Lessons from the current Irish crisis for Jamaica

David Wong, Contributor

Recent press reports of the dramatic deterioration in the Irish political economy such as: 'Irish grasp at EU, IMF lifeline' by David Enrich and Charles Forelle, in the Wall Street Journal of November 17; 'Ailing Ireland accepts bailout', by Marcus Walker, Charles Forelle and David Enrich, Wall Street Journal (November 22); and 'Irish leader, Cowen, to dissolve government amid bailout', by Landon Thomas Jr, New York Times (November 23), serve as a timely cautionary tale, full of meaning and truth for the Jamaican political economy.

In my recent piece - To peg or not to peg: that is not the question - (The Sunday Gleaner, November 14), I argued that pegging the Jamaica dollar to the US dollar would neither stabilise the exchange rate nor promote economic growth in Jamaica, as the experience of Italy and Greece shows, and Ireland is now showing, in a most dramatic fashion with the sharp decrease in its national income, growing unemployment, widening budget deficits, growing social discontent, and the imminent collapse of Prime Minister Brian Cowen's coalition government.

As a brief prelude to a more extended follow-up discussion to my previous Gleaner discussion, it is very insightful to study this lesson in the dismal science of Irish political economy, so as to obtain a better appreciation of how dangerous it can be for an unproductive and highly indebted economy such as Jamaica's to peg its exchange rate in a volatile global economy over which Jamaican policymakers have neither sway nor swagger.

Both the David Enrich and Charles Forelle Wall Street Journal article and the Landon Thomas Jr New York Times article make a basic point. The root cause of the intensity of the crisis in the Irish political economy is its use of the euro, which means that the Irish currency is effectively pegged at full parity to the euro. In the Enrich-Forelle piece, we are told: "The Irish capitulation underscores the hazards of placing separate countries under a single monetary regime." And, in the Landon Thomas Jr piece, he quotes Desmond Lachman, a former policy executive at the International Monetary Fund, now with the American Enterprise Institute in Washington, DC, as saying, "They (the highly indebted euro-zone countries) all have a fixed exchange rate and have to make these massive adjustments (i.e., deflate their economies), so people are asking whether they are on the right path." The elaborations in the parentheses and the stress on fixed exchange rate in the quote from Lachman are all mine.

DANGEROUS ARGUMENT

Lachman's statement is extremely pertinent to the discussion that has been going on in Jamaica over pegging its exchange rate to the US dollar at some firm value, i.e., a 'hard peg'. Edward Seaga, a former prime minister and finance minister, frequently insists, in season and out of season, that a pegged exchange rate is required as a necessary prelude to promoting economic growth in the heavily indebted and uncompetitive Jamaican economy today.

However, not to mince words, such an argument is extremely dangerous for Jamaica's political economy, because it just might be taken seriously by policymakers, and a pegged exchange-rate policy adopted because, it seems, superficially, to be a simple policy that fixes directly what you want to be fixed. You desire a stable exchange rate and certainty, right? Stabilise it by government fiat! What could be more simple and direct? Unfortunately, for this simple viewpoint, life in a capitalist economy is not so simple and there is no enduring stability in the motion of the global capitalist system of which the Jamaican political economy is a tiny part. The fact is, as I said before, the exchange rate is a market price. It is not a symbol of national prestige and pride like the Jamaican flag. It is a macroeconomic price and not a microeconomic price like the price of milk or yam.

If you fix the price of a commodity in a market, the only way the market can adjust to a disturbance or a shock - and the present great recession surely qualifies as a big economic 'shock' to the Jamaican economy - is by adjusting quantity-traded. In the case of a macroeconomic market, let's be very clear about it: quantity traded is the produced Gross Domestic Product (GDP) or the national income. When a global recession causes your exports to fall off sharply, with a firmly pegged exchange rate ('hard peg'), the national income has to fall sharply in order to bring down the imports and to improve the trade balance. There is no other way for the macroeconomy to adjust.

This means that people who work in the private sector will be laid off and the government budget, even if it were balanced to begin with, will go into deficit with the consequence that government spending will have to be cut as well, and people who work in the public sector will have to be laid off too. This is the part of the sequel where social discontent will begin to swell as people are no longer able to pay their mortgages or rents and won't have one penny to rub against another to keep each other company, never mind finding food for their children, and political instability will surely come to the fore. This is the sad, but true story of the Irish political economy today, as the dismal science foretold it, and the lesson for Jamaica to learn before it follows bad advice from its distinguished elder leaders.

When a major global recession comes along, and recessions there are going to be in the unstable and volatile global economy, a flexible exchange rate will not save you from the recession-induced pain. But a flexible exchange rate will provide another adjustment mechanism, along with income adjustment that can soften the blow from the recession. The less-competitive economies within the eurozone are now learning about the real costs of using the euro as their currency. Everyone wanted the benefits of using the euro such as eliminating the uncertainty about prices across countries in a fluctuating exchange-rate system and widening of the market area, but there is no free lunch, and it's the cost of using the euro when your economy is uncompetitive in the global economy that is now doing in the Irish government of Prime Minister Cowen.

So, in summary, the lesson for Jamaica from the dramatic decline and fall of the Irish political economy is: Don't jump in the water, if you can't swim, as Bob Marley said. The lesson is, to repeat: Don't peg your currency to the US dollar or the euro or the yen or the yuan unless you know, for a fact, that you can support the peg that you have chosen. In that case, you'd probably have a stable exchange rate without pegging it anyway.

Ask yourself, seriously, why an ancient and proud country like China, the Middle Kingdom no less, is so reluctant to increase its national prestige and pride by appreciating the yuan? The answer which the Chinese leaders have given, time and time again is: It's not good for employment and economic growth in China, and it will cause serious social upheavals and political instability. Don't you think that the Chinese know their own business? The question is: Do Jamaicans know their own business?

In closing, let me say that the fast-moving, ongoing, and very dramatic events in the Irish political economy point to the need for a serious study of Jamaica's political economy as a foundation for developing good economic policies for promoting economic growth and job creation. I hope to present elements of such a study in a series of papers to The Gleaner soon.

David Wong (dwong@fullerton.edu) is a professor of economics at California State University, Fullerton and a participant in the Caribbean Dialogues forum that is moderated by Trevor Campbell. Feedback may be sent to columns@gleanerjm.com.