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PUBLIC AFFAIRS: How did we get here? - Part 1
published: Sunday | July 20, 2008
Claude Clarke, Contributor
Clarke
Recently, there was a public attempt to understand what has led to the sorry state of the economy and social order in our country today. I would like to contribute to this debate as I believe that as one who has had the benefit of perspectives from several sides of the subject, my observations may be of some value.
Although before coming to office in 1989 the People's National Party (PNP) had been engaged in developing plans to manage the economy employing principles of pragmatic people-based development, once it became government, it quickly embraced a policy of 'continuity'. In other words, it would continue the policies left by the outgoing Jamaica Labour Party (JLP) administration.
The abandonment of democratic socialism had clearly begun but no alternative had yet been thought out. In the absence of a clear philosophy to guide the development of policy in those first years, the decisions of government seemed to drift without direction or rationale. Certainly, there were announcements of new projects, but the first significant economic policy change from those inherited from the JLP was the surprise liberalisation of the foreign-exchange [COLOR=orange! important][COLOR=orange! important]system[/color][/color] in 1990. This thrust the country into the era of total liberalisation, under which we operate today. It not only represented a major change from the JLP's approach of a managed monetary regime, but a dramatic departure from the PNP's tradition of controlling the main economic, pillars of the country.
Currency liberalisation
Omar Azan, president of Jamaica Manufacturers' Association, tests a Sealy [COLOR=orange! important][COLOR=orange! important]mattress[/color][/color] at the JMA/JEA Expo 2008 at the National Arena, St Andrew. Azan is owner of Boss Furniture, a maker of beds. While some local manufacturers struggle to survive, many international companies have been relocated to the Eastern Caribbean. - File
I certainly believe that in and of itself, currency liberalisation is a good thing. But for its benefits to be realised and its harmful effects avoided or mitigated, it needs appropriate institutional, monetary, fiscal, trade and administrative policy arrangements ahead of its announcement to ensure its smooth introduction and operation. None of these things was done. As far as I am aware, the policy was a surprise announcement made at a party political event and that was that. Since then, we have been battling the consequences of what can only reasonably be described as a very rash act.
Because the necessary preparations were not made, the Jamaican dollar lost over 75 per cent of its value in just 19 months. This set off an inflation explosion, which peaked at over 80 per cent in 1991. The accompanying inflation having cemented the currency's depreciation in the economy, there was no rational way to reverse it except by achieving lower inflation rates than our [COLOR=orange! important][COLOR=orange! important]trading[/color][/color] partners in subsequent years. That did not happen. Notwithstanding that the Govern-ment acted in defiance of economic logic, and with the assistance of some sections of the private sector, misguided public support engineered, or at least allowed, a revaluation of the Jamaican dollar of 51 per cent.
The Jamaican dollar began the year 1992 at an exchange rate of $21.20 to the [COLOR=orange! important][COLOR=orange! important]US [COLOR=orange! important]dollar[/color][/color][/color] and ended it at $22.20; a depreciation of five per cent. In the meantime, the inflation rate for the year using the GDP deflator, which is a better measure of internally generated inflation than the Consumer Price Index, was 60 per cent, that is 58 per cent above that of the USA's, which was two per cent. On this basis, a product with a 100 per cent Jamaican content, which at the beginning of the year cost J$21.20, or US$1.00 to produce, would see its cost increase in Jamaican dollars by 60 per cent to J$33.92 or to US$1.53 at the end of the year, without there being any change in the efficiency of its production. The Jamaican dollar had thereby been revalued by 51 per cent.
Increasing production costs
While this revaluation was increasing, the cost of Jamaican production by 60 per cent in Jamaican dollars and 53 per cent in US dollars, the prices of US products imported into Jamaica were increasing by only two per cent in US dollars and seven per cent in Jamaican dollars. The consequence of this was that the competitive ground was sharply cut from under all Jamaican products, not only in export markets, but right here at home.
Unfortunately most Jamaicans were blissfully unaware of this as the whole country was caught up in celebration of the 'success' of the great 'Dollar Initiative' of 1992.
The Jamaican dollar has been revalued continuously since 1992, and continues to this day. In the five years following 1992, it was revalued by a further 70 per cent, causing the competitiveness of Jamaican production to be further undermined. At the same time, our CARICOM neighbours held their inflation in line with the US They had no need to devalue their currencies and were not foolish enough to revalue. In so doing, they were able to maintain and, in some instances, improve their competitiveness, even while they maintained their exchange [COLOR=orange! important][COLOR=orange! important]relationship[/color][/color] with the US dollar.
