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Who is in charge of economic policy in Jamaica?
Raulston Nembhard
Thursday, February 26, 2009
Raulston Nembhard
We need to have a clear determination as to who is in charge of economic and development policy in the country. This concern is echoed against the background of what seems to be a widening disjunction between the Ministry of Finance and the Bank of Jamaica as far as interest rates and the exchange rate are concerned.
At a recent press conference, the governor of the bank, Mr Derick Latibeaudiere, seemed exasperated at the increasing criticism of the bank's high interest rate policy. The president of the Jamaica Manufacturers Association, Mr Omar Azan, has been insistent that the high interest rate policy is stifling production - businesses cannot grow in the present crisis with high interest rates. This is even more palpably clear when you consider that other countries are reducing interest rates while in Jamaica they are going in the opposite direction.
This has been the case in Jamaica for the past two decades. Successive governments have determined that their first economic duty is to defend the exchange rate. The thinking is that a runaway exchange rate spikes inflation and thus retards growth in the economy. The government then has to dampen demand by mopping up liquidity, and the most readily available tool to do this is high interest rates. To do this does not take a great deal of thinking or hard work. It is a less arduous route than that which has to be taken to build aggregate demand in the economy and inspire productivity, which ultimately are the best ways in which the foreign exchange problem will be solved. The simple truth is that the country has to earn more foreign exchange so that there can be an adequate supply which will satisfy realistic demands for it.
This simple economic fact seems to have escaped Mr Latibeaudiere over the many years he has been governor.
Now there appears to be this widening chasm between his views and those of the government, at least those of Mr Shaw, the minister of finance. Mr Shaw, when in the Opposition, was quite vociferous that high interest rates were stifling the economy. He promised to reverse this trend when the Labour Party became the government of the day. Now they have and the high interest rates continue apace. To be fair to Mr Shaw, he has recently spoken of the need to reduce interest rates, but his views seem to be at variance with those of the governor who, in his press conference, seemed quite adamant that the high interest rate regime could not be dismantled, as if to suggest that they will be around for a while. He was emphatic that we should expect no growth in the economy in 2009-2010. With this assessment the country might as well get comfortable with the status quo as it is and wait out the storm.
Mr Latibeaudiere and those who think like him are wedded to a fading and pernicious paradigm of high interest rates that no longer works. It was this oppressive high interest rate regime that largely contributed to the financial collapse in the 1990s. We are on that doomsday trajectory with this present policy. In Jamaica we learn very little from history and so we remain doomed to repeat its mistakes.
Of one thing one can be certain. The need to step aside will become more apparent if the chasm of thinking on economic policy between the Bank of Jamaica and the government gets wider. The productive sector and the country at large cannot entertain the luxury of the present confusion that now exists about foreign exchange and high interest rate policies.
This is the time for clear, cogent thinking. Businesses cannot plan in an atmosphere of confusion. The government must come with a clear and unequivocal statement about its policy regarding high interest rates and who really is in charge of setting economic policy. Specifically, it needs to define the role of the Bank of Jamaica in this matter. We do not have a great deal of time to do this either. Over to you, Mr Minister.
stead6655@aol.com
www.drraulston.com
http://www.jamaicaobserver.com/colum...N_JAMAICA_.asp
Raulston Nembhard
Thursday, February 26, 2009
Raulston Nembhard
We need to have a clear determination as to who is in charge of economic and development policy in the country. This concern is echoed against the background of what seems to be a widening disjunction between the Ministry of Finance and the Bank of Jamaica as far as interest rates and the exchange rate are concerned.
At a recent press conference, the governor of the bank, Mr Derick Latibeaudiere, seemed exasperated at the increasing criticism of the bank's high interest rate policy. The president of the Jamaica Manufacturers Association, Mr Omar Azan, has been insistent that the high interest rate policy is stifling production - businesses cannot grow in the present crisis with high interest rates. This is even more palpably clear when you consider that other countries are reducing interest rates while in Jamaica they are going in the opposite direction.
This has been the case in Jamaica for the past two decades. Successive governments have determined that their first economic duty is to defend the exchange rate. The thinking is that a runaway exchange rate spikes inflation and thus retards growth in the economy. The government then has to dampen demand by mopping up liquidity, and the most readily available tool to do this is high interest rates. To do this does not take a great deal of thinking or hard work. It is a less arduous route than that which has to be taken to build aggregate demand in the economy and inspire productivity, which ultimately are the best ways in which the foreign exchange problem will be solved. The simple truth is that the country has to earn more foreign exchange so that there can be an adequate supply which will satisfy realistic demands for it.
This simple economic fact seems to have escaped Mr Latibeaudiere over the many years he has been governor.
Now there appears to be this widening chasm between his views and those of the government, at least those of Mr Shaw, the minister of finance. Mr Shaw, when in the Opposition, was quite vociferous that high interest rates were stifling the economy. He promised to reverse this trend when the Labour Party became the government of the day. Now they have and the high interest rates continue apace. To be fair to Mr Shaw, he has recently spoken of the need to reduce interest rates, but his views seem to be at variance with those of the governor who, in his press conference, seemed quite adamant that the high interest rate regime could not be dismantled, as if to suggest that they will be around for a while. He was emphatic that we should expect no growth in the economy in 2009-2010. With this assessment the country might as well get comfortable with the status quo as it is and wait out the storm.
Mr Latibeaudiere and those who think like him are wedded to a fading and pernicious paradigm of high interest rates that no longer works. It was this oppressive high interest rate regime that largely contributed to the financial collapse in the 1990s. We are on that doomsday trajectory with this present policy. In Jamaica we learn very little from history and so we remain doomed to repeat its mistakes.
Of one thing one can be certain. The need to step aside will become more apparent if the chasm of thinking on economic policy between the Bank of Jamaica and the government gets wider. The productive sector and the country at large cannot entertain the luxury of the present confusion that now exists about foreign exchange and high interest rate policies.
This is the time for clear, cogent thinking. Businesses cannot plan in an atmosphere of confusion. The government must come with a clear and unequivocal statement about its policy regarding high interest rates and who really is in charge of setting economic policy. Specifically, it needs to define the role of the Bank of Jamaica in this matter. We do not have a great deal of time to do this either. Over to you, Mr Minister.
stead6655@aol.com
www.drraulston.com
http://www.jamaicaobserver.com/colum...N_JAMAICA_.asp
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