Keith Collister, Contributor
COLLISTER
IT IS unlikely to be a coincidence that consumer confidence, as measured by the Jamaica Chamber of Commerce's Conference Board, has soared to an all time high of nearly 30 per cent above the level in the previous quarter, just when a new Prime Minister has emerged from Jamaica's presidential race.
As this survey took place between the end of January and the middle of March, the post- election euphoria is very likely to have had a significant influence on the results. Professor Richard Curtin of the University of Michigan, who presented the survey, attributes the huge increase in consumer confidence to expectations of improvements in job prospects, in income and in economic growth. This suggests that much of the Jamaican population are expecting a significant improvement in their personal economic conditions. Rather surprisingly, this positive economic outlook does not seem to be based on expectations of higher remittances which, according to the survey, registered a slight decline in this, the first quarter of 2006.
THE DANGER OF HIGH EXPECTATIONS
Professor Curtin believes the much more muted 12 per cent increase in business confidence - still below the highs of the first quarter of 2005 - is a more realistic view of our economic prospects. However, both businesses and consumers are anticipating a strong improvement in economic growth while, based on his reading of the confidence numbers, Professor Curtin himself sees a growth rate of 2.5 per cent as the floor for the year. Nevertheless, he anticipates that the excessively high expectations of the consumer are likely to be disappointed, and cautions that another failure to achieve the targeted level of growth would be a severe blow to confidence.
WHERE TO START IN CHANGING THE ECONOMIC MODEL - THE EXCHANGE RATE REGIME?
The high expectations of consumers will increase the political pressure to go for growth, while simultaneously putting pressure on the budget to allocate resources to improving social services in Jamaica. The adoption of a fixed exchange rate has been put forward as a means whereby Jamaica might escape from our fiscal straitjacket. The logic of the proposal is that, by reducing the interest rate premium investors require to compensate for exchange rate risk, it would allow interest rates to fall. Thus, lower interest rates would result in a reduction in the enormous cost of servicing Government debt, while simultaneously encouraging economic growth and at the same time allowing room in the budget for additional social expenditure.
ONE SIZE 'EXCHANGE RATE REGIME' DOES NOT FIT ALL
Jamaica has in fact tried most, although not all of the available exchange rate regimes, which range from a 'free float' to the ultimate 'hard peg' as represented by dollarisation, whereby the Jamaican dollar is replaced by the U.S. dollar as a medium of exchange. Jamaica originally had a currency board as part of the U.K's sterling area, when one dollar Jamaican would have been worth U.S. $1.20. The tremendous loss of value in the Jamaican dollar since the 1970's were the result of very poor fiscal and monetary polices over most of the period. This is why in the mid 1990's the Economic Policy Committee of the Private Sector Organisation of Jamaica (PSOJ) looked at the issue of whether Jamaica should adopt a currency board, as a solution to the very high inflation we were experiencing at the time. One of the principal proponents of such a regime, U.S. Professor Steve Hanke, argued in his maiden speech in Jamaica in the early 1990's that the costs of achieving economic policy 'credibility' through tight monetary policy
would be so great for Jamaica, that it would be better to 'borrow' credibility through adopting a currency board or the U.S. dollar. One's view as to whether he was right or not probably depends partially on how much of Jamaica's subsequent financial meltdown one ascribes to poor regulation, rather than excessively tight monetary policy.
DOLLARISATION - THE ULTIMATE HARD PEG
The Jamaica Chamber of Commerce (JCC) took over from the PSOJ in examining closely the issue of dollarisation in 2000 as an alternative to our current 'dirty float', where the Central Bank intervenes in the foreign currency market. The JCC were looking at dollarisation primarily as a way to raise our very low growth rate, as it was thought that Jamaica's still very high nominal and real interest rates were stifling growth. The reason they chose to look at dollarisation as opposed to the 'soft peg' of a fixed exchange rate was that research suggested that intermediate fixed exchange rate regimes were brittle, and could break with damaging economic consequences.
Indeed the issue was included in the Government's 4th Capital Markets Seminar in March of 2001, where it was addressed specifically by the current Governor of the Bank of Jamaica and Dr. Carl Ross of U.S. Investment Bank Bear Stearns. At the time, Dr. Ross argued that there were certain unique characteristics of Caribbean economies that made them particularly strong candidates for dollarisation, including the small size of their mainly service based economies, the fact that they were already substantially dollarised (with large foreign exchange flows relative to the size of their economies), and that devaluation was seldom regarded as an attractive policy option due to their heavy reliance on imported goods.
IS A FIXED EXCHANGE RATE REGIME APPROPRIATE AT THIS TIME FOR JAMAICA?
Whilst still supporting the view that Jamaica should study dollarisation as part of the menu of exchange rate regime options, the JCC quickly decided that dollarisation was not a panacea for Jamaica's economic problems. One issue was that the assumption of the Finsac debt onto the national budget, which vastly increased our debt burden in terms of its overall size and cost of servicing. By giving up the option of devaluation, dollarisation makes running a balanced budget even more important, and there were serious concerns about our ability to do this without Jamaica retaining the ability to devalue to maintain our tax base. These concerns appeared to have been borne out in the fiscal overruns experienced in the 2002 election year budget.
Even after a huge fiscal effort over the period since the last general election, we are likely to achieve a fiscal deficit of only around three per cent of GDP this fiscal year as opposed to the original target of a balanced budget. This shortfall is primarily due to the underperformance of tax revenues. We also clearly have a competitiveness problem, as the Economist Intelligence Unit estimates that our current account deficit in 2006 will be amongst the highest in the world, at over 10 per cent of GDP.
For these and other reasons, the JCC had decided that the Jamaican economy needed a much wider economic transformation than just our exchange rate regime. In early 2003, the JCC began to intensively research the economic transformation of Ireland. Of particular interest was the clever use the Irish made of their tax system in creating new industries, compared with our situation in Jamaica, based on our belief that it was the continued reliance on industries that we have had since the 1960's that it at least partly responsible for our poor economic growth performance.
Keith Collister is a Director of the Jamaica Chamber of Commerce (JCC) and a member of the Economic Policy Committee of the Private Sector Organisation of Jamaica (PSOJ).
