Book Reviews: Strategies for Small States

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The review covers Strategies for Small States by Worrell, discussed in F&D Magazine.
BERT VAN SELM is deputy chief in the IMF Strategy Unit and was the IMF mission chief for Barbados from 2017 to early 2023.
The analysis draws on the author’s decades of hands-on economic policy experience, both at the IMF and at the Central Bank of Barbados, where he served as governor from 2009 to 2017.

Small states are more open and hence exceptionally vulnerable to external shocks.
Limited resources force specialization in a few internationally competitive products and services.
Policies that seek to switch expenditures toward local products are usually not effective.
In the Caribbean, prices that determine the competitiveness of local industries (tourism, mainly) are set in the currency of a much larger neighbor—the United States—rather than in local currency.

Worrell argues small states are best served by a pegged exchange rate.
- A fixed exchange rate regime helps contain inflation and lend credibility to the overall economic strategy.
- Other macroeconomic tools—in particular, fiscal policy—must be used when adjustment is needed.
If a small country cannot establish a framework and track record for maintaining an exchange rate anchor, Worrell’s preferred alternative is abolishing local currencies and adopting the dominant currency as legal tender (in the Caribbean, the US dollar).
- This eliminates a potential source of instability and of central bank financing for the government that could undermine fiscal discipline.
- Worrell suggests small Caribbean countries should follow countries in the Americas that have decided to forgo their own currencies.

With limited or no monetary policy, fiscal policy takes center stage.
- Key areas: tax policy and administration, expenditure and public wage policy, debt management, and management of state-owned enterprises.
Efficient delivery of public services is particularly important and has been a struggle for the Caribbean.
Budget allocations for health and education should be large enough to boost human development indicators and raise international competitiveness.
Because the bulk of consumption needs are imported, imprudent fiscal policy tends to spill over into declining international reserves and can trigger a balance of payments crisis—a frequent occurrence in the Caribbean.

In Barbados, balance of payments crises in 1991 and 2018 both originated from fiscal policy failures.
Both crises were successfully addressed by policies centered on fiscal consolidation while maintaining the exchange rate peg, within the context of an IMF-supported program.
Worrell’s analysis assesses what worked and did not work in macroeconomic adjustment programs in the Caribbean and offers lessons for future policy design.

F&D Magazine; Strategies for Small States; BERT VAN SELM; June 2023

Strategies for Small States
- Strategies for Small States (Markdown version)
- Strategies for Small States (PDF)