The adverse consequences of our absurd revaluation policy are best seen by comparing our economic growth rate for the two years preceding liberalisation (1989 and 1990), with the first 15 years under this policy. Growth in 1989 and 1990 averaged 6.2 per cent per annum. The average growth rate since then has been less than one per cent, just marginally above the population growth, resulting in no growth at all for our people.
While this has been happening, growth among our CARICOM trading partners has been vigorous and strong; and their people have enjoyed rapidly increasing prosperity. Trinidad grew by an average of over five per cent and Barbados by over three per cent.
It would be a wonderful thing if Jamaica had an economy strong enough to justify a revaluation of our currency. But not even the most irredeemable lunatic could believe that that is the case. There are certain unchallengeable facts of economics which defy the logic of revaluation as a strategy for a weak economy like Jamaica's. The most important of these is that a revaluation subsidises imports and foreign workers while it taxes exports and local workers. It also subsidises the export of a country's wealth. The result of that policy in Jamaica is there for everyone to see. The supermarket shelves have barely an item made in Jamaica, while they groan under the weight of imported goods, including those from our CARICOM competitors.
International companies such as Colgate Palmolive and Johnson & Johnson, which hitherto saw Jamaica as a competitive location for production, have closed their, doors and relocated to our trading partners. Jamaican manufacturing companies like West Indies Glass, Jamaica Biscuit Company and Carib Cement have either died or been taken over by foreign interests who now enjoy the financial benefits of their strong Jamaican brands and/or the revenues to be garnered from a captive Jamaican market.
Political advantage
It is difficult to understand why a government presiding over a struggling economy would allow such a devastating set of circumstances to develop. The fact that the policies gave people a false sense of prosperity - a feeling brought about by an increased capacity to consume imports with revalued, inflated incomes - even while the country was producing less, would suggest political advantage may have been the motive.
The result of this extraordinary policy is that exports stagnated, imports skyrocketed and the trade deficit exploded; moving from a negative US$678 million in 1991 to negative US$3.4 billion in 2007, a fivefold increase. As a result, we now face a national debt of over $1 trillion, the interest payments on which gobble up 47 per cent of our tax revenue. This deprives our people of much of the vital social services for which they pay nearly half their income in taxes.
Factories built with taxpayers' money have closed and have been converted to warehouses for imports. Farms have been laid bare and some farmers have even resorted to selling imported foods. Workers have been laid off in droves, been pushed into lower-value jobs, or have had to seek opportunity in foreign lands. Productive output, which is where the real wealth of an economy is created, has declined.
Manufacturing jobs have declined from 140,000 in 1991 to less than 70,000 today. In the meantime, a consumption culture which was being fostered over the years, has been demanding ever-increasing volumes of imports.
With less real value being created in the country, the growing consumption appetite has come to be satisfied by a variety of 'alternative economic schemes'. These are not restricted to the Cash Plus-type activity. Long before the Cash Plus-type phenomenon, the distortions in the economy created by government's policies had created the same 'Cash Plus' effect through the rapid expansion of the financial sector in the early 1990s, while the real economy, which is what should be sustaining it, was stagnant.
Resource gap
The financial services sector, largely powered by unproductive government paper, expanded by 80 per cent between 1991 and 1994, while the goods-producing side of the economy had an accumulated growth of one per cent. During this period, the banks were recording mega profits. Some of their managers were said to be earning multimillion- US-dollar packages and it was party time for all who were engaged in what one of their leading lights once aptly described as 'the paper chase'. How was it that our economic planners could not see that this was a contradiction that needed to be understood and corrected?
But there were far worse effects to this policy. They include the explosion of criminality, murder and mayhem in the country. The extortion racket, drug trafficking, money laundering, are all a part of the mix of activities into which more and more of our people were and continue to be drawn in the effort to close the resource gap between real value created in the country and the irrepressible passion for import consumption.
These 'alternative schemes', which all operate outside the country's legal framework, have in common a methodology of corruption and criminal enforcement, which are what account for the poisoning of our culture and the conversion of our society from being a most peaceful and friendly place, to becoming the world's murder capital today. The persistent, intractable and growing criminality we have been experiencing is explained by the fact that more and more of our economy is represented by criminal enterprise. Significant portions of our economy and society survive out of the proceeds of crime and the economy would probably be paralysed if these resources were to disappear overnight.
