Fri | Nov 16, 2018

Peter Espeut | Devaluation equals poverty, not prosperity

Published:Friday | August 31, 2018 | 12:00 AM

The daily devaluation of the Jamaican dollar is causing prices of almost everything to go up, while our salaries remain the same. The effect is that every day, we get a little poorer.

The Government would have us believe that the present sustained devaluation has absolutely nothing to do with the fact that we failed one facet of a recent International Monetary Fund (IMF) test, namely, that we missed the inflation target.

In 2017, the Government agreed with the IMF that from April 2018 onwards, inflation would fall within the band of 4-6%. However, between April and June 2018, inflation was less than 4%, which has been deemed to be a failure, requiring the Government to explain to the IMF why we failed the test, and to outline the actions being taken to rectify the situation.

Simply put, the Government had to state to the IMF the strategies it would put in place to cause inflation (i.e., prices) to increase.

One way to cause inflation to increase is to devalue the Jamaican dollar, but the Government swears it has taken no such policy decision, despite being accused of doing so from many quarters.

In an effort 'to prove' that the Government has NOT been manipulating the exchange rate, Finance Minister Dr Nigel Clarke has released 25 pages of correspondence between himself and Bank of Jamaica Governor Brian Wynter, much of it dated AFTER he made the promise to do so.

Dr Nigel Clarke is a Rhodes Scholar, and I do not expect this sort of fundamental logical fallacy from him, namely, attempting to prove a negative. Submitting evidence that something is absent may simply be the absence of evidence.

 

Plans to increase inflation

 

It is true that the letters he has released do not show that the Government has been manipulating the exchange rate, but then other correspondence dated earlier (nearer to the failure of the IMF test) might expose that, but those - if they exist - have not been released. In particular, I would like to see correspondence between the Bank of Jamaica and the IMF, where the Government explains to the IMF what it plans to do to increase inflation.

But Dr Clarke - a very bright fella - should know that no matter how many thousands of pages of correspondence he releases not containing any such policy, he cannot thereby prove that no such decision was taken.

Indeed, the decision to devalue in response to low inflation might not be contained in any correspondence at all!

Because I expect that a Rhodes Scholar should know better, I have to ask if the much-heralded release of recent correspondence was an attempt to obfuscate?

Frankly, I am disappointed that none of the multitude of bright journalists - who also should know a little logic - has called out Dr Clarke on this one.

I am not a fan of economics, which seems to me to be pseudo-science (as I have written before; observations that greedy people raise their prices in the face of scarcity has become a 'law', and therefore prescriptive; and if we don't do likewise, we are branded as 'irrational').

All those years when we had runaway inflation, we lusted after low inflation - and the lower the better; and the prescription was devaluation (for our exports to become more competitive). Now we are being told that very low inflation equals failure! And the prescription for that is devaluation (to make our local prices higher)?

This sounds to me like a recipe for poverty, not prosperity.

- Peter Espeut is a sociologist and development scientist.

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