Economic independence and BOJ inflation targeting

PRIME MINISTER Andrew Holness and his finance minister, Dr Nigel Clarke, have both called on Jamaicans to pursue economic independence as the central national objective. This is consistent with Norman Manley’s 1968 charge to the next generation to achieve “economic independence”, following his generation’s successful pursuit of political independence. This is not a controversial issue, which may explain why there is not much excitement either.

Another reason may be the clarity and precision in defining economic independence. In his address at a recent UN General Assembly gathering in New York, Prime Minister Holness spoke very broadly about the need to pursue economic independence within the context of support for the interdependent global system for trade, finance and climate change. This is sensible and is consistent with the country’s traditional approach to multilateralism – a system now under serious threat from President Trump’s ‘America First’ policy.

Stripped of rhetorical flourish, Minister Clarke’s outline of what he calls economic independence is simply restating the need for sound public policies that will result in greater domestic savings (debt reduction), faster economic growth, and better social protection. These laudable objectives should find favour with most sectors of society, including the Opposition, which pursued similar goals under the Extended Fund Facility with the International Monetary Fund (IMF) until 2016. The minister hopes that the 2019 end of the current IMF agreement will be a step towards independence.

Dr Clarke has been pushing support for the independence of the Bank of Jamaica (BOJ). This has been under discussion for many years and is backed by the IMF. Bank independence speaks not only about how the governor and the board members are chosen, or the reporting relationship with the governor, but, most important, the mandate of the bank. These issues need to be very thoroughly ventilated.

In a small, polarised society such as Jamaica, the independence of the central bank will need to be protected by broad-based national support. That support will only be forthcoming if a large enough segment of the population has confidence in the integrity and the competence of the governor and his technical staff. This is usually judged by the outcomes, based on the quality of technical work and the clarity and consistency of communication. These are areas that the bank needs to improve on.

LESS CONTROL

In September 2017, the BOJ got approval to pursue an inflation target of 4-6% over the medium term as its nominal anchor. Having missed the lower range of the target, the bank had to explain to the minister of finance, the IMF and the public in August 2018, that this failure was owing to higher domestic crop production, lower import prices, and weakened domestic demand than the bank projected. These are clearly variables over which the bank has less control than it probably likes to think.

We recognise that price stability is critical over the medium term for the performance, inter alia, of GDP growth, external competitiveness, investment decisions and the current account balance. For these reasons, we urge the BOJ to do all that is possible to improve its performance in meeting this target.

This newspaper is aware that monetary policy must be complemented by sound fiscal policies if inflation targeting is to be successful. It is, therefore, appropriate to focus on the quality of the technical leadership and staff of the Ministry of Finance. We are concerned that this is an area of the public sector that could do with significant strengthening.

The minister of finance may wish to inform the country of his plans to see to the technical upgrade of his ministry to support his drive for economic independence. He may well feel the need to give the country a fiscal anchor to judge success or failure. The achievement and maintenance of a target of 8-9% wage-to-GDP ratio over the medium term could well work as that anchor.