Towards a monetary solution

Published: Friday | December 11, 2009

Lee Kuan Yew


WHEN ASKED in a recent interview, what is the secret to having a strong economy such as Singapore's, Lee Kuan Yew answered, "Never let your currency come to grief."

He expanded: "When your currency comes to grief, investors lose confidence and substantial long-term investments, such as hedge funds, are scared away, along with other attendant opportunities."

I decided to research the value of hedge funds invested in the region and found out the following. Over 56 per cent of these funds are invested in the Caribbean; this represents approximately US$1 trillion. It would be interesting to further disaggregate the fund to see how much, if any, is invested in Jamaica. The figures were not available at the time of writing.

Since our currency has suffered grief since the 1970s, our currency obviously could not be an attraction to such investments. Therefore, I surmise that the high-interest rate regime which is designed to mop up liquidity in the system and protect the dollar would explain the presence, if any, of hedge funds invested here. The downside of having these investments and other international funds suggests that our mopping up of liquidity has not only been done locally, but also internationally. I will leave our erudite economists to explain the voodoo in this.

Caught betwwen a rock and a hard place

Now, if we can change and lift our conversation and forget house and politics, maybe we will see that we are in a catch-22 scenario, where high interest rate is stymieing real investments, but if we should lower interest rates significantly, the dollar will free-fall or devalue at a more rapid rate with greater fiscal ramifications.

Edward Seaga, in the 1980s, addressed liquidity not so much from the interest-rate system. But by intervening in the exchange rate market, and by fixing the rate in tiers, he was able to encourage the productive sector and discourage consumption of imported consumer goods and services. The dollar remained stable during that regime. What has become of this option?

There are two proposals on the national table that still have some currency (no pun intended).

Seaga has proffered dollarisation of the Jamaican currency. I understand this to mean we would align the J$ with the US$. No central bank, no independent exchange rate, no independent monetary policy. Parallel, or substitute, or a mix can be chosen. Example, The Bahamas. They use their own paper money and coins. Panama uses the United States paper money, but has its own coins. This option requires strong net international reserves (NIR) for intervention (social safety net), especially at the initial stage.

The positives? It would promote fiscal discipline, financial stability, lower inflation. Negatives: short- to medium-run severe hardship or challenges. Argentina, in the early 2000s, cannot be cited as a negative example. This was an aberration, not a norm.

Bruce Golding, in another dispensation, proposed an independent central bank. I understand this to mean no interference from the Government, that the sole responsibility of the central bank would be monetary, to protect the integrity of the dollar (not allow it to come to grief), and with no responsibility for fiscal matters, but would contribute to the overall objective of economic growth.

Eliminate the central bank

We could also eliminate the central bank and put in the Constitution provisions for a currency board or board of commissioners of currency, entrusted to promote monetary stability, and credit and exchange policies conducive to the growth of the economy. This board will also supervise the financial sector. (This is Singapore's model.)

Do not be surprised if most of the US$1 trillion of hedge funds is domiciled in the above countries, including the Cayman Islands, because of monetary stability, notwithstanding their relatively low interest rates. Is this saying something to us?

The price to be paid for the implementation of any one of the above proposals is not akin to a cow giving milk, but a pig giving bacon.

For the people, in the short run, we will have to suffer the bitter taste of the medicine for the long-term benefit of our children. We have to pay the price. After all, it was our generation that played politics with their legacy and squandered their inheritance. For the implementing government, remember, you will be giving bacon.

We have not the benefits of Lee Kuan Yew's benevolent dictatorship, so this proposal will have to be implemented within a single five-year term. This is because most of the electorate will become impatient, or ignorant of the process, or simply exploited by others for short-term political gains. This would make the prospect for a second term remote. But let's do it anyway.

I am, etc.,


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