[00:00] Rasheed Griffith: Hi everyone, welcome back to Caribbean Progress. Today we are going to be speaking with Dr. DeLisle Worrell. He is a member of the Bermuda Financial Policy Council, the Bretton Woods Committee and the College of Central Bankers.
[00:18] He is also the former Governor of the Central Bank of Barbados. Today we are going to be speaking about his new book, recently published this year, titled Development and Stabilization in Small Open Economies, Theories and Evidence from the Caribbean Experience.
[00:32] We are going to have a wide ranging conversation from monetary policy to political economy about his ideas developed most concretely in this new book about how Caribbean management should be done.
[00:46] So Dr. Worrell, very happy you joined us today. I'd like to discuss some of the topics that you wrote about in your very recent book, Development and Stabilization in Small Open Economies, which came out this year with Routledge. And it is a very dense book, although it is not particularly super big, but it's a very dense book in itself. And you cover many topics, some that are essentially very unexplored in most theory about the Caribbean.
[01:15] But I want to start with the topic of small economies in the world. And in this instance, people tend to not really have a clear realistic view, as in a view that coheres to the facts about small economies. And they typically use their general large economy, large export base, large import base, macro models to impart that same theory on small economies. But in reality, that doesn't really work.
[01:45] And you mentioned in your book to quote, you said, “The policymaker must understand that the nation is not the economy. The economy is an exchange of national output with the rest of the world and internal circulation, which that exchange permits.” Well, that to me, granted growing up in a small economy makes total sense, as is quite obvious. But why did this specific conception of small economies become a minority view in a general conversation of economic policy globally?
[02:14] Dr. Worrell: Right, so the critical word that you just mentioned is conception. The view that I have expressed in my book is something that is new even to me, because our conception of the economy originates with the nation. And so we think of the economy as being self contained entity, which both produces and consumes. And so there is an internal economy, which is self reproducing in a sense. And then there's an external sector, which is an add on to that internal economy. And it is only through a process of working through the implications of that, that I have now come to realize that a small economy is not like that at all.
[02:58] That a small economy, the external commerce is the economy. And without the exchange of goods and services and payments and so on with the wider world, then there is no domestic activity in a small economy. None. So the total economy is effectively a multiple of what the small economy sells to the rest of the world. But even that multiple goes to zero if there are no sales to the rest of the world. So the essential mechanism of the small economy is more like the mechanism of a household.
[03:36] The household can't, that's if there's an internal economy of housework and so on. But that economy depends on the export of wages to the community so that there's income with which to purchase goods and services from the community. If there is no wage income, if you are unemployed, if you have no wages, then you don't have a means of supporting your livelihood.
[04:01] And similarly, the small economy, the essential difference in the small economy, and it is something, as I said, that I've had to work by way of recognizing is in the goods and services that you sell to a wider world. There is no internal economic activity unless there is export.
[04:21] Rasheed Griffith: So this is, I think, a very good starting point to think about the many policy rules, our policy ideas that a lot of Caribbean governments and most small economies have when it comes to setting macro policy.
[04:35] One of these policies that is somewhat of a toy example, but it's the real things that governments say, is the whole idea of food security. In the sense that, the idea is we should, we meaning the small country, should grow more food at home, consume more food at home for some kind of idea of reducing the import bill and reliance on the rest of the world. And that to me is kind of a crystallization of the drawbacks of thinking about the small economy as an isolated venue because even especially in food essentially, you can't actually grow anything of substantial variety in a small economy.
[05:15] But yet this is something clearly that's being said every week, it seems, on the news internationally in terms of thinking about how do the small economies support themselves. And they always use the example of food. And I can remember even years ago, you started by using that example of why that has a crystallized view of why people think about the small economy in very weird ways, and especially why they think about the balance of payments in very weird ways.
[05:40] Dr. Worrell: Absolutely. The way to secure, to deal with food security, of course, is to have income and savings so that you have rich countries, for example, are never food insecure. And the populations of rich countries are also never food insecure, so long as income is reasonably well distributed.
[06:02] And it has been established that famines, for example, happen, not because people don't produce their own food, they happen because people produce their own food, but they don't have an income outside of their own food production.
[06:15] So in fact, producing your own food in small economies is just not possible. But in fact, it reduces your food security, even for those things that you produce, because when there is crop failure, it means that you have nothing to eat. Whereas if you have income, you can always satisfy your needs from the bounty that is in the rest of the world.
[06:39] And as I said, these are things that become clear once you understand that the essential fuel of a small economy is the foreign exchange that you earn, that you borrow from abroad. It also relates to things like the currency and questions of monetary sovereignty. There is no monetary sovereignty in a small economy. They cannot be, because the money that matters for all economic activity is the US dollar.
