By Paul Hay
In 2003, Alvin G. Wint – former head of the Department of Management Studies at the University of West Indies, Mona Campus – noted in his book, “Competitiveness in Small Developing Economies: Insights from the Caribbean,” that dependent territories in the Caribbean typically have the smallest economies but the highest per capita incomes.
Early in the 1960s, when most Caribbean countries were either dependent or newly independent, territories which would later form the Caribbean Community (CARICOM) could be listed from the highest to lowest per capita income as: Trinidad and Tobago, Jamaica, Barbados, Guyana, the Leeward and Windward islands.
Twenty years later, seven territories of the Leeward and Windward Islands formed a monetary union called the Organization of Eastern Caribbean States (OECS). Wint states that: while they “are politically independent, their monetary policy independence is constrained by their membership in this regional economic union”.
Later, the 2000/2001 World Development Report (WDR) classified Trinidad and Tobago, Barbados and most member states of OECS as having upper middle incomes, while the other CARICOM states had lower middle incomes. But, the Bahamas and dependent Caribbean territories were classified as having high incomes.
The dependent territories attributed their success to the global perception that they had lower political and economic risks. While many CARICOM member states were approaching 40 years of political independence at that time, this certainly seemed to have been the case.
Independent states adopted independent exchange rates in the 1970’s
Besides falling in ranks from the 1960’s per capita listing, Jamaica and Guyana both have flexible exchange rates.
With the exception of Trinidad and Tobago, other Caribbean countries use fixed exchange rates. According to Wint, “movement away from fixed exchange rates in the 1970’s gave developing countries the opportunity to adopt independent exchange rates for the first time…”.
The fact that Trinidad and Tobago did not share the same fate is instructive. Changes in exchange rates increased after 1973; and, “most non-oil producing developing countries experienced significant budgetary imbalances as a result of the quadrupling of oil prices in 1973”. Trinidad and Tobago, being an oil-producing state, would have been spared this experience.
Non-oil producing countries of the Caribbean typically use a significant portion of their export earnings for oil imports. Devaluation of the Jamaican and Guyanese currencies therefore inflated the value of their imports over their exports: thus making a bad situation worse.
According to Wint, “The advantage of fixed exchange regimes, on the other hand, tends to be the financial discipline they impose on governments”. With regard to OECS, it was stated that: the union “had forced on all the countries a degree of macro-economic discipline…”.
Caribbean Community agreed to establish a monetary union in 1992
In the mid 1970s, CARICOM formulated a compensation facility utilizing currencies of its member-states. The objectives of this facility were two-fold: to facilitate monetary stability, and to encourage trade. This was initially a bi-lateral facility, but in 1977 became a multilateral facility referred to as the CARICOM Multilateral Clearing Facility (CMCF).
CMCF’s objectives included the promotion of regional cooperation within the banking sector and also cooperation between member states. CMCF succeeded until the early 1980s, when Guyana defaulted on its debts and Barbados was unable to extend more favourable payment terms.
Recently, the CARICOM Secretariat in conjunction with the Guyana Bureau of Statistics hosted a seminar on the community’s trade performance, and it was stated that the intra-regional exports from 1973 – 1981 averaged 9 percent of total exports. Also, there was a decline in the 1980’s because of a debt crisis.
Nevertheless, the CARICOM Single Market and Economy (CSME) was conceptualized in July 1989 by then CARICOM heads of government at Grand Anse, Grenada. In 1992, the heads of government agreed to establish this monetary union. But, CSME was only a part of CARICOM’s development strategy in the midst of globalization: where size and strength were becoming increasingly important.
Caribbean Single Market and Economy stalls in 1993
CSME’s primary objectives are price and exchange stability, and reduction of transaction costs of regional trade. The secondary objectives are the stimulation of capital flows from intra-regional trade and investment, improvement of balance of payments, and increased growth and employment.
CARICOM member states were grouped into one of two classifications. States in category A were already compliant with the 1992 CSME criteria, and were only required to maintain monetary stability. States in category A were the Bahamas, Belize and the OECS: OECS having already been established as a monetary union.
States in category B had to make adjustments to become compliant. States in category B were initially Trinidad and Tobago, Barbados, Jamaica, and Guyana; but Suriname and Haiti were added later. The strength of regional currencies suggested a monetary union would have been straightforward, but this has proved otherwise.
A 3-phase implementation schedule was proposed. A Council of CARICOM Central Governors should have been established in phase 1. This phase included Trinidad and Tobago, Barbados, Belize and OECS. But, phase 1 stalled in 1993 when Trinidad and Tobago floated their currency; and, efforts to proceed without them failed.
