Anthony Woodburn, Contributor
THIS IS a response to 'JLP must present alternative model', The Sunday Gleaner, April 23, 2006, by Don Robotham. His article contains glaring economic contradictions and gaps which must be pointed out, albeit, an anthropological analysis of economic variables and issues within the Jamaican context.
Firstly, he argued that "Jamaica has a grossly overvalued exchange rate and needs a devaluation." The fact is that currencies are either overvalued or undervalued, and not the exchange rate as he argued. This is explained in the literature by the theory of Purchasing Power Parity (PPP).
ROOT CAUSE
Secondly, he also argued that; "the root cause of our (Jamaica's) indebtedness, interest and exchange rate problems and lack of economic and social development is our dismal level of productivity in the real economy." How then does he reconcile his own admission that "It is perfectly obvious to thinking people in the JLP leadership that the economic model being pursued by Dr. Davies is the only viable one." Perhaps Robotham is only aware of contractionary monetary and fiscal policies to the neglect of expansionary policies, and indeed, he might want to explain to us what 'viable' means.
The flexible rate system to which Robotham romanticises is a system that has been 'managed' or 'dirty floating'. Under dirty floating, central banks intervene to buy and sell foreign currencies in attempts to influence exchange rates as opposed to a fixed rate system where neither the Ministry of Finance nor the BoJ can intervene to determine exchange rates.
DRIVING IMPULSES
Can Robotham tell us exactly what are the impulses driving such urgency for his perceived devaluation? Realistically, one of the reasons cannot be to improve our balance of payments. In 1967, under The General Agreement on Tariffs and Trade (GATT), the British devalued the pound from US$2.80 per pound to US$2.40 per pound and benefited from increased exports of goods to US consumers.
More recently, under the World Trade Organisation (WTO) the US dollar depreciated against a basket of currencies including the euro and the yuan, the US increased exports to the EU, amidst strong protest from its European trading partners under WTO rules. Simultaneously, US trade imbalance with China widens, this is an indication that there are other factors associated with a depreciation/devaluation strategy.
Devaluation is a useful short-term strategy for increasing exports in goods, but considerations must be given to the following in the consuming countries; high income elasticity of demand, low price elasticity of demand and inflationary patterns, also professional speculators and hoarders in foreign currencies within the domestic economy. With these strategies in practice, India's high and mid-market products and China's low-margin high-volume goods are responsible for their successes in international trade. Jamaica has not grasped the work ethics, discipline, techniques or technology to fit into the profile of these elasticities and product profiles.
Characteristically, Jamaica is import inelastic and the consequences of a devaluation multiplier include increases in the costs of: medication and treatment, oil and petroleum products, light bills, telephone bills, information, technology, education and generally a reduction in people's standard of living. Is it that; "the Jamaican dollar is crying out to be devalued" or is it that some one needs to reduce interest cost on the national debt while that the BoJ can make a profit or to favour professional speculators and hoarders?
It has become necessary to point out these contradictions and paradoxes because Jamaicans deserve better from our Journalists, opinion and decision makers. It cannot be just about meeting deadlines for the Editor, impressing friends, family members and colleagues or pecuniary considerations. As Dr. Michael Witter, Head, Department of Economics, UIW Mona once said, "One of his greatest discomfort is to read or listen to the widespread abuse of the discipline, just about anyone and everyone can speak confidently on the economy." What a shame? It is time to educate our fellow Jamaicans and not to continue to use superior knowledge to fool them.
Anthony Woodburn is the Immediate Past President of the Young Economists Association (YEA), UWI, Mona Campus, anthony.woodburn@uwimona.edu.jm.