[07:08] Rasheed Griffith: So let's dive into this point, the foreign currency constraint. So I guess it is somewhat well known amongst Caribbean economists that there is a hard foreign currency constraint on the small economies. And this is usually what leads to the persistent number of balance of payment crises throughout the region. And again, in most small economies, I think even in 2023, most people internationally always remember the Greek crisis when it comes to this particular problem.
[07:38] But of course, it happens everywhere almost all the time. It's currently one happening in Argentina, currently one happening in Bolivia, they were riots in Bolivia last week, just for this same kind of problem. And this is a big issue in the Caribbean for decades and decades. Could you explain in more detail what exactly is the foreign currency, foreign exchange constraint in small economies? And then we can discuss some of the reasons why it doesn't really make it into the standard models of macro policy in the Caribbean.
[08:06] Dr. Worrell: Right. So I no longer talk about the foreign currency constraint, because the constraint actually is the productive capacity of the economy. That productive capacity can be expanded indefinitely if you are able to maintain your international competitiveness. That is to say, if you are able to offer returns to potential investors, which are competitive to the returns that they would get in putting their money elsewhere in the world. Right. Again, this has been for me a process of evolution by thinking.
[08:42] So for most of my career, you will find that I also talk about a foreign currency constraint. I no longer speak of a foreign currency constraint, because it is true that the economy cannot grow unless you increase foreign exchange. And the size of the economy, given the technologies and tastes and so on, is determined by the inflows of foreign currency, because that determines how much you can afford to buy in terms of the imports and supplies that you need to run the economy. Okay. But that supply can be increased, whatever the size of the economy, by increasing your productivity and moving up market in the goods and services that you sell without limit, because the world can absorb whatever you're able to produce.
[9:32] Rasheed Griffith: So this is up market services and goods, but for a foreign audience, not necessarily domestic consumption?
[9:39] Dr. Worrell: Exactly. The thing that propels, that expands the national output and production in the small economy is internal. It is all to address the foreign market, because the local demand for any activity is so miniscule. There are only a few things that the country can produce at a scale that is internationally competitive. And once they reach that scale, then they flood the local market immediately. And in any case, the local market does not provide foreign exchange.
[10:16] So I'm not sure if I've said that exactly clearly, but the point I'm trying to make is that because you need foreign exchange, your focus has to be on the capacity to produce exportable goods and services. And that your capacity to have government have purely non-tradable services, such as domestic transportation and so on, that capacity is limited by the foreign exchange that you're getting from your tourism and from your exports.
[10:46] Rasheed Griffith: So then if I were to restate that the productivity and competitiveness of goods and services in the small economy is this thing that one needs to maximize in order for the second order effect to happen, which essentially have earned more foreign income, which can be used then for proper domestic or internal circulation and internal consumption.
[11:06] But how then does one measure this productivity and competitiveness increase in small, open-coming? Let's say you have a policy target to do that, increase those things. How does one assess if you're going in the correct direction?
[11:22] Dr. Worrell: By your results. So the main methodology that I use to measure competitiveness is market share. I look at the market share for the things that a country produces and I see whether that market share is increasing. And if your market share, however small that market share might be, is increasing, then that tells you that there is some degree of competitiveness.
[11:46] In fact, I have developed a quadrant of relative prices and market share. So if you're able to increase your relative price and maintain or increase your market share, then you're really competitive because that means that even though your goods continue to sell, you're able to move up market because you're able to sell relatively more expensive goods and still increase your market share. What you don't want to do is to have to be reducing your relative prices in order to maintain your market share because that way you're going to go to business eventually.
[12:23] Rasheed Griffith: One of the main counter points that a lot of people make when it comes to small economies, this is particularly Caribbean in our case, they always say that a small economy in the Caribbean are too undiversified when it comes to sectoral contribution to GDP and revenue. And usually the target of this is tourism.
[12:44] They say, okay, well you cannot focus too much on tourism because in an external shock that goes away and therefore is bad for the economy. And also because just by, I guess, some kind of portfolio theory they have in their mental model, that the economy just supposed to be more diversified. Do you kind of agree with that assessment of how you should think about small economy management?
[13:07] Dr. Worrell: Absolutely not. The notion that diversification as a means of reducing risk is a large market notion. So if you're a big company and you're operating in a big market, then you want to spread your risk around as many things as possible. But in a small market, there is no opportunity to diversify, to reduce risk by diversification. This isn't only tourism, it's anything that a small economy is doing. In my survey of 41 small economies around the world, all of them have concentrated a handful of exports and all the exports are subject.
