This paper proposes an approach to macroeconomic policy which equips the authorities in small, open, financially-integrated economies (SOFIEs)2 to target the exchange rate by influencing the volumes of trade in goods and services to achieve equilibrium at the target rate. This is achieved by the use of fiscal policy: the authorities may adjust the size of the fiscal deficit and how it is financed to contain the level of aggregate expenditure in the economy, and the demand for imports that flows from that expenditure.
This paper was prepared for the Handbook of Small States - Economic, Social and Environmental Issues (Routledge 2018), edited by Lino Briguglio of the University of Malta. You can also access this publication on The Social Sciences Research Network.
The forecasts in my paper The Barbados Economy: The Road to Prosperity are based on an empirical model of an export-driven economy, where the source of growth is increased productivity and competitiveness in tourism, other traded services and exports. Foreign exchange inflows and incoming investment generate multiplier effects on domestic production and incomes, which in turn increase the demand for imports, paid for out of the foreign exchange earnings and capital inflows.
Journal of Latin American Studies, Beijing:, 2016: Small, very open economies (SVOE’s) are defined in this paper as those economies with population and total GDP so small and limited that they must specialize in a handful of exports and services to enable them to become competitive on international markets. These countries have negligible scope for import substitution, and an open financial account. These structural characteristics define the policies that are effective in SVOE’s: growth is always led by expansion of foreign exchange sectors, which fuel the imports needed for consumption and production; an exchange rate anchor is the most effective stabilisation tool, and it may be sustained with the use of fiscal policy; and the maintenance of an adequate level of foreign reserves defines the limit of fiscal sustainability.
2016: This paper analyses the potential causes and consequences on the Caribbean of de-risking strategies adopted by international banks in response to recent changes in bank regulation, reporting requirements and judicial pursuits. These include the initiatives adopted by the Basel Committee, the Financial Action Task Force, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, the US FATCA, and the increasing judicial scrutiny faced by international banks. The impact to date has been felt in the Caribbean across -the-board, including in jurisdictions with competitive, well regulated and transparent international financial centres, which provide high quality financial services.
2016: This paper explores the difference in perception between economists and ordinary folk about the importance of stable exchange rates for small open economies. Small open economies everywhere are preoccupied with exchange rate stability, whereas most economists believe that exchange rates should be managed flexibly to maintain competitiveness or allowed to float freely. To most non-economists it is fairly obvious that countries with more stable exchange rates are more prosperous. Our paper finds empirical evidence in support of that view.
2016: Exchange rate devaluations have been used by economies around the world in an attempt to enhance their external price competitiveness. This paper evaluates the efficacy of this strategy in small-island developing states. We classify countries around the world into two broad categories, large or small according to population, land area and economic size, proxied by GDP. We compare large countries with small countries according to the following dimensions: the country’s share of world export markets, the diversity of exports of goods and services, the elasticity of import demand for consumer and producer goods, and the sensitivity of prices and wages to exchange rate changes. Using these results, we assess the efficacy of devaluation as a competitive strategy in small states as well as in larger countries.
2014: This study investigates the competitiveness of the Barbadian economy relative to its regional counterparts. The analysis incorporates the relative rankings of the Global Competitiveness Report 2013-2014, relative market shares and productivity gains, as well as a novel price competitiveness index by Worrell, Greenidge and Lowe (2013). The results suggest that Barbados is competitive both regionally and globally, ranking ahead of its peers in key areas such as the strength of its institutions and the quality of its health care and primary and higher education. In addition, despite some declines in tourism post-crisis, the island has maintained market share in most of its key foreign exchange earning sectors, while seeing improved price competitiveness of its internationally traded goods and services over the past decade.
2013: There is sufficient evidence from the existing literature to support the view that small states are different: they are more open, they are forced by their limited resources to be specialised in a few internationally competitive products and services, and they therefore do not have the option of adopting more of a closed economy strategy in pursuit of economic growth. Small states have outperformed large states, but only when they pursued strategies appropriate to their circumstances. The strategies for stabilisation and growth that work for large economies do not suit the circumstances of small economies, and if applied as in large countries, they invariably result in policy failure. In particular, the record shows that economic growth in the small open economy depends on increasing quality and productivity, and is unaffected by changes in relative prices. This paper surveys the literature with a view to gaining insights into monetary and exchange policies that are best for small economies.
2013: In their 2010 IMF policy paper, Blanchard, Dell’Ariccia and Mauro observed that central banks of smaller economies were well advised to manage their exchange rates, as well as to contain inflation. They admitted that many countries did in fact pursue both inflation and exchange rate objectives. The present paper takes this argument one step further, demonstrating that the management of aggregate demand, using fiscal policy, is an effective means of achieving an exchange rate target, whether that target is an unchanged exchange rate anchor to a single currency or a basket of currencies, or a stable rate with low volatility.
2013: The economic prospects for the Caribbean depend on creative private sector responses to the challenges of the countries’ markets for exports of goods and services, principally in North America and Europe. Governments’ role is to stabilise exchange rates, thereby minimising inflation and ensuring domestic policy credibility, to support the private sector export thrust in selected, strategic areas, and to secure the social safety net for vulnerable groups in society. These countries have all achieved a relatively good quality of life for their citizens, reflected in Human Development Indices that range from the medium to the highest category; simply by avoiding economic contraction they may preserve a comparatively good lifestyle, in the interval that will be required while new investments in exports, tourism and other export services germinate.
2012: Insufficiency of foreign exchange may at times constrain the growth of small open economies which lack the domestic resources to produce import substitutes for their consumption, investment and input needs. This study explores the foreign exchange constraint in three small open Caribbean economies, using a structural model of the relationship of foreign exchange earnings and growth, and the economies’ openness to international markets. The model is used to evaluate the prospects of economic growth for these economies, based on the forecast availability of foreign exchange.
