Horace Levy | Rebalancing the economy
In last week's Part One effort (Gleaner, August 17, 2018) to understand Finance Minister Nigel Clarke's position, I traced Jamaica's IMF path of the past six years bringing us to the current policy. Two components of this policy emerged, both management related.
Under IMF guidance, one component was the ending of the Bank of Jamaica's (BOJ) management of the flexible currency float (in favour of a completely free float) and, therefore, also of the exchange rate. Viewing the dollar slide as only a 'depreciation' moment, Dr Clarke and Governor Brian Wynter refuse to accept that over a longer period, there is a gradual devaluation, since prices raised for a so-called 'depreciation' never go back down. They can only argue that merchants must stop reading devaluation into every dip.
The second component was the BOJ's management of the inflation rate to bring it to a higher level (than the present 2.8 per cent) as more conducive to economic growth. This is the standard prescription for low inflation resulting from weak aggregate demand such as in Jamaica. Supposedly from the earnings of higher prices, businesses expand and hire more workers, thus growing the economy.
Since what has worked mainly in large developed countries may not be effective in Jamaica's small developing economy, we must hear the 'CORRECTIVE MEASURES' that Clarke has told Wynter to "wheel and come again" to reach the three per cent to six per cent level. These must be made public for transparency sake.
PART TWO: ANOTHER COURSE OF ACTION
1. From its present position of relative fiscal strength, Jamaica must take the stand, whether the IMF can be persuaded or not, that:
(a) a free float of the Jamaican currency is premature. Until production and productivity increase significantly, market-driven currency fluctuations are likely to yield the deep troughs such as we've seen over the past two months and these will inevitably be read as - and be - devaluations;
(b) rather than fiddling with the inflation rate, this is the time for the administration to really MANAGE the economy by POSITIVE measures, such as those listed below, to increase production. These, in turn, will raise the aggregate demand needed to spur a production cycle while keeping inflation at the two to three per cent regardedas healthy.
2. As a first measure, Jamaica's tax regime must be revised to include INCENTIVES and DISINCENTIVES to benefit critical PRODUCTIVE enterprises, those:
(a) employing Jamaican resources, especially where they integrate sectors, e.g., agriculture, music and sport with tourism.
(b) banks and other financial institutions providing loans and other assistance to productive sector-integrating enterprises. The banks hold the enormous wealth of Jamaicans. They must be STEERED by incentives and disincentives into financing Jamaican production and productivity. The freeness of loans for imported cars while small businesses starve is intolerable. Merely exhorting the banks is idiocy.
3. Second, wage agreements still to be reached between Government and trade unions, namely those of nurses and police, should be promptly concluded in such fashion as to meet the major reasonable outstanding demands of these groups. Meeting the nine per cent limit on the public-sector wage bill should be postponed for now.
4. Third, in the negotiations soon to begin between ministries and the Ministry of Finance towards the 2019-20 Budget, the guiding principle must be to give clear priority to two critical sectors: (a) education and training, and (b) putting an end to the subculture of violence and murder.
5. This means that expenditure on such matters as a new Parliament building or to further enlarge reserves (already far in excess of IMF requirement) or on other optional enterprises must be postponed until every Jamaican child is getting the maximum educational opportunity, and murder is brought down to less than 10/100,000. The latter can be done through investment in an expansion of the court system, community social intervention and uplift, and reformed, respectful policing that is commensurate with the annual loss from crime and violence to GDP of five to seven per cent.