THE ONLY WAY to stabilise small open economies like those in the Caribbean is to cut total expenditure.
Central Bank of Barbados Governor Dr Delisle Worrell made this assessment on Thursday at Hilton Barbados during a conference hosted by the International Monetary Fund, the Central Bank, and the University of the West Indies on Options For The Caribbean After The Global Financial Crisis.
In making an appeal for more “practical economics”, Worrell said the policymaker’s challenge boiled down to how expenditure on imports and other foreign currency spending could be brought down to the level of available foreign currency inflows.
“In economies like the United States or Brazil which produce practically everything domestically it may be possible to persuade consumers to switch from imported to domestically produced items by depreciating the exchange rate or imposing a tariff,” he said.
The Governor noted that this option was not available in the Caribbean because we produced only a few consumption items competitively and most of them would become more expensive with currency depreciation because of their import content.
He said the Caribbean policymaker was left with only one option to reduce spending on foreign exchange and that was to reduce spending on everything.
Worrell added that the tools to reduce aggregate spending were all fiscal and noted that the link between the fiscal deficit, external balances and foreign reserve adequacy made for the success of stabilization policy.
