The downside of dollar devaluation

Doreen Frankson, Guest Columnist

I make reference to an article in the October 16, 2013 Gleaner titled 'BOJ won't accept disorder in forex market - Wynter'.

In said article, Robert Wynter, following the cries of many other pundits, has categorically stated that the "exchange rate has to be adjusted as part of the effort to improve competitiveness for Jamaican businesses".

I am informed, as is the rest of the Jamaican population, that devaluation is supposed to cause a boom in Jamaican exports and sustain investment-led growth. I can understand why the economists find this an attractive solution as it implies that a cheaper Jamaican dollar will lead to lower prices of domestic goods and our foreign trade partners will want to buy more of what we produce.

It also implies that we should begin to see a decrease in the value of domestic wages in terms of foreign currency, making domestic

workers more competitive on international markets. But this worldwide view of competitiveness, which is a country's share of world markets for its products, is a zero-sum game, because one country's gain comes at the expense of others.

This view of competitiveness is used to justify intervention to skew market outcomes in a nation's favour. It also underpins policies intended to provide subsidies, hold down local wages, and devalue the nation's currency, all aimed at expanding exports and driving down wages.

Unfortunately, this intuitive view of competitiveness is deeply flawed, and acting on it works against national economic progress. The need for low wages reveals a lack of competitiveness and holds down prosperity. Subsidies drain national income and bias choices away from the most productive use of the nation's resources.

NATIONAL PAY CUT

Devaluation results in a collective national pay
cut by discounting the products and services sold in world markets while
raising the cost of the goods and services purchased from abroad.
Exports based on low wages or a cheap currency do not support an
attractive standard of living.

There are many other
indirect consequences that are likely to crowd out any positive effects
of currency devaluation. Many Jamaican businesses, like the Jamaican
Government, have been running high debt and have used it to fuel
consumption. A decrease in the exchange rate would imply higher interest
payments in Jamaican dollars for all those with outstanding euro- and
USD-denominated loans with the banks, leaving households and businesses
with less disposable income - and by extension our own
Government.

As a response to this effect, the working
population may be forced to negotiate higher domestic remuneration which
will hinder the devaluation effect on wages, thereby undermining the
increase in competitiveness.

Besides, Jamaica needs to
move its labour market from highly unskilled to skilled if it wants to
make its workers more competitive on the international market. No
currency devaluation will resolve the deep structural problems of the
labour market, no matter how competitive it seems because of cheaper
currency.

What Mr Wynter and his learned economists
are forgetting is that manufacturing in Jamaica is forced to use
overseas inputs into its production process because 1) inputs are not
available locally because the stimulus required to encourage new
businesses that could potentially offer locally produced inputs is
engulfed in bureaucracy; and 2) demands cannot always be met
consistently - at high standard - which hinders the production process,
forcing manufacturers to choose a more reliable and stable
supply.

Devaluation, therefore, does not lend itself
to competitiveness in this regard, as input costs now become high,
reducing competitiveness both locally and globally.

In
addition, since businesses purchase these raw material inputs in USD or
euros, fluctuations in exchange rates will result in lower revenues or
higher costs in Jamaican dollars to businesses and thus affect financial
results.

REAL BUSINESS
CHALLENGES

Price competitiveness will be harmed if
businesses seek to increase prices in local currencies to compensate for
lower revenues or to increase prices in Jamaican dollars to absorb the
higher cost. While companies will take measures to reduce the risks from
fluctuations in foreign currency exchange rates, such measures will
only delay, or temporarily mitigate, the adverse impact of such
fluctuations and have proven not to be effective in the long run for
many of businesses.

I am no economist, simply a
businesswoman who can enunciate the challenges I am now facing in my own
business as the dollar devalues without an end in sight. I am appalled
that, as part of the Jamaican populace, I am being asked, along with
everyone else, to make sacrifices to help this country survive, yet our
own Government continues to scoff at local businesses with examples of
purchases of furniture, schoolbook printing, uniforms and services from
overseas sources, rather than supporting local
industries.

Rather than focusing on depreciation,
which is a smokescreen for the need for institutional reform and better
governance, we should be doing all we can to allow the ease of formation
of new businesses, encouraging entrepreneurship and fostering social
reforms that encourage micro-enterprises.

As a
manufacturer, I am truly offended every time I hear the claim that
devaluation will help business competitiveness in Jamaica, hence my need
to pen my annoyance. Nuff said.

Doreen Frankson is
past president of the Jamaica Manufacturers' Association and CEO of
Edgechem. Email feedback to columns@gleanerjm.com and
jma@cwjamaica.com.