PUBLIC AFFAIRS - Production or poverty?

Claude Clarke, Guest Columnist

The hand-wringing has begun. Given our dismal economic performance, the Jamaican dollar has eventually done what was inevitable: it sank below one US cent in value.

Predictably, the event has been marked by expressions of doom and distress. But these have focused on the fear of price increases and its effect on consumption. Questions about the underlying reasons for the unending decline in the value of our currency have hardly been raised. This is typical of the high emotion-low cerebral responses that characterise discussions on matters of national economic importance in Jamaica.

Despite this observation, it is of some significance that the International Monetary Fund (IMF) report for Jamaica's arrangement under the extended fund facility recognises the serious and continuing overvaluation of the Jamaican dollar and the uncompetitiveness of Jamaican production.

Also, as should be obvious, if the goods and services produced in the economy are to be priced to compete in today's liberalised global environment, the unwarranted cost that an overvalued currency adds must be removed. This is the only way in which there can be demand for Jamaican production, jobs can be created, and a dynamic business sector developed.

Without bringing the price of the Jamaican dollar into alignment with its real competitive value, none of this will be possible. This is called devaluation: a word for which today's politicians have a mortal fear. Devaluation, however, is a necessary reality they will be forced to accept if there is to be any credibility to their stated goal of rescuing people from growing poverty and social decay.

Drip-drip-drip depreciation

But it doesn't seem as if the Government has any intention of doing what realism and prudence would dictate. The sanguineness of its reaction to the drip-drip-drip depreciation of the currency that has been taking place since 1990 suggests that the uncompetitiveness of the dollar will continue.

The unplanned crawling nature of the depreciation does not have the same effect as a planned devaluation, combined with complementary policies, as it allows too much opportunity for domestic prices to adjust and erode any potential competitive gains. The drip depreciation system brings nothing but economic uncertainty and continuing currency uncompetitiveness.

On the other hand, if the devaluation is sharper and the Government is prepared to use the tools at its disposal to restrain increasing domestic prices, the hard-currency cost of local productive inputs will fall and the competitiveness of our production will improve.

In the 1980s, Trinidad used sharp devaluations in fairly quick succession to move its dollar from 2.42 to 5.70 to the US dollar. Jamaica took similar steps, devaluing from 1.78 to 5.50. With these actions each country approached what marketers refer to as 'competitive parity' for its currency. The two economies were put on a solid competitive platform. The productivity of the factors the countries put into production improved. Their production increased. And their economies were better placed to create opportunities for their people to be lifted out of poverty.

But even with a competitively priced currency, if the Jamaican Government applies taxes and fees to productive inputs while removing the possibility of compensation through duty waivers, manufacturers will never be able to compete with their overseas counterparts, who bear no such cost burdens. The sector will continue to decline as it has been doing since the 1980s. Yet it appears that this is precisely the Government's commitment to the IMF under its programme.

The prospect of further declines in manufacturing will probably cause no discomfort to many in positions of leadership who subscribe to the view that Jamaica's future lies principally in agriculture, along with a few low-level services. The country's US$1-billion food import bill is interpreted purely as an opportunity for agriculture. It certainly provides an opportunity to boost our agricultural output. But it is an even greater opportunity to develop our manufacturing.

The preposterousness of the idea that the US$1 billion of food products imported into Jamaica consists of raw agricultural produce is borne out by a proper analysis of STATIN data which shows that more than 80% of these food imports are not farm produce but manufactured, processed goods.

No doubt, these facts will do nothing to affect the views of those who continue to diminish the critical role that manufacturing must play in Jamaica's economic future. They are quick to see the economic benefit of replacing US$100 million of raw agricultural imports with local farm produce but find it extremely difficult to recognise that there is far more to be gained in replacing the over US$800 million of manufactured food imports, or the over $1 billion of other manufactured imports (not including transport equipment and chemicals), with locally manufactured goods.

Nor do they even suspect the existence of boundless opportunities for finished-goods exports, given the ongoing boom in the international trade of manufactured goods.

Special role

Manufacturing must play a very special role if Jamaica is to have the means to take our people out of poverty. The relatively high value-added content of manufactured goods increases the scope for the creation of jobs at comparatively high wages. And manufacturing's use of complementary backward, lateral and forward linkages within the economy acts as a stimulant to other economic activities, which is unmatched by any other sector.

In circumstances in which Jamaica desperately needs economic growth, it would seem that adding cost burdens to the means of production would be the last thing a government would want to do. But that is exactly what the Government has included in its proposal to the IMF. Rather than promoting the development of manufacturing, we see the Government targeting the sector as a source of revenue to solve its fiscal problems.

This is happening at a time when Jamaica is failing to produce goods and services capable of competing in today's world of liberalised trade. The low level of productivity to which these extraneous costs contribute has made much of our manufactured output uncompetitive and the sector incapable of creating new jobs that can compete with the rising lure of crime as an economic response to poverty.

Poverty results when inflated economic input costs make the goods and export services produced too expensive to attract consumer demand. When consumer demand declines, production is cut back, reducing the ability to employ labour. This is how the cycle of poverty is set in motion.

This has been the story of Jamaica for more than two decades. The pall of poverty that has been left hanging over our people has denied them the opportunity to lead productive, law-abiding lives.

This depressing economic smog can only be removed if Government creates a policy environment in which high value-added productive activities are given the opportunity to succeed, not one that adds to their cost.

The growth agenda contained in the IMF programme, while recognising the need for improved productivity and competitiveness, does not provide details of how these will be achieved. The reliance for growth seems to be squarely placed on the prospect of super projects promised by foreign interests. The commitment to local high-value large, medium and small productive activities is absent.

The Portia Simpson Miller administration has stood firmly on a platform of care and concern for the poor. It has the duty and the opportunity to bring life and substance to that commitment by building an economy that is increasingly engaged in producing high-value goods and services capable of creating the increments of wealth that can offer economic mobility and uplift to the poor.

Initiative

The quest for production is not the responsibility of any single ministry; it spans many portfolios. Where the execution of any initiative is so divided, it is the prime minister's office that must drive it.

This is particularly relevant in Jamaica's case as production represents the only hope for the poor to whom our prime minister is so strongly committed. Mrs Simpson Miller would greatly advance her commitment if she were to create the capacity within her office to shape macroeconomic and microeconomic policies and organise the institutional and administrative structures capable of achieving growth in production.

The prime minister's office must be able to coordinate the Government's economic actions to ensure that they lead to improving our productivity and increasing our production. Her office must be on top of the effort to increase the value of the country's economic output, increasing employment and reducing poverty.

Although she has assigned ministers to specific areas of responsibility, no one but the prime minister is accountable for the outcomes of their actions. In the end, the extent to which she will be able to inspire the people's confidence in the Government's policies is to convince them that the policies are hers and that she is in charge of the effort to achieve their objectives.

Her choice is simple: Will it be production or poverty?

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