EDITORIAL - Oranges, Mr Shaw?

A week ago, Peter-John Gordon, an economics lecturer at the University of the West Indies, published in this newspaper a short primer on real exchange rate and purchasing power parity, in which he substituted an orange for the Big Mac hamburger that is usually used to illustrate the effect of exchange-rate disequilibrium.

We commend the article to the economic policymakers of the Jamaica Labour Party, in particular the shadow finance minister, Audley Shaw, who has declared last week's intervention by Jamaica's central bank in the foreign-exchange market as vindication of his campaign against the devaluation of the Jamaican dollar.

Our interpretation of the Bank of Jamaica's (BOJ) action doesn't accord with Mr Shaw's chest-thumping analysis. But on a chance that he is right about the BOJ's motivation, it would suggest that the finance minister, Peter Phillips, and the BOJ's governor, Brian Wynter, have lost either their nerve and/or their grip on economic policy. Either way, it would be bad for Jamaica.

In the two and a half years since Dr Phillips has had the job, the Jamaican currency has depreciated by around 30 per cent, reflecting, largely, a policy decision, under Jamaica's economic reform agreement with the International Monetary Fund (IMF), to allow an overvalued currency to find its real effective rate. Mr Shaw, who served for four years as finance minister and on whose watch Jamaica's previous agreement with the Fund ran aground, thinks otherwise.

Shaw's stance

He believes that the Jamaican currency should be fixed, or, at least, should be stoutly defended at some predetermined value. It was a policy he pursued in the latter period of his tenure. The Jamaican dollar recovered nearly three per cent in nominal value against its US counterpart between March 2009 and the time Mr Shaw left office, despite the wide inflation differential between the two countries.

Indeed, as data provided by Dr Gordon in the primer to which we referred demonstrated, the historic trend is for Jamaica's inflation to significantly outstrip that of its main trading partner, the United States (US). For example, in the dozen years to the end of 2012, inflation in Jamaica was 265 per cent. In the US, it was 37.8 per cent. Yet, over that period, the nominal value of the Jamaican dollar depreciated substantially less than half the rate of inflation, in part because, as the IMF's boss, Christine Lagarde, observed during her visit to the island, Jamaica agreed to "a bleeding of its reserves to support a currency that was clearly overvalued". The upshot: We subsidised imports and exported jobs while making our exports less competitive. American oranges, in the circumstances, or Big Macs for that matter, would be comparatively cheaper in America.

Allowing the Jamaican dollar to find its real effective exchange rate, especially when other painful reforms are under way, is a painful and politically tough policy to implement. But it is the right one. Indeed, the sweeping reforms, including fiscal discipline, being pursued by the Government are demonstrating their efficacy. But markets must be orderly and not be subject to the whim of speculators.

And that is what we understand to be the basis of last week's intervention by the central bank into the currency market; not as an effort to cushion the political impact of depreciation. If it were otherwise, it would be a frittering away of the country's reserves and giving advantage to American oranges or Big Macs.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.