[13:48] So it means that you can't diversify by doing many things. That really is perfectly obvious. The notion of using diversification as a management tool as a result of linear thinking. I mean, it's just that you've read that in a book and it makes sense in a big market. You don't think about the potential once you have to deal with small market size or the meaning of it once you deal with small market size.
[14:13] Rasheed Griffith: I agree with that assessment. But at the same time, I am not sure how to respond to people that say what happens, for example, like COVID. Let's say you have the, a very tourism dependent economy and COVID comes and there's no substantial tourism and the economy has this external shock that has these very severe consequences. In that light, people would say, well, hey, this is an example of why you should be a lot more diversified to have this kind of shock protection. What do you respond to people that give that argument?
[14:43] Dr. Worrell: That's not being realistic. And more importantly, that the shock to tourism has not really materially affected the economies, the development status of the economies affected. The GDP went down for a year and it's gone right back up. So the capacity to earn foreign exchange remains. That's unaffected by COVID. The hotels are still there and so on. So you had one year in which income was drastically reduced and the next year you're back up. So I think that it's kind of short term thinking and also you're using the wrong yardstick.
[15:22] So another point in my book is that development is the quality of life as reflected in the human development index is the yardstick that we should use. Now that contains, as you know, three elements. It is gross national income per head, but purchasing power parities, but it is also a health and educational component.
[15:42] There was damage to both the health and educational components from COVID and so there will be consequences, but that's what the consequences for all countries, not just tourism countries. And as far as the income component is concerned, it is true that the loss of income for the tourism countries was much greater than for other mineral and other exporters, but the recovery has been swift and so the permanent loss is very little.
[16:09] And as far as, as I said, the impact on health and education, the tourism economies are no worse affected than any others. In fact, in many respects they're less because when the height of the pandemic, when the incidents of death was highest, there was no travel. And so many tourism countries were actually spared the worst of the adverse consequences of COVID.
[16:31] Rasheed Griffith: I'm curious why you put so much emphasis on particularly human development index, let's say relative to some other index, like the social progress index developed by primarily Michael Porter based on some Amartya Sen type econ research. Why was the HDI the more important of it as you chose to emphasize?
[16:53] Dr. Worrell: Because it is available for all countries, it has been available for all countries for 30 years. It has an established methodology, which has been extensively researched and it is flexible. So all the other add-ons for several countries now, the annual index is modified for income inequalities and you can modify it also for other indicators, housing and so on. And for the quality of health services and the quality of educational services and so on. So it is flexible, but its main strength is that it is, that you have that for every country in the world.
[17:31] Rasheed Griffith I want to move then to some of the IMF topics. Okay. We talk about the difference, structural difference between the small economy and the large economy. And it seems to me the international organizations, the IMF or the World Bank, but particularly IMF do not actually make a distinction between the different macro structural priorities of small economies versus large economies. And they apply the same, essentially same medicine. Usually they come in when things are kind of going badly like they would if they were reading from a US based textbook on macro management. Why has this been the case for so long when it comes to IMF and the Caribbean?
[18:14] Dr. Worrell: Actually, and the Caribbean governments make the same mistake because they use a model in which the driver of economic growth is the exchange rate. So the IMF does not have a model in which they break down the economy into productive sectors, tradable and non-tradable as I do. And so they don't use the kind of index that I use, which relates competitiveness to productivity.
[18:46] Their model is a demand model. And again, it derives from a large economy concept, right? Where if the two large economies are trading with each other and they're both producing essentially more or less the same goods, I mean, there are some differences, but the range of and variety of goods that they've been produced in the two countries are more or less the same. Then they can increase the consumption of local production and they can increase even output of local production by changes in relative prices.
[19:17] That is why the IMF puts so much emphasis on the exchange rate, because the exchange rate is the thing that drives growth in the IMF model and in the models that are used by all our central banks, because they go to the IMF courses and they use the same financial programming model that the IMF uses. That is a demand driven model. And because every small economy, small economies are essentially supply driven, except it is the supply of tradable goods, it's the supply of exportables that drives the economy, because that's the source of foreign exchange. And that is the fundamental difference between the IMF model and my model.
[19:58] So the things that the Caribbean governments complain about that the IMF, in fact, the main thing they complain about is the need for fiscal adjustment, fiscal consolidation. And that is the one thing that the IMF gets right. So the solution in every case where countries find themselves in balance of payments difficulties and need to resort to the IMF is that they have got to fix their fiscal problems.
[20:28] They have been overborrowed, they've been trying to expand the economy and usually the public sector on the basis of local currency, and that has created an external demand, which has exhausted the reserves and has left them in an unsustainable deficit on the balance of payments, which resulted in depreciation of the exchange rate and informal markets. That is the typical case. And the solution to that always has to be fiscal consolidation. That's the one thing that the IMF gets right.
