Working Papers

The currencies of Caribbean countries have now outlived their usefulness, and have become a liability. They were devised at a time when most payments were made using notes and coin, issued in distant metropolitan centres. Scarcity of the means of payment was a severe hindrance to commerce. In response Currency Boards were set up, to issue local currency as needed in the colonies. The system worked well because the local currency issue was backed by an equivalent value of Sterling, in a global system of fixed exchange rates. In contrast, nowadays payments are made mostly by electronic communication, credit and debit cards, cheques and drafts, with settlement over digitized bank accounts. In today’s world an own currency has become a liability for small economies, limiting access to international goods and services, exposing residents to risks of currency devaluation and inflation, eroding the value of domestic savings, increasing economic inequalities, providing a tool for unproductive government spending, and diverting attention from the need to increase productivity and enhance international competitiveness.

Abstract. The oil price boom has undermined efforts to diversify the Trinidad-Tobago economy, and the wide fluctuations in oil prices have wreaked havoc with Government finances. Manufacturing has declined in relative importance and the economy is once more overly dependent on the petroleum sector. The abrupt fall in oil prices in 2015 substantially increased the fiscal deficit, and brought on chronic shortages of foreign exchange.

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.

"Macroeconomics and Small Developing Economies: a Policy-Maker's Perspective," in Economics in a Changing World, Volume 4, edited by Edmar Bacha, London: Macmillan, 1994.

"Economic Adjustment and Growth in Small Developing Countries," in Open Economy Macroeconomics, edited by Helmut Frisch and Andreas Wortgotter, London: Macmillan, 1993.