A disingenuous dodge

A favourite practice of those who hold defenceless positions is to engage in personal insults and obfuscatory commentary in order to disguise the bankruptcy of their arguments. This approach to national debate only advances ignorance and does not serve public enlightenment. The public interest is not served by indulging in the debating techniques of fish wives, and, therefore, in addressing Dr Omar Davies' article in last Sunday's Gleaner, as it relates to my article 'The tragic folly of FINSAC', which appeared in The Sunday Gleaner two weeks earlier, I will confine myself to facts and reason.

Dr Davies' response to my assertion that "the replacement of the auction system with total liberalisation was catastrophic" assumes that total liberalisation of the foreign-exchange system was the only alternative to the admittedly imperfect auction system. But right here in the Caribbean, Barbados, Belize and The Bahamas operate foreign-exchange systems that are neither one nor the other, with great success. They have maintained their competitiveness and sustained economic growth with currencies that have held their value for more than 30 years: Barbados and Belize at 2:1US and The Bahamas at approximately 1:1US.

The auction system was introduced in the 1980s to bring order and predictability to a chaotic foreign-exchange situation. Though flawed and requiring change, it had relatively positive economic results.

total liberalisation

Under the system, the economy grew cumulatively by 25 per cent in five years; inflation fell to eight per cent by 1988; the exchange rate remained within a band of 5.50:1US and 6.00:1US, even if it was managed; and lending rates in the banking system were in the 20 per cent range.

In contrast, the total liberalisation of the foreign-exchange system in 1991, without the necessary preconditions, had manifestly disastrous economic consequences. It brought with it spiralling inflation, exceeding 80 per cent at one stage, devaluations of 66 per cent in just over four years, and bank lending rates of more than 70 per cent before penalty charges. Ultimately, it turned a growing, productive economy to chronic stagnation.

Government is judged on outcomes, not on the opinions of some individuals about particular systems they may find inconvenient. The auction system was an awkward and imperfect system and needed to be changed. But in changing it, a responsible government had a duty to replace it with a system that would, at the very least, maintain the country's economic competitiveness, growth and stability. Instead, the Government totally liberalised the foreign-exchange system without the necessary preconditions and brought uncompetitiveness, stagnation and chaos to the economy.

Rather than maintain order in the foreign-exchange market, evidence given before the FINSAC commission of enquiry is that, after liberalisation, the foreign-exchange market was chaotic and agents of the Bank of Jamaica were on the streets competing with the business sector for foreign exchange.

In 'The tragic folly of FINSAC', and in many of my previous articles, I have deliberately refrained from attributing the decline of the economy and the demise of the productive sector solely to Govern-ment's high interest rate policy. Instead, I have argued that it was the mix of economic policies, including the use of high interest rates to prop up the currency, that created the uncompetitive economic environment which led to Jamaican goods and services becoming uncompetitive in the international, regional and domestic markets. However, the defenders of the policies of the 1990s find it more convenient to reduce my analysis to a criticism of the high interest rate policy, probably because they believe that is the easiest issue to defend.

In that vein, Dr Davies has found it convenient to misrepresent the reason to which I attributed the exodus of foreign productive enterprises from Jamaica. The point of my article was that the foreign companies left Jamaica for the same reason that Jamaican productive businesses failed: the uncompetitiveness created by Government's economic policy mix which resulted in a spiralling of local production costs that made it impossible to produce to compete with goods and services from other countries.

competitive currency

Another favoured 'straw man' of the architects of the 1990s economic policies is the suggestion that support for a competitive currency is tantamount to advocating devaluation. The opposite is true. Whenever a currency needs to be devalued for an economy to be competitive, it reflects a failure by Government to control domestic inflation. Inflation is a blow to competitiveness. Failure to keep the currency competitive is a double blow. And the use of high interest rates to hold the currency at uncompetitive levels is yet a third blow.

