Thu | Nov 26, 2020

Overvalued dollar, devalued people

Published:Sunday | June 16, 2013 | 12:00 AM

Orville Taylor, Contributor

If you didn't think that Jamaica's hindquarters are in a vice now, you obviously are one of the stupid tribalists who think that the Government can do nothing wrong.

In order for us to move forward, we have to start telling the truth - in particular, telling it to ourselves. We have a national currency that is slipping faster than the Reggae Boyz's chances of making the World Cup Finals. Touching the $100 mark for the first time, it seems to be on a relentless run in the direction of a historic low each day. By the time the mega actors wake up, it could be so low, it has to look up to see a snake's belly.

My colleague, sage Damien King and other orthodox economists, continue to sell the doctrine of a cheaper Jamaican dollar leading to lower imports, increased exports, growth in the net international reserves (NIR) and, ultimately, economic stability. More important, the overvalued dollar will continue to suck the NIR dry, and we have the mother of all problems.

This is consistent with the pronouncements of the International Monetary Fund (IMF). For King himself, the country's economy has structural problems, evidenced by "domestic prices … , inflation has been eight to 10 per cent per year, and the exchange rate has been stuck". Furthermore, over the past two years, "… imports have been becoming cheaper and people were switching away from domestic production. The depreciation is now solving that problems."

I haven't seen all the data, but what I do know is that the Jamaican dollar improved from US$1:J$87.38 in 2010 to J$86.08 in 2011, but ended 2012 at J$88.99. With the cheaper exchange rate of almost J$89.00, we imported more than US$1.99 billion from the United States in 2012. Yet, with the more expensive currency, the figure was US$1.6 billion in 2010.

DIFFERENT STORY

Moreover, if you look at our exports to America in 2007, when the US dollar was at J$69, the analysis is turned on its head. Exports to Uncle Sam were US$720.4 million. However, when the dollar started kissing up the J$90 at the end of 2012, we only exported US$507.6 million to 'farin'. Maybe, I skulked too many mathematics classes, but the numbers tell me something different from what the economists say.

You see, economists and sociologists know that foreign demand for Jamaican goods is not generally responsive to our prices. Between 70 and 80 per cent of manufacturing inputs, including energy, is imported. Thus, devaluation must mean that local products become more expensive to produce but cheaper when sold abroad.

Consequently, when King optimistically assesses the manufacturing impact of devaluation, as "the price of the exported good goes up by 100 per cent of the depreciation and the price of domestic goods should go up by more than 70 per cent of depreciation, but less than 100 per cent, so devaluation creates an advantage for local producers," I have to see it to believe it.

Opposition Spokesman on Finance Audley Shaw argues that the exchange rate could be fixed around J$100 and kept stable like a gas station instead of moving like a jackknifing oil tanker. On the other hand, departing IMF representative Gene Leon thinks that is not where the focus should be. Rather, like King, he declares that the fundamentals of the economy should be the main concern. This is irrefutable.

My problem is, nonetheless, there is little historical evidence that devaluation will help us. Trade deficits hardly ever respond positively to the depreciation of the dollar, because the exports do not typically shoot up and imports remain as resilient as curry stains.

Let me ask the economists this question: How do we benefit from a devalued dollar when one of the most important elements in our production is electricity? If history is anything to go by, we will not have any sustained kick in our export earnings, though our hindquarters will feel it. The point was made in my column of May 26, 2013 that since 1985, devaluation has not produced the economic outcomes dictated by the economists. So once again I say, show me the money!

Leon notes that across four decades we had less than one per cent economic growth, and this was the result of uncompetitive exports, high energy cost, stifling bureaucracy, and low productivity,

My
expertise is not in number-crunching of abstract concepts; I study
people, and despite the political diatribe and rhetoric of the parties,
none seem to understand what people-centred development is. There are
four elements outlined by Leon - two are economic: rising energy costs
and lack of competitiveness. The other two are about the way people are
organised and treated in the world of work.

One
element that is indisputable is the bureaucracy and overall lack of
efficiency of the state apparatus. That is legendary. The public sector
needs rationalisation, and that includes the slate of ministers and
ministries as well. Intrinsic in that is the inherent corruption in the
system, where administrations of the past quarter-century have
distinguished themselves more by their myriad scandals, lack of
transparency and corruption perception indices (CPI) between 3.0 and
4.0, than by sound governance and proper fiscal
discipline.

LABOUR
SCAPEGOAT

However, the question of productivity has
always found a labour scapegoat. True, labour productivity has declined
consistently since the 1990s. However, the prevailing research did warn
that the labour policies being pursued would have led to low and
diminishing performance in this statistic. Cornfields don't produce
peas.

And the IMF is now doing its poor imitation of
Pontius Pilate and behaving as if its hands had nothing to do with the
crisis. In 1977, Jamaica, with 25 per cent unemployment, and faced with
the fallout of an international oil crisis, went to the IMF. Indeed,
then Prime Minister Michael Manley was facing negative growth of 6.3 per
cent in 1976.

However, developmental guru Dudley
Seers observed in 1981 that the IMF was "merely the front office of
governments (those of the United States, Britain, West Germany, France
and Japan) that determine policy under its weighted voting system". And
at the time, Manley was not a favoured son, and his socialism made him
be seen as hostile to the Washington-based Fund.

As
the 1970s came to an end, the IMF put such a tight squeeze on the Manley
Government that he could sing in falsetto. By the time Jamaica put in
place the devaluation from US$1:J$0.91 in 1977 to J$1.78 in 1980, native
industries had suffered, labour had been marginalised, and the
rich-poor gap widened. That is the truth.

While it is
also true that every post-Independence government has seriously
mismanaged this country, the IMF also helped to mash up the
island.

The country is in a deep hole, and this is not
the time for pusillanimous leadership. Nevertheless, the solution is
not as difficult as one thinks, and as Finance Minister Dr Peter
Phillips states, the "name of the game is production". However, planning
and implementation must displace speech.

If we ever
needed national consensus, it is now.

Dr Orville
Taylor is senior lecturer in sociology at the UWI and a radio talk-show
host. Email feedback to columns@gleanerjm.com and
tayloronblackline@hotmail.com.