THE WORLD BANK’S deputy chief economist for Latin America and the Caribbean, Dr Daniel Lederman, is reported to have “stayed clear of making any pronouncements on whether or not Barbados should devalue in light of the country’s economic problems”.
This is so typical of economists, and as a student of Sir Arthur Lewis myself, I know he would have been dismayed. Lederman’s interview would have given local policymakers absolutely nothing, and only muddied the waters in which we will collapse if we procrastinate much longer.
He warns that a monetary strategy (devaluation) will be painful, and then he goes on to say that the fiscal option will be painful as well. Of course, both will be painful, but it’s “going to have to be one or the other – or both, and certainly not neither. The objective of a government should be to minimise the length of time it takes for the country to return the critical deficits to a modicum of stability.
A combination of the two policy options is indicated, so why not say this outright: devaluation will address market competitiveness issues and bolster new investment, expand reserves and resolve union demands; the other option (tax adjustment) will dampen any price inflation affecting low-income earners, and channel our spending.
It’s a horse-and-carriage logic.
All businesses have on occasion to do a price cut when trading is low and creditors are calling. Devaluation is the economy-wide equivalent of an announced “special” and we will crawl out more resilient and moneywise than ever, so long as we can outlast the competitors.
Devaluation will force us all to be less wasteful in our consumption of imported commodities like fuel and become more strategic in the sourcing of consumer goods.
All the Lederman inferences about smallness of the economy being a risk factor refer to the elasticity of demand ratios – is the export dynamic greater than the effect on imports (see Marshal/Lerner Conditions). In fact, I believe the smaller the economy the easier will be its reconstruction.
His caution is obviously for countries that are inextricably dependent on a single trading partner for imports.
A policy research working paper (Devaluation in Low Inflation Economies by Miguel Kiguel and Nita Ghei) of the same World Bank in fact proposes that devaluation when supported by adequate demand policies is more effective in low-inflation economies.
At present, the inflation rate in Barbados is relatively low, and world petroleum prices are going to stay low and merchants are learning to source goods from cheaper sources than the United States.
Kiguel and Ghei argue that “devaluation pessimism” has in some cases gone too far. Certainly, Lederman should have a chance to get more acquainted with the conditionalities in Barbados before making such empty pronouncements.
– LEE FARNUM-BADLEY
