Once again, some (maybe, many) Jamaicans are expressing concern about nominal depreciations in the exchange rate, and (dare I say) once again eyes are looking in the wrong direction.

First, let’s dispense with knee-jerk calls for the government to ‘do something’ about the level of the exchange rate. Whatever the government (and central bank)–‘the authorities’–can do is unlikely to have any lasting effect if the rate is being determined in a market. Sorry, the authorities can spend a good amount of hard-earned foreign exchange reserves trying to defend a rate, but we know how that can go (ask the UK about the pound in 1967, for instance).

I’ve seen a clear story about the exchange rate and it’s the counterpart to the story I’ve tried to tell about labour productivity (see, for example, Productivity problems in Jamaica—Jamaica Observer article.) Available data show that the average Jamaican worker is producing or serving less than in the past, ie productivity is declining. I did not clap when data showed employment was rising and unemployment falling. (The most recent data showed the trends of a rapid decrease in unemployment, while GDP flounders under an annual rate of 2 percent.)

Why? Because growth (GDP) was hardly rising, and, arithmetically, output per worker must be falling.

In conventional economics, labour productivity movements are directly related to the movement of the ‘real’ exchange rate (ie. the nominal rate adjusted for inflation). (See IMF Working Paper, Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?) So, as I noted a couple of years ago (see What’s the exchange rate telling Jamaica?) and repeated a few weeks ago, the exchange rate is telling a very clear–albeit, complicated) set of stories. Whatever else may be weighing down the exchange rate, it’s clear that Jamaica is not competitive enough to support the exchange rate, so it must depreciate. Jamaicans are busily looking at other people for undermining their currency’s purchasing power, without understanding what role they play.

Advertisements