Taming the runaway dollar - Speaking up for consumption and imports

Martin Henry, Contributor

Why is there this huge bias in economic analysis against consumption and imports and in favour of production and exports?  Being not a 'real' economist, as a certain real economist never misses an opportunity to remind me, and therefore with no professional reputation to be damaged or lost, I can risk asking the stupid questions which everyone else wants to ask but is afraid to ask in the intimidating presence of 'real' economists.

As the Jamaican dollar crosses the psychological threshold of, 100 to US$1, the question of how currency depreciation may help and hurt the Jamaican economy is engaged again with even greater intensity. Depreciation is supposed to make exports more competitive in international markets as they become cheaper to buyers there.

So currency depreciation must be a good thing, if exporting is the only real game in town.

Except when we lift our eyes out of economics textbooks and switch off the commentaries of real economists and look around the real world, the hundredfold depreciation of the Jamaican dollar against the US dollar from parity at currency conversion in 1969, has not been accompanied by any sustained boom in exports and growth of the Jamaican economy.

Depreciation is supposed to compress imports as it takes more soft local currency to buy the hard foreign currency like the US dollar, which has to be used to pay for imports. And this is supposed to be a very good thing for domestic production as consumers will be forced to divert to buying and consuming more locally produced goods.

The economy, in which well-organised producers and exporting companies and their organisations like the Jamaica Manufacturers' Association, the Private Sector Organisation of Jamaica, the Jamaica Exporter's Association and the Jamaica Hotel & Tourist Association hold enormous power and wield enormous influence over public policy, is supposed to take off from energised production. Except that this hasn't happened.

Dollar's Worth

So what is the real value of the Jamaican dollar? The IMF, with some local concurrence like banker Aubyn Hill's, says the currency is overvalued, but hasn't ventured to say what its real value should be. The question itself indicates that currencies are tradeable commodities like coffee or cars. Government may attempt to fix the price, or at least influence the trade, but, ultimately, the value is really determined by supply and demand.

The progressive depreciation of the Jamaican dollar against its US counterpart is a compelling measure of the failure to pull enough of the desired US dollars into the local economy. This would be a key function of exports, except that remittances provide a bigger supply of US dollars than selling Jamaican goods abroad does.

And the hard currency is needed to pay for imports. So cutting back on imports, which depreciation helps, should be a good thing, right? That is until we actually examine what is, in fact, imported.

But before we do that, we should point out that the currency is, at base, a storage device for wealth. Its depreciation, however it is sliced, represents a loss of wealth to those holding their wealth in Jamaican dollars. Which means the vast majority of us. And when salaries are held down well behind the rate of depreciation and the rate of its cousin, inflation, workers/consumers get poorer.

But in the economic balance of power, the worker/consumer is expendable in favour of production and export. Only the failure to provide public safety and security outranks in sheer size and scope and damage the failure of the Government of Jamaica to protect the people's interest by preserving the stability and integrity of the currency.

Import Dependency

So what do we import? The textbook argument to compress import consumption may fool us into believing that we are talking about luxury goods and optional goods. Jamaica, from the time the Europeans came here and the subsistence economy of the Tainos disappeared, has been overwhelmingly an import-dependent economy. Not much has changed.

Let us start with what the producers themselves, whether for the domestic market or the export market, need to import. Virtually all machinery and equipment are imported and a great deal of the raw material used. Even at the ground level of primary production, agricultural raw material has to be imported. Jamaican chickens, for instance, convert imported feed into meat in fowl coops on Jamaican soil built mostly out of imported material. So even when we tout exports above imports, we still are talking imports.

Nothing is more basic than food. Jamaican staple foods, since 1494, have been imported. The Jamaican people are fed, three times a day, by imported flour and rice as the core carbohydrates for calories, and the chicken which is nowadays the staple protein replacing imported salt fish is fed on imported grain.

Things which we can, in fact, produce with comparative advantage like coconut oil and powder are still imported from the other side of the world, even when local company labels are affixed as mere distributors.

But even if we got past the cultural obstacles to eating what we grow here, Jamaica cannot become self-sufficient in food. There simply isn't capacity to grow quantities of anything at all to replace the roughly 150,000 tonnes of flour and 80,000 tonnes of rice imported annually.

We're not alone

But don't let the minister of agriculture force us into a panic; most countries are net importers of food. Even the core carbohydrate food products that we produce in the largest volumes, banana and yam, are merely higher-priced supplements and very dispensable options to cheaper flour and rice.

We import virtually all our pharmaceuticals or raw materials for the few assembled here.

We are 90 per cent energy-dependent on imported oil. We can and should diversify to other cheaper fossil fuels like natural gas and coal. But none of them is mined here. And let's not fool ourselves that local renewable energy sources can do anything but provide a minor supplement to imported fossil fuel sources.

The bulk of Jamaican imports, then, are not dispensable luxury goods, or even domestically replaceable optional products. They are lifeline imports on which the Jamaican people and the Jamaican economy absolutely depend. 'Export, or die' is more like 'Import, and live', certainly if we are talking about basic necessities.

God bless China. That country is now the workshop of the world, producing a flood of inexpensive goods which the poorer consumers of the world can better afford. To buy higher-priced Jamaican goods for patriotic reasons trotted out by producers, aided and abetted by a captured Government, rather than to buy cheaper goods imported from the marketplace of the world, is not a rational consumer choice.

Producers, whether countries or companies, also consume and import. We should be wracking our brains about what we can send off to China and the rest of the world in the empty ships which have dropped off imported cargo here.

And this is not really a question for Government. It is a question for entrepreneurs, gifted with the capacity to scan the market environment and find unsatisfied niches - or create wants - which can be satisfied with made-in-Jamaica products. Government facilitates with appropriate policies and actions, one of which is to preserve wealth held in Jamaican dollars, despite the touted advantages of currency depreciation.

And how have we been paying for those imports and will be able to pay for future lifeline imports? We, naturally, will have to sell something which others want to earn the money to buy what we want, like how Farmer Brown sells banana to buy flour. So we are not knocking production and exporting; they are one-half of the virtuous economic circle of trade.

Plugging the gap

But one of the mysteries of the Jamaican economy which real economists have not yet been able to help me resolve is that magical and everlasting widening of the balance of trade gap, the difference between the value of exports (lower) and the value of imports (higher). Every year we hit the panic button about the growing trade deficit. So how does a country continue to pay for imports in perpetuity if it doesn't have exports of matching or greater value?

The easy answer tossed around is that we plug the gap by borrowing and the house built on sand will come crashing down any time now. And every one per cent depreciation of the currency, increases the burden of external debt by 0.5 per cent. For all the long and urgent cries of "wolf! wolf!", the day of collapse has been slow in coming.

I have a sneaky suspicion that the booming informal economy is a far more significant factor in allowing the country to afford its imports than we are willing to admit. The unofficial hard currency income of the drug trade, remittances which don't pass through the formal financial services, and the under-table deals in foreign currency which the formal sector undertakes.

Import-dependent consumers are numerous. There are 2.7 million of us. But they are far more weakly organised than producers and exporters and far less able to twist the arms of Government to look after their obvious interests which too many of us have been samfied into believing tally with the interests of producers and exporters.

Imports and consumption, common sense suggests, will naturally adjust to the earning power of production and exports, mediated by the currency, preferably a stable currency, if Government doesn't meddle too much in favour of one side or the other. The proper role of Government in a market economy is umpire, not advocate.

Martin Henry is a communication specialist. Email feedback to columns@gleanerjm.com and medhen@gmail.