That is why all our crime plans - no matter how draconian and oblivious of human rights, have failed and will continue to fail. It is my view that while strong national security action will always be necessary, we will not be able to reduce crime until we create the means to wean the economy off the proceeds of criminal enterprise.
published: Sunday | July 20, 2008
Claude Clarke, Contributor
Clarke
Recently, there was a public attempt to understand what has led to the sorry state of the economy and social order in our country today. I would like to contribute to this debate as I believe that as one who has had the benefit of perspectives from several sides of the subject, my observations may be of some value.
Although before coming to office in 1989 the People's National Party (PNP) had been engaged in developing plans to manage the economy employing principles of pragmatic people-based development, once it became government, it quickly embraced a policy of 'continuity'. In other words, it would continue the policies left by the outgoing Jamaica Labour Party (JLP) administration.
The abandonment of democratic socialism had clearly begun but no alternative had yet been thought out. In the absence of a clear philosophy to guide the development of policy in those first years, the decisions of government seemed to drift without direction or rationale. Certainly, there were announcements of new projects, but the first significant economic policy change from those inherited from the JLP was the surprise liberalisation of the foreign-exchange [COLOR=orange! important][COLOR=orange! important]system[/color][/color] in 1990. This thrust the country into the era of total liberalisation, under which we operate today. It not only represented a major change from the JLP's approach of a managed monetary regime, but a dramatic departure from the PNP's tradition of controlling the main economic, pillars of the country.
Currency liberalisation
Omar Azan, president of Jamaica Manufacturers' Association, tests a Sealy [COLOR=orange! important][COLOR=orange! important]mattress[/color][/color] at the JMA/JEA Expo 2008 at the National Arena, St Andrew. Azan is owner of Boss Furniture, a maker of beds. While some local manufacturers struggle to survive, many international companies have been relocated to the Eastern Caribbean. - File
I certainly believe that in and of itself, currency liberalisation is a good thing. But for its benefits to be realised and its harmful effects avoided or mitigated, it needs appropriate institutional, monetary, fiscal, trade and administrative policy arrangements ahead of its announcement to ensure its smooth introduction and operation. None of these things was done. As far as I am aware, the policy was a surprise announcement made at a party political event and that was that. Since then, we have been battling the consequences of what can only reasonably be described as a very rash act.
Because the necessary preparations were not made, the Jamaican dollar lost over 75 per cent of its value in just 19 months. This set off an inflation explosion, which peaked at over 80 per cent in 1991. The accompanying inflation having cemented the currency's depreciation in the economy, there was no rational way to reverse it except by achieving lower inflation rates than our [COLOR=orange! important][COLOR=orange! important]trading[/color][/color] partners in subsequent years. That did not happen. Notwithstanding that the Govern-ment acted in defiance of economic logic, and with the assistance of some sections of the private sector, misguided public support engineered, or at least allowed, a revaluation of the Jamaican dollar of 51 per cent.
The Jamaican dollar began the year 1992 at an exchange rate of $21.20 to the [COLOR=orange! important][COLOR=orange! important]US [COLOR=orange! important]dollar[/color][/color][/color] and ended it at $22.20; a depreciation of five per cent. In the meantime, the inflation rate for the year using the GDP deflator, which is a better measure of internally generated inflation than the Consumer Price Index, was 60 per cent, that is 58 per cent above that of the USA's, which was two per cent. On this basis, a product with a 100 per cent Jamaican content, which at the beginning of the year cost J$21.20, or US$1.00 to produce, would see its cost increase in Jamaican dollars by 60 per cent to J$33.92 or to US$1.53 at the end of the year, without there being any change in the efficiency of its production. The Jamaican dollar had thereby been revalued by 51 per cent.
Increasing production costs
While this revaluation was increasing, the cost of Jamaican production by 60 per cent in Jamaican dollars and 53 per cent in US dollars, the prices of US products imported into Jamaica were increasing by only two per cent in US dollars and seven per cent in Jamaican dollars. The consequence of this was that the competitive ground was sharply cut from under all Jamaican products, not only in export markets, but right here at home.
Unfortunately most Jamaicans were blissfully unaware of this as the whole country was caught up in celebration of the 'success' of the great 'Dollar Initiative' of 1992.
The Jamaican dollar has been revalued continuously since 1992, and continues to this day. In the five years following 1992, it was revalued by a further 70 per cent, causing the competitiveness of Jamaican production to be further undermined. At the same time, our CARICOM neighbours held their inflation in line with the US They had no need to devalue their currencies and were not foolish enough to revalue. In so doing, they were able to maintain and, in some instances, improve their competitiveness, even while they maintained their exchange [COLOR=orange! important][COLOR=orange! important]relationship[/color][/color] with the US dollar.
