How Ms Lagarde's visit can help Jamaica

Friday, June 27, 2014

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Jamaica's international sporting reputation has been based on sprinting and not marathons. Culturally, patience, discipline and teamwork have not been seen, either overseas or locally, as obvious national traits, unlike, say, for the German national football team.

However, the rigour of the current IMF programme is likely to provide an almost unprecedented test of our national character. And we cannot afford to fall off, as the consequences are too dire.

The visit today of IMF Managing Director Christine Lagarde presents an opportunity to make the current programme flexible enough for Jamaica to complete the marathon.

The IMF's core mandate is to help countries with balance of payments problems. Yesterday, PSOJ President Mr Christopher Zacca asked Ms Lagarde to address key areas of concern to the private sector, including the steady depreciation of the Jamaican dollar, energy, tax reform and bureaucracy.

Decades of poor policy choices have left Jamaica with a shrunken export sector to pay for what we import, necessitating some devaluation.

However, a falling exchange rate, in an economy not used to exporting, is a weak tool to bring our external accounts into balance. An external devaluation may temporarily improve the profit margins of an export industry, say, tourism, but will be quickly offset by the catch-up effect on costs, possibly leading to stagnation if overall production fails to rise. It will also increase the debt.

Internal devaluation, meaning public and private sector wage cuts to improve competitiveness, is more frequently used in countries with fixed exchange rates, such as Barbados. Without flexible capital and labour, and private sector investor confidence willing to invest to take up the slack, this can lead to falling GDP and rising joblessness.

A third option is what Cambridge economist Mr John Maynard Keynes called fiscal devaluation. For example, reducing the cost of labour through cuts in payroll taxes, rather than direct cuts in wages, and thereby improving international competitiveness. Indeed, it has been proposed for Eurozone economies that cannot devalue, like Ms Lagarde's home country, France.

The question is whether such a policy, which the IMF has argued works, is more appropriate for Jamaica than simply letting the overall exchange rate fall. As a recent IDB paper, 'What to devalue', points out, Caribbean tourism economies already do fiscal devaluation through tax concessions for that sector.

Although Jamaica has moved in the direction of cutting payroll taxes with its recent incentive reforms, overall the IMF has severely limited that policy option, requiring elimination of tax expenditures, or waivers.

The main focus of the IMF programme has been to balance the budget, reflecting the imperative to reduce debt. However, despite the fall in the exchange rate and a rigorous reform agenda, these have "yet to translate into measured improvement in the business environment", in the words of last week's IMF article 4 report.

Indeed, Jamaica fell a further three places in the most recent 2014 World Bank Doing Business Report, is now ranked 94 out of 189 countries globally, and has fallen another two places in the Travel and Tourism competitiveness index of 2013, to 67 out of 140.

It follows that Ms Lagarde's trip can help Jamaica most if she nudges our IMF conversation from one primarily about debt reduction to improving business confidence and competitiveness, no doubt familiar issues to her as a former minister of finance of France.

There are signs of this in the revised IMF agreement, which has a much greater emphasis on public sector reform, but the overall business reform agenda needs to move much faster. More fiscal space for areas with potentially large economic impact, such as reducing crime, or improving infrastructure, would help, including reviewing the excessively tight loan cap of three per cent of GDP for new user-funded public/private partnerships.

With competitiveness as job one, she will see how Jamaica can run.




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