C usol, Jean
A icle
Mone a y and Economic P oblems o Small Island
Economies: The Ca ibbean Case
Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de
Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: C usol, Jean (1979) : Mone a y and Economic P oblems o Small Island
Economies: The Ca ibbean Case, Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS)
- Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü
Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol. 99, Iss. 1-2, pp. 227-236,
h ps://doi.o g/10.3790/schm.99.1-2.227
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Mone a y and Economic P oblems
o Small Island Economies
:
The Ca ibbean Case
By Jean C usol*
The ollowing p oposi ions a e he ou come o he empi ical s udy
o he main ea u es o he economic de elopmen o se e al Ca ibbean
Islands, namely: Ba bados, Guadeloupe, Jamaica, Ma inique, Pue o-
Rico and T inidad, du ing he las 25 yea s.
These a e small insula economies cha ac e ized by:
— Indi idual popula ions unde 3 million inhabi an s in he 70's and
su aces all smalle han 15,000sq km.
— Economic s uc u es highly specialized in he expo o one o wo
commodi ies, which gene ally ep esen mo e han 50 °/o o he alue
o expo s1: suga and bananas in he F ench islands, bauxi e and
oil in Jamaica and T inidad, p oduc s o ligh indus y in Pue o-
Rico, ou ism in Ba bados.
— These expo s ake place wi hin he ame o p e e en ial ag ee-
men s, p o i ing by quo as on me opoli an ma ke s o by la ge
o eign i ms.
— A e y es ic ed sec o p oducing o he domes ic ma ke , and
consequen ly high impo and expo coe icien s (impo coe icien
> 50 o/o, expo coe icien be ween 15
%>
and 50 ^/o).
Ma inique and Guadeloupe a e F ench o e seas depa men s and
hus assimila ed wi h he ench economy. Pue o Rico is a "F ee asso-
cia ed S a e" pa ly go e ned by US laws and ins i u ions. Ba bados,
Jamaïca and T inidad a e indépendan .
Despi e hose di e ences, all o he islands had, in he pe iod
1950 -1975, a as economic g ow h, he a e age yea ly a e o g ow h
* Cen e Uni e si ai e An illes-Guyane.
This is a e ised e sion. I am deeply endeb ed o P o . Ha y G. John-
son and P o . Emil M. Claassen, as well as o he pa icipan s a he Con e-
ence, o nume ous c i icism and imp o emen s. E iden ly, all my e o s
a e my own esponsabili y.
1 All s a is ical da a om ou hesis: "Island Economy and Fo eign O ien-
e De elopmen " (Economie insulai e e dé eloppemen excen é, 1977).
15*
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228 Jean C usol
eaching 10
Vo
in nominal e ms, and 4%> o 5% in eal e ms. Besides,
hey ha e wo common p oblems:
— hei a e o unemploymen has emained, h oughou he pe iod,
o e 10%>,
— hei balance o ade shows a ch onic de ici . The a ios o impo s
o expo s eached be ween 70 % (T inidad) and 25 °/o (Ma inique)
in he ea ly 70's.
These a e he main p oblems ha insula au ho i ies ha e been
acing o many yea s.2
The emedies gene ally p oposed o hese wo p oblems by cu en
economic heo y can be oughly classi ied in o wo main ypes o econ-
omic policies:
— hose ha p i ilege he " eal" ins umen s,
— hose ha p e e o eso o mone a y ins umen s.
A he le el o diagnosis, hese wo s eams o hough ejoin. Un-
employmen is mainly due o insu icien capi al and he domes ic in-
es men a e. The balance o ade de ici is a esul o insu icien
g ow h and he compe i i eness o expo s. Bu he p oposed economic
policies a e di e gen : Fo he i s school o hough , he ise in he
o eign in es men a e is bound o inc ease employmen and de elop
expo s. Fo he second one, he manipula ions o money supply and o
he exchange a e should lead o he same esul s.
