Anthony Woodburn, Contributor
The demands of external trade influence monetary policy. File
It is a common view that Jamaica's economy has not met its overall performance criteria within the last 44 years. Over the same period empirical data show that average Gross Domestic Product (GDP) grew at a rate of 2.14 per cent per annum. If real GDP growth is disaggregated, inarguably, one can see that there has been substantial growth in both the volume of production and the value of goods and services in certain sectors. Ironically, increases in the value of goods are not strongly reflected in increased production and productivity; instead, these are usually caused by an increase in inflation. However, sustainable growth is what matters most, and unfortunately, this has proven elusive within Jamaica's realities which is perhaps our biggest challenge.
interrogating a
44-year-old challenge
But, how does one really interrogate this 44-year-old challenge, and do so with a view to enriching public policy decision-making processes? Social scientists have advanced new ideas, comparative analyses and research, over time, so as to enhance economic growth and development. Likewise, both formal and informal entrepreneurs have advanced ideas based on their experiences, but despite these interventions, Jamaica's economy has consistently failed to maximise its production possibilities. In an attempt to analyse our weaknesses one might ask: What mechanisms can we use to assess the extent to which our macroeconomic policy-makers have failed to implement economic policies which are consistent with sustainable economic growth?
In his academic paper 'Exchange Rate Policy in Jamaica: A Critical Assessment', Dr. Michael Witter assesses the exchange rate policy in Jamaica since independence. His method of analysis was to trace the historical development of exchange rate policy in relation to overall government economic policy and the underlying economic circumstances. Economic theory states that it does not matter the state of the human capacity, political system, physical infrastructure or the state of technology; the exchange rate takes all these factors as given, in the domestic economy and in the rest of the world. The exchange rate asks how many units of labour in Jamaica should be exchanged for one unit of labour abroad. In other words, the exchange rate reflects the relative labour productivity in two countries. For instance, in 1967, one U.S. policeman was worth three Jamaican policemen, while in 1984, the same U.S. policeman was worth 16 Jamaican policemen.
Historical perspective
Witter noted that Jamaica has always pursued a dependency exchange rate policy. After Jamaica became politically independent in 1962, the colonial monetary system established in 1937 remained basically intact. This authority was now vested in the Bank of Jamaica (BoJ) which was established in 1961. Through the BoJ, the Government continued to maintain parity with the pound. The Jamaican pound was freely convertible into sterling, implying that the interest rate set by the BoJ could not fall too far below the U.K. rate without encouraging capital flight. In 1967, the sterling came under pressure and was subsequently devalued by 14.3 per cent. In November 1967, the Jamaican Government devalued the pound by a similar percentage in order to maintain parity with the sterling.
the importance of trade
Witter argued that the rationale for the Jamaican devaluation was the importance of trade with the sterling area, particularly the U.K., to the Jamaican economy and the relative proportion of the external debt denominated in sterling. Not having devalued, the Jamaican Government would have accepted a revaluation of the Jamaican pound vis-à-vis sterling and this would have meant a loss in the value of the Jamaican pound export earnings and an increase in the Jamaican pound value of exports to U.S. consumers.
Importantly, the devaluation of the Jamaican pound was accompanied by a range of policies to offset the adverse effects. The Government imposed a price freeze on goods and services, and in addition, introduced subsidies on a small number of essential imported consumer goods. The bank rate was increased from five per cent to six
per cent and the prime lending rate from 7 per cent to 8 per cent, consistent with the increased Bank rate in the U.K., so as to minimise unfavourable capital movements. Exchange commissions were also increased to discourage conversion into sterling for the purpose of capital flight. The government decided to diversify the country's reserves in order to reduce the dependence on sterling.
Instability in the Int'l Monetary system
In 1969, the Jamaican pound was replaced by the dollar at a rate of J$2.00 to UK£1, this until 1971 when the US dollar was devalued. Since parity was maintained with the sterling, the devaluation of the US dollar caused a simultaneous revaluation of the sterling and the Jamaican dollar by 8.5 per cent. From mid-1972, the British Government allowed the sterling to float and this contributed to the high degree of instability of the international monetary system.
As in 1967, the Jamaican government once again decided that because of the importance of the sterling trade, the Jamaican dollar should float with the sterling. This created uncertainty about the value of the Jamaican dollar and even anticipation of its devaluation helped to feed speculation and capital flight. Jamaica began to lose reserve rapidly inspite of a series of measures that were put in place to slow the depletion of reserves. The first measure was the decision to float the Jamaican dollar with sterling. Once again, so as to maintain parity with the sterling, British exchange rate was allowed to dictate the value of the Jamaican dollar.
