Morrison

Talk in recent weeks of a possible new borrowing arrangement with the International Monetary Fund (IMF) would naturally have set off certain impulses in the Jamaican collective mind. Etched in the psyche of people age 35 years and older, are memories of 'a villainous' IMF, which imposed painful devaluations in the 1970s and 1980s that brought down austerity on the population.

But we have heard from no less a world authority on finance than the British prime minister, Gordon Brown, that the 'Washington Consensus' of one-size-fits-all conditionalities is dead. And indications are that 'winds of change' have swept the fund on to a more flexible and less ideological path. Nonetheless, we should not assume that attached to a loan from the IMF would not be conditions involving tough policy options for the most critical problems.

Our ballooning deficit in the balance between exports and imports of goods and services is one such problem for which there is no soft policy action. This deficit is unsustainable and is a manifestation of deep-seated structural problems which have been aggravated by the current global crisis. One component, which was raised in my last week's column, is the decline in our agricultural sector over the past 40 years.

The consequential weakening of export earnings from the sector goes all the way back to the late 1960s when sugar production went down by nearly 30 per cent in four years. Combined with this loss on the export side is the more potent damage to our foreign-exchange situation due to the sharply rising bill for imported food. The increased dependence on food imports can also be traced to the !950s and 1960s. As was revealed by Owen Jefferson in his doctoral thesis, imported foods which represented just 16 per cent of total food consumption in 1950 had risen to 32 per cent by 1968.

Remittances declining

Imported foods must now be running at nearly 60 per cent of consumption, having doubled between 2000 and 2008, moving from US$448.3 million to US$886.3 million in 2008. They accounted for one-third of the deficit between exports and imports of goods and services in 2008. With gross foreign-exchange earnings from tourism and bauxite-alumina exports likely to fall by at least US$700 million this year alone, the food import bill will have to be adjusted or else the foreign-exchange deficit will worsen.

Remittances, which became the fastest-growing source of cash flowing into the local economy since the early 1990s, have also been declining. In the first four months of the year, US$75 million less came from this source. It should not take an IMF prescription or conditionality to force us to adopt measures to bring about the adjustment that has to be made. If we have learnt nothing else from the IMF years, we should have riveted in our consciousness the destabilising effect of a widening foreign-exchange deficit.

No one should be so naïve as to expect that the deficit caused by the rising food bill can be reversed in short order. Apart from the savings due to falling grain prices, reduction in the bill will have to come from targeted expansion of production of domestic food crops. This will require revolutionary moves in crop zoning, finance, marketing, investment packaging, and promotion and technical support for farmers, especially of the small- and medium-size scale.

The long-term decline in agriculture will not be reversed without these structural changes. Were we to be forced to use devaluation as the tool to raise the prices of imported food in order to force down demand and thus cut the food-import bill, there would still be need for bringing the sector into modern practices.

farmers need cheap imports

In any case, farmers need cheap imported inputs, such as fertiliser on the cost side and high prices for imported foods that make local produce more competitive, thus boosting their profitability and growth. While devaluations help their revenue side, it also pushes up their costs, and the resulting inflationary environment is counterproductive. The devaluations of the 1970s, 1980s and the 1990s provide ample empirical evidence of how this has hurt the farmers.

We know too that to some extent, overvaluation of the currency from time to time has been a disincentive to the farmers, as it makes imported foods relatively cheaper. This demonstrates why maximum effort has to be made to improve the productivity levels of farmers.

As in agriculture, radical changes are needed in the efficiency with which we use energy if the contribution of the oil bill to the foreign-exchange deficit is to be brought down. Rising prices are obviously an important tool to secure adjustment, particularly because we lack any serious indigenous sources. For too long, politics trumped economics in making rational policy in this vital area, as happened in the USA as well.

What put us even beyond the irrationality of Americans on this subject was that oil-based products were being sold in Jamaica at prices below those in petroleum-rich countries. Policy action to drive the changes in energy use is also necessary. Diversification of energy source is a fundamental step that should be taken now as oil prices are already at nearly US$70 per barrel, double their levels of six months ago.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.