Mankind's steady progress toward its present state of modernity and socio-econo-mic sophistication has been largely achieved on the basis of each generation standing on the experiences and achievements of all preceding generations, learning from their mistakes and benefiting from their accomplishments. Jamaica, through its current economic policies, seems intent on becoming the exception that proves the rule.

The present global economic crisis has provided the Government with the opportunity to demonstrate that it has learned from past mistakes. However, its approach so far suggests that it is oblivious to past errors and seems determined to repeat them. It has focused only on the immediate effects of the crisis and ignored the underlying problems of our economy.

The recently announced stimulus package, though containing some worthwhile measures, follows the same pattern of previous stimulus initiatives: dealing with the immediate symptoms of a problem without addressing the deep structural weaknesses of the economy that have made us much more vulnerable than we otherwise would be. As has been the case in the past, this will provide a short-term palliative, but will leave us to continue drifting from crisis to crisis.

The single action that can be expected to have a real structural effect (Bank of Jamaica's potentially credit-crippling and sudden increase in interest rates by approximately 40 per cent) will unfortunately have a deeply negative one. The stated reason for the hike is the same worn-out reason we have heard again and again since the 1990s: 'The Jamaican dollar has to be protected.'

Margin calls

According to the Bank of Jamaica (BOJ), the Jamaican dollar has come under increased pressure as a result of a spike in demand for the United States (US) dollar to meet margin calls on local securities dealers, who are holding US dollar-denominated Jamaican Government bonds, the prices of which have collapsed in the wake of the global financial meltdown. This is significant only because an extraordinarily large proportion of Jamaica's foreign commercial debt is held by locally based institutions.

Normally, sovereign hard currency-denominated bonds floated on the international capital market by international broker-dealers are largely bought, traded and held by interests outside the sovereign territory and any loss in value would be borne, disproportionately, by external investors. What is unusual about Jamaica's case is that so much of our hard currency-denominated bonds are held by local interests.

Faced with losses resulting from the collapse in the market for these bonds, the Government has intervened to bail them out: providing substantial lines of US dollar liqui-dity support, some US$180 million of which has been taken up so far. But, was this the best solution? And was it in the best interest of the Jamaican economy and the Jamaican taxpa-yer, whose money has been risked?

The opportunity to provide the country with a significant debt write-off by buying back our bonds at heavily discounted prices has been lost. This strategy would have the added benefit of lowering our debt-servicing burden, as not only would the total debt to be serviced be reduced, but the debt retired would be among the most expensive.

Of course, interest rates on any new loans raised by Government on the international capital market would reflect the higher yield on the discounted bonds. However, if the Government follows through on its pre-election commitment to replace our commercial foreign debt with multilateral debt over time, this may not be of much consequence.

Local securities dealers

The financial hit which would be taken by the local securities dealers holding these bonds and the effect this would have on the local financial sector are important factors to be considered. But, unlike what occurred in the 1990s, any intervention to rescue the institutions should incorporate the likelihood of a return to the taxpayer whose capital is being risked.

Unfortunately, the action now being taken by the Government is uncomfortably reminiscent of that taken in the 1990s. The decision to forego the opportunity to reduce our debt and our debt-servicing burden and instead risk taxpayers' money to shore up artificially the position of local securities dealers requires a more complete explanation. In the 1990s, no public discussion took place before decisions were taken to buy up bad debt at face value and this proved extremely costly to the country. So far, there has been no meaningful discussion on the best ways to address the present crisis.

Today, history is repeating itself. In a Jamaican-style version of Groundhog Day, the interest of the financial sector has been protected and the people are again set to pay the price. This can only be explained by the incestuous relationship which has developed between the Jamaican Government and local financial institutions over the years, with the sector becoming both the benefactor and the beneficiary of the Government. One of the outcomes of this relationship is the outsized profits earned by the banking and securities sector in relation to the economy as a whole, especially as almost none of its earnings come from outside Jamaica.

This cosy relationship began when Jamaican financial institutions, knowing that foreign debt has first call on the Budget and having the confidence that foreign debt will be serviced on a priority basis, began buying Government of Jamaica (GOJ) debt floated on the international capital market.

