comments, Soc. & Econ. Studies 195 (Dec. 1982)). 132. Massing, supra note 63, at 45. 133. Davies, supra note 124, at 91-95.




production all declined during the first half of the 1980s.134 The lack of export growth failed to cushion the impact of the economic reforms, and the lower and middle classes of Jamaica, like the lower classes of Chile, bore the brunt of the economic reforms.135

The IMF agreements, as in the case of Chile, required the Jamaican government to drastically reduce government spending, which forced the government to fire thousands of government employees.136 The reduction of the government workforce intensified the chronic unemployment problem.137 Unemployment hovered in the mid-20 percent range during Seaga's term.138 The economic reforms thus failed to improve the bleak unemployment picture.

The liberalization of the import and foreign exchange system resulted in a large inflow of imports.139 The increased foreign competition resulting from the reforms had a greater impact in Jamaica than in Chile because of its smaller and less diverse economy. Thirty-three factories shut down as a result of the large inflow of cheap imported goods during the early 1980s.140 Unlike Chile's strong export sector, Jamaica's exports did not perform well in the early 1980s. This poor performance coupled with the increased imports worsened Jamaica's trade deficit.141

Although the large inflow of imported food products helped to eliminate the food shortages that characterized the latter years of the Manley regime, another problem arose.142 The rapid devaluation of the Jamaican dollar greatly reduced the purchasing power of the average Jamaican. Most Jamaicans thus could not afford to buy the products that lined the shelves of Jamaican stores.143

Specifically, the cost of basic food items rose substantially.144 In addition, the devaluation forced Jamaican utilities, heavily dependent upon foreign credit, to raise utility rates by over 116 percent.145 The IMF agreements also required the JLP to remove price controls on many basic items, which also resulted in increased costs to Jamaican consumers.146

Perhaps most importantly, the devaluation had a devastating impact on Jamai- ca's debt burden.147 The devaluation increased the cost of repaying Jamaica's debt to creditors. Debt-servicing as a percentage of total government spending increased from 26 percent in fiscal year 1982-83 to 47 percent in fiscal year

134. Id. at 93. 135. Id. at 97-99. 136. Bernard D. Headley, Behind a Manley Victory in Jamaica, Monthly Rev. 17, 27-28 (Feb.

1987). 137. Id 138. Davies, supra note 124, at 101. 139. Id at 97-98. 140. Headley, supra note 136, at 26. 141. Id. 142. See generally Massing, supra note 63, at 37. 143. See generally id. 144. Headley, supra note 136, at 26. 145. Davies, supra note 124, at 99. 146. Headley, supra note 136, at 22-23. 147. Id. at 27.




1985-86. 148 The devaluation put additional pressure on Jamaica to borrow in order to repay earlier loans, forcing Jamaica into the " Third World debt trap dilemma."149 Jamaica's debt in 1980 was over one billion U.S. dollars; its debt increased to nearly $4 billion by the end of Seaga's term.150

The adverse economic impact of the trade liberalization reforms on ordinary Jamaicans greatly limited the implementation of Seaga's privatization program. Initially, Seaga had hoped to privatize many state-run industries, including the hotel industry.151 Although the Seaga government created a divestment committee to sell state-owned companies early in his term, the committee struggled to find investors who were willing to purchase these companies in light of the continued economic instability.152 In addition, privatizing more companies would likely result in additional layoffs of government employees which would only worsen Seaga's declining political clout among most Jamaicans. The government, rather than selling these companies at low prices, opted to retain control of the island's major hotels.153 Ironically, the Jamaican government under Seaga gained additional equity in other industries, such as the petroleum industry.154 Thus, although the Seaga government had taken important steps to liberalize Jamaica's international trading system, the government still maintained a major role in the Jamaican economy throughout Seaga's term.

After the 1983 elections, Seaga never enjoyed substantial political support because the "fruits [of Seaga's economic reforms] were too small, ripened too late and harvested too unevenly for Jamaicans. . . .

"155 Seaga's vision of Jamaica

as a Caribbean Singapore never materialized during his term.

E. Free-Market Reforms Under Manley and Patterson

Although many persons expected Manley to reinstate socialist and activist economic policies, Manley and the PNP continued to pursue the free-market economic policies initiated by Seaga. As the Economist noted, "The change is unmistakable: Michael Manley has shed his socialist spots."156 Manley described the reasons for his more conservative economic posture in the Jamaica Daily Gleaner,

While we did many good things in the 1970s, we made some mistakes. Chief among them was believing that governments can be a convenient shortcut to production. My experience tells me that is not so. ... With a peaceful democracy firmly in place, Jamaica could look forward to an era of unprecedented growth; one fueled by the

private sector as an engine of growth ... I am happy to tell you that those of you

148. Id. 149. Id. 150. Edie, supra note 75, at 121. 151. Massing, supra note 63, at 42. 152. Id. at 46-47. 153. Id. 154. Id. 155. Ruling Becomes a Yawn, Economist 39 (Sept. 21-27, 1991). 156. Id.




