Mark Ricketts | Price stability, exchange rate, and hard-working poor
This is the second of a two-part series on inflation target, exchange rate, and low wages.
Inflation targeting and price stability are the catchphrases that everyone might as well get familiar with. Time must be spent understanding their implications and what impact they will have on economic transformation in our extremely open economy.
Nothing is wrong with Government's efforts to try to make inflation targeting and price stability of much greater relevance and significance than they are currently. However, it can't be on the backs of the hard-working poor.
This can't be yet another brilliantly conceived policy idea that exacerbates the already suffocating and extremely cruel income inequality that exists in our society. In the past, so many of our policies are paved with good intentions but lack the pragmatism that ties them to what is the real Jamaica. These policies must be changed to make them more applicable.
Language, too, has to change. Merely lambasting people that they are politicising the exchange rate when they instinctively, and quite logically, react to every downward movement in the dollar is unfortunate. Trade and the US dollar play such a dominant role in our country. People have watched their dollar nosedive from 43 to 137 in less than 20 years.
The current drumbeat to elevate the inflation rate, while diminishing the enormous impact that the exchange rate has in a small, trade-dependent country, is somewhat misguided. To change people's thinking will take time, as well as clear evidence that the dollar, over the medium term, can lose value (decline) or gain value (appreciate), but in the end it can't always be that the dollar continues to devalue.
It is sustained performance, not chiding the public, that alters behaviour over time. The Government has to come with much better economic and management policies to assure the nation of medium-term stability of its currency. Alternatively, we have to hope that global oil prices decline precipitously and the current trade wars and conflicts abate, allowing us to sidestep collateral damage.
People and businesses get queasy over our dollar, because the US dollar is everywhere. Look at upscale neighbourhoods throughout the country and scour the resort areas and see how many assets, including commercial and residential real estate, are quoted, or benchmarked, in US dollars.
Look at the ease with which people registering overseas addresses enjoy overnight delivery of items from foreign warehouses and stores. The ocean is an illusion; cultural dominance, brand-name allegiance, and consumer preference for goods and services from a highly developed and innovative economy, that's what it's all about.
Focus on corporates and our capital market to get a sense of the size of financial transactions in foreign currency. Talk to medical students, some of whom borrowed, just five years ago, a good portion of the annual J$2.7 million fee for medical school. At the time, the $2.7-million annual fee was equivalent to US$28,000, the price UWI quoted and charged each year for the course.
Students saddled with the huge annual debt, computed in US dollars, were somewhat pained, but optimistic about the stability of the Jamaica dollar.
It was 2013, the year of Jamaica's new economic reform package. Unfortunately, the dollar, then in the 90s, has depreciated to 137.
Can you understand why the Students' Loan Bureau is having such a hard time collecting debt, why so many students migrate, seeing it as their best chance to repay their student loan, and why the exchange rate is at the forefront of discussions among individuals and businesses?
Farmers, dentists, engineers, truckers, contractors and other big equipment users in sourcing their capital goods overseas might have had to secure their equipment loan in foreign currency. Like the medical students, they pay keen attention to the movement of the exchange rate.
To offset everyone's preoccupation with devaluation, the hope is that people will accept the premise that the exchange rate is incorporated into the inflation rate and is just one of the factors influencing that rate. But the pass-through effect of foreign currency is huge when we consider that prices are influenced by raw materials, technology, and capital - much of which is imported - as well as labour and the cost of credit.
The finance minister has to be commended for emphasising the monetary-policy objective of the Bank of Jamaica being that of inflation targeting and price stability. And as Dr Uma Ramakrishnan, the IMF's mission chief to Jamaica, says, "Keeping the prices low for the Jamaican people, in the 4-6% range, is important, and making it predictable and setting expectations so that people are able to foresee what the inflation is likely to be, is important for daily planning for businesses and households."
All good, but as I pointed out in last week's column, there are too many hard-working Jamaicans who are left behind in a society where income distribution is abysmal; there are too many Jamaicans who are left behind because their wages are suppressed and they are always being called upon to make sacrifices; and there are too many Jamaicans who are denied justifiably price increases because it would blow away the Government's inflation target and claims of price stability. Most of these people trapped in a situation of economic despair have no acceptable voice.
The issue here is not whether those at the top do not deserve what they earn, but that those at the bottom, many hard-working men and women should not be left so far behind in livable wages. They simply can't make it, and should not be so far removed from technology, modernisation, and relevant education so that productivity increase is an illusion.
Our problem is that we have created a class, status, income divide that is so extreme that talking inflation targeting and price stability and seeing these as benchmarks to quality of life improvement is a pipe dream.
A person at or above the water's line in a swimming pool will continue to enjoy quality of life if he or she is elevated a few inches consistent with the water rising. A person far down in the pool, if elevated an equivalent few inches, still experiences suffocation, unless he or she takes drastic action to survive.