Together, the three were devastating to our economy and to everyone engaged in production, including the country's workers and farmers. The former finance minister is clearly not aware that the responsibility for controlling inflation is Government's, and that it is by properly discharging that responsibility that the competitiveness of an economy is maintained and devaluation is avoided.

Dr Davies also seeks to challenge my assertion that the great majority of the $140 billion used to bail out the financial institutions benefited the cash-rich depositors of the banks. But it seems Dr Davies doesn't understand what is meant by the expression "lion's share" and the word "rich".

When I state that "we can be sure that the lion's share of the 40 per cent of GDP FINSAC paid to the financial institutions benefited the cash-rich depositors of the banks", it means the larger portion went to such interests. The obvious implication is that the smaller portion went to the interests he listed: small depositors, pensioners and insurance policy holders.

If Dr Davies wants to bring clarity to the issue and to honestly and intelligently address my assertion, he should reveal what percentage of the $140 billion used to bail out the financial sector went to the large depositors, and how much went directly to small depositors, pensioners and insurance policy holders.

One would have hoped that, having now had almost four years in Opposition to reflect on his stewardship, Dr Davies would have realised that the crisis of the banks could have been far better addressed by an arrangement in which the massive interest accruals on deposits resulting from the Government's high interest rate policy were separated from their principal value. The entire principal balance would be secured.

However, the portion of the interest to be restored would be determined on a sliding scale, beginning with 100 per cent to the smallest savers and decreasing percentages applied to larger amounts. On this basis, small savers, pensioners and policyholders could have been protected without plunging the country into a debt that has hobbled the economy and will take generations to repay. The reported 40,000 businesses that went down might have been saved, the thousands of jobs that were lost and hundreds of families that were devastated might have been spared.

I would never have thought it would be necessary to tell a finance minister of 14 years that a bad loan is not worth more than the realisable value of its securities. This is the principle that guides every prudent bank in the treatment of loans which can no longer be serviced by their borrowers. Because banks are accountable to their shareholders, they cannot be influenced by motives like spite, malice, favouritism, punishment and caprice and are, therefore, obliged to approach their delinquent loans with no other objective but to either restructure them within the ability of the borrowers to service them, or to realise as much as possible from the securities.

A government, on the other hand, may very well harbour non-business motives that the banks must avoid. This may explain the seeming preoccupation of the former minister with questions of who is to be rewarded and who is to be punished. It may also explain Dr Davies' concern with recovering the book value of a loan rather than the realisable value of its securities when dealing with the debtors. This clearly was no longer a concern when the debt was sold to the foreign debt collector at a small fraction of its face value and reportedly considerably below the value of the collateral.

Were the Government guided by the objectives of preserving the economic health of the country and ensuring the development of its productive engine and its ability to generate economic vitality and jobs, these non-business, punishment-focused questions would not have arisen, and judgements about reward and punishment of persons caught in the national economic meltdown would not have been necessary. Productive businesses and jobs would have been saved, the financial sector would have been restored, and the economy would have maintained the growth momentum inherited by the Government in 1989.

history

Dr Davies, having presided over the longest period of economic stagnation in our history even while the world economy was enjoying its greatest boom, has a duty to do much better than spew invective at individual businesses and business persons, whom he insists on blaming for the failure of the economy which was under his stewardship.

Undoubtedly, business persons are accountable for matters falling within their responsibility, namely the fortunes of their own businesses. Indeed, it was their fault not to have recognised the senseless and confused economic policies of the Government sooner and protected themselves from their consequences.

When will Dr Davies find the courage, the honesty and the humility to acknowledge his own responsibility for the failure of the economy, for which only he and the Government in which he served were given responsibility by the people of this country?

Erecting 'straw men' for the convenience of abuse-laden attacks, and using small depositors and pensioners as human shields to hide the massive bailout of the rich at the expense of the economy, the poor and the productive, is not a substitute for such an acknowledgement and is no more than a disingenuous dodge.

Claude Clarke is a businessman and former minister of trade. Email feedback to columns@gleanerjm.com.