[20:58] What the IMF doesn't get right is the flexibility of the exchange rate, the monetary policy, inflation targeting, all of those things don't work because the relative prices don't actually affect the growth of the economy. The economy is not demand driven and the IMF model is demand driven.
[21:28] Rasheed Griffith: I'm going to come to fiscal consolidation in the balance of payments crisis issue later, but I want to stay in the IMF for a bit. So I'm just stunned that the IMF model has not been adjusted after so many decades of applying it, to the small economy. It's not the case where these are simply, let's say, U.S. based economists in the U.S. only looking at U.S. data and then once in a while having a consultation in Bermuda or Barbados.
[22:45] These are typically long range commitments over decades. They have decades of data, perhaps some of the best in the world, but yet they still don't actually adjust the model even after their own programs fail and fail and fail. What do you think is institutional, lets say, hesitancy in the IMF to adjust the model to actually make their programs work in small economies?
[22:07] Dr. Worrell: What I'm saying is that in fact policy almost nowhere is done on the basis of a model. The models that they use actually are not models in a mathematical sense. It is basically intuition based on a spreadsheet so that the drivers, the economic relationships and so on are not spelled out in any definitive way in the model. The model isn't what determines the policy. The policies are ad hoc. That's basically the problem. That the underlying model which would suggest differences in policy. Let's try to make it concrete.
[22:48] The argument about the exchange rate. Even in the central banks who are arguing with the IMF, they believe and many of my colleagues at the university and so on in the Caribbean believe, that a devaluation actually stimulates growth of the economy. The reason why you notice that the one thing that the countries in, as I say, in the Caribbean don't complain about is the need for independent central banks and inflation targeting. They don't have a problem with that. They all of them pass that legislation and so on.
[23:18] The thing that they complain about is the need to cut government expenditure and to generate savings on the government's current account. That's what they're talking about when they're talking about structural measures and so on. But that's not the IMF's business. That is the business of the governments of the individual countries. The problem is the inefficiency of public administration and the ineffectiveness of the allocation of that money within the countries. It's not a structural problem.
[23:51] Rasheed Griffith: Okay, how about this? When the IMF has the various article four consultations with the governments and have recommendations, yes, they have very often give the fiscal consolidation recommendations or some requirements when they're doing a loan program, a structural adjustment loan program. They obviously have it based on these oftentimes fiscal consolidation factors. That's what they get right. At least thats what the Caribbean governments tend to get wrong because if they do it, they wait until essentially a stop, an economic crisis or near crisis happens. And then they want to do fiscal consolidation.
[24:28] By the same time, IMF also pushes these various monetary adjustment programs as well that make it harder oftentimes to do fiscal consolidation if you're adjusting the currency, devaulation, and so on at the same time. But, of course, the Caribbean governments are not against that per se and the IMF is for that in this case. So there's a lot of disconnection happening on both sides.
[24:52] Dr. Worrell: But I think that on the exchange rates, as I said, the Caribbean and the fund, Caribbean thinkers and policymakers and the fund both make the mistake of believing that the exchange rate is determined by a process of demand and supply and that the price of the currency naturally finds a level which equates to demand and supply. That's the model that they have in their head. They all believe that and that's what's wrong.
[25:20] Rasheed Griffith: Why do you think that is? Is it simply because that's what they learned in textbook years ago? It can't be just that.
[25:25] Dr. Worrell: No, because they conceptualize the market incorrectly. In my book, I point out that the foreign exchange market in a small economy adjusts through quantities, not through prices. And so the correct way of stabilizing the exchange rate and making sure that the exchange rate never changes is for the central bank to have adequate reserves to make up for the ins and outs of the demand and supply within the market.
[25:59] And for you to have a mechanism that whenever there is a major disequilibrium, whenever demand rises much in excess of what is available, that you take fiscal measures to reduce the aggregate demand in the economy so as to bring the demand for foreign exchange back in line with the supply so that you protect the central bank's war chest. That is the essential mechanism of the foreign exchange market in a small open economy. And neither the IMF nor the central banks understand that.
[26:34] Rasheed Griffith: How should a government do fiscal consolidation optimally so it doesn't actually deepen the crisis or lead to a crisis?
[26:44] Dr. Worrell: That is what I just said. A good way to look at it is that the government must always make room for the private sector and adjust what its tax and expenditure policy based on what is happening in the private sector. And if the private sector, they see that the situation has developed in the private sector where economic activity in that sector is causing a demand for foreign exchange which exceeds the available inflow of foreign exchange, then the government under those circumstances always has to either increase taxes or reduce its own expenditures so as to restore the balance. It's always a fiscal problem.
