Slow­ing FX slide and driv­ing growth

Jamaica Gleaner - - OPINION & COMMENTARY - Ros­alie Hamil­ton and Vanus James Con­trib­u­tors I Email feed­back to col­umns@glean­erjm.com and rhser­maf@gmail.com or sco­tia­bankchair@gmail.com.

SINCE NOVEM­BER 2015, the Ja­maican dol­lar has en­dured a pre­cip­i­tous slide from a for­eign ex­change (FX) rate of about J$120:US$1 to the cur­rent rate of about J$129:US$1. Gov­er­nor of the Bank of Ja­maica, Brian Wyn­ter, in his ad­dress to the Pub­lic Administration and Ap­pro­pri­a­tions Com­mit­tee (PAAC) of Par­lia­ment on Oc­to­ber 19, 2016, in­di­cated that the slide is re­lated to in­creased in­vest­ment ac­tiv­ity.

The gov­er­nor also in­di­cated that the dol­lar is now fairly valued, not­ing that the cur­rent ac­count of the bal­ance of pay­ments (BOP) is now in sur­plus af­ter de­duct­ing im­ports funded by FDI (for­eign di­rect in­vest­ment). Our BOP has been res­train­ing our growth, and now there are new growth pos­si­bil­i­ties. He as­sured Ja­maicans that there was no FX short­age and pointed to the en­cour­ag­ing sign of gross do­mes­tic prod­uct (GDP) grow­ing by 1.4 per cent in the June 2016 quar­ter, nearly dou­bling the av­er­age growth for the pre­vi­ous two quar­ters.

Does this mean we can now an­tic­i­pate a slow­ing or ar­rest of the slid­ing dol­lar and more growth in the Ja­maican econ­omy?

There is good rea­son for cau­tious op­ti­mism. In Novem­ber 2015, in his quar­terly press state­ment, Gov­er­nor Wyn­ter stated: “The Ja­maican dol­lar is no longer over­val­ued and is, there­fore, less sus­cep­ti­ble to un­pre­dictable slip­page ... . We are, there­fore, con­fi­dent that we will con­tinue to reap the ben­e­fits of sta­bil­ity in the months and quar­ter ahead.”

So some guessti­ma­tion is in­volved in the de­ter­mi­na­tion of the right FX value and FX sta­bil­ity. It is im­por­tant to note that cur­rency de­pre­ci­a­tion has no strong record of fos­ter­ing de­vel­op­ment in any coun­try, although it can be a use­ful com­ple­men­tary tool. The value of cur­rency de­pre­ci­a­tion is mainly to en­cour­age ex­ports, but es­pe­cially since our econ­omy is so im­port-de­pen­dent, de­pre­ci­a­tion im­poses a size­able penalty in ris­ing costs of pro­duc­tion and ris­ing costs of liv­ing.

The gov­er­nor iden­ti­fied the sec­tors that are cur­rently gen­er­at­ing the favourable bal­ance of trade un­der­ly­ing the favourable cur­rent ac­count – min­ing, en­ergy, ports, tourism, con­struc­tion, com­mu­ni­ca­tion, BPO, agri­cul­ture, and man­u­fac­tur­ing. How­ever, most of these sec­tors do not prom­ise dy­namic feed­back and sus­tain­able growth over the long term be­cause they do not make cap­i­tal out­put that other sec­tors can use as in­puts. For ex­am­ple, agri­cul­ture and min­ing mainly yield pri­mary ex­ports, and man­u­fac­tur­ing mainly makes con­sumer im­port sub­sti­tutes. We have been down that road be­fore.

The fall­ing im­port bill, tied to low en­ergy prices, is a ma­jor con­trib­u­tor to the favourable cur­rent ac­count bal­ance. It of­fers an­other op­por­tu­nity to put a more trans­for­ma­tional pro­duc­tion pro­gramme in place that is driven by cap­i­tal-pro­duc­ing sec­tors that can grow pro­duc­tiv­ity, ex­pand ex­ports and save for­eign ex­change, thereby en­abling us to in­crease the rate of eco­nomic growth on a sus­tain­able ba­sis. What are these cap­i­tal sec­tors?

SEC­TORS THAT DRIVE EX­PORTS AND SAVE FX

In­stead of re­ly­ing on tra­di­tional sci­ence and knowl­edge, where we have a spotty record of in­no­va­tion, we should turn to sec­tors fo­cused on in­no­va­tion through cre­ative cap­i­tal that rely on in­tu­ition, in­sight, and in­spi­ra­tion. The main ones are high-end ICT, ed­u­ca­tion and the copy­right­based sec­tors, in­clud­ing mu­sic and sports. Ja­maicans are good in these ar­eas. We are also good at ex­port­ing our cre­ative out­puts to the world. Mu­si­cians sell as much or more of their out­put abroad than they sell at home, and the same is true for sports and ICT out­sourc­ing ac­tiv­i­ties.

Cre­ative ac­tiv­ity pro­motes pro­duc­tiv­ity growth, is highly prof­itable, and can at­tract for­eign in­vestors on favourable terms, thereby boost­ing the cur­rent ac­count of the bal­ance of pay­ments. By pro­duc­ing a ma­jor share of the cap­i­tal they em­ploy, these sec­tors in­crease em­ploy­ment of do­mes­tic in­puts, and there­fore, grow their ex­ports rel­a­tive to the im­ports they use, thereby sav­ing FX.

Mi­cro-level data sup­port fo­cus on the cre­ative in­dus­tries. Data col­lected in the Sco­tia­bank En­ter­prise-Wide Risk Man­age­ment and Fi­nanc­ing project (201416) in­di­cate that the cre­ative in­dus­tries, ed­u­ca­tion and ICT gen­er­ate the high­est pro­duc­tiv­ity re­sponses to growth of their cap­i­tal-labour ra­tio. They have the most cred­i­ble claim to strong pol­icy sup­port.

Ev­i­dence must guide cred­i­ble in­dus­trial re­struc­tur­ing for a brighter fu­ture for Ja­maica, and the avail­able ev­i­dence is that a fo­cus on the cre­ative cap­i­tal-pro­duc­ing sec­tors of­fers the best long-term prospects for grow­ing ex­ports and sav­ing FX. It is also this dou­ble fix – ex­pand­ing ex­ports while sav­ing for­eign ex­change, that will ul­ti­mately slow the FX slide and drive sus­tain­able growth with de­vel­op­ment in Ja­maica.

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