Edward Seaga
AMONG THE factors that influence the cost competitiveness of Jamaican goods and services, none has wider application or deeper impact than the monetary and fiscal policies which determine exchange rate, inflation and interest rates.
In the decade of the 1990s to the present, the Jamaican economy has been a classical showcase of the use of inappropriate economic policies resulting in extensive monetary and fiscal instability.
The decade of instability in the 1990s shows a well-defined pattern of imbalance. From 1991-1995, the economy was characterised by monetary instability and fiscal stability.
Since 1996 to the present, the situation has been reversed to monetary stability and fiscal instability.
HIGH INTEREST RATES
But one factor remained constant throughout this entire period of instability: exceptionally high interest rates.
This has been an overbearing burden to private business and public sector budgeting. It is perhaps the principal factor in the lack of achievement of competitive costs in the production of goods and services.
Growth in non-traditional exports, as a consequence, has been stagnant in CARICOM and other markets and domestic production continues to be displaced by imports from CARICOM and elsewhere.
The impact of high interest rates is pervasive, spreading damage throughout the entire economy. Until this weakness is corrected and competitive interest rates achieved, in a sustainable and credible macro-economic environment, competitively priced goods and services will not be achievable.
In this non-competitive scenario, participation in a Caribbean Single Market (CSM) is of little or no value to the future prospects of development of the Jamaican economy.
If the policy priority is the lowering of interest rates then the exchange rate must be fixed to allow maximum reduction of interest rates to be realised.
FIXING EXCHANGE RATE
In the Caribbean region, 30 of 36 states fix their exchange rates to the American dollar, or, in the case of French states, the French franc. Eight of these 30 countries have gone further to substitute U.S. dollars (dollarisation) or francs for domestic currency.
Pegging the exchange rate has proven overwhelmingly popular in the Caribbean with very good results. A correlation of the exchange rate regime in force and the average commercial bank (lending) rate, over 1994-2003, in 13 independent Caribbean countries, show unmistakably that those countries, except Belize, with pegged exchange rates have single-digit or low double-digit commercial bank lending rates, considerably less than the commercial rate in Jamaica.
The impact of a fixed exchange rate on inflation is also well established. A critical correlation is made between exchange rate regimes and average inflation rates, over the period 1980-2003, establishing that countries with fixed exchange rates also have low inflation.
INCOME LEVELS
Nine countries with rates pegged to the U.S. dollar averaged 1.4 per cent to 2.6 per cent per annum inflation rates. By comparison, three countries with flexible exchange rates averaged 11-13 per cent per annum inflation.
The pattern of correlations can be taken one step further, indeed to the ultimate comparison: the relationship between fixed exchange rates and the level of per capita income.
Alvin Wint, professor of international business and head of the Department of Management Studies at the University of the West Indies, makes the comparison which clearly indicates that countries with upper middle to high per capita income levels have fixed exchange rates.
From these comparisons, it is clear that there is a positively established empirical correlation between a fixed exchange rate and low interest rates, low inflation, and upper middle-high income per capita on a sustainable basis. This correlation is a persuasive argument for a fixed exchange rate as the centrepiece of a macro-economic policy of a low interest rate, low inflation strategy a combination which has eluded the Jamaican authorities for some 15 years, since 1990.
The damage created to the economy by the overburden of excessive interest and inflation rates cannot be overestimated: business and private households have been dislocated; individuals have suffered from job displacements in failing enterprises, and opportunities lost for jobs in an anaemic economy.
Domestic production and exports have stagnated under crippling interest rates, among other factors, reflecting on the embarrassing failure of the low inflation, high interest rate policy of the past 15 years.
The question is not whether a fixed exchange rate to boost the economy is desirable, but how and when, and where does this strategy fit into prospects of the CSM?
This brings us to the question of the postponement of the establishment of an integrated economy by the original structure of the Caribbean Single Market and Economy.
This postponement is more likely to be an abandonment, as the creation of a single regional CARICOM currency, in a Caribbean monetary union, to replace all CARICOM monetary units of exchange, makes no sense at all, notwithstanding that a successfully integrated economy would depend on a common currency as its centerpiece to facilitate trade and investments.
The pattern of Caribbean regional trade shows unmistakably, that few CARICOM countries have regional trade with the rest of the group exceeding 10 per cent of their GDP, a level so small that to create a replacement currency to facilitate a miserly volume of intra-CARICOM trade would be ridiculous.
The conclusion can be drawn that if Jamaican exports continue to face the present insurmountable barriers of one of the lowest levels of productivity and education, together with one of the highest interest rates in the region, then the expansion of export-led economic growth through export enhancement will not materialise.
That objective of the CSM will fail in Jamaica. At what cost?
COST CONSIDERATIONS
The CSM machinery will have a cost which has to be borne by member states, including Jamaica. The cost is not publicly known and perhaps not yet fully computed.
The source of funding is to be the treasury of each country, although it was suggested by one member state that there should be a Caribbean lottery. The cost will depend on the size of the administrative machinery of the CSM. This is where there is a hidden tiger waiting to pounce.
The CSM functions on the basis of a web of legislation only some of which so far have been amended to have the same meaning in each country of the region. Further amendments, or new legislation, will require meetings at top decision-making levels. This will be an ongoing exercise which would become entirely impractical unless the decision makers are constituted as a political executive body to sit in long sessions and take decisions.
This is what councils and parliaments do, and repeatedly, the call hereafter will be made for a CARICOM body to deal with these affairs. If this body is to be a council, some higher authority has to give instruction for decision making. If it is to be a parliament, then history would be repeating itself and we would be back to where we were 44 years ago in a political union the Federation of the West Indies.
In both cases, there will be substantial costs. In neither case will there be any benefit to Jamaica. The situation then will be one of cost without benefit.
DIVERSION FROM NATIONAL GOAL
Jamaica has been reduced to a state of fragility in which every effort must be made to focus on the mission of recovery. The CSM plays no demonstrable role in that mission. It is a diversion from the national goal for which we have little resources. We have been down this path before with other diversions the dismembered West Indies Federation and the collapsed socialist programme.
In each case, we lost the better part of a decade in futile, unrewarding effort. If Jamaica is now to succeed in pulling itself up from the bottom of the CARICOM ladder to retrieve some of its former strength and glory, let there be no more wayward journeys, only beneficial paths.
In all regional arrangements, I begin by first seeking the interest of Jamaica. If that interest concurs with others, we can pursue our goals together. If not, I make no apology for putting Jamaica first because although I love my regional brethren, I love Jamaica more.
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the University of the West Indies. Email: odf@uwimona.edu.jm
