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Small Island Economies: Structure and Performance in the English-Speaking Caribbean Since 1970.

Small Island Economies: Structure and Performance in the English-Speaking Caribbean since 1970

DELISLE WORRELL, the director of economic research at the Central Bank of Barbados, has written a thoughtful book that will be of value to businessmen, academics, policy analysts and others interested in the Caribean. The book covers a lot of territory: thirteen countries for the period 1970-84. Worrell devotes the core of his analysis to the more populous countries of Barbados, Guyana, Jamaica, and Trinidad-Tobago. The other countries, covered in less detail, are Antigua and Barbuda, the Bahamas, Belize, Dominica, Grenada, Monstserrat, St. Kitts-Nevis, St. Lucia and St. Vincent.

In 1970, the prospects for sustained growth for most of these countries seemed fairly good. The 1950s and 1960s witnessed stable growth during the transition to independence. Many had taken steps to reduce their historical dependence on sugar through the development of tourism, some light manufacturing, and, in Jamaica and Guyana, a bauxite and alumina industry. Expectations of improved standards of living had been raised.

However, as small open economies, their prospects were linked to the economic performance of the major industrial countries, especially the United States, In comparison with the previous two decades, the 1970s were turbulent: the suspension of fixed exchange rates in 1971, the oil shocks of 1973-74 and 1979, volatile prices for other commodities, erratic interest rates, and general stagflation. In the early 1980s the United States experienced a severe recession.

These factors provoked balance of payments deficits, ignited inflation and stifled growth throughout the Carribbean. Worrell finds that Caribbean governments have a limited range of economic policy levers to cushion the effects of external changes. Of these, fiscal policy is the most important. Owing to the high import content of domestic expenditures in these countries, injections into the spending stream by government have a direct, adverse impact on the balance of payments.

The most successful measures to restore the balance of payments featured tight fiscal policies. Although Jamaica was seriously affected by external factors, the actual origin of her economic decline lie in fiscal expansion in the mid-1970s. On the other hand, Barbados, which is quite sensitive to foreign price movements, came through the period in fairly good shape, owing in large part to conservative fiscal policies. The surge in petroleum prices helped oil-exporting Trinidad-Tobago. However, fiscal policy encouraged greater consumption which in turn aggravated inflationary and external payments pressure in the 1980s.

The author is not optimistic concerning exchange rate changes as a tool of adjustment. In theory, exchange rate changes are expected to increase the relative price of tradables to nontradables, save foreign exchange by switching some spending from foreign to home goods, and modify the level of fiscal contraction required balance of external payments. Caribbean countries have been reluctant to experiment with exchange rate changes. Worrell believes that exchange rate changes can be helpful in making long-term changes in a country's production base. However, his review of the available evidence in the Carribean indicates that such changes produce inflation, reduce real income, but result in little expenditure switching.

With the possible exception of Jamaica, monetary policy was of limited usefulness, owing to a scarcity of effective tool of implementation in countries where trade and finance are quite open. General price controls also were not very useful in fighting inflation. And nationalizations have not been very successful. In fact, the widespread nationalizations in Guyana in 1976 contributed to the country's eventual impoverishment.

Worrel states that none of the countries could claim have adjusted successfully. Unemployment and underemployment remained high and little success was achieved in promoting exports to hard currency areas. In classifying the adjustment programs, Jamaica and Guyana had the worst records. Jamaica's policies between 1974-76 were classified as "harmful" (they actually aggravated the external shocks) and those between 1977-84 were "failures" (they were of no assistance in dealing with shocks.)

As the most populous country in the English-speaking Caribbean, Jamaica occupies a special position. In the period after Worrell's survey, Jamaica has undergone a policy-led recovery. Fiscal deficits have been significantly reduced, and a comprehensive tax reform and a dynamic privatization program are in place. Reforms in the exchange rate, trade and tariff regime have stimulated nontraditional exports. Inflation has subsided, unemployment has been reduced, and real growth rates of about 5 percent have been realized in 1987 and 1988. A new government, elected in February 1989, seems committed to moderate policies and preserving the gains at have been made in the latter part of the 1980s. Interestingly, the policy changes that Jamaica has made are consistent in principle with those advocated by the book.

The book covers many other important topics, such regional economic integration, external debt and the growth of Caribbean manufacturing. The six technical appendices include an economic forecasting model for the Caribbean. Those who work in, or deal with, the Caribbean will find his book a valuable reference.
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Author:McLindon, Michael P.
Publication:Business Economics
Article Type:Book Review
Date:Jul 1, 1989
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