FILE
Offices of the Ministry of Finance in Kingston.Don Robotham, Contributor
WELL, AT LAST we seem to be getting consensus on economic policy. As the recent non-debate about the non-alternative between our non-Government and our non-Opposition proved, what is essential now is 'low inflation.'
This is the crucial point. The budget deficit is the source of the threat to increased inflation. Therefore, what the consensus around the need for a 'low inflation model' means is this - both Government and Opposition agree that the budget must be cut.
Both Government and Opposition now agree that taxes must be collected more effectively and where appropriate raised. It means that there is now consensus that there should be no salary and wage increases. At last we are getting somewhere.
Of course, the Opposition is agreeing, while denying that it is doing any such thing. This is the familiar Jamaican way. Say you are against a 'low inflation model' but for a "low inflation growth model."
Also, expect much chatter about attracting "well-directed investments" or even about some fantasy called 'GDP-indexed bonds."
I would not be surprised if the Opposition does not shortly call a major press conference laying out a detailed zillion dollar investment plan to be financed by some mystery group of foreign financiers from nobody knows where. After all, these gimmicks are the specialty of you-know-who. Play it again Sam.
Just hollering and bawling. Pay no attention to it. Focus on the crucial words: 'low inflation model.' In laywoman's terms, "Please get on with cutting the budget deficit, but don't tell anybody that I said so."
There can be no 'growth' unless we slay the inflation dragon. This is the key to attracting investments, 'well-directed' or otherwise.
In other words, if you look behind the debating points you will find the following: "Yes, we agree. Please go ahead and cut the budget deficit. But never you say I said so! After all, I may want to organize a roadblock or three against your budget cuts."
What a game! Civil society and the media face the challenge of seeing through the nonsense coming from both non-Government and non-Opposition. We have to insist that both sides stick to the essentials: a low inflation model.
Delroy Chuck's column (Daily Gleaner, January 22) is a case in point.
Delroy certainly had a good rant against the present economic model. Pay no attention to the rant. Good for the soul and warming to the heart of the faithful.
What you should pay attention to is the presence of this crucial sentence (paragraph six): "Such a model must be based on a low inflation and low interest rate policy, as any other model is counter-productive."
In other words, "Please cut the budget deficit. Please do not give the teachers a salary increase. Please increase taxes." Delroy, too, has now made his peace with Omar.
Of course, neither Government nor Opposition is accepting any responsibility whatsoever for the role which their hefty retroactive salary increases is playing in sending up inflation. No, that blow against the 'low inflation model' is fine.
NO 'POCO' ECONOMICS
They bi-partisanly pocketed their increase. But the medical technologists and teachers must get three per cent. Welcome to Jamaica: a land of shamelessly hypocritical political leaders.
One thing we can be thankful for: the Opposition did not on this occasion champion 'poco' economics.' They may yet do so.
'Poco' economics is my Jamaican term for what Americans call 'voodoo economics,' no offence meant. Made popular by the first President George H. Bush, it referred to those who claim to have a magic wand which can cut taxes and reduce budget deficits at one and the same time.
Mr. Bush's simple point was that a deficit was a deficit was a deficit. There was no magic wand, no 'voodoo' which could alter that fact. The deficit had to be reduced by harsh fiscal measures: a 'low inflation model.'
We are in a similar situation in Jamaica. We have developed a budget deficit which is more than eight per cent of GDP and rising. This deficit, too, will have to be reduced by harsh fiscal measures.
Only then can interest rates decline, the dollar depreciate and economic growth resume. There is absolutely no alternative to this. A low inflation model.
In the past, instead of supporting this 'low inflation model' Mr. Seaga regretfully resorted to 'poco economics.'
The PNP too, given all the Anancies on that side, has also practised 'pukku economics.' Especially in that awful period best forgotten - when Jamaica had the misfortune of having Mr. Patterson and Hugh Small as our Finance Ministers.
In Mr. Seaga's case, he recently proposed legislation to establish a currency board system in Jamaica. No repeat of that madness this time, so far. The collapse of Argentina, which set up the mother of all currency boards, put a temporary stop to that particular piece of nonsense.
The thinking around the abortive currency board proposal seemed to have been that a magic wand had at last been found to cut the budget deficit and to attract hundreds of millions of "well-directed investments". Mr. Seaga had this 'rod of correction' in his possession and would generously let the Jamaican people benefit from it. Yet, as in the case of the United States, so in Jamaica: a deficit is a deficit is a deficit. You can 'spread' as many revivalist tables as you like and 'jump' as much pukku as you wish, after you have emerged from possession, the deficit will remain.
UNILATERAL DOLLARISATION
Let us be clear what a currency board and dollarisation does and does not entail. It does not mean that if you currently earn J$50,000 you will now get US$50,000! In fact it means the opposite
This is a legal mechanism whereby your exchange rate is fixed permanently at a certain level in relation to one of the international hard currencies - in our case, the US dollar. An example would be that we fix the rate of one Jamaican dollar as equal to two US cents, which is about the current level.
In a currency board you stop at this point and guarantee to all that this rate will be backed by enough foreign exchange and never, ever move.In dollarisation, you go further. You eliminate your local currency altogether and you unilaterally adopt another hard currency as your own, in our case, the US dollar. All of this is done by legislation and big time constitutional amendments, which of course take time to draft. These changes would mean in effect, that we would not really need a Bank of Jamaica anymore, as the US Treasury would now be our central banker.