The adverse consequences of our absurd revaluation policy are best seen by comparing our economic growth rate for the two years preceding liberalisation (1989 and 1990), with the first 15 years under this policy. Growth in 1989 and 1990 averaged 6.2 per cent per annum. The average growth rate since then has been less than one per cent, just marginally above the population growth, resulting in no growth at all for our people.
While this has been happening, growth among our CARICOM trading partners has been vigorous and strong; and their people have enjoyed rapidly increasing prosperity. Trinidad grew by an average of over five per cent and Barbados by over three per cent.
It would be a wonderful thing if Jamaica had an economy strong enough to justify a revaluation of our currency. But not even the most irredeemable lunatic could believe that that is the case. There are certain unchallengeable facts of economics which defy the logic of revaluation as a strategy for a weak economy like Jamaica's. The most important of these is that a revaluation subsidises imports and foreign workers while it taxes exports and local workers. It also subsidises the export of a country's wealth. The result of that policy in Jamaica is there for everyone to see. The supermarket shelves have barely an item made in Jamaica, while they groan under the weight of imported goods, including those from our CARICOM competitors.
International companies such as Colgate Palmolive and Johnson & Johnson, which hitherto saw Jamaica as a competitive location for production, have closed their, doors and relocated to our trading partners. Jamaican manufacturing companies like West Indies Glass, Jamaica Biscuit Company and Carib Cement have either died or been taken over by foreign interests who now enjoy the financial benefits of their strong Jamaican brands and/or the revenues to be garnered from a captive Jamaican market.
Political advantage
It is difficult to understand why a government presiding over a struggling economy would allow such a devastating set of circumstances to develop. The fact that the policies gave people a false sense of prosperity - a feeling brought about by an increased capacity to consume imports with revalued, inflated incomes - even while the country was producing less, would suggest political advantage may have been the motive.
The result of this extraordinary policy is that exports stagnated, imports skyrocketed and the trade deficit exploded; moving from a negative US$678 million in 1991 to negative US$3.4 billion in 2007, a fivefold increase. As a result, we now face a national debt of over $1 trillion, the interest payments on which gobble up 47 per cent of our tax revenue. This deprives our people of much of the vital social services for which they pay nearly half their income in taxes.
Factories built with taxpayers' money have closed and have been converted to warehouses for imports. Farms have been laid bare and some farmers have even resorted to selling imported foods. Workers have been laid off in droves, been pushed into lower-value jobs, or have had to seek opportunity in foreign lands. Productive output, which is where the real wealth of an economy is created, has declined.
Manufacturing jobs have declined from 140,000 in 1991 to less than 70,000 today. In the meantime, a consumption culture which was being fostered over the years, has been demanding ever-increasing volumes of imports.
With less real value being created in the country, the growing consumption appetite has come to be satisfied by a variety of 'alternative economic schemes'. These are not restricted to the Cash Plus-type activity. Long before the Cash Plus-type phenomenon, the distortions in the economy created by government's policies had created the same 'Cash Plus' effect through the rapid expansion of the financial sector in the early 1990s, while the real economy, which is what should be sustaining it, was stagnant.
Resource gap
The financial services sector, largely powered by unproductive government paper, expanded by 80 per cent between 1991 and 1994, while the goods-producing side of the economy had an accumulated growth of one per cent. During this period, the banks were recording mega profits. Some of their managers were said to be earning multimillion- US-dollar packages and it was party time for all who were engaged in what one of their leading lights once aptly described as 'the paper chase'. How was it that our economic planners could not see that this was a contradiction that needed to be understood and corrected?
But there were far worse effects to this policy. They include the explosion of criminality, murder and mayhem in the country. The extortion racket, drug trafficking, money laundering, are all a part of the mix of activities into which more and more of our people were and continue to be drawn in the effort to close the resource gap between real value created in the country and the irrepressible passion for import consumption.
These 'alternative schemes', which all operate outside the country's legal framework, have in common a methodology of corruption and criminal enforcement, which are what account for the poisoning of our culture and the conversion of our society from being a most peaceful and friendly place, to becoming the world's murder capital today. The persistent, intractable and growing criminality we have been experiencing is explained by the fact that more and more of our economy is represented by criminal enterprise. Significant portions of our economy and society survive out of the proceeds of crime and the economy would probably be paralysed if these resources were to disappear overnight.
That is why all our crime plans - no matter how draconian and oblivious of human rights, have failed and will continue to fail. It is my view that while strong national security action will always be necessary, we will not be able to reduce crime until we create the means to wean the economy off the proceeds of criminal enterprise.
See conclusion in next Sunday's Gleaner. Claude Clarke is a former trade minister and manufacturer.
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