Talk is not cheap

Sunday, August 25, 2019

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An essential ingredient for economic growth is confidence. It allows producers, investors, consumers, and business people to operate in ways that are conducive to economic growth. In the absence of confidence, producers, investors, and consumers will make decisions which stifle and retarded economic activities.

For example, lack of confidence in the stability of the exchange rate can cause speculation, which in turn can create an artificially high demand for foreign exchange, driving up the rate. This can happen even when the economic fundamentals are good and unchanging. The lesson is that economic confidence is fickle and not always based on rational thinking, but subject to information — real or fictitious.

Confidence, therefore, is influenced by three things — economic data, such as interest rates; the stability and predictability of economic policy; and pronouncements about changes in current economic policy.

Economic data are indicators of the reality that consumers, investors, and producers use to plan and guide their economic decision-making. Economic agents will make the right decisions, but if they have doubts about the future, there will be uncertainty regarding the predictability of economic policy.

This is the value of the International Monetary Fund (IMF). It has a standard one-size-fits-all policy template, which it applies to all countries at all times — a predictable policy package which reassures local and international markets. This is why the Government of Jamaica wants IMF monitoring after the formal agreement with the fund ends.

Two developments, though, can disturb economic confidence — the reality of unpredictable changes, such as a hurricane and talk about possible changes in current economic policies. Talk is the great danger. Spokesmen on economic policy cannot talk up an economy, but they can talk it down.

Examples abound. Here in Jamaica we have been rightly talking up the economy and making the most of the changes in the country's economic fundamentals. However, we must be careful to avoid getting to the point where, if any questions are raised, such as in the recent debate on poverty statistics, it is seen as unpatriotic and politically motivated.

Harmful economic talk abounds. Best example, Brexit and the dangerous talk of Britain leaving the European Union without a deal and the fantasy of getting a new deal because England has a new prime minister. Some analysts argue that those views on Brexit have shattered the remnants of economic confidence.

Elsewhere, the on again off again pronouncements about tariffs on Chinese goods by US President Donald Trump are affecting economic confidence in a US economy that is going well and a struggling global economy.

The current meeting of the G-7 (France, Italy, Canada, Germany, United States, Japan, and United Kingdom) in France provides an opportunity to try to restore economic confidence by refraining from inflammatory national statements and seeking instead to arrive at a general consensus on cooperation on economic policy to avert the possibility of a global recession.

Talk is not cheap. Indeed, it can be very expensive, especially when it undermines economic confidence. We know this from experience in Jamaica.


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