Ou pape s consis s o ou sec ions:
1. The " eal" policies based solely on he aising o he in es men
a e (domes ic o o eign) do no gua an ee he sup ession o unemploy-
men in insula economies. In ac , he ise o he in es men a e can
go on a pa wi h he pe sis ence, e en wi h he inc ease o unemploy-
men and o he balance o ade de ici .
2. Conside ed sepa a ely, mone a y policies (whene e possible
wi hin he ins i u ional ame) canno co ec he unbalances we a e
dealing wi h. I is e en possible ha he eal s uc u es hinde hem,
make hem inope a i e o ha m ul.
3. The eason o hese ine iciencies lies in ha hese policies a e
based on heo e ical concep ions ha ce ainly accoun o he unc-
ioning and de elopmen o big indus ial economies, bu do no neces-
sa ily shed any ligh on he mechanisms and s uc u es esponsible o
2 In he F ench islands, he balance o ade de ici is no conside ed as a
p oblem.
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Mone a y and Economic P oblems o Small Island Economies 229
he unbalances in insula economies, unde de eloped and open. A
policy in ended o sol e hese p oblems should begin wi h a speci ic
in e p e a ion o hei causes, wi hin he ame o he economies in
ques ion. We shall gi e a b ie ou line o such an in e p e a ion.
4. The main poin s o an economic policy a e ou lined.
I. Rise o he in es men a e, unemploymen
and ex e nal unbalance in an insula economy
To suppo ou i s p oposi ion, we ha e plen y o empi ical da a
a hand. Since he 50's he p incipal o ien a ion o economic policies
implemen ed in mos o he islands has been o a ac o eign capi al
and aise he public in es men a e.3 The ins umen s o his policy
ha e been o g an iscal educ ions o o eign capi al and build in-
as uc u es ha would allow a ise in p oduc i i y. As a esul o
hese policies, all he islands ha e had a mos ema kable ise in hei
g oss in es men a e in he las 25 yea s. The a io o g oss capi al
o ma ion o g oss domes ic p oduc has gone up om 10 -15 °/o in he
50's o 25 - 30 °/o in he 70's, whe eas he pa o ex e nal in es men
(public and p i a e) in o al in es men eached 50 °/o o mo e.
Ye , a he same ime, he a e o unemploymen emained a he
same le el e e ywhe e and du ably a 10 °/o o mo e. A ew examples:
In Pue o-Rico i has gone om 12,9
^/o
in 1950 o 10,8
<Vo
in 1970 and
19,1 °/o in 1975. In Ma inique i wen up om 11,6
%>
in 1955 o 21,5 «/o
in 1967 and 26,3
%>
in 1972. In Jamaica, i wen om 17
Vo
in 1955 o
13,4 % in 1960 and 20,5 Vo in 1974.
The e o e, he ise o he in es men a e has no educed he a e
o unemploymen . Nume ous examples like hese exis o o he pe-
iods and o he islands.
As o he balance o ade de ici , i also appea s ha he in-
c ease o he g oss in es men a e wen on a pa wi h i s appea ance
and i s pe sis ence (o i s inc ease). In all he islands, he ade
de ici appea ed in he yea s 1940 -1950. In he subsequen pe iod,
i inc eases slowly in Jamaica, Pue o-Rico and T inidad, he a io o
impo s o expo s dec eases in hese islands, going down om 85%
o 65lo/o in he ea ly 70's. In he F ench islands and Ba bados, i in-
c eases much mo e apidly, he a io going down om 70
%>
- 80 %
in he 50's o 25
%>
-
30 «/<>
in he 70's.
The e o e, he inc ease in he in es men a e has gone on a pa wi h
he pe sis ence (and e en he inc ease) o unemploymen and balance
o ade de ici .
a C . Le Plan des DOM 1966-70, Lewis (1950) and Echenique (1963).
