"An arbitrary decision to re-introduce a fixed exchange rate system just will not wash," Davies told the House of Representatives as he closed the annual budget debate.

According to the finance minister, a fixed exchange regime had costs, and "a critical one relates to the removal of flexibility to respond to domestic and external shocks".

Seaga, in his presentation, had told Parliament that a strong case existed to examine the option of either a currency board with a fixed rate of exchange, or an independent Central Bank with a special regime to maintain a pegged rate, "as the means of ending the frustrations of a stagnant, debt-ridden economy".

Numerous studies, including several in this region, he argued, had showed a clear correlation between a fixed exchange rate, low interest rates, low inflation and an upper-middle to high per capita GDP.

"This correlation is persuasive argument for a fixed exchange rate as the centrepiece of a macro-economic policy to stabilise the economy by a combined low interest rate, low-inflation strategy - a combination which has eluded the Jamaican authorities for more than a dozen years, since 1990," Seaga said.

Seaga, in arguing his case, had also highlighted the experiences of Argentina in the early 1990s and Jamaica in the 1980s when his party formed the Government and fixed the exchange rate at J$5.50 to US$1, resulting in growth reaching 5.5 per cent and moderate inflation.

Yesterday, Davies, saying that Seaga's proposal was "deserving of further serious analysis, noted that many of the opposition leader's references were dated, with most of the data sets ending in the mid-90s and, in certain instances, up to 2000. He said that he was left to wonder at the "arbitrary" cut-off point and argued that the reality was that decisions on exchange rate systems had become far more sosphisticated.

Davies said that in Argentina's case, it is a fact that subsequent to the fixing, by law, of the relationship between the peso and the US dollar, inflation was brought under control, the economy grew, interest rates declined and foreign investment increased.

However, he said that the fixed rate "locked Argentina into certain structural deficiencies which could not be adjusted in the face of the fixed exchange rate". Over time, the country's productive sector became "increasingly uncompetitive" and a problem in a small domestic bank escalated into "widespread panic, leading to the virtual collapse of the economy and the society".

Said Davies: "The highly-touted magical formula of the legislation on the fixed exchange rate was abandoned as quickly as it had been implemented. Even today, although there has been some recovery, the problems remain."

In Jamaica's case, the finance minister said that while it was true that the fixed exchange rate brought about increased stability, the policy was relevant for a decreasing percentage of the economy.

"Everyone knew that virtually every business and every individual had funds stashed away which they used to keep operations going, to be replenished whenever the Bank of Jamaica was able to provide them with some of the resources they had paid for months before," Davies said.

"It later became known that the Bank of Jamaica itself, in order to prop up this artifically-fixed rate, was purchasing dollars on the black market."

Davies admitted that a fixed exchange rate could temper inflation and ensure that imported inflation remained at the same level as that of major trading partners, thereby allowing greater predictability in making long-term commitments.
However, he warned that no one should be "fooled about this 'magically motivating dynamic force' which a fixed exchange rate holds in the market".

He said that by offering the policy "as a solution for all of our problems", Seaga had done damage to his case.

"Like any other magical trick," Davies said, "once you get behind the smoke and mirrors, the reality is different."