CENTRAL BANK GOVERNOR Dr DeLisle Worrell dislikes the “policy prescriptions” the International Monetary Fund (IMF) and World Bank have for small very open economies (SVOEs) like Barbados.
While asserting that foreign exchange is the lifeblood of the Barbados economy and all recent efforts to sustain it, including austerity measures, were merited, the veteran economist said agencies like the IMF and World Bank were not doing enough to distinguish between small and large economies.
He made the statements in the new working paper Economic Growth, Development And Stability In Small Very Open Economies.
“The . . . analysis of the economic circumstances and development prospects of what I call [SVOEs] must be deepened to provide useful insight about the policies that are efficacious in accelerating their growth and development, and ensuring their economic stability,” Worrell said.
“As far as I am aware, this work has not been done, by any of the small economy groups set-up by international institutions. In fact, the IMF and World Bank have not distinguished between small countries and large in their policy prescriptions.”
He lamented that “the same suite of policies is expected to produce similar results in Barbados and Brazil, because they are both categorised as emerging market economies, even though Brazil has a population that is over six hundred times as large as Barbados”.
Worrell defined SVOEs as “as those economies with population and total GDP so small and limited that they must specialise in a handful of exports and services to enable them to become competitive on international markets”.
“Small very open economies are 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.”
“With respect to monetary, fiscal, and exchange rate policies, the most accessible framework for such economies is an exchange rate anchor, where the foreign currency market is balanced by managing aggregate demand, using fiscal policy.
“The most sensitive indicator of fiscal sustainability derives from the fiscal impact on the balance of external payments and receipts. It has also argued that expansion in the small very open economy is sustainable only if led by the sectors that earn or save foreign exchange.”
Worrell also said SVOEs “have negligible scope for import substitution, and an open financial account” and noted that such structural characteristics “define the policies that are effective in SVOE’s”.
He added: “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.” (SC)