Policy makers in small open economies continue to manage exchange rates as though there is a relationship between the US dollar value of the domestic currency (if they have one) and the performance of the economy. This paper, which presents some essential messages of my recent book Development and Stabilization in Small Open Economies, explains why that is not the case.
This book analyses and explains the nature of the economies of small countries and territories. It includes an assessment of material prosperity in 41 small open economies worldwide, with case studies focusing on the Caribbean and Central America, and a review of the development of their economies in recent decades. The volume recommends a suite of economic policy tools for the management of these economies, demonstrating how these may best be employed in economies that live and breathe through international commerce.
This study uses changes in the Human Development Index (HDI) between 2019 and 2021 as an early (and incomplete) indicator of the impact of the Covid-19 pandemic on the countries of Central America and the Caribbean (CAC). The HDI, which has been published annually by the United Nations Development Programme since 1990, combines indices of the purchasing power of average national incomes (measured in US dollars), life expectancy, and average years of schooling, for each country. Except for Guyana and Nicaragua, the HDI score for every country in the CAC declined.