[27:28] Rasheed Griffith: It's always a fiscal problem. Okay, so you were the governor of the central bank of Barbados and this was also at a time when the government was not taking fiscal consolidation particularly seriously. I think that's an easy way of saying that. Why was it so hard in your view for the government to actually have a proper fiscal consolidation policy?
[27:51] Dr. Worrell: So it's always difficult and it's more difficult if as is the case with all our Caribbean governments, the governments have become very inefficient and so the allocation of expenditure. Countries are overburdened with taxation and they're not seeing the results in terms of the quality of public services and public administration in the distribution of the tax revenue and that's the fundamental problem.
[28:14] And so when the governments go to cut, they do not do so in a way which optimizes, I don't like that word, but optimizes an optimal strategy in terms of ensuring the protection of the most vulnerable and so on all the things that they're supposed to do. The way they actually execute their program is not optimal and that is a political economy problem which we currently have no way of addressing.
[28:43] Rasheed Griffith: When you say governor of different Caribbean central banks discuss issues either formally or informally, I'm curious if they have, in your opinion, better views of how the economy does work in those conversations than they do publicly or than they state publicly or is it just the case that they seem to really not have the correct mental and economic model in mind when they think about the management in their respective economies?
[29:10] Dr. Worrell: Yes, I think that it is the latter, and I think that this is a universal problem. That there have been a lot of international discussion for many years, decades or even, about size and how that size is an important variable that you have to take into specifically into account. Some people have denied that that is the case. Over time, the international organizations and most small countries have come around to the view that size does matter, but unfortunately they don't understand how size matters. They think that it is because we're more vulnerable and we're not diversified and we're more dependent and so on. That's not true. None of that is true.
[29:49] The difference is what I try to explain in my book. The difference is that a small open economy is actually a different animal. It's a different species and it operates in a different way. A large economy operates with an internal dynamic with the external spillovers. If you're US or China, you can look at the external activity as a spillover. In a small economy, the external economy is the economy and the internal economy is simply a multiple of the external transactions. Commercial, physical and even the movement of people.
[30:30] Rasheed Griffith: So I guess in this case, size, lets say quantity. You know how they say a difference in quality is a difference in quantity, but in our case the difference in quantity is itself a difference in quality. So the size does have a dramatic qualitative difference in how you assess what's happening in reality.
[30:47] Dr. Worrell: Yes and it comes down in practical ways. So the control of inflation. A small economy cannot control inflation in any absolute way. The best that a small economy can do is to make sure that the activities of government and the central bank do not amplify the international rate of inflation. You can never on a permanent basis get the domestic rate of inflation in a small economy below the international rate of inflation.
[31:16] Rasheed Griffith: Can you explain that a bit more detailed? What does it really mean to, you hear a lot, import inflation. Can you explain what that really means in more detail?
[31:24] Dr. Worrell: It simply means that because you are importing everything, you have to pay the prices at which you can buy imports. And by and large, there is variation and stuff like that. But by and large, you have to take account of transport costs and so on. And you can do a certain amount of, you know, you can take care in terms of how you import and so on. But basically, at an aggregate level, those prices are given. All that you can do is to ensure that you keep your own domestic currency stable so that the prices that people see in the supermarket do not increase faster than the imports. That's basically it.
[32:08] Rasheed Griffith: So we've discussed a lot, and we've mentioned the currency issue several times. One of the core points you make in the book is this idea that small and open economies shouldn't really have their own individual domestic currencies. They should have either a really truly fixed exchange rate or no exchange rate and actually adopt the currency of a larger national currency anchor like the US or in some cases perhaps the Euro, depends on where you are in the world.
[32:36] This, I think, flows very naturally from what we've just discussed in terms of what you've been saying whats in your book. But could you, let's say, maybe argue it more explicit why a currency substitution is probably better for more small open economies?
[32:49] Dr. Worrell: Yeah, at one level, the example I give is the question of foreign reserves. So you pay a price for having a domestic currency, and that price is that the loan that you have to make to the US government, the richest government in the world, much of the money that the Barbados government, for example, has borrowed from the IMF in particular has been lent back to the United States because the reason why we felt it necessary to have an IMF program was because of the low level of foreign reserves that we had. In other words, the low level of balances that we had with the Federal Reserve and US Treasury bills that we had.
[33:28] So we borrow money from the IMF and instead of investing it in productive capacity and so on, because IMF does not lend money for those purposes. The IMF's money is simply to help you through a period of adjustment so that you can get back on your feet. So the borrowing that you get from the IMF, you don't actually use. You lend that to the US government or you place that on deposit with the US Federal Reserve that the US Federal Reserve can then lend to the US government. If you didn't have a currency of your own, you wouldn't need to do that. In fact, if you didn't have a currency of your own, all the uncertainty and controversy about devaluation just would not arise.
