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Inflation Management and its Consequences on Nation, Citizens and Businesses
“Now abideth these three rates: interest, forex , and inflation; but the greatest of these is inflation.” Apostle Common Sense, Acts of the Economy, Knowledge Testament, New International Wisdom Version, Burnsil Doctrine n true Jamaican style, we have been generating prevailing inflation rates.. much heat, reactions and focus on the consequences of poor inflation management You cannot have a low interest (interest and forex rates) but with an equally deafening silence on the causes. The focus of rate regime in a high inflation the business community, the policymakers, the technocrats, environment. the workers, the citizens and the media should be on INFLATION. All things being equal; bring inflation down On the matter of forex rates, think about this, if the US to single digits and the other two rates will receded. (And annual inflation is 3% and Jamaica’s is 20.2%, what is note that recede implies gradualism). Maintain a double the minimum that the forex rate will slip in a year….17.2% digit inflation environment and we will perpetuate a high at least. It is as simple as gravity. If the dollar started interest regime and a galloping forex rate. Let us not blame out at 71:1 at the start of 2008 and the USA-JA inflation the commercial banks. Lay full blame with the institutions, differential is 17.2% what is the expected value at end of systems and processes responsible for managing and 2008 ……83:1. Its not rocket science. That model is driving down inflation. They are clearly doing a dismally generally defined as the purchasing power parity of poor job. Forget the circular argument about which came the currency. Lower adjustments than that serves to overfirst (inflation or forex or interest); inflation drives the other value the dollar by dynamically, and artificially, revaluing rates. Further, forget about the “small, open economy” it upwards. No amount of NIR, or moral suasion, or minargument; Jamaica has the worst inflation record of all isterial imploring can prevent the subsequent, inevitable, the “small open economies” in the entire Caribbean. In corrective devaluation. As an adult country of 47 years, the small OECS countries, inflation runs between 1 – 3% we should all have learned this lesson by now. What can We can typically; in Cuba 3 – 6%.; Barbados 0 – 5%; Trinidad we, therefore, justifiably blame the BoJ for ? 4 – 8%. In Jamaica’s case the out-turn has been, 8.5% in blame them for trying hard, as mandated by their own 2006; 9.3% in 2007 and 20.2% in 2008 (data source Act, to maintain artificially overvalued exchange rates. – IMF 2008 World Economic Outlook). We should ask The Christmas 08 debacle is proof-positive of this. We ourselves why is this so ? What are we doing in Jamaica can also blame them, and the authorities, for the present to make our inflation rate so terribly high ? Even with the long list of mis-placed priorities in the BoJ Act’s five stated same common exogenous variables, Jamaica’s outcome objectives; none of which includes price stability. is much worse.
I
Think about it if, as a lender, we know that inflation is hovering at 20.2%, would any of us lend out money at less than 20.2% ? No we would not. An interest rate of 20.2% is just maintaining the nominal value of your funds. Add operation costs and profit and one is already at 25%; at least. However, consider this, with an inflation
“The principal objects of the Bank shall be: • to issue and redeem notes and coins, • to keep and administer the external reserves of Jamaica,
environment at 4%, would strident calls for interest • to influence the volume and conditions of rates to be in the 9% range be an issue. Clearly supply of credit so as to promote the fullest expansion in production, trade and employment, consistent with not. Interest rates in double digits would be clear the maintenance of monetary stability in Jamaica and and obvious anomalies in that context. By a the external value of the currency, perverse logic, the BoJ is correct on this one; their rates are in the correct range, given the actual • to foster the development of money and capital
MOVE UP JAMAICA eSUPPLEMENT
Inflation Management and its Consequences on Nation, Citizens and Businesses
• to foster the development of money and capital markets In Jamaica,
• to act as banker to the Government” Objects 3 and 5 are inherently conflicted; i.e.
a culture in the BoJ which is geared to an objective of promoting the fullest business expansion locally would seriously run counter to the mandate of unreservedly bankrolling deficit spending. In fact, and not surprisingly, the term price stability does not even appear in any part of the BoJ’s Act. The country’s price stability has been wandering aimlessly on auto-pilot since Independence. Any wonder then at the perpetual home-grown self-inflicted turbulence ?
Further, the government and businesses should tap into the knowledge-base of two world-recognised Caribbean experts in this inflation management domain; Sir Courtney Blackman and Sir Dwight Venner, who both have successful proven track records. However, as we explore further as to why we keep underachieving on the inflation metric we will discover that some of our problems are more fundamental and deep-rooted than at first appearance. The world around us is at least a decade deep in its rapid transformation into a knowledge economy. The World
You cannot have a stable f o r e i g n exchange rate regime in a high inflation environment. This inflation differential metric also explains why the rest of the Caribbean’s currencies are stable, as their inflation is generally the same as, and sometimes lower than, that of the US. The best determinant and protection of the forex rate is wellmanaged low-inflation environment. We should look at, and learn from, the sterling work that has been done on curtailing and controlling inflation by the Reserve Bank of New Zealand and the Central Bank of Chile; all since the 1990’s (see figure 1) Their economies, businesses and citizens are more stable, productive and resilient as a result. Nothing else but expert, targeted inflation management will do for Jamaican workers, businesses and citizens. Our brightest and best economic minds should be focused on this task 24/7 for the next decade and beyond.
Bank’s recent global assessment of this transformation, reflected in their 2008 Knowledge Economy Report, shows Jamaica regressing since 1995 based on the World Bank’s global Knowledge Economy Index (KEI), whereas, within the Caribbean, Barbados and the Dominican Republic has progressed. There is a strong correlation (87%) between a country’s KEI and economic growth (see figure 4). But somehow, we are on a trend in the opposite direction. When the index is decomposed, it shows that we are rated very lowly for our Economic Incentive Regime and our Education Regime, and middling on our Innovation Culture; three of the four critical pillars used for their global assessments.
MOVE UP JAMAICA eSUPPLEMENT
Inflation Management and its Consequences on Nation, Citizens and Businesses
What should we as a country be ramping up in order to break this cycle ? MoveUpJamaica.Org suggests the following;
a. Build on our stock of
knowledge that can be applied to persistent value creation ; ie let education, creativity and innovation reign
b. Build out e-skills opportunities and capacities across the country
c. Incentivise knowledgeintensive industries, business and production; articularly for export
d. Drive real productivity in firms e. Develop a culture of competitive market pricing
based on continuously improved internal processes, rather than the present ingrained business tendency of seeking to pass rising costs along to the end-users, as our first option.
partisanism, to address these fundamental underlying issues. That is where the heavy lifting lies. Not in feel-good sound-bites about soon-coming, quick-fix, unsustainable, revaluations based on other people’s money.
f. Implement expert, competent, transparent
Societies which are not geared up to be knowledge creators and, hence, suppliers to the world’s marketspaces will be condemned to be persistent knowledge consumers and net wealth losers
g. Amend the BoJ Act to put primacy on price stability
Let the adult discourse on these fundamentals begin. Our country, citizens and businesses deserve it.
Inflation Management
h. Reform the BoJ’s governance rules to make the
institution fully accountable for inflation performance but independent of political influences
i. Control any tendency to print money to support government objectives
j. Institute tight reins on the deficit ( i.e. tightly manage BoJ object #5 above)
We urgently need a national consensus built on tri-
S. St. Aubyn Clarke policyteam@moveupjamaica.org www.moveupjamaica.org A SME Advocacy Group Production, Design and Layout To get your corporate branded eSupplement, contact us at advertising@yourmoneyezine.com