In January 1973, the Jamaican dollar was devalued by 5.6 per cent as one of the measures to counter the pressures on the balance of payments. This came about as a result of increasing trade with the US dollar area, making it more important than trade with the sterling area. The government then decided to peg the value of the Jamaican dollar to the US dollar at the rate of J$1.00 to US$1.10. In a dramatic turn around, it was now the exchange rate policy of the US government which would determine the value of the Jamaican dollar. Initially, it was a defensive strategy by the Jamaican government to devalue the pound in 1967; but, crucially, it was the deterioration of the balance of payments in 1972 which led to the devaluation of the Jamaican dollar in 1973.
Impact of devaluation
in the 1990s
Ever since our balance of payments problems which led to the devaluation of the dollar in 1973, even to date, we have not sought to find new solutions to our balance of payments problems. This deliberate and over used devaluation strategy is a manifestation of a crystallisation of ideas that has not changed much. The managers of our macroeconomic policies will argue that devaluation is a deliberate strategy to reduce consumption especially at a time of record oil bills and high inflation. Also, it will increase exports and ultimately increase real GDP growth. But, others will argue that devaluation makes Jamaican resources more expensive. Ideally, in a globally competitive economy devaluation should boost our exports and increase real GDP growth; instead, the opposite is occurring.
For the period 1994 to 2000, real GDP growth calculated in 1986 prices was significantly lower than 1996 prices (see table 2). This is consistent with Witter's findings that devaluation had the effect of inflating the value of imports. Over the same period, the dollar devalued by 30 per cent and accumulated inflation was 98.2 per cent. The value of imports increased by 51 per cent and the value of exports increased by 28 per cent, while balance of trade declined by 80 per cent. The same period saw tourist arrival increased by 42 per cent while estimated expenditure in tourism increased by 44 per cent.
An analysis of the rate of growth of GDP by industrial sectors for the period 1994 to 2000 showed that agriculture declined by 14.7 per cent, manufacturing declined by 14.9 per cent, construction declined by 15.8 per cent, while mining and quarrying grew by 11.8 per cent. In its review of the balance of payments, the BoJ highlighted the fact that a current account deficit of US$788.4M was recorded in 2001 and this deterioration was evident in all sub-accounts. Both export value and volume in alumina and sugar decreased.
Table 2
1994 1995 1996 1997 1998 1999 2000
GDP @1986 prices 0.88% 1.02% -1.08% -1.74% -0.33% -0.45% 0.66%
GDP @1996 prices 1.0% 2.5% 0.3% -1.1% -1.1% 0.9% 0.8%
Inflation 26.8% 25.6% 15.8% 9.2% 7.9% 6.8% 6.1%
ImportsUS$Mn 2,233.2 3,082.2 3,171.1 3,325.6 3,225.2 3,142.9 3,380.7
ExportsUS$Mn 1,219.6 1,796.6 1,721.3 1,700.3 1,613.4 1,499.4 1,555.0
ExchangeRate J$ to US$ 33.35 35.54 37.02 35.59 36.68 39.33 43.32
Visitor Arrivals 1.57m 1.75m 1.82m 1.90m 1.90m 2.0m 2.23m
EstimatedExpenditureUS$Mn 926.6 1,074.9 1,092.3 1,130.8 1,196.9 1,279.6 1,332.8
Source: Statistical Digest
For the period 1970 to 2005, the Jamaican dollar devalued by an average annual rate of 212 .6 per cent. For the same period, real GDP grew by an average annual rate of 1.5 per cent. Over the same period, the Barbadian dollar remains constant at BDS$2 to US$1. As highlighted by Witter then, and is even more conclusive now, devaluations have failed miserably to stimulate exports, contain growth in imports and to significantly reduce balance of payments deficits. Devaluation has automatically driven up local prices and erode real fixed incomes, thereby undermined the domestic market. Devaluation has not addressed our production crisis and its attendant social problems. Devaluation is blinded to the inelasticity of imports demand due to our import dependence of production and consumption. Also, devaluation is insensitive to the speculative tendencies which derive from investor's lack of confidence in the productive sectors.
The overused and deliberate strategy by our macroeconomic policy decision-makers must not be allowed to continue. We can no longer ignore it. Instead, we must shake the administration out of its complacency towards devaluation. Data suggest that devaluation has consumed our resources, to the point where the economy is characterised by "its either this or that", and like our CARICOM partners, our economy should be characterised by "complementarity".
n Anthony Woodburn is a past president of the Young Economists Association (YEA), University of the West Indies, Mona Campus. Email: anthony.woodburn@uwimona.edu.jm