[34:08] Through a process of evolution, because I started out like every other economist with notions of exchange rates and the impact of exchange rates and so on, and gradually over my career I came to realize that the only remaining virtue of having a domestic currency is if it helped the population to recognize the vital importance of fiscal discipline. Because if you borrowed money from the central bank, that would create internal dynamic in terms of the effect on the total demand in the economy that would result in more imports with no more foreign exchange and pressure on the exchange rate.
[34:47] The Barbados experience in the period after 2013 showed that this is not a sufficient incentive for the government to do right. That's why I believe that inevitably all the currencies in the Caribbean will go the way of the Jamaica and the Guyana dollar and eventually more and more people will simply discard them. It's already happening for anybody who has access to US dollars. So what you're creating really is widening inequalities in the society between the haves who have US dollars and the have-nots who are compelled to earn only a local currency.
[35:29] Rasheed Griffith: I want to double tap on the point you made just now about the reserves because this is not necessarily something that most people think about in their normal activities. What is the, you give it a reason why you have reserves, but how does the government accumulate reserves in the first place? Because the government doesn't make money in US dollars per se. How do they actually accumulate reserves?
[35:55] Dr. Worrell: So reserves are the result of the balance of payments. And so if the inflows both for your current account and also investment inflows that bring foreign exchange into the economy in any given year exceed the amount of imports that people want to buy during that year, that's how you accumulate reserves. So you will want to do that until your reserves reach a level that the market is comfortable with, that the market feels okay, that's enough to cover all the seasonalities and so on.
[36:34] But beyond that, what I think is absolutely essential and what is very difficult to achieve is that the government and the population must understand that you must maintain fiscal discipline to avoid money creation through lending to the central bank. Because if you don't do that, then it will lead to an erosion of reserves and pressure on there.
[36:59] Now I think that we have that understanding in Barbados, but in spite of that, we actually ended up not doing the right thing. Now the government was punished for it. I mean, that was a major reason why the previous administration was wiped out in the election. It's not the only reason, but it was a large part of the reason. But the fact is that that political process, the protection that I thought that was guaranteed by having the fixed exchange rate actually is not effective within the political economy, has proved ineffective within the political economy of Barbados.
[37:35] Rasheed Griffith: Yeah, I'm going to get into that also, because you explained that in the book as well, a very good case study. So just make sure that everyone really grasps the reserve idea. So on the capital account is farely simple to understand intuitively. There's a large investment for hotels from some company in the U.S. wants to build a hotel in Barbados. They're going to invest some money, usually U.S. currencies that kind of flows into the account essentially. On the current account, then how does the current accounts usually get the increase in the foreign exchange? These are essentially firms that sell or have products or services that are sold internationally, and that money comes in how?
[38:13] Dr. Worrell: All the tourist expenditures that are recorded in the country, all the proceeds of exports, whatever the country exports and so on, is what appears on the revenue side of the balance sheet. All the funds that you borrow on the financial side, that's on the capital side of the balance sheet. All of those are in the foreign exchange market as receipts, and that's what the funds the imports.
[38:43] Now the currency doesn't actually come into the market. I mean, that's not how modern economy works. So money may be deposited by sort of trading companies, and hotels and so on. They may deposit in the travel agencies, may deposit in accounts abroad. That doesn't matter. It's still revenue, and it is still that money that pays for the imports, which is what makes the balance sheet balanced.
[39:05] And if that revenue is not available for the purchase of the imports, which are actually the thing that does come into the economy, that's when the banks then have to get foreign exchange from the central bank in order to pay for the imports. But so long as the imports are cleared through the bank market, then it is obvious that it has to be from the receipts from tourism and from these other sources.
[39:29] Rasheed Griffith: But how then does the, mechanically speaking, because commercial banks, yes, they want to get extra USD from the central bank as the central bank has it, but then the central bank again doesn't really trade. So how then does the central bank acquire the correct amount of USD that they have?
[39:48] Dr. Worrell: So the way that the market is that there's a trading arrangement between the central banks and the commercial banks. So normally they will shop around if a particular bank is short of foreign exchange on a day. They will shop around and see whether they can buy the bond for an exchange from another bank. If they fail, then they will go to the central bank. And similarly, if a bank has excessive foreign exchange, and I think the central bank probably still has a requirement that they sell a certain proportion of their daily or weekly earnings to the bank so that it maintains the supply.
