Out of place, Governor Worrell

Clyde Mascoll,

Added 01 November 2012

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No Caribbean-trained economist believes in devaluation. What was a most embarrassing moment for Barbados is somehow being spun into a clash on devaluation between the Governor of the Central Bank, Dr Worrell, and the managing director of the International Monetary Fund (IMF), Christine Lagarde, at a recent meeting in Japan. Governor Worrell let his guard down on the Latvia internal devaluation. The Japan meeting was not the place for the argument on devaluation, but, more importantly, Dr Worrell fell down in his presentation.     The meeting is held for Caribbean ministers of government with responsibility for the IMF and the World Bank to share perspectives with the leadership of the organizations. To demonstrate that it is a meeting for ministers, this is what Minister Sinckler said at the end of his opening remarks: “As I said, my colleagues here are going to make some presentations, and I want to invite them to do so on specific issues. Minister Singh will speak on debt and debt sustainability. Minister Burke will speak on growth. And, of course, our colleague Minister Phillips will wrap up these closing remarks . . . , and I pass this over to them at this stage.”   It is quite evident that Dr Worrell was never invited to speak by Minister Sinckler. This is the first part of the embarrassment. Second, the issues raised by Dr Worrell bordered on the more technical microeconomic foundations of the issues chosen by the ministers. The issue of devaluation raised by the Governor was therefore misplaced. But the most embarrassing matter related to the experience of Latvia with devaluation, put on the table by Dr Worrell – which is not the kind of devaluation that the Caribbean fears. Christine Lagarde won the major point with “ . . . I will take the example of Latvia, which I visited recently, where clearly while they didn’t devaluate – don’t forget, they did not devaluate – their currency; they decided to go the hard way, which is internal devaluation by lowering the cost of labour factors . . .”. Dr Worrell actually then agrees with the managing director of the IMF that reducing the cost of labour is the way to go to increase price competitiveness. In effect, the governor supports the notion that lowering the cost of labour is an internal devaluation. However, in his opening remarks, Dr Worrell argued that “you cannot grow the economies by price competitiveness”. When pressured by Lagarde on the experience of Latvia, the Governor conceded “so the only thing you can do in order to increase your price competitiveness, so to speak, is to reduce the cost of labour”. In other words, he accepted that reducing labour cost increases price competitiveness. Then it must lead to economic growth to be a policy of choice. Freezing wages and salaries is a way of lowering labour costs, which is what has effectively happened in Barbados over the last four years. So Barbados has had an internal devaluation. It may not have been a cut in labour costs like Latvia, but freezing labour costs is designed to have a similar, though smaller, effect on price competitiveness.   The Governor therefore agrees that the Barbados economy has experienced an internal devaluation in recent times. The notion that the Barbados economy can only grow “if foreign exchange grows” is false. It is preferable for the growth to be led by the foreign exchange earning sectors. But Barbados’ economic growth also comes from local spending. The workers, who are also the spenders, need more money to help grow the Barbados economy.     The truth is that the issue of whether or not to devalue a country’s currency is a very academic pursuit. The meeting with the minsters is not the place for such a discussion. This is why the contribution of the president of the World Bank, Dr Jim Yong Kim, is instructive. He said: “Governor Worrell has his own model. He is sending me a long, thick paper about his model, and I’m still obviously in the process of studying his paper, and we debated in Barbados and Trinidad and a few months ago, but I think I’m going to hold a very high level academic seminar to discuss his model and his paper . . .”    There is always a right time and a right place! •  Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email clydemascoll@gmail.com.

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