Monetary and Economic Problems of Small Island Economies: The Caribbean Case

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 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/291440 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. 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I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ 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* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 228 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 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). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 230 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 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 232 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). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 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). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37 234 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). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.99.1-2.227 | Gene a ed on 2023-04-04 11:56:37