Clarke
The Jamaican economy has long been in crisis. Our ballooning trade, current account and balance of payments deficits; our stagnant GDP, a chronically unstable currency and intractable state of lawlessness are so bad that the description 'crisis' almost seems a euphemism.
Well before the world economic crisis unfolded - our home-made crisis had been before us, begging for solutions. These solutions will have to be found if special measures created to deal with the global crisis are to have more than a band-aid effect.
Many countries have instituted stimulus packages to deal with the effects of the global crisis, and there is a popular view that Jamaica should do likewise. But, is a stimulus package the right strategy for Jamaica at this time?
First, for a package to be meaningful, it must be large enough to affect productive output, employment generation and domestically focused consumption. Unless the multilateral agencies come to our aid, Jamaica will not be able to marshal the resources necessary for a sufficiently large stimulus package to do these things.
Second, there needs to be pre-existing productive capacity within the economy and realisable export opportunities. Neither of these is available to Jamaica at this time.
Our productive capacity has been severely depleted and our uncompetitiveness makes meaningful export growth impossible in the present globalised environment.
Chronic uncompetitiveness
A truck transporting scrap metal slowly travels along Nelson Mandela Highway. Much of the country's productive infrastructure has been exported as scrap metal in the past few years. - File
The country's crisis is rooted in the chronic uncompetitiveness which has hobbled the productive sector since the early 1990s and was brought about by a period of economic management which encouraged import consumption while undermining the country's ability to produce the means to pay for it. These policies could not rationally have been expected to have any outcome, but the piling up of debt and the destruction of the county's productive capacity. Unfortunately, apart from the switch from financing through the private capital markets to multilateral loan financing, this administration has made no fundamental change to these policies since coming to office. Hopefully, the global economic crisis will now force the Government to re-examine them.
In carrying out a review, the Government needs to recognise that Jamaica's policies since the early 1990s have had the effect of de-industrialising the economy. This de-industrialisation has led to skyrocketing imports and stagnant exports, resulting in our ballooning debt and unhealthy dependence on remittances, much of which could be considered suspect. Continuing these policies will only cause us to remain vulnerable to adverse changes in the external environment and less able to respond to economic stimuli.
Countries which are able to respond positively to stimulus packages all have relatively strong industrial bases. Today there hardly is an industrial base in Jamaica. Our productive sector was gutted during the last two decades. Much of our productive assets have been decommissioned, some exported as scrap and many of our skilled workers have become disengaged from the productive process or have emigrated.
What Jamaica needs today, and has needed for a long time, is not a stimulus package, but a complete economic make over. We must direct our efforts towards creating a competitive economic environment within which a successful productive sector can be rebuilt.
Government was able to thrive while our productive base was crumbling because it discovered how easy it was to outbid private businesses for available domestic capital and how willing an international capital market, flush with money, would be to lend at high rates to a government constitutionally bound to repay foreign debt before feeding its people. This, along with 'remittances', provided most of the foreign exchange to finance the skyrocketing imports which displaced the output of our crippled local factories and farms.
Macro-economic environment
Competitiveness is central to the success of every economy. Contrary to the impression given by many of our leaders, the responsibility for and power to make an economy competitive is that of Government and not individual businesses. The role of the business is to achieve its own internal efficiency within the context of the macro-economic environment created by Government.
It is Government's responsibility to establish and manage efficient and effective regulatory and administrative institutions and contain its size and cost so that it does not impose an undue burden on the economy. It must also ensure that the costs of the local goods and services needed by private enterprises are competitively priced when compared with similar goods and services produced elsewhere. Government has the power to do this by controlling inflation with the application of sound monetary and fiscal policies and sensible incomes policies where necessary.
It is the failure of government to do these things over many years which has eroded the competitiveness of our factories and farms and led to their demise and the loss of thousands of good Jamaican jobs. Many of the productive businesses that survive today do so because of huge subsidies paid by the Jamaican consumer in the form of high protective duties and import restrictions. What these protective measures do is allow the businesses that benefit from them to charge higher prices to Jamaican consumers without having to worry about external competition. This is no substitute for the competitive environment that government should have provided.