(who invest) in Jamaica are doing so in absolute safety, your right to foreign exchange and your rights to repatriation of profits indisputable.157

Manley and the PNP worked closely with the IMF in formulating economic policy, a direct contrast to his stormy relationship with the IMF in the 1970s.158 Manley ended food subsidies, cut public spending, privatized many state-run industries, reformed the tax system, reduced tariff rates, and further liberalized the foreign exchange system. Manley reduced the budget deficit to less than 3 percent of GDP, compared to 18 percent in 1980. 159

Beginning in late 1991, the Jamaican government completely liberalized the foreign exchange system.160 In 1992, the PNP repealed the Exchange Control Act of 1954. 161 This reform represented a major achievement of Manley's reform program. The repeal of the act enabled exporters or importers to retain their earnings in either Jamaican or foreign bank accounts.162 Under the new act, foreign exchange must be bought or sold through authorized dealers, mainly commercial banks.163 The Jamaican dollar now floats freely against international currencies.164 This new act marked the final stage in the liberalization of Jamai- ca's foreign exchange system. Manley resigned as prime minister for health reasons and, in 1992, Percival Patterson won the ensuing election. Patterson has pursued similar economic policies as Manley. For example, the government has cut tariffs from the 1993 rates of 5 to 25 percent to 0 to 5 percent currently.165 Despite modest economic growth during the Manley and Patterson years, real income levels have not increased.

IV. Conclusion: A Comparison of the Economic Impact of the Chilean and Jamaican Trade Reforms

Both the Pinochet regime and the Seaga regime sought to move their respec- tive economies away from activist socialist policies toward free-market economies with exports as the main engine of economic growth and development. Pi- nochet's trade reforms coupled with his expansive privatization program suc- ceeded in transforming the Chilean economy into an export-oriented economy. Despite the setbacks the Chilean economy experienced in the early 1980s, the Chilean economy has rebounded and grown every year since 1983, outper- forming virtually every other Latin American and Caribbean economy. Im- portantly, Pinochet's reforms also helped the Chilean economy diversify, thereby making it more resilient to external shocks. For example, the Chilean economy

157. Edie, supra note 75, at 143-44. 158. Rulinp Becomes a Yawn, supra note 155, at 39-40. 159. Id 160. Price Waterhouse, supra note 68, at 197. 161. Id. 162. Id. 163. Id. 164. Id. at 11. 165. Id




grew during the late 1980s and 1990s during a world recession. Chile, arguably, is now the most economically developed country in Latin America.

Despite its relatively high level of development, Chile faces many economic challenges. First, although Chile has a strong export economy, its exports consist almost exclusively of raw materials such as copper, fish, and timber.166 Chile's manufacturing exports constitute only 20 percent of its total exports.167 Chile cannot sustain such impressive levels of growth indefinitely as these natural resources dwindle. Many of its waters, forests, and lands have suffered serious environmental degradation.168 The challenge for the Chilean government is to diversify into manufacturing and non-raw material export sectors, such as wine and furniture rather than grapes and timber.169

Second, Chile must successfully tackle its wealth disparity problem in order to shed its status as a developing country. Pinochet's economic reforms and privatization programs did not solve Chile's poverty problem, but rather exacerbated it. The Frei administration has increased spending to help alleviate the plight of the poor. Unfortunately, as evidenced by all the developing countries throughout the world, poverty seems to be a persistent problem and short-term programs are relatively ineffective. Although the Frei administration has vowed to end poverty by the end of the century, it is likely to remain well into the next century.

Although the Chilean economy will continue to grow, it probably will not grow at the rates experienced during the late 1980s and early 1990s. In addition, the collapse of the Mexican economy and the new peso has had a ripple effect throughout Latin America; both the Chilean economy and the Chilean peso have been hurt by Mexico's economic woes. The decline in the Chilean peso will once again hurt the lower and middle classes in Chile. Although the Chilean economy can overcome such a setback, Chile's poverty problem will be aggra- vated if political opposition blocks the transfer of resources from the military budget to the social and economic welfare programs.

The free-market reforms implemented in Jamaica have not had the same success as those implemented in Chile. Although the reforms helped to diversify the Jamaican economy, Jamaica's economy still remains extremely vulnerable to external forces. Like the Chilean reforms, the Jamaican economic reforms not only failed to solve Jamaica's poverty crisis, they also worsened the economic plight of the ordinary Jamaican. The Jamaican government's ability to tackle the poverty issue is still hampered by its substantial yet stabilizing debt, which continues to drain valuable resources out of the economy.

Although the reforms did not solve Jamaica's poverty problem, they are beginning to show some benefit. Economic growth has been modest in the 1990s. In addition, net foreign reserves have grown steadily in the 1990s, turning

166. Green, supra note 48, at 15. 167. Id. 168. Id. 169. Id.




positive at the end of 1993 for the first time in nearly 20 years.170 The Jamaican dollar has remained relatively stable over the last two years, and inflation has been reduced to modest levels.171 These positive trends have improved Jamaica's image in the world's financial and lending markets.172

Although the reforms in Chile and Jamaica have not solved their poverty problems, both countries are still committed to an export-oriented growth and development strategy. Chile has signed free- trade agreements with Venezuela and Mexico during the 1990s in an effort to increase its trading opportunities. Similarly, both Chile and Jamaica seek to join the North American Free Trade Agreement in the near future; in fact, Chile is likely to be the next country to join. Despite these potential opportunities, both countries will likely face an uphill battle in translating export-oriented growth and greater free-trade ties into widespread economic development.

170. Bernai, supra note 3, at 1. 171. Id. at 3. 172. Id. at 1.



Documents

Project: Privatization: The Global Scale-Back of Government Involvement in National Economies || "THE QUIET REVOLUTION": TRADE AND INVESTMENT LIBERALIZATION IN CHILE AND JAMAICA