Edward Seaga, Contributor
ON A global basis, conditions have been very favourable to economic stability and growth. This robust performance has been flourishing since the early part of the last decade.
For Jamaica, this has not been the case. The period has been marked with an embarrassingly weak performance which runs contrary to the pattern of global buoyancy.
Table 1 is indicative of this weak performance: a chronic fiscal deficit; forbidding interest rates; excessive inflation; a sliding exchange rate; ballooning debt and anaemic economic growth.
This tepid performance has positioned Jamaica at the tail end of the list of countries in this region and points to the urgent need for a new growth strategy.
The preparation of a new national development plan would not be necessary for a new growth strategy.
Over the past 60 years, 10 such national plans have been prepared. Of these, only one was fully implemented, the 1963-68 Independence Plan which, coincidentally, was prepared by the Central Planning Unit in my term of ministerial responsibility.
Of the remaining nine, none finished the course. Six were abandoned as a result of changes of government leading to the preparation of new plans; two were scuttled by the financial meltdown in the 1990s and one was never published.
With this record of unsuccessful planning, another approach has to be used.
The alternative is to place greater reliance and emphasis on the use of macroeconomic frameworks, as has become the practice of the more recent past since the end of a borrowing relationship between Jamaica and the IMF in 1996.
THE INFLATION TARGETING MODEL
Macroeconomic frameworks are built around a targeted variable. The performance of all other variables is geared to achieve the target which anchors the framework.
The most generally used anchors are inflation and the foreign exchange rate. Inflation targeting has been the model on which macroeconomic planning has been proceeding in Jamaica for many years.
It is useful to set out the problems which this inflation targeting model was designed to overcome and then to review the results.
Impediments to economic growth have centred around inadequate investment as a consequence of:
The pre-emption of 93 per cent of annual budget revenues to service debt, pay salaries and housekeeping budgetary expenses, leaving only seven per cent to contribute to public investment. High interest rates which reduce the competitiveness of production and disrupt the feasibility of private investment. Inconsistency of inflation, interest and exchange rate creating unsettling effects which discourage investment.The objective of the model is to target low inflation which should induce lower interest rates, generating savings on debt service to apply to investment.
Lower inflation would also induce lower production costs and greater competitiveness, triggering greater investment.
The principal problem with this model is the volatility of the exchange rate which has to be controlled by mopping up bank liquidity through increased issues of high-cost debt.
As a consequence, the national debt escalates requiring increased debt service which completes the circle by pre-empting more revenue.
The result is persistently high inflation and interest rates which dissuade investment, pre-empt revenue for debt service and depress growth. These are the very conditions which the model is expected to alleviate.
While the past 10 years (1995-2005) have been more stable than the previous five-year period (1990-94), the economy has not benefited much from the improved stability.
As indicated in Table 2, the period has been marked by an intractable fiscal deficit, inconsistency in stabilising inflation, rigidity in the persistently high interest rates and bouts of unpredictability in the sliding exchange rate. Hence, growth has been negative or marginal.
On the basis of the poor outturns, the inflation targeting model cannot be said to be a successful growth strategy.
THE FIXED EXCHANGE RATE MODEL
A fixed exchange rate anchor, as an alternative model, would pull other variables into line to achieve the objectives of a co-ordinated strategy for growth:
There would be no increase in debt by mopping up liquidity to protect against adverse exchange rate movements because the rate would be fixed and not adversely affected by accumulating liquidity; The consequential build-up of liquidity in the banking system would then pressure the reduction of commercial lending rates;These factors would induce economic growth by:
Slowing down the accumulation of public debt, enabling faster reduction of debt service and debt to GDP ratios. Enhanced credit ratings would follow, reducing interest costs and improving the availability of softer external borrowings for investment and growth; Increased commercial bank lending at lower interest costs which would release more investment for growth. Increased lending by banks due to lower rates would compensate for the reduction of bank lending spreads;Greater competitiveness of exports and domestic production through lower interest costs;Lower interest costs which would reduce inflation rates, creating greater wage and price stability for investment and growth; Improved budgetary surpluses for public investment consequent on lower charges on the revenues for debt service, producing fiscal surpluses, rather than deficits. Inflows of mortgage financing and repatriation of savings from abroad, attracted by a fixed rate of exchange with zero cross-border currency risk would add to the investment pool for enhanced growth.This model, though simplified in the presentation, encourages positive rather than negative movements of the key macro-economic variables, producing an appropriate environment for economic growth and job creation.
Revenue would increase very substantially - by $16-18 billion this past fiscal year if the fixed exchange rate model had been adopted.
The present fiscal year, could be of the same order of budgetary savings for investment.
The unanswerable argument in support of this model is the success which countries of the region enjoy, with very few exceptions, from fixing the exchange rate, or pegging the rate, a softer version.
Countries which prefer a floating rate have the weakest economic performance in the region: Haiti, Suriname, Guyana, and Jamaica.
Table 3 demonstrates the success of a fixed exchange rate and its softer variety, the pegged rate, in achieving:
Low inflation. Lower commercial interest rates. Higher income levels.CARICOM countries, using a pegged rate of exchange, produced low inflation, not exceeding four per cent.
This is in sharp contrast to the Jamaican performance of 11.65 per cent over the same 10-year period, 1995-2005.
Table 4 illustrates the marked contrast between countries operating on a fixed exchange rate regime, using a pegged arrangement, with lower bank lending rates, compared to others with higher lending rates, including Jamaica, based on a floating rate regime.
TO BE CONTINUED.
Edward Seaga is a former Prime Minister. He is now a Distinguished Fellow at the University of the West Indies, Mona. Email: odf@uwimona.edu.jm
