Senior Economist, Republic Bank Ltd., Trinidad and Tobago
Paper Presented to an International Conference on “Iceland and the World Economy: Small Island Economies in the Era of Globalization”, Center for International Development (CID), Harvard University, Cambridge, MA, May 20, 2002
Explaining Differences in Economic Performance in Caribbean Economies
Most Caribbean states are small by conventional standards. As such they all face the common constraints of size including vulnerability to external shocks and natural disasters. Notwithstanding this, some of these states have done better than others in terms of economic performance. This paper investigates some of the factors that might explain the superior performance of some of these small states. It is found that within the selected Caribbean group of small states, the smaller or microstates performed better. Better performance was associated with a higher degree of openness, an economic structure of these economies in which tourism and offshore finance sectors featured significantly but not agriculture, greater political stability, endogenous capability expressed in a strong macro-economic framework and societal cohesion. Among the preliminary conclusions arrived at is that small states are not without possibilities in spite of a hostile external environment. Special treatment in international fora to complement appropriate domestic initiatives can give all small states a better chance for progress in a globalized environment.
Explaining Differences in Economic Performance in Caribbean Economies
Notwithstanding that all small states face common external and domestic challenges, the fact is that some do better than others. An enquiry into the explanations as to why this might be so, must be important for understanding and shaping domestic and regional policies.
The Caribbean for our purposes in this paper comprises fifteen (15) small territories i.e. islands and littorals all of which are sovereign states. These territories range in size from St Kitts and Nevis with a population of 41,000 to the Dominican Republic with 8,373,000 persons. Grenada, the smallest island in our grouping has a land area of 340 square kilometers to Guyana with 196,850 square kilometers (Table 1). These territories were colonized by English, French, Dutch, Spanish and Portuguese settlers who for the most part removed the indigenous peoples, replacing them by African slaves and indentured laborers mainly from India but also from China and other parts of the Middle East and Asia. The population also includes descendants of the European settlers. For our purposes in this paper all the territories are considered small. While the population of Jamaica, Haiti and the Dominican Republic is over the “standard” 1.5 million, these countries generally share the major characteristics of smallness. The territories are a mixture of different economic performances, languages, fortunes and hopes.
The primary focus of this preliminary enquiry is not so much as to what distinguishes the performance of small economies from large economies, which issue dominates much of the literature on small economies. Rather it seeks to explain why, within a group of small economies some did better than others. This focus is not pervasive in the literature.1
By way of approach the paper begins with a review of the literature in Section 2, which helps to identify the major explanations of growth of small economies. This forms the basis in Section 3, of an empirical investigation of the factors that might explain the performance of the group of selected Caribbean economies. Section 4 arrives at some tentative conclusions and suggests areas for further research. This research must be considered a preliminary effort due to the time constraint. The conclusions must therefore be taken as tentative.
Source: World Development Indicators Database, May 2002
Explanations of Economic Performance
A brief review of the literature on growth theory suggests that there is still much debate on what might be the most relevant theory in the case of small economies. Mueller (1994) and Read (2001) are among those who argue that endogenous growth theory holds the most relevance because of its departure from the assumptions of the traditional neo-classical growth theory. Easterly and Kraay (2000) say the “good news is that the lessons of growth experience from all countries seem to be applicable to small states.” Notwithstanding this debate empirical research has gone ahead in the identification of factors that explains growth in small economies.
The measurement of economic performance of small countries is not entirely a straightforward matter. This might be measured by growth in income or growth in per capita income in which case one might use GDP and GDP per capita, respectively. In the case of per capita GDP one may use the current position or an average over some period. This latter indicator is considered superior for the purpose at hand. Arguably, one may also measure economic performance by the scarcity of poverty since the less poverty in any country, one might argue, the better the performance. For this one might use a measure of the proportion of the population living under the poverty line. Alternatively, there is the UNDP’s Human Development Index, which is a broad measure of living conditions in individual countries. Yet another measure of economic performance might be the degree of competitiveness of an economy. All these measures have some limitation. In this paper we use an average GDP per capita (1975-2000) as the main indicator of economic performance.
Small economies are all faced with common constraints and size is considered a constraint to better economic performance. Constraints include (i) small size of the domestic market (ii) limited possibilities for the development of endogenous technology (iii) limited quantities of natural resources (iv) narrow structure of domestic output, exports and export markets (v) high level of imports and (vi) high transport costs. It is these characteristics, which combine to make most small economies especially vulnerable. Further, it is these characteristics which seem to describe at least some small states as sub-optimal in economic terms and which lead some researchers and policy makers to adopt quasi-defeatist positions and attitudes upon which arguments for aid and special privileges are based.
Despite the existence of common challenges the fact is that some small economies do better than others. In any case we share the view that size in itself is not a sufficient explanatory factor for economic performance. This is borne out in the literature on country experiences such as by Armstrong and Read, (1995, 2001) and Read, (2001). Indeed Armstrong and Read (1995) lament the lack of attention to “potential advantages, which might also arise.” In the same vein one Caribbean economist, Pantin (1994) argues that in the past, too much emphasis has been placed on the disadvantages of small states. Not surprisingly Read (2001) argues that the “literature tends to adopt a fatalistic tone.”
But just as the pessimistic view seems overly skewed so too might be the more positive positions. Easterly and Kraay (2000) find that small states are nearly 40 percent richer than other states. Read (2001) points to the advantages of small size such as openness to trade and social cohesion.
Perhaps unfortunately, there is a too strong a tendency in parts of the literature to argue as if there is a special virtue in being small. Briguglio (1998) however reminds those of that opinion that small states do tend to be successful “ not because they are small but in spite of this fact.”
Our focus is on explaining the differences in economic performance amongst a group of economies, which are all considered small. Put another way, the issue to be investigated is this. What explains the varying performance amongst a group of small Caribbean economies?
Our review of the literature indicates that the factors explaining growth in small economies might be classified differently depending on the variable(s) of interest of the researcher. Nevertheless certain main factors stand out. These are (1) geography (2) the degree of vulnerability, (3) natural resources (4) openness (5) economic structure (6) workers’ remittances (7) culture and social coherence (8) independence (9) endogenous policy and (10) political stability. I will now discuss each in turn.