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230 Jean C usol
II. Mone a y policies and insula economies
In ac , he e a e wo possibili ies o e ed by a mone a y policy:
— One o hem consis s in inc easing he money supply o lowe he
in e es a e and acili a e he inancing o in es men . I is based on
he concep o he c edi mul iplie
AS
A
G = wi h 0 < < 1
whe e AG is he c ea ion o money
he a e o bank ese es
A
S he inc ease in ese es
We know ha o be comple e, his mul iplie mus ake capi al lows
in o accoun : owa ds he non banking sys em (C) and owa ds he
ou side (d).
The mul iplie hen becomes:
A S
A G = — : ™ h 0 < C < 1
+
(C
+ d)
(1
- )
Bu se e al ac o s end o educe he signi icance o his concep in
insula economies (Thomas 1972). On he one hand, he e is no ixed
ese e a io o comme cial banks in he english speaking islands. On
he o he hand, in e y small economies, e y open, C and d a e e y
high and e y a iable.
Besides, empi ical da a show ha , in p ac ice, comme cial banks ha e
a s ong p e e ence o sho e m inancing o he pu chase o con-
sume goods and impo ed goods and a e loa h o commi hemsel es
o long e m new ac i i ies o p oduc ion.
Finally, he a e o exchange being ixed and he " eal" and mone a y
ela ions wi h he ou side o e whelming, he c ea ion o money ends
o ha e immedia e epe cussions on he balance o paymen s and make
i s di icul ies wo se.
— The second ype o mone a y policy has as i s goal o wo k di ec ly
on he le el o he balance o paymen s. Conside ing ha ex e nal un-
balance and unemploymen a e he esul o insu icien compe i i e-
ness, expansion o expo s and/o p oduc ion o he domes ic ma ke ,
i p oposes de alua ion as a quick way o lowe expo p ices and aise
impo p ices (in domes ic cu ency) (c . Lewis 1972).
I we suppose ha he economy has he adequa e impo (nm) and
expo (nx) demand elas ici ies i. e. nm > 1, nx > 0 and em = 0, one can
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Mone a y and Economic P oblems o Small Island Economies 231
expec an expansion o expo s ha would se s aigh he balance o
ade and abso b unemploymen .
Bu , because we a e conce ned wi h small economies, s ongly ex-
po -biased and wi h limi ed esou ces, e en hough in he e y sho
e m he elas ici ies a e adequa e, one mus suppose ha in he middle
e m, igidi ies come up a he le el o he domes ic supply o consume
goods and b ing abou a ise in hei p ices. The wo ke s will eac o
he ela i e de e io a ion o hei pu chasing powe by in ensi ying
hei indus ial demands and he sa is ac ion o hese demands will
induce a ise in nominal wages and e e y hing else being equal, d op
in he compe i i eness o expo s. So ha once he p inciple o he
change o he exchange a e is accep ed, i is no a de alua ion, bu
an exchange a e policy ha mus be en isaged. Then, he e is a choice
be ween wo main op ions:
— an (ac i e) policy o exchange con ol;
— a (neu al) policy o lexible exchange a es.
Bu wha e e op ion is chosen, he a ia ions o he exchange a e
will b ing specula ion on he cu ency (and consequen ly ha m ul e -
ec s o he balance o ade and he in es men a e), as long as he
exchange a e is no op imum (See Taylo 1974).
Conce ning he al e na i e consequences o hese a ious mone a y
policies in he islands, empi ical da as a e non-exis en . Fo , al hough
o o e en yea s he au ho i ies in he independen islands ha e had
he legal possibili y o implemen ing ac i e mone a y policies, in
p ac ice hey ha e always ollowed passi e policies, keeping a ixed
exchange a e and he con e ibili y o cu ency in o he dominan
cu ency4 (i. e. he pound S e ling) (Thomas 1972).
In ac , a se e al le els, ac o s appea ha se e ely es ic he
possibili ies o an ac i e mone a y policy in he islands:
— On he le el o economic s uc u es, he hea y specializa ion in a
ew p ima y p oduc s sold on expo ma ke s and he high impo
coe icien ;
— On he ins i u ional le el, he s ong hold o o eign en e p ise and
capi al on insula esou ces and he p edominance o o eign o
me opoli an inancial in e media ies;
— On he unc ional le el, he ecou se o a de elopmen policy based
on he a ac ion o o eign capi al and on he access o me opoli an
p e e en ial ma ke s, namely a o eign o ien ed de elopmen policy.
