Rosalea Hamilton and Vanus James | Slowing FX slide and driving growth
Since November 2015, the Jamaican dollar has endured a precipitous slide from a foreign exchange (FX) rate of about J$120:US$1 to the current rate of about J$129:US$1. Governor of the Bank of Jamaica, Brian Wynter, in his address to the Public Administration and Appropriations Committee (PAAC) of Parliament on October 19, 2016, indicated that the slide is related to increased investment activity.
The governor also indicated that the dollar is now fairly valued, noting that the current account of the balance of payments (BOP) is now in surplus after deducting imports funded by FDI (foreign direct investment). Our BOP has been restraining our growth, and now there are new growth possibilities. He assured Jamaicans that there was no FX shortage and pointed to the encouraging sign of gross domestic product (GDP) growing by 1.4 per cent in the June 2016 quarter, nearly doubling the average growth for the previous two quarters.
Does this mean we can now anticipate a slowing or arrest of the sliding dollar and more growth in the Jamaican economy?
There is good reason for cautious optimism. In November 2015, in his quarterly press statement, Governor Wynter stated: "The Jamaican dollar is no longer overvalued and is, therefore, less susceptible to unpredictable slippage ... . We are, therefore, confident that we will continue to reap the benefits of stability in the months and quarter ahead."
So some guesstimation is involved in the determination of the right FX value and FX stability. It is important to note that currency depreciation has no strong record of fostering development in any country, although it can be a useful complementary tool. The value of currency depreciation is mainly to encourage exports, but especially since our economy is so import-dependent, depreciation imposes a sizeable penalty in rising costs of production and rising costs of living.
The governor identified the sectors that are currently generating the favourable balance of trade underlying the favourable current account - mining, energy, ports, tourism, construction, communication, BPO, agriculture, and manufacturing. However, most of these sectors do not promise dynamic feedback and sustainable growth over the long term because they do not make capital output that other sectors can use as inputs. For example, agriculture and mining mainly yield primary exports, and manufacturing mainly makes consumer import substitutes. We have been down that road before.
The falling import bill, tied to low energy prices, is a major contributor to the favourable current account balance. It offers another opportunity to put a more transformational production programme in place that is driven by capital-producing sectors that can grow productivity, expand exports and save foreign exchange, thereby enabling us to increase the rate of economic growth on a sustainable basis. What are these capital sectors?
SECTORS THAT DRIVE
EXPORTS AND SAVE FX
Instead of relying on traditional science and knowledge, where we have a spotty record of innovation, we should turn to sectors focused on innovation through creative capital that rely on intuition, insight, and inspiration. The main ones are high-end ICT, education and the copyright-based sectors, including music and sports. Jamaicans are good in these areas. We are also good at exporting our creative outputs to the world. Musicians sell as much or more of their output abroad than they sell at home, and the same is true for sports and ICT outsourcing activities.
Creative activity promotes productivity growth, is highly profitable, and can attract foreign investors on favourable terms, thereby boosting the current account of the balance of payments. By producing a major share of the capital they employ, these sectors increase employment of domestic inputs, and therefore, grow their exports relative to the imports they use, thereby saving FX.
Micro-level data support focus on the creative industries. Data collected in the Scotiabank Enterprise-Wide Risk Management and Financing project (2014-16) indicate that the creative industries, education and ICT generate the highest productivity responses to growth of their capital-labour ratio. They have the most credible claim to strong policy support.
Evidence must guide credible industrial restructuring for a brighter future for Jamaica, and the available evidence is that a focus on the creative capital-producing sectors offers the best long-term prospects for growing exports and saving FX. It is also this double fix - expanding exports while saving foreign exchange, that will ultimately slow the FX slide and drive sustainable growth with development in Jamaica.