The Balance of Payments Crisis in the Caribbean: Which Way out?

• Author: Courtney Blackman
• Pages: 117-155

THE BALANCE OF PAYMENTS CRISIS

117

Introduction

The moment I accepted the invitation to speak on this topic,

I recalled a recent experience in Holland. My Dutch friend was

taking me to a restaurant near the sea when he said to me: ‘Look

up at that ship.’ I had to look up since, as my friend pointed out,

our car was more than 30 feet below sea level. Had the dike given

way then, as did in fact happen in the early 1950s, many persons,

including us, would have been swept away. Yet, I reflected, I had

never heard a Dutchman speak of the ‘crisis of the dikes’. The

breaching of the dikes is a risk that the Dutch take in their stride.

Their only protection is the tremendous skill at dike building that

they have developed over the centuries. Similarly, that is the way

it will have to be in the case of the balance of payments in the

Caribbean.

As long as a country trades with other countries it is likely to

have balance of payments difficulties. It is unlikely that the value

of their exports will always match the value of their imports;

sometimes there will be a deficit on foreign transactions, and

sometimes there will be a surplus. Even countries as self-sufficient

in respect of natural resources as the Soviet Union may experience

balance of payments fluctuations. In recent years Russia has on

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THE BALANCE OF PAYMENTS

CRISIS IN THE CARIBBEAN

WHICH WAY OUT?

THE PRACTICE OF ECONOMIC MANAGEMENT

118

occasion suffered from poor crops, and has had to seek trade

credits from the US in order to obtain adequate supplies of grain.

Of course, the balance of payments poses most serious

problems for countries with limited or highly skewed natural

resource endowments. Most Caribbean countries produce a few

major commodities, such as sugar, bauxite in Guyana and Jamaica,

and some oil in Trinidad and Tobago, but are totally lacking in

iron ore, copper, tin and other basic raw materials. The need to

import, then, is an economic fact of Caribbean life. Until the oil

shock of 1974, balance of payments crises were the result of civil

disturbances, as in the case of Zaire, or extraordinarily bad

economic management, as in the case of Ghana in the last years

of Nkrumah. However, the four-fold price increase of so essential

a commodity as oil posed tremendous difficulties for all non-oil

producers, and for countries that depended heavily on imports

in general. Except for Trinidad and Tobago, all Caribbean

territories were severely affected. Not only did they have to pay

four times as much for oil as before, they also had to find more

foreign exchange to purchase imported industrial goods whose

price reflected increased energy costs.

A cruel irony of the oil crisis is that the country against which

the oil embargo was specifically directed, the US, was the one

best able to weather it. The reason is that the OPEC nations had

no other option than to accept US dollars in payment for their

oil. (US dollars are merely IOUs of the US government.) They

also had to invest their oil revenues in US securities, since the US

is the only economy large enough to absorb such massive inflows

of investment capital. Indeed, the health of the US economy is

very much the concern of OPEC nations; no one knows this better

than Sheik Yamani of Saudi Arabia, who restrains his OPEC

partners from further oil increases that would only worsen inflation

in the US and erode the value of their American investments.

They cannot invest in the USSR.

THE BALANCE OF PAYMENTS CRISIS

119

Furthermore, in an effort to modernize their economies, many

OPEC members have made heavy purchases of capital equipment

and high technology services from Western Europe and Japan,

who, with the exception of the ‘sick men’ — Britain and Italy —

were able to adjust with remarkable swiftness to the oil shock.

The main victims were non-oil producing Third World countries

whose currencies were not acceptable IOUs, and who could not

produce industrial goods to pay for costly oil imports. This paper

attempts to lay bare the anatomy of the balance of payments crisis

in the English-speaking Caribbean. Firstly, we will review the

historical development of the crisis. Secondly, we will set out the

mechanics of balance of payments operations. Thirdly, we will

develop a model to explain the relationships among the factors

affecting the balance of payments and the various policy considera-

tions involved. The special problems of a prolonged and massive

balance of payments surplus, as in the case of Trinidad and Tobago,

will be considered in the fourth section. The fifth section will

deal with long-term aspects of the balance of payments. The paper

ends with some general observations on the conditions required

for maintaining the balance of payments in equilibrium.

Slide into crisis

A country’s decline into balance of payments crisis may be

compared to a man on a slippery slope. Once his slide begins, it is

extremely difficult for him to reverse the process, which we might

term an implosion. Two Caribbean territories, Jamaica and

Guyana, provide excellent laboratories for the study of this process.

A careful and disinterested study of their experiences should be

carried out as soon as possible so that we in the region may draw

the appropriate conclusions. In fact, the non-oil-producing more

developed countries of CARICOM (MDCs) were better placed

than most other Third World non-oil producers. Both Guyana

and Jamaica enjoyed heavy foreign exchange inflows in 1975 as a