Businessman Joe Issa Points To Jamaica’s New Economic Policy Direction

As Jamaica looks forward to mobilizing local and foreign capital for growth-inducing investments to continue and build on a trend now emerging, it has to take policy decisions that will either make or break it, and the choices are not only limited but tricky.

According to the well-respected ‘Impossible Trinity’ theory among economists, a country has two out of three policy choices that it can implement simultaneously, in order to achieve its economic goals of employment and growth; it cannot implement all three at once as this will collapse the economy and put it in recession.

Now given Jamaica’s own experience with exchange rate management, restrictions on capital plight and monetary authority over the many years of anemic or no growth, Ocho Rios businessman Joe Issa in an interview made his pick of policy choices for the country.

Based on the ‘Impossible Trinity’ theory in Wikipedia, Jamaica must pick two out of the following three policy choices:

1.      It can fix its exchange rate without weakening its central bank, but only by controlling capital flows (like China today);

2.     It can free up capital movement but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain – or Canada); or

3.     It can free up capital movement and fix its exchange rate, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe).

If Jamaica should ever think of going for the ‘Impossible Trinity’, it should be reminded of its own folly in the latter half of the 1990s when an independent central bank operated a high interest rate policy to mop up liquidity and protect the value of the currency, while allowing free movement of capital. By trying to have all three at once – fixed exchange rate, central bank autonomy and free movement of capital – this resulted in the collapse of the real estate market and the financial system, said Issa.

Referencing a recent article on the trilemma that has haunted economics for decades, Issa said the authorities must also take note of the silliness of the United Kingdom in the early 1990s, when it tried to achieve the ‘Impossible Trinity’ and interest rates shot up to 15 per cent to support its currency, causing the housing market to collapse and putting the country in recession.

In the interview on the Chinese approach to solving the economic puzzle no-one has ever solved – controlling foreign exchange, having and independent central bank executing macroeconomic policy and free movement of capital in and out of the country – Issa, who is a past student of the London School of Economics, said it is interesting and worth looking at to see if it suits the country’s needs.

“I read the article and thought it was quite interesting and perhaps worth looking at to see if it’s something we can adopt… What I think the Chinese did was to redefine the problem, which is common in problem-solving exercises.

“The problem all along has been with achieving all three at once without deviation, but with some flexibility, they are all achievable at once,” Issa says of the Chinese approach, emphasizing that “the problem was with rigidity, such as the total control over currency movement, total independent central bank, and no control whatsoever of flow of money in and out of the country, which have been shown to be unachievable all at once.”

In other words, Issa explains further, “The problem was not with having your cake – the ‘Impossible Trinity’ – but with eating all of it, rather than some of it – some control over the value of the dollar, limited independence of the central bank, and some measure of control over capital flows.”

In what is referred to as a variation of the ‘Impossible Trinity’, the Chinese are emphasizing partial (rather than extreme) solutions for all three conditions at the same time, such as strongly managed exchange rate rather than exchange control; limited independence of monetary policy rather that total independence of the central bank; and partial capital outflow rather than free movement of capital, according to an article.

In China today, it said, “Interest rates are low to keep the money supply up and liquidity in the economy buoyant. The currency, allowed to float a bit more freely than it has in the past is weakening, and capital outflows are accelerating,” informing that total net capital outflows occurred for the sixth straight quarter in 20015 and reached a new record of $221billion, while official reserves also declined to a record of $161billion.