Sun | Sep 23, 2018

Mark Ricketts | Inflation target, exchange rate, and low wages

Published:Sunday | September 16, 2018 | 12:00 AM
Dr Constant Lonkeng Ngouana, IMF resident representative for Jamaica.

Finance Minister Dr Nigel Clarke should be commended for his efforts in using the media, as well as speeches from public platforms, to inform and engage Jamaicans on a range of economic reforms he regards as important for the country's advancement. In a speech last week to the Kiwanis Club of North St Andrew, he continued to emphasise the inflation rate over the exchange rate.

While the minister's message is always well thought out, I have some misgivings based on the fact that too much in our economy is suppressed as far as prices and wages are concerned, and too many are left behind for the inflation target to be treated as a sine qua non of a healthy lifestyle. (Sine qua non is a fancy phrase economists like to use. It means an essential condition).

Let's start with suppression of prices. Transportation has a massive flow-through impact on the economy, and in an oil-dependent country as ours, where we don't make buses and cars, and most automobile spare parts are imported, movement in oil prices and the exchange rate has an immediate and devastating impact on those involved in plying their trade in this sector. Their situation literally becomes life and death when in a market-driven economy they can't pass on their much higher costs because licensing authorities and government ministers determine otherwise.

For years, taxi drivers have been lobbying Government for fare increases, but have been denied, and now their requests have skyrocketed to a 100 per cent increase in fares on all routes. Nobody is listening - not the prime minister, the finance minister, nor the transport minister, because such an increase would blow Government's well-honed inflation target and make the recent passage of the minimum-wage legislation an exercise in irrelevance and futility.

 

No fare increase

 

The society does not want fare increases either. How are gardeners, people selling in the market, helpers, those working minimum wage in the wholesale sector, and low-wage earners in the hotels going to survive if fares on your typical route jump from $100 to $200.

Let's do the maths. The new national minimum wage of $7,000 weekly has passed after two years in the making. Tens of thousands are affected by the inflation guideline if used for wage increases. Let's assume 5% inflation (it's now 3.2%) workers will get $350 a week more, for a daily wage increase of $70; far less than the $400 increase a day a worker with a two-stage route fare, morning and evening, will have to fork out.

Government, while knowing the 100% taxi fare increase is justified - and really it should be more when depreciation is factored in - will hold meetings designed to procrastinate.

Bus and taxi drivers, who are regarded by the privileged and the ascendant classes as the underbelly of society, without class and status, have no one fighting on their side, so they weaponise their vehicles to secure justice and livable earnings. They hold up traffic at busy intersections to obtain yet another fare. They crisscross lanes to secure an advantage, and they use turning lanes with arrow signals as launching pads.

It is not just the suppression of prices, but the suppression of wages to dumb down likely wage pull inflation, and the conditions under which people work which discount productivity, assail efficiency, and undermine performance. To understand, just take a walk into any police station. You are in a time warp as far as functionality, modernisation, and technology go.

Imagine a constable five years in the force earns a monthly income of $60,033 on which wage increases are determined, a housing allowance of $27,392, and a fixed overtime allowance of $14,383. Many times, they have to work overtime in excess of 20 hours per week, and it gets worse with ZOSO and states of emergency.

A 5% income increase will give the police officer an additional weekly amount of $800, which means he had better live in walking distance to the station.

 

Left behind

 

Clearly rank-and-file policemen have been left behind and will continue to be left behind utilising the inflation target as a barometer for wage increases. So, too, will recent graduate nurses, prison guards, postmen and women, garbagemen, and private security personnel.

In the hospitality sector, Sagicor Chairman Richard Byles challenged hoteliers to do better as there are workers earning wages that are inadequate to buy even breakfast where they work.

What makes it particular hard on these workers is that they are paid in Jamaican dollars yet function in an environment where everything is benchmarked in US dollars. It is the greenback, not the Consumer Price Index (CPI) that calls the shots.

Our problem is that we have developed a culture of patronage, a politics of affection, and an economics of spoils and scarce benefits, in the process leaving too many workers behind and vulnerable. Catching up is not made any easier because the size of government debt leaves insufficient space for modernisation, infrastructure improvement, technological advance, and better capital output ratios.

Interestingly, in communication and conversation with brilliant economist Constant Lonkeng Ngouana, IMF resident representative in Jamaica, our positions often converge on some matters, but on this occasion we are still out of step with each other.

He thinks inflation targeting is very appealing because the CPI is a better barometer for what's going on in the overall economy, and is also more relevant for people's living standards than the exchange rate.

"As a matter of fact, the inflation rate already embeds the impact of exchange-rate movements given that imported goods and services are part of the basket used to measure the CPI. As such, the Bank of Jamaica is focused on delivering something more relevant to the Jamaican people: price stability," says the IMF representative.

Continuing, he points out that price stability allows households and businesses to plan better; preserves the purchasing power of the Jamaican dollar; and protects the life savings of Jamaicans.

"From international experience, modern central banks have increasingly adopted inflation targeting. The framework features a virtuous cycle, whereby the credibility of the central bank improves as it delivers consistently on its inflation mandate. Inflation expectations then become better anchored, further reducing the pass-through of exchange-rate movements on inflation," says the IMF guru.

And there you have it, dear readers, the first in this series.

- Mark Ricketts is an economist, author and lecturer. Email feedback to columns@gleanerjm.com and rckttsmtk@yahoo.com.