Doreen Frankson, Guest Columnist
I make reference to an article in the October 16, 2013 Gleaner titled 'BOJ won't accept disorder in forex market - Wynter'.
In said article, Robert Wynter, following the cries of many other pundits, has categorically stated that the "exchange rate has to be adjusted as part of the effort to improve competitiveness for Jamaican businesses".
I am informed, as is the rest of the Jamaican population, that devaluation is supposed to cause a boom in Jamaican exports and sustain investment-led growth. I can understand why the economists find this an attractive solution as it implies that a cheaper Jamaican dollar will lead to lower prices of domestic goods and our foreign trade partners will want to buy more of what we produce.
It also implies that we should begin to see a decrease in the value of domestic wages in terms of foreign currency, making domestic
workers more competitive on international markets. But this worldwide view of competitiveness, which is a country's share of world markets for its products, is a zero-sum game, because one country's gain comes at the expense of others.
This view of competitiveness is used to justify intervention to skew market outcomes in a nation's favour. It also underpins policies intended to provide subsidies, hold down local wages, and devalue the nation's currency, all aimed at expanding exports and driving down wages.
Unfortunately, this intuitive view of competitiveness is deeply flawed, and acting on it works against national economic progress. The need for low wages reveals a lack of competitiveness and holds down prosperity. Subsidies drain national income and bias choices away from the most productive use of the nation's resources.
NATIONAL PAY CUTDevaluation results in a collective national pay cut by discounting the products and services sold in world markets while raising the cost of the goods and services purchased from abroad. Exports based on low wages or a cheap currency do not support an attractive standard of living.
There are many other indirect consequences that are likely to crowd out any positive effects of currency devaluation. Many Jamaican businesses, like the Jamaican Government, have been running high debt and have used it to fuel consumption. A decrease in the exchange rate would imply higher interest payments in Jamaican dollars for all those with outstanding euro- and USD-denominated loans with the banks, leaving households and businesses with less disposable income - and by extension our own Government.
As a response to this effect, the working population may be forced to negotiate higher domestic remuneration which will hinder the devaluation effect on wages, thereby undermining the increase in competitiveness.
Besides, Jamaica needs to move its labour market from highly unskilled to skilled if it wants to make its workers more competitive on the international market. No currency devaluation will resolve the deep structural problems of the labour market, no matter how competitive it seems because of cheaper currency.
What Mr Wynter and his learned economists are forgetting is that manufacturing in Jamaica is forced to use overseas inputs into its production process because 1) inputs are not available locally because the stimulus required to encourage new businesses that could potentially offer locally produced inputs is engulfed in bureaucracy; and 2) demands cannot always be met consistently - at high standard - which hinders the production process, forcing manufacturers to choose a more reliable and stable supply.
Devaluation, therefore, does not lend itself to competitiveness in this regard, as input costs now become high, reducing competitiveness both locally and globally.
In addition, since businesses purchase these raw material inputs in USD or euros, fluctuations in exchange rates will result in lower revenues or higher costs in Jamaican dollars to businesses and thus affect financial results.
REAL BUSINESS CHALLENGES
Price competitiveness will be harmed if businesses seek to increase prices in local currencies to compensate for lower revenues or to increase prices in Jamaican dollars to absorb the higher cost. While companies will take measures to reduce the risks from fluctuations in foreign currency exchange rates, such measures will only delay, or temporarily mitigate, the adverse impact of such fluctuations and have proven not to be effective in the long run for many of businesses.
I am no economist, simply a businesswoman who can enunciate the challenges I am now facing in my own business as the dollar devalues without an end in sight. I am appalled that, as part of the Jamaican populace, I am being asked, along with everyone else, to make sacrifices to help this country survive, yet our own Government continues to scoff at local businesses with examples of purchases of furniture, schoolbook printing, uniforms and services from overseas sources, rather than supporting local industries.
Rather than focusing on depreciation, which is a smokescreen for the need for institutional reform and better governance, we should be doing all we can to allow the ease of formation of new businesses, encouraging entrepreneurship and fostering social reforms that encourage micro-enterprises.
As a manufacturer, I am truly offended every time I hear the claim that devaluation will help business competitiveness in Jamaica, hence my need to pen my annoyance. Nuff said.
Doreen Frankson is
past president of the Jamaica Manufacturers' Association and CEO of
Edgechem. Email feedback to firstname.lastname@example.org and