Cracks in the System

Just as the Jamaican central bank, in an unpopular move among the business sector, pushed up interest rates on certificates of deposit to curb money supply and halt a decline in value of the local currency, comes an IMF staff assessment urging countries to lower interest rates and thus stimulate production and demand as the part of the medicine for fixing the cracks in the wall of the global economy.

“What needs to be done in the short run is clear, if not easy,” writes Olivier Blanchard, Economic Counsellor and Chief Economist of the IMF in the December edition of Finance and Development (F&D). “Governments must attack the crisis on two fronts. They must implement and refine the policies adopted in the past few months to deal with the financial crisis. And they must take strong measures to sustain demand, limit the fall in output, and restore confidence and private spending.”

Just what are these measures proposed by Blanchard in his article, “Cracks in the System – Repairing the damaged global economy”?

“Governments must attack the crisis on two fronts. They must implement and refine the policies adopted in the past few months to deal with the financial crisis. And they must take strong measures to sustain demand, limit the fall in output, and restore confidence and private spending,” argues Blanchard.

“…[I]t is clear that the onus will have to be on fiscal policy. While some countries, notably in Europe, still have some room to ease monetary policy further, others—especially the United States and Japan—have already decreased interest rates to very low levels, and real rates are rising as inflation falls. Fiscal expansion must, therefore, now play the central role.”

Blanchard acknowledges that the problems are particularly difficult for emerging and low-income countries where he forecasts growth will moderate because of weakening global growth prospects, plunging commodity prices, and tight financial conditions.

Countries such as Jamaica and Guyana, which have been in crisis mode for 30-odd years, are now faced with the prospect of losing, through World Trade Organization rules, their agricultural commodities markets in Europe – where they had no control over prices in the first place – are now stretched by low demand for bauxite and low prices for what is in demand.

The news from the Bank of Jamaica in Kingston on December 1, therefore, that CD rates were moving from 14.65 to 17 per cent for 30-day instruments at the low end and 16.70 to 24 per cent for 365-day tenor brought howls of protest from the Private Sector Organization of Jamaica (PSOJ) and the Manufacturers’ Association (JMA), which predicted the final nail in the coffin of the declining sector.

Since the mid-1970s, Jamaica has endured various IMF managed or monitored austerity regimes that have prescribed exchange rate liberalization and general economic deregulation aimed at stimulating growth.

The effect on an economy short on natural resources, heavy on an underqualified workforce has been year after year of low or no growth. The island’s latest decline while linked to the global financial crisis has far older and deeper roots, not just the recent decline in tourist arrivals and bauxite contraction.

Prime Minister Bruce Golding, speaking at the commemoration ceremony for the construction of two upscale resorts by a Spanish consortium, noted that many industries including tourism, manufacturing and the agricultural sector, are under great economic stress, and they have called for government intervention. He said his Cabinet is considering a number of initiatives which he hopes to present shortly as it is important to sustain these critical sectors through these challenging times.

Golding said Jamaica will have to weather this storm but the greater focus will be on the rebound and the recovery and on the things that need to be done now.

“We have to focus on the investments that need to be made now, the plans that need to be put in place now – to ensure that when the world begins to ride out of the crisis … because it will, this is not a life sentence – we want to make sure we position Jamaica so we can be at the head of the line when the recovery begins,” Golding said.

It is just what the IMF’s Blanchard is saying: prepare for the crisis hereafter if it comes.

“Monitoring systemic risk at the global level is essential. The IMF seems best equipped to do the job, in collaboration with central banks and other international organizations. This will imply expanding our global surveillance role, and this is something on which we have to start working right now,” wrote Blanchard.

Whether the Jamaica central bank’s high interest low liquidity model fits the new mode to address a cracked global system is definitely moot.

     

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