Wednesday | March 4, 2015

A fool's errand

Published:Sunday | December 9, 2012
Clarke Claude

Claude Clarke, Contributor

The vehement denials by the Government and the formal financial institutions of the Opposition's claims that a foreign-exchange black market has re-emerged in Jamaica are consistent with the pattern of deception that has characterised the country's monetary management since liberalisation of exchange controls was declared two decades ago.

It isn't necessary to catch informal traders in the act to recognise that foreign exchange is being bought and sold outside the formal system, when the institutions within the system are rationing dollars and are unable to satisfy the normal foreign currency needs of their customers. This is the undeniable state of the foreign-exchange market in Jamaica today.

During the entire period of 'liberalisation', it has been the practice of governments to coerce institutional traders into using price levels for the Jamaican dollar which, while publicly attractive, are inconsistent with the logic of the market. This, in and of itself, guarantees the development of a foreign-exchange black market; as in any situation where price is not allowed to bring demand and supply into alignment, an underground operation is the inevitable result.

Although command economics as a tool of governance has long been discredited and has no place in the modern capitalist world, Jamaican governments have persisted in the belief that they can command economic outcomes in defiance of market forces. The market's role in ensuring that wealth accumulation is consistent with the creation of economic value appears to be new to them, and they continue to refuse to accept the market as the only mechanism capable of maintaining the essential balance between wealth and economic value.

Although markets must be regulated for fairness, transparency and efficiency, attempts by Government to dictate their outcomes, directly or indirectly, create distortions that lead to economic dysfunction and macroeconomic uncompetitiveness.

Government-created market distortions are easily exploited by savvy companies and individuals who may profit handsomely at the expense of the less aware and more vulnerable poor. Wealth gained in this way drives inflation, as it is not supported by value. The inflation created, in turn, undermines production and leads to the destruction of capital. Any economy characterised by these distortions will be deprived of investments, with the inevitable consequences being decline in production, reduced capacity to create employment and economic stagnation.

It is not that countries do not periodically intervene in their foreign-currency markets to iron out quirks in supply and demand, manage seasonal changes, and strategically influence the value of their currency to achieve economic advantage. But the peculiar behaviour of continuously pricing our currency above the level that would be determined by competitive logic seems almost unique to Jamaica.

In what can be described as a series of Faustian deals over the last 20 years, the Government has held the Jamaican dollar above the price that would be justified by our productive output, expecting a miraculous positive outcome.

As a measurement of value, a currency needs to be priced to reflect the real economic value it represents, so that when used as a means of exchange, it can credibly establish value equivalence between economic jurisdictions. But the Government's persistent attempts to impose a price on the Jamaican dollar that does not accurately reflect the true economic value of the goods and services produced in the country has created a harmful price incongruity against similar economic assets produced in other countries. This has left Jamaican producers and workers in a competitive hole and has inhibited the optimal functioning of our economy.

This exchange rate/economic value incongruity is clearly demonstrated by the fact that the price of the Jamaican dollar cannot be maintained without generous inducements. So far, the incentive of choice has been high interest rates. But the success of the recent effort to reduce rates has diminished the effectiveness of this strategy. It helped to create the conditions for the foreign-exchange black market we now see and exposed the fallacy of command and control as a governing strategy for our monetary system.

The reality that domestic economic output cannot support the country's demand for foreign exchange has come painfully to light. Past irresponsible government borrowing and criminal financial schemes, the means by which the charade was made possible, will no longer be as available; and the dysfunctional monetary policy that prices our currency beyond the reach of our productive output can no longer be sustained.

The tragedy is that, apart from giving consumers a deceptive short-term fix of import consumption, the policy is damaging in all respects. First, it reduces the effectiveness of foreign capital used in Jamaica, as it buys less Jamaican value than it is worth, thereby diminishing the attractiveness of Jamaica as an investment destination. Second, it inflates the foreign-currency cost of Jamaican production, effectively reducing the demand for Jamaican production. Third, it sets the Jamaican-dollar price of imported goods beneath their true foreign-currency value, putting Jamaican products at a competitive disadvantage.

But perhaps the worst consequence of this misguided policy is the incentive and opportunity it provides to export Jamaican capital. It is not difficult to see that an overvalued Jamaican dollar makes it cheaper for our citizens to acquire foreign currency and would tend to encourage pragmatic, even if patriotic, persons to store their wealth in the more dependable and liquid currencies.

The end result of our foolish monetary policy is that the economy is starved of both domestic and foreign-productive investments, Jamaican production is undermined and the Jamaican market is overwhelmed by imports.

It is little wonder that in just the last 10 years, we have spent almost US$40 billion more on imports than the US$18 billion we have earned from exports. It is just as unsurprising that we have accumulated J$1.68 trillion of debt, more than 140 per cent of everything the country produces in a year, and our economy now seems to be trapped in a state of unending recession after having endured almost two decades of paralysing economic stagnation.

Government would also do well to remember, lest it be tempted by desperation to resort to it again, that the high interest rates it used in the past to impose unrealistic prices for the Jamaican dollar resulted in the unleashing of the destructive force of FINSAC; and could, if employed in today's depressed international economic environment, send the Jamaican economy into deep depression.

An economic depression is a real probability if we cannot bring stability to our economic environment. This stability cannot be achieved unless we have a currency that is trustworthy. But as long as the price of the Jamaican dollar is not credible, it will not be trusted as a reliable store of value or means of exchange.

These are some of the economic realities our Government must accept if it is to halt the slide of the economy and not continue to frustrate our people's hope for a better economic future. But it is becoming increasingly difficult to believe the Government is in tune with economic reality.

Much of what is needed to cure the ills of the economy rests on creating a monetary policy that is consistent with economic competitiveness. The central bank will never be able to properly fulfil its mandate of safeguarding the value of the domestic currency and ensuring the soundness of the financial system if the Jamaican dollar is not competitive. Achieving a competitive currency must, therefore, be its first objective.

If the bank is to be true to its mandate, and if the Government is to put the people's interest above political advantage, their policies would be unified around the objective of creating a competitive economy on which a currency worthy of confidence and trust can stand.

The International Monetary Fund, too, if it is interested in the recovery and growth of the Jamaican economy, should insist that monetary policy reform be a central part of Government's reform programme. It should not be influenced by the short-term boost that an overvalued currency gives to the Government's ability to service its foreign debt from domestic tax revenue. It must, instead, focus on the longer-term advantage that a growing economy, enabled by a competitive currency, would provide for the country to service debt without harming its economic and social prospects.

Both the Government and the Bank of Jamaica need to abandon the fool's errand of seeking to apply the techniques of command economics to control the most capitalistic of all economic phenomena - money.

Claude Clarke is a businessman and former minister of industry. Email feedback to