The impact the global recession has had on economies all over the world continues to occupy the attention of economists and financial analysts.
But it is the plight of small open economies like Barbados which has received even more attention, considering their vulnerabilities and dependence on larger countries to earn money.
In recent years, this led to several differences of opinions between the various officials responsible for monetary policy in large and small countries. The role institutions, including the International Monetary Fund (IMF), have played in trying to find solutions to these challenges was also a major source of controversy.
From an international perspective, internationally-acclaimed economist Joseph Stiglitz is one of the experts who has researched and voiced opinions on the plight of small states, specifically their macroeconomic policies in the face of external economic upheaval.
From as far back as 2001 in a paper focusing on Iceland, the Nobel Laureate said, “Small open economies are highly vulnerable to currency and financial crises. Such crises have become increasingly frequent, with higher costs, over the past quarter of a century, and have affected countries following a variety of policies, for example, exchange rate regimes.
“While ‘bad’ economic policies may enhance the probability of a crisis, even countries praised for their economic policies are vulnerable. Countries need to manage these risks; risk management entails actions that reduce the likelihood of a crisis occurring and that reduce the costs incurred when the crisis occurs. A wide range of instruments are available as part of such a risk management strategy.
“While it might have been preferable if the problems posed by global financial instability had been addressed by reforms in the global financial architecture, significant reforms are not likely to emerge in the near future. In the meanwhile, countries. . . must take responsibility for their own welfare, for the stability and well-being of their macro-economies.”
One of the controversial IMF remedies evoking discussion and criticism from noted economists from the developing world, including Central Bank of Barbados Governor, Dr DeLisle Worrell, is currency devaluation.
Worrell and IMF managing director Christine Lagarde reportedly had a major difference of opinion on the issue during a 2012 meeting in Japan, with Worrell defending Barbados’ exchange rate peg against the United States dollar that has been in place since 1973.
Lagarde had suggested that Barbados should devalue its dollar, a measure she believed would make the tourism sector more competitive and help grow the economy, but Worrell’s view was: “To most of us in the Caribbean, it does not seem rational to impoverish yourself to grow your economy. To us, it is obvious that is what devaluation implies.”
Subsequent to this exchange, the IMF issued a report on the Caribbean, noting that “the choice between . . . external and internal devaluation . . . is difficult, because both may entail adverse macroeconomic effects. Moreover, in small open economies, the balance between the positive and negative effects of the two options differs from those in larger economies, because of their high degree of trade openness”.
But what are the options other than the IMF devaluation prescription? With high debt levels and commitments including social welfare programmes, as well as the fiscal tight spots islands in the Caribbean still find themselves in 2014, the choices are not many.
Government has taken measures aimed at fixing its own financial problems, in addition to policies its various spokesmen said were intended to stimulate economic growth. The IMF and others said these policies, which included the retrenchment of 3 000 public sector workers, were on the right track, but needed to be sustained.
From Barbados’ point of view, specifically the policy direction authorities here are pursuing, any successful fiscal consolidation and economic growth will largely depend on the island’s ability to earn and save foreign exchange, while reducing overall expenditure as much as possible.
Keeping a close watch on those areas which require a lot of foreign exchange – including the importation of petroleum products for electrical production and transportation – is included in this effort.
It is also linked to the pursuit of economic diversification, focusing on the increased adoption of alternative energy solutions. The consensus was that what was required was a mixture of policies minus devaluation.