As the United States grapples with the nightmare of the financial crisis, the problem is striking at the heart of the real economy. In October, the American economy shed 240,000 jobs, causing the unemployment rate to jump to 6.5 per cent, the highest level registered since 1994. The American automobile industry now appears to be on the brink of collapse, and at present, there is talk in Washington, DC, of a US$25-billion rescue plan for the auto-industry giants - General Motor, Ford and Chrysler. Sure enough, the problem has not remained within the borders of the US. Neither is it just affecting the industrialised economies of Western Europe and Japan. Indeed, it has cast a dark shadow over the developing world, and Jamaica is no exception.

After soaring to a record high in May, the Brazilian stock market plunged, wiping out more than 50 per cent of its value. And in October, Brazil's vibrant automobile industry saw an 11 per cent decline in the sales of new vehicles. In Argentina, the government had to step in and nationalise the country's private-pension fund, as it faced the grave risk of default. In Mexico, the stock market has declined by 34 per cent in six months, and in August, manufacturing exports to the US shrank by 3.8 per cent when compared to the same period last year.

Depreciating dollar

As international credit dries up and the growth in the global economy stumbles, Jamaica struggles with the headache of its depreciating dollar. Over the last six weeks, the currency has depreciated by 5.5 per cent, against the US dollar. In this respect, Jamaica is not unique. Since the crisis, the Mexican peso has lost 25 per cent of its value; in Turkey, the lira has declined by 27 per cent, and even South Korea, one of the strongest developing economies, has seen its currency slide by 30 per cent as investors flee. Yet, it is not enough to take comfort in the idea that you are not alone in your predicament.

Interestingly, the dollar would perhaps have depreciated below $80 to US$1 had it not been for the intervention of the Bank of Jamaica (BOJ). During the month of October, the countries net international reserves was reduced by US$448 million as the central bank pumped more US dollars into the foreign-exchange market. In addition, the BOJ increased the interest rates on its certificates of deposits by 0.65 percentage points. This was aimed at reducing the demand for the US dollar. And yet, the BOJ has not succeeded in stabilising the Jamaican dollar.

Remittance inflows

Both Finance Minister Audley Shaw and the minister without portfolio in the exchequer, Senator Don Wehby, have sought to calm fears. They have pointed out that tourist arrival for September increased by 5.5 per cent relative to the figures recorded in the same month last year. Remittance inflows are still ahead of what was seen over the comparable period of 2007. In addition, the weakening of the global economy has caused the price of oil to fall from US$140 to US$65 per barrel.

Consequently, the demand for US dollars to finance fuel import is less. It is on this premise that Minister Shaw concludes that there is no basis for the slide in the dollar and urges "those who for any selfish or greedy basis would seek to be disruptive to the foreign exchange market", not to do it.

It is clear that Minister Shaw has dismissed the notion that a weaker tourist market or flagging remittance inflows is the cause of the instability. He seems to be suggesting that there are greedy players in the market who are speculating on the currency with the intent of profiting from the crisis. This deduction is logical, given the structure of his argument. However, there is a missing component to this interpretation: fear.

For many Jamaicans, a rapidly depreciating dollar is a frightening experience. It raises the spectre of the early 1990s when the Government embraced market liberalisation and the dollar spiralled hopelessly out of control. As such, it is not surprising that alarm bells are being set off within the private sector and questions are being raised as to whether the Government has embarked on a policy of devaluation.

The currency market is one that is closely linked to the psychology of the people. If there is widespread expectation that the currency will depreciate, it will happen. This is not dependent in any way on whether the expectation is reasonable, since the slightest dip in the currency serves to confirm that conviction as true.

There is a growing conviction (not merely perception) that the recession in the US will be long and deep. The dismal unemployment statistics and the slashing of output in the American auto-industry certainly seem to confirm this view.

Trade-off

However, apart from the BOJ's effort to make more foreign currency available to the private sector and the acquisition of a special facility from the Inter-American Development Bank to ease the credit crunch, the Government has not seriously addressed the issue of economic growth. Of course, there is a trade-off between growth and stability in the economy. Both cannot be achieved simultaneously.

Additionally, the level of debt burden the country faces puts severe limits on what can be done. But, in the midst of crisis, the only medicine for fear and self-destructive speculation is an understanding of how growth can be achieved. This is urgently needed. Is this too much to ask?

Cedric Wilson is an economicsconsultant who specialises in marketregulations. Send your comments to: conoswil@hotmail.com or columns@gleaner.com.