Source: Routledge.
DeLisle Worrell, Development Stabilization in Small Open Economies: Theories and Evidence from Caribbean Experience. Routledge. 2023.
Price: USD $54.95 | 442 pages
DeLisle Worrell’s Development and Stabilization in Small Economies: Theories and Evidence from Caribbean Experience is a work of love by one of the masters of Caribbean economics. Armed with a Ph.D. in Economics from McGill University, Worrell has had a long and distinguished career, including working at the International Monetary Fund (IMF), fellowships at Princeton and Yale Universities and the Peterson Institute, and a long connection to the Central Bank of Barbados—where he served as Governor from 2009 to 2017. When he is not publishing, he is a member of the Bermuda Financial Policy Council, the Bretton Woods Committee, and the College of Central Banks, Federal Reserve Bank of Philadelphia. His current work covers considerable ground on development economics of small open economies.
The main thrust of Development Stabilization in Small Open Economies “is about the implications of small size for the design, targets and implementation of macroeconomic policy, a topic which has not received the attention it deserves during the last four decades.” One of the key factors in impacting these calculations is foreign currency valuations. Worrell contends that part of the problem on the policymaking side—which extends to assessing financial assistance at multilateral lending institutions—is that models used by IMF staff and others to assess Caribbean policies “base their specifications on their experiences, which are of European and North American countries.” This includes factors such as the “dominant currency paradigm,” which encompasses the relationship between nominal exchange rate fluctuations and other nominal and real variables which depend on the currency in which prices can be rigid.
Another issue related to the currency issue faced by small open economies is that their international commerce operates, “in terminology which has become familiar in the context of small renewable energy production, on a buy all/sell all” basis.” This means that small open economies, like those in the Caribbean, face an economic landscape in which their small size and limited range of skills, resources, and productive capacity leave them with a handful of goods and services with which they can compete in international markets. As Worrell explains, “The stability of the small economy is secured by a balance between what they earn in foreign sales and prudent foreign borrowing, and what they spend on purchases from abroad. The growth of the economy depends on selling more abroad, through increased productivity and increased capacity to produce competitive products and services.”
In this context, small open economies are economically fueled by foreign currency. For example, many Caribbean economies have competitive tourist sectors and exports—such as the Dominican Republic, Jamaica, and Guyana—which earn foreign currency. This in turn helps attract foreign investment. The inward flow of external capital is converted into local currencies, which then go to public utilities, transportation, communications, banking and insurance services, and wholesale and retail activity. In turn, spending on these areas generates imports of fuels, vehicles, equipment, building materials, and consumer items. Any surpluses go into foreign reserves. In this sense, Worrell’s punchline is that, “The economy will grow only when the earnings of foreign currency increase; or when there is major foreign investment.”
Worrell adds that “Government spending on public utilities, health infrastructure or housing may be a national priority, but unless such spending is funded by borrowing from abroad it will be counterproductive, because the imports that would result from the additional activity will deplete the foreign reserves. From the point of view of both growth and stability, the conclusion that foreign currency is what animates the small open economy is inescapable.” This is something that needs to be taken into greater account in looking at small open economies from a model and policy standpoint.
Development and Stabilization in Small Open Economies is divided into four overarching sections. Section A describes the evidence on which the theory and model of Section B are founded. That evidence is not solely from the Caribbean, but is derived from 41 small open economies and considers indicators of human well-being and the changes that have occurred over the past three decades. Chapter 3 (part of Section A) includes case studies of Barbados, the economies of the Eastern Caribbean Currency Union, the Dominican Republic, Trinidad and Tobago, Belize, Cuba, Iceland, and Mauritius. The parts on Barbados, Cuba, and Mauritius are particularly insightful.
Section C expands on the practice of economic policy-making, including the skills and knowledge needed and the proper use of the tools of the discipline. Section D rounds off the book, with chapters on institutions, the global context and changes, and a technical overview of the Human Development Index.
Chapter 19, Practical Guidance for Policy Makers in Small Open Economies, is among the most useful chapters. Here, Worrell ties together the many strands he touches upon throughout the book and underscores what he believes is the need for economists and policymakers to make better use of the Human Development Index (HDI) as the measure of economic success. In many ways, this points to the simple equation that a happy and healthy population is more productive. It also points to a policy framework that improves on the collection, analysis, and timely public distribution of HDI data, “so that the public could be kept abreast of improvements that might be expected as the economic strategy unfolds.”
Another key point is that for any economic program or strategy to succeed, it must be sold to the public. As Worrell notes, “The strategy needs to be sold to the local economy on its merits, with quantitative targets and deadlines with which everyone can mark its progress; and it has to be presented to the world in an informed, analytically sound and persuasive manner.”
In 2010, Worrell gave an address to the Barbados Economic Society in which he stated, “Back in the sixties, when I began my career in economics, we were all too aware of the limitations of the discipline: it was static where the world was dynamic, it assumed competitive markets where few existed, it assumed rationality when we knew full well that economic agents were not rational (at least not by the definition economists use), the choice of first principles was always arbitrary and culture bound, economics had no way of dealing with changing tastes and technology, and much else besides.”
Some time has passed since that speech and Worrell’s book does much to address many of those issues. Worrell’s Development Stabilization in Small Open Economies is highly recommended not only for Caribbeanists, but also those interested in challenges faced by small open economies, students, and policymakers—including those in multinational organizations.
Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings, Research Fellow at Global Americans, and Founding Member of the Caribbean Policy Consortium. His latest book, The New Cold War, China and the Caribbean, was recently published by Palgrave Macmillan.