These institutions got the benefit of the extraordinarily high (and in many cases tax-free) yields and capital gains on these instruments while the going was good. Now that the global wealth bubble has contracted and the value of their bonds has collapsed, the Government is effectively accepting the cost and the taxpayer, without being asked, will pay the price.

Jamaica has been locked in a debt-servicing crisis for almost two decades, borrowing ever increasing amounts to service an ever-expanding debt. Most countries facing such a crisis would have been forced by the international market to take corrective action long ago. The Government would have long since been required to correct the fundamental problems of the uncompetitiveness of our macroeconomy and our low productive output. Argentina was forced by the international capital markets to address these problems after it had struggled for years to hold on to an uncompetitive currency. The result has been a dramatic improvement in its competitiveness, increased productive output, reduced imports and increased exports. Its per-capita income increased by over 50 per cent and it achieved a spectacular positive turnaround of its balance of trade, current account and balance of payments.

Economic expansion

Jamaica could achieve similar results if we were only prepared to address the underlying problems of our economy. There would be economic expansion; and more of our people would be legitimately employed and less susceptible to the attraction of criminal employment. However, the incestuous relationship between government and our local financial interests has led to policies which from all appearances puts the financial sector first and the Jamaican people last.

This exemplifies the now famous observation from one who sat in Parliament on the government benches in the 1990s, "Government has presided over the most massive transfer of wealth from the poor to the rich (and I would add from the productive to the unproductive) since the abolition of slavery."

Government would do well to study and learn from the Argentinean experience. Because Argentina did not have the luxury of its foreign debt being owned by Argentinean institutions it could not maintain the pretence that its currency was competitively valued while its producers and workers were being devastated by imports and its exports could no longer compete. International creditors would not buy it. But Jamaica's local creditors do.

For Jamaica to correct this slow-death scenario and give ourselves the hope of putting our economy on a path of growth, we must begin with the mission given to our central bank. The BOJ is now being led by a mission statement which can have no other outcome but an uncompetitive economy. Its mission statement describes its central mission as "safeguarding the value of our currency". This objective will inevitably lead to building a capacity to consume imports and impede the ability to produce and export.

Our massive visible trade deficit, which is now more than twice the value of our exports, is there to prove it. In a country with an urgent need for development and economic expansion, the mission of the central bank must be to manage our currency in such a manner that it stimulates production rather than encourage import consumption. This would require us to keep our currency competitive.

Our most successful CARICOM neighbours, Trinidad and Barbados, seem to have realised this and so it is not surprising that the mission statements of their central banks do not focus on the value of their currencies. Instead, they emphasise the development of their economies.

Prosperous society

Someone needs to give the BOJ a mission appropriate to our circumstances and to our times. It must begin with the recognition that it is not possible to have a prosperous society with an uncompetitive macroeco-nomy and that a macroeconomy cannot be competitive if its currency is uncompetitive. A currency is correctly valued only when the goods and services produced within its jurisdiction are able to compete, particularly within its own market. That is why all successful countries have ensured that their currencies are competitive and encourage exports rather than imports.

For those who believe devaluation is the only way to achieve a competitive currency, I would point them to Barbados, which did it with an effective income policy and good fiscal management. There are also those who hold the view that the measures required to achieve a competitive currency would be socially torturous and economically unstable. But can anyone think of a state of greater social and economic instability than that in which we have been mired for almost two decades, while pursuing the quixotic dream of achieving economic stability by stabilising our state of economic uncompetitiveness?

Somehow, in Jamaica we believe we are governed by a contrary economic logic. Our economy and people have paid a heavy price for this delusion. It has resulted in Jamaica's economy remaining stagnant for nearly two decades in the midst of the grea-test global economic expansion in a century.

My great fear is that this government, having come to office promising to change course and giving the people hope for change, is as deluded on the economy as its predecessor, which it had derided for "not changing course". Will change ever come, or will it always be déjà vu?

Claude Clarke is a former trade minister in the People's National Party and a manufacturer. Feedback may be sent to columns@gleanerjm.com.