2012: The paper finds that (a) the proportion of indirect taxes in total revenue remained unchanged after the introduction of the VAT; (b) the yield of the VAT relative to the rate of tax, was no higher than for the consumption tax in the period prior to its introduction; (c) the costs of administering the VAT and customs duties were about the same, relative to their yields, before and after the introduction of the VAT; and (d) the consumption taxes that preceded the VAT were more buoyant in response to changes in income, and more elastic, than was the VAT.
2012: This study includes measures of price and non-price competitiveness in the Caribbean. Results suggest that most countries have become more price competitive, while the smaller Caribbean islands have increased their advantage in the exports of goods and services and international finance. Preliminary estimates also provide some evidence that aggregate world demand, local investment and price competitiveness improve the growth of production in the tradable sector.
2012: This paper provides the rationale for the Central Bank of Barbados’ market-based interest rate policy, instituted in April 2015.
2011: This paper reports on a risk analysis for Caribbean international financial centres, and makes the case that the international initiatives for financial reform should be tailored to the risks, and the process should use the expertise which resides in the IMF and World Bank to lend credibility and fairness to international financial reforms.
Economic Review, Volume XXXVIII, Issue 1, June 2012: Pages 57-66. This paper describes how fiscal policy is used in Barbados to manage the demand for foreign exchange and ensure that the Central Bank is always stocked with adequate foreign exchange reserves to supply the needs of the interbank market. This enables the Central Bank to maintain an unchanged exchange rate through intervention on the interbank market. Sustaining the peg in this way lends credibility to Government economic policy and provides strong incentives to save and invest in the local economy.
Confucius Institute Lecture, UWI Cave Hill, Barbados, January 31, 2018
2017: “My motivation for this essay is to put the performance of the Barbados economy since 2008 into perspective, and to reassure Barbadians that prosperity will return to our country, provided that prompt, decisive and appropriate action is taken to address the obstacles that stand in the way of that goal. I will show that there is abundant evidence of dynamism and competitiveness in the Barbadian private sector, and that provides the fuel for a prosperous future for our economy.” You can also access this publication on The Social Sciences Research Network.
Presentation to the International Business Week Conference, Lloyd Erskine Sandiford Centre, Barbados, October 20, 2017
“Solar & Wind Power Can Be Game Changers for the Barbadian Economy,” Economic Insight.bb, Issue No 2, March 2017.
“State of the Union,” Economic Insight.bb, Issue No 1, September 2016, Dr. DeLisle Worrell reflects on Barbados' development over the past 50 years and previews where we go from here.
2015: Barbados is a competitive, high quality provider of IBFSs. International companies are able to increase their competitive offerings on the global market by judicious use of Barbados' IBFS centre. The economic logic that is driven by competitive forces is what drives expectations of continuing growth of IBFS services in Barbados and elsewhere.
2015: The independence of the central bank allows it to stand in for Government in the provision of infant industry finance in appropriate forms and linked to demonstrated performance, measured against clearly stated objectives. ….. For economies such as [those of the Caribbean], financial stability is the means to an end, that is, financial development. In pursuit of financial development the central bank may play the vital role of providing performance related finance for innovation, by virtue of its independent stature within the public sector.
Lecture to the Fair Trading Commission, Barbados, Accra Beach Hotel, March 14, 2014. I cited the examples of "The man who knew the price of all fish", the Emera purchase of BL&P shares, and the Libor fiasco, to make the point that the market only works when there are actual trades and when prices move slowly enough that today's price is in the neighbourhood of the price of a similar commodity when last I bought it. In cases where there is no trade, or share prices become very volatile, official intervention is necessary, but intervention must always be market‑friendly.
OMFIF, GLOBAL PUBLIC INVESTOR, 2017: “Hurriedly designed measures have biased international financial markets in favour of the largest players, according to their smaller rivals. Countries such as Barbados believe they are losing out even though their compliance levels match the best.”
OMFIF Bulletin, Dec 2016: “… the benefits of dollarization should not be overestimated. Where currencies have a credible track record of stability, particularly against the dollar, there is merit in maintaining exchange rate independence.”
The Bretton Woods Committee Bulletin, November 2016: “…. it is [the] promise to speed up payments, to fully exploit the potential of global telecommunications, which is the most exciting aspect of Blockchain.”
2015: “Our study provides an objective measure, for small open economies, of the risk that fiscal policy may render it impossible for the Government to fully service its debt obligations. The methodology we develop does not depend on … any of the usual caveats and assumptions of the conventional analysis.”
Worrell, DeLisle, “Why Devaluation Isn’t a Viable Option for Greece: Insights from a Small Open Economy,” http://voxeu.org/search/node/worrell, June 23, 2012.
Group of Thirty, 2012: “Small very open economies are very different from large economies, in that they face a foreign exchange constraint that cannot be alleviated by depreciation of the real exchange rate or other policies. This constraint affects monetary, fiscal and exchange rate policy including fiscal sustainability, debt management, and patterns of economic growth. … the most accessible framework for such countries is an exchange rate anchor.”
2011: A detailed analysis of retail pricing practices in Barbados, Curacao, Guyana, St Lucia and Trinidad and Tobago.
2008: Caribbean tourist destinations maintained their shares of the North American market over the 1980-2004 period by and large, but their shares of the UK market declined. For the most part, growth of the source market was more important than competitors’ prices in determining market share, but experiences varied.
1997: This compendium reports on the state of the art in the Caribbean with respect to economic policy modelling and forecasting, in the mid-1990s.