The root of our uncompetitiveness has been Government's obsession with holding the Jamaican dollar at levels which normal economic factors cannot support. High interest rates have been used as the tool. But this tool has imposed added costs on our producers. Paying interest rates higher than those of our trading partners increases the cost of everything produced within Jamaica. No policy has ever been as destructive to our economy as the blind commitment to defending the price of the Jamaican dollar in this way, in defiance of economic reality. The tragedy is that this policy is no more likely to succeed than the proverbial dog is likely to catch its tail.
However, despite its illogic and unworkability, this obsession with protecting the dollar has its own perverse logic, grounded in politics. Ever since the declared success of the all-night vigil and march on the Bank of Jamaica (BOJ) in 1986 by the then Opposition People's National Party, the exchange rate has become a huge political issue, commanding the respect and fear of both political parties.
Governments have been prepared to sacrifice anything to pursue the objective of a relatively high-priced dollar. Following that vigil, the exchange rate was held at J$5.50:US$1.00 until the change of government in 1989. But all efforts to keep the rate from falling since then have only resulted in further devaluations.
Technical defence
Even if we can understand the political motivation for 'protecting' the dollar, the technical defence of the policy betrays a fundamental misunderstanding of what is required to achieve a strong and stable currency. When the National Industrial Policy was developed in the early 1990s, I was struck by one of its commitments - that of maintaining a stable and competitive currency. This was significant because economists know that it is not possible to keep a currency stable if it is not competitive. One would, therefore, have thought that policymakers would have pursued policies which lead to macro-economic competitiveness as a prerequisite to achieving currency stability.
It is both surprising and inexplicable that they set out to pursue currency stability in the expectation that competitiveness would follow. It is even more puzzling that after so many years of observing the same failed result, Pavlovian instinct, at the very least, did not cause them to desist. This failed policy has caused everything produced in Jamaica, from our agriculture to our manufactured goods, from our minerals to our services, to become increasingly uncompetitive. Far from protecting the Jamaican dollar, the undermining of our productive output through this high-interest rate policy, is guaranteed to result in devaluations in perpetuity.
This senseless policy has also proven itself to be a great misallocator of capital. It has directed a highly disproportionate amount of the country's capital to the Government, whose employment of it can hardly be said to be productive or efficient. It has created a super-profitable, super-sized, financial sector, substantially dedicated to satisfying government's insatiable appetite for debt - all at the expense of the real wealth-creating sectors of the economy.
Lose-lose strategy
The Bank of Jamaica holds that high interest rates is the only strategy which can achieve equilibrium between the demand for foreign exchange and contracting supplies. Its position seems to be that the exchange rate is inviolate. However, by increasing the cost of Jamaican dollar credit, it effectively increases the volume of Jamaican dollars required to pay for foreign exchange. For producers, this essentially has the effect of a devaluation on their cost side, with no avenue open for a corresponding increase of revenue from its sales. This leaves our producers up the creek without a paddle. It is a lose-lose strategy. It has served to undermine the Jamaican productive sector and will destroy the entire economy if it is not discontinued.
This policy, vainly pursued by governments for almost two decades, has also had the distorting effect of making the productive and commercial sectors the servant of the financial sector rather than its master, as they should be. The resultant sellers market for financial services has led to the cost of their services going out of line with similar services provided to our overseas competitors. It is critical for our economic recovery that this distortion is corrected and the flow of competitively priced credit is restored to businesses again. Special low-interest windows, though potentially useful, is not the solution. Interest rates across the board must be brought in line with internationally competitive rates because uncompetitive rates across the economy will inevitably find their way into the costs of our producers and make them uncompetitive also.
There is no denying the enormity of the burden the global crisis has imposed on our economy. However, our response cannot be to attribute all our economic problems to it. What we should do is to use the opportunity of the wide public recognition and acknowledgement of the global crisis to fix the underlying structural problems of our economy and put the country firmly on the path to development and prosperity.
The choice facing the Government is whether it will now finally change course, or use this global crisis to provide itself with the mother of all excuses for failure.
Claude Clarke is a former trade minister and manufacturer. Feedback may be sent to columns@gleanerjm.com.