Edward Seaga
In Part 1, published last week, correlation of the outcomes on inflation and commercial bank in respect to lending rates, a pegged or fixed exchange rate, and a managed rate in 13 CARICOM countries, showed unmistakably that over the period 1995-2005:
Countries using a pegged or fixed rate of exchange have low inflation not exceeding four per cent. Indeed, inflation in eight countries averaged a tiny 1.4-2.6 per cent. This is a sharp contrast to the Jamaican average performance of 11.56 per cent using a managed rate;
There is a marked contrast in levels of commercial bank lending rates among the independent CARICOM group: all countries, except Belize, with pegged exchange rates, have single digit or low double digit bank lending rates. These are considerably less than the 21.2 per cent average commercial bank rate in Jamaica.
A further correlation is the position of all CARICOM countries shown in Table 5 which compares exchange rate regimes and per capita income levels among 36 Caribbean territories.
FIXED EXCHANGE RATE AND FLOATING EXCHANGE RATE
Table 5 clearly shows that among the exchange rate regimes of 36 Caribbean territories:
Twenty-two of 26 territories using fixed or pegged exchange rates enjoy upper middle or high income levels;
Six of seven territories using a managed float have low or lower-middle income levels.
From all these comparisons it is clear that there is a positive empirical correlation between a fixed exchange rate and:
Low inflation;
Low interest rates; and
Upper middle to high incomes per capita, on a
sustained basis.
This bears comparison with the outcome of the inflation-targeting strategy based on a floating exchange rate. This strategy has produced over a sustained period the exact opposite results:
Higher inflation;
Higher interest rates; and
Low to lower-middle incomes per capita.
FIXED RATE REGIME
SUCCESSFUL STRATEGY
There should be little doubt in the wake of the sustained success of the fixed-rate regime in the region, that it has produced an environment for macroeconomic stability and sustainable economic growth. It is a successful growth strategy which is worthy of serious assessment rather than histrionic or obstinate rejection.
The presentation, so far, has dealt with the type of macro-economic framework which could provide a favourable environment for growth. But growth strategy involves more than settling a macro framework.
A prime objective is to generate economic growth for job creation. While, generally, strong growth creates more jobs, the type of growth can determine the number of jobs. Table 6 bears out this relationship.
1970 and 1971 were high growth years but employment data were not available.
The high growth periods 1968-69 and 1986-88 were periods of substantial job creation. This has been the unachievable objective of the last 15 years. But, as demonstrated below it can be done.
MANPOWER-LED STRATEGY
To maximise the level of job creation, a unique approach was used in the last half of the 1980s to create a manpower-led growth strategy. Manpower availability was surveyed to determine what resources existed and what jobs had to be created, correspondingly. Job creating projects were then selected for establishment to provide the jobs appropriate for the available skills, or lack of skills:
For females with skilled manual dexterity, but little academic ability, 30,000 additional jobs were created through considerable expansion of the garment export sub-sector;
For young males and females with some educational background, the construction of an additional 3,000 hotel rooms created some 5,000 jobs directly and thousands more indirectly;
For females with both manual dexterity and some academic ability, the introduction of a major information technology operation, the Digiport, in Montego Bay, created hundreds of jobs with a potential for expansion in other locations with thousands of job opportunities;
The introduction of modern agricultural technology through Agro 21 established fruit orchards, banana plantations, vegetable farms and aquaculture employing thousands of unskilled workers.
This range of new employment covered most of the spectrum of the unemployed.
Together, the multiplier effect generated a great many additional jobs which resulted in a record level of job creation totalling nearly 100,000 over three years. The consequence of this wage-led strategy was substantial economic growth in the last half of the 1980s, averaging 5 per cent per annum. Youth unemployment also decreased from 48.7 per cent to 31.7 per cent, and notably, for the first time, the unemployment rate for young females was significantly reduced.
It is a point of much interest to note that this high growth, wage-led strategy which was introduced in the 1980s is precisely the planning approach now used by China, in particular, and India.
These two countries with the largest populations, (totalling one out of every three people in the world) recognised that the large pool of available manpower, skilled and unskilled, was their resource base.
They strategized to create and attract industries which would produce jobs for the available skilled and unskilled manpower.
This wage-led model is the successful centrepiece of their high growth development strategies, which resulted in China growing a remarkable 10 per cent last year and India 7.6 per cent.
To be continued
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the UWI. E-mail: odf@uwimona.edu.jm.
