Dear Editor,
Please permit me to make a few remarks about your editorial of February 16, 2007 captioned “The role of the mandarin”. I would like to reposition one of Mr. William Demas’s conditions for development which the editorial restates: “A very small country can achieve transformation only with a high ratio of foreign trade to GDP.”
Essentially, I would interpret that to mean development requires that a country be able to continuously pay the bills for structural transformation and diversification of production. Small open economies such as Guyana, Jamaica or Botswana do not possess a key international reserve or internationally convertible currency. Hence, those economies face a perpetual foreign currency constraint, which means they do not always have the money (or the internationally acceptable medium of exchange) to pay the bills for structural transformation. Unfortunately, the world is organized this way since the demise of the classic gold standard in 1914 (or more specifically the demise of the Bretton Woods system in 1973 and the formation of a de facto dollar standard since the Jamaica Agreement of 1976) and in order to develop the authorities must find the right balance of strategies to manage the constraint.
While at first glance it might seem very obvious, the constraint determines almost everything people do in small open economies. The amount of capital goods and intermediaries we can import; how fast we can grow in the long-term; how much we can pay teachers, police officers, nurses and all workers for that matter; how much technology we can import; and even the level of excess liquidity the banks demand are all determined by the foreign currency constraint. Therefore, it is not a trivial matter and development and sustained long-term growth will require finding innovative ways of dealing with the constraint. There is simply no other way.
Fortunately, one way to manage the constraint is faster and deeper regional integration. Indeed, the abovementioned editorial alluded to this (so too did your lead article on the Caricom Single Economy of March 6, 2007). Regional integration will save foreign currencies. However, each country within the region and the region as a whole will still need to focus on an export promotion strategy of development. Exports (from the periphery – the Caribbean) do not only need to be manufacturing, but also services such as tourism, offshore banking and back office services for the centre.
To truly save on foreign currencies, however, there will have to be Caribbean monetary integration, and fast. Indeed, while not fast enough, policies are in place to get there. To convert the Caribbean into a monetary union (or optimum currency area) it will require free labour movements, free capital movements, and greater intra-regional trade. As a start, the Trinidadians and Jamaicans will need to buy Guyana’s rice; especially since Guyana cannot subsidize her rice producers like America, which is a source of cheap subsidized rice in the Caribbean.
Monetary union, moreover, will require another constraint managing mechanism such as a regional stabilization fund, which is different from a regional development fund like the CDB. It is likely that Guyana and Trinidad and Tobago, for instance, will run sustained intra-regional current account surpluses against say Barbados or Antigua. One might argue that a common currency will obviate this problem. However, that is not the case if one starts from the premise of intensified intra-regional trade. Greater trade within the region will ultimately lead to winners and some occasional losers. Since greater regional welfare (and development) requires continual expansion of trade, then the winners must stand ready to finance the short-term payments problems of the losers.
However, the region (the periphery) will still need to run current account surpluses vis-