4 Jamaica has s a ed ecen ly a policy o exchange con ol.
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232 Jean C usol
In hese ci cums ances, insula au ho i ies ha e sc upulously ab-
s ained om eso ing o he manipula ion o he mone a y policy in-
s umen s. Ye he "ou -cen e ed" de elopmen policies ha e allowed
a e y as g ow h o he income pe -capi a in he las wen y- i e
yea s. And i we admi ha he ya ds ick o de elopmen is he ise
o his indica ion, one migh conclude ha he o egoing a i ude has
been e icien .
Bu , i we ecognize ha de elopmen does no iden i y i sel wi h
he g ow h o he income pe capi a, bu supposes a change in he s uc-
u es and he eliminai on o he unbalances o unde de elopmen , we
canno emain sa is ied wi h he achie emen s. Fo he e y mode o
g ow h is in ol ed which is esponible o a causal ela ionship be ween
he balance o ade de ici and unemploymen .
III. Speci ic in e p e a ion o o eign
o ien ed de elopmen in an insula economy
In o de o unde s and he mechanisms linking he p ocess o o eign
o ien ed g ow h o he ex e nal unbalances and o unemploymen in
insula economies, we ha e o ake a long e m iew o he economic
e olu ion o he islands.
In he 40's and 50's, he adi ional economy o he islands consis ed
on one side o a dominan plan a ion sec o , p oducing one o wo ex-
po p oduc s, cha ac e ized by a compa a i ely low p oduc i i y and
ela i ely low wages, a s ong hold o ex e nal capi al5 and a e y
la ge ecou se o impo s.
On he o he side, an emb yonic domes ic sec o (domes ic ag icul-
u e, handic a s, and indus y) in which p oduc i i y and he le el o
wages a e ha dly highe han hose o he plan a ion sec o . Fo he
insula economy as a whole, p oduc i i y and he a e age a e o wages
as well as he consump ion le el a e lowe han in me opoli an eco-
nomies6.
The de elopmen policy in use consis ed o inc easing ex e nal
(public and p i a e) in es men , ha is o say o jux apose o he a-
di ional economy a new sec o comp ising comme cial, indus ial
mining and inancial ac i i ies, a sec o cha ac e ized by a le el o
p oduc i i y and a echnology e y close o he le el ob ained in in-
dus ial "me opoles" (in he same sec o s), and a p ocess o p oduc ion
and inancing e ically in eg a ed in o he me opoli an economies.
5 Excep in Ma inique and Ba bados.
« On his in e p e a ion c . Bes and Le i (1969) and Bes (1972).
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Mone a y and Economic P oblems o Small Island Economies 233
The implan a ion o his sec o , ha we call he New Ve ical Sys em
(NSV)7 has se e al consequences on adi ional insula economy:
1. F om i s c ea ion, i has de e mined a conside able inc ease in
p oduc i i y because o he labou ha i abso bs. The a e o wages
being empo a ily a he le el p e iously de e mined in he adi ional
sec o , a compa a i e ad an age is c ea ed in a ou o he islands, in
compa ison wi h he condi ions o p oduc ion ob ained in he indus ial
me opolis. We ha e:
Yd ^
7x W,
wi h y s anding o p oduc i i y,
W he a e o wages,
d and x ep esen ing he island and he ou side wo ld espec i ely.
The a e o p o i being high, he NSV ends o widen e y apidly.
