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ON THE RIGHT: Devaluation, a bitter pill that is needed


DILLON CLARKE

ON THE RIGHT: Devaluation, a bitter pill that is needed

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THE CARIBBEAN HAS LONG BEEN PLAGUED by low growth, high unemployment, burdensome fiscal deficits, debt, and a high susceptibility to global shocks. On such shaky grounds, the economic outlook for much of the Caribbean, including the commodity juggernauts, remains well short of the feel-good vibes synonymous with the region.

What is clear is that there is a much deeper problem that has blighted the Caribbean, and it’s one that manifests itself as the inability to penetrate and openly compete on the world market – competitiveness.

Whether it’s Guyanese sugar, or the white, sandy beaches of Barbados and The Bahamas, the ability to sell products, be it tourist-based or commodities, at low costs to maximise profits is paramount for the growth and economic prosperity of a region dotted by small market economies.

However, being small is no excuse. Measuring competitiveness as the current account of the balance of payments illustrates a telling tale of Caribbean living beyond its means. With the exception of Trinidad and Tobago (thanks to black gold we know as oil), the region’s economies are characterised by excessive consumption beyond their domestic production. We see this when there is excess of imports over exports, excess of domestic spending and investment over what is produced, and excess of domestic, private and public investment over domestic savings.

These trends are more worrying as the Caribbean is being left behind by its direct small market competitors, or the rest of the small economies, as they turn the corner and make significant strides. So what can be done to rein in loose purse strings and improve productivity in the Caribbean? While productivity speaks to a micro-economic problem, tackling sector by sector reforms may be too long. Thus, a policy with far-reaching and explicit effects such as devaluation may be the bitter medicine that is needed.

Yes, devaluation. It’s no surprise that devaluation is generally met with immense fear and speculation. Financial markets see is as a sign of weakness and a potential threat to balance sheets rife with foreign currency, denominated assets and liabilities; while policymakers, more often than not, shy away from even discussions on the issue, fearing populist backlash because of its effects throughout the economic ladder.

Like most parts of the world, the Caribbean and their policymakers are also haunted by these fears from such a bitter policy prescription. But much knowledge could be gained by tinkering as there is much more to devaluation than just tanking a currency. If perennial current account deficits are unsustainable and competitiveness is low, devaluing the exchange rate may be a viable option, better known as external devaluation. However, it is argued that expenditure cannot be switched from tradable goods to non-tradable goods in countries such as those in the Caribbean.

Therefore, real exchange rate devaluation only depresses real income. Worse, devaluation could result in stagflation, that is, reduce economic growth and increase inflation. While devaluation is no cure all, as there is a cadre of infrastructural energy and transport deficiencies in the region that this policy measure cannot fix, it may represent an interim measure to cede the Caribbean’s slide.

Dillon Clarke is an Inter-American Development Bank researcher in Guyana.

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