IMF deal the beginning of a long haul

Wilberne Persaud, Financial Gleaner Columnist

Monday's International Monetary Fund (IMF) statement on Jamaica reads: "Fund management will submit to its Executive Board a 48-month arrangement under the Extended Fund Facility in the amount of SDR 615 million (about US$958 million, or 225 per cent of quota), with the recommendation that it be approved. It is expected that the board meeting would take place by the end of April."

Simultaneously, a joint World Bank/Inter-American Development Bank (IDB) release recognised "the decision by the management of the International Monetary Fund to present to its board its proposal for a new Extended Fund Facility with Jamaica. This is an important reflection of that institution's confidence in Jamaica's macroeconomic stabilisation programme".

Uncertainty and speculation should now subside.

The dollar's descent has almost reached that psychological 100:1 barrier even as conspiracy theorists see the April 8 coincidence of circumstances as the multilaterals' magic number held under their hats till now.

The World Bank/IDB press release expresses their belief in Jamaican authorities taking "the bold decision to tackle the structural impediments to growth that have hindered its development for decades".

They each, as a reward, have "preliminarily allocated US$510 million in financing over the next four years" as supplements to IMF support.

Good news. Yet, the week's developments merely begin the long haul.

To assess possibilities consider the core issues of the exchange rate and, more importantly, what the World Bank and IDB consider Jamaica's 'structural impediments to growth'. Is there coincidence of view among them and the Government of Jamaica? Are they correct?

The seeming consensus lists the big debt-to-GDP ratio, dysfunctional fiscal policy and tax-enforcement regime, including arbitrary waivers, unsustainable pension regime, over-staffed, overpaid inefficient government bureaucracy and a production structure that seemingly guarantees continuing current account balance of payments deficits.

NDX provides breathing space and relief from the debt problem by lowering interest rates—an incentive for wealth holders to seek productive and beneficial avenues for deploying capital. So far, policy regarding long-run impact and sustainability of the pension regime seems unclear.

Managing public-sector wage out-turn remains a work in progress dependent upon political accommodation with labour. Radically altering the economy's productive structure is a task Government cannot accomplish. It can only nudge the private sector by strategic policy shifts. Finally, there are external factors beyond government control.

Opinions on the path forward seek validation. For instance, manufacturers suggest 'buy Jamaican'. Recent history gives this little chance of success.

Interestingly, devaluation to a 'realistic' level according to purchasing power parity theory continues its rope-a-dope. This view ought to be debunked. That it persists despite more than 30 years of contrary evidence of its efficacy is amazing.

Importation a problem

Another alarming notion holds that the exchange rate responds primarily to wage inflation when research work going back as far as 1977 identified the 'push' impact of devaluation on the rate of inflation.

Honestly, no big multivariate analysis need figure this out. Actually, one of the objectives of devaluation is to raise import prices. We import a lot!

More disturbing is the suggestion that the Government reduces corporate and individual income tax and increase GCT. Apart from putting an excessive burden on people least able to cope, it could likely result in a perverse outcome.

The tax take could actually decline. Recent results from Barbados indicate exactly this: as the value-added tax increased 2.5 per cent in the past few years, associated revenues declined. Economists think of the complex-sounding term, price elasticity of demand. But it is just common sense, for as prices rise people have to take decisions about income allocation.

The real crux of the matter is that for as long as folks commented on problems of cohesion in Jamaican society, the notion of 'two Jamaicas' emerged up front and centre. Some spoke of 'haves and have nots', 'uptown vs downtown', among other kinds of language.

Levels of inequality in the Jamaican economy and rewards from its operation are hugely skewed against the majority of the population. This fact was identified empirically as far back as 1964 in Ahiram's work, Income Distribution in Jamaica, 1958. We haven't progressed much since then.

So while we cannot avoid today's immediate policy decisions to keep the macroeconomy working and gas in our cars, to claim that Jamaica has "taken the bold decision to tackle the structural impediments to growth that have hindered its development for decades" is itself a 'bold' pronouncement.

Peaks of crisis

Until we match stabilisation policy with initiatives that tackle the true 'structural impediments', we'll continue periodically to bump into peaks of crisis.

Stabilisation policy is not in and of itself the enemy of development policy. The latter requires us to deal with early-childhood health and education, attitudes and possibilities for embrace of science, technology and innovation, realistic objectives for tackling crime in the short run that do not equate crime fighting with bigger guns and more squad cars.

This is a huge lift requiring perhaps visionary leadership. For this reason, we must, if the objective is Jamaica as a place in which to live, work, do business and raise a family, see the week's major announcements on the economy as great news but merely the beginning of a long haul.

Wilberne Persaud, an economist, currently works on impacts of technology change on business and society, including capital solutions for innovative Caribbean SMEs. E-mail: wilbe65@yahoo.com