2. The in eg a ion o insula labou in he NSV has wo o he con-
sequences in he middle e m:
— on he one hand, he condi ions o o ganiza ion o he said labou
imp o e apidly (by way o concen a ion and u baniza ion);
— on he o he hand, he publici y and c edi dis ibu ed by he NSV
end o exagge a e he popula ion's p opensi y o consume ( he
a e age p opensi y o consume has been g ea e han 1 in Pue o-
Rico since he 1950's and in Jamaica since 1970's) and o di ec
as es owa ds he p oduc s o he NSV, i. e. impo ed p oduc s o
impo subs i u ion p oduc s manu ac u ed om impo ed in e me-
dia e goods. The ma e ial aspi a ions o labou inc ease, indus ial
demands ge mo e in ense, he esul in he medium e m being he
inc ease o he nominal a e o wages o a highe hy hm han ha
o he me opoli an nominal a e o wages (in he same sec o ). This
is made possible by he g ea di e ences exis ing om he s a
be ween wages and p oduc i i y in he NSV and by he alignmen
o insula wage demands on hose o he me opoli an ade unions.
Wage inc eases cause he ise o impo demand (o he ise in he
demand o he p oduc s o e ed by he NSV, which is he same hing).
Bu he inc ease in he impo ed pa o consump ion and insula in-
pu s in eg a es mo e and mo e la gely he in luence o ex e nal in la-
ion and o he cha ges weighing on impo p ices ( anspo , eigh ,
comme cial ma gins, e c...) in he de e mina ion o he le el o do-
mes ic p ices.
7 New dynamic sec o in he e minology o Bes and Le i (1969).
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234 Jean C usol
This ends o cu eal wages and u ges he wage ea ne s o s eng hen
hei igh in he iew o he inc ease o nominal wages. Thus a cu-
mula i e ci cle is c ea ed, in which he inc ease o nominal wages
acili a es he inc ease o he pa o impo ed consump ion and whe e
he e ec o he la e on he eal wages leads o he in ensi ica ion o
wage demands and o he inc ease o nominal wages. The inc ease o
he a e o nominal wages ends o lowe p o i abili y in he ac i i ies
o he NSV. To a oid his educ ion, p oduc i i y has o ise a he
same hy hm wi h he a e o nominal wages.
Bu , as p oduc i i y in he NSV is close o he me opoli an le el,
i s a e o g ow h is limi ed by ha o me opoli an p oduc i i y. In so
a as, in he me opolis, he a e age wage ises almos a he same
hy hm as p oduc i i y, in he islands, he a e o nominal wages will
ise mo e apidly han p oduc i i y, i. e.:
AWd ^ Ayd ^ Ayx
m
Wd yx yd
Thus appea s a endency o a decline in compe i i eness o , i one
p e e s, o he compa a i e ad an age o he islands.
Bu in so a as o he accessible e i o ies exis whe e he a es o
nominal wages a e lowe han in he islands, capi al will mo e ou o
hese e i o ies. Thus, new compe i o s appea , whose e ec is o com-
p ess expo p ices o insula p oduc s on me opoli an ma ke s. In
hese condi ions he de e io a ion o he compe i i e posi ion o he
islands can only be slowed down by capi al in ensi ica ion, he a-
ionalisa ion o cos s and he eplacemen o labou -in ensi e ac i i ies
by mo e capi al-in ensi e ac i i ies. All o his means he educ ion o
he a e o abso p ion o labou in he NSV8.
In he long e m, as we a e dealing wi h e y small economies, he
inc ease o nominal wages in he NSV a ac s labou om he adi-
ional sec o s, whe eas he ise in domes ic p ices ends o dep ess i s
eal income and b ings i o inc ease i s " ese e p ice".
In he plan a ion sec o , he en ep ises canno e lec he cos in-
c eases in expo p ices (because i is an ag icul u al ac i i y, com-
pe i ion is s ong). They ha e o a ionalize cos s o disappea .
In he domes ic sec o , en ep ises whose p oduc i i y and inancial
capaci y a e al eady weak, ha e o ace a he same ime he inc ease
in cos s and he compe i ion om impo s. They also ha e o a ionalize
8 Fo a s udy o his phenomenon in he sho e m, see: Gu ie ez (1971),
He e o and Cas aneda (1971).
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