[40:21] Rasheed Griffith: So now let's go back to the monetary financing issue, in particularly in Barbados. This is a very dramatic example. This is a fully clear case of this issue. Could you explain some details about what happened, this is like 2013, what happened in the Barbados economy at the time where the government decided to do this very, very quick and high level monetary financing and then what were the consequences to the economy of that?
[40:47] Dr. Worrell: Right, so the phenomenon is quite familiar. It happens in most democracies. They call it the election cycle because the ruling administration invariably wants to create a sense of having achieved things that are visible, road works and so on, in the immediate precursor to a general election. And so that's what happened in 2013. Before the general election, the budget, you overran the budget with election spending. That's quite familiar.
[41:16] But then that had come over a situation where we still hadn't fully recovered from the adverse impacts of the 2007, 2008 global financial crisis, which had thrown the fiscal accounts out of balance. So the deficit in the immediate aftermath of the election was very large. The borrowing from the central bank was also very large. So the spending on imports was drying down. And also people knew that there was also a precautionary activity for companies and so on to protect themselves by making sure that the external position didn't have any outstanding trade credits and stuff like that.
[42:00] So the top policy committee, which was chaired by the Minister of Finance, we sat down and we worked out the extent of fiscal adjustment that would be necessary in order to reverse the train. And the government put in place, they had actually two emergency budgets, one in July, I think it was, and the other one in November, to bring things back into balance. And they also were able to negotiate an external loan to bring the reserves back into some reasonable level.
[42:32] But unfortunately, the adjustment program required a substantial cut in public service numbers, among other things. It also required what is currently underway, which is substantial reform and consolidation of the state-owned enterprises. And those were the elements which the government did not follow through with in the event. And so every year in the subsequent years, the reserves kept dropping and the government kept promising the people of Barbados that they were going to get the deficit down and promising the IMF and the annual consultations that they would reduce the deficit and so on. But budget control in Barbados has gone to pieces. And so they simply were, did not follow through on the necessary measures for the implementation of those controls.
[43:25] And that's why when they came now to the 2018 elections, which is, you know, they delayed and delayed and delayed until they couldn't delay anymore, they added insult to injury in a situation where the foreign reserves had already been severely eroded because of their failure to adjust earlier. They added fuel to the fire so that by the time the new administration came into power, the need for assistance from the IMF was really urgent.
[43:54] Rasheed Griffith: How exactly does the government borrow from the central bank? What actually has to happen?
[43:59] Dr. Worrell: Nothing unusual. The central bank is the government's banker. So every time government purchases, salaries, everything are drawn on checks on the central bank. And so when the whatever payday is on every month, people just deposit their checks with their banks drawn on the central bank. And if there is insufficient revenues, there's usually some borrowing that takes place and is rolled over through treasury bills and so on. You try to project those things and we see what the expectation is.
[44:33] But if government exceeds the budget allocations, then a lot of people who should not have been on the payroll present their checks. And it is through honoring those checks in excess of the revenues that the government has received that you add additional spending power in the economy. And that's how the process takes place. It is not anything that requires a deliberate action or anything like that.
[45:00] So there is actually a legal limit on these things that has always been. But the point is that if you honor the legal limit, it would require you to reject checks over a certain level. So the central bank would have to say to teachers and policemen and so on when they went to deposit the wages or they would deposit their wages. But when they were settled at the central bank, the central bank would simply, once the limits were reached, would say send insufficient funds and send the checks back to the individuals. Now, obviously a central bank can't do that.
[45:32] Rasheed Griffith: So even when there's a legal protection against the borrowing by simply mechanical reasons, the borrowing just goes overboard anyway.
[45:39] Dr. Worrell: Exactly.
[45:40] Rasheed Griffith: So that's why you would argue that these monetary constitutional arguments don't really hold up. Just because the normal operation of daily policy doesn't really fit such easy categories. So even if you have all of these rules in place to prevent these things from happening, just by boring reasons, they can happen anyway.
[45:56] Dr. Worrell: Exactly.
[45:57] Rasheed Griffith: So that's a very, very important point. People always use that. Oh, well, if you have a fixed currency, it's fixed. And if you have a currency board, it's a currency board. But then in the real world, these things are much more loose and vague than people give it credit for, on paper at least.
[46:11] So I want to move to the very last point or last comment, last question is this idea of the independence issue raised in the book. And it stems very clearly from the conversation of the development and stabilization at external versus internal economy. [46:26] Cause if your true economy is actually so external, then even the structural idea of independence becomes even less sturdy. So less shakier ground. Because the country by default has to exist in this larger network, but then this larger network has no political dimensionality. It's just this very tiny idea of politics. If you have a larger dimensionality of politics, the small economy actually could say has more footing in the world on that sense as well.
