Anthony Woodburn, Contributor
THE JAMAICAN consumers have long been victims of liquidity constraints. Liquidity-constrained household members, by definition, are spending less than they would like and hence, will spend every extra penny they can lay their hands on (Dornbush & Fischer 1990). Unfortunately, most consumers are oblivious to the causal relationships between liquidity constraints and changes in certain macroeconomic policies, which usually expose consumers' challenges and vulnerabilities. Hence, consumers are highly sensitive to increases in the price of goods, services and taxes while behaving indifferently to currency depreciation, or a rise in interest rates. Most consumers liken interest rates and exchange rates to business interests exclusively, forgetting that these economic issues affect them as well.
The main determinants of consumer demand or householders' standards of living are wages and salaries. Wages and salaries decline in real terms whenever there are increases in inflation, taxes, interest rates or a depreciation of the Jamaican dollar. These economic pathologies result in uncertainty, income and employment inequalities, irrational consumer behaviour and the crowding-out effect. In addition, Jamaica's GDP per capita in 2000 was US$3,639.00 (HDR 2002), and it fell to US$3,083.00 in 2003 (HDR 2005), a decline in the standard of living of 15.3 per cent in just three years. These phenomena explain Jamaica's harsh realities of a constantly declining standard of living for especially pensioners and those who earn fixed incomes.
ECONOMIC PATHOLOGIES
If we assume that wages and salaries are held constant, with an increase in the prices of goods and services, consumers' standards of living will decline. It will now take more money to purchase the same amount of goods and services, and indeed, the consequences will be the same should there be an increase in taxes, more so, the General Consumption Tax (GCT). If interest rates rise or the dollar depreciates, consumers will have to think hard about how to manage their debts, in addition to maintaining their standards of living. The Bank of Jamaica (BoJ) has said that as at December 2004, consumers now owe J$32.7 billion (Table 1) on cards, loans and mortgages.
This translates to consumer debt per capita of US$185.00 or just 6 per cent of GDP per capita. Consumer credit in Jamaica is too low when compared to other economies, for instance, in June 2005; the Bank of England (BOE) reported that consumers now owe £1.004 trillion, which is US$29,173.80 consumer debt per capita or 56 per cent of GDP per capita. Hypothetically, if Jamaican consumers are experiencing liquidity constraints and declining standards of living, and the 'formal financial system' is under-representing their debt obligations, then who or what mechanisms are substituting? Jamaica's small consumer debt per capita, as reported by the BoJ needs to be examined by public policy makers, as it has serious implications for our democracy, the growth of small and medium sized entrepreneurs, the reporting relationship between BoJ and financial institutions, the monetary authorities and the income tax department.
Indeed, consumers' debt burden might not be so small when added to a national debt per capita of US$5,024.00, which amounts to US$5,209.20. Ironically, Jamaica's GDP per capita is currently US$3,083.00, which places each consumer's debt burden at 169 per cent of per capita income. In other words, in order to earn 30 per cent debt free wages and salaries, consumers must expend 200 per cent time, effort and money, and this is in an ideal tax-free working environment. With this realisation, consumers can identify with the harsh realities of a rise in interest rates (Table 2) and a massive depreciation of the dollar (Table 3).
In 2003, the Jamaican dollar depreciated against its US counterpart by 19.52 per cent, when compared to 2002, and during the same period, total consumer debt increased by 34.7 per cent (Table 1). According to the HDR 2005, Jamaica's average annual change in Consumer Price Index (CPI) for the period 1990 - 2003 stood at 18.3 per cent.
THE PROGNOSIS
Despite not being conclusive, but highly probable, empirical data for the period 2001 to 2004 have shown chronic economic pathologies in 2003. These include: the largest increase in total consumer debt, 34.7 per cent; the only increase in annual average domestic interest rates, .39 of 1 per cent; and the largest annual depreciation of the dollar, 19.52 per cent. In addition, central government wage bill for fiscal year (F/Y) 2002/03 was the lowest, J$59.08 billion or 12.1 per cent of GDP, when compared to F/Ys 1996/97 to 2003/2004, and tax package of US$280 million. These stressful conditions which ate at consumers' standards of living are consistent with the prognosis highlighted by the HDR 2005, where GDP per capita declined by 15 per cent and average annual inflation rate stood at 18.3 per cent. In the end, Jamaica dropped twenty places in its Human Development Index (HDI) ranking. Given all these difficulties, Dr. Omar Davies in consultation with trade unions, prescribed the Public Sector Memorandum of Understanding (MoU) in order to stabilise the situation.
GOVERNMENT AND TRADE UNION NEXUS
As Jamaican consumers' standards of living decline, the Government epitomised the irrelevance of traditional principles. The Government has clearly riveted its attention on the status quo, taxes continue to increase; wages and salaries remain at the basic minimum, despite increases in consumer debt burden; inflation remains excessively high; the dollar continues to depreciate at its rapid rate and the budget deficit widens. This resulted in a serious dilemma for the Government: either to halt the increase in consumer debt and increase their standards of living or to reduce the burgeoning budget deficit. How does the Government proposes to treat with these economic pathologies?
MULTIPLE CHALLENGES LIE AHEAD
It is anticipated that the year 2006 will be filled with social, political and economic pathologies. The presentation of empirical data, trends and forecasts are heightening consumers' level of expectation, both from the premise of a worsening situation as well as the principles of good government and good governance. Jamaica has posted yet another record number of murders; the Jamaican economy is among seven out of 177 that has not recorded any annual growth rate for the period 1990 - 2003 (HDR 2005); the MoU will expire in March 2006 - what happens thereafter?
In addition, we are preoccupied with the CARICOM Single Market and Economy (CSME); the uncertainty of general elections in either calendar year 2006 or F/Y 2006/07, and its attendant fiscal and monetary irresponsibility; a potentially explosive year for public sector employees' salaries negotiations; attaining the elusive economic growth and budget deficit targets; low crime rate especially murders and increases in employment. It's a difficult task, but with the will of consumers to survive, basic information and the consideration for the greater good, as Jamaicans, we can make it happen.
Table 1
Consumer Debt
| Year | Credit Card | Loans | Mortgages | Total | % Change |
| 2001 | J$3.2B | J$5.4B | J$8.2B | J$16.8B | 0% |
| 2002 | J$4.1B | J$7.0B | J$8.5B | J$19.6B | 16.70% |
| 2003 | J$5.8B | J$10.0B | J$10.6B | J$26.4B | 34.70% |
| 2004 | J$7.3B | J$12.1B | J$13.3B | J$32.7B | 23.86% |
Source: BoJ - Statistical Digest August 2005
Table 2
Domestic Interest Rates
Year Savings Rate (%) Lending Rate (%)
| 2001 | 8.16 | 20.34 |
| 2002 | 7.11 | 18.52 |
| 2003 | 6.89 | 18.91 |
| 2004 | 6.32 | 18.14 |
Source: BoJ - Statistical Digest August 2005
Table 3
Ave. annual J$ exchange rate
Year US$ J$ % Change
| 2001 | US$1.00 | J$46.19 | 0% |
| 2002 | US$1.00 | J$48.73 | 5.50% |
| 2003 | US$1.00 | J$58.24 | 19.52% |
| 2004 | US$1.00 | J$61.39 | 5.41% |
Source: BoJ - Statistical Digest August 2005
Anthony Woodburn is the immediate past president of the Young Economists Association (YEA), UWI, Mona Campus. Email: anthony.woodburn@uwimona.edu.jm