Non-compliant states stalled the CSME
This failure was founded in the 1980’s, between the end of CMCF and conceptualization of the CSME. Paradoxically, it was due to issues of trade and monetary instability. The Barbadian government engaged in deficit spending in the run-up to the 1981 election. While, Trinidad developed a programme to diversify its exports to non-oil markets in response to a slump in oil prices in 1982.
By the mid 1990’s, Trinidad had substantially increased its non-oil exports, “particularly to the Jamaican market”. But, when Jamaica liberalized its exchange system in 1991, Trinidad followed suit in 1992 floating its currency to provide incentives for its exporters.
Trinidad’s trade policy began with protectionism, which led to reduced earnings for Barbados. Coupled with that government’s fiscal relaxation in 1986, this gave rise to a financial crisis in 1991: where Barbados’ net international reserves dropped to three weeks of imports.
Economic development in CARICOM improved after 2002
In an article titled “Jamaica and the Caribbean Community” published in the Jamaican Gleaner of 24 November 2013, Byron Blake – former assistant secretary general of the CARICOM Secretariat – wrote that the Bahamas, which was one of the compliant states, “was not prepared to join the CSME” and could have been excluded from CARICOM were it not for a “special pact” signed between themselves and CARICOM.
Nevertheless, there was exceptional growth in intra-regional trade from 2002 – 2008, and the CARICOM Single Market was established in 2006. Growth in trade contracted as a result of the global economic and financial crisis. But, intra-regional trade is now 17.2 percent of total exports. This is almost double the rate in 1981: Trinidad and Tobago being the dominant exporter to the region.
WDR 2012 indicates that Trinidad and Tobago, and Barbados had joined the Bahamas as high income economies. Data for both were not included in WDR 2014, so it is uncertain whether this was sustained. However, the report indicated that OECS states of Antigua and Barbuda, as well as St. Kitts and Nevis had high incomes.
This seems to indicate the initial set-back associated with political independence has now been overcome. Now, the real threat to economic development is the misuse of political independence, particularly with regard to macro-economic stability. The example of Barbados is instructive in this regard: as a non-oil producing state.
Barbados restored macroeconomic stability without devaluation
In 1973, mercantile exports of many developing countries, including Barbados, increased. Barbados exercised fiscal conservatism by off-setting increased expenditure on oil with increased inflows from exports, and created a surplus fund.
Barbadian policy makers were cognizant of the negative impact devaluation had on its CARICOM colleagues: Jamaica and Guyana. According to Wint, these “policy makers illustrated that the macroeconomic stability of which the exchange rate was a symbol would be supported by prudent economic policy and fiscal conservatism”.
This approach was taken to deal with its deficit spending of 1981, and “fiscal correction was so comprehensive that it allowed Barbados to negotiate a standby agreement with the IMF without requiring any discussion on exchange rate adjustments”. This approach was again successfully applied in dealing with its 1991 crisis.
The Barbadian example shows that “…a fixed exchange rate as a nominal anchor does not necessarily reduce the temptation to resort to fiscal impudence and a corresponding inflation tax, but it does induce a rapid return to fiscal propriety if the anchor is not to be lost”.
Conclusion: Political independence requires fiscal propriety
It is therefore incomprehensible that a reputable financial institution such as Moody’s could recommend that OECS be dismantled and the Eastern Caribbean Dollar devalued. It could also be inferred from this recommendation that CARICOM should abandon CSME and the use of a common currency.
But, the facts support the response of Sir Dwight Venner – Governor of the Eastern Caribbean Central Bank – that “Evidence to the contrary suggest that the stability of the deposits in the banking system have been anchors on which the stability of our economies and financial system has been built over the last three decades…”
Macroeconomic stability is essential for growth in two dominant service industries in the Caribbean: international financial services and tourism. Macroeconomic stability is necessary for the full implementation of CSME. It is not necessary for OECS or CARICOM to change course.
A Caribbean Monetary Authority (CMA) is proposed to be established in phase 2 of the CSME, which will be accountable to a Council of Finance Ministers. Then, a common currency will be issued to settle regional transactions. Finally, Guyana and Jamaica will be admitted, on becoming compliant. Phase 3 requires all states to enter the monetary union as well as CMA membership.
The Revised Treaty of Chaguaramas, which was concluded in 2001, has the objectives of improving administration of trade, increasing the scope of trade to include services, and facilitating regional investment. International concerns should not be allowed to derail the progress made. Otherwise, political independence in the Caribbean will truly have been at the expense of economic development.
Paul Hay, a Caribbean Journal contributor, is the founder and manager of Paul Hay Capital Projects.