[46:57] And you made the point that if you're going to speak about independence, you really have to have this idea of benefit that if independence is a true benefit, then the sovereignty, post independence, must actually produce much more productivity and competitiveness of the small economy relative to the prior period when it was so-called not independent. And it's essentially a very provocative point to make and people will kind of take it to be almost offensive in some ways. But could you explain what you mean by this point?
[47:29] Dr. Worrell: Very simple, you know, I think that the proof of the pudding is in the eating, right? And so post independence, I think we all expected that because we were now masters of our own destiny and so on, that we would take policies which would actually give us more jobs, better jobs, expanding economy, more activity and so on.
[47:53] And I think that the sort of fathers of our independence, the founders of our independence understood that that meant that we had to be highly connected with the outer world. They didn't see it as Barbados for Barbadians. They saw Barbados as being a commercial and financial hub for the entire Eastern Caribbean and maybe even beyond. So they, people like Errol Barrow and Tom Adams and so on, saw Bridgetown as becoming a financial center with networks radiating North and South throughout the Caribbean and into North America, certainly, and also possibly into Latin America.
[48:37] Certainly, that was the thinking that informed most of the intellectuals at that time. So for us, Spanish was very important to incorporate into our thinking and so on and looking towards Latin American participating in Latin American activities and culture and so on, building those relationships. We never saw it as being independence for Barbados per se. And I think that the examples of the countries that have pursued policies which have caused them to advance most rapidly are those where countries have deliberately advocated policies which were connected to the rest of the world.
[49:22] On the contrary, most of the, our concepts of sovereignty in the English-speaking Caribbean have been about owning things. So we must own things and so on, and we must buy Bajan and things like that and so on. That is an unhelpful construct. So make no mistake, our economies have grown and have developed, but they have developed in spite of government policies, not because of government policies, because all the things that we have been focused on, all the things that the governments have been signing treaties about, CARIFTA and then CARICOM and then CSME and so on, none of that has made any impact whatsoever on the economy.
[50:00] Economies have been transformed. The Barbadian economy has gone through major transformations from a diversified economy in the 1980s with sugar, manufacturing, and tourism, to a monocrop tourism economy now. The Eastern Caribbean economies have gone from agriculture to tourism.
[50:18] You know, we never thought in the 80s I did consultancies in the Eastern Caribbean, and the country like Dominica, for example, we thought had no tourism potential. We were looking at agri-processing as being the future for Dominica, and now all those countries are tourism economies.
[50:35] The things we talk about, educational tourism and health tourism, educational tourism has developed in the form of offshore medical schools and so on. Again, not the things that the government is focusing on.
[50:47] Even our university, the university talks about attracting international students, but the university does not provide a path for those international students back into the international economy. International students are not going to come to do degrees at the University of West Indies, sustained in the West Indies. Even if they're interested in small economies, they are interested in small economies and international, so they want to be able to context. So they come from a small economy in the South Pacific and so they want to go back to the South Pacific. They come from a small economy in Africa, they may want to go to the South Pacific. And so it's that kind of thinking that we need to cultivate if we are to exercise our sovereignty in ways that will benefit the people to a greater extent than when we did not have suffering.
[51:36] Rasheed Griffith: What is your response when people give the inevitable point about the idea of decolonization and those kind of high, high-brow words when it comes to this point?
[51:50] Dr. Worrell: Because I think that the problem is the notion of nationalism. Historically, the idea of nationalism and natural patriotism and so on are relatively recent constructs and they're a destructive concepts.They're not useful.
[52:03] And the idea that small units can somehow make life better for themselves by virtue of running their own affairs really does not make any sense when you think about it.
[52:17] Even in terms of the quality of people that you have, once you're a talented person in a small space, the opportunities that are available to you, you quickly reach the ceiling of what you can do and how you can exercise your talents within the small space. You have to move out. And these are things that independence actually makes more difficult. So sovereignty really has not served us well.
[52:45] Rasheed Griffith: Yeah, especially the migration.
[52:47] Dr. Worrell: It's not that sovereignty is bad in and of itself, but you have to understand that it is not about, it really is not about sovereignty. It is about how you devise policies that are to the best interests of the people in the space. It's not about ownership. It's not about who owns the land and all this kind of thing. All of those things are irrelevant.
[53:08] What is this about? Is the government able to use its command of whatever space it has or whatever resources are within that space in ways which will give the people within that community the best chances to exercise their talents and their abilities and to develop their capacities and their capacities to produce of the resources that are at disposal.
[53:33] Rasheed Griffith: Dr. Worrell, this has been a very entertaining and insightful conversation. I thank you so much.
[53:40] Dr. Worrell: Thanks for the opportunity.