The power of Caribbean central banks

Wilberne Persaud, Financial Gleaner Columnist

Governor Wynter's address to the Jamaica Manufacturers' Association's 2014 economic forum tells an important tale.

Put simply: Caribbean central banks, like those of other small developing countries, possess but little capacity to influence behaviour in their economies during periods of economic stress linked to fiscal overhang and balance-of-payments constraints that reflect import-dependence in face of sluggish export performance coupled with low, or no growth.

Wynter's introductory statement devotes but one sentence to monetary policy: "Monetary policy is focused on lowering the rate of inflation to levels consistent with inflation in our major trading partners."

He continues by outlining Government's fiscal policy goals, targets that have been met in two previous IMF tests, programmes and systems yet to be implemented. Actually, the first sentence is followed by: "This is fundamental to the achievement of the goals outlined under the Government's medium-term economic programme supported by the agreement with the International Monetary Fund (IMF)."

His comments go on to discuss national debt reduction, revenue, expenditure and debt-management measures designed to squeeze debt down relative to GDP. This commitment, he says, requires achieving "annual primary surpluses of 7.5 per cent of GDP over the life of the [IMF] programme".

An inattentive reader would surely be forgiven should he or she conclude that this was the minister of finance addressing fiscal outlook. But these are remarks by the governor of the Bank of Jamaica. We must clearly, therefore, gather that monetary policy shall play a purely facilitative role, while the real economy - the profit-seeking private sector - hopefully driven by expectations of fiscal prudence and efficiency, ramping up investment and business activity, generating economic growth, jobs, employment opportunities and stability in the foreign exchanges.

Attempting comparison with say, the Bank of England, the US Federal Reserve or Bank of Japan, we'd find significant differences in possibilities.

Britain's Old Lady of Threadneedle Street is hundreds of years old - actually created in 1694. Last year, the US Fed hit a century. These central monetary authorities have chequered histories, doing today much more than their original mandate required. By no means were their policy objectives, support from the political system or level of independence settled matters when they were created.

Former Fed Chairman Ben Bernanke reminds us that the powerhouse he oversaw up until very recently, was described by one of the authors of the US Federal Reserve Act as having been established to "provide a means by which periodic panics which shake the American Republic and do it enormous injury shall be stopped".

History confirms this was not initially achieved and, over the years, the role of the bank changed, giving it enormously more power to influence events, most recently exhibited in 'quantitative easing' and 'forward guidance'.

The Fed and Bank of England embark on procedures meant actually to take interest rates almost to zero - quantitative easing - and to telescope in a bankable way - forward guidance - to corporations and businesses, that specific policies shall be kept in place for readily discernible, knowable periods of time.

Late in 2012, Bernanke and his committee 'invented' the new tool we know as forward guidance when the Fed announced it would not raise interest rates until the unemployment rate fell to a minimum of 6.5 per cent, once inflation did not exceed 2.5 per cent. Late the next year, the Bank of England employed the same paving tool! The Bank of Japan is doing likewise with quantitative easing.

Our region's central banks, beginning with the Bank of Jamaica - operating since 1961 - don't have the economic space in which to use these kinds of tools effectively. The simple fact, one may say, is that the size of our economies, inordinate dependence on foreign trade and finance, untimeliness of statistics plus fickle confidence of our business sector preclude these kinds of possibilities.

Is this true today? Might it perchance become false tomorrow? If so, why? And how can such possibilities be achieved?

Competing views associated with reputable economists have perennially centred on the relative merits of monetary and fiscal policy. Even as monetary policy tools and power have grown, these controversies lurk in the background. Underlying them are expectations and what Herbert Simon put so beautifully: "Human beings, viewed as behaving systems, are quite simple. The apparent complexity of our behaviour, over time, is largely a reflection of the complexity of the environment in which we find ourselves."

All of these things mix and merge to create that misty thing we call 'confidence'. And this can only be generated by an environment in which the human being, the capitalist, the worker, the entrepreneur, the provider of financing all have some feeling that the complexity they confront in the economy and society can be summed up by a feeling of confidence.

We must work on that.

Wilberne Persaud, an economist, currently works on impacts of technology change on business and society, including capital solutions for Caribbean SMEs. Email: wilbe65@yahoo.com