Home' Trinidad and Tobago Guardian : May 14th 2015 Contents MAY 2015 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG17
Is the fixed currency exchange rate
between the US and some Caribbean
countries affecting the latter s inter-
national competitiveness? This is a
question that deserves review as
Caribbean countries struggle with
difficult economic conditions caused,
in part, by the rapid change in their
terms of trade and the value of currencies in
which such trade occurs.
Nine of the 14 independent Caribbean Com-
munity (Caricom) countries have currencies
whose values are tied to a fixed exchange rate
with the US dollar. These countries are: The
Bahamas, Belize, Barbados and the member
states of the Eastern Caribbean Currency
Union: Antigua and Barbuda, Dominica,
Grenada, St Kitts-Nevis, St Lucia and St Vin-
cent and the Grenadines. There is no evidence
to suggest that these nine countries are per-
forming more competitively than other coun-
tries in Caricom that have a floating exchange
rate. Indeed, based on economic performance
over the last decade, particularly as guaranteed
markets for exports have disappeared and trade
rules have changed significantly, the economies
whose currencies are not fixed to the US dollar,
have done better.
Small states face real difficulty in competing
with other countries across the world in the
free trade environment that has developed
since the 1960 s. While it was possible in pre-
vious decades to prop-up economies through
import substitution protected by high tariff
walls, those days are over.
Businesses now have to stand on their own,
competing with foreign businesses in their
own market and for a place in export markets.
The issue of competitiveness is now central
to the success of any small state in finding
work for its people, including its annual school
The ability to compete is determined by
many factors such as natural resources, avail-
able capital, skill levels, cost of production,
and productivity. Additionally, good commu-
nications, transport infrastructure, and efficient,
proportionate and cost effective bureaucracies
are all necessary for international competition.
It goes without saying that a stable and peaceful
environment is also vital.
The list may seem long and complex. That
is because it is. There is no silver bullet that
determines economic success and full employ-
ment. The recipe is multifaceted and made
up of fast-changing ingredients. An important
element in the list is the exchange rate of local
currency in international trade, particularly
for countries whose economies are as open
as those in Caricom and which are reliant on
tourism as export earnings.
Until recently, a system of international
trade dominated by the US dollar has existed.
Created since 1947, the system represented a
degree of hegemony never previously seen. In
this context, the decision taken in the 1960 s
to link Caribbean currencies to the US dollar
was a compelling policy step, especially in the
light of the then existing world trading pattern
and geographical factors in the region. Among
those factors were: dominant trade with the
US in goods and services, including tourism;
and significant aid and investment from the
US.However times have changed. Aid and
investment from the US has dwindled. Busi-
nesses in the region now have to be competitive
on world markets and in their domestic markets
against imports from which there can no longer
be import duty protection. The rules of the
World Trade Organisation, which give no spe-
cial or differential treatment to small states,
have put an end to protection of local busi-
The unequal reciprocal arrangements of the
Economic Partnership Agreement between
the entire European Union as a bloc and indi-
vidual Caribbean states also put a detrimental
nail in that coffin.
For its own domestic purposes, the US Gov-
ernment has adopted policies designed to keep
its dollar strong against other currencies.
Therefore, for those countries whose currencies
are fixed to the US dollar, the cost of their
exports to, and tourism from, other major
markets is expensive and uncompetitive. Local
manufacturers, farmers and service providers
also face severe competition in their own
domestic market from non-US countries.
To re-enforce the point, tourists to Caricom
countries as a whole are mainly non-US.
Therefore, Caribbean countries, whose cur-
rencies are tied to the high value US dollar,
are prohibitively expensive for non-US tourists.
Further, the US is no longer the principal
source of Caribbean imports. Consequently,
the cost of imports from non-US sources is
high and raises the cost of living.
The currency link to the US dollar brings
no benefit other than for exports and imports
to and from the US. In essence the only market
where the region operates on a level playing
field is the US.
World trade is increasingly no longer dom-
inated by the US or by the US dollar. The Chi-
nese yuan, the Japanese yen, the European
Union Euro, the British sterling and even the
Hong Kong dollar are assuming growing
importance. China trade rivals the US globally.
Indeed, for many countries in the world, China
is now their main trading partner. In the
Caribbean, imports of Chinese products are
so high that China enjoys a large trade surplus
with the entire region (including those countries
with which it does not have diplomatic rela-
While there are many challenges that gov-
ernments and the private sectors in Caricom
countries need to address so as to deal effec-
tively with the problem of a lack of economic
competitiveness, a fixed exchange rate tied to
the US is one policy that should be scientifically
Setting their exchange rates against a basket
of currencies, particularly the currencies of
countries with whom their trade is increasing
such as China, and those from which the
majority of their tourists come, would seem
to be considerably more advantageous. By
continuing to tie their currencies to the US
dollar, the countries that do so also seem to
be linking their fortunes to the policies of the
US alone; policies that are made rightly in the
interest of the US alone.
In a world dominated by free trade, a fixed
exchange rate appears to be an anachronism
and inimical to the international competitive-
ness of Caribbean countries. The fixed
exchange rate between the US dollar and the
currencies of the nine Caricom countries
named earlier, may be contributing to a weak-
ening of their international competitiveness.
It would be useful if the governments were to
commission an independent study by leading
Caribbean economists---and there are many
capable of doing the job---to provide objective
advice on the exchange rate.
If the nine can t do it together, the govern-
ments of the Eastern Caribbean Currency
Union should consider it.
(The writer is concurrently a senior fellow
at Massey College, Toronto and the Institute
of Commonwealth Studies, London)
Fixed or floating exchange rates
Which serves the Caribbean better?
Links Archive May 13th 2015 May 15th 2015 Navigation Previous Page Next Page