Horace Levy | Jamaica's currency puzzle
To understand Minister Nigel Clarke's dissertation in last Sunday's Gleaner (12/8/18), puzzling at first sight, you have to know where he is coming from. To also assess its worth, you must get answers to some questions and appreciate the possibility of an alternative. Here in Part One is an outline of where Minister Clarke and Bank of Jamaica Governor Brian Wynter are coming from and how the next step consistently fits in, with, however, some questions.
1. The Visible Problem: Like many young, developing nations, Jamaica grew a massive debt. It appeared different since much of it was owed not to foreign institutions but to its own; in fact, however, it wasn't that different, because the big foreign element in Jamaican goods creates a huge and steady leakage of US dollars out of the country anyway. The debt got to the point where borrowing was no longer possible, except on tough conditions. This is when Jamaica went to the IMF.
2. The Real Problem [= analysis of Visible Problem]: Jamaicans were consuming more than they actually produced, and did so by borrowing from other countries' production surplus, hence the debt.
3. The Solution: (a) Consumption was to be reduced. This was achieved by limiting the wage increases of the working class, both middle and lower-nurses, doctors, teachers, police, civil servants, factory, and so on. 'Belt-tightening' it was called. Mild resistance prolonged negotiations between Government and unions over months, years, but in the end, the unions took less than they wanted.
(b) Devaluation of the Jamaican dollar also led to less consumption. It moved from 88.80 (in 2012) to 137 (today) to the USD. This meant people could buy less.
(c) The business class also took a hit. It had to absorb some of the devaluation just to be able to sell its products. It found another method as well - it began to sell more abroad, setting up branch companies in other countries, thus showing profits.
(d) But the banks are the exception, reaping immense profits. They live off the rest of the economy and are merciless in extracting their pound of flesh.
4. The Current Result: (a) All the 'indicators' of success are in place - lower interest rates, low inflation, high foreign reserves, debt reduced and on track to still lower, lowered pass-through from foreign exchange rate to inflation rate ... . But
(b) Production still not happening and productivity is declining, because
(c) 'Aggregate demand', i.e., people's ability to buy, is absent, because of
(d) Six years of belt-tightened low wages, low production and, without incentives, even lower productivity.
5. Next Clarke-Wynter Step on THIS track.
(a) Keep the belt tight.
(b) Stick to the IMF's (International Monetary Funds) prescription, which requires a shift from the 'managed float' of the Jamaican dollar (JMD) to a 'free float',
(c) Even if this means further devaluation of the JMD, which is HAPPENING - with informed predictions of much worse to come, because
(d) The Jamaican economy is so small that large purchases of US dollars, whether by legitimate business or by speculators or by political activists, can cause havoc to the exchange rate, and
(e) The pass-through from exchange rate to inflation rate has been lower than before but is not water-tight. Small business operators are already reeling from the inflation effects of the past year's seven per cent depreciation, the five per cent of the past two months.
(f) Minister Clarke's assertion that "the four to six per cent inflation target ... is more likely to lead to monetary policy that is more accommodative to economic and job growth than a lower target (say, three per cent), all other things being equal", is the standard prescription that a good dose of inflation will stimulate production.
(a) But will all other things turn out to be actually equal?
(b) Might not the move to the 'free float' be premature?
(c) Is this the 'bitter medicine' promised in 2011 that cost Andrew an election? Is he mindful of what an IMF sharp devaluation did to Michael Manley in 1977-79? Might not more bitter medicine now be too much of a good thing?
- Horace Levy is a human-rights campaigner. Email feedback to firstname.lastname@example.org.