This is where the hitches begin. For, since we would have unilaterally fixed our currency to the currency of another nation, this is not like France joining the European Monetary system and giving up the franc for the euro. That case is one of a multilateral agreement.
The U.S. Treasury and Congress have repeatedly warned countries thinking of unilaterally establishing currency boards and dollarising that the U.S. Treasury will not in any way take on responsibility for any such country when it gets into financial difficulties as it must, given globalisation and the normal cycles of a market economy.
Jamaica would not be like New York or Florida, which constitutionally are states of the U.S. New York City at the moment has a fiscal deficit of US$3 billion. The projected deficit for New York state for the coming fiscal year is US$14 billion. Property taxes in New York City were just increased - by a Republican businessman mayor no less - by a whopping18.5 per cent.
The announced increase in fees for undergraduates at the State University of New York is 41 per cent. Nearly every single state in the United States is currently running a severe budget deficit, laying off people and raising taxes right, left and centre.
All these states are beating a path to Washington for a bail out. But they are not getting a positive response. Well, poor Jamaica would not even have a chance to be rebuffed. We would not even be in the line.
No reasonable person could ever expect that the US Treasury would take responsibility for the economic mess of another nation. This is just the usual Jamaican game of trying to pass off our economic responsibilities unto someone else - anybody else, not me. 'Poco' economics.
THE ARGENTINE DISASTER
This reality has recently been confirmed by the experience of Argentina. They set up a currency board and dollarised. They did not tackle their deficit. Their exports became uncompetitive. The foreign debt rose to US$141 billion. The budget deficits soared, despite currency board and dollarisation. No adjustments allowed. No lender of last resort. No bail out. Bankruptcy.
Argentina dollarised after a one-time sell-off of its utilities, which netted them US$90 billion. This is what they used to back the peso at one-to-one to the U.S. dollar at the start of dollarisation.
Jamaica has no such set of windfall foreign exchange inflows available. The rate of inflation in Jamaica is substantially higher than that of our main trading partners - the U.S. and Canada. The Jamaican dollar is, therefore, overvalued.
In fact, there would have to be an even greater and more draconian budget cut and a deeper devaluation than is currently being contemplated. Goodbye teachers, medical technologists and taxi drivers! Even more social unrest.
What is more, currency boards and dollarisation are for keeps. As Argentina discovered, when you put yourself in that box, the price to get out is bankruptcy.
This is because you have voluntarily deprived yourself of the possibility of adjusting exchange rates and managing the deficit in tandem with the inescapable movements of the market. You have banned all depreciation and macroeconomic management by legislative fiat.
Goodbye 'dirty float'. Goodbye firms which depend on exchange rate competitiveness to attract and keep customers. Goodbye Wray and Nephew. Goodbye Sandals and SuperClubs and most of our hotels, which depend on a discounted Jamaican dollar rate to attract tourists. Goodbye 'Ochi,' 'MoBay' and Negril.
This would not be the Davies frying pan anymore. This would be the real authentic Seaga fire.
In a market economy, currency levels, inflation, investments and growth arise primarily from market forces, which are often global. Not from grandiose schemes springing from the febrile imagination of financial wizards. Mr. Seaga never has liked or even understood market forces. They move things up and down too much.
Not easy to control. Too messy. Very annoying! In his first stint as Finance Minister in the 1960s, his forte was planning. He was the master of the scorching, no-nonsense, "well-directed" command.
In the 1980s as Prime Minister, it was his reliance on 'commands' to create the illusion of exchange rate stability that impressed. Only the late Moses Matalon, no slouch himself, could manage him.
This exasperated his Republican Party backers and led to the famous (famously shattering) 'fresh look mission' of 1985. It turned out that you could not 'command' David Rockefeller!
Jamaica lost an invaluable friend. USAID, the IMF and the World Bank washed their hands. Talk about 'Washington consensus'! No more "well-directed investments." In no time at all, Michael Manley was meeting with then President Bush, in the White House no less.
No prizes for guessing the name of the well-connected Jamaican businessman, with ties leading right to the Bush front door, who arranged this 're-connect' for his old friend Michael. The message was clear: the One Don had over-reached himself again. He was being dumped. He had 'commanded' himself back into the political wilderness. 'Donkey' is right - this world is not level.
Many people in the private sector don't actually realise that Mr. Seaga has zero experience with macro-economic management in a deregulated market environment, without exchange controls and quantitative import restrictions. Yes. Zero experience. A neophyte.
It shows in the idle talk about 'well-directed' investments. The great director is going to bring 'growth' and some magical investments, not the market. Mao, the Great Helmsman, used to think the same way. 'Poco' economics.
Command economics does not work, full stop. Especially in a small market economy open to the world. It works even less in your private business where the market really rules. If I set up a hotel on the North Coast and make it the most beautiful and elegant in the world with the most enchanting gardens, flower after meticulous flower, I cannot 'command' tourists to occupy it at the price I demand.
I cannot 'direct' investors to accept my terms and conditions, or else. I can attempt to 'command' my creditors as much as I like, they will 'command' me into bankruptcy! Persons who think like this should definitely not go into business. They fail when attempting to manage a market economy as well.
Don Robotham is an anthropologist who specialises in development issues in the Caribbean and West Africa.
